A Look At a Few Charts: Revisited

As a follow-up to the charts I posted before my annual August hiatus, here’s what happened for each of those names. The yellow line in each of these charts is July 17, when I posted the charts before.

SPY:

The broad market ended up having a big drop as August started, but mostly recovered since then. If you tried to trade breakouts you got chopped to pieces. If you tried to fade breakouts you had to take a lot of heat during the chop for not a lot of benefit. This chart is textbook for how I used to give away a lot of my gains for the year by forcing trades during this time. I’m happy I sat this out. Things seem bleak for the markets going forward with global slowdowns and recession indicators flashing. I’m leaning toward taking more defensive long term positions here.

AAPL:

Earnings were good, AAPL spiked and then sold off all the gains. Then it dropped, and shorts got burned in that chop. In the end, it’s at the same level today as it was when I posted the chart before. Nothing but pain in August.

ROKU:

ROKU was the exception to my August rules. After some contraction before earnings, it popped and didn’t look back. If I weren’t sidelined by rule, I would have gone long on the Swing VWAP breakout at about $135. I have liked ROKU all year and in this case, breaking my rule would have paid off. Missing things like this and accepting it are important to having the right trading mindset. There have been so many good setups in ROKU this year, and I’ve been able to catch a few of them. It’s ok if I don’t get every one. Greed is a killer, as is fear of missing out, and begrudging any moves you may have missed.

TSLA:

TSLA ended up being pretty volatile with the earnings report and different news stories during August. Any of my typical setups would have lit me on fire. Lots of chop, lots of heat whether you traded breakouts or faded them. The only edge was in knowing the news and earnings beforehand, which is basically impossible unless you are cheating with inside info. Another good chart to watch rather than trade.

Going into the fall, I’ll keep an eye on any setups that may occur. I’m biased toward the bearish side, but we’ll see how things pan out.

A Look at a Few Charts Right Now

Going into August is the time I have historically lost the most in my trades. I overtrade and try to push something through when the markets are in a choppy, listless environment. So one of my rules is that I don’t trade from the end of July through Labor Day.

That said, here’s a few daily charts I’ve been watching and what I think my indicators are telling me. I’m mainly looking at the ProSwingVWAP and the Multi-Divergence Indicator v2 on the RSI(20). Also plotted in a gray line is an indicator I’m working on called AdaptiveSuperSmoother. I prefer it over moving averages. More on that later. On to the charts:

$SPY (S&P 500 ETF)

The broad market. As far as divergence, there isn’t any. No hint of weakness on a longer timeframe. The lower Swing VWAP is far below, so no definitive trend change. Since the middle of June we’ve broken the upper Swing VWAP 6 times. Today’s weakness doesn’t look good for continuing that streak, however. This looks like a textbook chart for sideways chop. This tells me take August off.

$AAPL (Apple Computer, Inc)

I am always and everywhere a big Apple fan. Slightest of slight bearish divergence. Nothing compared to what we saw at the end of April. I’d ignore that here. The upper Swing VWAP points are barely grinding higher, so no real bullish drive. Not near the recent high in May. The lower Swing VWAP is well below the current price, so no likely trend reversal indicated yet. All signs point to blowing up your account overtrading it in August.

$ROKU (Roku Inc.)

Roku has been a monster all year. Into June, a large bearish divergence showed up as it pushed above $100. We got a 10% drop after that, and the divergence ended. In the first part of July there was an upper Swing VWAP breakout at about $95. I most recently went long there at $97. Pushed back up to new highs where we are now. The drop today seems like a rejection of that newest high. The lower Swing VWAP is down at $100. Below $100 I’d look for a trend change to bearish. It would take strength above $114 to look like a continued uptrend. Another sideways chart, though I see more of a downside risk here. I’m still long here but wouldn’t add at this time, and will watch $100 closely.

$TSLA (Tesla Motors, Inc.)

