Tuesday, February 14, 2012
A high probability trade, to me, is one that is correct at least 70% of the time. The truth is you can make money in trading if you’re right at least 40% of the time if you strictly limit the size of the losses. When a trader is right on 70% of their trades, they can make a lot of money... this week my system signaled two high probability trades.
#-ad_banner-#I use a 26-week rate of change (ROC ) strategy to find trades. ROC measures how fast a stock is moving up. I've developed a portfolio for TradingAuthority.com that holds the top three rated ETFs -- the strategy has averaged gains of 15% a year since 2007.
In any strategy, some trades work better than others. Because each trade is strictly defined by rules, I can back test to see exactly how each buy signal has worked in the past.
The first ETF I’m buying, Vanguard REIT ETF (VNQ), has been a winner 65% of the time after one month, 70% of the time after two, and 100% of the time after three months.
The buy signal is triggered when the ROC (shown in the chart below as the black line) crosses above its upper Bollinger Band (shown as the blue dashed lines). Most of the time, an indicator will stay within the Bollinger Bands  which means breakouts offer  important clues about what the price is doing. An upside breakout when the price is above its moving average  is bullish , as the back tested results show.
There are other reasons to be bullish on VNQ. The chart shows that the price of VNQ is breaking above resistance that dates back to April of last year. The ETF is at a new 52-week high , another sign of strength. Traditional momentum indicators like MACD  are also bullish.
The second ETF I’m adding to the portfolio is the SPDR  S&P 500 ETF (SPY). In many ways, the chart is similar to VNQ's chart. Stocks have started 2012 very strongly, and the ROC system says that we should expect even more gains over the next three months.
Testing shows that buying SPY when the ROC crosses above the upper Bollinger Band has a winning percentage of 71% in one month, 80% after two months and “only” 83% after 3 months.
Submitted by Thomas Gresham of Gresham’s Law,
Here we present a history of the Fed in charts. As you’ll surely glean from the below — the Fed has degenerated from a by and large passive institution (dealing only in high-quality self-liquidating commercial paper and gold) to an active pursuant of junk, an enabler of wars, a ‘benevolent’ combatant of the depressions of its own creation, a central planner of employment & prices and of course a forgiving friend to inconvenient market follies.
The Fed’s Assets from 1915 to 2012:
For the first time since the last week of December of 2011, the S&P 500 Index closed lower on the weekly chart. Recently I have been discussing the overbought nature of stocks based on a variety of indicators. However, the real question that should be asked is whether last week was just a short term event or if we see sustained selling in coming weeks.
The issues occurring in Greece spooked the markets somewhat on Friday as Eurozone fears continue to permeate in the mindset of traders. The U.S. Dollar Index is the real driver regarding risk in the near and intermediate term future. If the Dollar is strong, market participants will likely reduce risk. However a weakening Dollar will be a risk-on type of trading event which could lead to an extended rally in equities, precious metals, and oil.
Friday marked an important day for the U.S. Dollar Index futures as for the first time in several weeks the Dollar held higher prices into a daily close. The U.S. Dollar appears to have carved out a daily swing low on the daily chart from Friday. Furthermore, the potential for a weekly swing low at the end of this week remains quite possible. The chart below illustrates how the 100 period simple moving average has offered short term support for the past few weeks.
U.S. Dollar Index Futures Daily Chart
I would also point out that the MACD is starting to converge which is a bullish signal and the full stochastics are also demonstrating a cross on the daily time frame. As long as the 100 period moving average holds price, a rally is likely in the U.S. Dollar Index in coming weeks.
Should that rally play out, it will likely push risk assets lower. My primary target for the S&P 500 would be around the 1,300 – 1,310 price range if the selloff transpires. It is important to note that headlines coming out of Europe could derail this analysis in short order.
Assuming that a selloff in the S&P 500 occurs it will present a difficult trading environment for market participants. Market participants are going to be in a tough position around the 1,300 price level. A rally from 1,300 could serve to test the 2011 highs. In contrast, a confirmed breakdown of the 1,300 price level could initiate a more significant selloff towards the 1,250 area.
Should price move towards the 1,300 price level the bulls and bears will be battling it out for intermediate control of price action. This is my preferred scenario for the short-term time frame, but I would only give it about a 60% chance of success at this point in time. We simply need more time to see how price action behaves the first few session of the forthcoming week.
S&P 500 Index Bearish Scenario
The alternate scenario which has about a 40% chance of success would be a sharp rally higher which likely would be produced by news coming out of Greece and/or the Eurozone that pushes the Euro higher. Right now risk is high due to the sensitivity of price to headline risk. With that said, the bullish alternative scenario is shown below.
S&P 500 Index Bullish Scenario
At this point we just do not have enough price information to give us clarity regarding the most probable outcome. The price action in the Euro is going to drive price action for the S&P 500 and other risk assets in weeks ahead.
Anything is possible in the short-term, but I have to give a slight edge to the bears simply based on the price action Friday and the fact that almost every indicator I follow is screaming that the equities market is severely overbought. The price action this week should be telling. Headline risk is excruciatingly high, trade safely in the coming week!
The "Chart of the Day" is Dick's Sporting Goods (DKS), which showed up on Friday's Barchart "All Time High" list. Dick's Sporting on Friday posted a new all-time high of $44.23 and closed up 0.68%. TrendSpotter has been Long since Jan 13 at $40.18. In recent news on the stock, JP Morgan on Jan 31 added Dick's Sporting to its Focus List, reiterating its Buy rating and raising its price target to $50 from $45. Dick's Sporting Goods (DKS), with a market cap of $5.3 billion, is a leading full-line sporting goods retailer in the United States.
Peter Grandich was still in a mild state of euphoria over the victory of his New York Giants. Peter works closely with a number of team members in a Bible Study Class. And just like there’s some good pro ball players out there, there’s some good solid investments, even in an environment like this one. Peter urges you not to be fooled by the so-called investment pros who are always trying to make things look much better than they really are. He calls them the, “Don’t Worry, Be Happy,” crowd, because they’re always playing up the positive and dismissing the negative. Not a good plan for long term financial success.
Peter says everyone should have a written financial plan. This will help you avoid the emotional traps that await every successful investor at one time or another. There are sectors of the market that have great upside potential. Peter thinks this may finally be the year the juniors start to catch up with the ever escalating metals prices their value should be related to. While he is not yet ready to bet the farm on this hunch, he sees many signs that are making him more and more optimistic. But, Peter says you always need to invest with caution and a real certainty in your own fallibility. It’s this attitude that has made Peter’s career the success that it is.