Moving Average Crossover Trading

Early Friday morning, I posted the backtest results for a mechanical moving average crossover trading system that has been performing very well in the first three months of the year. Tonight, I want to share the two-day results for stocks that would have been purchased on Friday. 

I didn't provide a list of buy signals for the crossover system on Friday because I was too tired by the time I finished the post around 3 a.m., I simply forgot. 

But, had I listed the buy signals, they would have been LMDIA, UTIW, CMVT, CYH, AGO, ACM and QMAR. Note, however, that the system only holds five stocks at any time, so ACM and QMAR would not have been purchased. I also would have skipped QMAR as a result of its impending purchase. But, all are included here for illustration purposes.

The two-day results for Friday's signals are in the table below. The best performer so far is UTIW, which is up six percent. The worst performer is AGO, which is down 2.5 percent. I will repost this table at the end of five days, which is the maximum holding period for the system.

And here are the individual charts for each of the above stocks. The first candlestick touching the blue shading is the buy signal, which represents last Thursday's price action. I also will repost these charts at the end of the five-day holding period.

Peak Oil...Not Yet

From Next Energy News:

In the next 30 days the USGS (U.S. Geological Survey) will release a new report giving an accurate resource assessment of the Bakken Oil Formation that covers North Dakota and portions of South Dakota and Montana. With new horizontal drilling technology it is believed that from 175 to 500 billion barrels of recoverable oil are held in this 200,000 square mile reserve that was initially discovered in 1951. The USGS did an initial study back in 1999 that estimated 400 billion recoverable barrels were present but with prices bottoming out at $10 a barrel back then the report was dismissed because of the higher cost of horizontal drilling techniques that would be needed, estimated at $20-$40 a barrel.

The above was posted in February. I haven't found any updates yet.

Mechanical Trading for Profits

While discretionary day trading is a lot of fun, it is very time consuming and can be psychologically brutal. Thankfully, there are multiple ways to make money in the market.

A less stressful trading method is to use a mechanical system for swing trading using end of day prices, thus negating the need to stare at a computer screen all day. Well, okay, you probably do that anyway, but you don't have to do it to make money in the market.

With the girls off to grandma and grandpa's in Michigan, I used some quality quiet time Thursday evening to dust off some mechanical filters over at StockFetcher.

One of my favorite filters is the triple moving average crossover, which Marlyn at Filtering Wall Street created. Marlyn was one of the first visitors to my humble blog and he provided a tremendous amount of encouragement and help during my initial foray into trading. Marlyn doesn't post any more, but his blog is still up and I highly recommend spending a couple evenings reading all of his posts, you will learn a lot. The link is on the right.

My task tonight was to update my backtest results for the crossover filter to find out how it has been performing in the 2008 bear market. Has it handled the volatility reasonably well? Or has it crashed and burned with the market? (I haven't been swing trading the filter, but I do use it for day trading.)

Before I share the updated test results, here is the code for the filter.

The filter looks complicated, but it is fairly simple. In essence, the filter issues a buy signal when the price opens below the EMA 4, 8 & 21, and then closes above the EMA 4, 8 & 21. The objective is to catch stocks at the beginning of a new move up.

To narrow the stock universe to something more manageable, only stocks priced between $10 and $35 with average volume of 500,000 shares are used. According to Marlyn's research, these stocks provide the average trader with the best opportunities for reasonable profits.

You can delete the price and volume restrictions, but you'll end up with a bunch of penny stocks, so broaden the parameters if you want, but don't eliminate them entirely.

Now, the backtesting parameters:

Test Period: Jan. 1 to March 27, 2008
Stoploss: 8 percent
Maximum Holding Days: 5 (all trades closed at the end of day 5)
Maximum Trades Per Day: 5
Maximum Open Positions: 5

And now, the results:

Trade Statistics
There were 60 total stocks entered. Of those, 55 or 91.67% were complete and 5 or 8.33% were open.
Of the 55 completed trades, 27 trades or 49.09%resulted in a net gain.
Your average net change for completed trades was: 1.02%.
The average draw down of your approach was: -4.74%.
The average max profit of your approach was: 5.74%
The Reward/Risk ratio for this approach is: 1.42
Annualized Return on Investment (ROI): 58.03%, the ROI of ^SPX was: -42.42%.

