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New freshmen class and possible online workshop! How I use Bollinger Bands and how this indicator foreshadowed this decline; Just a brief shake-out? Short and long term trends of the market remain up

@ 11:25 am
GMI4/6
GMI-23/9
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My new online class with 100 freshmen began on Friday. What a wonderful privilege to teach the next generation how to ensure their financial futures! Thanks to Mark Minervini (IBD), Irusha Peiris (MarketSmith) and Michael Thompson (TC2000) for making my class possible!!

Many of my students will be watching this blog and I will therefore take the time today to explain some things in more detail. Many people have asked to take my class and I have always responded that  it was only open to a small group of university students. I have arranged with the university to offer a noncredit online workshop to all persons worldwide who wish to enroll. I will announce the workshop in a few months. It will likely be 10 2-hour sessions, once a week, in the evening. There will be a fee paid directly to the university and  my research center on substance abuse will benefit from the proceeds. Stay tuned.

One of the most important indicators I put on my daily charts is Bollinger Bands. These bands create a 95% confidence interval around a moving average. I use a 15 day average and the lines are drawn 2 standard deviations above and below that average each day, yielding the 95% prediction. All you need to understand is that almost all prices will remain within these 2 bands and when a price moves outside it often times comes back in, reverting to the average or begins a new short term trend.

The bands are very useful. When a stock has been rising, once it goes above the upper band it can mean the end of the short term rise. However, if a stock has been consolidating, a rise above the upper band can signal a break-out. Similarly the lower band can show times when a stock will bounce up or begin a larger decline.

On Friday, the QQQ and APPL declined to near their lower bands and bounced. A failure of one of these bounces would suggest to me the likelihood of their further decline. The blue arrows show the last 2 times the QQQ has bounced off of its lower BB. An alternative interpretation could be that the indexes found support near their exponential 21 day moving average (blue solid line), an indicator used by many traders. If multiple indicators work, they must be somewhat correlated!  I prefer the BB because I think it works better for me. Notice how the QQQ stays mostly within the bands and think how you might use this phenomenon  in your trading rules..

AAPL, which is highly correlated with the QQQ (Nasdaq100 ETF), also bounced near its lower BB. Note that at its recent top, AAPL traded outside its upper BB and reversed to close below it, a sign that it was extended and could decline. The black dot indicates a bounce up off of an  extremely oversold short term condition and the green dot in July represents the possible start of a new short term up-trend which was confirmed by a break-out above the upper band. The two green price bars show a bounce up off of the lower BB. My students learn how to create all of these indicators using the TC2000 charting software, see the upper tab on my blog. My talented former student and current teaching assistant, Richard Moglen, has created a series of youtube videos that you can access.

 

One more example, ZM. The large volume break above its upper band was a sign of ZM’s being extremely extended. I mentioned in a prior post that more than 50% of Nasdaq100 stocks had traded that day above their upper bands. The following day we had that large decline.  Trading stocks without charts is like driving to a place for the first time without Waze!

 

 

On Wednesday, 56% of the Nasdaq100 stocks traded above their upper BB. On Friday only 2% traded above their BB and 42% traded below their lower BB, suggesting to me at least a market bounce. Meanwhile my $QQQ short term indicator remains in an up-trend at day U-106. The GMI remains Green and is at 4 positives (of 6). The more sensitive GMI2 fell to 3 (of 8). Note there were more new lows than highs on Friday, for the first time since last May. In view of  the extreme oversold condition of the market indexes and the many oversold stocks  on Friday and the  GMI on a Green signal, I have to say that last week may turn out to have been a rapid shake-out in the midst of a continuing up-trend. Enjoy the weekend!!!!!

 

 

Blog post: My bounce off of support strategy; Some possible examples: $DDOG, $ETSY, $NET, $BAND, $PLMR, $DOMO, $CIEN, $PING, $ADBE, $AYX, $DSGX.

@ 11:37 pm

Almost all of the growth stock strategies my favorite trading gurus (Livermore, Darvas, O’Neil, Minervini)  involved searching for strong growth stocks that have already appreciated as much as 100% in the past year, that have formed a base and then break out above the top of the base on greater than average trading volume. They often have different names for their bases: boxes, cup with handle, double bottom and volatility contraction. I coined the term green line break-out (GLB) to designate stocks that reached an ATH, rested at least 3 months and then breakout to a new all-time high (ATH) above the top of their multi-month base, the green line, on above average volume.  I like to buy stocks breaking out of a base to an ATH. The problem with this approach is determining where to put a stop loss indicating the break-out has failed. The key to success in this game is controlling losses when a set-up has failed. When I buy a GLB, I sell immediately if the stock closes below its green line, but this can be far below the price I paid for it if the stock moved quickly through its green line.

I have been attracted more and more to an approach where I buy strong growth stocks that have rested and become oversold and then bounce up off of support. I have designed indicators in TC2000 that define an oversold stock and search for them. One of these indicators is the green dot signal where the low fast stochastic turns up and crosses above the slow stochastic. When I buy an oversold stock that is bouncing off of support I then immediately place a stop loss just below the recent low. In this manner I am able to minimize  my losses. When I decide to buy such a stock I also make sure that support will not be too far from my purchase price so the possible loss will be low. The famous turtle traders always entered a trade thinking  it would fail so they always were prepared with an exit strategy. Most successful traders say that 50% or more of their trades fail. The way to succeed in trading is to have many small losses and a few very large gains. I buy, place a stop loss, and then watch without emotion to see if it succeeds or fails. If it fails I am sold out  and if it sets up again, I often buy it back. The shake out often sets up a nice subsequent advance.

Below is an example of SEDG, which I traded  using the strategy outlined above. Note the large volume down day before the bounce. That can be a good sign because the weak holders have sold to new holders and many traders may have shorted the stock as it fell, setting up a strong rebound when the stock starts to rise. The key is to wait for the bounce to occur and not jump the gun. The stock could just continue declining.

I ran a scan this weekend for advancing stocks that became oversold and are bouncing up off of support. I am not recommending the purchase of any of these. My goal is to educate my readers and students so they can learn the strategy and evaluate it for themselves. The stocks are: DDOG, ETSY, NET, BAND, PLMR, DOMO, CIEN, PING, ADBE, AYX, DSGX. Check out BAND. My GTC stop would be set below the low from the last 2 days (around 121.49) and hopefully, I would have bought it for less than where it closed on Friday.

NET is another one. It has found support at its 30 day average (red solid line). My stop would be around 34.49.

The GMI remains at 6 (of 6). But the QQQ short term up-trend is 71 days old and the short term sensitive GMI-2 is now 4 (of 8).

 

 

Blog post: Day 67 of $QQQ short term up-trend, since 2006 only 7 of 95 up-trends lasted longer

@ 10:58 pm
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GMI-27/9
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As my readers know, I compute each evening the number of days that the QQQ has been in a short term up-trend or down-trend. (I have a proprietary objective method for designating changes in the short term trend, so don’t ask for it.) Since 2006 there have been 95 short term up-trends. The current up-trend has now reached 67 days. The longest short term up-trend since 2006 lasted 91 days, from October 14, 2019-February 24, 2020. This was followed by  a 30 day short term down-trend that included the steep March decline. One of the reasons I became so cautious in February was because the up-trend had gone on for so long. The fact that the current short term up-trend has now reached day 67 leads me to suspect the current up-trend will end soon. The ending of a short term up-trend and the start of a down-trend does not necessarily signify a large market decline.  The down-trend could be very short. Nevertheless, I have one foot out the door now. I post the short term trend count, now U-67,  in the GMI table each weekend.