Occasionally I like to peruse my old haunting grounds to see how I would be doing if I still traded using stock screening techniques. As many of you know, the Zweig stock screen was my "bread and butter" for several years and it performed marvelously for several years averaging a 50% return for me each year. I was using a "tweaked" version of the screen that simply ranked the Zweig screen candidates by their 26 week relative strength (as compared to the S&P 500) using AAII's Stock Investor Pro.
I then chose the top 5 stocks listed in the screen (the screen averaged about 10) and bought them Monday morning. I held through the week without using any stop losses. I would re-evaluate the screen on Sunday and if any stocks dropped off the list, I would sell them Monday morning and replace them with new stocks that qualified for the top 5.
I sometimes held stocks for just a week, but in most cases, the stocks stayed on the screen for weeks and months at a time. It was a very simple way to trade using mechanical methods which allowed me to work full time during the day and still enjoy returns that handily beat the indexes. But things fell apart for the screen in 2008, and AAII's version of the screen lost 34% over the year. Before 2008, the screen's worst performance since 1998 had been a 17% gain in the awful market of 2002.
By mid-2008, I knew that I would have to change my trading strategy if I was going to be able to eventually trade for a living. A losing year just wouldn't cut it for paying the bills since I didn't have an abnormally large chunk of equity. So I made the switch to day trading which I felt gave me much more control over my trading and my equity curve.
I'm still learning, and the transition hasn't been easy by any means. The fast pace and emotional stress of trading intra-day takes its toll. It is much more complicated and requires a huge amount of effort, learning and dedication. I sometimes question the switch I made (as many of my readers have done). So once in a while, I'll "take a peak" at some of my former methods just to see how they're holding up.
I'll have to admit that I was completely surprised to see that the Zweig method has performed poorly this year--down 17.4% YTD. This is the type of environment where the stock screen usually thrives--an unrelenting bullish bias after the market bottoms out. In 2003 the unmodified screen returned 89% with monthly re-balancing.
That fact gives me pause that the rally we are seeing today doesn't necessarily indicate that happy days are here again. Something is not quite right fundamentally if the Zweig screen is down for the year after a 40% rally has taken place.
Today's action provided several opportunities for profit, but more importantly a clean Elliot Wave pattern formed throughout the day. I like Elliot Wave patterns because they provide several important areas where traders can find an edge.
Understanding Elliot Wave patterns intra-day has helped me become a much more patient trader because they provide good entries, specific stop-loss areas, and logical targets. Take a look at the chart at the left (you can blow it up by clicking on it). The chart was captured about 30 minutes before the market closed.
You can see how the entire day unfolded into a "story" with predictive value--taking what most people see as random price movements and creating a sort of "crystal ball" that gives clues as to what will happen next.
I used to jump in on any pullback to a moving average. Now I try to wait for an ABC pullback to complete before I take a trade. Today, we got a pullback after a 3rd Elliot Wave (big number "3"). I wanted to take a trade as soon as price moved back to the 20 EMA. You'll notice that price bounced of the 20 and began heading upward. But I held off because I was expecting a larger wave 4 to form and I new that wave for usually created an ABC pattern.
The ABC corrective pattern did indeed form. If I had taken the trade too early, I probably would have stopped out--even with a stop comfortably below the 20EMA. Instead, the ABC pattern completed with a "hammer" candle forming off a bounce on the 50EMA. This provided a terrific trade with edge. A stop placed below the 50EMA with a target of the top of wave 3 is what Elliot Wave would suggest as a "wave 5" trade with a 2 to 1 risk/reward ratio.
You'll notice when that trade achieved its target that price continued to move up quickly as the sellers who were shorting ended up buying back their shares. I held my trade as their stops were triggered creating additional gains for the trade.
Over the past couple of weeks the indexes have really struggled to create good trading opportunities. They have often opened with a large impulse up or down and then consolidated for most of the day with very little movement.
Today has given us another example of this. From the opening bell, daytraders have had little opportunity. The gap didn't fade at all. Then we got some indecision and then a solid move down.
But that soon fizzled out and we got a retracement back to the 20 period moving average. After that price just bounced up and down most of the day as the Bollinger Bands narrowed.
On days like these, I try to find other things to do while I have the market "in the background". I'll often take a laptop with me while I work on the car or clean part of the house. A solid breakout might peak my curiosity, but as the market "coils" I'd rather be doing something productive than watching it compressing all day long.
