Triple MA System Update

Here are year-to-date results for the Triple Moving Average Cross Over system.

The Random Portfolio: Day 3

Guess there is something to be said for the dart board method, heh!?

Swing Trade: QID

Bought QID @ $37.31 as an RSI(2) swing trade. RSI(2) midday was 4 on the daily chart.

GLD & QID Oversold

GLD and QID triggered buy signals for the RSI(2) system today. GLD has an RSI reading of 3.03 while QID is at 7.06. 

I almost pulled the trigger on QID this afternoon when the RSI dipped below five, but I hesitated as the market appeared ready to head still higher. Hopefully, Friday will provide a rally to fade.

The Random Portfolio: Day 2

The random portfolio had a good day, as did the overall market.

The Random Portfolio

Here is what the random portfolio looks like after its first day on the job.

Swing Trading Randomness

In a comment at his blog, Woodshedder said:

I would like to see someone test random entries into the universe of equities, with maybe only a volume filter, and then apply differing money mgmt condition on the entries, testing the effects. I have a feeling they would not perform nearly as poorly as most would imagine.

Not one to turn down a challenge, and sharing a curiosity on the subject of randomness and stock trading, I have decided to take up the task.

My first order of business was generating a random list of stock symbols to trade. A quick search for random number generators took me to Random.org, a website that generates true randomness using atmospheric noise. Huh!? Just read this.

After poking around the website for a couple minutes, I noticed the List Randomizer, which will turn 10,000 items into a random list, all I had to do was provide the raw material in the form of stock symbols.

To keep the experiment as random as possible, while also being realistic enough to trade, I had to select stocks with adequate liquidity. So, I limited the stock universe to issues with a price between $10 and $500, with daily volume between 500,000 and 100 million shares. These two criteria produced a target list of 1,249 stocks via the stock screener at MarketWatch.

I entered the symbols into the list randomizer, which turned my alphabetical list of symbols into a random list in less than a second.

The next step took me to Investopedia's stock simulator. The simulator provides basic tools for paper trading stocks and options, and includes a $100,000 starting balance for portfolios.

To keep this experiment simple, I will be buying $10,000 worth of stock in the first 10 stocks on the random list. Each stock will be bought using market orders at the open. Each stock will be held for five days, and then sold at the open on day six. A stop loss of eight percent will limit downside risk. Stocks that stop out will not be replaced until all existing positions are closed after the five-day holding period.

Now that the ground rules have been established, let's meet the first 10 random candidates. Market orders have been placed for the following stocks: GNK, BMS, BCS, DBRN, ETR, DRIV, STZ, BDX, HAS, and NDAQ.

Triple MA Cross Over Update

Here are the updated results for the Triple MA Cross Over system.

Heading to the Lake

We're heading to the family cottage in Grand Haven, Michigan, so blogging will be light to nonexistent for a couple days. Here is the view from the front deck of the cottage.

Atmospheric Physicist Fred Singer on AGW

Someday, Anthropogenic Global Warming will go down in the history books as one of the greatest scientific frauds ever perpetrated on mankind, and one of the men who will be credited with debunking the theory is Fred Singer, professor emeritus of environmental science at the University of Virginia.

What most people don't understand is that the entire theory of AGW is based upon dozens of computer models cranking out doom and gloom predictions. Unfortunately for the doom and gloomers, the computer models don't match reality.

Below is a chart showing the difference between the models and reality. For more information, read Professor Singer's guest column on the website of the New Zealand Centre for Political Research.

Charting RSI(2) Stocks

Here is a quick chart showing the number of stocks with RSI(2) readings below 10. The chart covers the last four weeks. The stocks represented by this chart have prices above $10 and average volume of 100,000 shares. As of today's close, there are 715 stocks meeting these criteria.



UPDATE: Here are the RSI(2) less than 10 stocks expressed as a percentage of all stocks with a price above $10 and average volume above 100,000.


UPDATE II: Damian at Skill Analytics has just posted backtest results for an RSI(2) system that doesn't quite make the grade...yet.

RSI(2) Buy Signals

Yeah, everything is oversold. Do we even need charts? Didn't think so, but here they are anyway.

The top three charts are leveraged index ETFs, with the most oversold presented first, followed by plain vanilla sector ETFs. It appears that homebuilders, financials and consumer discretionary bore the brunt of this week's sell off based upon their RSI(2) readings.

