We talked about the short squeezes, which if coordinated, can lead to strong bull markets. This is usually the case when prices reach an area around the one year high, which is seen as resistance, and so many are shorting to benefit from a price reversal. This works from time to time, but the back testing does not validate it on markets, all stocks, … so be careful!
Coming back to our random market model, it is easier to pick up a trend when it starts, and drive it until it wears out. That is what I am doing with Bitcoin and Etherum. Bitcoin has walked back from its recent top to the random walk path (RWP) and is ready to pick up again. MACD is still largely positive, no reason to exit for now. A partial profit was of course welcome in January.
Etherum is even stronger. The RWP has not even pointed south one day! I don’t know if it will go to 100k$, but 1800$ is surely next target in the short term!
Tezos might be a candidate for near future. MACD is in positive area after a divergence, so just monitor!
There are two crypto-like stocks (in terms of performance). One is of course Tesla and the other one is …. surprise…. Ford!
In spite of never ending pandemic, a looming economic crisis, everything is bull, except maybe dollar and gold. Strange, isn’t it?
Sorry for silence other the last two weeks, urgent business to attend. Anyway, while Bitcoin and stock markets have been more or less flat, then emerge the stories of Robin Hood young traders who want to bring down selected Wallstreet funds because they have huge short positions on their specific stocks. Let’s take a look!
While it is absolutely ok to use same tools as big funds, playing against the big boys in frontal MMA fight will definitely end badly. Why? Because the big boys are making the rules! If you are making insane profits and they are making insane losses, one will claim you are working against the highest interests of the nation (or any bullshit like that) and deserve spending 120 years in jail. We already see the central banks being very unhappy about usual folks making money (and not that much actually) and planning to ban the use. See example of India here. I am still bullish on Bitcoin, Etherum, and many others but the situation must be monitored very closely.
We can make lots of profits by using the methodologies already explained on this blog. Don’t follow blindly the Reddit forums. If you are ever asked why you have Gamestop in your portfolio, then just show the chart:
The random walk path was bullish, the prices objectives were some good distance, … a no brainer case! Of course, don’t forget to exit while you have huge profits waiting.
When does the WallstreetBets game stop? I will tell you. As long as they disturb only a few selected funds and push some stocks up, they can survive. But if suddenly, Robin Hood decides to short BlackRock, then it will be a different story!
That’s it for now. I will come back later. Until then, trade SAFELY!
In part 1, you have learned how to identify key market turning points, which we have called Swing Point, shortened to SP. Swing points follow peaks and troughs in alternative way. Then we looked at short term and medium term SP’s. The last one are the ones we are interested in for drawing pitchforks.
Of course, the first question is why drawing pitchforks? Pitchfork is an interesting tool in the sense that is allows to identify trend in easy and blunt manner, no discussion is needed; then it gives buy and sell signal; it also measures the volatility! In short a dream tool, this is my Christmas gift to readers, but mastering will require some practice!
We are going to play with Exxon Mobil today. On the following graph, I have indicated the medium term swing points. Again take time to practice a bit here, because then it becomes (relatively) more difficult.
We are going now to number the SP’s, starting from the right of the graph, and in backward direction from 4:
Tough, isn’t it? Then your charting software should have a pitchfork tool. Select it and select the swing pints 1, 2 and 3. You should get something like that:
I am not going to explain the geometry used to draw the pitchfork, there are plenty of sites that do this. Let’s zoom instead on price action:
The green light is the median line, the red ones are the MLH (acronyms defined by doctor Andrew), are parallel to median line. After SP3, you notice that prices seem to adhere to the upper MLH, that is a sign of strength! At point 4, you can easily observe that price have not touched the median line, there is a gap between SP4 and median line, this is an other sign of strength and, according to A. Andrew, the minimum price objective for this situation is the price at SP3! The pitchfork is down trending and price have already exited the pitchfork even before SP4: this is the buy signal! We are all set up. We need to verify one last thing, the pitchfork made on SP’s 2, 3 and 4 should be trending up! Let’s draw:
Everything is perfect. We will look in future post the rules and how to find out where prices might be going, but let’s use for now the minimum price objective, so you need to place an order with stop at SP4 and objective at SP3, meeting your gain / risk sensitivity.
