Alsi Trader

New blog

2011-02-10T08:10:00.000+02:00

ALSI TRADER BLOG HAS MOVED TO:

http://www.tickertalk.co.za/profile.php?user=ALSITRADER

KEEP FOLLOWING US.

Ideal trades

2011-02-03T12:31:00.001+02:00

Today is developing like sideways days with fairly decent range. So far, around 12:00, we are at 340 points and I would like to show you how ideal trades today should have looked like.

First trade, I took this one, was at 9:15 and it was break above opening range. Entry was above 29410 (point 1). That was break of mid point between pivot and R1. Market quickly relied to R1 and made high of the day at 29600 (point 2). Close could be in that region, so potential profit of 180 points was on cards. Let’s be honest and say it was 150 points with slippage and brokerage.

Second trade, if you are more aggressive, could have been around 29540 on 9:55 bar, with stop loss above high of the day, with risk of 60 points (point 3); or if you are less aggressive 10:20 bar where we closed below 20 exponential moving average (point 4). Market slowly ticked down and tested 50 exponential moving average. You can see how volume increased at that point. Marked did close below once, but just for following bar to close above (point 5). One could have closed position there, but at that point we didn’t know if market will drop further. After that, market bounced back and tested 10/20 exponential moving averages, which was followed with drop again, but on much smaller volume than what the case was on first test of 50 exponential moving average. At 11:10 market traded below 50 ema, to close above it (point 6). This was back test of low made at 10:50, but on much smaller volume. Ideal place to close that short was break of high of that doji, around 29400. So, that could have been possible profit of 140 or 80 points, which is a very nice profit.

That very same point was nice place to go long and that long would still hold, with stop being close below 10 and 20 exponential moving average. In meantime ALSI tested R1 again so that long could earn you some 200 points.

I made first trade, marked with arrows. Then, I made second trade of less aggressive type, but I’ve missed that clear bottom and I’ve closed trade for 20 points loss. Not being focused to spot that low caused me to lose about 100 points on short side and I’ve missed opportunity to be long for some 140 points so far.

Someone could say that it is easy to see in hindsight, but those clues were on chart, as market developed.

Trade with trend!

Thursday Reading

2011-02-03T12:19:00.000+02:00

Bespoke:

Homeownership Rate at Lowest Level in Over 10 Years

CXO:

Stock Market and the Super Bowl

Globetrader:

As sharp as it gets!

Nothing to add…

Quantifiable Edges:

Recent 1st Day of Month has been Especially Strong

The Big Picture:

Naive Science and the Nature of Financial Markets

How U.S. Income Groups Get Squeezed By Food Prices

Wall Street Pay Hits Record Highs (and . . . ?)

Fun!

Inflation Rates vs Your Birth Year

Trading the Odds:

February’s Seasonalities

Top40 30 minutes chart one more time

2011-02-01T08:33:00.001+02:00

We will review once again J200 (Top40) 30 minutes chart to see what the possible outcomes are.

J200 broke trend line few days ago and did back test it on January 27th, making at the same time first lower high. After making that high J200 plunged and lost 1100 points as of yesterday around 11:00. Around that time it tested low that was made on December 10th of the last year, breaking and closing below it for one bar, just to close above it immediately on the next one. From there on J200 bounced back to test 20 exponential moving average and it was stopped there and closed below 10 ema.

Very important level to watch is that low from December and yesterday. If that is broken there is very little support all the way down to 27000/27100 zone.

On the upside, close above 50 exponential average coupled with making higher high will bring bulls in control.

Trade with trend!

Top40 30minutes chart for January 24th

2011-01-24T13:07:00.000+02:00

Quick update for Top40 30minutes chart.

Rising wedge was broken on Thursday and break was retested on Friday and again this morning. Together with break 50 exponential moving average (blue line) was tested and proved to be a strong resistance. Market dived after initial strength this morning and it is currently some 350 points off the high.

There is another less sloped trend line on the chart, exactly where Top40 got stopped. Bellow that line is horizontal support around 28200 and if that is broken we will have very little support all the way down to 27100.

Dow theory is still pointing towards bull run, market made only lower high with no lower low yet. That will happen if 28415 is taken.

On the upside watch for close above 50 exponential moving average and new higher high above 28835.

Trade with trend!

Top40 end of the week review

2011-01-24T08:10:00.000+02:00

First three days of last week produced some sideways trading, making it five all together with last two days of previous week. Thursday and Friday brought us some direction, one big down day and one solid up day. All together, Top40 closed between 10 and 20 exponential moving averages on Friday, while close on Thursday was below 20 exponential moving average, third occurrence from December 1st.

Stochastic and RSI are more or less in neutral position, staying around 50 and together with MACD are still showing negative divergences. My personal opinion is that Top40 will still go down in short term – next week or two. If you check how last correction happened in second half of November you will see that it started with sideways movement, then down day, then market tried to recover and that failed, which was followed with only last two days being strong down days. Don’t expect that market will drop 2000 or 3000 points without any fight from bulls, as they will try to protect their positions in this market.

Dow Theory is still showing higher high and higher low, so trend is still intact, with 50 exponential moving average around 28200, almost paired with previous low. If those two levels are broken, look for more downside to come. On the upside, free money is coming from overseas and that can always push market higher.

Last week I posted Top40 30minutes chart that painted clear picture of rising wedge and potential targets.

Trade with trend!

Sunday Reading

2011-01-23T13:58:00.000+02:00

Bespoke:

Global Unemployment Rates

1% Declines From a 52-Week High

Streak Snapped at 37 Trading Days

Simply amazing!

Picture of the Day: Shanghai in 1990 and 2010

Some great visuals that The Big Picture has collected:

Stocks Oil, Gold, Bonds for the Long Run?

Total Market Cycle

Market Capitalization as a % of Nominal GDP

The Media Universe

Recession Recovery by the Numbers

Trading the Odds:

January Option Expiration Week

Today’s mistake

2011-01-21T07:32:00.000+02:00

Most of the traders and bloggers out there will show you how they make 100 or 1000 points every day, just to boost their ego. Completely opposite to that I will post my day’s trade in order to explain my mistakes: In 600 point day with clear trend I managed to finish some 80 points in red. Yes, it amazes me as well!

I missed first hour or so, as I had to go to municipality to do some work, so I was in front of screen from around 10:00.

First trade was short at 28772 around 10:20 (entries are marked with big arrows, exits with small arrows). Exit was 3 bars later at 28719 and the reason for close was red bar on high volume (stopping bar), which usually marks end of the trend. Profit 53 points

Second trade was at 28820 around 11:40 with very tight stop loss. ALSI tested previous high (from 9:50) and volume was not supporting move upwards, so it was ideal place to short. Unfortunately, I could not get full size and I had to go with my son to swimming lesson, so I had to close at 28780 for 40 points profit, but effectively it was only about 13 points, because it was only one third of the size. Ideally, this short trade should have been closed much later in the day. Easy close would be 14:00 at 28700 when we closed above 10 and 20 exponential moving average.

Later in the day I tried to go long, trying to find a bottom at 15:55 and later at 16:45 and both trades closed as losses. Loss for those two together was around 140 points, so day was closed with 80 points loss.

As I’ve analyzed chart tonight I realized that instead of trying to find bottom around 15:55, much easier and better trade was to go short at exactly the same time with very tight stop loss of around 30 points. That short could have easily gone all the way till the end of the day and it would have pocketed anything between 200 and 300 points.

So, today’s two good trades were short 28820 around 11:40 with 30 points stop loss and with close at 28700 for 120 points profit and second one was short 28700 around 15:55 with 30 points stop loss and with close for 100 points profit (to be modest). That would make you 220 points profit on the day when daily range was 610 points or 36% of daily range.

So, two lessons to learn from today’s experience:

- Don’t try to catch tops and bottoms, especially when market is up or down 500 points;

- Patiently wait for good setup, as it will happen at least once a day and can easily make your day.

Our job as a trader is to make money, not to trade. If you can make your daily target in one trade, relax and enjoy.

Trade with trend!

Top40 30minutes chart

2011-01-20T10:50:00.000+02:00

Today market is dropping so far, it is 260 points down as of 10:00, so let’s take a look of 30 minutes J200 chart to see what is telling us.

From September 2009 nice trend developed and it was not penetrated even once. It was tested three times. As of 10:00 trend line is around 28700 or some 50 points away. It is easy to notice rising wedge with top line connecting 4-5 recent tops.

Target for wedge if trend line breaks is around 26600 (red line on chart) and that is exactly where last break out happened. Top40 was stuck between 26500/600 zone and it broke above in October, after that it tested break out point few times and continued higher.

Levels to watch on downside are 28200 and that was last major low. Bounce can come from around that level. If that is taken, then 27100 is next target.

Trade with trend!

Intraday trading part II

2011-01-19T07:45:00.002+02:00

Over last several days I’ve got few e-mails from people asking when to exit their positions and this blog post is going to address that important issue.

I’ve tried to explain in post titled Trending or range day what one side of the medial is and how to distinguish between trending day and range bound day. Today I will take a look at daily range distribution and see what it is telling us.

First chart shows daily range distribution for ALSI from just before December 1st, 2008.

Second chart is from May 4^th, 2009, date on which, I would say, our market changed. Volatility evaporated, market changed from follow through to mean reverting and trend following systems started to struggle, while profits on some of them got halved form 2008 to 2009 and then dropped again significantly in 2010.

In this sample, there are 431 trading days and one can see that only 23 days or 3% were with daily range above 700. Most of the days were in the range from 200-500 points.

So, why are we publishing all these numbers and charts?

I would like to couple this information with the goal that was made in post titled How to become intraday trader. Stated goal was to get 10% of the trading range in the first three months of trading. To get 10% of daily range one must make at least 40 points in a day. So, answer to readers who emailed asking about exits is a very simple one: If you enter position and it went in your favour 50 points I would recommend to close it and wait for next signal. This will be good example to practice your discipline. As we grow as intraday traders will shift this boundary and will try to start taking more points when they are available, as final goal is to trade only when there is reason to trade.

And to finish off, I would like to quote one blogger: “Success doesn’t come easy, especially in trading. But if you can focus on your game and not dream of the million dollar carrot on the horizon, I am sure you will succeed.”

Trade with trend!

Top40 end of the week chart

2011-01-17T08:05:00.001+02:00

Second week of trading in 2011 was very nice, especially sessions on Tuesday and Wednesday. After four days of weakness market bounced nicely and on Wednesday J200 broke year to date high, making one more on Thursday. Finally, on Friday J200 showed weakness in the first part of the day, but bounced strongly towards the end of the day, with ALSI futures making fresh year to date high after cash market closed.

Currently J200 is trading above all major moving averages - 10, 20 and 50 and, so far, trend is very much intact. Close on Friday was at 29226 and that is 2167 points or 7.4% away from all time high at 31393. I’m of the firm belief that we are going to see new all time high and most probably that is going to happen sooner rather than later, as too much free money around the world is looking for home and emerging markets are favourite number 1.

Having said in mind, I just want to point that chart is showing some serious negative divergences on RSI and MACD. Negative divergences are not selling signal by itself, but triple negative (or positive) divergence could be a warning signal. One trend line is around 28500 together with 50 ema and the second one is way down around 25000. If/when those negative divergences play out market will correct very sharply and strongly. If one holds long term position, good place to close is close below 50 ema, but be ready to jump in long again quickly. Dow theory short will be close below 28194.

At the end, just want to conclude by adding that I don’t think this bull market is in any danger. For as long as interest rates in major countries are at zero or close to it, that is not going to change.

Trade with trend!

Friday reading

2011-01-14T14:33:00.001+02:00

Interesting article!

Why Chinese Mothers Are Superior

SMB:

Delisting Stress

The Big Picture:

Inflation’s Impact on S&P Price Return (1871-2010)

Can You Get Fear “Wrong” ?

The Talent Code:

Have You Had Your Vitamin S Today?

Not much, but it is end of the week, so it is time to go home.

Trending or range day

2011-01-13T09:16:00.000+02:00

The biggest question every intraday trader must have in the morning is what kind of the day market will present.

If market is trending during the day one could use moving averages and if market is stuck in the range one could use support/resistance trading paired with Stochastic oscillator. Problem is to know well in advance what is going to happen on that particular day. Obviously, nobody has crystal ball to tell us around 8:30am what is going to happen later in the session.

As an example let’s take a look on yesterday’s trading day and let’s see if we can spot anything that can tell us what to do?

First picture is screen shot from the first part of the day from open till around 13:00. As we can see market started slightly lower than it closed on Tuesday, ran up to drop for few bars and around 9:20 it broke opening range. This should be your entry to long, especially because we had very strong Tuesday and continuation is more probable than change of the trend.

After this break ALSI was running on 10 ema (green line) until around 12:00 when it closed below 10 ema for the first time. We were entering quiet period of the day in that stage (from 12:00 to 15:00), so you could assume that trend is running out of steam. Second warning signal should be close below 20ema (red line) and there about one should have closed long for potential profit of about 170 points.

So, now let’s see second part of the day from around 13:00 till end of trading day.

As you can see on this chart market was stuck in the range from 28120 to about 28220 for the rest of the day, not counting last surge after cash market closed.

As we can see on that chart, it is obvious that market was bouncing around 10 and 20ema. In this case one can use one of two options: One is to determine range border and wait for any of them to be broken, or to short top side of the range and go long bottom side of the range. Also, maybe the best option for me was to take rest of the day off because you made enough that morning.

So, trending day or range day?

If market is closing above and below important moving average (10 exponential and 20 exponential), where those two moving averages are close to each other and crossing each other all the time then one should use techniques to trade range.

