Category: Analyses

To trend or not to trend, that is the question

Today we are going to study how trends transition to more or less flat markets and how to position ourselves for the best!

I am sure most of you are already familiar with indicators which supposedly indicate when a market is trending, and when you would be better off sleeping and out of the market.

Moving averages are close to be one of best indicator for that purpose. See that graph of Microsoft with Alligator indicator. Note ADX indicator at the bottom does not indicate too much!

The truth is investors are either having the same opinion at the same time and there will be a trend or investors disagree and market ends up being choppy and overall very flat. So any time that you see what could be the end of a trend, switch to drunkard mode and start counting the steps! If you need background information, please refer to this blog post.

Sure enough you could wait for prices to cross Alligator lines and then that colors are in the right order, … then you may have lost 50% or more the big next move! You need think differently. Don’t worry, I will skip the action-reaction lines for today!

First step if course to detect the end of an existing trend (at least 2-3 weeks long), you can use MACD crossing over its signal for this purpose. See this example with AMD:

What the heck am I supposed to do here? We are obviously leaving a short down trend and we don’t know where market is going to go. Nobody does unless you can dig into the brains of all investors at the same time!

Again we assume the most recent bottom is a lamp post, from where our drunk guy is going to walk northwards, maybe in trending manner or in random hesitating steps. But we know about the objective he can reach within the next period of observation. This is the first dotted line above the candles. In this example, it is 8 steps away and we are going to draw lines every 2 steps.

Now we are ready, the 3-months objective is roughly 55$, you need to use a convenient stop to protect and dimension your trade. See this post for instance. Let’s accelerate the time now!

2 weeks later, objective is reached (8 steps), the drunkard makes it even to the 10th step. From there, market reverses, a new long trend does not really pick, so you can do the exercise in opposite direction:

This time the drunkard does not go beyond 4-steps and after 3 months, you need to give up your short play. Then MACD goes again above signal

We reach first objective within 3 weeks, but this time the trend continues reaching 20 steps. You have successfully mixed together trending and random action!

That’s it. It does not need to be complicated. Don’t forget to choose stocks or indexes that have the capability to trend. Until next time, trade safely!

The boring market report – October 5th 2020

Sorry it has been a while since last post, I have been busy with the Cozy Dragon Research team about their discoveries. Digging in the data, and starting from the fact that Gaussian distribution is a scam for stock market data, many doors keep opening in the way we analyze this data. Exponential distributions are key of course, but even then as we focus on longer time analysis, we find that data is spread is in many populations, themselves are within an exponential distribution! There is therefore a fractal statistical Laplace structure. We can identify clearly what some call the smart money, then the money of everybody, and it all reflects the opinion diversity…

Let’s stop on that and come back to real market, where our goal is of course to make as much money as possible!

Unlike those waiting for Fed money, we want to profit from market meanders. The proximity of US elections, and Trump having caught COVID-19, and … Nothing gives us better indication that mathematics.

We left S&P500 between the last 2 reactions lines, and I told you it was mirroring the end of summer 2019. The move was much more violent this time but as you can see it ended exactly at next reaction line. The weather should be more quiet from now. The trend is of course still very bullish.

Nasdaq is same configuration. Those would wanted a strong correction will need to wait some more!

Our friend Tesla is blocked by a reaction line but bulls are still pushing to go through.

We can not anticipate of course what the many investors have in mind. Maybe Trump will recover from the virus and win in a landslide, in which case, the bull market will continue and take a deep breath after November. Maybe Biden makes it to the White House and many will go short on the market. A down wave is surely to be expected, but the exact timing it is starting is the biggest question. Not just now…

That’s it! Until next time, trade safely.

The boring market report – September 23rd 2020

Don’t worry, we are not there yet, only one big drop on Monday when everybody sold what they have, as the little tiny virus does not seem to want to vanish.

From the long term perspective, always good to look at kagi graph:

A 3-Buddhas top pattern is now obvious, and prices have gone to the ‘yin’ side. As you can see by the average in dotted line, the trend is still very bullish on Nasdaq….