RSI(2) & V

V has an RSI(2) of 10.67 and is sitting on the EMA(21). I'll be watching the stock closely for an appropriate long-term entry.

RSI(2) Buy Signals

This afternoon's selloff has produced quite a few buy candidates for the RSI(2) swing trading strategy, but first, an example of why it is important to follow the rules of your trading system.

On Monday, I bought SDS, the inverse ETF for the S&P 500. On Tuesday morning, I sold the position with a nice three percent profit when the RSI(2) hit 70 on the daily chart.

Now, a three percent profit in less than 24 hours is nice and respectable, however, had I traded the system using end of day prices and RSI(2) readings, then I would be selling SDS tomorrow morning for a 6.5 percent gain.

Moral of the story, stick to the rules. They really do work!

Now, back to the charts.

There are six ETFs in my watch list with RSI(2) readings below 10, they are XLF (2.31), XHB (2.46), XLY (4.01), QLD (5.02), DDM (7.02), and XLK (7.21).

Last night's plan was to buy XLF and XHB, but the market popped at today's open and then immediately began selling off, so I took a pass on the trades. Now, with RSI readings at two and change, the short-term downside seems limited and the upside more attractive, although the charts look absolutely awful. 

Twitter

I have removed the Twitter feed from my blog because Twitter has been having technical difficulties that were preventing my blog from loading. 

You can still access and subscribe to my Twitter feed by following the link on the right, but you won't be able to read my Tweets here until I'm confident the folks at Twitter have fixed their problems.

RSI(2) Buy Signals

Among the sectors getting crushed today were the homies and financials, represented here by the ETFs XHB and XLF, respectively. XHB has an RSI(2) of 8.48, while XLF is at 5.96.

I'll be opening a position in each, just not sure if I will do it tomorrow or not. The Nasdaq's RSI(2) dropped to 15.26, which is nearing oversold, but not quite.

My plan is to keep a close eye on the futures pre-market, and then act accordingly. The ideal situation would be a gap down at the open, or a quick morning sell off to a pivot point, followed by an oversold rally.

RSI(2) Entry with RSI(2) Exit

Woodshedder and BHH have been experimenting with the RSI(2) as an entry and exit signal for buying leveraged ETFs.

The basic rule is buy when RSI(2) is below 10 and exit when RSI(2) is above 80. The results are impressive and well worth checking out.

While the system works well with leveraged ETFs, it also works with plain ol'stocks, such as the Nasdaq 100. I ran a quick five-year backtest starting with $50,000. Equity per trade is 10 percent. No stop loss was used.

New Blog, New Link

There is a new blog in town and I'm adding it to the roll. Skill Analytics will focus on system trading, which I obviously find of interest, so I'll be a regular visitor.

Krull Hangs Up His Hat

Wild man stock trader Jefferson Krull of Suck My Nasdaq fame is calling it quits after blowing up three accounts last week.

I've always enjoyed watching Krull's video antics, but for the life of me I could never figure out why he traded specific stocks and options. What was his methodology? What were his rules for entries and exits and for taking profits and losses? I could never answer those questions from reading and watching his website.

I hope someday he'll return to stock trading, but in the meantime I think we can all learn from what Krull has to say in this YouTube video, which may be his last. It is humbling to watch.

Swing Trade: SDS

I sold my SDS position at $55.39 for a profit of $1.65 per share or three percent. The RSI(2) went just a tad over 70 this morning, so I exited the trade rather than wait for another 10 points on the RSI.

Swing Trades: SDS

I bought SDS at $53.74 when the RSI(2) on the daily chart was below 1. Market seems tired.

Trend Following System Pick: IDTI

I bought IDTI this morning after my trend following system issued a buy signal after Friday's close. I have no idea what they do.

Swing Trades: SWC & IFSIA

I bought SWC and IFSIA at the open this morning. These are Triple MA Cross Over picks.

Indiana Wind Farm Goes Online

A nearly treeless stretch of northern Indiana that once produced only corn and soybeans is now dotted with 87 hulking wind turbines that harvest the region's incessant breezes, generating enough power to light 43,000 homes. 

The 130-megawatt Benton County Wind Farm — the state's first commercial power station fueled by the wind — went online this month about 90 miles northwest of Indianapolis near the Illinois state line.

More here.

Triple MA Cross Over Update

Here are the updated stats for the triple moving average cross over system, as of Friday's close.

