Time to Be Selective

In this week’s issue:

• Weekly Commentary
• Strategy of the Week
• Stocks That Meet The Featured Strategy

In This Week’s Issue:

• Stockscores’ Market Minutes Video – Trend Reversals
• Stock Features of the Week – Gold, Oil and The US Dollar
• Stockscores Trader Training – Time to Be Selective

Trader Training – Be Selective

This is the time of year when it is really necessary to be selective with the trades you take. We are at the seasonal end of the weak season for trading, the market tends to improve sometime in October or November.

Before that happens, the market also tends to be its most volatile and difficult. We often get sharp corrections at this time of year so it is essential to be very fussy about the trades you take. We are likely within a few weeks of an improvement in the market, so be patient.

It’s better to miss a good trade than to take a bad one. Missing a good trade doesn’t deplete your capital-it only fails to add to it. A bad trade will not only reduce the size of your trading account, it will eat up emotional capital and your confidence.

A losing trade is not a bad trade. Bad trades are simply taking the trade that doesn’t meet your requirements. Bad trades come from working hard to see something that’s not there, guided by your need to trade rather than the market offering a good opportunity.

I have read very few books about the stock market, but one that I’ve read more than once and that I think is a must-read for every investor is Reminiscences of a Stock Operator by Edwin Lefevre. Here is a wonderful quote from that book that captures the essence of what this chapter is about:

What beat me was not having brains enough to stick to my own game-that is, to play the market only when I was satisfied that precedents favored my play. There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily-or sufficient knowledge to make his play an intelligent play. 
-Reminiscences of a Stock Operator

I advise all my students that they will make more money by trading less, at least so long as trading less is the result of having a high standard for what they trade. If you tell yourself you’re limited to only making 20 trades a year, you’re probably going to be very fussy about what trades you take. With less than two trades to be made each month, only the very best opportunities will pass your analysis. All of the “maybes” or “pretty goods” will get thrown out.

We take the pretty good trades because we’re afraid of missing out. It’s painful to watch a stock you considered buying but passed on go up. You remember this pain and the next time you see something that looks pretty good, you take it with little regard for the expected value of trading pretty good opportunities.

Pretty good means the trade will make money some of the time and lose some of the time, and the average over a large number of trades may be close to breaking even. The fact that one pretty good trade did well is reasonable and expected. In the context of expected value, taking those pretty good trades many times will lead to less than stellar results when the losers offset the winners.

You shouldn’t judge your trading success one trade at a time. You must look at your results over a large number of trades. To maximize overall profitability requires you to have a high standard for what trades you make. Maintaining that standard will be easier if you take the trades that stand out as an ideal fit to your strategy, not by taking those that are marginal and require a lot of hard work to uncover.

This week’s Market Minutes video is about trend reversals. There is a very steep upward trend in the US Dollar which is causing most commodities to be in very steep downward trends. Eventually these oversold trends will reverse but trying to catch the bottom is like trying to catch a falling knife.

Here are the charts of Gold, Oil and the US Dollar.

To catch the trend reversal, watch for the following three things:

1. Break of the trend line
2. Formation of a rising bottom (or a falling top on the US Dollar)
3. Break from a rising bottom

Until that happens, avoid these sectors. The US Dollar fell sharply today, as it is hitting long term resistance, so we may be very close to a reversal so watch these charts closely.

1. UUP

2. GLD

3. OIL

The New Stockscores Trader Education Center
Stockscores will be launching a new online trader education center in the next two weeks. Those who would like a guided tour should register for the upcoming webinar:

Wednesday Oct 15 6:00pm PT, 9:00pm ET
Click here to register

The Toronto Money Show
Join Tyler Bollhorn and a star-studded cast of financial experts at The World MoneyShow Toronto (Metro Toronto Convention Center) this October 16-18. Tyler will be speaking on Saturday Oct 18th at 12:45 – 1:30 on How to Find and Trade Hot Stocks.

Attendance is free but you must register. For more information, and to register, click here

Stockscores Market Minutes Video – Trend Reversals
What are the important signs of a trend reversal? This week, Tyler shows how both up and down trends tend to reverse and what to watch for. Plus, his regular weekly market analysis.

Click here to watch on Youtube

References

• Get the Stockscore on any of over 20,000 North American stocks.
• Background on the theories used by Stockscores.
• Strategies that can help you find new opportunities.
• Scan the market using extensive filter criteria.
• Build a portfolio of stocks and view a slide show of their charts.
• See which sectors are leading the market, and their components.

Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligenc

So, for now at least, the “bulls” remain in charge of the current rally that begin the Federal Reserve’s market interventions in late 2012. The seemingly inexhaustible rise, despite rising geopolitical tensions, extremely cold weather and weak economic data, has defied logic and lulled market participants into an excessive state of complacency. In fact, the bulls continually argue that the “retail” investor has yet to jump into the markets that will keep the bull market alive.

The chart below suggests that they are already in. At 30% of total assets, households are committed to the markets at levels only seen near peaks of markets in 1968, 2000, and 2007.

…..continue reading HERE

VIX Voodoo Analysis

The Volatility Index (VIX) seems to be indicating something big is brewing. Let’s investigate taking a bottom up approach beginning with the daily chart.

