Sunday, May 29, 2016

Process of Simplifying

"Everything should be made as simple as possible, but not simpler" -Albert Einstein

As a trend trader I aim for simple. Simple methods, simple charts, simple execution. When a strategy becomes too complex it can handcuff the trader. If the process has too many variables getting a clear signal is very difficult.

 It is commonly known that a trader's path moves from complex to simple. At first the appeal of indicators seeking a "magic formula" is often the driving motivation. But as the trader becomes more seasoned in the market they realize there is no perfect indicator. Without the appreciation of price action as the leading indicator most methods will fail.

For the vast majority of market participants taking a longer timeframe will improve results as well. In a world of high frequency trading, becoming a low frequency trader is one way to limit the impact of this new market opponent.

What we basically seek with an active management strategy is a way to identify strong performing stocks at the correct time to take advantage of a shift in momentum. An active strategy should also protect against large downside adjustments in prices.

The best way I have found to participate in up markets while avoiding catastrophic losses is to follow the trends. The path of least resistance is to trade in the direction of the dominant trend. If you want to make money its a good idea to pick stocks that are currently moving in the desired direction.

The basic tenants of my active investment strategies are to follow the trend, respect the price action, and avoid noisy signals that do not improve my returns. I am on a constant journey to improve the clarity of these rules.

Over time I have tested different methods and timeframes. Depending on the asset, some will behave better with specific rules. Large Cap stocks tend to offer clearer signals with less fake outs on longer timeframes. This suggests Weekly charts perform better than Daily and Monthly perform better than Weekly.

The inherent trouble with any longer-term strategy is slippage; should the stock move adversely through the stop level rapidly, larger than expected losses can stack up before a valid sell signal triggers. The rapid loss of market cap is generally more pronounced in the smaller capitalization stocks. These can have swings of 50% or more in one month's time should bad news hit the company. For these assets, waiting for a Monthly signal can create substantial losses. But with the high quality Blue-Chip companies in the S&P100 rapid declines of this magnitude are much less frequent. Large Cap stocks also tend to pay dividends which is an additional reward to longer-term holders.

With exceptionally strong companies that grow over time, the long-term trends can be significant. If you use a shorter timeframe it is almost impossible to stick with a move long enough for a huge winner to materialize. Using LMT as an example of this, here is a look at both the Daily and Monthly charts:

LMT Daily
The circles above indicate where prices invalidated the current Daily trend in place based on setting lower lows. As you can see from mid-2014 LMT gave at least 6 false sell signals.

LMT Monthly
Stepping the timeframe out to the Monthly bars price never once violated the rising 20 Month SMA. There was also not a single "lower low" for this timeframe.

Had a Daily timeframe been used it would have been very difficult stick with the stock long enough to capture the seemingly "perfect" uptrend that resulted in a 250% rally since the 2013 breakout.

*Granted the recent bull market has been exceptional, the trends have been very strong and steady. But if you have been participating in the stock market since the '09 bottom, very little has been "easy" about sticking with the uptrend. Looking back in hindsight its obvious that this was an easy trend to ride, but living through the day-to-day noise didn't have the feel of a smooth ride I assure you.

This is why stepping back a little bit, removing yourself from the day-to-day wiggle of the market and CNBC, can be very beneficial to your long-term returns.

-Using the longer-timeframe can be helpful for initial entry placement. If you wait until a stock consolidates into the 20 Month SMA, it will have built a very substantial base formation. This "base" should form over a multiple months which often results from a fairly sizable pullback on the lower timeframes. But there is no reason to go barreling into a stock that is moving lower or sideways, it could certainly continue to do so for many more months in the future. This is where waiting for a resumption of uptrend is beneficial.

The next modification for the Lg-Cap Portfolio is to clean up our entry and stop criteria. Since we are adjusting our timeframe to capture the larger Monthly trends, we want to be able to participate in as timely a way as possible.

Based on my backtesting and monitoring in real time, a consolidation into the rising 20 MMA that then "kicks off" above the highest closing price of at least 4-months offers a strong entry signal. As the trend progresses more of these "flag" like pullbacks will occur allowing for more opportunities to add to positions and/or trail stops to the next valid level.

Using SHW as an example of this we can see many of these "flag" like patterns:

SHW Monthly
After the Primary base breakout in the middle of 2009 there have been several viable opportunities to add exposure or make new entries into the stock. Each time SHW has traded sideways into the 20 MMA it has found support and resumed its uptrend.