If market is riding one of important moving averages, then it is time to sit and relax and enjoy your ride. In this case don’t be tempted to take 50 or 100 points profit because days like this can easily turn into 200-300 points day. Close your trade only when there is reason to close it, not because you made “enough” points.

Trade with trend!

How to become intraday trader

2011-01-11T15:46:00.000+02:00

In Thursday’s post I questioned if it is not maybe better to start with intraday trading. (Under intraday I mean trading with no overnight position as positions will be held only during the day.)

I am a swing trader and I was a swing trader for last 7-8 years and such transition will be a new challenge, but I’m looking forward to it. In other words, I’m becoming old and having position overnight, being glued to Bloomberg or Stockcharts is simply not for me.

How would I approach this transition?

Firstly, one must have systematic approach for entries and exits. Many intraday traders are using pivot points and that would be main trading strategy. To spice everything up I will add some moving averages - 10 and 20 exponential and 54 volume weighted moving average. Entry points will be at failed pivot points, short or long depending on market bias and exit will be on the test of significant moving averages or other pivot point. Main issue with trading intraday is to have tight stop loss and to be discipline enough not to question it.

Why pivot points as main trading strategy?

Again, I will refer to Thursday’s post in which daily range is outlined to be around 400 points. Over last 18 months average distance between pivot point and R1 was 51% or some 200 points per day. Distance between pivot and S1 over same time was 49%, so approximately 200 points again. This is logical, because if you deduct S1 from R1 you will get daily range.

So, what are the milestones in this process?

First one is to make 10% of average daily range over next 3 months.

Second is to make 12.5% of average daily range over next 3 months.

Third is to make 15% of average daily range over next 3 months.

And last is to make 20% of daily range over next 3 months.

That way at the end of 2011 I will be in position to make about 80 points on average per day, or about 19000 per year.

To make 20% of daily range maybe looks like a big target, but don’t forget that 20% of daily points is not even half of what the difference between pivot point and next major point (S1 or R1) is. And market is not going in straight line from low to high.

Will elaborate further on the topic in days to come.

Trade with trend!

Top40 end of the week chart

2011-01-10T08:20:00.000+02:00

First trading week of 2011 was an exciting one: First two days were up days with small range. Market made 52 weeks high on Tuesday at 28947. On Wednesday bears came out and pushed market lower - some 420 points on close. Thursday was again slow green day, which leaves us with Friday when bears were in control again.

Currently Top40 is trading below 10 and 20 exponential moving averages and that can be a warning signal. If you are trader who wants to catch swings lasting for a couple of days, you should be short already. Next line of defence for bulls is 50 exponential moving average that is around 27950, as well as trend line which is around 28100.

Major indicators are pointing towards more downside. Stochastic is at 45, MACD is around 200 and RSI is at 51. All recorded negative divergences from peak on November 15th and one on Tuesday.

Is this change of the trend?

I don’t think so. Market is so close to all time high that it will probably get there. This must be normal correction where market will get rid of access fat (overbought) that was accumulated over holidays. If you are looking to go long or add to long position, this will be good chance, but don’t rush into it and wait for a bit more downside.

Trade with trend!

Sunday Reading

2011-01-09T20:04:00.001+02:00

Bespoke:

Bull and Bear Market Lengths

Country Market Caps

Percentage of Stocks Above 50-Day Moving Averages

The Big Picture:

Long Term Stock Market Growth (1871-2010)

Apple the Sovereign

SPX Index Secular Markets (1900-2010)

Trading the Odds:

Will Too Many Bulls Really Make a Bear ?

VIX and More:

The Year in VIX and Volatility (2010)

and better version of the chart is here:

Some interesting stats

2011-01-06T09:42:00.000+02:00

Over last couple of days on some Internet chats story about volatility came up again. People are complaining because there in no enough volatility and they can’t make money. Daily range on ALSI is steadily declining and if we take last month into consideration it is well bellow the average.

So, I did some small exercise to find out how many points were available over last four years:

Year      Amount of all points available – Top40          Daily range
2007                   111.395                                               464
2008                   175.971                                               733
2009                   118.814                                               495
2010                    97.297                                                405

Number of points made (as percentage of total points available) by one of our systems is declining slowly from around 17% to 10.2% currently, so we are getting declining monthly returns. Reason for that is most probably lack of follow through over last 18 months or so.

So, question that I want to ask - Isn’t maybe time in South Africa to start considering intraday trading (like in US)? If you can make 20% of daily range every day you will easily beat probably all systems.

Trade with trend!

Gold – daily chart

2011-01-05T09:15:00.002+02:00

I was scanning through my charts and GOLD chart popped out as very interesting one.

Gold is in massive bull run, as you can see from this daily chart.

Is that going to continue?

There are some warning signs on that chart. First, market developed three push pattern on October 18th, November 9th and December 7th. Also, next swing high didn’t break previous one, so lower high was made.

Currently gold is trading below 10 and 20 exponential moving averages, but it is still above 50. If gold closes below 50 ema, that is currently just below going price, possibility of testing red line will increase.

If you want to be less aggressive, possible short trade would be close below 1361 low from December 16th.

Trend line is currently around 1263 and is resting exactly where previous major high was. So, some 100 points could be made on this short.

Stop loss is obviously close above 1431, which is previous major high.

Trade with trend!

Mid week reading

2011-01-04T20:48:00.000+02:00

Afraid to Trade:

2010 Intermarket Relationship Charts with the SP500

Popped Stops and History Repeating in SPX

Bespoke:

Overbought The Entire Month of December

Final 2010 Global Market Performance

Mark Goulston:

How America Messed Up Its Kids... And How We Can Fix Them

David Fry:

A Look at Base Metals

Derek Hernquist:

2011 Goals

SMB:

Dear readers, this is one great post and great series. Comments are excellent.

My list: some ideas for finding tradable edges

The Big Picture:

What I Expect in 2011

How the World Has Changed from 2000 to 2010

The Talent Code:

Got Passion? The Quiz

Trading the Odds:

Implications of 2010 Year-End Returns

A Perfect (Bullish) Score, if …

Top40 30 minutes chart

2011-01-04T07:46:00.000+02:00

Most of the time people trading one time frame get so focused on it that they can’t see what is brewing on other time frames. Best approach it to have global picture and one level lower time frame than yours and, of course, time frame that you trade. Even Dr. Alexander Elder recommends using 5 times bigger time frame to determine trend for time frame you trade. So, for example if you trade 5 minutes time frame one should first check 30 minutes chart to see what is going on.

We are going to do exactly that tonight:

As you can see from chart above, there is nice clear trend on 30 minutes J200 (Top40) chart. It was started on December 13th and it is still intact. Currently trend line is around 28650 and break of that level will signal change of trend. We have to be honest and note that market is not really steaming up, as it is easy to see that new highs are smaller every time they are made, but there are still being made.

There is a rising wedge on that chart, for my liking is too extended, as I prefer to see wedge breaking earlier. This is bearish pattern and there are around 700 points in it if it breaks, of course.

For now, 30 minutes chart does not show any weaknesses, we are solidly above 10 exponential moving average and long trade on your 5 minutes time frame should be taken more aggressively and short trades should be ignored or tight stop loss should be in place.

Trade with trend!

Top40 end of the week charts

2011-01-03T07:27:00.000+02:00

After some quiet period Alsi Trader will continue to publish regular updates and will try to progress further together.

Firstly, I would like to wish you Happy Trading in 2011 and to become best trader that you can be.

Let’s start 2011 with weekly and daily charts of Top40:

First chart is weekly and I’ve chosen it for one reason only - Last three years started with market dropping for 3-5 weeks in a row. I am not saying that this will happen again this year. As Mark Douglas says: ”Every moment is unique”, but I would choose to keep an eye on this curious development.

The second chart is daily Top40 chart and it points to extended market, with some visible negative divergences. Negative divergences are not trading signal by itself and certainly not confirming it is time to change trading side, but one must keep an eye on them.

If we continue with trend from previous years and if market goes for correction over first few weeks, levels to watch are 28400 (previous resistance now support paired with 20 exponential moving average around same level); trend line coupled with 50 exponential moving average that is around 27900 currently; further down 26500-26800 area.

On the upside, there are not many resistance levels all the way to all time high at 31393 or some 2640 points away. I have no doubts that Top40 will reach new boarders this year and if I can be brave with my prediction - It will happen in the first three months of the year.

Trade with trend

Weekend Reading

2010-11-14T20:40:00.000+02:00

Au.Tra.Sy. blog:

Excellent! I would recommend following volatility research too (link provided in post).

Trade with the “Big” Trend

Bespoke:

S&P 500 Breadth Hits a High For the Year

Breadth Pulls In Slightly

MarketSci:

An Early Look at Thanksgiving

The Big Picture:

“Quantitative Mining” Debasing Gold

Fascinating!

Kvetching on 311: What New Yorkers Complain About

Percentage of Stocks Over an Index’ Moving Average as an Oscillator

Top40 - end of the day recap for week ending on November 14th

2010-11-14T20:38:00.000+02:00

In this week’s update I will take a look at some important end of the day levels and ways to play them.

Last week was more or less sideways week with candles that showed indecisions. There are many reasons for that as numerous traders did not believe in this break out and were not ready to participate in it. But, as we all know, market does what it wants and it doesn’t care what traders think about the market. I believe that the most of them who missed this move are now expecting pullback, so no money is getting into market.

Top40 chart is showing us that market is trending very nicely from the low which was set in late August. Since then market added almost 5000 points and all of that in almost straight line. Close on Friday at 28253 was the highest close on Top40 from July 1st, 2008. Problem that Top40 is experiencing now is trend line connecting last two tops with current market top. It was tested few times this week and market had difficulties to break above it. Trend line is almost parallel with major trend line that started in early 2009 and all in all we have very nice channel.

Small channel that developed from low in August nicely determines current uptrend, with market spending most of the time next to top line. It is easy to see that 10 and 20 exponential moving averages are working as nice supports with 20 ema being tested only once over last 2 months. Oscillators on the top are overbought, but that by itself does not mean market shall collapse. In strong trends oscillators tend to stay overbought.

So, all in all, Top40 is in nice strong uptrend and so far there are no indications change will come soon.

If you are riding this trend - good for you and enjoy while it lasts. However, if you have missed it, don’t try to short it because there are good chances that you are going to lose money. Rather try to find nice pullback to hop onto it with tight stop loss.

Levels to watch are 20 exponential moving average and bottom of the channel - both in 27500 region currently. If Top40 closes bellow those two, one should consider closing long, or if we come close and test them one should add to long position with tight stop loss again.

My personal opinion is that we are not going to collapse 10-20% from here, more likely we are going to continue going up, with small pullback here.

Trade with trend!

Monday Reading

2010-11-08T07:41:00.000+02:00

Afraid to Trade:

Remember Remember the Fibonaccis in November

Au.Tra.Sy. blog:

State of Trend Following: October, best month of the year so far

Bespoke:

Dollar and Stocks Not Getting Along So Well Lately

Silver Gets No Respect

ETF Prophet:

Analogues Suggestive of SPX 1,250 by Year-End

Quantifiable Edges:

The Importance of Breadth & Volume Confirming A Move To New Highs

SMB:

The Fixed vs Growth Mindset- The Consequences (Part III)

The 800 pound gorilla in the room: EXITS

The Big Picture:

Current Dow Rally, Duration and Magnitude

The Talent Code:

How NOT to Develop Your Talent: The 3 Deadly Habits

Trading the Odds:

%B and (really) Overbought?

VIX and More:

Money Market Mutual Funds

J154 daily and hourly chart

2010-11-03T10:08:00.001+02:00

Let’s take a look at JSE’s J154 index or Other mineral extractor index, as two biggest companies listed on JSE, Anglo and BHP Billiton, are part of the index. Two of them, as well, make big part of J200, so those two indices are highly correlated.

First chart is end of the day chart from March 2008 and it shows clearly peak from 2008. After massive drop, index bounced and trended nicely. In April 2010 it broke trend line and retraced somewhat, making what can be seen as triple or quadruple bottom around 6800-6900 level. After last bottom was recorded at end of August 2010, market relied strongly and currently is at 8700 or some 2000 points from the bottom, what makes around 30% run. There is massive resistance on the same chart around 9100 that was tested already twice in January and April 2010. There are good chances that we are going back to it to test that level again. What is very symptomatic is that if J154 breaks above there is not much resistance all the way to all time high around 12700.

Second chart just shows how this 30% move from the bottom panned out. There are nice trend lines all the way that were not broken. J154 extended high above trend line, so we could see temporary pullback towards 8500 level. But, before this index clearly shows us some downside, I would not short J200.

Trade with trend!

EDIT:

As from 04.November J154 reached resistance at 9100. As you can see bump it's head three time today agains it.

There are two options now, first one is break above tomorrow where J154 will make new year to date high or second is small pull back and retest again.

Weekend reading

2010-10-23T13:08:00.000+02:00

This weekend’s selection is really good one and I would truly recommend to all readers to devote some time to read and chat with these articles. Enjoy!

Afraid to Trade:

Unusual Similarities in Structure for Current Rally and Prior Creep Up

BIDU Joins the Ranks of the Ten Baggers and a Lesson in Holding On

Au.Tra.Sy. blog:

Trend Following Wizards in September 2010

Word of Caution on Statistics

Bespoke:

Google (GOOG) 10%+ Gaps Higher

David Varadi:

Simplicity at the Expense of Reality

Derek Hernquist:

Think Differently, Not Opposite, About Markets

The Big Picture:

Peak Earnings Versus Stock Peaks

The Kirk Report:

Visualize Success

Simply amazing interview with Mike from SMB!