How did the trade go?
The min objective was reached only a few days later, then price has gone up since, landing currently a cool 33% at the time of writing!
This was your first pitchfork trade. Next time, we will look at the major rules to use pitchforks in safe and efficient manner.
Anaximander of Miletus, a Greek philosopher who lived in the 500s B.C.E. speculated that humans must have descended from some other type of creature, most likely fishes. This idea became later a scientific theory when Darwin wrote about it. But it still is a theory, because these days, no new species arise on earth, maybe man will change into superhuman with exoskeleton and additional processing power, but still is a man, form fit and and function wise! A counter theory is that at some point in time, a disruption occurred, allowing for instance more radiation from the Sun or stars on brain cells, that allow the monkey to become a different specie: the man! Don’t tell anyone I told you about this one ;-))
When a company changes so that it is not the same as before, because it has been eaten by a bigger one, or they invented a disruptive technology, it is not usually a smooth process. The new company may not have children (or clones) on its own because the market timing was missed. Or it may thrive in unusual manner and explode, what we call bubbles. This is exactly what we can observe and measure on our charts. Well, seems I have demonstrated life on earth is actually the output of a random process!
If you want to make money with trading (I did not say investing which is an other subject), you need board a ship that is willing to go northern direction. A disruptive technology is the right vector to use. Because, when something has the potential to disrupt, then it is attracting attention of big money, and you need to follow this track. If you are sticking to old business, then your gains may not outweigh your losses.
While I am it, instead of complaining of inefficiency of government in managing virus crisis, take time to think about disrupting something in a gently way. Become expert in one domain, then explode it with new concept, and sell you concept to make big money!
Now let’s look at the market and their disruption potential!
I will explain in future post about the usage of pitchforks. When you master many trading tools, you should change from time to time to avoid analysis being a boring task. So S&P500 escaped from a down trending pitchfork, thereby generating a buy signal. The MACD at the bottom being in positive area, and price being above moving averages, this was a good signal to check whether index was waking up from the horizontal move. Which it did! The slope looks good, we can stick with the market. Careful about any divergence with MACD… nothing to fear for now!
I am more concerned with Nasdaq. I is right on the 3-months objective and MACD is now lower than beginning of September. This is a divergence! Should you hold major index contributors, like Apple or Facebook, would be good to watch closer to market behavior and secure some gains!
Bitcoin is still pleasantly flying in the 10R area, 10R means it is 10 times the Risk I took when I entered beginning of October (stop under yellow zone). I have taken partial gain and will come back to it later. As long as MACD is positive, I am keeping a small line so I won’t miss out the beginning of next rally (the famous FOMO) and then I will add more to the line when the rally is confirmed!
Telsa has landed (pun intended after Starship issue!) me a cool 40% of gains without leverage. Same divergence as Nasdaq. I will wait lower!
That’s it! Until next time, trade disruptively but safely!
We begin a series of posts dedicated to newbies in trading. I wrote a few times, there would be no such posts, but of course I will take radically different approaches from other web sites. Again, I only target methods of trading that makes sense for those with small portfolio, so there is no need to spend too much time on candlestick theory other than a few key information.
Trading with a pitchfork sounds weird, but it is one of easiest and most reliable and profitable method… providing you know what you are doing. The second part of the sentence is exactly what is missed on some popular sites! Pitchfork trading is usually compared to channel trading, which it can be, but that is very poor usage of this wonderful tool!
Before we introduce the tool, you need to first major in peak and troughs analysis. Don’t go away just yet, it is pretty straightforward with a little practice. Peaks are … peaks and troughs are … just troughs! The major ones are usually easy to identify!
Let’s start immediately with an exercise. Can you point peaks and troughs on this Netflix chart?
Maybe you ended up with this, peaks with green ‘P’s and troughs with yellow ‘T’s
If you did not end up with same collection of peaks and troughs, that is fine. We are working with random system, you are allowed some deviations!
There is one important rule is that peaks and troughs must alternate: P – T – P – T – ….
Is there any way to automate the discovery of peaks and troughs? Answer is yes, and there exists more than one. But in order to respect previous rule, you will sooner or later meet some ghosts!
One way to to identify a trough (same for peak) is by using a two steps approach, first one can be automated easily, second one is more complex!
