May

Investing Systems Research Lab Blog for Week of May 24th, 2010

Welcome to the last trading week in May, 2010.

“A good signal jumps at you from the chart and grabs you by the face – you can’t miss it! It pays to wait for such signals instead of forcing trades when the market offers you none.

Amateurs look for challenges; professionals look for easy trades. Losers get high from the action; the pros look for the best odds.”
- Dr. Alexander Elder

Friday’s snapback rally was encouraging, however our Long-term market timing indicator is nearing the “Sell to Preserve Capital” signal.

IF the monthly close Friday, May 28th, is below the red horizontal band, the sell is triggered. Use that information in a way that makes sense to you, but my thinking is that the signal triggers a “Capital Preservation” switch, that moves long-term investments to cash equivalents in the long-term investing account. The investing account is indexed to the overall market and is separate from the trading account.

Remember, the signal is only valid on an EOM (end of month) close, not an intra-day poke below. Should it get triggered, it is very likely the market will bounce and then in June I will have to buy back in, but the whipsaw is just fine with me. I refuse to take a significant drawdown on the outside chance the market is headed much lower.

We are giving our traditional signal a little “leeway”, using previous lows as final support. Typically with Market Timing you want to avoid whipsaws. So we are using the February low as the trigger level instead of the “1% below the 10-month” close trigger. Volatility is up dramatically and I think this extra leeway makes sense. But then I don’t classify myself as a “conservative” investor.

One week from now, we will know for sure. We sincerely hope the market finds it’s footing, but hope is not part of this timing signal, so we will “trade what we see”, not what we hope…haha.

Here’s a closer look at the “line in the sand” on the Weekly chart. Notice we closed below the 30-week, which puts us on “high-alert”. Often we suggest more conservative investors reduce exposure on that weekly break. Of course we were suggesting “reducing exposure” several weeks ago near the top of the channel when it was clear the market was overbought and bumping up against the 61.8% Fib retracement from the March low to the recent high.

Notice on the left side of the chart I included Fib the retracements that should act as support if the market trends lower. The 38.2% retracement of the current move lies just a hair below our trigger, but it’s the Monthly closing level we will focus on.

Suppose the Monthly sell gets triggered and the market turns right around and heads back up?

No worries at all…a month from now if we see SPY close above it’s 10-month simple moving average, we just point-click and buy back in. In the case of a whipsaw or two, we expect that many accounts would easily bear the burden of a couple transaction fees, equivalent to about what I spent on lunch today. The “family 401k” actually doesn’t have any transaction fee to switch from equity funds to money market. To preserve capital I will “sell first” and ask questions later, IF the sell signal is triggered.

The biggest risk to this timing strategy occurs if the sell is triggered, then the market immediately turns around and rockets up. Then in June we may have to buy back in at much higher prices. A possible, but not very likely scenario.

The biggest risk in not taking the signal is that the market gets hammered and we enter a 2008 type “liquidation” environment. Every “investor” remembers how quickly things can go south, and that’s why we firmly believe you have to time the market. Anyone that held GE from 40 to 6 learned a valuable lesson.

If you weren’t a member during the 2008 meltdown, read the original post: http://blog.investingsystems.com/date/2008/07/. Doug actually “rang a bell” and declared “the top is in” at the office at the beginning of 2008 while we were live on the air doing our radio show. It wasn’t until July that we introduced the Members Blog. but here’s the recording of the January 2008 radio show . Be sure to stare at a chart of the market as you listen to get the perspective and follow our comments when the S&P was near 1400.

Now, on to trading stocks…

Yes we are stock traders and active speculators and no matter what happens in the big scheme of things, next week might make for some great trades. The volatility is up and we are seeing extraordinary intra-day swings on many of the picks in the Research Lab. Several days last week, when the market was getting crushed, we saw tons of inverse ETF’s make well over 5% daily moves. We also saw lots of stocks that bucked the overall trend and moved higher, many significantly.

We are stock traders in any environment and have been since stocks were trading in fractions..whew.

Let’s move on. So far in May, with one week to go, there have only been 2 Trade Plans. One got stopped-out and one hit all three Targets. 1 winner 1 loser and lots of “sideline time”. Actually, since we average 10 Trade Plans a month, the “lack” of new plans in May indicated all was not well. A subtle clue perhaps?

So let’s look at the 2 closed trades.

Below you see GTN, a wild speculation, and well worth the lesson on always using stops. The green line is the buy and the red line is the stop, and the yellow circles show the false breakout and subsequent stop target.

Imagine being foolish enough to not have a stop-loss? We didn’t think so.

THOR is our winner so far and the arrows show the Entry and Target 3.

As you can imagine, the main reason that we have not had many Trade Plans this month is due to market conditions and broken charts. In the past 16 months we averaged 10 trades per month. Then something strange happened. As the market got more and more overbought we were getting less and less results form our swing-trade scans. We had reached the top of the cycle and potential trades practically dried up.

Then came the “pullback” and “flash crash”, which resulted is proliferation of “busted charts” and broken patterns.

For daytraders the action has been fine. Day after day the Stock Picks have been a plethora of inverse and leveraged inverse ETF’s, and some like the VXX have made significant moves over time.

Even with the recent carnage, save Friday, we are starting to get some potential trades and are able to identify a small list of stocks that make a great watchlist for the upcoming week.

Here’s a just a few charts we find interesting and will discuss this week on the show.

Now for the good stuff.

Here is our “Focus List” of stocks for next week. These have real potential as you will see when you go through them in your charting software.

AAP
BJ
CATM
DLTR
FDO
HAIN
HAUP
LCC
NOVL
PTV
QSFT
RMBS
SCS
SOLR
TLAB
UHS
WNR
RADS
APKT
VCI
MBLX
SPRD
CSTR
VRX

Obviously this is not a recommendation to buy these stocks. Our system has simply identified them as some of the best you will find at this point. Chart em and see for yourself.

Many members will recognize some of the stocks from the list above. They were picks last week in the Research Lab. CATM and HAUP come to mind as we were following the charts live on the show. Friday’s follow-through on CATM was quite impressive.

I know for a fact that the intra-day scans in the Research Lab will give us a lot more stocks to watch this week. The stocks above simply make for a good watchlist to start the week. We may even find a couple that pass the rigorous internal system and show up as Trade Plans. Keep your eye out for new Trade Plans this upcoming week as we are on the verge of a potential tradeable bounce from oversold conditions.

It’s going to be one exciting week ahead for traders, while long-term investors anticipate the monthly close with baited breath. (whatever that means).

We will definitely be on the edge of our seats…

So please join us at the opening bell Monday morning as we set the game plan for next week and mark up charts of the picks live. As you know, we have recently done some back-end technology upgrades to our system and beefed up our servers. The transition is almost complete and we have several new modules on deck. One of them is the new “Strategy Room”, where we will present short videos that nail down specific tactics you can use.

The Strategy Videos will cover topics such as our scale-trading technique, sweet-spot trades, intra-day entry points and much much more. The upcoming video series for Research Lab members will give you specific techniques you can use over and over to make money trading and avoid the pitfalls.

We will answer all questions and share more on the Live Broadcast next week. See you there.

Have a great weekend and get some fresh air.