Mike Bellafiore

Monday reading

2010-10-18T07:13:00.000+02:00

Afraid to Trade:

Fascinating Chart as SPX Stays Tight Within Sigma Bands

Bespoke:

S&P 500 and Sector 6-Month Trading Range Charts

77.6% of S&P 500 Stocks Overbought

Relative Strength: Consumer Discretionary and Financials

Sovereign Debt Default Risk

Derek Hernquist:

(Mis)Use of Market Indicators

SMB:

Random thoughts (or, rather, thoughts about randomness)

The Big Picture:

Mortgage Market Breakdown by Equity/Delinquency

Weekend reading

2010-10-10T20:44:00.001+02:00

Afraid To Trade:

Quick Charting the EURUSD Daily Measured Move Price Target

Three Simple Trends You Should Not Be Fighting

Current Hourly Price Structure and Insights for the Dollar Index

Au.Tra.Sy blog:

September State of Trend Following report

Bespoke:

A Tale of Two Chinas

Percentage of Stocks Above 50-Day Moving Averages

Kiss the Financial Crisis Goodbye!

S&P 500 Priced in Gold

Over 69% of S&P 500 Stocks Are Overbought

MarketSci:

Very important!

More Random Bits of Data: Asset Class Correlation

Quantifiable Edges:

Happy Columbus Day?

The Big Picture:

Very interesting!

The Value of an Hour of Work

Excellent!

Gold Hits Our $1350 Target; Now What?

Explosive Growth in Food Stamp Usage

NFP Chartfest

The Kirk Report:

Lessons & Rules

Thursday reading

2010-09-30T14:31:00.000+02:00

Thursday reading

Afraid to Trade:

Update on SP500 Intraday Triangle and Market Internals

Bespoke:

# of IPOs by Month

Volatility Check-Up

29 Stocks in the Nasdaq 100 Up More Than Gold

CXO:

How Much Can High-frequency Traders Really Make?

Dollar-Euro Exchange Rate and U.S. Stocks

The Big Picture:

War & Peace + Inflation + Secular Bull = Dow 38K ?

Global Public Debt Clock

Trading the Odds:

Permanent Open Market Operations (POMO)

Top40 - end of the day recap for week ending on September 26th

2010-09-27T06:41:00.000+02:00

We haven’t seen much from our market last week. Out of four days we had only one decent day and that was Monday’s session with real direction. Tuesday, Wednesday and Thursday were not even worth the mention as all three days had small body with Tuesday having hardly 150 points daily range.

There is funny coincidence that out of last nine trading days only two were with some direction –both bullish and both were Mondays. Knowing that Friday was public holiday in South Africa and that US and European markets performed nice rally on Friday, there are good chances that we will have third Monday in a row with nice direction. Will the rest of the week be the same like the case of last two weeks, it is to be seen, but I hope that it is not going to be the case.

If we examine chart we can see horizontal resistance at 25800 and Top40 (J200) spent last week just bellow it. If J200 follows international markets then on Monday it should break that resistance with next possible stop around 26550 level, which is year to date high.

What we can also see on this chart is that 10 exponential moving average (green line) was acting as perfect support. From August 31st, when it was broken for first time, it was tested five times. So, if I was to short this market based on end of the day chart, I would consider waiting for 10 exponential moving average to get broken and it would be ideal for J200 to close below it. (Moving averages are, for me, the most important indicators and very often market stops exactly on them. I would highly recommend to traders with no experience to go and study moving averages, because one can trade with moving averages only and be very profitable.)

Indicators on top did not change much when compared to where they were last week. So, MACD is above signal line and above 0, RSI is still around 65 and it is not moving much, but that is expected when it deals with market with no much momentum. Stochastic is well above 80 and it is bouncing around 90 and it is not moving much, but, again, that is expected when we deal with nice trending move.

Last directional move on J200 from August 25th to September 23rd recorded 2111 points or just above 9%.

Trade with trend!

Weekend reading

2010-09-25T17:44:00.000+02:00

Afraid to Trade:

The All Important Level to Watch on the US Dollar Index

SP500 Levels to Watch and Market Realities You Should Know

Bespoke:

No Longer A "Goldman" Market

International Revenue Exposure

Technology Rallies; Financials Falter

Charts Gone Wild:

Excellent post with some sharp old-school and new-school points!

Key Psychological Shifts Forming the Foundation for this Rally

CXO:

Turn-of-the-Month Effect Persistence and Robustness

Does the Turn-of-the-Month Effect Work for Sectors?

The Big Picture:

Job Change Post-Recessions

Property Taxes in America

US National Net Worth Plummeted 26%

Effect of Structural Deficits on USA National Debt

4 Recessions (and Recoveries)

USDZAR end of the day chart

2010-09-23T08:40:00.000+02:00

During last few days Rand was appreciating against US dollar or, should we say, US dollar was losing value against all major currencies and commodities, so Rand was gaining against it too.

We should take a look at what end of the day chart is telling us:

Firstly, USDZAR is in clear downtrend from peak that was made in July 2008 (when risk appetite for emerging markets dried out). From almost 12.00 we came all the way down to 7.00, where it is trading now.

On downside (ZAR appreciation) we can look at 7.00 level that was breached yesterday for short period of time, but pair bounced back above. Below we have 6.80 that played massive role in the past. From 2005 all the way to 2007 – 6.80 was resistance, then support, then resistance again and then support again, and it looks this time around it will act as support again. If that level is broken we can see more downside for USDZAR with potential target in 5.70-5.90 region.

On the upside first resistance to watch is 7.20 that acted as support for more than a year (from August 2009 till few days ago). Above that we have downtrend line that currently seats around 7.35 and if that level is broken, than we again have horizontal resistance around 7.80-8.00.

For now I guess USDZAR will test 6.80, but from there on, I believe one should be very careful. Fast bounce towards 7.20 is most probable scenario after test.

Looks like RISK is ON for now and money is flowing into South Africa.

Trade with trend!

Trading course

2010-09-22T06:33:00.000+02:00

Over the last few weeks I’ve received quite a few e-mails with questions regarding trading courses in South Africa - which one should attend and what course is the best one?

I’ve tried to answer everyone’s questions, but then I’ve realized that I can type post that is going to address that subject.

I would like to start by sharing my experience from years back, when I started with trading. At that stage there were no blogs, tweets and other modern ways of sharing information about trading - one could buy a book or attend a course. So, I started to read and buy books and as I was reading them I would go over some of them a few times. At the same time, my first course that I attended was SA Warrants and that’s when Simon and Manfred explained warrants and how they work and who makes the market. They also used all funny Greek letters. Some time later, my second course was about Technical Analysis and it was presented by the same guys. Also, some time later Larry Williams came to SA and I was attending his course as well, and I must say that I can not recall ever having spent money on as bad a thing in my life. Finally, at that stage trading blogosphere was emerging and I would read all that I found interesting.

After several years I’ve decided to go for another course, named “ALSI trading” presented by Dr. David Paul and followed the following year with another of his courses which was a two day course. Those two were good ones and really enjoyable.

So, let’s go back to the topic – Which course is the best in South Africa and which courses should one attend?

I guess my answer is going to steer a lot of unhappiness among course organisers, as my answer is: simply NONE!

Reasoning behind this opinion:

Course that you choose to attend is, probably, going to be overpriced. You will have to pay approximately R10.000 for some lousy lunch, where somebody with very little or no experience in trading will teach you two or three shady setups that you will most probably forget before you get home or maybe even earlier. They will, for sure, try to sell you the next course that will teach you all that you need to know to become ultra rich before you are 25 years old and/or they will probably try to sell you software that have all indicators which are optimised for making exactly a million a month.

So, how should one learn about trading?

There is lots of free and quality info available on various blogs related to trading – go and read them! Find ones that you enjoy the most, read them every day or week, read comments published on them, read all that you like and all that you don’t like. Then practice, practice some more and practice every day and every weekend and print daily your charts of instruments you trade, with marked entries and exits and when market is closed dedicate some time and energy to review them. I do that on early mornings of every Saturday and I would suggest you to take approach of printing your charts as you make trades, write your comments regarding entry, target, thinking behind trade, etc. Then, again when market is closed, review and find out if you have done correct thing. And do this over and over again as trading is about practice, like anything else in life. Simply, it is not about perfect indicator or set-up. The more you trade, the more experience you will gather and it is going to become easier for you to see proper set-ups. But, to reach that level you will need to analyze thousands and thousands of charts.

Finally, with all the blogs, books and trading forums - One has no need to go to trading courses, as one can teach oneself all that is needed for trading.

However, if you want to attend a course here in SA, I recommend only courses held by Dr. David Paul.

Trade with trend!

Disclaimer: I am not compensated in any manner by Dr. David Paul and this positive review was not solicited in any way and Dr. Paul was, actually, not aware of this public and positive feedback from me.

Tuesday reading

2010-09-21T14:35:00.000+02:00

Afraid to Trade:

Unusual Recent Moves with Stocks Oil and VIX

Bespoke:

Dow 30 Trading Range Screen

Charts Gone Wild:

Intermediate-term Index Support/Resistance

CXO:

DJIA-Gold Ratio as a Stock Market Indicator

David Fry:

Bulls Giddy Up

Derek Hernquist:

Imagine Crossing the Behavior Gap

Scott Bleier:

Think all the major indices have broken out? Think again…From CreateCoin Premium…

Quantifiable Edges:

When the SPX and VIX Both Rise on a Friday

SMB:

Traders Ask- What is My One Good Budget?

Pullbacks: an example in RIMM, post-earnings 9/17/10

The Big Picture:

Who Gets What If Tax Cuts Are Extended

Its Official: Recession Ended June 2009

Trading The Odds:

September Seasonalities and OE’s Price Pattern

SPY 2 up before FOMC session

Top40 - end of the day recap for week ending on September 19th

2010-09-19T21:04:00.000+02:00

Last few weeks didn’t bring us a lot on the end of the day front. For almost a year now Top40 (J200) is stuck in sideways channel. In October 2009 Top40 broke 22900 and in that stage such break looked like important one. However, J200 rallied quickly to 25500 in early January 2010 and following January market tried four times to break 22900 and four times to break 25500, with one failed break in April this year.

Currently we are trying for the fourth time. Market spent last few days around or just below 25500, with Friday morning which looked like breakout, but market faded away during the day.

There are massive resistance levels around 25500-26000:

First is 61.8% Fibonacci level for the drop from May to November 2008. Many technical guys consider 61.8% level as last resort for bulls or bears and break of that will be final confirmation that trend has changed.

Second resistance is down-sloping trend line that started on all time high in May 2008. It was tested three times already and it still holds tight. So, break of trend line will be another nail in the coffin for the bears.

Third resistance is horizontal line around 26000 that connects last three tops, including the one that was just a bit higher, but to prevent TA purists even Elder says that you should place lines through congestion, not through exact peaks.

J200 is above all moving averages and they paint bullish picture as well. Indicators are in the upper half, with Stochastic being above 80 for few days already. RSI still have space on top to run, but as RSI is momentum indicator it will move when market moves. Last four days J200 hardly moved on end of the day basis, so RSI is stuck around 60. MACD is pointing up and it is above signal line.

Finally, I am here not to predict what market is going to do, my goal is to follow it. If we check previous events and if market repeats what it has done already few times, I would recommend going short here with tight stop loss (break of 26000). There are not too many reasons to be too bullish here, as there were not too many reasons to be too bearish around 29900. And as law of inertia states: ”A body (market) moving on a level surface will continue in the same direction at a constant speed unless disturbed.” So, as far as I’m concerned market will stay in sideways channel between 22900-26000 levels for now. Break will happen, but nobody can tell you when and whether it will be up or down.

For people that are not used to shorting market, I would use famous words from Jesse Livermore: “After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting.”

So, stop thinking, sit, relax and wait for the break. There will be enough points to be made after the breakout, so direction of the break should not be guessed, but waited to be seen.

Trade with trend!

ALSI daily range

2010-08-25T11:19:00.000+02:00

Just as a follow-up to one of the previous posts (http://alsi-trader.blogspot.com/2010/01/blog-post.html) I’ve decided to post these two charts.

We had some movement and systems responded to a certain degree, but things are not yet as “busy” as we would like them to be.

Trade with trend.

Update on J200 end of the day

2010-08-25T08:35:00.001+02:00

I wanted to update Top40 (J200) end of the day chart, as of yesterday’s close.

Top40 (J200) dropped heavily yesterday and just touched trend line. This is third touch and trend line is becoming more valid. Previous low at 23770 is not broken yet, so be careful today out there. Bias is on a short side, but we have lots of support around these levels.

On the bearish side - there is broken rising wedge with target around 22900 and that is still on cards.

Trade with trend.

Mid week reading

2010-08-25T08:32:00.000+02:00

Afraid to Trade:

A Closer Look at Corrective and Impulsive Phases in Gold

Twists Turns and Traps: Chart Updates for Potash POT

Bespoke:

Final Earnings Season Stats

Q2 Earnings Growth Beats Expectations

Existing Home Sales Expected to Be Down in the Dumps

Asia's Daily Impact on US Markets

Charts Gone Wild:

Some excellent reading.

The Four Stages of Learning

Correction in the Poker Industry

The Top 10 Largest Crashes

Mutual Fund Industry Unable to Recover, Historically Low Cash Levels

David Fry:

Stocks in Summertime Funk

Scott Bleier:

Everyone is scared shitless. So why isn’t the VIX?

