Using multiple timeframes to determine price structure

I think a lot of people (including me) were anticipating a powerful trend day today. We had a big gap that refused to fill even a little bit. A big downward impulse followed with new TICK lows.

A slight pullback occurred and then another downward thrust with a fresh new TICK low. Advancers outnumbered decliners by 2,300 at that point. All signs pointed to a trend day.

But price started oozing upward eventually breaching the 20 period moving average and is testing the upper Bollinger band as I write this.

What caused price to unexpectedly reverse and start heading upward?







Looking back a few days we can see a level of support that formed on the 30 minute chart.

Once the price of SPY reached that support level, it bounced and headed upward. It's still going up as I write this.

We'll have to see how powerful this level of support is. Will we get a "broken" trend day as price reverses.

Watching different time frames can help you to determine targets and stops and allows you to have an upper hand as price makes seemingly random moves.

Zack's Research Wizard results

Here are a couple of recent comments about Zacks's Research Wizard that are in response to my post a few weeks ago.

I'm guessing this is the same "Anonymous" who offered to post his return on a weekly basis:

During the past six weeks, one of my better strategies in RW selecting 8 stocks per week ran -9.5%, Fridays to Fridays, -14.5% of which was during the past three weeks. YTD, during the past 44 weeks the result was 137%, Fridays to Fridays, including staying in the market during the four volatile weeks in February, when I stayed out, triggered by the 4.5% drop in the DOW. As stated earlier, when you invest rigorously from Mondays' closes to Mondays' closes, your result ends up at about 75%-80% of the result RW shows you would have gotten. This result excludes the transaction cost of the 8 stocks in the portfolio, about half of them stay two weeks or longer in the portfolio.

It is relatively straightforward to test with RW under which market conditions the Zacks rank 1 and 2 stocks produce ineffective results. Jeremy Grantham's latest quarterly October newsletter spelled it out: "As we have demonstrated to our clients in earlier cycles, earnings estimates in particular merely follow the market up (not the other way around, as one would hope). So it is a law of nature that strong estimates will abound after a major market rally. The earnings and economic growth estimates in such cases are usually throwaways". Hence, when the market runs down in high volatility, I don't use RW to pick my stocks. During such a time, the earnings and growth estimates are usually throwaways as Grantham states. I estimate that to be about 30% of the past ten years. The onset of these periods do usually precurse themselves by a growing VIX and/or the first time that the DOW drops 4.5% or more in one day. For the rest, I find RW a money machine if you have the proper strategies and always buy and sell at Monday closes.

CWatts also chimed in with his own opinions about Research Wizard:

Scott, I totally agree: "There is a real lack of support for such an expensive product. I think it would really help to have a user forum available. Any sort of communication on a weekly basis would be great." What's with that? It makes no sense. I got into the Motley Fool Pro as a charter member and found the support was great. I wasn't so impressed with the profits their recommendations were providing. Still, I felt that support, encouragement and information was abundant from the Pro community and Fool staff. Zacks seems to say, "We've got your money. Now you're on your own." It is almost as though they are assuming they will have no return customers because they are doing nothing to foster loyalty. A community of Zacks Wizard users is really needed. If Zacks has no interest in fostering it, how can it be done?

I've had good weeks and bad weeks using the Zacks Wizard. But in the Last six weeks I've gotten creamed in excess of $50,000. Part of the problem is my own. After a couple bad weeks I decided to sit on the sidelines in cash for a little while, just in time to miss the biggest gain in months. I was up nearly thirty percent for '09 when I started using Zacks. I'm closer to 10% now. That hurts. But I can endure losses if I have solid assurance that the swcreens are accurate and you can make serious money if you are faithful to the program. But it seems to be hard to find anyone who has continued using the Wizard faithfully for several years. Do any of you know of independent careful critiques of the Wizard? I want to believe but I don't want to wipe out in the process.

Trend Day or Range Day?

The website Verticle Solutions provides a real time gauge with a proprietary alogorythm that determines whether the current day's structure indicates we are trending or in a range bound environment.

I look at it a couple of times a day as another way of monitoring market activity. It's an interesting tool and I like anything that has colors and arrows. I do like my gauges.

Every Kramer Entrance

Using TICK to plan your day

Today started with a gap of over 1% and good earnings news from Intel which are often catalysts for the formation of a trend day. Trend days can make your week or even your month if played correctly so it is important to be able to identify one early in the day so that you can take advantage of the easy pickings during the rest of the day.

If you just focused on price alone, you really have no indication that today is not a trend day (as of 12:00 pm EST). We had a large opening gap, and price hasn't crossed the 20 period moving average (green line). It seems that the bulls are in complete control, and the news is hailing DOW 10,000 before it even happens.

But when you look at market internals you'll see a different picture. The NYSE TICK is a great tool for understanding what is going on "behind the curtain".





I've posted a capture of the NYSE TICK which shows that caution should be taken in assuming this is a trend day. Usually on a trend day you'll see extreme readings on the TICK (above or below 1,000). The green line is +1,000 and the red line is -1,000. As you can see, the TICK has not reached extremes on either side of the spectrum. To me, it looks weighted on the sellers side, especially during the first couple hours of trading.

Currently, it looks like TICK is hovering around the "zero" line which indicates this day is more like a "range day" than a trend day. Using tools like the TICK can help you make better decisions about price structure and allow you to determine how aggressive you want to trade. On a trend day you want to go nuts and risk a lot to make a lot. On a range day, caution is the theme of the day and you should trade much more conservatively.

As always, it will be interesting to see how the day plays out.