Let’s take a closer look at with candlestick chart:

The first objective is reached!!! So Nasdaq kindly bumps back to north direction. Does not mean it will not go through the floor in next couple of days, that is when you want to go short, but as usual, in intelligent manner, not risking you pants and shirts!

That’s it for today. Busy with other stuff. Until next time, trade safely!

The boring market report – September 18th 2020

Volatility is still quite high out there, so the chances of big downfall are somewhat limited, … but non zero!

The graph of Nasdaq will show it all:

There is a nice divergence with WAD2.0 indicator and my personal indicator indicates a correction is already taking place, which is true. But before taking a position, you need to ponder about the volatility and objectives.

Volatility is still high, but a down move results in increasing volatility. So the best shorts start from small volatility. As said before, volatility and price objectives are closely linked together. 8940 is probably worst case objective but reaction lines (not shown) tell me it is an improbable scenario (at least not in straight line). I therefore favor more horizontal wandering for some time, … until we get exciting news like end of pandemic, or US election, or ????

Portfolio management – the myth of diversification

Continuing the myth busting series, we have now to challenge the way we are proposed to manage a stock or any securities portfolio.

Why are we supposed to diversify our portfolio? Finance people tell us that market is unpredictable, stocks go up and down and having a balanced portfolio allows to prevent wild swings for your money. Think about it for a moment!

Sorry guys, most people want to know how to go from A to B, I can’t guide you!

If some stocks go up and some go down, how performant is your portfolio going to be? Very average! A performance close to zero is probably what they expect you to do. Now you have an objective which is making as much money as you can (don’ t lie!) while having not too much stress, so let’s study the ‘one-stock portfolio’!

This strategy is actually a diversification kind of portfolio, but instead of using stocks from different sectors, … we will use time diversification for a single stocks. How does it work? Easy! Consider a stock for which the long term trend is up, for which you know there a sunny future, … Could be some AI, robotics, cannabis(?), …

Let’s consider Adobe Systems for the example. Adobe makes multimedia and creativity software products, digital marketing software. Adobe is also known for its Adobe Flash web software ecosystem, Photoshop image editing software, Adobe Illustrator vector graphics editor, Acrobat Reader, the Portable Document Format (PDF), … A long history of innovation and most likely a brilliant future ahead.

First step: Let’s look at the monthly chart:

Trend has been up for very long time, I do not advise to invest right now, but you see the idea. Start investing the first day of a month a number of stocks that matches your risk sensibility. See previous blog posts here or here . Beginning of next month, check where market is and how much money you still have at risk. If stop has gone up, voiding your risk, add extra stocks so you still have x$ at risk for the following month. You are accumulating by averaging up!

Second step: we diversify with the weekly chart.

We are closer to trading now. Add additional stocks to your portfolio when your trend indicator (a MACD in our example) confirms the price crossing over the red stop line. Use same criteria for line sizing! Exit those specific line when indicator crosses down its signal (don’t wait for the stop!)

Third step: we are going to boost the performance by trading the daily chart. Ideally you want to do that with CALL and PUT options, while considering your risk is 100%, should you misinterpret your chart.

You need to check momentum and volatility before entering your position. You need to master of course option trading, idea is of course to use here rather long term options. Exit when any of the indicator tells you to go out (stop or momentum or volatility). You may also use a stop much closer to the prices. When trading the down side, you are also covering for the down swings of your monthly positions so don’t expect huge gains these months, you are therefore also achieving portfolio volatility control via time diversification!

We like very much this strategy. We advise you to test it in details before trying it out for your portfolio. It does not work with all stocks. The dividends collected part of weekly and monthly lines are of course re-invested.

Note we have had this Adobe stock portfolio for real for the last 10 years. The yearly performance has gone to the 3-digits area a few times!

That’s it. Until next time, trade safely!

Short Tesla and Buy Ferrari?

Tesla may have gone up pushed by a whale and bulls have bought hysterically the stock. But it was stopped… by a reaction line! Just kidding of course, but it is worth noting that the action-reaction theory works whatever market conditions to predict somehow where market hiccups or changes direction!

