The Novice Bear

I would have to say that while reading around the blogosphere today I got the sense that people were not that worried about today’s selloff. There was some serious technical damage done today and it seemed to me that most folks were shrugging of the decline, saying things like, “Don’t worry, we will bounce back.”

Such complacency worries me and I’m forced to be a little more cautious about the market. Another day like today and we will be back to the August lows before you can say “Helicopter Ben”. That high-volume low is a strong magnet that is begging to be tested.

Gold can’t go up forever. I hear Dennis Gartman is selling it. TD Combo says to sell also.

No wonder why the DeMark indicators cost so much money!!! Look at this chart. I posted the Callaway Golf chart recently and was tempted to buy it at the 16.50 level. I didn’t and decided that it would be prudent to wait for a lower risk entry. It came back to the original buy point and I planned on going long today. Unfortunately, the company made a positive announcement pre-market and ELY gapped up before I could buy.

I am amazed at how powerful TD Sequential can be.

Paul Tudor Jones said that when the TD Sequential or TD Combo doesn’t work, “it really doesn’t work”. For this reason, it is sometimes suggested that one go short as soon as a TD Sequential or TD Combo closes below its stop-loss point. I have been looking into this recently and have put together some charts.

Notice how the stop-loss area can be treated as the same stop-loss short postition after the TD Sequential failure. In some cases, the price bounces back and reaches into the stop-loss area. In such a case, this offers someone a late entry point to go short or allows someone who already is short to add to their position.

Given that large short-covering spikes can be so incredibly nerve racking, having a well defined entry and exit strategy would be helpful to those who want to play both the bull and bear sides of the market.

Perhaps the most difficult aspect of William O’Neil’s Canslim method of buying stocks is that it is usually difficult to determine the proper buy points. Furthermore, for the average investor, it is almost impossible to always be on top of the market, which is what is required if one hopes to buy on those high-volume breakout days.

As I said in a previous post, I have been working on a more systematic way to trade the high momentum IBD stocks. Here are the results of a backtest of one year. Notice the excellent winning percentage and the gain/loss ratio. The three plots are of the buy and hold of the IBD 100, the equity line, and the number of stocks in a buy mode. While the strategy underperforms the buy and hold, what it does do is control the risk of a serious downturn. Say, for instance, that the correction of this summer turned into a bear market, my strategy would have been mostly in cash during the entire hypothetical bear market, thus protecting capital.

The system is basically a volitility based breakout system. I include requirements of volume and making new highs. Selling requires large volume breakdowns. What is especially nice is that this system only requires that someone buys or sells the open after a signal is given. Such a system doesn’t require someone to constantly watch the market. All one would have to due is to place their orders the night of the signal.

Out of all the stocks on the IBD 100 I picked out six at random and looked to see how they fared during this last correction. I also wanted to see how close an IBD based buy point lined up with my system’s buy point. I think you will be amazed my how well the two lined up. On the six charts I show the IBD buy points and where my system would have made a buy. The green up arrows are my buys, with the grey shaded areas being times when the trade is on. The red down arrows are sells.

I should say some more about the indicators on the charts. The moving average envelopes are just 9 period exponential moving averages of the highs and lows, displaced by one standard deviation of the price. The colors of the averages are turned on and off using the TD Average I rules that can be found in Tom DeMark’s “New Market Timing Techniques”.

I have some older IBD 100 lists and will be performing some test on them, trying to figure out how well losers are rejected from the system and how well new leaders are included. Look for more posts soon.

I don’t have much time, but I wanted to show the chart of Force Protection (FRPT). It completed a TD Sequential and ran up to the TDST line. Look what it does there.

I know the retailers are still in serious fundamental and technical trouble and I don’t plan on making a buy here, but the VFC chart looks good for a counter-trend trade. It also might be a nice time to enter for a long term hold.