Price Divergence on S&P 500 3/25/13

One of the indicators of market weakness is when the price of the stock makes new highs but its major indicators like the MACD makes a lower high. In the attached chart, you will see that the S&P500 ETF “SPY” is making new highs on price while the indicator similar to MACD but not the same, is making a lower high. Such price divergences usually resolve itself in the direction of the indicator. It is an early warning of a correction. See the heavy orange line sloping downwards while the price line in the heavy teal color is pointing upwards.

(MACD: Moving Average Convergence Divergence – or more simply, the difference between its 12 period exponential moving average on price to the 26 period exponential moving average of its price. If the MACD is headed upwards, then the near term momentum is stronger as the 12 period exp moving avg is greater than the slower 26 exp moving avg)

Markets take a long time to top out, and I am certainly not thinking we have a huge drop ahead of us or that one needs to sell and go to cash. But that is all a matter of perspective. If you have made some profits, this would be a good time to bank some. For myself, I will sell some call spreads for next month on SPY, letting time decay be on my side. Selling a call option spread will be a successful strategy for me if SPY stays sideways or goes down. It will still make some money on a small up movement as the time decay element is in my favor. I would lose money if SPY jumped higher.

The stock is still above the blue support line on the chart, but my trading system has also flashed a down signal with the arrow downward. Pretty early I might add. 

Searching for the Grail 3/24/13

As I sit to write this blog, I realize it is my birthday. I am swamped with birthday wishes from my many Facebook friends and I realize how many many people have touched my life, and how I have touched theirs. Yet with age comes the inevitable realization that this earthly life will all have to end one day and we would not want it any other way.

My close friends in trading remain on the hunt for the Holy Grail of trading systems. It seems I am still searching for improvements as well. I do feel that the yin yang between a cyclical trading system and a trend following one is where the best systems lie. Trading is never going to have all wins.

In my search I attended OptionsANIMAL’s class on Managing Risk with Options by Charan Singh last week. It was a great 1 hour class where he showed that they are generating 93% wins by mending broken trades using options. You have to spend between $6,000 - $14,000 to take enough classes to master it. The more you pay the better your learning as you take more classes and spend more time at mastering the methods. Kind of like getting a Bachelor’s degree versus a PhD.

After having my toe stubbed several times signing up for classes taught by others promising great results, I am not interested in this right now. Still, for someone who wants to learn options and manage their accounts with controlled risk, and is willing to dedicate serious time to learning, this is a valid option.

So why not for me? Because it is time for me to stick to my main systems and if I have confidence in them, stick to them and follow the method regardless of who is telling me what around me. I think a combination of trend following with buying on dips works fine. Not all the time and there will be losses; but if I stick to the method and not let it go, it will generate the rewards I am seeking.

To make a case in point, look at my chart on AAPL. Let us also assume that we can trade the long side as well as the short side using options or option vertical spreads to control risk. If we look at the left hand side of the blue line on the chart, we can see how the trading was choppy and difficult to make money on. Now look at the right hand side of the blue line. The chart is crystal clear, the primary (large) buy and sell signals are spot on and even the secondary (smaller) signals that tell us when to buy on a dip, in the direction of the main up trend is right on target. On the primary down signal, we can buy puts on the peaks and enter with the secondary down signals. The stock is now moving and trending, and the system pulls in huge monies.

Unfortunately, we cannot control and tell when the stock is going to leap forward like this, looking at the left of the blue line. The key is to be patient and wait for the ride. Same goes for trading systems. None of them work all the time and we need to take a diverse selection of stocks or funds to apply our systems on and wait patiently for the ride. It will come. Very few stocks go sideways and gently move forever. And if we have a good selection, then even if we get one that refuses to move, the others will pay off. Find our favorite system. Then ignore outside noise and stick to it. If you have the time and money, keep investing in learning one more technique but be aware that in all likelihood it may not be the grail you were looking for. Don’t make the mistake of jumping methods till we are convinced it is a better grail than the one we currently have..  

Is Ford (F) making a move? 03/17/13

Ford has been consolidating after a large move up, and wants to move up again. No guarantees how long this up signal will last though. The Volare trading system that I have developed on Ford gives me multiple entry points. I have realized that the fastest way to lose money on paper (or real) is to keep betting against a trend! The best thing I can do is the opposite, which is to add to positions in the direction of the trend. I have not done that before. In fact I find it very hard to do; but I am going to force myself to do that, as that will pay off in the long haul.

Once a trend starts, no one really knows how long the trend will last. So why not start with a small position? Then if the trend continues, I add more to my position. If the trend quickly reverses against me, then I can close my position with a small loss. Pristine recommends a method that enables you to take some profits along the way. I would say that is also a good way to go. One can always use a cyclical indicator like stochastics to time short term entry or exits. I like my cycle accelerator/decelerator black line to do that in the chart below the price chart. Each person can use their own favorite methods.

The Volare system gives you multiple positions in a strong up move. Each of these could be an additional position I can take. In fact one could do the opposite in a downtrend and sell call spreads at each signal. Currently the entry signal is up and I have taken a small starting position. By doing back testing, I found that a simple MACD>0 for long positions, works quite well on Ford as well.

401K Monthly Analysis – Who leads the pack? 3/9/13

I could copy and paste last month’s 401K analysis and say no change and that would be pretty close; but there is a small shift that I will mention later.. SPY remains pointed north. The talking heads can keep threatening a pull back but the market does what it does. Everyone knows that nothing rises forever. Still, the best way to manage our money is to take small losses and let the winners run.

First, my chart on SPY shows a small pause but the journey up has resumed.  When I look at my previous employer based 401K account, the funds to be in are Artisan Mid Cap Value, Vanguard Explorer Admiral and Spartan Ext Market Index. This indicates a rotation out of a couple of International funds like the TRowe Price International Discovery and Fidelity Diversified International. The US market is gaining steam versus international. The latest unemployment report and the jobs created numbers say the recovery is certainly headed in the right direction. The rest seems to be comments based on political affiliations. Republicans will continue to call the recovery anemic and the Democrats will say more jobs were created but there is room for improvement. Either ways, the rich are getting richer based on their market investments.

With my current employer’s 401K, the strength goes to WFA SPL Midcap VL, Royce opportunity, and Fidelity Growth Strategies. This is similar to last month except take the international fund off the list.  

Attached below are charts of SPY, WFA SPL Midcap VL and Artisan MidCap Value with my trading systems on them.