I've had several e-mails lately wondering why I use candlesticks in my charts. There is nothing magical about candlesticks, but they do provide information that can be used to understand some of the underlying sentiment or emotion in the market. Plus they look cool.
Adam Hewison has a terrific free video on how you can use candlestick formations in your trading. Right now he's offering a free e-book on understanding market movement using candlesticks. He does a much better job than I can in explaining what candlesticks are and how they can benefit you. Check it out here.
Today had a good lesson for me on why having a bias is counterproductive as a trader. In Mark Douglas' great book Trading in the Zone he emphasizes the importance of understanding that at any moment in the market anything can happen. Every moment and therefore every trade is different from the last.
This morning I ignored that good information and created a bias in my mind that caused me to trade against an known edge. I saw that the futures were down over a percent in premarket trading and instantly I assumed that we were going to have a down day--possibly a trend day down.
When the market opened up, the gap was less than a percent--about .80%. My trading edge says that a .80% gap is right on the edge of a good gap fade trade. So I should have either been fading the gap, or waiting to see what happened over the next few minutes. I did wait, however, I was so blatantly sure that we were going to have a down day that I sold short after what I assumed was confirmation--a couple of long wicked candles and a bounce off of a Fibonacci level.
The market kicked my buttocks quite thoroughly with a strong move against my position and stopped me out with a loss. The lesson that I learned--my bias kept me from seeing the reality that the market was communicating and caused me to make a trade that had no edge.
This morning gave us a brilliant example of why patience pays off when you are trading stocks. SPY provided a gap fading opportunity from the opening bell.
I've found it important to avoid hesitation lately when the market opens higher or lower from the day before because the price often seeks equilibrium quite quickly and traders who hem and haw over their entry decisions are often left in the dust. So it doesn't pay to be patient when entering a gap fade trade.
What does pay is waiting a bit to see where the trade goes once the gap is filled. In today's example, the gap was filled within pennies within 10 minutes. However, if you were to hold on for the next 15 minutes you could have doubled your money by holding on through the gap and taking part in that large red candle down.
The nice thing about this trade is you could have easily moved your stop loss to break even when the gap was almost filled. Even though price retraced a bit, it never really threatened the opening price and you would have had a no-risk trade that went on to double what you were willing to risk on the trade.
I wanted to point out a great setup on a trade today that eventually fell apart. I credit the buyers who remain able to push this top-heavy market higher yet.
I've detailed a "short" trade in SPY that set up today at 3pm EST. Here's what the trade had going for it (click on the chart to see more detail).
I wanted to point out a trade that appeared today where everything pretty much lined up perfectly. It isn't often that the trading gods offer such nice setups.
This morning DIA formed a bear flag with a doji candle at a 50% Fibonacci retracement as the moving averages crossed over. This all occurred after a new price and momentum low for the day.
Whew. When the market gives you an opportunity like that you've got to grit your teeth, put on a larger than normal position and (hopefully) watch the money roll in. With this trade, you wouldn't have even endured any sort of heat as the trade pretty much did everything it was expected to do.
If you missed this trade, or hesitated to take it because it wasn't "perfect", it pays to look over an example to help prevent missing future trades. These patterns appear on all stocks and burning them into your mind will help you be ready the next time one occurs.
I have a notebook with patterns that I traded (or missed) and I often refer to it during the day to keep me from taking trades that aren't good and to force me to take trades that are.
What a week! I was looking for a big down day that never came. Fortunately, as a day trader, I can take advantage of unpredictable moves in the markets without the emotional stress that holding overnight creates.
Adam Hewison's latest video attempts to explain where we are in the price movement of the S&P 500. Here's his explanation of the video:
With the S&P 500 making new highs and as world equity markets following suit, the question becomes how high can we go?
In this short video on the S&P 500, I outline some mathematical upside target zones that I am looking at for this market.
You can watch the free video here.
For most of my life, I've been terrified by the prospect of running into a yeti. After following his Twitter posts for a while, I find he's not the spooky ape-man I once thought he was. In fact, he's a bit of a philosopher. A sample: every day is gift. Sometimes not very good gift though, like oven mitt soaked in pee.