The Big Picture:

Is the Fed Pushing on a String?

Top40 - end of the day recap for week ending on August 22nd

2010-08-23T07:29:00.000+02:00

It is time again to check what Top40 chart is telling us.

Top40 was in a solid downtrend over last month or so, actually - out of last 18 days only 4 had higher close, while on 14 occasions we had solid red days. Top40 dropped from 25799 on August 2nd to current 23921 (with low of 23770), making it massive 2000 points drop from high to low.

So, let’s first see what patterns and trend lines are telling us: There is massive trend line resistance around 25700 that stopped Top40 twice already this year. That line is drawn from all time high in 2007. Break of that trend line would be very important for bulls, but that is for now out of question. Top40 first has to clear about 2000 points on upside.

On a down side we have trend line support around 23600-23700, just bellow Friday’s levels, and below that value we have crucial support in 23000 range. That support held three times in May, June and early July, as well as it held earlier in February. That same level is neckline for massive head and shoulders pattern that developed over last nine to ten months. Break and conformation below neckline could easily push Top40 down to 19500-20000 zone. So, this is point to watch if you are bear. It looks like range between bulls and bears is getting smaller (it is only 2000 points now), so maybe we could expect some resolution soon.

Indicators look oversold, Stochastic especially, while RSI is not so oversold (around 35 but in current sideways market it dropped below 30 only once). MACD is below 0 line.

Moving averages, which help us to determine long, medium and short-term trends:

• long-term (200sma) - DOWN

• intermediate (89sma) - DOWN

• short-term (10ema) - DOWN

Trade with trend!

EURUSD head and shoulders

2010-08-20T12:12:00.001+02:00

Let’s take a quick look at EURUSD 4 hour chart.

Pair broke second important trend line, following break of one in early August. There is more than obvious head and shoulders pattern with neckline around 1.27 being broken. Target for pattern is around 1.21 to 1.22, so we should see more on downside.

EURUSD is in very strong down trend and it looks like it is going to stay like that.

Trade with trend.

End of the week reading

2010-08-06T07:39:00.001+02:00

I believe in reading. It is a form of communication, which brings fresh ideas and new perspectives or involves reader in self-discussion which, in turn, leads to more work on current projects. That’s why I share (almost on weekly basis) links to the people who, in my opinion, contribute in positive manner to trading blogosphere.

Here is this week’s selection of people and ideas:

Afraid to Trade:

Triple Fibonacci Confluence Reveals TrappedSP500 – Key Levels to Watch for Breakout

Au.Tra.Sy. blog:

Super Trend Following Index?

the State of Trend Following in July

Bespoke:

S&P 500 P/E Ratio

Country Default Risk

CXO:

Testing Engulfing Candlesticks

MarketSci:

The (NEW) State of Short-Term Mean-Reversion:July, 2010

The Big Picture:

Boomer Bust

The Kirk Report:

Justification Mode

The Talent Code:

How to Be a Late Boomer

Friday reading

2010-07-23T13:39:00.000+02:00

Afraid to Trade:

Color Chart and Major Support Line to Watch in Gold

Will it Hold or Break? Major Resistance Revealed on the Three Indexes

Au.Tra.Sy blog:

Trend Following Wizards – June 2010

Bespoke:

The US Lags

International Market Snapshot

CXO:

Success Factors for High-frequency Pairs Trading

David Fry:

Earnings and Punchbowl Beat Poor Data

Quantifiable Edges:

Low Volume Bounces Like Monday’s Have Fared Poorly in Recent Times

SMB:

Don’t Give Away An Edge

The Big Picture:

Ego: Illusionist, Trader’s Nemesis

The Talent Code:

Why Being Terrible is Kind of Wonderful

Mid-week reading

2010-07-14T11:47:00.000+02:00

Afraid to Trade:

SPX Tests Critical Daily Resistance Cluster July 13

The Support Shelf and Trading Range to Watch in AAPL

Bespoke:

Down 5 Days, Up 5 Days

Country Stock Market Performance

S&P 500 6-Day Winning Streaks

Woodshedder:

Buy the SPY After 5 Consecutive Higher Closes?

The Big Picture:

The Startup Business Cycle

4 Secular Bear Markets

The Kirk Report:

Everything Evens Out

VIX and More:

The Risk Trade

Reading to kick star new week

2010-07-12T07:15:00.000+02:00

Afraid to Trade:

Upside Levels to Watch on the Daily SP500 July 8

Market Internals Matter! A Closer Look at the Three June Market Reversals

Bespoke:

Earnings Season Starts Monday

David Fry:

Light Volume Temptations

Derek Hernquist:

When Should I Break the Rules?

MarketSci:

The Death Cross

Reading the Markets:

Who is a trading talent?

The Kirk Report:

Independent Trading: Pros & Cons

The Talent Code:

The 0.25 Second That Makes All the Difference

Top40 update

2010-07-05T07:38:00.000+02:00

Last week was one to forget – in case you are holding Top40/Satrix 40. All in all, over last 9 days Top40 closed only on two occasions higher than previous day and both of those bars were not convincing at all. Market is still holding long term support around 22900, but will see what happens during new week.

Oscillators dropped last week and now they are in oversold position: Stochastic is around 10, while Relative Strength Index is around 40. At the same time, MACD is struggling to break 0 and good thing about MACD is triple positive divergence, which is quite visible now. Positive divergences can be spotted on RSI as well.

Coming week can bring us, as always, two scenarios: First one is bounce from support at 22900 and test of upper trend line and 200 simple moving average which is around 24500. On the bearish side, break of 22900 could take us quickly to 21700 support from August and September 2009.

Moving averages, which help us to determine long, medium and short-term trends:

long-term (200sma) - DOWN
intermediate (89sma) - DOWN
short-term (10ema) - DOWN

Trade with trend!

Weekend reading

2010-07-02T11:21:00.000+02:00

Afraid to Trade:

1930 Dow Comparison Hitting Too Close to Home

Writing the Obituary for the Stock Market

The Collapse of the EURCHF and the Relation to the SP500

Gold’s Strange Top Heavy Chart with Negative Divergences

Hidden SP500 Fibonacci Confluence Last Hope for Bulls

Bespoke:

Reaching the Halfway Mark

Percentage of Stocks Above 50-Day Moving Averages Back Below 10%

Bearish Sentiment at Highest Levels Since July 2009

Percentage of S&P 500 Stocks Above 50-Days Down to 4%

Google (GOOG) In Uncharted Territory

CXO:

Stock Market and the National Election Cycle

A Slinky (Short-term Reversion) Effect?

David Fry:

Incredible Stock Market Performance

Woodshedder:

What you NEED to Know about The Death Cross

Scott Bleier:

A disconnect between Wall Street & Main Street?

MarketSci:

Independence Day and the Stock Market

Reading the Markets:

The growth curve of highly successful businesses

The Big Picture:

Dark Cross History

UK Public Spending by Government Department

Psychology Cheat Sheet

Vix and More:

VIX Showing Signs of Progressive Desensitization

Top40 - end of the week update

2010-06-28T07:04:00.000+02:00

It looks like volatility in our market dried up with the start of World Cup. ATR is back below 2% (10-day ATR) and it is pointing down very much. Will see what is going to happen in remaining two weeks.

Top40 tested high around 25300 on Monday, but it did not break it. Trend line connecting two highs (from April) was around same level. After failure to break above, Top40 got sold off for the remaining of the week, recording four red days in a row and closing week at 24263, which is below 200 simple moving average.

Stochastic turned down and currently is around 64, relative strength index is pointing down as well, but it is still above trend line that was made with positive divergences. Macd is above zero and signal line, but as well pointing down.

Coming week can bring us two scenarios: First one is another attack on trend line with high around 25300 and this time 89 simple moving average is there as well. On the bearish side, market can sell off even more and test 22900-23000 level one more time.

Moving averages, which help us to determine long, medium and short-term trends:

long-term (200sma) - DOWN
ntermediate (89sma) - DOWN
short-term (10ema) - DOWN

Trade with trend!

Reading to kick start new week

2010-06-21T14:35:00.000+02:00

Afraid to Trade:

Opportunities and Levels to Watch in NASDAQ and QQQQ June 16

Breakout in GLD? A Look at the Arc and Triangle

Current Standard Deviation Bands for NASDAQ and Dow Jones

Au.Tra.Sy blog:

Trend Following Wizards: negative month (May), 2010 now in the red…

Bespoke:

Stronger Than Expected Capacity Utilization

TED Spread Sees Largest Decline Since March

Gold vs Dollar Correlation

Chris Perruna:

Trend Reversal Coming…?

CSS Analytics:

High Frequency Trading and the Online Retail Investor

CXO:

The Lure of Trading at the Open?

David Fry:

The Most Boring Expiration 'Ever'

Woodshedder:

Backtest Report: Stocks Above 5 Day Moving Avg. Indicator

Scott Bleier:

Dollar Chart-Art…

The Big Picture:

America: Where Are You Moving From?

On the Treasury “Bubble”

U.S. Consumer Spending ChartFest

VIX and More:

The Elusive Trading Range

Top40 - end of the day update

2010-06-21T07:37:00.001+02:00

Last week brought us four trading days, with futures close-out on Thursday.

Top40 progressed further and now there are 5 green closes over last 7 trading days. Index added almost 2000 points in those 7 trading days and formed doji on Friday. Target for falling wedge on Thursday has not been met and there are approximately 1000 more points to go.

What should worry bulls is Stochastic, which is resting around 90 level, but as we know it can stay in overbought position in prolonged up moves. RSI is flattening out and MACD is around 0 level, but above signal line.

Moving averages, which help us to determine long, medium and short-term trends:

long-term (200sma) - UP
intermediate (89sma) - DOWN
short-term (10ema) - UP

Trade with trend!

Top 40 - daily update

2010-06-15T07:47:00.000+02:00

After few weeks during which some changes took place on ALSI TRADER, we are riding again.

Today we will take a look at daily chart of Top40 index.

Firstly, what we can see is that Top40 broke down sloping trend line and for now correction is over for this market. Trend line was at the same time top line of falling wedge pattern and with braking of that top line on Thursday and back test on Friday, so far we can say that falling wedge patter is broken. Target for that pattern is around 26100, few points short from year to date high.

If we inspect indicators on top of the chart, there are very obvious triple positive divergences on RSI and Stochastic oscillators and positive divergences on MACD. Stochastic is currently around 70, but RSI and MACD still have room to go up.

So, for now, Top40 chart looks very bullish, but markets are jittery, so have you mouse ready to trade.

On the down side, there is obvious support around 22900-23100. It was tested four times so far in last few months and this level is clear border between bulls and bears. Bulls should not be worried if Top40 is above it.

Moving averages, which help us to determine long, medium and short-term trends:

long-term (200sma) - UP
intermediate (89sma) - DOWN
short-term (10ema) - UP

Trade with trend!

Reading to kick start new week

2010-06-15T07:11:00.000+02:00

Afraid to Trade:

Dow Jones Priced in Gold Long Term View June 9

Third Time’s a Charm? SPX Tests Line in Sand

Bulls Willing to Do Anything to Avoid Falling into Market Abyss

Bespoke:

I would recommend reading these short and informative posts in given order, as it really paints nice picture of strange market action.

TRIN Index Shows Extreme Selling

6-Month Rolling Change of the Dollar Index

Consumer Discretionary Still Leading, Technology Not

Percentage of S&P 500 Stocks Above 50-Day Moving Averages

S&P 500 10-Day A/D Line Back in Positive Territory

and some fun:

The World Cup Indicator?

CXO:

Lunar Cycle and Stock Returns

End-of-Quarter Effect

David Fry:

A Market Show About Nothing

Woodshedder:

Very nice two-post mini series on ATR.

How to Adapt to a Volatile Market- Part 2

The Talent Code:

3 Principles of Goofing Around

The Big Picture:

NFP Chart Round Up

Oil Consumption Around the World

Mid-week reading

2010-06-09T13:14:00.000+02:00

Afraid to trade:

Long Term View of the VIX from Crash through Recovery

Bespoke:

S&P 500 Price vs Breadth

S&P 500 50-Day Average Daily Change Back Above 1%

S&P 500 Average Hourly Change Since April Peak

CXO:

Very interesting!

A Daily Stock Return Cycle

David Fry:

There Will Be Growth Next Spring?

Engineering Returns

Very informative!

NDX100: the impact of inside bars for mean reversion

SMB:

Simple and it works!

Do What You Do!

The Big Picture:

This is scary!

FDIC Bank Closure # 81

Anatomy Of A Bubble

Home Sales Collapse w/o Government Support

Reading to kick start new week

2010-06-07T07:38:00.000+02:00

Afraid to Trade:

The Great Wall of Resistance at SPX 1110

Au.Tra.Sy blog:

May: +35% for some Trend Followers!

Bespoke:

TED Spread Widens Again

Up and Down and Round and Round

Crisis Moves to Hungary?

Worst Jobs Day Since at Least 1998

Market Sci:

The State of Short-Term Mean-Reversion: May, 2010

SMB:

Very inspirational post!

Coach Wooden Taught Us Trading

Very good and very interesting!

First Ticks – Wrong Ticks

The Big Picture:

Interesting.

McKinsey: Equity Analysts Are Still Too Bullish

3 Psychological Phases of a Bear Market

The Kirk Report:

Simply great dead!

Learn To Love Uncertainty

The Talent Code:

Rules of Ignition

VIX and More:

I find this to be very interesting.

Low ISEE Equity Number

Mid-week reading

2010-06-02T10:19:00.000+02:00

Afraid to Trade:

Rounded Reversal Forming Again on Intraday SP500 June 1

Bespoke:

Worst Starts to June

Ray Barros:

Very nice reading!

