Sunday, April 26, 2015

Spring Cleaning, Trailing Stops, and New Potential Leaders

Spring Cleaning

US markets continue to press against new all-time highs.

SP500 range chart

Coming into the week our Lg-Cap Portfolio was fully invested, but this week we need to clean out a few holdings that are a drag on our returns. $LMT $PPG and $IP are trading at the lower end of their ranges while Indexes trade at the upper end. This means one of two things is likely to happen:

1. Indexes fail at the upper range creating sell pressure. This would likely cause lagging stocks to lead to the downside.


2. Indexes breakout and continue to rally. In this scenario we want to be able to position toward the new leaders making highs instead of hoping the laggards bounce off lows.

Either way we want to have some free capital for protection at the upper range OR to put to work in new leading names.

Exiting LMT
LMT made new 50 day lows and closed for a second consecutive week below the 20 WMA. A rally attempt mid week was rejected after they reported weaker than expected earnings. The long-term relative strength trend was broken as well. 

IP also made new 50 day lows this week although it did bounce from the lowest levels. Price is at a decent support but you can see how weak the Relative performance has been since March. There was an attempt to rally back 3 weeks ago, but that bounce was completely reversed last week and this week followed through to the downside. All the while the SP500 has been challenging new highs. 

PPG was rejected from its attempt at retaking the 20 WMA. Price initially was able to breakout above, but couldn't hold and left a bearish upper wick on last week's bar. We then saw strong downside this week confirming last week's negative action. 

The breakout attempt can be seen better on the daily chart below. PPG reported a decent Q1 earnings and the stock rallied early in the day. However it was met with strong selling and closed on the low of the day. This is a sign of distribution and this week's breakdown reinforces the bearish posture. 

Daily view

A couple months ago I had the privilege to hear legendary trend trader Ed Seykota speak in Seattle. Something he discussed, which I have been working with since, was the idea of setting a "time limit" on lagging positions. This time limit wasn't an exact period, but more of developing a way to filter out lagging positions from your portfolio that haven't necessarily stopped out. These holdings are a drag on your relative returns and occupy precious trading capital that could be used in more fruitful ideas.

The exits above fit this new criteria I'm experimenting with. While none of these holdings have broken our stop levels (and in fact are very near to lower range support areas), they are clearly showing relative weakness and have been for some time. The SP500 made a new high this week while LMT, PPG, and IP continued to show weakness and trade lower thoughout the strong week. 

I realize we can't expect to outperform 100% of the time, things ebb and flow. But by holding lagging AND losing positions while passing potentially new market leaders is counter productive to our idea of owning the strongest stocks in the market. 

The key to our process is to eliminate losses quickly and let winning trades continue to work in our favor. Having a criteria to eliminate losing, meandering trades I believe can enhance relative returns even further. 

This concept challenges the boundaries of traditional trend following, but I feel it can add value by cutting lagging holdings even before they truly invalidate the initial entry criteria. This line of thinking is backed up well by the following quote: 

When you are right, have the patience to be right big; when you are wrong, have the discipline to be wrong small. 
-John Boik

Trailing Stops

We are able to trail stops in $SBUX $AAPL $DIS and $UNH.

Charts shown are daily bars to better show supply/demand levels:

Starbucks was a rocket ship this week gaining just under 10%. After a breakout to new highs on Thursday, we had a confirmed higher swing low at $45.70. The post earnings reaction Friday only increases the strength of the overall trend.

AAPL found support along its rising 50 DMA and is resuming its uptrend. Earnings will be reported Monday after close.

DIS looks a lot like SBUX here and with its new high this week, we can trail stops to below the recent congestion area. Nice trend here.


UNH continues to hold up and consolidate orderly. Sideways consolidation allows for moving averages to catch up and that allows us to continue to ratchet stops higher. Eventually this will breakdown and rollover, but for now we will stick with it. 

These four stocks display perfect trending behavior for strongly supported growth stocks. 

