Trading Tips

Entering An Interim Trading Range: New Signal For S&P500 Is Sell

In our April 27th forecast, our arbitrage model signaled an upward trend for the period through May 10th (and maybe even further). While relative strength remained high during this period (especially supported by the positive manufacturing numbers from the US economy) sudden changes in statistical measures indicate that we are entering a trading range with possible setbacks until May 9th:

  • Statistical arbitrage signals sell for the coming 5 trading days. Our statistical model recommends selling the S&P500 for the coming 5 trading days. While volatility may rise during this period, possible setbacks may create significant pressure on the index. For possible large-scale setbacks, we recommend that you keep checking our Market Pulse page for potential reversals in the market direction forecast.
  • Technically, we still do not see a major correction on the short-term horizon yet. However, potential selling pressure may push S&P500 index down to 1,350 and maybe further down to 1,292 levels. For longer-term investors (or more patient traders) who entered the market in Mid-April on the long-side, it may not be wise to close positions immediately, as we are not bearish beyond May, 9th as of today. For aggressive traders who choose to be short at this level, we recommend a stop-loss of 1,425.
  • “Employed or not employed?” For the coming week, the US unemployment data may negatively surprise the market. Apart from the economic data, the market may not want carry a lot of risk through the weekend, at which time France will choose its new President. These uncertainties will likely increase volatility, thus willingness to unwind some positions.

In summary, we change our view on the generic market to a bearish trend for the coming 5 trading days.

Get this market direction change instantly through your iPhone or iPad with Stock Arbitrage Trader. Learn more about Stock Arbitrage Trader.

Bullish Reversal Trading Strategy

Sample Bullish Reversal Trading Strategy with Market Scan for the iPad.

Filter 1: Bollinger Band narrowest in the last 6 months


The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.

Many securities go through periods of high volatility followed by periods of low volatility. Using Bollinger Bands, these periods can be easily identified with a visual assessment. Tight bands indicate low volatility and wide bands indicate high volatility.

See the yellow highlighted section on the screenshot below. [Click Screenshot to Enlarge]

A Couple of reminders
- The text color of the button will turn green to show that there is a selection made with that indicator (see button “BOLL”).
- Date selection is “0”, meaning we’re filtering the Last Trading Day.

Filter 2: MACD rises above the signal line

When the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid entering into a position too early.

[Click Screenshot to Enlarge]

Now, we have only 2 stocks to view for further analysis (data as of 12/02 – DHX: Dice Holding Inc., MEAS: Measurement Specialities Inc.). Please note that this number will change every day with the market condition. If you end up with a higher number of stocks, you can use a more rare filter criteria or add new filters to reduce the number of stocks to a manageable size.

[Click Screenshot to Enlarge]



Does this mean that these stocks will go up the next trading day? Of course not. This is just a scanning tool for you to filter the stock market so you can save time and find profitable investment opportunities.
One of the best reversal indicator is Parabolic SAR. It is a technical indicator that is used by many traders to determine the direction of an asset’s momentum and the point in time when this momentum has a higher-than-normal probability of switching directions. The Parabolic SAR is calculated almost independently for each trend in the price. When the price is in an uptrend, the SAR appears below the price and converges upwards towards it. Similarly, on a downtrend, the SAR appears above the price and converges downwards.
Here are the same charts with Parabolic SAR. [Click Image to Enlarge]


One of the most important aspects to keep in mind is that the positioning of the “dots” is used by traders to generate transaction signals depending on where the dot is placed relative to the asset’s price. A dot placed below the price is deemed to be a bullish signal, causing traders to expect the momentum to remain in the upward direction. Conversely, a dot placed above the prices is used to illustrate that the bears are in control and that the momentum is likely to remain downward. The first entry point on the buy side occurs when the most recent high price of an issue has been broken; it is at this time that the SAR is placed at the most recent low price. As the price of the stock rises, the dots will rise as well, first slowly and then picking up speed and accelerating with the trend. This accelerating system allows the investor to watch the trend develop and establish itself. The SAR starts to move a little faster as the trend develops and the dots soon catch up to the price action of the issue. The Parabolic SAR is an outstanding indicator for providing exit points. Long positions should be closed when the price sinks below the SAR line, short positions should be closed when the price rises above the SAR line. It is often the case that the indicator serves as a trailing stop line.

If you have any questions, please feel free to email us.

How to Analyze a Stock

One great way to analyze a stock is to first create a watch list of stocks that you monitor or trade on a daily or weekly basis.

Then, at night or over the weekend, take some time to evaluate the daily charts of these stocks. Look for candle setups such as hammers, shooting stars, dojis, etc. Also look for significant chart patterns such as Head & Shoulders, Inverted Head & Shoulders, Slanted Head & Shoulders, Double Tops or Double Bottoms, etc. I use the 20, 50 & 200 Exponential Moving Averages (EMA) on my charts because they offer great support and resistance areas for the stock price to either bounce (remember, a bounce is as good as a fresh cross) or reverse trend.

Once I have found a pattern or candles setup, then I like to change my time frames and look at the 60 Minute and the15 Minute chart time frames over the previous 10-20 trading days for my entry points. A lot of times on these smaller time frames you can draw trend lines that offer support and resistance points that you can use to time your entry and exit points. You also may find pattern setups that could trigger bigger moves. Once you have found a stock candidate to trade in accordance with your trade plan, then you need to make sure you know where to set your stop loss and profit targets. These are crucial; use them to manage your trade so you can control your emotions and not end up with a bigger loss than you are willing to accept.

Analyzing stocks really does not need to be that hard. All you need to do is simply create a plan to analyze your trade candidates and use that plan to look for your next winning trade.

By Jason Ramus

www.DayTradingFearless.com
Follow Jason on stocktwits @DayTradingFearless

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