Introducing The Real Trading Report – 9/24/2017

Most of the people who write about trading on the Internet do one or more or all of the following 4 things:

  1. Never talk about losing trades.
  2. Don’t have a real system for trading the markets.
  3. Believe that they are smart enough to predict the future.
  4. Are biased to their favorite asset class.

I define a real system as a system that clearly defines entry and exit criteria for winning and losing trades.  Something that you can write down and explain to someone else.  The system makes no attempts to predict the future.  The rules of the system have to be followed.  Many smart traders are aware of different systems and may say that they use them, but when push comes to shove they are NOT really following the rules.

Bias to their favorite asset class means they constantly look for bullish theories for assets they are bullish on, and vice versa for assets they are bearish on.  Whether they are willing to admit it or not, they start with their bullish or bearish outlook first and then try to build a theory behind that outlook to justify their opinion.

I’ve been guilty of all 4 of these things earlier in my trading career.  Until I adopted Stage Analysis I had no real system, but even after I studied Stage Analysis initially I still wasn’t following the rules.  Mostly because I had some inherent biases to different asset classes, notably commodity related assets.  And a lot of those biases came from listening to people who just predict the future and are guilty of the other 3 things above.

In this new series of content on my site at www.nextbigtrade.com I’m going to do the opposite of the 4 things above since I believe that is the real way to trade the markets:  1) talk about winning AND losing trades 2) use a REAL system to trade the markets and follow the rules 3) no predictions and 4) no biases.

For the first report I’m going to take a look at the semiconductors sector and 2 semiconductor stocks that I have positions in.  I like the semiconductors sector because it is clearly in a Stage 2 advance and a number of stocks in that sector are at or near all time highs.  Looking at the chart of SMH below over the last 6 weeks it has started to breakout to the upside after consolidating for a few months over the summer.  SMH has been outperforming the S&P 500 since it broke out in mid-2016 and hasn’t gotten overextended from the 30-week moving average yet (as shown by looking at the PPO below).  According to Stage Analysis when the market is bullish, you want to be in sectors that are outperforming the overall market and in the best stocks in those sectors.

I’ve been tweeting about semiconductor stocks for the last few weeks since I’ve been observing the price action in many names starting to act well.

I made my first entry in NVMI in mid-August and have added some more shares since.  I use the 30-week moving average as a line to measure risk against.  The further I buy above this moving average the more risk I’m taking since the stop loss is right below this line, so this impacts my position sizing.  The closer I buy to the moving average the bigger the position size I can take.  The ideal time to buy is either the breakout above the moving average or a pullback to it during a consolidation.

DAIO looks like a lot of other semiconductor related stocks.  Broke out of a base on explosive volume in mid-2016 then followed it up with another explosive breakout in May of this year.  Consolidated for the rest of the summer but recently has been acting well and might be ready to breakout soon.

My goal is to continue this series with real trading results and be a different format than the majority of what is out there on the Internet.  I will follow up with what happens with these 2 trades and have future trades to discuss as the series progresses.

Checkout my new Stage Analysis Screening Tool at: http://screener.nextbigtrade.com

Twitter: @nextbigtrade

The original article and much more can be found at: http://www.nextbigtrade.com

The views and opinions expressed are for informational purposes only, and should not be considered as investment advice. Please see the disclaimer.

Gold And The Investor’s Buy Point

After gold’s incredible surge last week, it is now facing a critical test that will either prove or negate a new bull market in the yellow metal.  The gold ETF GLD crashed through the 30-week moving average  two weeks ago on 2-times average  weekly volume, then followed up that move with a surge last week on 4-times average weekly volume.  This explosive increase in buying pressure accompanied with a move above the 30-week moving average is the first ingredient to a new Stage 2 bull market.

gld

The second and more important test for the transition from a bear market to bull market is a retest of the 30-week moving average that holds as support.  This confirms that prices are now trending higher and that the rally was not merely another bear market rally that failed at resistance.  The chart below marks this second ideal buy point B and notice that it occurs above the 30-week moving average.

Ideal_buy_investor

Source:  Secrets For Profiting In Bull And Bear Markets

The best thing about buy point B is that it offers a lower risk, higher reward opportunity in establishing a position in a potential new uptrend.  By waiting for the pullback to the 30-week moving average, risk is reduced because the the moving average can be used as the line in the sand for taking a loss if the pullback fails to hold.

