Leading Indicators Study Say's Bears are Still in Control

One indicator that I created a while back and have been following is called the "Leading Indicator Study."  No, these are not the economic data leading indicators, these are just different etfs of asset classes that represent the bullishness or bearishness of the market that tend to lead big moves.  It is based on the Euro (FXE), Copper (JJC), Small Caps (IWM), Emerging Markets (EEM), VIX (VIX or VXX), Long Term Treasuries (TLT), Short Term Treasuries (SHY) and Consumer Staples (XLP). 

I'm not going to go into exactly how this works, but I wanted to share the general idea...maybe it will spark some ideas with clever traders that look at such things to derive an edge.  The basic concept is to take risk sensitive asset classes, determine whether they are in an uptrend or downtrend, and then create a score based on the trends.  This particular indicator uses a couple of regression calculations to determine the trends and then it adds points for the bullish trends and subtracts points for the bearish.  Simple enough.  Regression is not necessary, you could easily use a moving average or volatility break out system in place of the regression.  The point is to look at multiple asset classes at the same time to get a heads up on what the market's current risk appetite is.

Here's a screen shot of the indicator paired with the S&P 500, note the colors of the price bars are indicative of the bullishness (green), bearishness(red), buycaution (yellow) and sellcaution(blue):

Hopefully you found this interesting and you can work out something similar or even better to implement with your own market analysis.  As you can see with the chart, price bars are red and the indicator score is a very low -92 which confirms the bearishness of the market.  That tells me not to get too excited about any rallies until this indicator gets back to bull territory.

TLT

CNBC Portfolio Challenge

I couldn't help myself...I had to sign up. Not gonna spend a lot of time on it (not really a revenue producing activity) but it is fun. I put together a couple of portfolios and will manage them in my spare time just for the heck of it.

Off to a good start so far..here's the rank as of today:

1068th isn't bad considering there are over 500,000 portfolios.  We'll see how it goes.

Have a good one.

TLT

Take a Look at the EuroDollar Index over 3 Month Libor

This is an interesting indicator. Much like the TED spread and a handful of others, it tends to give good indications of whether the market is likely to move higher or lower. Nothing is perfect, but the short term interest rate markets are usually quick to move when something is anticipated in the market. Take a look at the chart, and notice the crosses on the moving averages:

I chose to use the word "anticipate" rather than signal because that's what I use this for.  It's not a signal in and of itself, it's a tool that helps gauge the likely overall direction of the market.  So why the 3 Month Libor instead of 1 Month? No special reason, you could use 1 Month Libor..the 3 Month is a little smoother when plotted with the EuroDollar. (*Note this is the EuroDollar market that is made up of dollar deposits in other countries..this has nothing to do with the Euro Currency in the forex market).

Something interesting to watch and keep on your radar. Hope everyone is managing the volatility..it's a wild one right now.

TLT

Index Trader Indicator for Think or Swim: Using Volume, Advance/Decline and Cumulative Tick for Day Trading

I've been playing around with a day trading indicator.  It consists of the ratio of advancing stocks to declining stocks (on the NYSE), Up volume vs. Down volume (NYSE) and the cumulative tick (also NYSE).  Basically, if advancing stocks are above declining and the UpVolume for the day is higher than the down volume, this indicator will show you that the market is bullish.  To filter these signals, I use the cumulative tick.  If the tick lines up with the other two then the bars are painted green (when bullish) or red (when bearish).  If the tick conflicts with the other indicators, the bar will be painted blue.  Check out a five minute SPY chart:

This indicator is useful for day trading, as it can help you determine where the market internals are pushing the market and get you on board with the trend as it's developing intra-day.  This indicator should not be used all by itself for entries and/or exits.  It is not perfect, as there are plenty of times when the bars are green and prices just drop.  I have been playing with it more as a filter.  For example, if I'm trading using bollinger bands, I will look for long intra-day setups when the bars are green.  Or if I'm looking to fade rallies using a stochastic oscillator, I'll look to sell an over bought signal if the bars are red.  There are lots of possibilities to incorporate this and tweak it to your liking.

Here is the think script code for think or swim if anyone out there uses TOS.