Zack's Research Wizard

I haven't used Zack's Research Wizard for over two years and I haven't written about it in at least that long, but I consistently receive comments and questions about the product. Curiously, a Google search of Zack's Research Wizard lists StockPunk as second in rank under Zack's own website!

There are a many great discussions about the product on a couple of my posts. The best debate has probably gone on after I posted my opinion about the product after using it for 6 months. You can see the post and read the comments here.

I no longer use screening or buy individual stocks, but I still find the world of stock screening fascinating. My love for the markets and trading started with fundamental screening. I still enjoy reading Charles Kirk's posts about his Stock Screen Machine.

Recently, an anonymous commenter offered to post his impressive returns using Zacks Research Wizard. Here is his comment: I have four RW strategies that produce separately and combined a CAGR of ~75% over the past 10 years if you buy and sell the weekly selected stocks on Mondays at close. One of these strategies selects some 8 stocks each week. I am willing to send Scott this selection every Monday for the next three months so that he can publish those on his secured site while I will stay anonymous. If the DOW drops more than 4.5% on a day, we use this as a stop loss and stay out for the next 20 days.

I'd be up to posting his results on a weekly basis if other readers are interested. Let me know through the comments section of this post or through e-mail and I'll let the poster know that there are readers who are interested.

Using structure from yesterday to trade today

The day opened with a .30 gap in SPY which according to backtesting research has a pretty good chance of filling. Usually I'll attempt to fill any gap under 50 cents because gaps of that size have good edge and usually fill.

But today I decided to wait because of what happened yesterday. Many day traders trade only in the moment and ignore the previous day's (or even the previous hour's) action. However, the structure that sets up yesterday often continues into the next day as it did today.

Yesterday we got an excellent bear flag into resistance near the close. Not only was the 50 period exponential moving average acting as resistance, but price also stopped at the 61.8% Fibonacci retracement (see next chart).

The bear flag began its decent with a big down bar 25 minutes before the close, but as often is the case, some sort of buying programs clicked in and killed off the move in the closing minutes of the day.

The pattern still remained viable, and as we opened the day with a gap, you should have been hesitant to jump right in given the dominant bear flag that had formed into the close yesterday.

On this chart I've drawn the Fibonacci retracement which allows you to determine a stop loss for the bear flag (if you're wrong). In this case, your stop loss would have gone above the 61.8% retracement (slightly above 107.71). You could have entered after the doji formed 10 minutes after the open today.

To set your target you could have drawn a Fibonacci extension on yesterday's bear flag (next chart). You could target the 100% Fibonacci extension which would be the completion of the bear flag. Notice that price continued through the 100% extension and nipped the 138.2% extension.

Aggressive traders could have held on until they saw a reason to get out (that nearly engulfing up candle would have been a sign that it was time to leave the trade). Or you could have targeted 138.2% which would have been a successful target (to the penny).

This may all seem too complicated to perform in real-time, but I assure you, with a little practice, it becomes second nature. It just takes a few seconds to look over patterns and draw Fibonacci retracement and extension lines. The information they provide can dramatically increase your confidence to put on trades and to formulate realistic targets.

Many traders struggle with when to get into a trade and when to get out. By studying price structure you can really improve your execution and increase your accuracy. Understanding yesterday's price action is also invaluable when trying to understand the price action today.

A Guitar World video review of my buddy Gabi's hand-made amplifier.

http://www.gabtone.com/

AAII's Zweig Stock Screen Down 17.4% YTD

Occasionally I like to peruse my old haunting grounds to see how I would be doing if I still traded using stock screening techniques. As many of you know, the Zweig stock screen was my "bread and butter" for several years and it performed marvelously for several years averaging a 50% return for me each year. I was using a "tweaked" version of the screen that simply ranked the Zweig screen candidates by their 26 week relative strength (as compared to the S&P 500) using AAII's Stock Investor Pro.

I then chose the top 5 stocks listed in the screen (the screen averaged about 10) and bought them Monday morning. I held through the week without using any stop losses. I would re-evaluate the screen on Sunday and if any stocks dropped off the list, I would sell them Monday morning and replace them with new stocks that qualified for the top 5.

I sometimes held stocks for just a week, but in most cases, the stocks stayed on the screen for weeks and months at a time. It was a very simple way to trade using mechanical methods which allowed me to work full time during the day and still enjoy returns that handily beat the indexes. But things fell apart for the screen in 2008, and AAII's version of the screen lost 34% over the year. Before 2008, the screen's worst performance since 1998 had been a 17% gain in the awful market of 2002.

By mid-2008, I knew that I would have to change my trading strategy if I was going to be able to eventually trade for a living. A losing year just wouldn't cut it for paying the bills since I didn't have an abnormally large chunk of equity. So I made the switch to day trading which I felt gave me much more control over my trading and my equity curve.

I'm still learning, and the transition hasn't been easy by any means. The fast pace and emotional stress of trading intra-day takes its toll. It is much more complicated and requires a huge amount of effort, learning and dedication. I sometimes question the switch I made (as many of my readers have done). So once in a while, I'll "take a peak" at some of my former methods just to see how they're holding up.

I'll have to admit that I was completely surprised to see that the Zweig method has performed poorly this year--down 17.4% YTD. This is the type of environment where the stock screen usually thrives--an unrelenting bullish bias after the market bottoms out. In 2003 the unmodified screen returned 89% with monthly re-balancing.

That fact gives me pause that the rally we are seeing today doesn't necessarily indicate that happy days are here again. Something is not quite right fundamentally if the Zweig screen is down for the year after a 40% rally has taken place.