A Look at the Big Picture: SPY Monthly Chart

About once every month or two I like to pull up the monthly chart of SPY with a MACD indicator attached to the chart. This helps me keep things in perspective and the MACD on the monthly chart does a good job of alerting you to potential changes in trend. Here's the chart:You can see on the above chart that the MACD never got above zero with this past year's rally...and now the distance between the signal line and the moving average is converging. These things are a very bearish indication to me but the market could go up.

The MACD is great for putting current price action in proper context but it does not tell you where price action is heading. This bearish looking MACD could turn very bullish if the market rallies for the next week or two. That being said, it still appears that the path of least resistance is down and that's the direction that I will continue to put money to work.

Have a great weekend.

TLT

A Reliabe Indicator For Major Market Moves

One indicator that I watch rarely gives signals, but it is worth listening to when it does give a signal. It is the regular MACD applied to the monthly chart of the S&P 500. This indicator alone has called some major market turns. Also, I think that it works as a good filter for telling you when to be long and when to be short (or out of the market if you don't short).

As a rule of thumb, you should be long when the signal line (aqua blue line) is above the exponential moving average (gray line). This rule will keep you in the same direction as the long term trend, which is generally a good place to be. Here's the monthly chart from an excellent website, freestockcharts.com:Through experience, I have noticed that MACD crossover signals tend to be more reliable when they are sharply made and there is a wide margin between the lines just before and after the cross. That looks to be the case right now. Obviously this signal is not 100% because NOTHING is a sure thing...but this signal is worth keeping an eye on and it might give me the confindence to stick with my long positions when I am hearing all of the chatter about how the market is about to crash. The fact is that we are currently in an uptrend, and I believe in staying long until the trend is over. From the looks of the above chart, we've still got some room to move up in the S&P.

TLT

Nzd/Usd: File this one under winner

One of the most basic trading setups that I've been using for a long time gave me a good trade today and I was able to pocket 70 pips. It was a trade that consisted of selling the Nzd/Usd or Kiwi short. Here's the chart:Here's the setup:

1) There's an established downtrend or sell signal (or uptrend if you're buying) on the higher time frame...in this case the higher time frame used was the daily chart, and the sell signal for the daily chart was the same as the signal for the hourly...a macd and stoch combination,

2) The MACD signal line has begun declining and is about to cross the moving average,

3) The stochastic is oversold and is moving lower.

Once I saw all of these conditions in place, I placed the trade and set a stop just above the upper Bollinger Band and I set a profit target for 70 pips based on the lows from earlier in the day. This trade ended up being a textbook trade because it played out perfectly...have to enjoy it because that doesn't happen that often.

So how did I come up with this trade? I found it by doing my daily scan through the charts this morning. I like to look over all of the daily, hourly, and 5 minute charts for all of the major currency pairs and a few of the popular crosses every morning. Going through the motion of looking through these various charts in different time frames helps me stay in tune with the market and it often generates a few trading ideas as well. This is a practice that I highly recommend and it's easy to do. Just spend 10-15 minutes and look over charts at roughly the same time every day and make note of any potential setups, patterns or trades.

Good luck out there.

TLT

Dollar Update

The dollar has been trading in a range bound congestion pattern lately, which is frustrating because that type of action sends out a bunch false signals on my trend following system (like this post). That's just the name of the game when you're attempting to catch and ride trends...a bunch of small losses while waiting for the big gain. Here's an updated 4-hour chart of the Eur/Usd pair.As you can see from the chart, the pair is still approaching the upper regression line. I will be paying close attention over the next couple of days to see how it reacts to that level. There's a little bit of bearish chatter out there about how the dollar is heading lower and it might be completing a head and shoulders pattern and blah, blah, blah. I say that we have to take a wait and see approach and try to hold off on getting too bearish. Remember, the trend has been down and we don't want to go against the prevailing trend until a new trend is established.

One interesting thing that I've noticed is that the dollar has not reacted very negatively to some bearish readings on a couple of indicators. The article that I linked to above states that the Dollar Index looks "sickly" and the author points out a couple of indicator readings to back up the opinion. Here is my own chart of the Dollar Index:As you can see, both the RSI and the MACD are very bearish right now...the RSI is sloping down and the signal line on the MACD is below the red line, which indicates a sell. While these are bearish, the price action has not confirmed the readings...at least not confirming that a new trend is developing. In my experience, it is generally a bullish (or at least neutral) signal when the MACD is falling after a bearish cross (the blue circle) but the price stays bound in a range like it has over the last month. I believe that it's jumping the gun a little to proclaim that the dollar down trend is beginning...it might just be some healthy consolidation and possibly a good opportunity to buy the pullback. Of course, I could be wrong and if the price action signals a new trend by breaking out of the range to the downside, then I'll be looking to short. Like always, only time will tell.

Good luck out there.

TLT

Multiple Trend-Following Systems Combined: Attempting to Achieve

Lately I've been exploring the use of a couple of independent trend-following systems used in conjunction with each other. I have finally found something that seems to work like I intended when I undertook this project. It combines 2 separate trend following systems and it waits for confirmation from both systems before an entry is generated.

Basically, it combines a moving average crossover system with a volatility break-out system. This seems to work pretty well, however, there is still room for improvement. The improvement comes with multi-time frame analysis. For this, I've integrated a brilliant indicator that tracks MACD readings for 9 different time frames (look at the upper left-hand text within the chart below). Below is a screen shot.In order to get a signal, there must be both green or red lines on the trend following signals (the band looking lines that surround the price and change color: green=buy, yellow is caution/sell, and red is sell/sell short) and there must be a correlation to the signals with multiple time frames on the MACD for an entry. Just how many and which signals I will leave for you to experiment with...if you're so inclined. I've found that it depends on your time frame and also on your profit target.

Bottom line: combining volatility and moving averages with multiple time frame readings can give you some excellent trend following entry signals. Just remember, the hardest part of trend following is getting out of the trade. Trading is like law in that you always practice it(as in "practicing law") and there is always room for learning...no matter how long you've been doing it. I give you these ideas in hope that they will influence a trader to think a little more or maybe even for someone to turn the corner and become profitable. It's one big challenge that attracts the best of the best...and we all hope that's us.

Good luck out there.

TLT

Potential Swing Trade...AFAM

This stock has been on my watch list for some time now. It has had a tremendous run-up over the past year, especially considering what the over-all market has done at the same time. Recently, AFAM's run has stalled and now it's entering the bearish stage of the trend cycle. This can potentially present a good opportunity to get into this stock at a price that offers a nice risk/reward trade. As you can see by the above chart, AFAM initially broke out of its overhead resistance, the blue line, and ran all the way up to $45. Now it is falling from its highs and the indicators are looking bearish. Their was recently a bearish cross on the MACD, the blue circle. Also the 10 period exponential moving average has started to point downward, which is a sign to sell. I would be looking to enter a long position in this stock around the $22-$26 range, somewhere within the green box at the edge of the chart. The $22-$26 range should offer some support because it's close to the break-out range and the price will be low enough to make several indicators give a buy signal. Once it touches the 26 level, I'll be looking for the MACD, BB width, and the moving averages to start giving bullish readings. Only time will tell, I'll give you an up-date in a couple of weeks after the stocks had time to play out. Good luck out there.

TLT