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2010-05-09T14:44:00.003-05:00

All future models, strategies, and market analysis can now be found on JeremyBain.com

[site overview]

This site is built from a collection of quantitative models, fundamental models, market studies, and trading strategies all designed to gain an edge in trading options and equities. The models, studies, and strategies found within this site are not based on discretionary price patterns or other subjective measure of technical analysis. Rather, this site is designed around observations that can be reduced to numbers, rigorously tested, and measured.

Further, this site recognizes the advantages that come with combining the analyses of both quantitative and fundamental analysis. Quantitatively, I've designed models that identify momentum and relative strength/weakness, as well as methods that identify when securites and/or sectors have become extended to the point of offering (un)favorable risk/reward ratios. Fundamentally, I've designed models based on earnings, cash flow, ROE, and momentum.

Both techniques currently use a top-down approach to valuation. Broad market indices receive the first level of quantitative/fundamental analysis to identify long and intermediate-term trends. Then market sectors are analysed and ranked according to any number of criteria, including price, earnings, momentum, relative strength, etc. These sectors can then be further drilled into, to identify specific securites that satisfy personal risk profiles. Future models will identify value through a bottoms-up approach.

RSI Divergence

2009-04-28T18:16:00.003-05:00

DJI - RSI Divergence

Shooting Star - SPY Tested

2009-04-27T07:31:00.005-05:00

Several sources today were citing the bearish implications that a 'shooting star' may have.

A shooting star is defined as: A single day pattern that can appear in an uptrend. It opens higher, trades much higher, then closes near its open. It looks just like the Inverted Hammer except that it is bearish.

Of course, we opened lower but we did trade much higher from where we opened. And it did close near its open. While this doesn't fit the description of a shooting star, the pattern still looks similar and I wanted to test its significance. It seems like it would suggest a rejection of higher prices which should lead to lower prices. So let's test that.

The criteria I used for my test was as follows:
1. The close has to be in the bottom 25% of the day's range.
2. The day's range has to be at least 4 x greater than the difference between the open and close. This results in a long 'shadow' and a small 'body'.
3. It sells tomorrow's close (1 day was used but 2, 3, 4, or 5 days didn't help)

Tested over a 5, 10, or 15 year period, this criteria provided almost NO edge whatsoever. It had a net profit close to $0 and won on average 50% of the time.

So all this shows is that with this criteria isolated is it virtually useless. If you'd like to incorporate this price pattern into your trading, you would obviously need to use this as a supplement to your entry criteria.

As a simple example, I used the criteria above but added the filter that the close had to be above its 10 day MA and under its 200 day MA. I just randomly picked these numbers but it does in fact describe the market's (SPY) current situation.

Under this new scenario it is actually profitable to buy the close. Granted it has only occurred 11 times since 1993 so I wouldn't consider this 'properly' backtested but it's just an example. Anyhoo, in this example, buying this scenario was profitable 91% of the time. See below - click to enlarge.
Results

Equity Curve

Simple System

2009-04-26T12:48:00.006-05:00

I stumbled across a very simple system today. It buys when SPY closes in the bottom 20% of the days range. It buys the close (day 1) and sells the open on day 3. It's essentially a one day trade but it sells on day 3's open opposed to day 2's close.

It is commonly known that the sell strength, buy weakness, mean reverting strategies are working right now. It didn't used to be like this though and at some point in the future it probably won't be either but until then that is where your focus should be. A good example of this is, go read some of the older trading books by Williams, Connors, the Turtles, etc. Many of their strategies were based on buying breakouts (buying strength). If you test those systems in today's market (I have) you will not achieve the same satisfactory results.

I don't recommend using this alone as a trading system but the concepts presented should be considered when building your own.
Results on SPY (5 yrs) - click to enlarge:

Here is a screenshot of what happens when 20% is replaced with x% (column A)

The results are surprisingly decent even when tested over a 20 year period. This certainly does not work with all stocks, so backtest accordingly.

TradeStation code:
INPUTS: len(1), pcent(.2);
IF Close < (Low + Range*pcent) THEN buy this bar at close; If BarsSinceEntry=len THEN sell next bar at open;

Limbo

2009-04-23T17:17:00.008-05:00

Currently, I view 875 as a top and will rely on the 60 min charts below for further clues. While the market looks to be rounding/topping off, it could just be consolidating. Dip buyers are certainly present. While I continue to favor the downside I must keep an open mind. There can be a fine line between conviction and inflexibility.