BarroMetrics Views: The Four Rooms of Change

David Fry:

As always, very nice and clean market commentary.

Stocks Fall in a Sinkhole

Scott Bleier:

Interest rates rising? WRONG

Market Rewind:

EasyLanguage Relative Volume Indicator

MarketSci:

Seasonality Map for June, 2010

Quantifiable Edges:

Very interesting way to look at A/D

A/D Line Highs and Maximum Risk

Reading the markets:

Simple and very true!

The channel of happiness

The Big Picture:

Wow!

Walk Aways, NYT Version

Very thought provoking!

Gold vs Other Secular Bull Markets

VIX and More:

Chart of the Week: SPX, Fibs and 200 Day MA

Chart Addict:

What Can Traders Learn from the Gulf Oil Spill?

Reading to kick start new week

2010-05-31T07:58:00.000+02:00

Bespoke:

Country Stock Market Performance Year to Date

Memorial Day Week Market Performance

David Fry:

Very nice look at Friday’s action!

Markets Back Off on Spain Downgrade

SMB:

One more good read from folks at SMB!

Ten Mistakes by BP a Trader Should Never Make

The Big Picture:

Take a look at Gold!

Gold Relative to S&P500 (1928-2010)

Reading to end work week

2010-05-28T13:09:00.000+02:00

Afraid to Trade:

So… Why Exactly is Technical Analysis Important?

Will February SP500 Pattern Repeat and Show the Future?

The 1100 Level on the SP500 May 27

Au.Tra.Sy. blog:

Very good read and useful calculator!

Your worst Drawdown is yet to come

Bespoke:

Emerging Market vs. G7 Public Debt Levels

Yesterday's New Home Sales Report

Bearish Sentiment Spikes

S&P 500 and Sector Breadth

Ray Barros:

BarroMetrics Views: Ebb & Flow Management

CXO:

Very good and very thought provoking!

Exploiting the Predictability of Volatility

David Fry:

Window Dressing

Engineering Returns:

Fresh and crisp reading!

Trend following and global stock market health

MarketSci:

Memorial Day and the Stock Market

Reading the Markets:

Can a trader’s life be meaningful?

The Big Picture:

Unemployment Rate Correlation with Mortgage Delinquency

The Talent Code:

Building a Leader’s Brain: The Underdog Plan

Quantum Financier:

Volatility Autocorrelation in Different Markets

VIX and MORE:

The Vix, Rule of 16 and Realized Volatility

How to develop trading system - part 3

2010-05-27T08:49:00.000+02:00

So, after we decided what we are going to trade (South African ALSI futures) and what software and data feed we should use, we are ready to go into more depth and think about what kind of trading approach we shall pursue.

There are two basic trading approaches:

1. Trend following

2. Mean reverting

The most common method of system trading is the trend following trading. In its most fundamental form, this approach simply waits for a significant price movement, then buys or sells in that direction. This type of trading approach banks on the hope that these price movements will maintain the trend.

Systems based on trend following can be designed around two basic indicators: moving averages and price breakouts.

Moving averages are probably the most used indicator in trading. They show average of the price over predetermined period of time. There are many variations of moving averages and more could be found if you just do some Internet searching and reading on this vast subject.

There are two ways to determine start of the new trend with moving averages. One is simple crossover and the other is penetration of the moving average. In the first instance when faster moving average crosses above slower, new trend is determined and you should take new position. Second one is penetration - when you just need one moving average and price. Close above or below moving average will determine trend and position should be taken accordingly.

The fundamental concept behind price breakout systems is similar to that of a moving average system. The idea is that when a new high or low is established, the price movement is most likely to continue in the direction of the breakout. One indicator that can be used in determining breakouts is a simple Bollinger band overlay. Price breakout tactic was used by famous “Turtle Traders”. Used time periods were 25 and 50 days highs.

Trend following trading systems will always be lagging in nature. They can never hit the exact top or bottom of a trend, as trend followers don’t try to pick bottoms and tops. This inevitably results in a forfeiture of potential profits, which can sometimes be significant. What we at ALSI TRADER are trying to do for the most of the time is to catch the middle part of the trend. We will gladly leave few points on the top and bottom for somebody else.

Other way to approach trading systems is around mean reverting concept or trading countertrend moves. Basically, the goal with the countertrend system is to buy at the lowest low and sell at the highest high. Last ten or so years in United States, markets were following mean reverting principal and one of the most used indicators was relative strength index with period 2. There is lots of reading on the web about this, so please go and read if you are interested.

The main difference between mean reverting and the trend following systems is that the countertrend systems are not self-correcting, meaning that trend following systems will give you new signal when trend changes and one should go out of trade and change position. With mean reverting systems one must have hard stop, because market can just continue to go against you.

As far as ALSI TRADER is concerned, South African markets are very much trend following markets and future posts will stay on the track of that trading approach.

There were some e-mails asking me to hurry on this topic and post everything at once. One should understand that this is very sensitive topic and lots of thinking must be implemented on reader side as well. In each of three posts I’ve gave several directions for reading on related subjects and honestly I would really appreciate if all readers invest time and energy in education, as my posts can just touch several points of system design, while in-depth analysis is always going to be required.

Many decisions are to be made and please stay with us. At the end, we will have nice trading system that can be used and I am looking forward to develop it together with you as we progress.

For more information look at previous posts:

How to develop a trading system – part 1

How to develop a trading system – part 2

Trade with trend!

Reading to kick start new week

2010-05-24T07:59:00.001+02:00

Afraid to Trade:

Year Long Chart View of Key Support in GS and JPM

The Arc Pattern and Support Test in Gold

Bespoke:

Sector and Stock Performance Since the 4/23 High

David Fry:

A Wild End to a Wild Week

The Big Picture:

Federal Debt as a % of GDP

Top Tax Rate? Socialism

S&P 500 Rally Draw Downs

Top40 - end of the day recap for week ending on May 23rd

2010-05-23T19:14:00.000+02:00

For last several weeks volatility is the name of the game for the JSE. Top40 had another down week, closing 961 points lower and on Friday at one stage it was down by 1442 points. First two days were with slightly positive bias for the market, but then from Wednesday real selling came in. Thursday brought, after many months, more than 1000 points daily range with solid close below 200 simple moving average. On Friday market went up initially, just for bears to come in and push it lower. Top40 tested long term support at 22900 and luckily for bulls it bounced from there. Even Top40 broke low from early February and it managed to close above. Also, bulls should be worried by Top40 having two consecutive closes below 200 simple moving average for the first time in more than a year.

So, what we can expect in a week to come? Market will probably rally from these levels and test 200 simple moving average and trend line that is currently around 24500. Positive divergences on Relative strength index and Stochastic are pointing to that. However, after that we could see another downslide that should test horizontal support at 21500, what is at the same time target for broken channel.

Please be very cautious out there.

Moving averages, which help us to determine long, medium and short-term trends:

long-term (200sma) - DOWN
intermediate (89sma) - DOWN
short-term (10ema) - DOWN

Trade with trend!

End of the week reading

2010-05-21T07:46:00.000+02:00

Afraid to Trade:

SPY Forms Interesting Intraday Trend Channel May 19

Bespoke:

Not Everything is Bad Out There

Oil to Natural Gas Ratio Comes In

Worst Earnings Season in at Least a Decade for Stocks

Sector Breakdown of Earnings Day Performance

CXO:

Does Volatility Selectively Filter Good and Bad Days?

Bubbles: Ride, Watch or Play the Pop?

David Fry:

Markets in Turmoil: Dave's Daily

Market Sci:

The Golden Cross: Daily vs Weekly vs Monthly

Quantifiable Edges:

From1% Up Intraday to 1% Down Close

SMB:

Sectors and Money Flows Revisted

The Big Report:

What’s Up with Goldman Sachs?

1987 Redux: Impossible or Likely?

National Debt by President

NASDAQ Cumulative Volume Trends Negative

The Kirk Report:

Excellent read!

Stubborn Determination & Confidence

Vix and More:

Chart of the week

Volatility and Wide-Range Days with Neutral Closes

Top 40 60 minutes chart

2010-05-20T13:44:00.000+02:00

Just as I am typing this Top40 is breaking support around 23450 and is going for the next one which is in the 22900-23100 region (double red horizontal line).

If we look back, Top40 was trading in nice up channel (blue lines) from March 2009 till just few weeks ago. It broke it on May 5th then retested it on May 13th and from there on it is just downslide. Target for that breakout is around 21200 and that is exactly 50% Fibonacci retracement level drawn between low of March 2009 and high of April 2010.

To me, more weakness is expected, but watch 22900-23100 as possible support and bounce. If that level is broken, than Top40 will get to 21200 in no time.

Trade with trend!

EURZAR daily chart

2010-05-20T07:17:00.003+02:00

Today we are going to take a look at what kind of picture daily EURZAR chart is painting.

It is obvious that EURZAR is in strong downtrend which started in November 2008, after reaching peak around 15.30. From around November 2009 EURZAR is in clearly defined downtrend.

On Tuesday and during early morning yesterday EURZAR tested long term support at around 9.30, coupled with bottom of the channel. Support held and market bounced some 30 points or 3% and it is resting around previous support which is now resistance (around 9.62) and for now that is where top line of the channel is.

To me 9.30 looks like very solid and strong support that will not be broken easily. Problem here could be that big guys are not anymore keen on risk side so much. That could cause EURZAR to go up from here, because money can flow out of the country.

On the upside, if channel is broken EURZAR will test 9.95-10.10 in no time. Those levels can play resistance and stop market to go further up. Just be aware that there is empty space between 10.00 and 10.70 with not much resistance on the chart. If market breaks above 10.00, especially with global markets continuing in southbound direction, we could see 10.70 tested once again.

Trade with trend!

How to develop trading system - part 2

2010-05-18T07:18:00.000+02:00

We have used last post to decide which market we would like to trade. Today, we will check which data provider and trading software choices are available in South Africa.

Simply, to design proper trading system one must have correct data. This is very important because if you have wrong or incomplete data, there is a chance of making system that looks good, but it is not worth the paper it was designed on.

Another decision is to be made here: What is going to be time frame on which one would like to trade?

If you would like to concentrate on end of the day time frame there are many options available in South Africa. Just use Google or search engine of your choice and you will get lots of answers.

If you would like to trade intraday time frame, such as we use on this blog, you will have only three options that I’m aware of. Local option is company called Hisat, prices are modular and from business perspective we find them to be fairly acceptable. They have very simple charting capabilities. Two other options are international and one could consider E-signal and QuoteCenter. E-signal has its own advanced charting capabilities and simple backtesting tools. Quote Center is on the other hand associated with Equis that supplies MetaStock software. Price range for last two for intraday data is from $130 upwards.

ALSI TRADER is currently using Hisat data feed.

When it comes to backtesting software – it is as important as data feed. There are numerous options on the market and simple Internet search is going to give you few options. Looks like this field is getting even bigger with many quant blogs growing over last few years. Simply put, there are two options available: Client side software that is installed on your PC and it is running as any other regular PC program. This is once-off purchase. One of the available solutions here is MetaStock or any other software that you might choose.

Other option is server based program for which user pays monthly fee to use it. Sometimes software like this is bundled with data and one pays only one fee for using it. Solution that comes to my mind here is Trade Station.

ALSI TRADER currently uses Meta Stock Professional 10.1 for its backtesting and charting capabilities.

For more information look at previous post:

How to develop a trading system – part 1

Trade with trend!

Note of disclosure: No one of above mentioned suppliers requested this review or knew in advance what I was going to write. I do not accept any reimbursements for the reviews I write.

Top40 - end of the day recap for week ending on May 16th

2010-05-17T07:44:00.000+02:00

Another “crazy” week for the markets. On last Friday market looked very bearish, with close below 200 simple moving average, but during the weekend EU decided to print few more Euros (or about 750 billion) to save Greece and the other problematic countries. Of course, market opened higher on Monday and ran some 1200 points on intraday basis. Tuesday was nothing special, but on Wednesday market almost repeated Monday’s action. On close on Wednesday market was up 1533 points from Friday’s close. Close was above 200 and 89 simple moving averages. Thursday ended as small doji bar and on Friday we saw similar action to last Friday’s: Market lost some 700 points and again swung back below 89 simple moving average.

Action over last couple of weeks is pointing to change in trend. There are three lower highs so far and if Top40 breaks below 23434 we will have definite conformation of bear trend. If that’s the case market will close below 200 simple moving average. Another level to watch next week is low that was made early in February – that is at 23111 based on close or 23072 based on intraday low. On the upside, be aware of break above 25299 (Thursday’ intraday high).

Indicators bounced a little bit with market moving higher last week. RSI and Stochastic are around 40-50 and MACD is deeply in negative territory (around -210).

Moving averages, which help us to determine long, medium and short-term trends:

long-term (200sma) - UP
intermediate (89sma) - DOWN
short-term (10ema) - DOWN

Trade with trend!

Reading to kick-start new week

2010-05-16T16:19:00.000+02:00

Afraid to Trade:

May 14 Update Market Sells off Exactly on Cue

Bespoke:

Gold vs. Silver

David Fry:

Stocks Close Up on the Week!

The Big Picture:

Perfect Qs: GS, BofA, C & JPM

Euro Zone’s Problem Children

The Kirk Report:

Focus On What Matters

The Talent Code:

Vision Improvement

Zero Hedge:

Visualizing An Austere Europe

How to develop a trading system – part 1

2010-05-14T08:21:00.001+02:00

There is old adage: “If you give me a fish you will feed me for one day, if you teach me how to catch a fish you will feed me for whole life”. Today I wish to start with series of posts in order to try to teach public how to fish.