Contributing factors to a possible new bull market in gold include the fact that GDX also had a massive increase in volume over the previous two weeks.  This confirms broader based participation in the gold miners which will outperform gold when it moves back into a bull market.

gdx

The U.S. dollar is also threatening to break down into a Stage 4 decline from its current Stage 3 topping pattern.  Simultaneously the Euro is still holding in a Stage 1 basing formation and the Japanese Yen is in a new Stage 2 advance.

Despite this evidence the most important factor is the ability of gold to hold above the key long term moving average to confirm change in trend.

Checkout my new Stage Analysis Screening Tool at: http://screener.nextbigtrade.com

Twitter: @nextbigtrade

The original article and much more can be found at: http://www.nextbigtrade.com

The views and opinions expressed are for informational purposes only, and should not be considered as investment advice. Please see the disclaimer.

Big Trend Changes And Gold

The stock market, the U.S. dollar, and gold are all undergoing important changes in trend that will impact millions of investors around the globe for the next several months to years.  Sadly, a large percentage of investors are completely oblivious to this fact.  Many are in denial that a new bear market in stocks has started.  They lack the ability to both identify the major trend, and understand that markets are cyclical and oscillate from bull to bear market and back again.

stageanalysischart

Stock market investors have enjoyed a bull market from 2012 until 2015 where the S&P 500 surged from roughly 1250 to 2100.  After breaking down for multiple months in 2011, the S&P 500 was able to retake the 30-week moving average in 2012.  Once this retest was completed successfully the S&P 500 continued higher in a stage 2 uptrend into 2015.

spx1

This new stage 2 uptrend in stocks was propelled by the healthcare sector which broke out from a multi-year base into a powerful stage 2 uptrend.  The biotech sub-sector of healthcare in particular staged an amazing run where biotech stocks were up double digits for 7 years in a row.

ibb

But stocks underwent a stage 3 topping process in 2015 where breadth deteriorated rapidly across the stock market and no new leadership formed.  In particular key indices like the transports and small caps diverged from the other major indices and started trending lower.  Finally the plunge in January confirmed the stage 3 transition into a stage 4 bear market in stocks.

spx2

The U.S. dollar followed a slightly different path than U.S. stocks, rallying into 2012 but then trading sideways into 2014.  Then after a tight consolidation formed over multiple months the dollar exploded higher in a parabolic stage 2 rocket launch that enthralled the media.  But just as this epic dollar rally was loved by the masses it topped out in March 2015 and has traded sideways in a topping formation since.

dollar

Both of these markets put pressure on gold over the last 4 years as gold moved counter-cyclical to both stocks and the U.S. dollar over that time period.  Gold broke into a stage 4 downtrend in 2012 and kept plunging into a major bottom in mid-2013.   Although the majority of gold’s stage 4 bear market was over in 2013 it continued to drift lower into the end of 2015 as stocks were making a major top.

gold

The cyclical nature of the markets has started to reassert itself in a major way to start 2016.  With stocks getting pummeled in a new stage 4 bear market, you would think investors would flock to the U.S. dollar as a safe haven.  But since the dollar has undergone a multi-year rally of its own it’s not the safe haven that it’s been in the past.  As long as the dollar stays below its 30-week moving average it’s no safer than stocks and could cause severe losses for currency investors if it enters a new stage 4 bear market.

Gold on the other hand is threatening once again to enter a new bull market.  Given that it has produced at least 7 failed rallies in its bear market since 2011, most people are skeptical gold can ever enter a bull phase again.  But that’s the kind of skepticism and utter disdain for an asset class that creates the conditions necessary for a new bull market to begin.

Checkout my new Stage Analysis Screening Tool at: http://screener.nextbigtrade.com

Twitter: @nextbigtrade

The original article and much more can be found at: http://www.nextbigtrade.com

The views and opinions expressed are for informational purposes only, and should not be considered as investment advice. Please see the disclaimer.

Stage Analysis Buying Process

Checklist for refining the buying process for using the Stage Analysis system.  To use the system properly only stocks that meet this criteria would be considered buy candidates.

The Stage Analysis Screener can be used to go through this checklist to find ideal buy candidates.