//
def VolUp = close("$UVOL");
def VolDn = close("$DVOL");

def advancers = close("$ADVN");
def decliners = close("$DECN");

def BullVol = if volup>voldn then 1 else 0;
def BullAdv = if advancers>decliners then 1 else 0;
def BearVol = if volup<voldn then 1 else 0;
def BearAdv = if advancers<decliners then 1 else 0;

def BullMode = if BullVol and BullAdv then 1 else 0;
def BearMode = if BearVol and BearAdv then 1 else 0;

def upper = no;
input hidecumtick = yes;
input symbol = "$TICK";
input period = 20;
input smooth = 5;
input lookback = 4;
input filter = 300;
def p = period;
def i = barNumber();
def na = double.nan;
#input usetrend = {"No", default "Yes"};
def usetrend = yes;
rec htick = if IsNaN(high(symbol)) then htick[1] else high("$TICK") ;
rec ltick = if IsNaN(low(symbol)) then ltick[1] else low("$TICK");
rec avgh = if i == 1 then htick else Max(filter, avgh[1] + 2 / (p + 1) * (htick - avgh[1]));
rec avgl = if i == 1 then ltick else Min(-filter, avgl[1] + 2 / (p + 1) * (ltick - avgl[1]));


def hi = high("$TICK");
def lo = low("$TICK");

def Last = if IsNaN(close(symbol)[-1]) then close(symbol) else double.nan;

def amean = if IsNaN(close) then na else (avgh + avgl) / 2;
def trendmean = if usetrend AND (htick > avgh OR ltick < avgl) then amean else 0;

def bull = if htick > avgh then htick - avgh  else 0;
def bear = if ltick < avgl then ltick - avgl  else 0;

rec ctick = if i == 1 then 0 else if IsNaN(htick) OR IsNaN(ltick) then ctick[1] else ctick[1] + bull + bear + trendmean; 

def ctickavg = ExpAverage(ctick, smooth);
def cumtick = if IsNaN(close) then na else ctickavg;
def nettick = if IsNaN(close) then na else ctick;

def zero = 0;

AssignPriceColor(if !upper then color.current else if cumtick > cumtick[lookback] AND ltick < avgl then color.green else if cumtick > cumtick[lookback] then color.gray else if cumtick < cumtick[lookback] AND htick > avgh then color.red else color.gray);

def hcumtick=if !hidecumtick then cumtick else na;
def hzero=if !hidecumtick then zero else na;
AddCloud(hcumtick, hzero );
def buy = if cumtick > cumtick[lookback] AND ltick < avgl then low - tickSize() else if cumtick > cumtick[lookback] then na else if cumtick < cumtick[lookback] AND htick > avgh then na else na;
def sell = if cumtick > cumtick[lookback] AND ltick < avgl then na else if cumtick > cumtick[lookback] then na else if cumtick < cumtick[lookback] AND htick > avgh then high + tickSize() else na;

def ahi = if IsNaN(close) then na else avgh;
def alo = if IsNaN(close) then na else avgl;
def hib = if hi < 0 then hi else na;
def lob = if lo > 0 then lo else na;
def phi = hi;
def plo = lo;

#plot zero=0;
#
# Formatting:

Def TickBull = (if cumtick > cumtick[lookback] then 1 else 0);

assignPriceColor(if BullMode and TickBull then color.Green else if BearMode then color.red else color.blue);
//


That's all folks.  I have been working on quite a few indicators and strategies lately and would be happy to share more code if there is enough interest/demand.  We'll see.  Hope everyone's trading is going well.

TLT

*****Update*****
The above code has been fixed.  A reader alerted me to a problem with the coding from the original post..not sure what happen but it appears to be a copy/paste error.  The new code should work much better

Jobs Resigns and $AAPL Declines

A nice little drop in $AAPL after the Jobs announcement in after-hours trading.  The important thing to watch is the follow through tomorrow morning.  If there is consistent selling but not panic selling, I would be concerned.  The pros will fade an obvious panic dump but calm consistent selling will be a sign of sophisticated people trying to unwind their positions.  Guess we'll see.