First step is to identify short term ‘swing’ points (SP), generic term for peak or trough. A swing point for a trough is simply a day where the low of the day is surrounded by two higher lows on each side. Example:
A medium term trough swing point is surrounded by one higher low short term swing point on each side:
Easy, isn’t it?
The medium term swing points will be the first ones of interest when playing with pitchforks.
Before I let you think on your own, remember the rule above, swing points must alternate tops and bottoms. But sometime, you will be missing a medium term swing point with the proposed method, so you know there is a ghost swing point!
Next time, we will look at how to anchor pitchforks to swing points
Sideways markets are the ones that hurt most traders because trend indicators fail miserably, stop are too far or too close, and those playing with highs and lows are punished when prices go out of the horizontal channel. As I warned in last post, those wanting to short Tesla had absolutely no chance going downwards. So it went up!
Bitcoin has also continued its rally towards new highs, the 2020 performance is now close to 200%! With such performance, you can trade only a small line of BTC and keep your money in safe harbor!
Speaking of safe harbor, Gold is now on the lips of many value investors because of dollars, euros, … printed by tons. Gold has been going down recently, stopped 8 steps from the stop, then went through… If it stops in 3 steps (1680$), we will have a nice hidden divergence, which will likely push Gold towards new highs!
Indexes like Nasdaq are still moving sideways. Volatility is pretty much like Tesla, quite high. So the northbound exit option must be privileged.
Last but not least, cannabis is waking up at last. Look at that beautiful Aurora Cannabis chart:
That’s it! I will start a new series of posts for beginners or almost. We will start by taking a fresh look at Andrew’s pitchfork. Until next time, trade safely!
Today we will take a quick look at most popular, most used indicator, but I have never understood why traders give it such value! Let me give you some tips to make it interesting. We are going to use Facebook for our study!
On the graph, you can see RSI indicator at the bottom, just below our customized MACD. It looks very noisy especially with default parameter 14, but since it is an oscillator (as opposed to trend indicator that MACD is), you may spot better synchronization with market tops and bottoms. If you can’t see, move your seat away from your screen, a bit more, even more… can see now? Good… The blue lines indicate the overbought and oversold levels, which, as you can see, are not reached very often!
So what’s wrong? The problem lies in RSI formula:
RSI = U / (U + D) where U is average of up moves in last n days, and D average of down moves over same period.
As I have previously demonstrated, market is a random and existence of trends is the proof of its randomness. So where is the link between this formula and random nature of market? The calculation could give similar results whether all the up days are consecutive or not, so with totally different market configurations. So, yes, it may work if you are very short term trader (a few days at most) and work out the divergences, market tops and bottoms, and decide what to do about it.
Could we modify it for more interesting usage? Of course! We can even use it for trend trading. Just replace delta between today’s and yesterday’s close by the delta measurement on your favorite moving average!
Now look at this new indicator. Buy signal is generated when improved RSI (iRSI) crosses above 50. You will notice it goes straight to 100 and stays then there until exit time. Easy, isn’t it?
As usual, use a stop to secure your gains. You may also define overbought and oversold areas at +30 and +70 if you want to stay with the trend as long as possible. False signal do exist of course, and there are 2 on the graph; the moving averages tell you not to go!
In last report, I was bearish for the short term, all indicators pointing in same direction: south! Now there were the US elections, and then yesterday the possibility of the existence of an efficient vaccine. Please note that Joe Biden is not formally elected and the vaccine testing is not formally finished! But anyway, markets have decided to turn back north after 2 steps to the south. This happens from time to time, stops are there to save us from disastrous situations.
Let’s look at Semi-conductor index first. The divergence on MACD should have driven the index towards the South. However volumes (see previous post) did not increase on that scenario, so it was a dead end.
Where are we going next? I need to show the steps in the opposite direction!
The first objective has been reached already and attempt to go beyond has failed yesterday. Short term traders may short this situation but the long term is up so you may want to stay on board for now, going to 3000. 5G should push in this direction!
Same situation for other word indexes, no additional comments.
Bitcoin has reached and gone beyond initial objective, hope you are part of the trip! (See other comments on previous post)
That’s it for today. Until next time, trade safely!