Tesla is interesting here. A bullish divergence back in early June signaled a potential trend change upward. Tesla demolished upper Swing VWAP’s from that point onward. The lower Swing VWAP from that big reversal has still not been tested. Strong uptrend. The latest weakness today after another upper break doesn’t inspire confidence, and we are far from the Adaptive Super Smoother “average” price. Kind of extended. It looks like Tesla’s bull trend is still intact, but this isn’t the time to get on board, especially with the broad market likely to languish for a while. The upside target would likely be about $290 resistance from the April highs, but I wouldn’t expect that to happen until the fall. With earnings coming up between now and then, it’s a wait-and-see chart here.

So it’s a whole lot of nothing out there. Sit on your hands or play with Bitcoin pinless hand grenades. Crypto is making biotech names seem like investment grade. With the yield curve inverting and possible recession looming, the end of the year should be interesting.

WWJT Revisited: Define the Market Environment

I’m back. Good to be writing again. 🙂 I’ll have some more Thinkscript indicators soon, but in the meantime, here’s a philosophy piece:

To revisit my What Would Jesus Trade post, I was listening to a recent podcast by Jeff Quinto where he was talking with another trader about three types of traders. The type they called “Market Savvy” traders would have a framework to define the market environment first and foremost, before any trade setups were even considered. This struck a chord with me.

As I said in my WWJT post, too often we try to tweak the details of our parameters instead of answering the most fundamental questions. It’s like dressing for the weather. If it’s 100 degrees and sunny outside, it’s really pointless to try to decide the best color of raincoat to wear. By a similar token, if it IS raining, then agonizing about whether a yellow or a blue raincoat would be better is equally pointless.

The same is true in trading. If we are in a heavily trending market, then almost ANY trend following setup will do well, and almost EVERY mean reversion setup will do poorly. It doesn’t matter how awesome your backtesting is or what your particular parameters are; these are just the basic facts. Random chop is not too good for anybody but the brokers, and there isn’t a trend following system that can be devised that can make gold out of sewage. The first and most important step is to define how you will interpret and classify market environments. Messing around with other things at the expense of doing this work is foolishness.

So hadn’t you better do the hard work and define some market environments? As they said in the Jeff Quinto podcast, you can’t really learn this from a book or third-hand knowledge. You have to study the market for yourself, and define a model for yourself. It can be simple–Trend or No Trend. That’s simple. You can then refine it to incorporate any other conditions that you want–volume, choppiness, retraces, etc.

One important thing: The market environment definitions are NOT the setups, or the trade plan! They are simply a way to describe generally how the market behaves and how the price action manifests itself. The trade plan and setups follow from that, and almost effortlessly, I would add.

What to do on an up trend day? Buy pullbacks! Trail stops! Maybe take some partials on strength. That’s an easy call. The harder part is knowing how to identify a probable trend day before the day is over. The gifted traders can see a trend day coming within the first 15 minutes of the open. Even CNBC can see a trend day at 4:00 ET.

What about stops? Well, a trend day should make higher highs and higher lows, right? So your stop goes where your market wouldn’t be acting like a trend day anymore. Simple, no agony or optimizing.

You’ve fought 80% of the battle right here. Now just be disciplined to execute and accept the outcomes you get dealt by the probabilistic universe. Of course, your models will need to have some technical parameters or other measurements, but you make a model as a baseline, and then update it if you get a better one. Are you listening, Prospectus? Yes, I am talking to myself here. Very much so.

Quit agonizing about finding a holy grail or a system that “always” works and instead create your own models for different market environments. I’ll be posting some of mine by way of example, but don’t take my word for it. Please do the work yourself and share in the comments if you feel like doing so to inspire others. Apart from learning a few facts, the only profitable reason to read any blog is to gain inspiration to DO SOMETHING, and then use that inspiration to DO SOMETHING. I myself get too caught up in reading and thinking and wishing (and writing) and don’t DO SOMETHING as often as I should. Hope this inspires us all a bit.

What Would Jesus Trade? (WWJT)

Disclaimer: This article applies to myself probably more than any trader that ever lived. I write in the hopes that it sinks in for me, and that helps out some readers.

