Nasdaq Trend Analysis

My bearish take on the general market is quickly turning out to be wrong.  In my view, it's okay to be wrong, but it is not okay to stay wrong for long.

Here is a quick update showing the daily chart of QQQ:

The ETF above is still trading beneath its 50 day moving average and is now hovering below the gap I mentioned last week.  If the price closes the gap and makes a new high, that would invalidate my hypothesis.  

Also, keep in mind that the long term trend of US stocks remains up, so shorting at this stage would be pre-mature, according to my moving average system.

However, most other markets outside America appear weak and are entering mechanical moving average sell signals for me.   For example, emerging market stocks have entered a long term down trend, with the 100 ema sliding below the 150 ema:

Lastly, here is a monthly chart of emerging markets showing price action making a new low:

US Stock Market Trend Analysis

I like to buy strong stocks in a rising stock market.    For the past 7 months, the stock market has been rising, so I have been continuously buying strong stocks during this time.  And it has paid off - my own account is up over 40% year to date.

However, for the last month or so, I have been buying the dip in this market and that has not paid off.  As I will present in this post, the evidence is now building that this is not a dip in an uptrend, but the end of the trend itself.

First, let's take a look at a daily chart of the S&P 500:

While I do not know what will happen in the future for the market, here are some observations about the present that I have made:

  • For the first time this year, the price has gapped down
  • For the first time this year, the price has closed below the 50 day moving average
  • The index has formed a lower high
  • The index has formed a lower low
  • The S&P 500 experienced its largest decline of the year this week
  • This decline took place on the highest volume in over a year 

All of the above statements are facts and cannot be argued.    My own conclusion based on these facts is that being a buyer of stocks no longer puts the odds in my favour, which is why I dumped all of my equity positions on Friday morning. 

Here is a daily chart of the Dow Jones:

If my six points were not convincing enough, subjectively, I could also argue that the Dow has formed an island top and also a bearish head and shoulders reversal pattern.  

So, I'm out of stocks now, which does have its advantages.   In my view, cash itself is a position, and going into cash when the odds of success move against you makes sense to me.  This is a game that I only want to play when the odds are stacked in my favour - when that changes, I'm out. 

Five Charts that are Bearish for Canada

I am bearish on Canada.   I'm bearish on Canadian stocks, Canadian bonds, the Canadian Dollar, Canadian real estate and the commodities that Canada exports.

First, let's look at the Canadian Dollar:

As I mentioned in May, the Canadian Dollar has entered a long term down trend.  Since that time, the price has continued to decline and the damage has now spilled over to the weekly chart, as shown above.

I don't want to get caught up in a narrative fallacy, but the Canadian dollar may be weakening along with commodities.   Almost every commodity I look at appears bearish to me; for example, take this chart of copper:

A falling Canadian Dollar and weakening commodities have taken a toll on Canadian stocks.  The chart below is a daily chart of the Canadian iShares:

Despite an enormous rally in American stocks,  stocks north of the border haven't made a dime for all of 2013, making Canada one of the weakest markets in the world.

To complete the trifecta, interest rates in Canada are rising, so Canadian investors cannot even take refuge in bonds:

What effect will rising interest rates have in Canada, a nation that has more consumer debt per capita than even the Americans and one of the frothiest housing markets in the world?

As always, price tells all:

High Potential Stocks of the Week

If the general stock market is rising,  then I like to buy strong stocks making new all time highs.    That's my strategy in a nutshell.  So, a question I need to ask myself:  is the general market still rising?

I use a 20 and 50 day moving average to define the short term trend of the market.   By doing so, there is no subjectivity or ambiguity:  either the trend is up or it is not up:

Because the 20ema is still above the 50ema,  the short term trend remains up.   Therefore, I will continue buying strong stocks.   Here are 3 stocks my scans found recently:

Some Nice Feedback In

One of the (few) benefits of blogging is that it allows me to connect with other like minded traders from all over the world.

For example, I was able to connect with Andreas Clenow, a professional trend following trader and author of "Following the Trend".    An expert on systematic trend following systems, I have learned much from Andreas through exchanging email.  Yesterday, he graciously reviewed my blog:

Let's face it. Most trading blogs are amateur level of very low quality. This one however, shows some serious research and knowledge. Very worth following to get a different perspective on trend following and trade ideas. 
I have discussed trading with Danny who runs the site, and it's clear to me that he knows what he's talking about.