I have talked many times how the volume of information (fake or real) continuously unloaded onto media (social or not) is actually misleading (or trying to) your trading activity, just as using those brackets in the text! Trading the mathematical way just helps you with information overload.
You may have noticed I have not talked the actual volume data so far, one reason being that it is not freely available for all the supports we want to trade with. I am going to show you how to simulate this information, and how to more easily analyze volume information.
Let’s play with CGC – Canopy Growth Corp, a company involved in Cannabis business (just to attract search engines!). Volume is usually display in form of histogram at the bottom of your graph, with up days in green color and down days in red color.
There seems to be some outstanding spikes here and there, these are usually linked to specific events, could be quarterly results, and dividends payments, or law changes, or market important information. These can be some good entry points in a trend, especially if you missed the beginning.
Before we jump to more detailed analysis, if you consider Bitcoin or even some sector index, you may not get this information easily, or you may need to pay for it. So it would be good to simulate it, even if we would be missing the actual scale information, i.e. the real volume information.
I have already mentioned in WAD2.0 post that Williams Accumulation Distribution can be calculated without volume information
1. Calculate True High (TRH) and True Low (TRL) TRH = Current bar high or precious bar close, whatever is higher TRL = Current bar low or previous close, whatever is lower
2. Calculate current bar Accumulation/Distribution: if Current close is above previous close then AD = Current Close – TRL if current close is below previous close AD = Current close -TRH if current close = previous close then AD = 0
The absolute value of AD is the simulated volume. Let’s look at it:
You can see the spikes in volumes are located at the same place, more or less. So now we can use this calculation to get volumes sort of information for Bitcoin or Gold or whatever… Good, one problem fixed! On top of that, I can even make it smoother with synthetic bars as explained in same post mentioned above!
Now you would like to know if volume is really going up or down in more accurate way, maybe something you can even automate. As a reminder, this is linked to your observation period, you will to consider parameters that make sense to you. The solution is straightforward, let’s apply the good old MACD to volume.
Whaouh, we can see things now! Note I used the 10-days synthetic volume here to smooth things out and a MACD with 40-80-9 parameters. Volume does not tell you the trend but you know a trend is starting or getting stronger if volume is going up! On the right side, you see the recent rally is helped by strong volume increase, just get in the market and then use stop or objective or whatever strategy to get out. Volume will indeed go down when the trend cools down, and then volumes will go up again but it might trend continuation or trend reversal (see first arrow!)
Now look at this Bitcoin chart:
See? Each rally is preceded by a signal cross over MACD. Confirmation by the moving averages. Easy, isn’t it?
Looks like the markets do not welcome this second coronavirus wave, not the wave itself, but rather the bad and worst decisions made by politicians! You should never panic because of sudden but announced meltdown, and again stick to our sound models!
S&P500: this will be the last time I am using these reaction lines (drawn end of March!), as the accuracy for top prediction is now failing. No big deal. Always double checking what the random walk model is telling me.
Following previous post, you see the MACD has been under its signal for a while, indicating downside pressure. First objective is 3094, due after the US elections, so another 10% to go. If might go further down, pending on lock-down conditions, as they say. The truth is that the market will go up if there are buyers, lock-down or not! If investors think all the GAFAM will be at bargain price when S&P500 reaches 3100, then market will resume up trend.
The SOX (or Semi-conductor Index) usually anticipates what’s coming up. No light to expect for now, as there is a divergence with MACD.
Speaking of Apple, the kagi graph is showing interesting things. A 3-buddhas top appeared by mid-September but because of strong uptrend, I deferred my idea of shorting Apple. Then a double window bottom has formed, a strong indication of further uptrend. Markets may be in bad mood for next few days but quarterly results may bring back confidence! Remember that the recent growth of Apple is before all due to buyback, a gift for shareholders who don’t get too much dividends otherwise. You might be bullish because of the upcoming 5G trend on smartphones, but this stock is overvalued somehow. The question is compared to what? There is no absolute reference!
Gold has reached its downward objective end of October but may still go down some more, which is very good opportunity to buy. Rationale: as countries are printing more money by tons, the value of money goes down, and Gold which is limited in quantity can only go up!
I wrote two weeks ago you should look at Bitcoin. It has gone up almost 20% already. On the way to 100k$!