Back in my Move the Markets days, “Mister White Folks” posted a quote from Elite Trader that is very wise, even though short on grammar and punctuation:

Yep don’t fix what aint broke, chop will still kill this system as it will any other so if you are going to spend time on anything, spend it recognizing when to trade and when not to trade

In general, traders (including myself) make trading too hard by focusing first on things that are not important, and neglect the things that are most important. It seems we put way too much emphasis on the particulars of a system–the setups, stop management, profit targets, false positive signals, missed trades that didn’t set up according to the “rules” but went on to win anyway. This is all psychologically satisfying, but it doesn’t help your trading performance in any material way if you don’t have other more important things in place! Further, this effort would do more for your profitability if applied in a slightly different area than is typically done. Unfortunately, it is easier to fiddle with indicator parameters than it is to tackle the bigger problems.

There is a passage in the New Testament (non-Christians, atheists, agnostics, hedonists and satanists bear with me here…) that illustrates this principle very well. Jesus said to the corrupt spiritual leaders of the Jews:

Woe unto you, scribes and Pharisees, hypocrites! for ye pay tithe of mint and anise and cummin, and have omitted the weightier matters of the law, judgment, mercy, and faith: these ought ye to have done, and not to leave the other undone. Ye blind guides, which strain at a gnat, and swallow a camel.

The Pharisees were unjust to the people, ignored the spiritual laws of God and took advantage of their clerical status in society. However, they made many outward appearances of being righteous. While they left the things that were important to God undone, they justified themselves and pointed to their superficial outward acts as evidence of piousness. Jesus didn’t buy it.

As a trader, do you strain at a gnat? Do you spend all your research and energy to find the perfect indicator, the one right system that gives you 100% wins and no losses? The one that catches every possible winning trade no matter what the situation? Do you constantly try to find THE system, the one that makes the most money, the best one?

Do you swallow a camel? Do you ignore position sizing? Do you take no thought for market volatility or the current environment? Do you leave money and risk management for later thought and action–or worse–no thought or action? Do you ignore the “black swan” that could come and take you out of business forever? Do you break your rules and blow your stops? Do you force trades on days where the market is totally stacked against your strategy, or the volume or volatility isn’t there?

Here’s the cold hard facts of life: Almost ANY trend-following system (channel breakouts, MA crossovers and so on) will do well in a trending market. Almost ANY trend-following system will get whipsawed to death in a non-trending market, whether active and choppy or dead and listless. Conversely, almost ANY range-bound system (mean reversion, oscillators, overbought/oversold indicators, etc.) will do well in a non-trending market. Almost ANY range-bound system will get killed in a trending market as you keep fading the strong move and dying a death by 1000 cuts. The systems work well when the environment is right. If they fail, it’s because YOU failed to implement the correct strategy. It’s not because your stochastic was too fast or slow, or because your pivot point used 24 hour data instead of market hours only data. After personal discipline and psychology, the largest part of the battle is as the Elite Trader quote said: Recognizing when to trade and when not to trade.

So, to speak to my carefully crafted, eye-catching, straw-grasping post theme–What Would Jesus Trade? Going by the scripture passage above, he’d ignore the gnats and quit chewing on a camel. He’d fulfill the weightier matters, and leave the less important ones undone. He’d trade a system that explicitly took into consideration what I consider the weightier matters of trading:

1. Personal Discipline
2. Risk Management
3. Position Sizing
4. Market Environment

If you are not disciplined, the market will pistol whip you and take your money. If you put 100% of your equity in an overnight hold of FAZ, you are about to meet Mr. Risk. If your trade size is too big for your account, your days are numbered. And if you don’t have a way to identify what the market environment is, and when to trade and when to sit out, then no amount of clever backtesting, indicators, statistics, or even the Holy Grail is going to make you win. So quit looking for all that other junk, quit wringing your hands over the perfect system, and concentrate on what the market environment is! It’s the way to the REAL Holy Grail 🙂

I am going to define some VERY simple systems to use as baseline strategies for examining this kind of idea–one for trending markets and one for range-bound markets. I will do some research into how to identify the market environments that we may be in, and then I will use these baseline systems to see how they do against how I define the market environment. This should be 90% of the battle. Only after these things are in place will I personally do any more messing around with indicator parameters or new fancy ways of looking at price data. Stay tuned!