As I said many times, trading is marathon run and for every marathon you must have proper shoes to make 42195m long race. In order to make it in trading one must have trading system with positive expectancy. Without having positive expectancy, one could have all the discipline of this world, but money is not going to be made.

I tried to look for articles on the web about this topic, but there are very few and far between. It looks like it is more profitable to sell trading system to people than to teach them how to make one for themselves.

So, what one must consider when developing trading system:

1. Markets to trade

2. Data

3. Software

4. Design of the system: trend following or mean reverting

5. Backtesting

6. Paper trading

7. Real Trading

8. Repeat from step 3

So, let’s start:

First three steps are somehow correlated to each other. First and the most important question is which market one should trade. There are three major groups of markets:

1. Equity market

2. Forex market

3. Futures market

Equity market is probably the most common market traded. Probably everyone in this world has heard about Warren Buffet and the ways he invests. Most common form of trading or call in investing is value investing, but there is place for trading this market. Many institutional investors are doing just that. This should be choice for people who are not enjoying checking prices every hour or so and who would like to make their decisions once a day or even once a week.

Forex market is the biggest and most liquid market in the world. In this market you will often find yourself betting against FED or ECB or JP Morgan. Such market is suited for people who like action of checking prices every few minutes and even waking up at night if positions are left open.

Futures market is similar to Forex, providing high amount of leverage. Futures are issued these days over everything: equities, forex, commodities – name it and it is there. It is, as well, very dynamic market and can move up or down very fast. So, be aware if you want to trade this market.

What is available in South Africa?

Apparently, South African futures market is one of the biggest in the world. There are many single stock futures market makers. Also, there are warrants issued here and together with contract for differences you can use them for trading. Futures market in South Africa is regulated by Safex that is part of JSE and there are several options available: First and the most popular is ALSI contract on financial board, with other options being futures issued over agricultural commodities, to name few: white and yellow maize, wheat, soybeans, etc. Few years back white maize was the most volatile instrument in the world and was traded only in South Africa.

My idea behind this series of posts is to describe process and to develop trading system. So, at this point one must decide which markets to trade. Since we are very familiar with ALSI futures we are going with that one and we are going to develop system for that market.

Stay tuned for next post on how to choose data supplier and software for backtesting.

Trade with trend!

Mid week reading

2010-05-13T06:59:00.000+02:00

Afraid to trade:

Updating the Intraday 1987 Crash Comparison to Today

Au.Tra.Sy blog:

Trend Following Wizards – April 2010

Bespoke:

Short Covering or Oversold Bounce?

Country Default Risk Plummets

David Varadi:

Market States: Regimes and Waves

CXO:

10-month Versus 200-day SMA

David Fry:

Gold Is Golden -- Call Now!

Global Market Ponzi Scheme: Dave's Daily

Market Rewind:

Volatility is Back - Which ETF Pairs Are Working?

MarketSci:

The State of Short-Term Mean-Reversion: April, 2010

Quantifiable Edges:

Strong Rally on Weak Volume for Nasdaq

Reading the Markets:

Speed kills

SMB:

Excellent read!

Technical Analysis: Four basic principles

The Big Picture:

S&P500 Priced in Gold

Debt: America versus Greece

Chart Addict:

Gold Update V & Market/Sectors in a Doji Trap

Top40 30minutes chart

2010-05-12T11:53:00.002+02:00

After massive drop we had late last week, market is trying to bounce. So, let’s see what the chart is telling us:

Top40 is currently trading just below trend line that signals down trend. Horizontal resistance around 24700 is broken and the next one is around 25300, but for that Top40 must break trend line first. Above 25300 there is a trend line which is currently around 25800 and one more resistance around 26000.

On down side, 24700 became support now, with trend line (not major) around that level too. Lower support levels are at 24200, 23850 and 23450.

Trade with trend!

ATR again

2010-05-12T08:22:00.000+02:00

It’s been some time since we looked at ATR chart. In the mean time some things changed, so it is a time to take new look at the ATR chart.

On the top of the chart is ATR% (5 day), so instead of looking into points values for ATR we divided ATR with price in order to get percentage changes. Chart is from early 2006 as I wish to compare different periods of Top40 behavior.

During last few weeks ATR bounced from very low levels and has reached top of our range (around 3%). Upsurge was quick; it happened over just few days and caught many traders in sleepy mode that was persistent over last year.

So, what does increased volatility mean?

For intraday traders it is very welcomed, because there are more points in daily range to be taken.

For swing traders it is welcomed as well, for the more or less same reason – there are more points in swings and systems should produce more points.

For long term investors, on the other hand, it is not welcomed at all. Volatility tends to increase as stock prices decline and decreases as the stock prices rise. The reason for this to occur is because falling stock prices mean greater uncertainty with regards to future risk. This leads to an institutional demand for insurance against future losses, meaning a higher demand for put options/short selling. On the other hand, increasing stock prices mean less uncertainty and subsequently less demand for put options, resulting in lower volatility.

The investor or trader can always count on volatility eventually returning to normal levels after going to an extreme. This principle is called “the mean reversion tendency of volatility”. It may take anywhere from days to months, but sooner or later volatility always comes back to middle ground.

Advise for traders is to use this opportunity to trade well (and manage risk extremely well) and make as many points as they can, because sooner or later we will be back to the middle of the range as per our chart, where our systems will not produce as massive number of points.

In my book – volatility brings opportunity.

Trade with trend!

Why short selling is important?

2010-05-11T06:54:00.002+02:00

The other day with markets plunging 1000 points, many voices are raised to stop short selling once more. Long term investors were the loudest in the bunch, and from their perspective that maybe make sense. Unfortunately there is always other side of the story. Yesterday market bounced and nobody asked how much of that bounce is because of bears closing their short positions. I would guess a lot. So as short sellers are pushing market down they are pushing it up as well when they are squeezed and running for cover.

Short selling, in principle, offers a number of advantages to market participants and the wider economy. These include faster price discovery in the market, greater liquidity, and enhanced opportunities in risk management. All these effects are considered to add to the efficiency of financial markets.

In principle there is nothing wrong with short selling. Short selling can provide markets with important information on pricing, facilitate the management and hedging of risks in many firms around the world, and provide financial markets with liquidity. In other words, short selling promotes the efficiency of functioning markets.

Selling an asset that you do not own certainly sounds counterintuitive, but it needs to be kept in mind that the asset needs to be re-purchased at some point – any short seller becomes a buyer. Also, for any short seller there is a buyer who expects prices to rise. And there is a lender who calls his shares when their value declines too rapidly.

Short selling can be used by market abusers just like any other financial instrument, and that is where strict regulations must come in.

I hope I shaded some light on the current topic for better understanding of short selling.

Trade with trend!

Top40 - end of the day recap for week ending on May 9th

2010-05-10T07:26:00.000+02:00

What a week that was – Market lost more than 2000 points last week and it happened very fast. Monday was one of the many days we saw in recent months – some 250 points daily range with not much to do or say. Then Tuesday came with 715 points drop, Wednesday and Thursday were down days with bulls trying to push market higher and then Friday came and was similar to Tuesday, but this time Top40 dropped 920 points. Sell-off was broad based. On Thursday evening US markets had the most interesting trading session. Dow dropped 700 points in 15 minutes, just to recover 600 in following 20 minutes. At one stage DOW was down almost 1000 points and that was the biggest ever single-day point loss. So, after complaining about low volatility we had to bite the bullet and to live through extreme changes last week.

With such a drop in the week behind us, many important technical levels were broken and some trend lines too - Trend line from March 2009 was broken on Wednesday, 89sma on Tuesday and 200sma on Friday. That was first close below 200 simple moving average since May 18th, 2009.

Following weeks could bring us the test of 23072 low (made on February 5th, 2010) and maybe even test of 21600 (red line on chart) and that could prove to be crucial test. On the positive side we could go up and retest broken trend line around 25000. Relative strength index and Stochastic oscillator are oversold with MACD venturing deep into negative territory.

Please be very careful out there because volatility is very high, coming back into markets after many months of boring activity of going up slowly. ATR last week broke upwards and that is good for intraday and short term traders because they will make their points at much faster pace. Just be careful as one could lose points much faster too in markets like this.

Moving averages, which help us to determine long, medium and short-term trends:

long-term (200sma) - DOWN
intermediate (89sma) - DOWN
short-term (10ema) - DOWN

Trade with trend!

Reading to kick-start new week

2010-05-09T16:20:00.000+02:00

Afraid to Trade:

Very good look at the events of May 6th.

A Quick Assessment of the May 6 Fallout on the 5 Cross Market ETFs

Comparing May 6 to 1987 Crash Intraday

Au.Tra.Sy blog:

April: a flat month for Trend Following

Bespoke:

Will You Remember?

The Dollar's Recent Impact on Stocks

FUTURESMAG.COM:

Excellent read!

The lowdown on high frequency trading

Interesting talk about gold.

McGhee on the gold currency

David Fry:

Two excellent daily reviews!

Ctrl DOW Delete: Dave's Daily

Dow Dive Shocks Investors: Dave's Daily

Market Sci:

Excellent post!

The “Monthly W” (in Video)

The Big Picture:

Blame High-Frequency Trading

The Kirk Report:

Everything You Know Is Wrong

The Talent Code:

Identifying Talent: What Really Matters

Vix and More:

VIX Implied Volatility Exceeds 2008 Crisis Levels

Dr. Brett:

Excellent series of posts!

Core Ideas in Trading Psychology: Trading and Self Development

Why is it difficult to trade?

2010-05-09T16:15:00.000+02:00

I wish to share basic stats for one of the variations of 30min Higher High/Higher Low system for ALSI futures. Results are for period 19.12.2007. – 03.05.2010.

trades: 691

W%: 42.11%

Avg. W/Avg. L: 2.14

largest loss: 823 points

t-formula: 3.77

f-formula: R 54 414 over margin amount

start equity: R 60 000 (6000 points)

end equity: R 491 710 (49171 points)

CAGR: 142.69%

Sharpe: 1.96 (calculated with 7.25% as risk-free rate)

Max drawdown: 3738 points

year 2008: 27914 points from 245 trades

year 2009: 13378 points from 304 trades

year 2010 (so far): (568) from 140 trades

System is always in the market and it does take both, long and short trades. Results are on basis of one contract being consistently traded and do account for brokerage of total of 2 points per trade, while these results do not account for slippage or any other costs that trader might encounter. Interest earned on margin and interest earned on trading account are not included in these results.

If we look at the entire sample, closed equity curve was at all time high only 106 times. The rest of the time system has spent either going deeper into drawdowns or getting from bigger drawdown level to smaller drawdown level.

If we look at year 2008, which was the best year we have on the record for this system – System has recorded 44 all time highs on closed equity curve, while the reminder of 201 trades ended somewhere within drawdown.

Simple conclusion: While trading one will often be wrong. Also, one will often be right, but that is still not going to be enough to move equity curve to new all time high levels. Understanding this is, simply, portion of the foundation on which any novice might and should try to build successful trading activity.

Trade with trend!

Note: Readers who are not familiar with difference between open and closed equity curves should do some reading on the subject in order to familiarize themselves with these two approaches.

Mid-week reading

2010-05-06T06:57:00.000+02:00

Afraid to Trade:

Competing Patterns and Levels to Watch in SP500 May 4

SP500 Color Bar Daily Chart Update May 4

Tuesday Selloff in Crude Oil Also Returns us to the 50 day EMA

Bespoke:

Earnings Beat Rate by Sector

S&P 500 Cumulative A/D Line Nears Prior Peaks

Weren't Interest Rates Supposed to Be Rising?

The Return of Volatility?

Sovereign Debt Default Risk

Ray Barros:

BarroMetrics Views: A Personal Journey to Gold-Medal Trading (4)

Victor Niederhoffer:

Other Things You Learn in Kindergarten Games

David Fry:

Stock Market Thrill Ride

Reading the Markets:

Ward, The Devil's Casino

The Big Picture:

Scary!

Bank Failures

Trader Mike:

May 4, 2010 Stock Market Recap

Vix and More:

VXX vs VIX

Dr. Brett:

Very good read!

Core Ideas in Trading Psychology: Identifying Historical Patterns in Markets

ALSI 30 minutes chart

2010-05-05T13:48:00.000+02:00

After spending whole April in trading range between 25600 and 26800 has ALSI finally decided to do something.

Yesterday it broke 25600 and then sell off accelerated, so in no time 25000 was tested. Target for above mentioned range is 1200 from 25600, giving us 24400 as a target. Main indicators bounced from oversold levels, but so far no major positive divergences can be spotted.

What can be seen is the new channel that is developing with some 900-1000 points in it. ALSI is currently closer to bottom line. Top line is currently coinciding with 25600, so there is possibility for ALSI to go and test that level.

Trade with trend!

Reading to kick start new week

2010-05-04T06:49:00.000+02:00

Afraid to Trade:

The 10-Year Relationship Between the SP500 and Fed Funds Rate

Chart Addict:

New megaphone is developing?

Usually, that pattern doesn’t help performance of our systems and will see if it is to develop and confirm on J200 and ALSI. So far, we are not even close.

Doji Plays / Gold Time Correction / Swing Updates / Delayed Day Trading

David Fry:

DOES VOLATILE ACTION INDICATE A MARKET TOP?

