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After tradings stocks for over 50 years my trading strategy continues to evolve. I used to ignore indicators like stochastics and Bollinger Bands because I mistakenly believed that such concepts as overbought or oversold were useless. I fortunately  began to re-analyze some of my trades using these indicators and found these indicators to be extremely valuable.

The biggest problem faced by me and my students is buying great stocks that then turn out to be “extended.” These stocks promptly turn around and decline right after what we thought was a perfectly timed purchase. Sound familiar? After listening to some of the expert traders who come to lecture to my students I decided that rather than buying stocks that break to new highs, I should buy strong stocks that have rested and become oversold and then start up again. I do like buying green line break-outs (GLB) but maybe should wait to buy them after the break-out when they subsequently become oversold. The GLB is just evidence of a strong stock that has broken out to an all-time high after a rest of 3 months or more. At the moment of break-out they are rarely over-sold!

I prefer to buy  strong oversold stocks that are bouncing off of support (BOS) and to place a sell stop just below where they have bounced. This means that if the bounce fails I am sold out quickly with a small loss. Since a lot of my purchases will likely fail, it is critical to have very small losses when my trades go awry. When the bounce holds, I can then ride the stock and even add more to my position  so that my relatively few large profits make up for my many small losses. There is nothing more freeing emotionally than to buy a stock and place an immediate GTC stop loss order to sell with a very small loss. My mantra is that each small loss brings me closer to the next big gain–no ego allowed.

I have written a number of scans in TC2000 that can detect strong rising stocks that have become oversold and that are bouncing off of support  (BOS). My primary measure of oversold is a bounce up from the lower  15.2 daily Bollinger Band. Once I find a list of bouncing stocks I  investigate such things as their trading volume, fundamentals, market trend and anything else that can help me decide which stock to buy. But these additional  analyses really do not matter much because in the end it  is impossible to reliably predict which stock’s bounce will hold. By the way, I have used this strategy successfully with all types of stocks and ETFs.

Below is a chart of a BOS stock that bounced on Friday, HII. Each previous bounce from its lower BB is shown with a “B.” The 2 magenta lines show when the major market indexes’ recent mini-corrections ended. Note that even though the decline to Bottom 2, the Grexit decline, was lower and steeper than the decline to Bottom 1, HII managed to show incredible relative strength and resist the declines. HII was actually trading higher at Bottom 2 than Bottom 1! Will HII’s Friday bounce hold? I do not know. But if I wanted to trade it I would buy it on strength (if it trades above Friday’s high) on Monday and place my sell stop below the bounce, perhaps around 167.19. I am presenting this only as an educational example of my technique. I do not own HII.

While I am not showing its chart, my favorite water stock, AWK, showed a similar BOS on Friday.

During the trading day, when TC2000 alerts me to a BOS, I often tweet the symbol to the world. You can receive my tweets intraday at @WishingWealth. Just keep in mind that I tweet only to teach people and to enable them to evaluate any of these stocks using their own criteria. I do not trade all of the stocks I tweet about. I am looking forward to fall semester when I will teach a class of 180 freshmen what I wish someone had taught me at their age.

The GMI remains at 6 (of 6).

 

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I assume that most  U.S. part-time traders, like me, tend to monitor  closely the U.S. stock indexes. I have been writing that the major indexes I follow (DIA, QQQ, SPY and NYSE) appear to be entering major down-trends, showing the RWB pattern I invented by modifying GMMA weekly charts. My charts have 12 exponential weekly moving averages, a band of 6 shorter averages plotted in red, and a band of six longer term averages in blue. A strong up-trend is evident when all of the red lines are well above the rising blue lines such that there is a white band separating them. I call this an RWB pattern, Red/White/Blue. A significant down-trend is evident when the reverse is true, giving a BWR pattern. I also include in my charts a gray dotted line that shows the weekly close of the index being plotted. This more recent price line (gray dotted line) tends to lead the averages.

The past few weeks I have been showing you that the U.S. indexes I follow have been transitioning from a multi-year strong RWB up-trend into a BWR down-trend. This is clearly evident in this weekly chart of the SPY. The NYSE index, composed of large multi-national stocks, is in a fully formed BWR down-trend.