Market fundamentalists estimate the real value of Tesla to be around 240$, meaning it was somehow well priced beginning of July before acceleration. Shorting Tesla is an interesting bet but be careful, trend is for now up and very strong, volatility needs to decrease first so it can go up for a downtrend!

No need to say I am very bullish on Tesla in the long term but they need to produce and sell more! Back to basics!

Ferrari on the opposite did not benefit too much from recent rally, a small 50% gain! Because of small volumes and many gaps, I am working on the 3-days graph! Stocks still bumps on random walk lines and Ferrari was also stopped by a reaction line. Ferrari is a totally different business: you order one now for 100k$+ and you will be delivered in 2022! The correction is likely an opportunity to get extra stocks if you can not afford the car itself (even second hand units can be more expensive than the brand new ones!)

I will follow this idea in coming weeks: short Tesla and get more Ferrari stocks with the gains! Careful! Market needs to be re-assessed with each new data and I may totally change my mind. Market is not ready for now.

That’s it. Until next time, trade safely!

[Big Blog Theory] Standing at the crossroads…

Browsing through the comments, I see many readers are frustrated because this blogs looks cool, maybe the perfect blog, although I never planned for that! I assume those readers have followed some training on blogging and are now at the crossroads: should I blog or should I go?

The very first thing you need to do after training, whatever subject, is to challenge what you have learned and especially the assumptions. You are not blogging to have a cool blog, you are blogging to connect to other people, so you need to take interest in them, and talk to them in efficient manner. Video may be too intrusive, emails lost in spam folder, … Subjects that usually interest people are money (this blog is primarily about making money), power and sex (health by extension). If you want to blog about cars, better talk about Ferrari (this blogs talk about Ferrari too!) than Chevrolet Volt!

Then, there is only one book you need to read. It is this one. The extra short summary is listen (or read forums for instance), discuss what matters and leave others a little better. I am sure you already feel a bit better after reading this!

If you are interested in the subject, I will post a few technical articles about digital marketing by a dedicated reader analyzing this blog!

Again, no, I will not post videos. When you are reading this blog, you ought to sit down and think quietly about what is written. I can not invade your space. I will be listening to your comments. I will meet new crossroads for sure but I am happy to share my journey!

What about a little music now?

Talk to you then!

The brainless society, the art of feeling nowhere at home

Philosophy and mathematics today for a change!

Should I mention Einstein, Laplace, Isaac Newton, … then you tell me these were geniuses of their time, with IQ far above average. They knew how to use their brains to solve some problems. Then maybe you would continue the list by quoting Warren Buffet, Bill Gates, Mark Zuckerberg? Right? Wrong! These are not geniuses. They are hard workers, use their brain to reach some objective, and have been helped by chance. A lot! They were at the right place at the right time to get money their way…

If you want to look at the work of an incredible brain without digging into formulas, you need to read that book. Author introduces a theory that Venus began as a brilliant comet ejected by Jupiter around 1600 BCE, wreaking chaos on Mars and Earth … For this objective, he has analyzed thousands of documents, we would call big data today, then produced a theory that unifies and matches all the stories shared until Roman empire at least. He may be wrong, but the attempt is definitely brilliant!

Let’s look now into the future! Who will be the brains of today that will be remembered in year 2500? They are called Deep Blue, Watson, Sequoia, Titan, MilkyWay-2, and their IQ are measured in Peta Flops, i.e. the number of operations they can make each second. The software on top of these super computers runs Artificial Intelligence algorithms, attempts to find repeated patterns in big huge amounts of data and appears intelligent because pattern from the past may produce similar results in the future.

Now imagine one second that such computer manages to prove that the straight line is not the shortest path between two points even in our euclidean space. Will you dispute this theory? Not a chance… Sooner or later, we will give up thinking and let the machines think for us. Sooner rather than later… look how advertisement pushes you to buy things you don’t need!

This is where we start having problems. Dividing the investment population (including robots) into bulls and bears is already very complex but completely pinpoints a divergent view between machines and humans. People are usually bearish or bullish on a stock, people change their mind, but if they have no opinion, they are not trading the stock. Bulls are bears can therefore be represented not by one but 2 exponential-like populations! If you are bull and suddenly express some concern, you are immediately flagged bear, but you can be drawn back to bulls territory in violent ways by hard facts. The exponential model fits that description.