The Big Picture:

Portfolio of Securitized Souls

Many Still See Economic Gloom

The Talent Code:

Learn Like a Baby

Dr. Brett:

Core Ideas in Trading Psychology: Creating Change Through Mirrors and Corrective Emotional Experiences

Top40 - end of the day recap for week ending on May 2nd

2010-05-03T07:52:00.000+02:00

Last week brought us 4 trading days with public holiday on Tuesday and bulls paid dearly. US markets sold off on Tuesday when we were closed and our market dropped some 500 points on open on Wednesday.

On Thursday market tried to bounce, but Friday was red day again. Over weekend there were some bullish and some bearish news, but for Top40 more important is new tax imposed by Australian government on extra profits for miners.

Indicators are so far looking either neutral or bearish. Stochastic is very close to enter oversold level, RSI is around 50 (that shows us no real momentum) and MACD is a tad above 0 line.

Important development over last two weeks is that Top40 closed only once above 10ema pointing to down short-term trend. In addition, price made lower high on Monday and lower low on Wednesday, again pointing to short-term weakness.

Moving averages, which help us to determine long, medium and short-term trends:

long-term (200sma) - UP
intermediate (89sma) - UP
short-term (10ema) – DOWN

Trade with trend!

Friday reading

2010-04-30T07:56:00.000+02:00

Bespoke:

Consumer Confidence Nears Pre-Lehman Levels

Sector Performance Since 2007

Bullish Sentiment Hits Highest Levels Since December 2007

Ray Barros:

An excellent read!

A Personal Journey to Gold-Medal Trading 1 -3

Chris Perruna:

NYSE New High New Low Extreme

David Varadi:

Very interesting.

The Limits of Technical Analysis (part 1)

CXO:

The Real Calendar Effects?

“Tests of statistical significance in this paper assume that daily stock returns have a normal distribution.”

Any Seasonality for Gold or Gold Miners?

Chart Addict:

Nice charts!

Gold Update I: Pullback Executed…Now What?

David Fry:

As always, very interesting commentary

Reading the Markets:

Risk is not the same as uncertainty

Three Feet from Gold

The Talent Code:

The Power of Play: 3 Tips

Vix and More:

Short-Term and Long-Term Implications of the 30% VIX Spike

Dr. Brett:

Minding Our Selves: How Body Becomes Soul

What Competent Traders Need Most

EURZAR and USDZAR 4 hour charts

2010-04-29T12:17:00.000+02:00

Over last couple of days quite bad news hit Greece, Portugal and Spain. Their long term debt was downgraded and that caused markets to stumble. Yesterday Top40 recorded biggest single day drop in more than 6 months and today’s picture does not look great either.

Last time when big news hit the market, big guys were quick enough to sell off all risky assets like emerging markets and that caused Rand to collapse. From August 2008 to October 2008 Rand dropped from 10.90 to 15.20 for US$. Is this happening again?

Two charts are shown on the top: First one is USDZAR, while the second one is EURZAR, both in 4 hours time frame.

USDZAR is currently trading in 7.20-7.85 range and that is going from August 2009. From March 2010 new and smaller range between 7.20 and 7.50 was developed. We tested top of the range four times and bottom three times. Those are two levels to watch. If 7.50 gets broken USDZAR will go to 7.85. However, if 7.20 gets broken we could see 6.50 or there about.

EURZAR is still in the channel which started in November 2009 and top trend line was just tested. Support was formed around 9.67 in early April and currently we are close to test it. Breakdown will be significant and EURZAR could drop further towards 9.30. With all instability in Euro zone this can be likely scenario.

All in all, those two charts do not show foreigners disinvesting from SA and such disinvestment would cause ZAR to weaken.

Trade with trend!

Top40 - end of the day recap for week ending on April 26th

2010-04-27T06:19:00.000+02:00

We had big internet issues on Sunday evening and Monday morning and that is why I am posting this update only now. Luckily, today is public holiday, so we missed only one day of action. On Monday we had strong up day, so maybe this internet problem came with some purpose.

Last week Top40 spent bellow 10 period exponential moving average, so we could conclude that short term trend was down during last week. On Monday market closed 1.52% up and it did break sideways consolidation of last four days, paired with solid close above 10 period ema and 25922 level, which I mentioned few times in previous posts.

Stochastic turned on Monday coming from very low base, so there is quite a room for it to advance. Relative strength index bounced from 50 and is looking to reach 70 again, while only MACD looks a bit flat currently.

During last correction market broke trend line of small channel, but it bounced back fast and is now seating on the top of trend line. Bigger channel (that started with new bull run in March 2009) is still very much intact and Top40 is currently in the middle of the channel.

Important development last week was making of double bottom around 25585 level on Top40 or 25800 on ALSI (with conformation on Monday) which could take us all the way to the 26700 on Top40 or 27000 on ALSI. Detailed post about that is to follow shortly.

Moving averages, which help us to determine long, medium and short-term trends:

long-term (200sma) - UP
intermediate (89sma) - UP
hort-term (10ema) – UP

Trade with trend!

Reading to kick start new week

2010-04-26T20:34:00.000+02:00

Afraid to Trade:

Revisiting SP500 Trendlines and Adding a Triangle

Bespoke:

Individual Investors Not As Bullish as Their Advisors

Q1 Earnings Beat Rate

SMB:

It’s the Price Action Stupid!

The Big Picture:

S&P500 Average Monthly Change

Existing Home Sales Gain Aheadof Tax Credit Expiration

Duration of Recessions and Bull Markets

Amazing graphics!

Death & Taxes (Updated)

Fun!

Fortune 500 Cover DK’d

The Talent Code:

How to Read

Q & A session – follow up

2010-04-24T16:24:00.000+02:00

We got few questions in Q & A session and I would like to use this space to reply:

1. When it comes to neural networks and trading my knowledge is limited to just being aware that there are numerous sites which are pointing to literature and various resources which cover field of neural networks and trading. If readers of this blog would like to share more on this subject, including good Internet sources as starting point for the research, please share in comments section of this post.

2. Stop loss was posted and re-posted on twitter. I’ve introduced small change, so in white section on the right hand side (Last twenty trades) Stop Loss level is going to be indicated at all times (in bold).

3. And as reader Stan pointed out, two valid choices for ALSI data feed are eSignal and HiSat (local source).

As always, I remain open for any comments/suggestions/ideas that might make this blog better.

In addition, I will keep on encouraging readers to join the conversation, so Q & A session will be re-introduced from time to time.

Trade with trend.

ALSI 30 minutes chart

2010-04-23T10:46:00.001+02:00

Quick check into what ALSI 30 minutes chart is telling us.

Market broke 26150 – 26750 trading range few days ago, but it did bounce back and ran into it again the next day. Then, on Wednesday market repeated the same pattern of break down and back into range and again the same happened on Thursday, this time with no break into range yet.

As one can see, there are two trend lines to watch: One down slopping and connecting last three tops while the other one is up slopping and connecting three last bottoms.

Currently market is making higher lows and lower highs, making it difficult to see real trend. Current pattern can be classified as triangle.

Watch those two trend lines for further direction.

Trade with trend!

Sad news

2010-04-23T08:15:00.000+02:00

Very sad news did hit me yesterday. Dr. Brett Steenbarger will wind down the TraderFeed blog.

I was following his writing for many years. About seven or eight years ago, just as I was starting with trading, I somehow ran into his old web page. It was very simple design that probably wouldn’t catch one’s eye. Somehow, I started to read and I found numerous very interesting stories about trading and life in general. After that, TraderFeed blog came to life and I was eagerly waiting for each new post, as Dr. Brett always had something good to say. The more I red, the more I realized that it is not in indicators; it is not in patterns and it is not in finding holy grail – It is in our heads and it was there before and it will stay there forever. One just has to dig it from somewhere deep within. Simply, TraderFeed blog, three books written by Dr. Brett Steenbarger and his early writings made me a trader I am. Without his inputs, probably, I would not be writing these lines now. As time passed, I’ve realized that his blog didn’t improve me as a trader, but as human being as well.

In his last post Dr. Brett has promised that he will try to do everything to keep the blog up as well as archive "the best of" posts. At least, we can go back and read his impressive writings whenever we want.

I’m not sure if Dr. Brett will ever read my blog and this specific post, but I would like to thank him for changing my life for better and for making me succeed in this tough game of trading. I’m very sad that he is leaving us without new contributions and I wish him all the best in his new endeavor.

I would close this blog post with words from his last post: ”If you put yourself out there, share your best ideas, reach out to people, and give more than anyone ever could expect you to give, you'll attract the right kinds of people--and the right kinds of opportunity. If you have passion and you have talent, make yourself visible: the best people will find their way to you and everyone will benefit.”

THANK YOU DR. BRETT!

Trade with trend!

Q & A session

2010-04-22T09:53:00.001+02:00

EDIT: I will wait for a day or two in case we receive more questions and will post all the replies as separate post.

Let’s try something new on this blog – Please ask any question (trading related) and I will try to respond to the best of my ability.

For readers who are interested, just post your questions in comment section of this post.

Trade with trend.

Mid-week reading

2010-04-21T13:43:00.000+02:00

Afraid to Trade:

SP500 Teaches the Importance of Rising 20 day EMA in Trend

Did We Just Repeat a Price Pattern from the February Low?

Au.Tra.Sy. blog:

Excellent read on leverage

How to apply Leverage?

Bespoke:

Bespoke's Sector Trading Range Charts

Story about Mondays. This is very interesting.

T.G.I.M!

Breadth Looking Better Than Price

US Equities Continue to Outperform in 2010

David Fry:

FRIDAY NEVER HAPPENED

The Big Picture:

What a chart?!?

FDIC Bank Closings

Dr. Brett:

Very nice!

A Few Things That I Believe: Observations From The Doc

Rational vs irrational

2010-04-21T07:22:00.001+02:00

The other day, nice discussion was developed on one small trading chat. I’ve posted there these definitions from some other blog:

“A rational decision is based on testing and data and an understanding of the mechanics underneath the system you're working on. The more you know, the better you decide.”

“An irrational decision is based on gut instincts, conviction and faith.”

I’ve linked them with trading and related them to having or not having system and trading on instincts.

After that, I got a reply from very good friend of mine:

“Igor, you are so right but just a thought, I've met recently few guys that trade SSF, they have a great deal with one medium to large company so they pay ridicules small fees to trade, When I asked them what triggers your trade, not one could tell me!! They say, if the price goes up, we buy, if it goes down we sell.

Now before you jump to conclusions, all of them are trading for a living, most of them never had any other job, some did work for brokers but got laid off, one of the okes bought my old house for cash.

They have a simple target, make 5-10k a day and what makes me sick in my stomach they do it almost all of the time.”

This is how I replied:

“One can make money trading million different ways: fundamental or technical analysis, long or short term, intraday, swing or end of the day trading. Who knows what story is behind those guys. How long they trade 10-20 years, how much capital they have, do they live out of trading or out of something else. Let's see example if they sold company for 50 million and now trade with 10 bars. Making 10k a day or 200k a month is not big achievement.”

At the end, it came down to the fact that those three guys are all self-made traders with 10-15 years of experience. They traded all their life for 8-9 hours a day. Remember what is being said – if one spends 10.000 hours on some activity he could be considered as very good in what one does. So, those three guys spent 10 years x 220 days x 8 hours = 17.600 hours watching markets and trading. They have 30 years of experience between three of them, so it is relatively easy for them to say: ”If the price goes up, we buy, if it goes down we sell.”

I want to make a point here – Not many of us have that feeling or instinct, call it as you wish. The only bet one can make to survive, before one gets instincts, is to have a sound system with positive expectancy and proper money management, as that system will make money for you for as long as it takes you to start with trading based on gut feel – if one ever gets to that point.

Trade with trend!

Reading to kick start new week

2010-04-20T07:43:00.000+02:00

Afraid to Trade:

Falling Friday: Giants GOOG and GS Plunge

Strangely Enough, Market Internals DO Matter - an Update

Au.Tra.Sy blog:

Big guys are having troubles with this trend as well.

Trend Following Wizards – March 2010

Bespoke:

26.4% of S&P 500 Stocks Trading at 52-Week Highs

Two Months of Up Days

10%+ Down Days for Goldman Sachs (GS)

Victor Niederhoffer:

Types of People Who Disseminate Views About The Market

David Fry:

COMPLACENCY KILLS

Market Rewind:

Very interesting

Painting the Trend with a Twist

Reading the Markets:

Very good read! Sound advice for individual traders/investors!

The life cycle of a hedge fund investment strategy

SMB Training:

Finding A New Trading Home (Assent and Etrade)

The Big Picture:

“Recovery” Bypassing Small Businesses

NYSE Volume Changes

Lagging Psychology at Turning Points

The Talent Code:

The Uses of Madness

Dr. Brett:

Dr. Brett's Coaching Insights for Traders - Volume One

An Updated Look at Stock Market Strength

Top40 - end of the day recap for week ending on April 18th

2010-04-19T06:15:00.000+02:00

During last week we welcomed back some volatility to our market. Wednesday’s and Friday’s daily range on Top40 was around 500 points and ATR started to show some signs of life again. Friday was especially interesting day - after making new year-to-date high on Thursday and after closing on the highest level since July 2008, market opened lower and then tried to run and test Thursday’s highs, but after failing to do so, it started to drift lower. Big surprise came in last hour of trading when news from US broke about civil-fraud charges against Goldman Sachs. That sent markets into free fall and Top40 closed 489 points lower. This was first weekly loss since the end for February 2010.

Close on Tuesday also pointed to weakness in the market. Top40 closed below 10ema for the first time since February 26th, but it managed to bounce back and close above it again on Wednesday. On Thursday market managed to stay above 10ema, but again on Friday market dropped and 10 ema was breeched as the market closed.