VIX Daily Chart

Since the low back in July 2014, price has developed a pattern of higher highs and higher lows – a bull trend. The Stochastic and Moving Average Convergence Divergence (MACD) indicators have just turned bearish so perhaps price is now headed down to put in yet another higher low. Where is this next low likely to be?

I have drawn a green highlighted circle which shows a gap. The high of the gap is 13.13 while the low of the gap is 12.61. I expect this gap to be filled before any continuation of the uptrend.

I have added a Fibonacci Fan from the low to recent high. Price looks to show some nice symmetry with this fan. Looking retroactively we can see price has found support a couple of times at the 76.4% angle. Perhaps price is headed back down for another test of the angle support.

I have added Fibonacci retracement levels of the move from low to recent high. The 76.4% fan angle is just above the 76.4 retracement level at 12.08. This is where I’m looking for price to make its higher low and can be seen in the orange highlighted circle.

VIX Weekly Chart

The Bollinger Bands show price bobbing up and down between the upper and middle bands over the last couple of months. Price looks headed back down now and perhaps the middle band will provide support once again. Let’s see.

The Parabolic Stop and Reverse (PSAR) indicator shows a bullish bias after price busted the dots to the upside last week. These dots will be support for any move down now and if this support holds then it can act as a springboard for price to surge higher. The dots are just below the previous low of 11.52.

The MACD indicator shows a recent bullish crossover and this is coming on top of a quadruple bullish divergence. Something big looks set to take place here shortly.

VIX Monthly Chart

If a quadruple bullish divergence on the weekly chart wasn’t enough, how about on the monthly chart?! Both the Relative Strength Indicator (RSI) and MACD indicator are showing quadruple bearish divergences. The MACD is also bullish so conditions are certainly ripe for an explosion higher.

The PSAR resistance held price in its attempt already this month to crack higher. Price looks headed down now but perhaps if price can turn back up this month it will be successful on its second attempt.

As for where price may come back to, I favour price consolidating the September candle. The open price for September was 12.32 and I suspect price can trade back to that level.

Let’s now zoom out for some big picture perspective with the yearly chart.

VIX Yearly Chart

I have added some simple Elliott Wave annotations which show the spike high in 2008 as the end of wave 1. That seems hard to believe but taking out the emotion that was the first major top after the all time low.

Price now looks like it is setting up a higher low which would be the end of wave 2. That implies wave 3 has already begun which should see price explode higher above the all time high of 96.40. I know this seems far-fetched but could it really be possible?

The RSI looks to be building strength with a pattern of higher highs and higher lows.

Momentum also appears to be building and it will be interesting to see if it takes out its own 2008 high. One possibility is price makes a new high while momentum does not. Time will tell.

This VIX analysis suggests something terrible and devastating is likely to happen to the stock market. Bears would be licking their lips.

Let’s quickly look at the yearly chart of the Dow to see if this VIX analysis fits with its long term picture.

Dow Yearly Chart

This yearly chart begins in 1900.

The RSI looks set to show a triple bearish divergence on this top.

The Stochastic indicator looks like it is having one last hurrah in overbought territory.

The MACD indicator shows the averages have diverged wildly which looks in need of some “regression to the mean”.

Momentum looks to have fallen off a cliff.

Hmmm. I don’t really think I need to comment further.

Briefly: In our opinion, speculative short positions are favored (with stop-loss at 2,030 and profit target at 1,900, S&P 500 index)

Our intraday outlook is bearish, and our short-term outlook is bearish:

Intraday (next 24 hours) outlook: bearish
Short-term (next 1-2 weeks) outlook: bearish
Medium-term (next 1-3 months) outlook: neutral
Long-term outlook (next year): bullish

The U.S. stock market indexes lost 1.3-1.6% on Wednesday, resuming their short-term downtrend, as investors continued to take profits following August rally, ahead of some economic data announcements, as expected. Our Wednesday’s intraday bearish outlook has proved accurate. The S&P 500 index broke below the support level of 1,960-1,965. The nearest important level of support is at around 1,930-1,940, marked by July-August bottoming consolidation. On the other hand, the resistance level is at 1,960, marked by recent short-term consolidation, as we can see on the daily chart:

Larger Image

Expectations before the opening of today’s session are slightly negative, with index futures currently down 0.1%.

The main European stock market indexes have lost 0.3-0.4% so far. Investors will now wait for some economic data announcements: Initial Claims at 8:30 a.m., Factory Orders at 10:00 a.m. The S&P 500 futures contract (CFD) is in an intraday downtrend, as it gets closer to yesterday’s low. The nearest important support level is at around 1,930-1,935. On the other hand, the level of resistance is at 1,940-1,950, among others, as the 15-minute chart shows:

Larger Image

The technology Nasdaq 100 futures contract (CFD) remains in a downtrend, as it gets closer to yesterday’s low. The resistance level is at around 3,990-4,000, marked by previous level of support. There have been no confirmed positive signals so far:

Larger Image

Concluding, the broad stock market resumed its short-term downtrend, moving below recent consolidation. We remain bearish, expecting a downward correction or uptrend reversal. Therefore, we continue to maintain our already profitable speculative short position with entry point at 2,000.5 – S&P 500 index. The stop-loss is at the level of 2,030 and potential profit target is at 1,900 (S&P 500 index). It is always important to set some exit price level in case some events cause the price to move in the unlikely direction. Having safety measures in place helps limit potential losses while letting the gains grow.

Thank you.