Update: U.S. Stock Market (DOW) Short Call Targets Met

Update: 7/27/15- 9:45am EST

Both targets met on the short call from 7/17/15 (link below).

U.S. Stock Market (DOW) Short Call 7-17-2015: 1st target 300 points, 2nd 650 points

We will update when we get our next signal. Looking for a bear trap or FL1, followed by BOT long to confirm. Stay tuned!

 

Part II: Long Japan, Short Emerging Markets

We update our post from May 9th where we suggested a defensive Long Japan, Short Emerging Markets trade. Since then, the spread between the two indices widened by over 10%. The market, as measured by the S&P 500 has gone essentially nowhere.

Ratio chart of EWJ: ADRE daily ("dollarized" versions of MSCI Japan and BoNY EM 50 Index):

Same chart weekly:

The trade still seems to have legs, but we will now highlight some additional defensive (re: negative beta spread trades) that appear to be in even earlier stages of development:

Long Japan, Short S&P MidCap 400 Value Index via EWJ/IJJ:

Long Japan, Short Russell Small Cap Value Index via EWJ/IJS:

Long Japan verus Russell 2000 Value Index via EWJ/IWN:

All of these trades have, or are beginning, to confirm long term trend reversals to the upside. These are long-term thematic reversals that should last for years to come.

Another idea that looks promising is long Japan, short U.S. High Yield:

Remember, we are not suggesting to go long the ebullient Nikkei. We are pairing EWJ, which is long Nikkei AND Yen, against higher beta shorts. The Yen is an historically defensive currency. 

Update: Pullback to OP on Crude Oil Bear Trap Long Signal: 7/21/15

Update: 7/21/2015 - 3:00pm EST

We pulled back to OP levels identified in 10:30am 7/21/15 post: "Long confirm: Pullback to OP with a Break of Trend".

OP pullback with "aggressive" long signal on 1 hour bar is shown on chart below. Break of today's high will confirm BOT mentioned in quote above from earlier post. BOT is point for addition into current position and/or "conservative" initial long entry depending on whether aggressive initial trade was taken or not.

Stop: Currently remains below bear trap, but can place below OP if risk is a concern.

Target: Remains unchanged.

Crude Oil Bear Trap Long Signal: 7/21/15

Crude oil potential Bear Trap long signal on 7/21/15

The first chart show the break of prior day's low with no follow-through. This is a sign that bears tried to short the break out down, but are now trapped short at those low levels. Historically, traps end trends at least for the short term to provide a leg up. If a BOT long occurs, this can be further fueled by short covering (even though there are no fundamental reasons for price to advance).

Horizontal lines are OP pullback retest levels. A pullback to OP with a break of prior day's high would confirm the BOT long signal which is strengthened by the Bear Trap if it holds and we trap at / above OP.

Second chart shows trend line that will trigger BOT and target zone (horizontal green line) due to OP of down move from June 26th.

What is an OP?

OP stands for origination point. It is the level / point where an up move or down move started / originated from.

Long confirm: Pullback to OP with a Break of Trend (BOT Signal- detailed in earlier post)*

Target: Approximately $9.00, over 17% to upside. Around OP of down move starting June 26th.

Stop: @ July 21st 4:00am low of day.

*If there is no pullback to OP, we would be looking at entry on BOT following failed short.

 

Confirmed FH1 Short 7-21-2015: U.S. Stock Market (DOW) Short Call 7-17-2015: 1st target 300 points, 2nd 650 points

Update: 7/21/2015 - 9:30am EST

FH1 short triggered on daily chart.

Short entry / addition point to current short: 17,980 - Break of prior day's low

Stop 18,059 - Break of prior day's high (above FH1 bar)

Targets hold from prior trade entry / 7-17-15 short call post

What is an FH1?
An FH1 is a failed long signal, confirmed by a short trigger. The chart above provides a real-time example. Here is the syntax:

Low today < Low 1 day ago AND
High today <= High 1 day ago AND
High 1 day ago > High 2 days ago AND
Low 1 day ago >= Low 2 days ago AND
High 2 days ago <= High 3 days ago AND
Low 2 days ago <= Low 3 days ago

Update: Triggered, LH LL - Bear Channel Forming: U.S. Stock Market (DOW) Short Call 7-17-2015

The break of prior day's low triggered the short call. Price structure is still intact as you can see from the 15 minute chart below. I highlighted the trend lines (top of bear channel) and Bull Trap bar. With bear channel formation beginning, we are in short to medium-term shorting territory here.