Exit Statistics
Stop Loss was triggered 11 times or 20.00% of the time.
Stop Profit was triggered 0 times or 0.00% of the time.
Trailing Stop Loss was triggered 0 times or 0.00% of the time.
You held for the maximum period of time (5 days) 44 times or 80.00% of the time.
An exit trigger was executed 0 times or 0.00% of the time.

In short, the filter is smoking. Did you notice the 58 percent annualized return even with a measly 49 percent win rate? Not too shabby. I think it is time to start swing trading this puppy.

Naz In Review

The Naz had a good run today, although I can't say the same for my trading. 

I got chopped up trying to go short as the Naz bounced off the bottom of the pivot point and EMA(21). On down days, those trades would have been golden, but today, they just reversed and stopped me out for losses. It was frustrating.

Mentally, I couldn't make the switch to bull mode and when the rally came in the afternoon, I couldn't pull the trigger due to the losses I took in the morning. 

Generally speaking, I sucked today.

As for the daily chart, the Naz stopped at the EMA(21) on above average volume. However, every rally since February has died at that line. If the Naz clears that hurdle, then the EMA(50) is 100 points overhead and the EMA(200) is 150 points above the 50. In short, a whole bunch of resistance before we are cleared for takeoff.

News Flash: Citigroup Analysts....

.....say we should avoid highly leveraged companies, countries and consumers because leverage is being unwound.

Really?

Wow. Didn't notice.

Hmm, wonder if the folks over at Bear Stearns know anything about this. Maybe I'll give them a call.

Geez. How much do these idiots get paid?

Have they been conscious during the last, oh say, 12 months?

Guess not.

And does this warning include their company's stock, too?

Just askin'.

Bad News for the Global Wheat Crop

Wheat stem rust, a fungus that can be spread by winds over long distances, has been discovered in Iran, and now the fungus is considered a threat throughout the wheat-growing regions of the Middle East. Science Daily has the details.

Not good news for global food supplies, but possibly good news for wheat prices, not that they have needed much over the last few months.

Resistance @ 21

The EMA(21) is the line in the sand for the Nasdaq. If it can't break the 21, then we don't have to worry about the 50 or 200.

Did You Enjoy The Rally?

Not sure it gets any uglier than this. 

Today's sell off is exactly what bulls didn't need after a huge up day yesterday. The Naz gave up nearly 60 of the 90 points it gained in Tuesday's Fed-fueled rally. So much for orderly consolidation of gains!

As for me, I ended the day positive but gave back $200 when the afternoon rally didn't.

Need to stick with morning trades and take the afternoons off. 

Day Trades: NQ

Made two trades this morning netting $560.

I lost $160 yesterday and made about $190 on Monday.

My trading has been less than stellar recently, primarily due to thinking too much. I need to be more reactive, less cerebral.

More about this later.

Trend Following System Picks

Tonight my trend following system issued a sell for ISRG and a buy for MSFT.

I don't own ISRG and don't plan to buy MSFT. I haven't been able to backtest the system through a death-defying bear market yet, so I'm taking a pass for now on buy signals.

Today's VIX Chart

Silver Sale...

I sold 70 ounces of silver bullion last Saturday, but it looks like I was a bit premature on that transaction.

NQ Chart Before & After

Here is a chart of the NQ futures contract before and after the Bear Stearns news. That is a 70-point swing in 1.5 hours

The S1 pivot gave way and then held but not sure if it will hold or not.

Futures Tanking

NQ (Nasdaq) down 30  -  The NQ, which I trade, is finding some support at the S1 pivot point at 1688. Let's see if it holds.

ES (S&P) down 20

YM (Dow) down 150

Fed Cuts Discount Rate

Getting lost in the Bear Stearns news is the Federal Reserve's decision today to lower the discount rate by .25 percent.

Shareholder What?

$95 to $2 in six months. 

98 percent of shareholder value vaporized.

Let the lawsuits begin.

Nasdaq Futures Spike

The NQ futures contract spiked up 30 points on news that JPMorgan is buying Bear Stearns for $2 per share.

UPDATE:  7:45 p.m. The NQ is down six points. We now return to our regularly scheduled bear market.