All of the other U.S. indexes I follow have  patterns  similar to the SPY, although the QQQ, shown below, composed of nonfinancial tech stocks,  is  less far along than the others in forming a BWR pattern. It is clear from these charts that these markets have come out of a  multi-year RWB up-trend. In an RWB the gray dotted line is largely above the red averages, showing that the direction is headed up. In a BWR down-trend the reverse is true. Note that the gray dotted lines in the above two charts are now below all 12 averages, signalling a deepening down-trend. One  sign of a new up-trend would be if the gray dotted line were to close back above all 12 averages, although I prefer to see the full RWB pattern develop before I trade big with a changed trend. My primary conclusion is that the RWB pattern (bull advance) of the lest few years in the U.S. markets  is clearly over and no one  knows when it will come back. Is it too late to sell?  Sorry, no one knows.

The above discussion would have been my routine analysis of the markets. But given the current market turmoil and the primary cause being ascribed to the market in China, I thought I would look at the chart patterns of markets world-wide. I examined 37 ETFs representing markets across the world. With the exceptions of the markets in Belgium and Ireland, all markets I examined were in well developed BWR down-trends!  Can we legitimately blame all of this on China? I will post just a few representative examples below.

Thailand:

Australia:

Russia:

South Africa:

United Kingdom:

Germany:

HongKong:

France:

Chile:

India:

Egypt:

Sweden:

China 25:

I am not an expert on world markets. Maybe one of you can comment on these relationships. Is it really possible that all world markets are going down because of the China market? I suspect not. There is probably another factor driving all of these markets? Deflating commodities?

Did similar relationships occur in 2008? Not all of these ETFs existed in 2008. When I looked back at the patterns across a few countries in 2008 I again saw tremendous similarity across the markets. That does not necessarily mean that we are entering  another crisis like the one  in 2008? Nevertheless, the possible implications of these charts concern me more than a little……..

My GMI remains on a Sell signal with all indicators negative. Where is the bottom? A major past signal of  panic-induced market bottoms that I have noticed is when the Worden T2108 indicator, now 15,  falls into single digits. The monthly chart below shows that T2108 reached 1 at the 2008 bottom,  7 in 2011 and around 6 last August. I post T2108 each day, to the right of this page.

If T2108 goes below 10, I hope to hold my nose and move some cash into an index ETF (SPY or QQQ) or an index mutual fund. I will then only average up if the market continues to recover. I make this promise each time we have a large decline but seldom keep it! At the bottom the market always looks too scary to buy…..

 

 

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With AAPL showing strength, it looks like this market will move higher. Check out AAPL’s daily chart.

And its strong RWB pattern.

Stocks are breaking through their green line tops to all-time highs. Like SYNA

And IMAX

And MGA

And TCX

And CTRP

I like to hold stocks that break up through their green line tops (GLB) as long as they stay above their green lines.

A green line top occurs when a stock reaches an all-time high that it does not exceed for at least 3 months. By definition, an IPO may not have existed long enough to rest for 3 months. I rediscovered what Jesse Livermore once wrote. If an IPO opens strong and then recedes from its peak for a few weeks, buy it when it breaks to a new high.   As Jesse said, it means something has changed. FB did this quite a while ago, although it took it almost two years until 2013 (monthly chart) to hit a new high.

SHAK flashed the buy signal much more quickly, after 12 weeks (weekly chart). It pays to watch the IPOs for this truncated GLB pattern.

The GMI remains at 6 (of 6).

 

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I have found that since 2006, the GMI has done a good job of keeping me on the side of the general market trend. It is my cardinal rule to trade consistent with the market trend.   While the GMI has helped me to exit the market in prior major declines, I have discovered an important limitation while examining GMMA charts. From the GMMA chart of the QQQ below, I can see that since early 2014, the GMI has issued 7 separate Sell signals (red arrows) followed by 7 Buy signals (green arrows). However, during this entire time the QQQ has remained in a strong RWB up-trend, with all of the shorter term averages (red) above the rising longer term averages (blue)!

It is clear to me that a GMI Sell signal should only be used by me   for short term trading decisions. Last week I posted that prior major market tops have been signaled when the shorter averages declined below the longer term averages. I should therefore probably remain invested long term in the market (at least in my university pension account) as long as the RWB pattern is in place, even when the GMI signals Sell. I am reinvesting my pension funds back into mutual funds. In the future I will use the GMI signals only to guide my shorter term trading in my more speculative accounts. I will heed the GMMA chart for longer term trends. One must never stop learning and adapting when it comes to the markets….

The GMI remains at 6 (of 6).

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