Being that we're at the top of the minor bear channel with the a lower high and lower low today compared to yesterday, I would look for FH1's (failed long signals) to short. We have historical posts about our FH1 and FL1 signals, but we plan on doing another post with details.

As mentioned in the earlier post, stop is above prior day's high, make sure to trail the channel swings once we print more prices. Targets hold at previously stated levels.

* If there is a BOT long out of here, this would become an FL1 with bias to long side and potential reversal of trade from short to long if the FL1 did occur. The short would be closed on the BOT by out stop management system and a long signal could trigger.

U.S. Stock Market (DOW) Short Call 7-17-2015: 1st target 300 points, 2nd 650 points

7/17/2015 - 9:20 am EST

* The call confirmation requires the following conditions which can occur today or next week, but need to trigger to make the call:

1) We do not break a prior day's high

2) If we do, only a bull trap would allow the signal to still be valid

3) For short trigger, we need to break below prior day's low

4) For trade confirmation / to add to position, we need to close below prior day's low to began the bear down

We pulled up to the expected resistance on the widening bear channel down on the daily chart. On an hourly chart, we have a bull channel within a major bear channel. The daily chart below shows the top line channel resistance and the move expectation:

 The 1 hour chart below has the conditional requirements for the call.

Targets:

1st target: Origination Point of up move, around 300 point profit, ~17,700

2nd target: Bottom of widening bear channel, around 650 point profit, below ~17,350

Stop:

Above prior days high to start. Recommended to go Risk-Free if sufficient leg down then trail the channel.

Buy or Sell, Long or Short? How to know which direction to trade: Break of Trend will tell you!

To start my post series, I want to share a major concept that we implement on every single trade, the "break of trend" or "BOT". We will refer to this concept as BOT on our charts and in posts. I will discuss our process in future posts, but I wanted to start with something that you can research and see on your own before we get into further details regarding specific signals, chart setup, etc. It's important to understand the BOT concept as it will tell you when to ignore certain triggered signals and when to focus on the high probability ones.

Here are a few chart rules that we have before I get into details on the BOT concept. I will also make a post regarding chart setup and what we use, in a future post:

Rule #1: NO Indicators!
Rule #2: Plot prior day's highs and lows and current session's highs and lows.
Rule #3: Analyze price structure to determine if bulls or bears are currently in control

So, pretty simple, right? All that a chart can tell you is executed trades and volume of trades on an instrument, nothing more! Why have a bunch of indicators on a chart? Is it that hard to see what's actually going on?? No! The hard part is setting yourself up in high probability trades, and a lot of times a good trade goes against our psychology. We "want" to buy low (super low), we want "the best" price, and want to sell at the highest price possible. But think about this, what is "the best" price? There is no such thing, it's just a number. So, what we believe is to trade in the direction of the trend because this will "help" your trade. I will get into psychology deeper in a future post, this was just a quick comment.

Now, the break of trend: When lows continue to be broken, sellers are in control. When highs continue to be broken, buyers are in control. When you see both in one day or on a selected segment, there's a battle for control. The BOT signal applies on every time-frame. For trading purposes, we like to glance at daily bars, focus on hourly bars, and analyze 15 minute bars. Essentially, there can be a trend within a trend within a trend. What I mean by this is that there could be e.g. 5 BOT signals on a 1 minute chart that are within 1 BOT signal on a 15 minute chart, mini BOTs within a more significant BOT.

In the above chart, there was a BOT Long confirmed by the HL/HH setup I discuss below. But, this was also strengthened by a Bear Trap at Low of Day from 9:00 am on the chart!

