Crude Oil Breaks Out

The price action of crude oil made a new high today and appears to be breaking out:


The top panel of the chart above shows USO, an exchange traded fund that attempts to track the price of crude oil.   The price has broken out of a consolidation area, which is bullish from my point of view.

The panel at the bottom of the chart shows USO divided by $WTIC (which represents the futures price of crude oil).  My point is that this ETF is doing a relatively poor job at tracking the underlying commodity.

In general, I think it is better to trade actual futures contracts rather than these type of ETF products, which is what I am going to do going forward.   I am currently long crude oil futures in another account aside from my stock trading account.


In addition to oil breaking out on the daily chart, the price action is also forming a bullish formation on the long term monthly chart:


Precious Metals Trends

My quadruple moving average system picked up a few changes of trend in the precious metals sector this week.

Gold, for example, has moved from a mechanical short signal to neutral:



The short term trend has turned up, but the longer term trend remains down, so this is not a buy a signal, but a signal to cover shorts.


Similarly, gold stocks have also put in a reversal of the short term trend:


Notice, as well, how much financial pain could have been avoided by following these clear, objective and emotionless moving averages.



Since I need both the long term AND short term trend to be up, it is pre-mature to buy these ETFs now, but there is a one precious metal that is buyable:




Out of the PM sector, this Palladium ETF is the only metal that is buyable right now, according to my system.

High Potential Stocks of the Week















Two Stocks I am Looking At

The trend of the general market remains up, despite this week's decline.   Rather than trying to outsmart the market, which is a mistake I've made in the past,  I am just going to rely on my trend indicator to make my decisions for me.

I focus on buying strong stocks when the general market is in an uptrend, and I define the short term trend of the market using a 20 and 50 day moving average crossover:


Now that we have determined that the trend is still up, here are two strong stocks that my scans identified this week:



I bought PRAN on Wednesday due to it's recent 52 week high and strong price action.  

Next:




There were not many stocks making new all time highs by the time this week ended, but RE was one them.  

Trend Following Trading Ideas

Because the general stock market is in an uptrend, I am continuing to buy strong stocks making new all time highs.  Here is a chart showing what I consider to represent the general market:



The price remains above all moving average levels and is within a hair of making another new record all time high.   Why argue with that?

So, here are some new candidates my scans found this weekend:


The stock above is within pennies of making a new all time high after forming a lengthly consolidation pattern.


Next,


The stock above, REGI, I bought on Wednesday thinking that the odds of an imminent breakout were high.  On Friday, it blasted higher by 7%, only to give most of it back. I continue to hold it with a stop at $13.48




Over the last two weeks,  I've been noticing that European stocks are starting to display impressive relative strength.

The chart below shows the Sweden iShares breaking out to a new all time high:



But it's not just Swedish stocks that are making new all time highs, German stocks are as well.  Below is a monthly chart of the German DAX index going back to the year 1990:



After consolidating for an incredible 14 years (sorry buy and holders), the index is finally starting to breakout, which is bullish.

If an index consolidates for a decade or two then breaks out, that's a bullish sign, just like it was for the Dow Jones in 1982:





A Pure Price Based Trend Following Strategy

When it comes to learning how to trade, I like to study those who have been in the business a long time, preferably 20 years or more.   So, I was excited to hear that one of the blogs that I follow, Finance Trends Matter, interviewed long time trader and market wizard Vic Sperandeo.

This interview inspired a new strategy, which I will summarize thusly:


  • When the S&P 500 is in an uptrend (20ema > 50ema  AND 100ema > 150ema)
  • Buy at the close of the second consecutive down candle
  • Sell the next day at the close




In the chart above, I have highlighted the profitable occurrences in yellow and the unprofitable events in red.  

Although the results appear impressive, I will need more time to study it before implementing it.   A long term goal of mine is to trade a basket of unique strategies, such as this one, in order to smooth out overall volatility.

 

The Trend Commandments Part 1

When it comes to trading, not only is it important to focus on "what to do", but it is also important to think about "what not to do".    So, here are a few pieces of negative advice pertaining to trend following trading:



1)  Do not risk more than 3% of your capital on each trade

This means that if you are stopped out of your stock, the total value of your account drops by 3%.    It does not mean sell your stock once it falls by 3%.

Also, depending on your win rate and tolerance for volatility, it may be necessary to risk much less than than this - 3% is the absolute max.  

If your win rate is 50% and you bet more than this amount, it is a mathematical certainty that you will go bankrupt eventually, which is why this is rule #1




2)  Do not average down on a losing trade

Doubling down on a stock will lead you down the path to bankruptcy pretty quick.

One of my favourite trading movies is "Rogue Trader".    In it, the actor who plays rogue trader Nick Leeson comments, "If you keep doubling up, you're bound to come out ahead".    He ended up losing over $1 billion.




3)  Do not buy stocks trading beneath their 50 day moving average

This is a very flexible rule that can be combined with other forms of trading, even fundamental analysis. For example, if you love Apple's products or balance sheet (or whatever), wait until the stock clears its 50 day.   Following this simple rule would have resulted in you sidestepping that stock's recent 50% correction.




4)  Do not buy a stock because it is "too low" or sell a stock because it is "too high"

It's hard for new traders to accept, but often what seems too high just keeps going higher, and what appears too low keeps going lower.




5)  Do not make a trade based solely on news or fundamentals

It's okay to have opinions based on fundamentals, but I think it is a mistake to trade off that alone.   If you do incorporate fundamentals in your trading, wait until they line up with the technicals before getting in.