TLT

Old Resistance Holds with $TLT

It was weird..just a few minutes ago I was scanning through some charts on FreeStockCharts and noticed that TLT, the 20+ year long bond etf, stalled out an upward advancement right at a green line that had been marked on the chart last summer.  Marking certain charts with red and green lines used to be common practice for me.  I haven't done it in a while but I do like to look at where price action is compared to old support and resistance lines..especially when price reverses right at one.  Check out the chart:

Hopefully all of you are not just holding up but also profiting from this market.  Volatility can be a great thing for certain styles of trading.  I think the worst is likely over, but you never know.

TLT

Headline Risk

What Does Headline Risk Mean?

"The possibility that a news story will adversely affect a stock's price. Headline risk can also impact the performance of stock  market as a whole."

Read more from Investopedia.

It's hard to say, as the market never likes a "negative" event that has never occurred before.  Was there really any new information?  Does this really change anything?  There's a good chance this could be a big deal, but the other side of the coin is that the market will come to terms with it and start discounting what rating agencies have to say.

Just hang in there and don't panic.  I could be wrong but I don't see a "2008" scenario here.  As always,  only time and price will tell.


TLT

Review of a Trade Set Up: The Snap Crackle Pop Trade

This is a phenomenal set up in the forex and futures market.  Today, there was a great opportunity to go long the Eur/Usd with the Snap Crackle Pop trade.  The setup is basically just a "swing low" that most traders are familiar with.  A swing low is a 3 day pattern where one bar's price action is surrounded by higher highs and higher lows. Swing traders and day traders use these to go long and place a stop under the low of the swing low. The slight difference with this setup is that a couple of conditions have to be present on top of the swing low.  Let's use the recent price action in the Eur/Usd for illustrative purposes.

1.  Snap -- the instrument needs to me massively trending down and making new lows.  This is the important part of the trade that distinguishes it from a normal swing low.  The more bearish the better.  In the chart below, you can see that the Eur/Usd just broke a major support level and looked like it was going to drop like a rock.  This entices a bunch of traders to hop on to the short..even though they are late to the party.

2.  Crackle -- the crackle is when buying action kicks in and the Eur/Usd trades back up and closes near the highs with a long tail on the candlestick/bar chart.  This is commonly referred to as a bullish hammer.  These are the pros trapping the amateurs by fading the obvious "short trade" which leaves amateurs scratching their heads.

3.  Pop -- if buying continues, we wait for prices to break above the prior highs and we enter a long trade on that break.  The key to this trade is to be nimble and remember that you're probably trading a counter trend.  I like to trail a stop under the daily lows or drop down to a lower time frame (like the hourly) and trail an atr stop to get me out.  These trades usually last about 3 or 4 days (or bars on other time frames).

Here's the chart:

This trade is taking advantage of the retailers and the traders that are late to the party, over leveraged and not taking their losses.  We want to see a text book short sell that fails and traps these traders and then we ride it up as their stops are hit or when they finally throw in the towel and admit defeat.

Sound brutal?  Well no one said trading was nice.  The forex and futuers markets are zero sum markets and either you're the loser or you are taking the loser's money.  This is one of my favorite setups.  It works on all time frames but obviously, the bigger time frames like the daily chart make for bigger moves.

Hope everyone is trading well.

TLT

Get Ready for Round 2 with Winn Dixie

Winn Dixie (WINN) is poised for take off again.  After rocketing from 6.50 to 9.50 very quickly and then pulling back, it appears that buying order flow is driving it back towards the highs.  I'm still long this one from before but I am probably going to add to it.  Below is a breakdown of the trade.

 As you can see from the above chart, the weekly chart just had a crossover on the 20 and 50 week moving averages...possibly the beginning of an uptrend.  Furthermore, the Volatility stops are still in "buy" mode.  I'll be targeting an add between 8.50 and 8.00 a share.  I'll set an initial wide stop at 7.30 and then trail the stop with the volatility stops.  We'll see what happens.  The market overall is starting to look stronger via market breadth and sentiment indicators.  This stock could really take off if buying hits the general market.  As always, time and price will tell.

TLT

Dodged a Freight Train

Fresh Strong Buy Signal on the EUR/USD and some Think Script Code

I'm long the Eur/Usd...my TrendFuzz system just switched from Buy to Strong Buy. The pair may make a run for it's recent highs, which would make for a great trade.  Here's the chart:

Note the bars changed from dark green to bright green indicating a "strong buy" signal.  This combined with the Trend Confirm Dots (a separate trend following system) makes the pair look bullish right now.