  1. Are the major stock indexes in Stage 2?
  2. Is the stock in a leading sector?
    1. Does the sector have one of the highest percentages of stocks in Stage 2?
    2. Are the stocks in the sector outperforming the major indexes?
  3. Is the stock above its 30 week moving average (MA)?
  4. Is the 30 week MA in an uptrend?
  5. Is the stock at an ideal buy point?
    1. Ideal buy point A: The stock breaks above the 30 week on a big increase in volume
    2. Ideal buy point B: The stock pulls back to the 30 week moving average after the breakout
  6. Did the breakout occur on at least 2 times average weekly volume?
  7. Is the stock outperforming the major stock indexes? (has positive relative strength)
  8. Does the stock have minimal or no overhead resistance?
  9. Is the stock not in Stage 1, Stage 3, and most importantly Stage 4!?

Ideal_buy_investor

Amazing Opportunity In The Gold Sector

Despite widespread pessimism, apathy, and derision towards the sector, gold and gold stocks present an extremely rare opportunity.  Gold stocks are on track to record 5 years of losses starting in 2011 with the $HUI gold bugs index plunging 84% percent from 2011 to 2015.  Gold is on pace to put in a 3+ year bear market with 3 years of losses.  But the utter destruction in this sector is what has created an awesome opportunity.  The only question is the timing of when this can be capitalized on.

Stage 4 bear markets are what create massive opportunities for upside gains and new Stage 2 bull markets.  A bear market causes investors to panic out of a sector.  Selling begets more selling until finally the sector bottoms out as sellers become exhausted.  After a bear market a Stage 1 base forms which is a period of disinterest in a sector as investors favor other sectors.  The sector may remain “cheap” and drift sideways for a long period of time, from months to even years.

stageanalysischart

When enough investors come back into a sector to force a breakout of the Stage 1 base a new bull market is born.  This is the most exciting and profitable time to enter into a position in a sector.  At this point the sector is still “cheap” because of investor disinterest, but it is now being bid up in a new and often explosive trend higher.  This produces massive gains for those brave enough to enter early.  They are usually looked at with skepticism buying into a beaten down asset class early in an uptrend.  But this healthy skepticism is what fuels the climbing of the “wall of worry” that is a hallmark characteristic of a new bull market.

For an offbeat but instructive example of how bear markets produce incredible opportunities consider the airlines sector.  From the early 2000s until the depths of the financial crisis in 2009, the airline sector as represented by $XAL declined by roughly 90%.  Airlines had been a terrible investment for a long time, and with oil seemingly in a perpetual bull market airlines appeared to never be a good trade.  But counter-intuitively the destruction in the airlines sector is exactly what created the massive opportunity airline stocks have been the past 7 years.

As you can see below airlines broke out from a Stage 1 base in 2009 and proceeded to more than double over a year and a half period up until 2011.  Then after enduring a mini-bear market from 2011 to 2012 airlines once again broke out into a Stage 2 uptrend in early 2013 and almost tripled over a 2 year period until early 2015.  Some airline stocks performed far better, producing 5-fold and even 8-fold returns if purchased early when everyone was ignoring this formerly loathed sector.

xal

One problem with Stage 4 bear markets is they produce false breakout attempts.  Every countertrend rally that fails leads to the next downleg in a bear market.  Only the last countertrend rally that holds and forms the first higher low is the real breakout attempt that produces the new Stage 2 bull market.

Gold stocks have had many false Stage 2 breakout attempts during their bear market.  Most notable were 2 attempts during 2014 where gold stocks traded for multiple weeks above the 30-week moving average before falling back below it.  Gold stocks have made 6 attempts since 2012 to move back above the 30-week moving average and each attempt has failed and produced another leg lower in the bear market.

hui

One way to filter out false breakout attempts is to wait for a re-test of the moving average in order to confirm that the breakout higher is real.  Waiting for this signal alone would have kept a trader out of the gold market and away from the damage of a Stage 4 bear market for the last few years.

After 5 years of a bear market and 6 failed breakout attempts, gold stocks are perhaps the most loathed they’ve ever been.  But the reality is that a cyclical sector such as gold will never remain out of favor perpetually.  Just as many would have believed that airline stocks would never make a good investment, those that shun gold and gold stocks will miss out on the eventual bull market that will be reborn.  They key is waiting for the opportunity to occur and being recognizant enough to take advantage of it.

Checkout my new Stage Analysis Screening Tool at: http://screener.nextbigtrade.com

Twitter: @nextbigtrade

The original article and much more can be found at: http://www.nextbigtrade.com

The views and opinions expressed are for informational purposes only, and should not be considered as investment advice. Please see the disclaimer.