Swing Trade: SDS

SDS, the double inverse S&P 500 ETF, has an RSI(2) of 2.93, which is extremely oversold. I will be a buyer at Monday's open.



The following chart shows recent trades triggered by an RSI(2) less than 10.



The following table provides more details on the trades triggered by a low RSI(2).

Swing Trade: QID

I closed my QID trade at $37.81. Way too early as it just went to $37.99. $38 was my profit target, but once the Nasdaq pulled back to its pivot point, the QID stalled so I bailed. Bad Dog, bad.

I've been trading scared since March and have not been letting trades develop the way they should. Mentally I pick a price target but inevitably bail on the trade before it gets there, and more often than not, my target is hit without me going along for the ride.

Frustrating.

MA 50 Cross Over Update

The MA 50 cross over system is one I track by updating the backtest at StockFetcher at the end of each trading day. Below are the year to date results for the system as of today's market close.

As a reminder, the system buys a stock the day after it closes above the MA 50. The stock is then sold the day after it closes below the MA 50, when it hits an eight percent stop loss, or when the price hits a five percent profit target, whichever happens first.

Year to date, the system has triggered 137 trades. Below are trades 101 to 137, which includes trades from April 4 to now.

Here are the six stocks that triggered buy signals today. If I was trading this system, I would purchase the first five at tomorrow's open. I really like the charts of ACR and CRI, however, note that all of the selections are overbought according to RSI(2), which isn't a surprise given the market's recent run. 

I suspect that most stocks crossing their MA 50 are going to be overbought, so I'm not sure a high RSI(2) reading should be a concern, although I am going to pull a random sample of past selections to confirm my suspicion. I'll report on what I find.

Swing Trade: QID

I bought 100 shares of QID @ $37.53.

The Nasdaq has an RSI(2) of 97.62, which is very overbought. I expect to be out of this trade within a day or two.

QID Swing Trade Update

The QID swing trade I mentioned in the previous post has been closed. The afternoon selloff gave me a nearly instantaneous two percent gain, so I took it.

While I'm leaving some money on the table here, this massive selloff is a bad omen for tomorrow. The Nasdaq has now been firmly rejected at the MA 200 at 2,516.

UPDATE: That is one ugly looking candlestick to finish the day on. One saving grace is the Naz finished up for the day, although just slightly at plus 1.5 points. Also, the RSI(2) dropped from an intraday high of 95 down to 88.

On the other hand, the NQ futures contract dropped below 2,000 in after hours trading. A level that was resistance, then support, now may become resistance again.

I think tomorrow is going to be fun!

Trade Updates

I closed two of my Triple MA Cross Over trades early today because they appeared to be running out of steam, along with the overall market. Yeah, I know, I'm not being very mechanical.

First closed was AM, which has had a nice little run from my entry at $18.86. I got out at $19.48, so I had about a 62 cent gain or 3.7 percent. Note the high RSI(2) reading of 94+. This one just didn't seem to have much room left to run, so out it goes.

Second stock out the window was INFA. Note the extremely high RSI(2) of 98.87. This one needs a rest before it can move higher. I was in at $16.48 and out at $17.36 for an .88 cent gain, or 5.3 percent. Good enough.

And here is why I pulled the plug on these trades. Around Noon today, The Nasdaq registered an RSI(2) of 95. It also was sitting on the R2 pivot point and the MA 200, which provided a fair amount of resistance. Overbought and sitting on resistance is a low-risk trade, although not a guarantee.

So, I opened a new position in QID, the inverse short ETF, which had an RSI(2) of 4.87 (see bottom chart).

Bottom line, I think the market needs to rest a spell.

Naturally, each and every decision could be absolutely wrong. We'll see.

Trading The Triple MA Cross Over

Late last week, I began trading the triple moving average cross over filter, which buys a stock when price crosses above the EMA 4, 8 and 21, then sells the stock after five days. An eight percent stop loss is put in place immediately after the entry.

Up until now, I have been reporting on the filter's performance via backtesting, but I decided it was time to start trading the filter after reviewing some of the winning trades I made with this filter last year. Another motive was my frustration in watching trend days pass me by without a dog in the fight.

Trend days, those when the market goes up without any measurable pullback, are very difficult to day trade. Usually, the only safe entry on such days is at the open, when you have no idea what kind of day it is going to be. Once a trend day is fully developed, however, the market stays overbought all day and low risk entries don't exist, so day traders sit them out if they don't have any swing or long-term plays in place.