With our latest purchase of SHW we can take a look at the ongoing risk management and stop placement:

A highly effective and simple placement for the initial stop is the lower boundary of the breakout bar's range. SHW triggered this signal at the close of March by breaking above the "flag's" downtrend resistance. We can then place our stop at the March low just above $270.

A violation of that low would signal a failed breakout and would mean our thesis is invalided based on trend and momentum.

This stop will be monitored on a Monthly closing basis. Yes that's a slow signal, and yes there will be slippage that occurs. But it is also one of the most effective methods of timely trend participation I have found for Large Cap stocks.

Also note my preferred charting "style" will be this single bar, closing price format. With this simple chart structure I can cleanly see what I need to: price, trend, and the prior closes of each monthly bar. It occurs to me that "candlestick charts" can add an additional bias to the price action that I don't find particularly helpful for my style of trading. "Hammers", "Hanging Man", "Doji" are all popular candlestick formations but by their nature are often one or two bar signals and tend to be more short-term and noisy. This is not to say that many people can't trade them successfully, I'm sure they do. But for me and my goals I find them distracting and mostly emotional indications of price action.

The market has seen a solid consolidation since the middle of 2015. This basing period has allowed many strong uptrending stocks to reset toward their longer-term averages.

We have entered a few that have resumed higher out of their bases recently (SHW, UNH, MDT) and there are several more interesting formations setting up right now.

Lowe's is offering a very strong signal this month. This is a buy at the close of the month on Tuesday. We will use the May low at $74.55 as our stop.

Comcast is due to signal an entry at the close of May this coming Tuesday. We will use the low from the month at $59.60 as our stop.

Cisco has been a very choppy and rangebound stock since its great implosion in 2000. It does appear to be attempting a breakout that could  finally move it out of its 15-year sideways range. Should it close Tuesday above 28.70 we can take a Long position using the May low at $25.80 as our stop.  

What I love about the monthly timeframe is that most participants and Wall Street are quite sour on NKE at the moment. It is true when they say participants always get most bearish the closer price is near support.

The media is talking, Footlocker just posted a bad quarter. Who cares?! When was the last time you went to Footlocker for sneakers? But you're wearing shoes aren't you ; ) Footlocker is part of "the mall is dead" theory and has nothing to do with Nike. As we can see, NKE is now testing substantial historical support in a robust uptrend. A resumption through this downtrend resistance would kick-off a new uptrend and I would be a buyer.


Priceline has offered some very nice signals since 2012. The latest Buy signal at the end of 2015 did fail recently as the monthly bar for January closed below the low of the October breakout signal. It is worth noting that from the initial entry signal in February of 2012 the stock posted a gain of +70% compared to a +42% gain for the SP500 over that same period. Now we await a new signal.


PPG also had a stop triggered after a massive 150% rally from its 2012 breakout signal. Again, compared to +45% in the S&P, that is outperformance we want to capture. 




-This is not a very different way of looking at stocks than before. It appears if we remain a little more patient better returns can follow. There will be times where it will seem crazy to stick with a stock this long. Through my testing of the SP100 stocks I track, there have been draw downs in individual names up to 50% without receiving an exit signal. But this kind of patience is exactly why I feel the strategy can improve our long-term returns. You have to be willing to do things the majority will not to create out sized opportunities. It pays to think differently than the majority. That doesn't mean be a mindless contrarian, constantly taking bets against the overall market. It means if most traders are caught up in the day-to-day volatility of the market and the noise associated with that, those will be the traders who batter their brains in, scrambling for mediocre returns.

-The plan revisions:

1. Seek stocks trading above a rising 20 Month SMA (i.e. Long-term uptrend)

2. Enter on a breakout above at least 4-months of closing prices after a consolidation near the 20 Month SMA

3. Size positions against the low of the breakout bar or recent pivot low (which ever represents the trend and setup best). This will be the stop on a monthly basis.

4. Trail stops once a new consolidation forms and resumes higher based on above rules.

5. An alternate stop that I have tested is the inverse of the buy signal (a bear flag below the 20 Month SMA setting a new 4-month closing low). This is helpful in the event of a strong vertical rally that doesn't offer a higher trailing stop. Should a bearish formation occur, it can be used as an effective exit location.

6. Take initial profits after 100% gain. No sooner and only once. We need to let our winning trades run. IF a position doubles we will take out our cost on the trade and let the profits ride.

