Stock Exchange: Are You Guilty of Voodoo Chart Reading?

Michael Kahn, a leading technician and columnist, provides the inspiration for this week’s Stock Exchange. In a recent post he take on a quest: Unmasking the Voodoo of Chart Reading.

This topic really hits home with our Stock Exchange Group. Since they cannot explain their methods in great detail, outsiders sometimes think of them as “black boxes” with mysterious decision criteria. In fact, their general methods are quite clear. Through this series, we share many of their specific decisions. When I review the output, I see it as suggestions from a group of wise friends.

Kahn emphasizes this point.

[Charts] do not tell us what will happen. They are meant to give us clues as to what to do.

Rinse, repeat.

Charts do not forecast the future. They suggest that it is time to take an action.

You don’t sell when the market is overbought. It may still be going up and will get more overbought. But you pay attention because if the market does start to succumb to supply, the indicator – whatever told you it was overbought – will back down by a certain amount.

This is a great attitude to take when employing your technical indicators. Let us try to take the voodoo out of our group’s current ideas!

Review

Our last Stock Exchange considered how to trade a market with a lot of headline risk. If you missed it, please check back and catch up on this important topic.

Market Tech Take

We are adding a new feature this week – a technical market overview. We will feature our proprietary measure, MHI, the market health index. This is a specialized combination of breadth and strength in our proprietary universe. For contrast, we will include an alternative technical measure each week. We welcome suggestions. What is your own favorite indicator?

One popular indicator of strength is the percentage of stocks above the 50-day moving average. Stock charts provides an excellent way to follow this indicator.

Another good one is new highs versus new lows. This is based on our special universe. It is over a two-year period. I will improve the time scale for this feature.

The market health is our key indicator. Once again, it covers a two-year period. It is important since nearly every method experiences the worst drawdowns when MHI give a negative signal.

Comments are most welcome on this segment – a work in progress. Vince and I will provide more ideas about interpretation. Meanwhile, watch out for the red line crossing above the green one!

Let’s turn to this week’s ideas.

This Week—How to Take the Voodoo Out of Your Chart Reading

 

Felix

I’m just getting into Wynn Resorts (WYNN). I’ll admit this is an unusual pick for me. Since I could be in this position for as long as a year or two, buying on peak isn’t generally my style. For my holding period, it takes a significant move to trip my trigger.

I find a few things attractive here. For one, the 200-day moving average increased steadily in 2016 despite rapid price fluctuations. It’s since leveled off, and now the 50-day moving average is climbing. I feel I can count on reliable growth here despite some short-term swings.

J: Are you worried about the company’s sensitivity to revenues from Macau? Those fell 40% in 2016.

F: That was just the subsidiary. The Chinese love to gamble. Look to the long run.

J: At least you have a choice that has a reasonable valuation and solid earnings growth. There is even a dividend. Chuck Carnevale’s excellent research tool helps us generate this chart:

F: I am glad you like the earnings, but I am focused on the price. What is this rumor that Mr. Carnevale is taking your job?

J: We hope to have him as our guest expert next week. He has his own job. I am taking a long birthday weekend with Mrs. OldProf. What about questions from your fans.

F: I always appreciate reader questions. The extra work helps my pay.

J: Are you responding to every request?

F: I am making a list of top choices from the “reader universe.”

J: What if a reader request is not on the list?

F: Then I do not see it as an attractive long-term choice. I respond to email with more specific questions.

J: And where would that be?

F: ETF at NewArc dot com. At least until you give me my own personal email address!

 

 

 

 

 

 

 

 

 

 

 

 

 

Oscar

In an unusual twist, I don’t have a new sector for this week. I generally try to hold three sectors for a period of 2-4 weeks each – which means I’m a fairly active trader. This week, however, I’m good with my current holdings. In lieu of a new selection, let’s review one of my favorite picks so far this year. The Aerospace and Defense sector (XAR) was very kind to me.

I recommended this one back at the beginning of February. As you can see, that pick enjoyed some steady growth until the end of the month. As I said, I generally exit around the 4 week mark at the latest, so it was easy to walk away with a nice chunk of change here.

J: Yes, we enjoyed booking some profits on that trade. What about your current holdings? I see some hotels and also Roadrunner’s AVGO idea in your account. Are you too caught up in your NCAA brackets to give us a fresh pick?

O: No way, but I really need North Carolina to lose.

J: Good luck with that. What about the reader questions?

O: Like Felix, I am emphasizing the top choices from the reader questions.

J: So they are not necessarily your own favorites?

O: No, but there is plenty of overlap.

 

 

 

 

 

 

RoadRunner

(Commentary translated from various pecks, rapid movements and beeps).

Reader PN informs me that I can get better performance from RoadRunner if I improve the birdseed diet. She writes, based upon personal experience in Oklahoma, that the best food consists of “small mammals, lizards, and insects.” Birdseed is a last resort. RoadRunner beeped with approval as I read PN’s email.