We want to see stocks breaking out, this is bullish behavior. But as the trend develops we also want to see the stock find support along its rising 50 DMA. The best trends will "rest" and consolidate often. When they turn to resume their uptrends it's considered an additional sign of strength for that to occur above that 50 DMA. 

We want to be positioned toward this strong trending behavior and remain skeptical of those not displaying it.

Watchlist- New Potential Leaders






We will be watching to see how the market handles its upper range resistance and which stocks emerge as the new leaders. Our portfolio now has 20% available cash to put to work, so we will be looking for the best opportunities that present themselves going forward. 

Saturday, April 18, 2015

Lg-Cap Portfolio Review (4/17/15)

SP500 Remains Range-bound

A lot has and will be made of Friday's trading action, where the SP500 lost 1.1% on the day. Never mind that the market still remains up roughly 1% for the month of April, all the media sees are the impending disasters. Greece, US Dollar, Earnings, Interest Rates, etc, etc. I feel like I go over the same thing every week. Maybe I do, but its simply to show how meaningless all this Bullish/Bearish debate really is. Despite the strong options either way, the market remains range-bound and will do what IT decides to do.

 The market decides where the market goes. It doesn't matter how strongly you feel your opinions are justified (or anyone else's for that matter) NONE of it matters unless the market says it matters.

If Greece matters to the market, then the market will respond to that accordingly. If Rates matter to the market, the market will respond to them. And maybe it already has, who knows? All we know and can know is where the market sits currently and where the major risks for our timeframes are.

If a move down to 2,040 means major risk to you then you will need to act according to your predetermined plan. If you are a longer term trader then maybe risk is not considered major until a break of 1,980 occurs. You should not be allowing CNBC or any other 3rd party opinion to alter your investment process. If you stick to what matters to your timeframe and your risk parameters then you are on the correct path.

Its important to remember that nobody else has your best interests in mind when they make a market call. They are looking out for themselves and likely have some agenda behind their remarks. If you think Goldman is looking out for you when they say to sell stock $ABC because "its overvalued", it doesnt mean they hope you listen and save yourself all this money and live a fulfilling life. It means they hope you react emotionally so they can come in and buy that stock at lower prices.

The bottom line is you should have a process based on actual market evidence and not let anyone's outside opinion cause you to deviate from your plan.

All that being said, we have 1 new entry for our Lg-Cap Portfolio this week and no exits. And speaking of Goldman, we have entered a position in $GS as of the close of trading Friday.

Entering Goldman Sachs (GS)
I will admit that's a pretty ugly looking candle on the weekly view. It's not exactly what I would call a convincing signal of strength. But it is a new weekly closing high. The highest weekly closing price since 2008. So there is that.

If we look at the daily chart though I feel it paints a healthier looking picture:

GS Daily bars
The stock gapped higher on Wednesday morning following a stronger than expected Q1 Earnings report to new recovery highs. It then fell back in line with the rest of the market Thursday and Friday, weakening enough to throw-back to retest the prior highs. Of course we don't know if this will be the end of the decline, but this is why we have specific entry triggers; uncertainty is always present in the market. All we can do is find quality setups in leading stocks, while managing our risks appropriately.

Weekly indicators suggest a high probability entry
 Our two secondary indicators are pointing in the right direction. All winning stocks present similar repeatable patterns. When those patterns are in place it is our job to take advantage of them as we don't know which ones will work and which ones wont.

As you can see here we have a weekly MACD that pulled back to (and violated) the Zero line in early April 2014. It then recovered back above Zero and the subsequent pullback was able to hold above Zero this time and has crossed back bullishly. This is the signal I look for from the MACD trend indicator.

Also we can see that Relative Strength (RS) vs the SP500 is in a steady uptrend since 2012. It has found support along its rising trend line and is continuing higher.

We will place our initial stops below the March low at $182.70, which is roughly 8% below our entry. That makes this a fine R/R and we have sized our position accordingly so that a stop-out would result only in a .5R loss for our account.

We have plenty to look at this week for our portfolio review. This week I wanted to "zoom out" on the long-term trends for our positions. I like to do this every few months to make sure I'm not getting too focused on the short-term and missing the bigger picture. Far too many (and under capitalized) traders focus too much attention on the short-term movement of stocks. They get so absorbed in the day-to-day gyrations that they lose sight of the larger movement going on.

