Traders' Library Blog

Applying IRSTS Swing Trading Rules

My IRSTS seven-part series published in Stocks & Commodities magazine has provided the components of the indicator rules for a swing trading strategy, from color-coding candlesticks to smoothing oscillators to creating an expert system. Now that all of the components have been detailed, here's how you can put this swing trading strategy to use in your trading. This seventh and final part of my series on indicator rules for a swing trading strategy (IRSTS), I will show you how you can apply the IRSTS rules to make trading decisions.

Enter a trade when these eight conditions are met:

1. The closing price breaks above or below the eight-day exponential moving average (EMA)
2. A valid candle pattern is visible at the last turning point
3. The turning point is close to the volatility band or an average
4. The expected zigzag wave is a wave 1 or 3
5. The expected price move is supported by oscillators
6. Support & resistance levels are in favor of the planned trade
7. Closing price breaks through the last possible trendline
8. The risk of the trade is within acceptable limits.

The basic Chart template

I use the following elements on my charts:
A standard candlestick chart with candlestick patterns at selected turning points
A 50-day simple moving average (blue)
A 100-day simple moving average (green)
A 200-day simple moving average (red)
A dotted orange eight-day exponential moving average (EMA)
An upper and lower volatility band (dotted magenta line)
A percentage- and volatility-adjusted high-low zigzag (light blue)
A Bollinger Band %b indicator in the lower subwindow (light blue)
A standard stochastic oscillator in the lower subwindow (dotted red).

Stocata S&P 500 Analysis: October 26, 2013.

Last week I wrote: 
"Last week I wrote "Using basic technical analysis and looking at the indicators there is a chance that we will make another higher wave 3.7". I would have preferred the start of the long term correction, but no, we have more or less as expected, a new higher high wave 3.7. But like the previous week I can only repeat "Looking at the long term, we must expect a long term correction down". Every week that passes this reaction will come closer. A good sign would be if next week there will be no higher prices anymore. My opinion, still moving higher would be an extreme overshoot of the long term up move. Wave 3.7 is I believe already one step too much, but reality is we are still in an up move. For the well being of our open short position, the start of the correction next week would be nice. I see 1750 as the next closest resistance level".

The index moved above the resistance around 1750. The move is small enough to keep our short position open. Maybe now we are looking at a small double top for the start of the down move. The index reached the upper side of the volatility band. Indicators are overbought. I am not yet giving up our short position. The index is far away from all averages. The question is how much longer before a reaction will start? Personally I suggest to close any long positions at the start of a down reaction. Because this reaction has a good chance to become a long term down move. Do not wait too long hoping that the up move will continue! I would consider a move below 1730 as the start of a further move down. If this is not yet happening the coming week(s), you should of course hold on to your long positions.

Sylvain Vervoort   http://stocata.org/

Stocata S&P 500 Analysis: October 19, 2013.

Last week I wrote: 
"We got what we expected, but in inverse order. We first broke the up going wedge through the low side. But this was not the clear start of a down move, because the index moved right back into the wedge pattern towards our expected up retracement of 1705 with a high of 1703. Using basic technical analysis and looking at the indicators there is a chance that we will make another higher wave 3.7. Looking at the long term on the other hand, we must expect a long term correction down. This long term turning point is hard to estimate in the short term. The message is: watch your long positions closely and take fast profit on new long positions. But my advice is not to take long positions now. Chances for a long term profit are too small".

Last week I mentioned "Using basic technical analysis and looking at the indicators there is a chance that we will make another higher wave 3.7". I would have preferred the start of the long term correction, but no, we have more or less as expected, a new higher high wave 3.7. But like the previous week I can only repeat "Looking at the long term, we must expect a long term correction down". Every week that passes this reaction will come closer. A good sign would be if next week there will be no higher prices anymore. My opinion, still moving higher would be an extreme overshoot of the long term up move. Wave 3.7 is I believe already one step too much, but reality is we are still in an up move. For the well being of our open short position, the start of the correction next week would be nice. I see 1750 as the next closest resistance level.

Sylvain Vervoort   http://stocata.org/

Stocata S&P 500 Analysis: October 12, 2013.