RR: I’m right up there with Oscar in terms of time frame. I like to get out of any new position within 20 business days at the absolute maximum. Short term growth is imperative. For Broadcom (AVGO), that’s exactly what I expect.

RR: This year has been a steep climb upwards for AVGO, with only a few bumps in the road. To me, the current price point looks more like an investment opportunity than a peak.

J: Your method is to look for rising channels, buying at the bottom?

RR: Yes.

J: I can see that on the chart, but why not draw it for us?

RR: That is your job! I can’t draw.

J: Broadcom looks good on a fundamental basis as well. Here is the fundamental analysis, once again from Chuck Carnevale.

RR: Once again, I am interested only in a four-week trade.

J: It is always better to trade stocks where the fundamentals are solid.

RR: Beep beep.

 

Athena

On occasion, I’ve been known to buy once a stock has already jumped. With Consol Energy (CNX), I’m confident that I’ll be jumping in early enough to come away with a tidy profit.

J: On occasion? That is your regular method.

A: The stock is about matched with its 50-day moving average; however, its 200-day moving average is still basically flat. We’ve seen a pop up from recent lows in early March. Who’s to say this one couldn’t recover to its prices from the beginning of the year.

J: I find myself asking each week: Have you ever learned about earnings? Look at the fundamental chart! The price chart looks like RoadRunner’s old nemesis – Wile E. Coyote.

A: I play for big, short-term winners. If necessary I will move on.

Holmes

I love QEP Resources (QEP) this week. Here we’ve got a stock that’s just gone through a huge correction, bringing the price well below both the 50 and 200 day moving averages. Past performance is no indication of the future, of course, but in my mind, there’s dramatic room for growth here.

Even a modest increase pack to $15.00 would make spending a few weeks with this stock worthwhile.

J: This is another energy name with no earnings.

H: As we all keep telling you, the market often does not require earnings.

J: There is a lot of bullish sentiment on energy. President Trump has been helping the group. CNBC pundits were enthusiastic today.

H: Who is Trump? What is CNBC? What is a pundit?

J: A sound attitude! That is why we keep you on the payroll. Err… I mean the biscuit roll.

 

Conclusion

Charts are always subject to interpretation. When I analyze the results from our models, the charts are a result – not the starting point. A careful look provides ideas about what the model is “seeing.” It is certainly not voodoo, and my own analysis has been sharpened over the years by the constant review of model picks.

The stimulus from new ideas and interpretations is one of our goals at the Stock Exchange.

We welcome comments, suggestions, and followers for each character. Even Jeff. I try to have fun once a week in writing this, and I hope you get a chuckle or two from reading it. Here is a scorecard for the characters, and information about how you can join in.

Stock Exchange Character Guide

Character Universe Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum One month Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value One month or long term Risk signals Recession risk, financial stress, Macro

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We report regularly on the “favorite fifteen” in each category– stocks and sectors—as determined by readers. Sign up with email to “etf at newarc dot com”. Suggestions and comments are welcome. In the tables above, green is a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the underlying universe. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

 

 

 

 

Stock Exchange: Finding Your Trading Sweet Spot

Our last Stock Exchange (two weeks ago) discussed diverse ideas from our experts, and also explained why I vetoed one of the recommendations. When trading using models, you can link directly to a platform if you do many trades and have a very short time frame. Otherwise you should not blindly follow the model. A human who understands the factors used by the model can identify when a situation is truly exceptional.

The current market environment is all about Trump – perhaps excessively so. Everyone worries about what companies are vulnerable to a tweet (which we will call a T-WOP, HT @corporatecommie). Each day includes more speculation about companies that might benefit from policy changes.

How should traders find a sweet spot in this environment?

This week includes both new ideas and reviews of some past highlights. Everyone can benefit from finding the trading model most relevant for your own style.

Let’s look at the ideas from our experts. As usual, I will conclude with a brief observation.

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We report regularly on the “favorite fifteen” in each category– stocks and sectors—as determined by readers. Sign up with email to “etf at newarc dot com”. Suggestions and comments are welcome. In the tables below, green is a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the underlying universe. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

This Week—Finding Your Trading Sweet Spot

Holmes

This week I’m buying good ol’ U.S.A. Macys (M). This stock probably needs no introduction, main street retail store.

This chart strikes me as a great money-making opportunity. My major concern is that this stock keeps making lower lows, but in the meantime it can have some terrific rallies. I see no reason it can’t get back to the mid-30’s. It’s a little comforting to know that there are 18 analyst holds on this stock and their target price is STILL 36. That is consistent with what the charts are telling me.

I’m buying here with tight stop, 29.25, and looking for a move back into the mid-30s. Giving me a nice risk/reward setup.