For a machine, this is not possible. There is an average, and the deviation compared to average is measured. When average is positive, machine is bullish. but not in an exponential way. It is only parabolic, under the influence of Gauss theories. As explained in previous blog posts, population at the average is close to zero and some bulls and bears may feel totally not included in this model.

The Gaussian parabolic model is used everywhere where money is engaged. The Laplace first distribution exponential model (incidentally, the Gaussian distribution is Laplace second distribution, but history forgets) is barely used though it better describes nature and human behavior.

You don’t believe me? Let’s consider your life insurance. Your insurer has defined profiles, keeps asking question about family, your work, your habits, … and you are classified as profile that entitles you to benefits pending whether you are daredevil or living an hermit life. Too risky or too safe is suspicious. The Gaussian curve averages it all, including the extra small font section in your contract, and when you think you could profit, you are just outside the dotted red parabolic curve! From another perspective, if you fit exactly the average, you are probably lying or are the boring kind.

Not everything can be fitted into Gaussian distributions. If you are managing a company designing products, you know you should focus your efforts on features that leave the competition behind. But spreading the budget in Gaussian manner across projects may be a very bad strategy, putting too much stress on critical matters. The spreading should look like this graph!

Pierre Simon de Laplace is still heralded a genius by many, including me. He has worked 2 distributions, one is akin to industrial processes (the parabolic one promoted by Gauss) and works perfectly for that purpose, the second one is a better fit for nature and human behavior. There may be still others…. Being in the wrong model makes you by default outside your own model and you don’t feel good at home! So wake up your brains, we need the world to be a safer place, we have enough to cope with cataclysms and pandemics and we want to have theories, disputes, …. because that is life!

Pierre Simon de Laplace

That’s it. Until next time, trade safely!

The boring market report – September 4th 2020

It had to come, it is there at last. The correction!

Yes, we can take this opportunity to go after Tesla or Apple, …. but we need to wait for markets to go back up again.

The current correction mirrors a messy period from August 2019, as highlighted by the orange circles. Of course, the trend is still up, but market will continue to be jumping up and down until next reaction line!

Situation is a bit more tricky for Bitcoin. Price targets are reached as usual on warning line levels, you just don’t know which one prices will stop at. Price target for the down move are 10250$, 9400$ and 8600$. Up trend will undoubtedly resume then as many professionals advise to buy some to protect yourself from the (virtual) printing of dollars by billions!

Gold is still above its random path, so we assume horizontal consolidation for now and we keep buying some more, for the same reason as Bitcoin.

That’s it for today. I will cover new subjects over the next weeks, from portfolio management to more technical or philosophical subjects. I will propose a tiny portfolio (10k$, 3 lines or technical volatile stocks) which will be updated on weekly basis.

Until next time, trade safely.

Secret new indicator makes trading easier!

When it comes to teasing potential subscribers for a newsletter, whether free or not, authors always mention a secret new indicator which detects the 10-baggers, stocks that can multiply by 10 in next few months. How disappointing when you find out it is about crossing the 1-year high! Such indicator indeed just does not exist, because stocks prices are moving because people are buying aggressively and not the opposite. We can predict with some accuracy where market has chance to make tops and bottoms in the near future based on volatility but exponential growth predictions can not be relied upon! Be cautious!

Brought to you by Cozy Dragon Trading Research Labs is a single new indicator that provides a sense of direction and timing never seen so far. It does not have any name so let’s call it Secret Indicator (SI). Let’s take a look at it!

Overlaid on price is our random walk path and just below the SI. If you are looking from the buy arrows, SI goes up keeps going up until the very day of trend reversal. Zero crossings of SI or its histogram can be used to trigger the buy action. There are a few finer rules to make the analysis fully reliable.

Please compare with RSI or STC indicators just below, causing many buy and sells orders because of whipsaws….

We can not disclose the formula behind this indicator. But we will use it in background for our market analysis!

That’s it for this back-from-vacations message. Until next time, trade safely.

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