7. Hold on for dear life.

The hardest part of the process will be patience, both on the entry side and exit side. There will be times when we feel left out as stocks don't consolidate for a period of time. There will be other times when our stops "seem" too far away and will be uncomfortable with the volatility we are experiencing.

-I feel this adjustment will help reduce bias even more so. This is a very black and white picture. Either the stock is above the most recent valid breakout or it isn't. There will be times when this is not easy. As my study has shown me often large open gains will be given back only to hold less than 1% from the stop and then reverse higher and rally 200%. That's something that will test your conviction in a live trade. The backtest is easy, everything "makes sense" in hindsight. Its the actual application of the strategy that involves emotions, this will be the real challenge.

As history has shown us, holding for the longer-term works. Whether past results can be extrapolated into the future I don't fully know. But I do know that the primary obstacles for a traders' success have mostly to do with over-trading, having emotional reactions without a plan, not compounding dividends, commission costs from highly active trading, taking excessive risks, taxes, etc. This adjustment should make improvements in all of those areas.

Sticking with the dominant trend works, I know this. Trend followers have more than 200 years of history backing their methods. The key has always been to hit big winners and keep losses small. Again, if history is any guide, this structure will yield strong results over time.

The primary driver of this adjustment is to seek stronger signals (both entry and exit), stick with winning trades longer, reduce trading noise along with the costs associated, and to more efficiently use my time and research.

Limiting signals will allow more time to focus on improving other areas of my process and creating a less stressful overall lifestyle.

Something I have suspected for some time and have recently been observing more is that to operate more successfully in the market its best to be on either end of the spectrum. Either trade short-term or long-term. If you find yourself in the middle there will be a lot of choppy and frustrating trading. As I've stated above if you trade like everyone else the odds will be stacked against you. You need to adapt strategies that the majority don't understand and/or don't have the patience/discipline to execute.

This change will also allow for a more consistent structure to the ZenTrends blog. I've noticed lately that the "Lg-Cap Portfolio Review" posts are getting less attention than other more broad market review posts. By focusing the portfolio on a Monthly basis I only will post a Lg-Cap Portfolio Review at the end of each month. I will also post a "Monthly Signal Watchlist" the week before the end-of-month signals execute. The other weeks will be dedicated to general market conditions, things I'm watching, some short-term trading, etc.

Thanks for reading.


Sunday, May 15, 2016

Lg-Cap Portfolio Review

The market pulled back for the third straight week but remains above both short-term and intermediate-term support.
-SPX weekly gap at 2,038
The first level to watch is the weekly gap at 2,038. This coincides with several inflection levels going back over a year. It also is where the recent swing lows reside. A break of that and a move to the primary support at 2,000 will be in play
-20 WMA at 2,000
2,000 is a nice round number, is the current location of the rising 20 WMA, and a major inflection level following the August decline. A break of this support will likely send prices back to the range lows.

SPX Daily
 Zooming in on the gap support level and prior lows mentioned above, Bears are attempting to take back control of the short-term action with a nearly complete Head/Shoulder Top. A convincing break of the neckline support at 2,038 would set this pattern into motion. For now its only a potential warning as nothing is yet confirmed.

NYSE remains the market index to watch due to its very clear and defined resistance levels. 
A potential Bullish scenario would be for the short-term pullback continue to play out, but for buyers to step in near the rising 20 Week moving average, forming a higher low. However as long as the NYSE stays below the prior swing highs at 10,600 this remains only speculation and caution is a better strategy.

Betting against the Banks- Round 2

The first time we shorted Banks we missed the highs by one week. This is often the trouble with shorting into strength, as there is no price behavior to confirm the bearish thesis. And as we know momentum can continue longer than seems reasonable.

This time we are entering our position into weakness as there is now price confirmation of the overhead resistance we've discussed for some time. The trouble with shorting weakness is that we could be selling the lows. That's always a possibility, but that's the risk we take for being in the market. There is no silver bullet; it's hard to short the highs and it's hard to short the lows. No matter how you slice it there will be uncertainty with any trade we make. 

It is good however that we know price is respecting the prior support levels as new resistance now. This recognition by the market gives us some ammo to take another shot at one of my highest conviction trades in the market currently. 

Entering Short Shiti Bank (C)
Following its furious rally, Citi is now pulling back and invalidating much of the bullish momentum it developed over the last 10+ weeks. The 20 WMA continues to decline which suggests the prior rally is a counter-trend move.