You can follow Bigfoot's daily ramblings here: http://twitter.com/hellobigfoot
Pre-market futures are up over a percent as I write this early Wednesday morning indicating that we may be in for a trend day if things hold up.
Yesterday on SPY the bulls held their ground and were able to pop price up above the moving averages with a little hammer type doji candle. As I've said previously, if the bulls can continue to push things up (and it looks like they might with this morning's action) we may see a rather large push in that direction as the bears get out of the way and as bearish stops are taken out just above the moving averages.
I was extremely bearish going into this week thinking that we would see a large move down possibly testing the March lows by Fall. However, we can't allow our biases to overtake the reality of the market. We aren't moving down and it would be foolish to start taking short positions here because the market "has to go down". Price is telling us (at least in the short term time frame) that price is going up whether we think it should or not.
The DIA is a little less clear as we have a doji candle right at the compressed moving averages. A drop 
below the 20, 50 and 200 moving averages would be extremely bearish and price would likely drop to the next area of supprt around 78.00.
Adam Hewison of The MarketClub discusses the DOW today in a free video titled Important Dow update, July 14th. In the video Adam shows how to use a Fibonacci retracement tool to determine where we are at in the swings of the market.
I've found The MarketClub's videos to be extremely helpful in getting a "bigger picture" idea of what's going on in the markets.
He covers several markets that I don't follow (ie commodities) which helps me develop focus for my intraday trades. I think it's very important to have several sources of information to create an edge for your trading and I've been very impressed with what The MarketClub offers. Check it out.
I really screwed today up. After my first awful trade, I should have gotten long right away. Instead I hesitated as prices continued to rise.
My first long trade didn't occur until about 2pm after 3 nice dojis had passed me by.
That would have been OK, because there were other opportunities to make money (every green circle), but I turned those opportunities into losses because I either held too long or moved my stop too close.
You can see that price rarely went below the 20 period moving average. When it did, at didn't go past it much and it never closed below. But I stopped out each time because I had my stop way too close.
Adding insult to injury, I played that last doji hoping for a new high on the day (which we got). But I accidentally went short instead of long. I got out without a huge loss, but I watched as price went to where I expected it would--without me.
If anyone tries to tell you that trading is easy, they're lying.
So, now SPY is exactly at resistance in the tightly wound 20 and 50 period moving averages. Tomorrow should be very interesting.
My first trade of the day worked out nicely. It seems like gap fade trades have been working out really well lately. For a while I couldn't get a gap fade to work to save my life.
Today's nearly stopped me out with that violent push up on the second candle. But two long legged dojis later we filled the gap and more.
My second trade of the day sucked. I thought I had a perfect setup with a doji at several points of resistance after new lows on the MACD and the TICK. As soon as I took the trade it went against me with two mean up bars. Ouch.
I got really aggressive with that trade and risked 2% of my account. It is all gone now. *Sniff*
In retrospect, I should have been much more careful in my aggression level. Looking at the daily chart of SPY gave us a clue as to what might happen today.
The 200 day simple moving average has been acting as support for several days and the bears have been unable to push price below it on a closing basis. After 3 days of the bears losing out on their plans, it makes sense that the bulls would be able to push things up.
Now we'll just have to watch the 20 and 50 period moving averages. They are about to cross forming a formidable barrier for price (around 900). If the bulls can't push above the averages, we may have a shocking move down. If they can push it above we could have a big move to the upside. Keep your eyes peeled.
After a sucky day like today, I really appreciate being able to go over the day from someone else's perspective so I can see what I missed and also clarify some of the day's events.
Corey Rosenbloom is providing exactly what I need in his Idealized Trades Reports subscription service. When Corey was mentoring me, I asked him if he could come up with a report on a daily basis that would detail his thoughts about the structure of the day. He put together a report that allowed me to veiw the day from more of a professional's perspective.
Corey uses trading "concepts" instead of mere indicators to understand what the market is doing and to get an inside glimpse of the internals of the market.
Corey is offering his Idealized Trades for the ridiculous price of $27 per month. I think it's a bargain and I told him he should charge more. I've paid much more for services that offer far less. Lately his newsletter is averaging 6 pages of up to date information about the market day.
I would highly recommend the service to anyone who wants to better their trading abilities. The lessons focus on the ETF for the S&P 500 (SPY) but they apply to any trading vehicle that you use.
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