Bear Stearns Sold for $2 Per Share

JPMorgan is buying Bear Stearns for $2 per share. Article here.

Ouch.

A Billion Here, A Billion There....

Goldman Sachs this week will announce writedowns totaling $3 billion, according to The Telegraph.

Ouch.

Day Trade: QID

Made a quick $325 this morning fading the gap with 500 shares of QID. With a bit of patience, I could have banked another $175 on the trade. Oh well.

Not sure where we go from here with the Naz up 44 points or 2 percent. 

However, I'm guessing we don't make another big move until the Naz reconnects with the EMA(21) on the 15-minute chart. The EMA(21) is at 2,200 at the moment with the R1 pivot point at 2,202. From there, a big move up or down is possible. Until then, though, I think we'll be range bound.

Margin Calls at Carlyle Capital

MarketWatch just posted a bulletin reporting that Carlyle Capital received more margin calls and lenders have liquidated some of its RMBS securities. Carlyle Capital is the Amsterdam-based unit of the Carlyle Group.

30-Day Reprieve for Ruby Tuesday

Ruby Tuesday has received a 30-day reprieve from default courtesy of the company's lenders. Read more here.

All About the Timing

I'm guessing there are some disgruntled IB customers right now. Just as the market was going into rally mode at 3 p.m., IB's data feed crashed and left many of us in the dark.

IB has been having problems all day with its live quote system. I sat on my hands for at least an hour this afternoon because of partial and/or sporadic quote service.

Can't help but wonder how many customers were net short when the system went down.

Ouch.

Pre-Market Futures Gapping Down

NQ futures are down about 12 points 27 minutes before kick off, setting up a possible gap fade at the open.

Pre-Market Looking...

.....boring. NQ is down four points or so as everyone awaits the ISM data at 10 a.m.

Not much to do but sit tight.

Urban Heat Island Effect Causing Global Warming?

A recently published paper by Ross McKitrick, an economics professor at the University of Guelph in Ontario, Canada, and Patrick Michaels, an environmental studies professor at the University of Virginia and Senior Fellow at CATO, concludes that half of the global warming trend from 1980 to 2002 is caused by nonclimatic effects (Urban Heat Island).

Here is a summary of the report. Pay special attention to how their findings and the findings of other researchers whose independent work showed similar results were simply ignored by the IPCC.

Here is the full paper if you are so interested.

Global Warming Debate Continues

Yesterday, Barry at The Big Picture dipped his toes into the man-made global warming debate and today expressed surprise at the number of comments from those who doubt the catastrophic predictions of the global warming alarmists.

He laments the scientific and mathematical illiteracy of his readers and calls skeptics "denialists", an emotionally loaded term that has more relevance to religion and politics than science. I guess Barry is having some trouble with that science thingy.

In his Saturday post, Barry made a big deal out of folks who used one year's worth of data to state that global warming was over. Even I made light of the issue in a recent post, although I did point out that one year does not a trend make.

Barry's concern is that people are paying attention to the short-term trend while ignoring the long-term trend, and he uses the following chart from the New York Times to demonstrate the existence of the long-term global warming trend, which he believes is man made.

Unfortunately, Barry is doing the same thing he accuses his readers of doing. Barry is focused on a short-term trend of only 158 years, while completely ignoring the fact that climate change occurs over centuries (note the use of the plural).

 

Below is a true long-term chart of Earth's temperature for the last 1,000 years or so, courtesy of the UN's IPCC. Note how the Earth's temperature changes over centuries. Note also that even after industrialization has helped increase the amount of CO2 in the atmosphere, today's temperatures are still lower than they were 1,000 years ago during the Medieval Warm Period (MWP).

The simple fact is, the Earth has always warmed, it has always cooled, and it always will. Nothing we do can stop the natural fluctuations. 

Yes, 6 billion people may impact their regional climates, and some of that may show up at the global level, however, humans are but a speck in nature's eye and she will have the last laugh, which will probably come in the form of glaciers reclaiming much of the northern hemisphere sometime in the next 10,000 years or so.

In the meantime, put another log on the fire, pour a nice cabernet, light your favorite cigar, and try not to get too worked up over things you have absolutely no control over.