Last week I wrote: 
"There were rather volatile moves the past week, closing just a bit lower than the week before. The low price of the week came already close to the 100 day average and the 61.8% Fibonacci retracement. The index closes above the PP monthly pivot level, above the 50% retracement and again above the 50 day average. What to expect next? Looking at the weekly chart moving inside an up moving wedge, I would expect a downward break out of the wedge, but this may take a few weeks more. For the short term I rather expect some up retracement towards the upper side of the BBS band around 1705-1710".

We got what we expected, but in inverse order. We first broke the up going wedge through the low side. But this was not the clear start of a down move, because the index moved right back into the wedge pattern towards our expected up retracement of 1705 with a high of 1703. Using basic technical analysis and looking at the indicators there is a chance that we will make another higher wave 3.7. Looking at the long term on the other hand, we must expect a long term correction down. This long term turning point is hard to estimate in the short term. The message is: watch your long positions closely and take fast profit on new long positions. But my advice is not to take long positions now. Chances for a long term profit are too small.

Sylvain Vervoort  http://stocata.org/

Japan is a Train Wreck

The latest insane policy to come out of Japan is that they are going to raise the countries’ sales tax from 5% to 8%!

Yes, the Japanese economy is starting to grow. But so is inflation.

Yet Prime Minister Shinzo Abe says it is needed. The New York Times reports that he is “citing the need to “maintain confidence” in Japan’s fiscal health and pay for the country’s growing number of elderly citizens.”

From the NY Times:
“If we raise taxes now, would consumption slump, and would the Japanese economy sink back into the deep valley that is economic morass and deflation?” he said. “I pondered these questions until the very end. But there is no road left for us but to grow our economy and to rebuild our finances at the same time.”

By combining a tax increase with government stimulus, Mr. Abe is signaling to global investors that Japan will start taking concrete steps to rein in its colossal debt and that it is prepared to take ample measures to shore up the economy.

Earlier this year, national debt topped 1 quadrillion yen, or $10 trillion, for the first time — more than twice the size of Japan’s economy and larger than the economies of Germany, France and Britain combined. That level of borrowing raises concerns that investors could one day lose confidence in Tokyo’s ability to service its debt, which could set off a crisis with grave consequences for the global economy.”

This will fail.

Yes, the government needs more revenue. But raising sales tax will lead to less sales.

I have a principle. If you tax something, you get less of it.
The principle means that there will be less sales as a result of the tax hike. This means that there will be a near recession coming in Japan after that tax hike.

I’ll monitor the situation closely to see if the staggering of the economy will create a trading opportunity. Normally, I’d be looking to sell the yen, Japanese stocks and buying Japanese bonds.

I’ll keep you posted!

  Notes    

I’ve never spent very much time in Japan. The weather sucks. It seems like it is always cold when I am there.

Yet, there, in the distance, is the magnificent Mount Fuji. I find my heart leaps every time I see that beautiful mountain.

I love Japanese prints by Hokusai and Hiroshige. I love them for their subjects, color, design, and odd perspective.

Few people realize the impact these prints had on western art.

I saw a remarkable exhibit at the Vincent Van Gogh museum in Amsterdam.

What they showed was early paintings by Van Gogh. What was remarkable were his copies of Hiroshige prints. He literally learned to paint largely from copying Japanese prints! Once you know that, you can start to see the influence even on his later work. Clearly his use of color and texture are very different from the Japanese prints but note that his perspective is very similar.

It gave me a completely different perspective on Japanese prints and Van Gogh. I love them both and the exhibit opened my eyes to a new reality and actually deepened my appreciation of both.

Why The Market is Like a Texas Sheriff

I had long hair and was driving a Volkswagen van. Yep, a total cliche of looking like a hippy. Well, I was a hippy so I guess that was to be expected.

I was driving as fast that that old 1957 microbus could take me which was not very fast.

All of a sudden, I heard the sound of a siren and saw flashing lights in the rear view mirror.

WTF!

I'm not speeding! My VW can barely go the speedlimit let alone speed in West Texas!

I pulled over. The cop got out and sauntered over to my window.

"I want you out of my county right now. Don't stop driving til you get out of my county.," he said succinctly.