C Daily
Zooming in on the recent action following the test of the overhead resistance band, the stock has now made a lower low on the recent pullback, violated the 50 DMA and triggered a short-term Head/Shoulder top. It is worth noting this formation looks very similar to the March-April action as well. That too formed what looked like a short-term topping pattern, broke the 50 DMA forming a lower low, yet then reversed and rallied higher.

This could certainly happen again, so keep your eye out for a false breakdown here.

Zooming in even further to the intra-day action I think its worth noting the very poor Relative Strength vs. the SP500 during this recent rollover. We can also see the Head/Shoulder top more clearly from this view.

For risk management purposes we only want to be short below the prior swing high near $47. We will use the weekly closing high from 4/22 as our reference point. A weekly close above that would invalidate this analysis and put us back in a neutral posture once again.

The hardest thing to do in trading I find is to put back on a trade that has recently just stopped me out for a loss. I was wrong on my timing the first time but the price action continues to confirm a weakening bias. As traders all we can do is follow the price action in front of us and take all valid signals presented. If this trade turns out to be wrong then we will sell for a small loss just as we did last time.

When looking for high quality short trades I want to see a strong support level broken, a flush to the downside, a sharp return to the broken support, and subsequent weakness once the rally stalls. These traits combined with an overall weak Relative Strength trend vs the overall market are the perfect recipe for a strong short candidate. C displays this setup perfectly and the patterns forming within the price action are confirming the longer-term bearish thesis. I would take this trade 10 times out of 10. I cannot control what the market does from here, but a signal is a signal. 

Entering Short Skank of America (BAC)
This trade sets up very similarly to the C trade above. BAC remains one of the weaker stocks in the market in terms of overhead supply and price is confirming this thesis. We want to be short below the recent weekly swing high at $15.11.

It appears very likely that we will see at least a retest of the February low which is near $11. This means we are risking a little over $1 for nearly $3 of downside as an initial target. A 3-1 reward vs risk suits me just fine. The possibility for even more downside is here as well.

With these new short entries our Large Cap Portfolio is now 70% invested:
10% Short: C BAC
30% Cash

This is what a groin kick feels like. We entered last week on the breakout to new highs and saw it completely reversed back into the prior trading range. I had initially placed my stop at $199 thinking it would take more than a week for any major failure to occur, which would allow the 20 WMA time to catch up to our stop location. Due to the rapid nature of the move SPG traded below $199 yet found support just below right on the rising 20 WMA.

I don't often place my stop above the 20 WMA as it is my primary trailing support indicator. This is a rare case where I will hold this position into next week to see if support can continue to hold. As long as the stock closes above this week's low we will stick with it.

But generally speaking to see a breakout get rejected like this is not a positive sign. SPG should be on close watch here.

Despite the recent chop in the short-term Crude Oil action CVX has consolidated its recent breakout very nicely. Oil was able to fight back this past week and this remains in fine shape. Stops are currently at the prior swing lows near $92.

Medtronic has shown decent follow through since its breakout last month. We don't have a reason to raise stops just yet and they currently sit at $73.40

Microsoft is clinging to support near $49 which remains our stop location. If the market were to take another leg lower I have doubts whether MSFT could survive for us. For now we hold with a skeptical eye.

Pepsi was really on the move early in the week rallying to new all-time highs. Wednesday, Thursday, and Friday's pullback however invalidated what could have been a strong weekly signal. Should we see a weekly close above $105 we will be able to trail stops to just above $100. For now we will keep them out of the way near $95.

The action in SHW looks very orderly. Following a decent shakeout the shares have firmed up and are once again trading above the prior highs. For now our stops remain near $270 at the "Valspar Buyout Lows".

United Health is pulling back just a bit below all-time highs. With a few more weeks of consolidation we will be able to trail stops once again to the recent swing low near $125. Lets sit back and let this one work.

PM is another that kissed new high territory before a late week retreat. This name continues to be very strong emerging from a multi-year base formation. Soon we will be able to trail stops to $96, but for now just let it be.

PCG appears poised to breakout to new highs very soon. This formation looks very Cup/Handle like. Utilities remain a very favorable group in the current market environment. Should we see a breakout stops could trail to 56.50. Currently we are trading against the $54 breakout level and I see no reason to get antsy.

AEP is also in very strong formation. Nothing to do here but sit back and watch. Stops are well out of the way.