J: I agree with you about ignoring the analyst ratings. I use it as a contra-indicator. Did you read that recent WSJ article?

H: You know that I do not read! I reach great conclusions from looking at charts. You humans read, but mostly to reaffirm your existing biases.

J: I am delighted that our clients caught this at a lower price, but do you realize the stock was up over $1.50 today?

H: No. I am enjoying the beach in Mexico. I sent in my pick, but that is like working overtime.

J: Oscar’s turf accountant would call your choice “past posting.”

H: Sorry. You are the one who set the schedule for Thursdays. I made the pick earlier, and it is still a good buy.

J: There is a rumor of a possible takeover. Did you know about that?

H: No. I just know a great rebound chart when I see one.

J: Are you going to have any trouble returning from Mexico? The U.S. is taking a hard look at those returning from other countries.

H: My papers are all in order. I’ll be back in the office in a week or so.

 

Athena

I admit it. I still have no new picks. We do not have the fresh, strongly-trending stocks that I prefer. I’m still holding most of my most recent picks, and I have room for one more buy.

J: Maybe you could give us an update on one of your current holdings.

A: Fair enough. I recommended United Rentals (URI) on 12/22, after buying it myself a few days earlier.

J: Isn’t this one of your few picks where I agreed?

A: Yes, I seem to remember that you said the pick was OK, but you did not own it yourself. I have held this one through a month or so of sideways movement, but now it’s starting to pay off in a big way. We’ve seen an increase of roughly 20% in the last two weeks. That means it’s about time for me to hop off this one (as fun of a ride as it’s been).

 

J: That certainly worked well. How are you doing overall?

A: Not as well as the fussy guy and the dog, but that will change soon. I think I am Vince’s favorite.

Felix

I will once again begin with my responses to reader votes for the favorites list.

My list provides rankings within each zone, as well as the basics about buy, hold, and sell. The list includes the top overall vote getters from our (free) subscription list as well as some new requests I got during the week.

J: The list has some interesting changes. I see that AAPL (which we own) is still in “hold” territory despite the major rally after its earnings report.

F: My ratings came before the report. How about AMZN? That did not do so well. My approach is geared to the long term, usually more than one year.

J: Fair enough. Do you have something new for us this week?

F: No.

J: What? I took a long weekend, but the rest of you were supposed to keep working. Only Holmes was on vacation.

F: I worked, but there are no new choices. Patience is called for.

J: Are you trying to get dropped from the weekly discussion?

F: You would not dare! My performance leads the group. In addition, I provide updated information to my many fans. You should be giving me a raise. I am on the job while the dog is in Mexico.

J: OK, we’ll let the readers decide whether they still want your opinions.

 

 

 

 

 

 

 

Oscar

My pick for this week is the Defense sector, shown here by the SPDR S&P Aerospace & Defense ETF (XAR). I liked this one back in early December too – but I got out before the downslide. Now that the price has had a few weeks to level out, I feel more comfortable getting back into this sector.

For my next “investment” – I’ll bet that Belichick can’t put together a defense to stop the Falcons. But that really is another subject…

Here are my ratings for the top reader interests. Keep the questions coming. My sectors are aggressive, but have less risk than Felix’s picks. I avoid the bad news from random, single-stock moves.

J: Interesting. Do you see evidence of that?

O: I hear about it. People are very worried about something called “tweets” that seem to hit their stocks for no reason. Playing sectors reduces that risk.

J: Interesting. The Tweeter-in-Chief has T-Wopped a few of the defense stocks, but most still believe in his support for higher defense spending.

O: I only follow sports tweets, but I know which sectors have legs, and which will fail down the stretch.

J: You really like the Falcons?

O: My week’s pay is on the line!

 

 

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Conclusion

The current trading environment is treacherous. Many frustrated traders are bailing out. Or have blown out. Political opinions about policy have proved to be a dangerous foundation for trading and investing.

Our models provide a range of diverse ideas, all successful. Pick one that you like. Use it as a counterpoint for your own method. And keep control of position size and risk.

The Stock Exchange does not have all the answers, but it provides good ideas and a stimulus for your own trading.

Stock Exchange: How to Maximize Gains

Last week’s Stock Exchange focused on risk – my first step in speaking with a new client. If you take on too much risk, you will find yourself bailing out at the first modest downturn. Our guest expert last week, Blue Harbinger, helped us in discussing the topic. Mark did a great job, just as he does consistently on his blog, and we got a very favorable response from readers. We will invite some other guest experts in the coming days, and we also hope to bring Mark back.

Once you have a handle on risk, it is time to maximize your returns. This is much more difficult than it seems. There are always many reasons to be fearful. It is only when you have confidence in your methods that you can stay the course through the inevitable blips.