A quick explanation of the TrendFuzz system is in order and I'll briefly describe it since I've been referencing it for a little while now.  TrendFuzz, is a trend following system that combines a market thermometer indicator or thermo with a volatility break out system.  The thermo measures an instrument's ability to make higher highs or lower lows (similar to what A. Elder described in Come Into My Trading Room) and it combines this score with another score based on current price in relation to a couple of past prices..like prices from 20 and 50 bars ago.  So, one part of the trendfuzz indicator is based on an increased/decreased average of thermo scores and the other part is just a volatility break out confirmation...the instrument needs to move 2x its historic volatility kind of thing.

This indicator is great for catching trends and does a decent job of minimizing risk.  The volatility filter helps filter out moves that are likely to whip saw...although not all of the moves get filtered out.  The "fuzz" in trend fuzz alludes to "fuzzy logic." This is because it is an adaptive system that can change its criteria for readings based on recent trading activity.  This means that an uptrend reading from today can have different criteria than an uptrend from a month ago...hence a fuzzy definition. 

I'm not going to share the code or the internals of the full system, but, I will share the basic code for the Thermo...which is what a good part of the system revolves around.  Some of the programming might be a little redundant and amateurish because, well, I'm not a professional programmer...just a self taught market junky that knows enough to get by.  The code used in the system is similar to this one, but it has been tweeked quite a bit.  This Thermo indicator is still rather interesting and can be useful to anyone interested in a new indicator. It uses a 52 Week High/Low score verbiage but its not really referencing the 52 week high/low..that is leftover from the original indicator.  Now can be set to look back at any bar you want..like 10 bars, 20 bars or even 100 bars back, just make sure the aggregation period on the chart is the same selected for the indicator.  Here's the code for thinkorswim:
####################################################
declare lower;

input ThermoAGPeriod = {default MONTH, MIN, HOUR, DAY, WEEK};
input ThermoLookBackBars = 12;
input PlotType = {default ExpMovingAverages, Standard};

def HighLowScore = 1000*((high-high[1])/(high[1])+
(low - low[1])/low[1]);

def A = highest(high(period = ThermoAGPeriod));
def B = lowest(low(period = ThermoAGPeriod));

def FiftyTwoWeekHigh = A[ThermoLookBackBars];

def FiftyTwoWeekLow = B[ThermoLookBackBars];

def FiftyTwoWeekScore = 10 * (((high
- FiftyTwoWeekHigh)/FiftyTwoWeekHigh) +
((low - FiftyTwoWeekLow)/FiftyTwoWeekLow));

def ThermoScore = HighLowScore + FiftyTwoWeekScore;

input MAPeriodShort = 9;
input MAPeriodLong = 50;

def EMA = ExpAverage(ThermoScore, MAPeriodShort);
def EMA2 = ExpAverage (ThermoScore, MAPeriodLong);

plot Line1;
Plot Line2;

Switch (PlotType) {
case ExpMovingAverages:
    Line1 = EMA;
    Line2 = EMA2;
case Standard:
    Line1 = ThermoScore;
    Line2 = ThermoScore;
}

def InvisibleLine=close*0;
plot Line3 = InvisibleLine;
Line3.hide();


addcloud(Line1, Line2, Color.CYAN, color.Dark_RED);
addcloud(Line2, Line3, Color.Dark_Gray, Color.Magenta);     

#####################################################

Enjoy and let me know if you have any questions.

TLT

WINNing

I couldn't help it...a Charlie Sheen reference is just to good to pass up.  But seriously, $WINN is exhibiting some interesting trading and it looks like it's ready to explode to the upside.  Check out the daily chart:

WINN is setting the stage for an accumulation break out.  After long sideways consolidations, these types of moves can be rather large.  Personally, I've taken out options positions for this trade as the options on WINN seem a little cheap...probably because of the lack of volatility lately.  The confirm dots in the chart are just a trend following indicator that I've been playing with that seems to have some promise.  It's basically just an updated version of the turtle trading break out method with a couple of small twists.  I'm finding that combining different trend following models that base their signals on different variables offers good trades.

I'm pretty sure Charlie S. would give WINN the Warlock seal of approval (okay, no more Charlie Sheen references).

Have a good weekend.

TLT