Regrettably, the majority of my trading systems remain in limbo. I have developed several methods of selling strength in bear markets and buying weakness in bull markets. I have not developed consistently profitable methods of buying weakness in bear markets, so I don't do it. We have been in 'stuck' in overbought territory (based on my indicators) since March 12th so I haven't been getting any new signals. This can happen in bear market rallies and the consolidation period that follows but it is frustrating to either not trade or rely on discretionary price pattern trading (which is more exciting but I find it more difficult). Lately I'm glad I don't have to trade with these choppy conditions (see first chart).

SPY & ES

Asset Classes

2009-04-21T16:30:00.004-05:00

A review of what the major asset classes are doing (S&P, dollars, bonds, and commodities) and some follow-ups to a couple of yesterday's charts:
SPY - I don't put a ton of stock into short-term fibs; however, today retraced exactly 50% from yesterday's high - we will see if this ends up being significant.

UUP

TLT

DBC

DBA - setting up...

XOM - heading lower.

OIH low-risk entry.

Charts

2009-04-20T16:07:00.007-05:00

The S&P hit 875 on Friday...where every possible resistance level was converging at. So as expected, we had a nice sell-off today. Market sentiment is still naturally split - it will take more than one down day to change anyone's mind. Almost everyone with a brain believes that this bear market is far from over; however, there is plenty of disagreement as to whether we see 700 or 1000 first, before heading lower. One thing that people can agree on, is that the market ran too far too fast in the last 30 trading days. At the moment, and given what is happening with earnings/guidance, I expect a more serious pullback. Now enjoy some charts.

SPY

QQQQ

VIX

SHORTS
TIE

OIH

WYNN

MMM

X

XOM

LONGS
TXN

USD

UUP

Rising Wedge

2009-04-16T16:06:00.005-05:00

Firstly, the after hours in GOOG was nuts. I don't know one person who didn't expect GOOG to outperform so I'm glad to see that the market isn't going to reward such obviousness (at least for more than 20 mins). Lately the market seems to be rewarding such behavior, which may be indicative of dumb money, but as they say, I'd rather be rich than right.

Easier said than done. It's still the same old story. It's stupid to buy at these levels but shorting hasn't been working out too well either. I'm convinced that as soon as I start buying breakouts, it will become fashionable to start selling strength and buying weakness again.

SPY remains in a rising wedge pattern (which 'should' resolve to the downside) but until that lower trendline is broken...

I still find AAPL intriguing. It finally closed its gap to the tick (from 09/26/08!) , several fibs seem to be collecting around its current level, and it's up 50% in a month but I don't know if I can bring myself to stand in front of this bus.

Tech Tock, Tech Tock

2009-04-14T17:22:00.003-05:00

Is it finally time for tech to take a breather? After hours traders appear rather indignant that Intel won't offer any Q2 guidance. Ah but alas, Obama Von Spendthrift and his tax evading cronies did not give the chip-makers permission to cook their books...only the banks. This lack of guidance may become popular during earnings.
Intel was being looked to for reassurance that the economy was in fact healthier than ever - big surprise. If you believe the tide is turning, at least temporarily, take a look at AAPL and GOOG, who conveniently happen to be up against resistance (which will allow for a low risk entry).
AAPL

GOOG

I will remain patient and see how this week's earnings go. The last 27 days have, for good reason, made me more cautious than usual. The short term trend is still up but it is clear that overhead resistance is taking its toll due to the rounding/topping shape of the SPY. It doesn't mean we don't go higher but it may indicate it's finally time for that pullback.
SPY

Here are two short suggestions:
XLU

XLB

Unfortunately, the options on these kind of suck but fortunately, they are cheap enough to short outright.

Weekly SPX

2009-04-13T09:42:00.003-05:00

With the exception of the two bars indicated below, every other weekly close on the SPX (since last Oct) has treated this blue line as either support or resistance - 870.