To be successful in the market you don't have to play every wiggle. If you can make money during the uptrends and protect capital during the downtrends, you will outperform significantly over time.

As usual we will focus on our losers first. Those are the positions that require action. Winners take care of themselves, its the losers that are the drain on the bottom line.

CSCO (-5.2%)
While CSCO has been weak since our entry, the longer term view looks quite constructive. The stock has recovered above the 61.8% Fibonacci level from the '08 decline. Typically when that level is broken price is pulled toward the prior highs for a retest. I still think this is likely, but a violation of support and the breakout level would be enough for us to step aside. 

LMT (-4.5%)
LMT this week closed below its 20 WMA for only the second time since its long-term bottoming formation after the financial crisis. The last time this occurred price was able to snap right back within two weeks. With earnings on deck Tuesday before the open we will see if the decline has more to go or if it will recover quickly like the prior instance. 

TWX (-3.8%)
TWX continues to hang out near its recovery highs. This leads me to believe an upside resolution is likely. But if not, our stops remain under the prior swing low at $77.

WFC (-3.5%)
Wells led out with earnings this week and posted a mixed result. The market didn't seem too phased by it and the stock traded mostly sideways. As you can see the long-term trend is intact. It will take a violation of the uptrend support and swing low to cause us to exit.

FB (-2.4%)
Facebook has traded back into its prior highs and breakout level with earnings due to be released after the close Tuesday. It is often a great setup for a stock to retest its breakout heading into an earnings report. FB has that setup here.

IP (-1.0%)
IP is a stock that loves to consolidate. Its currently in another post breakout consolidation. Nothing to do here as long as the recent higher lows are intact.

HON (+0.5%)
HON announced earnings on Friday with mixed results. International companies are struggling with the impact of the higher US Dollar, but the stock is in no immediate danger. Our stops are still well out of the way for now.

AAPL (+2.1%)
I'm still waiting for AAPL to pullback enough to give us a decent new swing low to trail our stops. That's an important concept to remember:

It is the trailing of stops that locks in our gains. Most people think of pullbacks as the time when their profits are at risk. But without pullbacks we have no way of establishing newer, higher supports.

Higher support areas are essential for the long, successful uptrends that payout large gains.

PCG (+3.4%)
Due to FreeStockCharts not updating for dividend adjustments, high yielding stocks like PCG don't look the same as a chart with dividends factored in. Often with high dividend stocks you need to look at another source for an accurate read on the price action (Finviz or are good places). The $49.50 level we are using is the prior "flag" breakout level after the larger base breakout. Its the most recent swing point before the vertical move PCG made.

I am also watching the lower consolidation that is being built currently between $51-54. I'm hoping price can hold here and break higher so we can trail our stops up to that range. 

PPG (+5.0%)
PPG reported a very strong quarter this week yet the stock was rejected from making a higher high. It is still trading within its $18 range and actually closed flat on Friday's big drop.

I'm not too sure what to make of all this yet. But our stops below support at $219.80 look like the right place to be.

BA (+11.9%)
BA is still flagging and trying to build a support base. I would expect to see some strength come back into the stock soon. They will report earnings Wednesday morning, so maybe that's the catalyst it needs to resume higher. Its also possible that any weak report will cause the stock to retest its prior highs at $144. We will just have to see what's in-store this coming week.

DIS (+15.1%)
Disney continues is ascent and with the recent Star Wars buzz its hard to imagine too much damage being done here in the short-term. Disney won't report earnings for another couple weeks, so I wouldn't be all that surprised for the stock to tread water heading into the report.

SBUX (+19.2%)
Starbucks will be announcing earnings on Thursday and I'm interested to see how the market responds to it after the torrid run its had since the last one. There has been little to no weakness to speak of in the name, so they will likely need to have a very strong report to not induce a little profit taking.