Another example comes from Gary Antonacci,  who runs a website called Optimal Momentum.   In spite of having an MBA from Harvard University, Gary makes a lot of sense and I recommend checking out his website.

Here is some feedback that Gary left for me:

I like your blog very much.... Everything you do makes sense to me. Choosing stocks making new highs is a form of momentum investing that has been documented to work well in the academic literature.

Short Selling Ultra ETFs

I like to short sell Ultra ETFs that are in downtrends.  After several years of observation, I have come to the conclusion that leveraged ETFs tend to erode, or decay in value over time.

You can perform an experiment yourself.   Make a list of all of the Ultra ETFs that you know of.  Then, find out what they traded for on their first day of trading.  Next, see what they are worth today.  You should find that about 90% of all these ETFs are worth much less than when they were first launched.

This fact, along with standard trend following principles, have allowed me to profit from shorting Ultra ETFs.  

Here are three funds that are in unmistakable downtrends and that are short-sell candidates for me:

The ETF above is the Ultra VIX ETF.   To the immense frustration of bottom pickers, UVXY has lost over 97% since it was launched.  And just because it has already dropped 97% does not mean that it cannot drop another 97%.

Next, the ETF below is an Ultra Silver ETF:

Near a new 52 week low and sporting a bearish gap down on Friday,  USLV  looks very weak to me.   

Finally, if you're like me and have noticed that the US Bond bull market may be ending, then this Ultra ETF is an ideal short candidate:

Trend Following versus Gap Downs

For the last few weeks, I've shown some nice trends that have developed and were captured by my moving average system.  Like any system, however, my system has weaknesses.  The achilles heal of my moving average system is "V" bottoms or tops, as the following chart shows:

After a moving average crossover in December, EWJ proceeded to trend impressively until about 3 weeks ago.  The ETF since then has been crashing down, erasing most of the year's gains, and what's worse is that the moving averages still have not crossed yet.

I would now like to introduce a rule that I have developed that will reduce the likelihood of this problem occurring.  The rule is:  if a stock gaps down significantly, then liquidate the position the next day, regardless of what the moving averages indicate.   I define "significant" as a a move greater than 1 ATR for the stock.

Here is an example:

Despite ending up with over a 14% profit,  AMGN's uptrend ended badly with a big gap down on earnings day.

The way I see it, when a stock gaps down significantly, it tends to cripple the stock.   After being crippled, the stock either can "heal" over a period of several weeks and eventually make a new high, or, as is often the case, the stock doesn't heal and is devoured by the bears, so to speak.

I sold AMGN shortly after the gap down.

Another stock that I traded this year was GV.  As the chart above shows, the gap down fatally wounded the stock and, with the benefit of hindsight, was a signal to exit.

Another chartist who I have been following for several years, Olivier Tischendorf, has also noticed this same pattern and commented on it here.

Lastly,  here is a chart of LNKD:

In what I believe was a case of good process, bad outcome,  LNKD ended up being my worst trade so far for 2013.

I sold the stock shortly after the huge gap down.   It's not easy to do.   Your ego definitely wants you to wait for the stock to get back to break even, so that you can be "right", but that's a mistake in my opinion.   Based on thousands of hours of chart observation, I can say that more often than not, these type of gap moves are an exit signal and if don't get out, you can end up getting crushed:

Trend Following Trading Ideas

I bought the stock WAIR on Tuesday:

Despite a weak Friday close, the stock is still near an all time high.  

A few days ago, I mentioned that the Australian Dollar looked weak.   It now looks even weaker, with an enormous red candle now fully formed for the month of May.  I am shorting the Australian Dollar in a different FX account apart from my stock trading account, since I find it much easier to do so.  However, it is possible to trade the Australian Dollar through ETFs, though it is more cumbersome:

The ETF above will rise if the Australian falls.  Although the daily chart may look somewhat overextended, it is my experience in the Forex market that once a trend begins, it can run a lot further than you may think. 

Another major signal that my quadruple moving average system detected took place in the US Bond market.  Below is a chart showing the long-term trend of an ETF that follows Treasury Inflation Protected Securities (TIPS):

The chart above shows the ETF entering a bull market in early 2009.   Since that time, the long term trend has been up, which means that only going long TIPS could have been considered, as I never want to go against the long term trend of a market. 

This week, the trend, which has been in place for 4 years, has come to an end.  And it is not just this particular bond ETF, other bond ETFs such as:  TLT, IEF, and SHY also look weak.   Two ETFs that will benefit from bond weakness are: TMV and TBT