GE has been on a bit of a skid since breaking to new highs at the beginning of April. This week we saw a breach of the 20 WMA. There is still little damage done and the trend remains intact. Should we see prices stabilize and resume through $32 we would then look to trail stops to the new swing low.

FB continues to be so strong. I simply love all the calls from the media and analysts that suggest selling this stock or even shorting here. That's unbelievable to me. I guess if you were an ultra nimble trader who could be in and out quickly I suppose you could short up here. But why bother? There are so many more appealing stocks to sell compared to one that continually sets record highs with massive fundamental upside surprises. Don't get cute, just keep running this winner and trailing stops higher.

Thanks for reading

Sunday, May 8, 2016

A Few Things I'm Watching

NYSE Monthly

-Probably the cleanest of the market Indices in terms of a Bull/Bear outlook. Above ~10500 Bullish, Below Bearish. This is a very broad reading of the general trend in equities. Prior support has proven once to be new resistance, will it prove this way a second time? I'm approaching this as my primary indicator of broad market health. Above the prior high I will treat this as bullish confirmation of the prior rally and will be aggressive with new positions. Below the high I will approach this market skeptically and with more caution.

AAPL Weekly
AAPL is becoming a real battleground stock. Carl Ichan selling, very high weighting amongst funds and Indices, "cheap valuation", concern over lack of innovation, etc.

Bottom line the intermediate trend is lower and substantially so. The stock will certainly rally at times, but until more demand can come in to stabilize the stock it remains an easy avoid for my timeframe. 

Even the short-term trend is lower, there are simply no signs of confident buying (which is what forms lows).

Yield and Safety Plays Lead

XLP- Monthly 

Without question Staples are the strongest sector in the market currently. All dips are being bought and the trend continues higher. 

Real Estate- IYR Weekly

REITs are another area that remain on fire and seeing very positive price action. They currently display a rare combo of growth and high-yield, usually mutually exclusive traits in the markets.

Within the REIT space these are a few names I like:

SUI Monthly

KIM Weekly

COR Weekly

CUBE Weekly

XLF Fills Gap, Awaits Next Move

Financials find themselves in an interesting position. The weekly chart shows a major gap-fill took place last week. I give a lot of weight to gap activity and whether a rally or pullback will reverse/continue based on a key gap area. 

I treat gaps as major support/resistance. Should the XLF reverse back above the recent gap-fill I would take that as a bullish sign and adjust my thesis. Below the gap I will continue to treat them with distrust and look for opportunities on the short side. 

The Monthly chart also confirms this area of interest. Price is colliding with prior support and a now declining 20 Month SMA. Again, above good/below bad.

XLE Resistance

Energy looks to be forming a potential base reversal. It could still use some time in this area building the right side to rally from, several months would be excellent. 

USO Resistance Band

After looking pretty sharp over the past month, Oil slowed its trend and may be encountering some substantial supply. Traders appear to be selling into strength since the recent breakout attempt at the end of April. Some time to digest overhead supply might be a good thing for higher prices in the future. 

CHK Pounded

I've been quite critical of this stock for sometime. It's recently undergone a massive 10-week rally. But after breaking what looked like major intermediate resistance the stock just tanked back through this key level and 50 DMA. This change in action is something we need to be aware of and be looking for in new potential setups. 

IBB Biotech

Among the "false breakout" perpetrators, Biotech is showing what can happen when these moves fail. 

We recently took a position on the initial breakout but were stopped out on 4/28. The ETF has since dropped 10% in only a few trading days. As far as offensive leadership is concerned, Biotech is a group that we like to see rallying with the market. It shows a healthy demand for risk from investors, but we are not currently seeing this.

 With Staples leading and Biotech lagging it shows the current intentions and conviction of the money being put to work. That conviction still favors safety and yield rather than high risk/high reward. 

US Dollar Major Support Violation

Everyone is now very focused on the Dollar and believe it will be responsible for the next move in stocks. If that's the case what is it saying?

UUP Daily

There was a decent rally this last week and UUP is now retesting the underside of it's broken 18-month support. A move back into the prior range would be seen as bullish activity and a sign of a failed breakdown. Continuation below would be bearish for the Dollar but would seem to be positive for the overall market. 

The SP500 now has a Positive Sloping 20 WMA

This is my broad definition of an uptrending market. A pullback to the 20 WMA would be ideal. The hope would then be to see the support hold and for the MA to curl under price. This would provide a strong launch pad for a sustained move higher.

Thanks for reading