So, to end those frustrating days, I will be swing trading the triple MA filter for the foreseeable future. Here are the trades I have on right now:

AM: Triggered Wednesday, Entered Thursday, Sell Wednesday Close

INFA: Triggered Thursday, Entered Friday, Sell Thursday Close

ENDP: Triggered Monday, Entered Tuesday, Sell Monday Close

I am making a couple deviations from the fully mechanical approach.

First, I have not acted on every buy signal until five positions are established. Instead, I review each day's picks, and then choose the charts I like best. Cross overs on extreme moves, or candles that have long wicks sticking out of the top, such as AM's above, are candidates I may ignore going forward. The maximum number of positions will be kept at five.

Secondly, the mechanical approach is buy at the open and sell at the open after five days, but I'll be selling at the close after five days, unless I forget!

I don't know if my discretionary calls will improve performance or not, so I'll track the trades carefully, including my discretionary exit price vs. the mechanical exit price, and see what my meddling reaps.

$4.3 Million to $250 Million in One Year

"We had a good year."

So said T. Boone Pickens after recounting how his hedge fund started the year 2000 with $4.3 million, down 90 percent over two years, and finished the year up more than $250 million, after pyramiding bets on natural gas.

The Big Picture has the video. It is rather long, but very entertaining and well worth your time. So grab a beer or a glass of wine, then kick back in your chair and follow the link.

Three Stocks Driving Nasdaq 100

Bespoke Investments has a very interesting chart detailing the stocks behind the Nasdaq 100's 15 percent rally from the March lows. 

One stock is responsible for 35 percent of the move, and three stocks are responsible for 50 percent of the rally.

Guess which three are the movers and shakers before reading the Bespoke post.

Timing Sector Trades Using RSI(2)

My regular readers know I have spent a lot of time researching and backtesting the usability of RSI(2) in stock trading.

Much of my work, however, has been inspired by, reinforced by, expanded upon, or confirmed by, numerous other bloggers and traders who also understand the usefulness of this simple indicator.

For more ideas and backtests on RSI(2), you can read my posts, Woodshedder's, Fast Eddie's, Marlyn's, and IBD Index, among many others.

While previous posts have focused on using RSI(2) to trade stock indexes or individual stocks, tonight I focus on using RSI(2) for timing trades into sector-specific ETFs. Specifically, I used the following:

XLY - Consumer Discretionary
XLP - Consumer Staples
XLE - Energy
XLF - Financials
XLV - Health Care
XLI - Industrials
XLB - Materials
XLK - Technology
XLU - Utilities
XHB - Housing

Obviously, this is not a comprehensive list, nor does it include leveraged ETFs, but these sector ETFs have multi-year histories that allow for more reliable backtesting, so I think the results from this test may be extrapolated to other sector-specific ETFs with much shorter trading histories.

The rules of the backtest were simple. Buy when the RSI(2) was less than 10, sell when RSI(2) was greater than 80, or sell when a 10 percent stop loss was hit. Maximum open positions were limited to five.

And here are the results for 2008 year to date:


The results are pretty good and the 74 percent win rate should be psychologically comforting for traders who need more winners than losers.

On the downside, there have only been 38 trades year to date, which means a lot of cash is sitting around doing nothing a great deal of the time. To address that problem, a trader could add other ETFs to the watch list to increase the number of potential trading opportunities.

As for immediate trading opportunities, three of the above ETFs have a RSI(2) below 10, they are XLF (financials) at 9.47; XHB (homebuilders) at 6.71; and XLV (health care) at 5.34. And here are their charts:




At this point, I do not have any positions in these ETFs, although I'm seriously considering a position in one or all of the above. I'll let you know what I plan do before I pull the trigger Monday morning.

MA 50 Cross Under

In previous posts, I shared backtest results for swing trading the MA 50 cross over. The filter buys when the price closes above the MA 50, then sells when price closes below the MA 50, or when it hits a profit target of five percent, or a stop loss of eight percent.

This afternoon, I reversed the filter so that it shorts a stock when price crosses under the MA 50. The exit triggers are a close above the MA 50, hitting a profit target of five percent, or hitting a stop loss of eight percent.

The results of annual backtests, starting in 2002, are in the table below. Also included below are rough calculations of how a $20,000 portfolio would have performed since 2002 had you traded five stocks or 10 stocks using this methodology, or if you simply parked the money in an S&P 500 index fund.