RSI is in the weakest state of all three indicators we follow, as it made three lower lows and lower highs in last two weeks, even as the market was making new highs. Stochastic oscillator is showing negative divergences, while MACD rolled over signal line on Friday. These negative divergences are showing us that market is not as strong as it was three weeks ago.

There is obvious channel on Top40 which started in March 2009 and there is small trend line currently around 25850. By checking shorter time frames one can see well defined trading range between 26000 and 26500. Watch for break of 26000 as it could take us down to 25500. After that support could be found around 25000 where 89 simple moving average is. On the upside, obvious test and break of 26500 might take us all the way up to that long term trend line, which is around 28000.

If you wish to check broad markets I would recommend the use of futures heat map from FinViz which shows how the GS-related selling kicked off a general divestment of risk assets, with stocks, metals and energy being lower; bonds pointing down; JPY and USD heading higher, while EUR and AUD retreated. This could turn very ugly for South African markets and Rand. Last time when divestment of risk assets started Top40 and ZAR were punished big time.

Moving averages, which help us to determine long, medium and short-term trends:

• long-term (200sma) - UP

• intermediate (89sma) - UP

• short-term (10ema) - DOWN

Trade with trend!

ALSI 60 minutes chart, as of April 16th, 2010

2010-04-16T07:45:00.000+02:00

This morning I will review ALSI chart posted in “ALSI 60 minutes chart, as of April 13th, 2010”

As I said in that post ALSI was making double top with conformation around 26150 and target around 26550. In mean time we had false break/conformation with market going up and testing 26750 again, making it now triple top.

There is obvious triple negative divergences on RSI and Stochastic, that pointing to possible sell off. Conformation is again around 26150 with target again around 25550. To add to this is market action yesterday late afternoon when ALSI was trying hard to break above 26750 but without any success.

Pattern can be seen as sideways trading range with 600 points in it. So watch for break out. Ideally one would like to sell market as close to 26750 as possible but I guess market will gap down on opening. Also watch 26150 because there is very strong support there now and even if market goes down will probably be stop there.

Trade with trend!

Top40 30 minutes chart as of 15th April

2010-04-15T07:21:00.000+02:00

This morning I would like to review Top40 30 min chart from around 1st March till yesterday.

In my previous post “ALSI 60 minutes chart, as of April 13th, 2010” I pointed out that potential double top is developing on ALSI 60 minutes chart. Conformation level was around 26150 and that level was breached two days ago. Unfortunately if you we short market bounced back and next morning gaped up and run all day adding more than 500 points. On the end of the post I said “nothing is certain” and that is especially true if you try to take trades against main market trend.

Lesson that we all should learn from this is that if you nicely planed action fails you should revisit situation and adjust accordingly. Action that should happen yesterday was close short and go long. And that is exactly what we did with system that is published on twitter.

Let’s go back to Top40 30min chart now.

Currently Top40 is trading in nicely define up channel started on 8th March with one false break on 13th April. Top line of the channel is around 26700 and that is where we can expect Top40 to go today, maybe even in first hour of trading. That would mark new year to date high.

Few time I posted that levels around 25922 on end of the day base or around 26030 on intraday base are very important and that breach of them on upside is very bullish. From the chart one can clearly see that once green line around 26050 was broken acted twice as solid support. This is very nice example of change of polarity, once resistance becomes support and vice versa.

Conclusion is solid up trend on Top40 for last month and easy money is on upside so far.

Trade with trend!

Mid-week reading

2010-04-14T09:26:00.000+02:00

Good starting point provided by Au.Tra.Sy blog:

Trading Regimes as Strategy Filters

Bespoke keeps on bringing interesting info:

Another 1,000 Points Under the Belt

“Believe it or not, this month's $65 billion shortfall was the fourth lowest over the last twelve months. “

Google (GOOG) Takes Out Its March Closing High

Household Debt as a Percent of GDP

Again, David Fry has great daily view of the markets:

PROPPING CONTINUES

Very strange place this iBC. Here are some good posts:

Lottery Ticket Market

Tuesday’s Breadth Report

Quantifiable Edges:

Some Early-Stage Volume Research

Quick Notes

The Big Picture:

Declining Bailout Costs or Bad Math ?

Stunning! --- Global Debt Relative to GDP

Rally Rank: 27 of 4,237

Vix and More:

“As the chart below (three years, weekly bars) shows, SPX 1225 is technically significant for several reasons.”

Low volume is talk of the week/month/quarter, so Dr. Brett joins the club:

Low Volume Bull Market: What to Make of It

and some other readings from Dr. Brett:

Continued Bullish Sentiment: The CBOE Equity Put-Call Ratio

Life Insights From Great Inventors

ETF Pairs as Sentiment Gauges: XLY and XLP

ALSI 60 minutes chart, as of April 13th, 2010

2010-04-13T07:37:00.000+02:00

ALSI 60 minutes chart is shown above. There is an interesting development that I would like to point out.

As we can see, from the start of this contract (JUN2010) around mid March, ALSI ran from 25300 to 26750 where it stopped on April 6th, as well as it rejected that level yesterday. So, with that in mind we could say that there is double top (for now) formed around 26750. Conformation for double top is at 26150 (thick black line) and if broken, target would be all the way down at 25550-25600 (long black line). Also, this target for double top is around previous support from end of March.

Together with double top there are negative divergences on RSI and Stochastic indicators (red lines on two top inner windows). There is a trend line (around 26200) determining current uptrend and it is currently just above confirmation line for double top.

This ALSI chart is telling us that we could have potential correction of some 4% or approximately 1200 points from yesterday’s high, but as everything in this market, nothing is certain.

Trade with trend!

Reading to kick start new week

2010-04-11T15:36:00.007+02:00

Starting this week I will post some links, as I believe that these articles can help you with your trading or investing as well as with understanding of markets and the economy. These are the links that we like the most.

Nice charts by Afraidtotrade:

Updated Arc Patterns on the Daily US Equity Indexes Reference

Logarithmic Chart View of the Arc Patterns on the US Equity Indexes

How is US market behaving?

The State of Trend Following report – Draft V0.2

As always, interesting stuff from Bespoke:

Key Earnings Reports Next Week

The Baltic Dry Heads Lower

Default Risk for Greece and the Rest of the World

Ray Barros has much to say

BarroMetrics Views: The Education of a Trader (4)

I would recommend reading related posts: The Education of a Trader 1 – 3

CXO Advisory is a great place to do lots of market related research

When Market Sentiment Works

How the 52-Week High and Low Affect Beta and Volatility

Nice charts by Chart Addict

Longer-term: Gold and Silver

Market Rewind has much to say

Day- vs. Inter-Session Performances

Does the Overnight-Session Predict the Day-Session?

David Fry has great daily market reviews with lovely charts

IT’S GREEK TO ME

As always, MarketSci has very interesting blog posts

Lots of Small Days Beget More Small Days

Correlation between Historical and Future Volatility

The Big Picture

Consumer Finances

BIS: The Future of Public Debt

Worst Post WWII Recession?

Accelerating Orders Around the Globe

Where South African Rand is heading

2010-04-08T07:40:00.000+02:00

I would like to take a look today where South African Rand is heading to. There are two charts on top. First one is daily EURZAR chart for last 3 years, while the second one is USDZAR daily chart for, more or less, same period.

As we can see from EURZAR chart, pair is in strong and solid downtrend, meaning that ZAR is getting stronger versus EURO. Currently, pair is very close to the bottom of the channel, so bounce toward upper line is possible. That can take us to around 9.95, which was previous support and should act as resistance now. Longer time frame can take us down to 9.33, what was major low in 2007. Finally, that can stop EURZAR decent and offer solid support for some time.

USDZAR is locked in trading range between 7.22 and 7.85 since around August 2009. Over last few days pair spent time on the lower side of the range with one unsuccessful break down. After false break, pair bounced some 10 points and is trading around 7.30 right now. Break of the range will probably take us down to support around 6.41 level, which was in play in October 2007. That is just a bit lower then channel projection of around 6.60.

Those charts are as info only, because our trading systems are making decisions for us.

Trade with trend!

Top40 - end of the day recap for week ending on April 4th

2010-04-06T06:54:00.008+02:00

Finally, something happed on Top40 front this week! We traded during four days, but Friday saw strong move up. Major closing level that I mentioned few weeks ago (25922) was finally breached and Top40 closed at 26113 on Friday. That was the highest close that we recorded from 17. July 2008. So, good news so far for the bulls.

Indicators are still at high levels, but with most of them pointing upwards, as of Friday. RSI reached 69 and Stochastic is above 80 once again. MACD is around 320 level for more than a month now. There are no major negative divergences so far. ATR is very low and is sitting very close to historical minimum. Currently, 5-day ATR calculated in percentage terms is around 1%.

Next week will bring us four-day trading week and maybe some volatility comes back to the market.

Next question that we should ask ourselves is: “When will see new all time high on Top40?”

Moving averages, which help us to determine long, medium and short-term trends:

long-term (200sma) - UP
intermediate (89sma) - UP
short-term (10ema) - UP

Trade with trend!

Position sizing

2010-03-30T13:44:00.000+02:00

One of the most important subjects in trading is position sizing, yet it is very difficult to find more information on it and to have quick and magic formula. A position sizing should tell you how much of a position to take based on your account size or, if you look it from our side of trading ALSI contract, how much one must have per contract traded.

My opinion is that for traders who made it to the next level of trading and who are constantly making money, the most dangerous is to trade with too big positions, as that could cause them to go belly up.

On the other hand, risking too little will prevent growth at speed desired. One should try to find very thin line between destroying his account when system gets into drawdown on one side and trading large enough in order for progress to materialize and for his account to grow.

So, what is the solution for this? How can we determine how much should we trade?

Some books say that one should not risk more than 1% of the equity on any trade. This rule was made for share trading/investing with no leverage added. My opinion is that this rule must be modified to 5% per trade for valid, sound, well-tested systems. So, what does that mean?

Let’s say we trade ALSI contract and average loser is 300 points. If you don’t want to risk more than 5% per trade, then you need to have at least 6000 points in account. So, if you trade one contract and average loser is R3.000, then I would recommend having at least R60.000 in your account. This will give you approximate chance to comfortably survive even 2500 points drawdown and have money to continue trading.

Another approach to measure position sizing is based on Kelly formula which was used by famous Turtle traders:

The Kelly's formula: Kelly % = W - (1-W)/R

where:

Kelly % = percentage of capital to be put into a single trade.

W = Historical winning percentage of a trading system.

R = Historical Average Win/Loss ratio.

Third approach is Optimal F formula which is small modification of Kelly’s work. I’ve found out about this formula from http://www.verticalsolutions.com/

Optimal F is maximum number of contracts one can trade for given account size. One should never trade more than optimal F suggests, because risk of destroying account is growing, but one can and probably should trade fewer contracts than optimal F suggests.

Optimal F formula: F = (Largest losing Trade)/((((1+win/loss ratio)*% wins)-1)/win/loss ratio)

One of the drawbacks of the Optimal F formula is that Largest losing trade is not fixed number and it could be changed in any time. Unfortunately, in trading there are few if any determined values, so one must live with it if one wants to use this formula. For most of our systems we are using this formula and for system published on twitter formula says that one must have R25.000 on top of the margin to trade one contract or R42.000 per contract with margin of R17.000.

As a side note for folks who like Optimal F – If you have tested your system over long period of time, but you have discovered later that your system was tested with data when Average True Range (or any other adequate volatility measure) was, let’s say, 2-4 times smaller than present volatility level, I would strongly suggest for exposure to be cut 2-4 times, as big loser (which will change Optimal F value) is just around the corner.

Also, from my experience, having in mind an assumption that your systems are robust, well tested and executed, I would suggest trading with 30–100% extra (in account per contract traded) over Optimal F value, subject to black swan events; robustness of your system and faith you have in your own research, and market conditions.

Last approach that I know of is Van Tharp’s approach from one of his books where he says that in account one must always have double the amount of known maximum drawdown (for the system) on top of the margin. For our average systems drawdown is between 2000 and 2500 points. So, that comes again to 5000 points plus margin for each contract traded.

Obviously, there is no magic formula that will tell you how much one must risk in every trade. There are four different calculations in this post and decision must be made according to risk profile of each trader. One must be very careful with how he handles money, because when money is gone the game is over, but again, one should not be too conservative because then there is no need to trade highly geared instruments like futures.

This subject is never ending story and the more we trade the more we will find what our optimal position sizing is. In some instances, when markets perform better or volatility is low, one can increase size or do the opposite when market conditions do not favor one’s systems. But again, this can and will come only with experience and for the start one should just stick to what is explained above.

Trade with trend!

Top40 - end of the day recap for week ending on March 28th

2010-03-29T07:39:00.000+02:00

Last week on Top40 was one to forget. Top40 lost 4 (FOUR!) points for a week with volatility dropping to extremely low levels (please check previous post). Top40 traded only during 4 days (Monday was public holiday) and it is important to mark that Thursday and Friday were inside days (price never broke above or below Wednesday’s daily range).

Indicators are still at high levels, with stochastic dropping just a bit and currently is around 70.

There is still potential for double top and Top40 has not closed above 25922 level.

Next two weeks will bring us four-day trading weeks and I’m not sure if volatility is going to increase soon. My opinion is that we are to wait for full 5-day working week to see some volatility.

Moving averages, which help us to determine long, medium and short-term trends:

long-term (200sma) - UP
intermediate (89sma) - UP
short-term (10ema) - UP

Trade with trend!