BMY (+26.8%)
BMY saw a +2.5% gain on Friday with the market lower by 1%. They had some positive news on a cancer drug and the stock was able to gap higher at the open and hold pretty well. We still want to stay with this until it gives us reason not to.

UNH (+53.6%)
 What a beast. UNH reported another strong quarter last week and the stock held up pretty well.. I do see some signs of profit taking over the last couple weeks, so a pullback soon would be expected. I still think a move down to the $106 area would be healthy. After that level though there isn't much support until around $85.

Its been our biggest winner since the portfolio's inception so I'm willing to give it some room at these highs to see if it can keep it going.

--The purpose of looking at these very long-term charts is to show just how little damage is done by these so called daily "events". And for those who feel that trading is highly risky to see how tight our stops really are in relation to the current rallies in place. Everyone with their bubble predictions about how it so dangerous to invest right now. If you employ some very basic risk management you are able to participate in (bubble-like) uptrends...Which is where a huge amount of the gains are made during a Bull market.

Honestly think about those who have been "trimming exposure" during this rally. I know I've heard since 2010 how the "easy money" has been made and that it was time to start taking profits. If you followed this advice you have dramatically underperformed and have watched this market move forward without you. No wonder everyone wants a breakdown, or even just a 10% decline. This is exactly why we haven't had one, in case you needed some evidence of underexposure.

I'm currently 85% long in all my accounts which is about the same exposure level I have had for the better part of the last 3 years. I see little reason to change that posture at this time. I'm always open to the possibility of change, and when it starts to happen I will adjust with it. I just haven't seen enough evidence that this Bull is rolling over. Sure I've seen Margin Debt levels and Risk Adjusted Return graphs, But I've been seeing this for a couple years now. Its not that those data points are useless, quite the contrary. All it tells me though is that when it goes it will really go, it tells me nothing about WHEN to expect it. I'll let price do that part for me.

Saturday, April 11, 2015

Trailing Stops and Watchlist (4/10/15)

SP500 Still in a Box

SP500 Daily chart
So much for any Jobs Report related weakness. Monday's open was immediately bought and markets saw an upward bias most of the week. In Bull markets bad news is easily ignored, and we saw that this week. Attach whatever meaning you want to the markets reaction to the news (lower rates, Fed dovishness, etc). But the fact remains that this is a Bull market and if you are not treating it as such, you are likely struggling in this environment.

While we saw a nice expansion Thursday and Friday from the tightening trading action, The SP500 is still below the "box" highs. Until the market moves away from this range it is still likely to be a choppy environment.

I am watching the lows at 2040 very closely as a breakdown of that support would be a sign that more downside is likely. Equally I am watching the highs near 2120 as a breakout above that would force many participants to reevaluate their cautious stance and cause them to buy back in at higher prices. Anything in between those points is mostly chop for our time-frame.

Trailing Stops 

We can now trail stops on two of our most recent large breakouts, BA and SBUX. We have seen  constructive consolidation of the initial moves and supports are showing up at higher levels. 

Since Boeing has be able to hold its breakout and consolidate above the prior highs we can trail our stops to the $143 level. This area coincides with the prior ATH's, rising 20 WMA and is below the lowest close of the last 10 weekly bars.

A break of this level would suggest much more pressure on the current breakout and we would want to step aside and let it find its new direction.

Starbucks split their stock 2-1 this week, so make note of that. This chart looks similar to BA above and we are able to raise our stop levels up to the next swing point. As you can see this level is where the 20 WMA rests and is also below the lowest close of the last 10 weekly bars.

We have been very patient in trailing our stops because we want to be sure we don't get taken out prematurely by some meaningless "noisy" trading action. If our new level is broken it would suggest more consolidation is required before moving higher.

We will be using the split adjusted price of $43.75 as our stop going forward.


I haven't posted many new Lg-Cap ideas recently simply for a lack of decent base supports and appealing opportunities. However this week it appears many more potential candidates are making their way onto my radar. Lets take a quick look.

Insurers like AIG have been setting up very nicely recently and I have been seeing opportunities in Small and Mid Cap names as well. This group is one to keep an eye on currently, not to mention they are arguably some of the "cheapest" valuations in the market.