Finally, I think this methodology may have greater promise if combined with the MA 50 cross over, which would give a trader a long and short methodology that would work in a variety of markets, up, down and choppy.

Cross Over Update

Here are the year-to-date results for the triple moving average cross over filter.

Cross Over Experiment

I ran my triple-moving average cross over filter at StockFetcher tonight, and while looking over the charts I was somewhat surprised by the extremely low volume behind the stocks' movement.

On one hand, I shouldn't be surprised because overall market volume today was light, but these stocks made significant moves on weak volume, which looks rather scary on the charts. So, out of curiosity, I added a requirement that volume on the day of the cross over had to exceed the average volume for the last 90 days.

Here is a quick comparison between the original and the revised cross over filter for 2008 year to date:

I'll post year by year comparisons starting in 2002 later tonight or tomorrow morning, but the above results look promising.

Van Halen: Panama

Creating A Diversified Portfolio for Backtesting

A few days ago, in a post entitled Want to Trade Like a Turtle?, I presented charts of Nasdaq 100 stocks that had made new 20-day highs, which was one of the entry criteria used by the famed Turtle Traders.

In the comments, however, John Forman of The Essentials of Trading fame, commented that trading a bunch of Nasdaq stocks wasn't truly in the spirit of the Turtles, because the stocks are correlated with one another, while the Turtles traded non-correlated futures contracts. 

He was right, of course, but as I stated in response, my goal was to identify an easy to use but profitable entry and exit system that an average retail trader could use effectively.

However, his comment did spark an idea. Why not assemble a diversified portfolio of ETFs, then backtest my breakout script against those ETFs? In essence, such a portfolio would provide a more Turtle-like trading experience, minus the high levels of leverage found in futures trading, although leverage is available through double long and double inverse ETFs.

So, that is what I am attempting to do, assemble a portfolio of non-correlated (mostly) ETFs that can be used for backtesting purposes, and this is where I need your help.

Below is a table with the preliminary portfolio I have assembled. I know there are markets that should be included, and some that probably should be deleted due to correlation issues, but I think this is a good start.

If you would like to contribute a suggestion for the portfolio, a stock or ETF, please leave your idea in the comments. Your input is greatly appreciated. Thanks!

 

Cross Over Backtest Update

I'm leaving for Indianapolis in two hours to walk in the Indy Mini-Marathon, so I am posting the updated backtest results for the 4, 8, 21 moving average cross over system now instead of after market hours, since I won't be here.

As of Thursday's close, the system is showing an annualized return of 27.87 percent compared to annualized S&P return of -17.87 percent. Still trouncing the market!

The mini-marathon is Saturday morning, so I probably won't be posting again until Saturday night or Sunday afternoon.

Have a good weekend everyone!

Want to Trade Like A Turtle?

The famed Turtle Traders were momentum traders who used two different criteria for entering trades, either a new 20-day high (or low) or a new 55-day high (or low). 

While the Turtles were futures traders, their methodology can be successfully applied to stocks.

So, given the recent strength in the market, I thought it was a good time to dust off my breakout script at Wealth-Lab.com to find Nasdaq 100 stocks making new 20-day highs. Their charts are below and please notice that every single one is way overbought at this point. I suspect that pull backs are imminent.

As usual, trade at your own risk.

Disclaimer: I don't own any of these, but NVDA looks very, very tempting.

MA 50 Cross Over Test: Alternate Time Periods

In the comments to my previous post, reader Del suggested testing the MA 50 cross over system during alternative time periods to gauge its effectiveness in different market conditions.

While I think the six annual tests based upon the calendar year did subject the system to very different markets, i.e. bear, sideways and trending, it never hurts to mix things up a bit to see what you get.

So, I took his suggestion and ran year-long backtests using a July 1 to June 30 fiscal year starting with July 1, 2002. Here are the results:

 

As these results, and yesterday's results show, the MA 50 cross over system works better in some markets and worse in others, as should be expected.

This system is basically a short-term trend following system, so it should perform well in trending markets, especially at the beginning, and do less well in sideways chop. 

One surprise, for me at least, was how well it did during the 2002 bear market. However, a quick glance at a chart shows several rallies in that year-long decline, so the system was able to capture profits at the turn, then get out before too much damage was inflicted by the next leg down.