Our models help with this problem. There are differing approaches, but all have been doing great. Holmes has just completed his impressive first year of real-time trading, beating the market with a lot less risk.

Readers see many bloggers who publicize alleged results. Some readers ask us to join in this deceptive game. Those others are either reporting on newsletters or they have bad lawyers! A legitimate investment advisor understands the regulations on reporting results. It is very tricky to put anything on the Internet, no matter how honest you are. We’ll respond to any inquiries by qualified investors with detailed results and a discussion. For most of my readers I must explain in more general terms. Today I include a recent discussion with Vince – the man behind the models. (More background here). I am trying to provide some ideas for your own consideration. While we view them as low-risk when employing our stops, no general results should be regarded as specific advice.

J: The models have all been doing well. Is it just because of the market rally?

V: When the market is strong, the models are even stronger. A rally helps.

J: What if things turn South?

V: Each model has a disciplined exit rule. No method comes without risk, but we do a good job of limiting it. How did Holmes do during the January dip?

J: Holmes pulled back a bit, dipping less than 4%. I was impressed. How do you develop such confidence in your results?

V: My method involves extensive training while preserving a generous out-of-sample period. If the latter period performs like the training time, you know you have something.

J: I add an extra test. When we start trading in real time, I track every trade. I am verifying that the model does what it is supposed to – making the right sort of trades and exiting when needed. It confirms the test results, but does much more.

V: That is only what I would expect. Humans are not really needed in my models.

J: Which brings us back to the old story of the space capsule, previously carrying only monkeys. Humans were supposedly not relevant. The designers of the manned capsule insisted on a window and engineers (like you) thought it was unneeded. The explanation? So that the astronauts could see to pilot the craft! We do not override the model choices very often, but humans remain in control.

To summarize: You need to make hay when the sun is shining. Do not get mired in pessimism. A disciplined method helps you to stay the course.

Getting Updates

I have offered a new service to readers on our Felix/Oscar update list. Each participant can suggest three favorite stocks and sectors. I plan to report the “favorite fifteen” in each category– stocks and sectors. If your favorite is not picked as part of the group, I’ll try to provide some individual answers. Sign up at etf at newarc dot com. Ideas and comments are welcome, as always.

This Week— Profiting from the Rally

Holmes

Recently TAP (Molson Coors Brewing) showed up on my list I’m the rebound specialist, and this one really fits the bill. Buying at 97.50 with a 94 Stop, looking for a move back to the 50d MA of 103.75.

I really like the risk/reward of this type of setup. If the stock starts to really move in my direction, I can raise my stops and raise my target price, although I would be likely to take some profits.

While I don’t play strict attention to what analysts say I see that there is a price target of 120.73. This is an added source of comfort for me.

J: Congratulations on your great first year of real-time trading! How much luck did you have?

H: There are always good rebound plays. My method is a natural for traders, and it minimizes risk.

J: Your choice of TAP makes no sense to me. The P/E ratio is over 26 and earnings growth is in the single digits.

H: You humans keep drinking beer! I am playing for modest rebound. You will see.

Athena:  SM Energy (SM) has been down this past week – I see that as more of a buying opportunity than a trend. Energy stocks have been favorable across the board, and here I see an opportunity to take part in a sizeable rally.

J: You and your colleagues all seem to be reaching for energy stocks. In general, I see the idea, but why not pick a name with some earnings.

A: Earnings? Look at the chart, the uptrend, the support…. This is a story. Earnings are not relevant to sustain the uptrend.

Felix

Nvidia (NVDA) recently experienced a sharp bump in price, but don’t let that scare you. The long-term trends here have been moving higher at a steady rate, suggesting the potential for gains over the next year or so. Some correction may be inevitable, but that’s a storm you’ve got to weather to hold out over the long term.

J: The company beat earnings expectations and guided higher, a winning combination.

F: The chart reflects that strength. I see this as a long-term winner.

J: Should we wait for a pullback?

F: For long-term investors it is more important to make attractive purchases when opportunities present.

Oscar

I want to talk about defense this week, and I don’t just mean the Kansas City Chiefs. (That said, eight straight games with at least one turnover is worth mentioning). My favorite sector this week is Defense (XAR).

In the past six months, we have seen a solid upswing in the moving averages here. I still think there’s plenty of room for growth here. I couldn’t say why it’s taken off so drastically since November, though.

J: Did you hear about the election?

O: Sure. Bud Selig in the Hall of Fame???? I did not vote for him.

J: You have a vote?

O: I mean that if I had a vote, I would not have picked him. That All-Star game home field advantage is strange.

J: I was referring to the Presidential Election. The results are viewed as favoring defense stocks.

O: The reason does not really matter, does it? This is a great trade!

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Conclusion

Last week we noted that accepting risk before year-end might well be correct. This week we balance the risk assessment with attention to possible rewards. The group still sees a very positive outlook.