 Since being shaken out of GS prematurely in January the stock has regained itself and is now threatening another breakout. RS is very close to testing a 2-year downtrend vs the SP500 and a move through $196 with subsequent RS confirmation would trigger a new entry for our Portfolio.

There is still work to do for ABBV but it has been building a defined support base for the last 3 months. Mostly we need to see that 20 WMA begin to flatten and turn higher, that would suggest the intermediate downtrend is ending.

LYB will be very interesting if it can break above its range highs. The 20 WMA has flattened and is about to roll higher. Nice looking setup forming.

GILD has gone effectively nowhere since our exit late last year. The current price action has been tightening nicely and all indications suggest this is just a pause in a long-term uptrend.

The stock will not have to break through the upper range to trigger an entry for us; a move above $106 would trigger new 50-days highs. As long as the secondary indicators support the trend change we will be interested at that time.

EOG is one of the better Energy stocks. While many in the sector have declined 50%, EOG has held up relatively well, only declining 30% peak to trough.

The MACD suggests that the recent decline has done substantial damage to the longer-term uptrend. Until that can trade above zero and hold, EOG will likely remain choppy and range-bound.

Gun to my head, EOG is an Energy name I could get interested in soon.

Similar to EOG, SLB looks like it could put in a little momo move soon. Still with the weak trend indicator (MACD below zero line) any rally is highly suspect and likely to see false moves and volatile trading.

Neither of these Energy names are likely to find their way into our Portfolio in the near term, but they are two of my favorite companies in the space. When a market is correcting substantially it is a good idea to build a list of your top candidates for when the tide turns for the better.  

All downtrends present opportunity eventually. Unfortunately most traders don't demonstrate the patience required to let the downtrend run its course and turn back positive. They simply cant help themselves and have to buy in early. In the trading profession "early" is the same as being wrong.

Patience is one of the most important attributes that successful investors share. Those that force trades in fear of missing out will struggle and likely fail to be profitable.

 This market loves its boring stocks and GE is about as boring as they come. Typically I don't like moves triggered by a selling off of assets as was the case here. Although the idea is that GE will use the capital raised to increase shareholder value through buybacks and dividend hikes. So there is that i guess.

In terms of price action, this week's move was very impressive. After trading sideways for the better part of 18-months, GE resumed its uptrend on a strong move Thursday and Friday.

Zooming out you can see how far GE still has to go to regain its highs prior to the 2008 crash:
Something I notice is that the recovery off the '09 lows has now regained 2/3 of that correction. Taking out our Fibonacci retracement tool, this week's rally closed above the 61.8 retracement level for the first time. Typically when this occurs price will be pulled like a magnet toward the 100% retracement level and prior highs.

This move won't occur overnight but it is something to have on your radar. I will be looking to see how GE handles these new breakout levels and whether it can hold above this 61.8% retracement level. If it can stay above the breakout area I will become very interested in the future.

Sunday, April 5, 2015

Building a Trade Part 2: Managing the Position (4/5/15)

We are now 3 weeks into our "Trade With Me" series featuring Home BancShares (HOMB). If you missed Part 1 you can catchup here.

 While the broad market has been choppy and weak, I feel that HOMB has held up quite well relative to the averages.

Taking a look at the Daily bars going back over the last 6-months we can see a clear breakout of a lengthy consolidation and now some more recent digestion above the breakout area.

HOMB Daily chart (6-months)
What stands out, in terms of relative strength, is how HOMB has been holding firmly above its 20 Day MA. The SP500 by comparison is trading below its 50 Day MA. 

For HOMB to be holding above its 20 DMA while the market is below its 50 DMA is a sign of strength for our new position. 

Due to the weak Jobs Report that came out Friday morning (while markets were closed), I would guess that the Fed will be even more convinced to keep interest rates lower for longer. That likely won't help the Financial sector and especially the more volatile Regional Bank space. 

Look for shares of HOMB to trade heavily early this week. Our focus will be to see how it handles this news and whether it can remain as a strong breakout candidate.