Here are the rules to determine BOT:

BOT to Upside for Long Trades
Rule #1: Connect highs sloping downward for a downtrend with potential BOT to upside. *
Rule #2(a): HL/HH pattern BOT: Look for 1) Higher Low and then 2) Higher High with break out of the downtrend
Rule #2(b): Trap BOT: Look for 1) Bear Trap at Lows (I will do a post on traps) and then 2) Higher High with break out of the downtrend
Rule #3: Look for trade signal confirmation in direction of BOT

BOT to Downside for Short Trades
Rule #1: Connect lows sloping upward for an uptrend with potential BOT to downside. *
Rule #2(a): LH/LL pattern BOT: Look for 1) Lower High and then 2) Lower Low with break out of the uptrend
Rule #2(b): Trap BOT: Look for 1) Bull Trap at Highs (I will do a post on traps) and then 2) Lower Low with break out of the uptrend
Rule #3: Look for trade signal confirmation in direction of BOT

*Don't focus on exact details of tails, you want to determine the general price action.

When to know what signals to consider and which to ignore:

Quoting what I said above, "It's important to understand the BOT concept as it will tell you when to ignore certain triggered signals and when to focus on the high probability ones."

Referencing the chart above, the blue arrows represent our FL1 long signal (to be discussed in detail in future posts). Since the FL1 is a long signal, why would you take a long signal in a downtrend, you wouldn't! Knowing the direction of the trend using BOT will help you avoid low probability trades.

The application is very simple: Do not take FL1 long trades in major downtrend. Take them once a BOT Long occurs, on the break of the trend line drawn, and is confirmed by Rule 2 above.

Hope this helps and please let us know if you have any questions!

Buy, Sell, or Hold? When, Why, and How? What to Expect From HT Trading Going Forward

Just want to post an update on what we plan on doing going forward. As we mentioned before, Bryan and I have specific experience in different areas of investing, trading, and money management. Recently, Bryan has been posting very thought-provoking analysis. We will be splitting the type of content that will be posted, focusing on our expertise during specific posts. We will both offer opinion and analysis on the other’s post if our added content adds value to the post. To give an example, Bryan might post regarding a specific industry and offer stocks that meet his criteria. I might then jump onto that post and continue, explaining what setup to look for and how to best execute the trade. Regarding futures trading, I will be focusing on “the market”, using the Dow E-mini (YM) as “the market”. To start, my first few posts will detail the following:

• Our trading process
• How we setup our charts (time-frames, indicators, etc)
• How we analyze price movements
• Our take on trading psychology and behavior of markets/investors

Following this, I will focus on:

• Specific setups / signals (I will teach you our “jargon” and what we look for)
• Entry, exit, and risk management

After all of the foundations are explained, it’s time to trade! At the moment, we have the idea of posting a weekly “outlook” on “the market” and then update during the week with signals that were triggered. We will include posts if a trade was filled, stopped, and/or met target. The idea is to have a trading plan for the coming week, monitor signals, post triggered trades, and show where stops and targets should be placed.

Aside from the above, I will throw in random posts related to trading the Dow E-mini Futures (YM). This could range from posting code for our signals to automated trading progress/results using our system.

Thanks and looking forward to the coming months!

A Lower Risk Way to Play Defense: Part II

We follow up on last week's post A Lower Risk Way to Play Defense. In that piece, we highlighted the fact that stocks with high long-term momentum that have recently had a period of consolidation or weakness tend to outperform stocks with poor long-term momentum that have recently had a period of strength. We demonstrated that this is especially true during bear markets. Obviously, we are not in a bear market, but if one is looking to start building a defensive portfolio, it would, nevertheless, make sense to implement the strategy. Normally we don't highlight the reasons "why" a strategy works, but instead let the market tell us "what" is working. We are interested in making money, not in becoming tenured professors. But... if one insists on finding a reason, one might realize that stocks that have performed well over the last year tend to be higher "quality" companies. Buying such companies after a period of weakness or consolidation becomes even more alluring when investors emphasize investment quality during a choppy or declining market environment.

The stocks listed as buys all rank in the top quintile based on this price momentum factor (12 month return minus 3 month return minus 3 times last month's return). The stocks listed as shorts are in the corresponding bottom quintile.

Short idea:

ASEI - A breakdown that is currently revisiting prior support at the '12 and '14 lows. Wait for the stock to reject those lows as new resistance, and short as it begins heading lower again.

Long ideas:

INUV - A new value zone has clearly been established and re-tested above the tops at $3. Therefore, the stock appears to have asymmetric risk to the upside:

VUZI - Ditto for this stock. The new value zone appears to offer at least $10.