The 23.6% retracement level, from the all time high in the S&P down to 666; corresponds to 877

Daily trendlines - resistance between 875-900

The market is up 30% in 26 trading days. I don't have a ton of confidence in market direction nor any interest in taking on additional positions right now. Fundamentals are nonsense right now and TA isn't doing too much better. If we get to SPX 870ish I will consider initiating more shorts or selling OTM call credit spreads on some individual stocks TBD. If GS and friends report better than expected earnings, which of course they will, look to get long FAZ early next week, below 9. By some measures (Bespoke) the S&P hasn't been this overbought since May 2001.

Now What?

2009-04-09T15:00:00.008-05:00

First of all, I want to congratulate WFC on $3B in Q1 earnings! On an unrelated note, I stopped marking my house to market, and it also is worth $3B! What a great day. It makes my small loss in GS look like unsalted peanuts.

Speaking of GS, I have analyzed the recent trade below (click chart to enlarge) to hopefully keep me from making similar mistakes in the future. I think it boils down to a poor entry, which equals a non-low-risk entry.
GS

GS (big picture)

Back to the overall market:
SPX

QQQQ

Goldman Sachs

2009-04-08T16:01:00.004-05:00

GS has made a short-term double-top at 119.76. It has established support at 112.50. I'm looking for a break at this level (see arrow). If I don't get it, I'm out. If I do get it, I'll be looking for a target of 107ish. Things need to start moving lower in a hurry though - I don't trust earnings (14th).

Longer-term view:

Utility Sector

2009-04-07T15:58:00.003-05:00

I noticed some interesting things with XLU today (click graphs below). Look for a breakout above 26.34 or below 24.92 to give yourself an extremely low risk entry. Granted, this isn't as exciting as FAS or FAZ but that's not always a bad thing.

XLU

CHARTS you need to know

2009-04-03T15:31:00.010-05:00

Today we broke out - as seen on SPY and QQQQ below (click chart to expand).
SPY

QQQQ

This market is wildly overbought, not to sound like a broken record. The market has made it quite clear though that it is in bull mode for the moment and not even 8.5% unemployment can stop it.

The market should not be able to run above 87/88 before a much, much needed pullback, perhaps that will be brought on by earnings season (even though expectations are in the loo). I think the green line is the next likely price target before retracing to 81 or even 77.

Notice in the next two graphs how the 2000-2003 bear market interacted with its 50 & 200 day MAs. Compare that to now. In 2000 the 50/200 MA crossover would have pretty much kept you out of the woods. And notice how many times price climbed all the way to its 200 day MA only to be rejected. In this bear market, we haven't even seen the light from the 200 day MA. More or less the light from any 50/200 MA crossover.
2000-2003 Bear Market

Current Bear Market

This doesn't mean we don't run up to SPX 1070 before seeing new lows. The timing of this, as always, is the hard part. I still have to think that if you are getting long now, the market cannot reward you - you missed the move - you are dumb money. Regardless, upon continued strength, here are a couple of examples of breakout stocks worth looking at, that have low risk entries:
MA

USD

With regards to GS. It did in fact close above its 200 day MA but as long as it is overbought and within its channel, I feel okay holding onto my puts. Plus, I bought OTM puts = small delta, so I'm not risking too much, to let out a little line on this one. The lack of strength in XLF gives me further confidence of a pullback. This will be a day-to-day decision.
GS

XLF

Final thing to watch:
VIX

Interesting Close

2009-04-02T16:28:00.014-05:00

The major indexes easily broke out of their range/channel today; however, where they closed was rather interesting. They closed on some much needed profit taking but more importantly, they closed right at, and in most cases beneath the upper bound of their range/channel (click on charts below).
NOTE: if you're using stops by placing them on the other side of resistance, for example, give yourself some breathing room - trendlines were meant to be drawn with a crayon.

It is becoming increasingly difficult to be bearish after the last 18 trading days - it almost reeks of stubbornness. But unfortunately, it's difficult to check my common sense at the door when analyzing this market.
NOTE: my time frame is an intermediate one and I don't trade counter-trend rallies (for no reason other than I haven't found a consistently profitable method of doing so).

We are overbought, resistance in the 830-870 range is going to get worse, and I'm still not convinced that the economy is recovering when unemployment numbers keep blowing estimates out of the water every month. Also, the financials (XLF) sold off ever since their gap up this morning, despite CNBC telling you that they were the ones 'leading the rally'. Dipshits.