I mistakenly blurted out, "But I didn't do anything!"

"Your tail light is busted."

"No, its not!" and I got out of the car and went to the back of the car. The tail light was fine.

He sauntered back, stopped for a second, and kicked out the tail light.

He blandly looked at me.

"Thank you, sir, for alerting me to my busted tail light. I'll get it fixed in the next county!"

The point: you can't fight the market. No matter how stupid, manic depressive, compulsive, or just plain wrong it is.
It will always win. It is too big to beat.

Our job as traders is to simply look the market plain in the eye and say, yes sir, I'll go short XYZ. Yes, sir, I'll go buy some ABC.

That is the way to make money in the market.

Notes     

I was in Hong Kong last week on business.

I was staying at the Hyatt Regency in Sha Tin, which is on the outskirts of Hong Kong.

Across the street is the Sha Tin Race Course. This is the secondary track in Hong Kong.

The biggest race course in the world is right in the middle of Hong Kong. It's called Happy Valley. Betting here is crazy!

The amount of money bet at Happy Valley in a year is more than all race courses in the US combined! They love their racing here.

I love Hong Kong! I love just walking down the streets because of the great energy on the streets. I've only felt that in two cities, Hong Kong and New York. Partially it is the jostling of people on the street. Partially it is the focus of the people on the street. I always feel that Hong Kongers and New Yorkers are on their way somewhere to accomplish something important.

Is this a great tourist town? Not if you want to go to museums. This is a city all about the living. Some people believe this is the best eating town in the world.

Stocata S&P 500 Analysis: October 5, 2013.

Last week I wrote: 
"Last week I concluded: For the coming week I do expect a further correction towards the R1 September pivot and 50 day average support. The low and closing of the week ended very close to this R1 pivot support, the 50 day simple average and the low side of the up moving pitchfork. Normally there will be some retracement now, but for the coming weeks I rather expect a further move down to the 100 day average and the low side of the BBS volatility band around 1650. At that level we must expect some retracement".

There were rather volatile moves the past week, closing just a bit lower than the week before. The low price of the week came already close to the 100 day average and the 61.8% Fibonacci retracement. The index closes above the PP monthly pivot level, above the 50% retracement and again above the 50 day average. What to expect next? Looking at the weekly chart moving inside an up moving wedge, I would expect a downward break out of the wedge, but this may take a few weeks more. For the short term I rather expect some up retracement towards the upper side of the BBS band around 1705-1710.

Sylvain Vervoort   http://stocata.org/

Why The Fed Will Not Taper Soon

The market was shocked last month when the Fed declined to cut their monthly bond buying. The Fed has basically said that the economy, especially the labor market, is not strong enough to stand on its own feet. Inflation is low enough that they feel that they can safely continue to keep money supply growing.

The market had felt that the economy was doing well enough to cut back the stimulus. They were wrong.

After the Fed's decision to not taper, the market thought that they would start the taper at their next meeting.

I'm coming to the conclusion that the Fed will not taper soon.

The current shutdown of the government will likely go on for another week or so, perhaps longer. The debt ceiling will be supposedly hit on October 17. As the shutdown continues, it starts to run into the debt ceiling. Right now the debt ceiling is not on the radar screen of the Mainstream Media. Only the shutdown counts right now.

But the longer the shutdown continues the more likely it will be lumped together with the debt ceiling fight into a Battle Royale about the role of government and spending policy.

I believe that they will find a solution at or about the date of the debt ceiling but I am afraid that both sides are currently digging in their heels and that will lead to a brutal fight around October 17.

As you know, I pay a lot of attention to seasonal price tendencies. This year, the normal seasonal calls for a 5% decline in October. The fight over the debt ceiling may be the trigger for the decline in the market.

I think the market has discounted the shutdown and it will no longer affect the market unless the shutdown drags on for another two weeks.

I am still long the market and enjoying the ride!

But I'm very nervous about the prospects for a 5% correction. As a result, I've got my finger on the trigger of my hedges. I'm using puts on the etf SPY. They are cheap right now. I'll trigger the hedges if we see a slight drop in the market.

I'm long but nervous.