Taking a look at the Weekly bars, I would expect any significant weakness to find support near the $32 area and rising 20 Week MA. 

HOMB Weekly chart
A retest of this level would not do damage to the base breakout formation and we would still want to be holders above the $31.30 swing low. 

So far so good for our new position and we will just have to see how well it can hold up in the face of challenging news events and general market weakness. 

Managing a position doesn't mean jumping in and out at every wiggle that comes our way. Often to catch big winners you have to sit through some volatility and "uncomfortable" moments.

As Jesse Livermore famously said, "money is made by sitting, not trading." 

Our long-term strategy suggests HOMB is a strong risk/reward holding currently and we want to give it plenty of room to let the system's analysis play out.

Good luck trading!

Friday, April 3, 2015

Lg-Cap Portfolio Review (End Q1): Watch Your Laggards

It doesn't matter what causes volatility in the market: a poor Jobs Report, an Earnings reaction, Macro news, etc. Our stops are in place to keep losses small. We can't control what the market will do. All we can control is how much we are willing to risk on the next potential opportunity. We never know where the market will go, so why bother worrying about all the ways your positions could be stopped out. Just buy the best looking setups and risk a small portion of your equity. Making money is why we are here, to grow our savings. We are not here to try to guess or rationalize each wiggle in the market. 

So yeah, the initial reaction to the Jobs Report sucked. But our strategy and winners have survived many a weakening economic report. It's just another uncertain day in the market. Believe me, if you plan on doing more investing in the future, there will be plenty of days like this. In fact if you ever plan on holding the best winners in the market, you will have to sit through many "fearful" days and anticipated "events". Sometimes we lose money, its the price we pay for being in the market.
You can't let emotions or opinions prevail over your system's long-term positive expectancy (your Edge). If you choose to not take this setup or decide not to acknowledge that one stop signal, if you let external events override your system's long-term expectancy, you just lost your edge. 

Your system back-test didn't factor in how you felt when the signals were taken or what the news was that day. It took them based on consistent rules. That's what makes it a winner over the long run. Rules, execution and consistency are what lead to strong returns. Emotions, bias' and predictions are what lead to ruin. 

We try to own the best trends in the market. When something changes we will see it through our winners. They will tell us when it's time to cash in and step aside. So far we aren't getting that message from our leading stocks. There are certainly signs that the overall market is weakening, but nothing that suggests running for the hills just yet. 

We had no changes to our Lg-Cap Portfolio this week, but there are some interesting things to look at none the less.  

SP500 in a Box
With an early sneak peak at the Futures market Friday morning following the February Jobs Report, it looks like the SP500 will test the lower support of the 2-month trading range.

From a Top Down perspective the resolution of this "Box" range will be the primary focus. A breakout below will suggest more weakness ahead and likely a test of the December lows near 1,980. 

Focusing on Laggards

While its not the most glamorous part of portfolio management, the losing positions are what you need to be focusing on first. Winners take care of themselves, its the losers that are a drag on your bottom line. We currently have 4 holdings that look distinctly different than the others: PPG, CSCO, IP, and PCG.





These are Daily bar charts showing the recent breakout consolidations. All are still above prior breakout levels, so there is no need to anticipate their demise just yet. But they are our weakest looking holdings. PPG, CSCO and IP would be stopped out on a weekly close below these Box supports.

PCG is still fishing for a higher low, so I will maintain my positioning with a stop at $49.50 until a new swing low can be established. A breakout above the $54.50 swing highs would allow me to trail stops to $51. 

Current Portfolio Open Gains/Losses
(view Weekly charts here)

UNH    +46.33%
BMY    +22.72%
SBUX  +18.12%
DIS      +14.32%
BA       +10.81%
PCG     +6.38%
PPG     +3.62%
AAPL   +2.61%
HON    +2.26%
IP         + .10%

FB         -1.48%
TWX     -2.04%
LMT      -2.63%
WFC     -2.98%
CSCO   -7.88%

10 Winners, 5 Losers
Average Gain +12.72%
Average Loss  -3.4%