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