Must Reads:
Debt-to-GDP (check out the debt tab!)
Large Traders Sell Into Strength
Best 2 Day Starts to a Quarter

SPY

QQQQ

GS

I'm still holding APR 100 Puts on GS. If it closes above 115, I will likely get out but I'll deal with that later.

Confidence: low

2009-04-01T16:33:00.008-05:00

My confidence is extremely low, going into Thursday short. I have a sneaking suspicion that an overwhelming amount of 'govt pressure' has been put on these FASB nerds to make the 'right' decision on the pending MTM decision.

On the flip side of that coin, wouldn't it be almost too obvious to load up on FAS before their announcement? Does the market want to reward such an obvious play? Plus, is the market really stupid enough, to think that if a company, all of a sudden 'pretends' that their assets are worth more than they really are, that this will increase shareholder value? Probably. Because the market is controlled by people - and people are stupid. I can't tell you how many articles I read today about how great the econ reports were, sweeping the jobs data under the rug. And home sales are improving because rates are being manipulated lower and the govt is giving 1st time home buyers 8k cash. Does this mean the economy is recovering?

In either case, the market doesn't reward people for knowing what it 'should' do. If it wants to ignore bad news and go up, it will. That said, from a technical perspective, no damage has been done yet - I'm just nervous about tomorrow - knowing that every time the rules change, it can be very tough on the shorts in the short-term, even though none of the rule changes ever have a lasting positive effect.

There is tons of overhead resistance but be aware that the reaction to the MTM ruling could knock your short little socks off. Be prepared to liquidate or hedge with some FAS, TNA, or other things that have a 3x in their name.

SPY - still well within its 'channel of cooperation'

Gap Fill

2009-03-31T16:03:00.005-05:00

We had a perfect gap fill today on, oh, everything. This suggests to me that we can now resume our downtrend with the likely help of some terrible economic numbers this week.
SPY - look at today's candle and where we closed. This represents a rejection of higher prices which SHOULD resolve to the downside.

GS - at about 107.50, just as the gap was filling, I bought the GS April 100 Puts with a stop at 115 and a price target of 100...and eventually 82.

GS - easier to see the gap fill on the 5 min chart.

UPDATE: I hope the G20 can talk some sense into Obama Von Spendthrift.

UPDATE 2: And that Conficker.C takes over everyone's PC, opens their brokerage account and shorts the SHIT out of Goldman.

Suspicious

2009-03-30T17:12:00.007-05:00

Everything on my radar looks like a textbook, perfect shorting opportunity - which, in a contrarian sort of way, makes me a little suspicious. In other words, things almost look too good. Plus, I swear, I need to V-chip (if I may use this as a verb) CNBC. It's fine to be optimistic but not when it interferes with reality. If I didn't know better, I'd swear we were in a normal, mundane bull market retracement instead of a bear market rally. Lunacy.

In either case, if enough people drink the kool-aid we could very easily see more upside even though it defies logic. That said, while it is necessary to have some convictions it is perhaps even more important to be flexible and not fight the market. I am looking for SPY 75.50 for an initial target and will re-evaluate there.

I would have preferred a breach of this level (QQQQ):

But here is the big picture (QQQQ):

Big picture (SPY):

Deutsche Bank AG

2009-03-27T18:07:00.010-05:00

Here's one of many examples where short covering played a major role in launching this turd of a stock from the low 20s to the low 40s in roughly 15 trading days, for a modest 100%+ return. This remains a risky sector to be playing with, given the random but frequent policy/rule changes. Nonetheless, a pullback, as with the rest of the market, seems in order and the following charts of DB present some low risk entries and stops.
DB

DB - with fibs

There have been a lot of respectable traders talking about 666 representing an intermediate-term bottom given the level of bullishness over the last couple weeks.
While certainly possible, I have yet to see any fundamental reasons to support this with the exception of a blip in the housing numbers - likely due to 8k being given to every first time home buyer to help soak up the excess inventory - as part of the new stimulus. On a fundamental basis, I am more interested in the unemployment numbers which have shown no sign of improvement (quite the contrary); and the egregious amount of money being printed (debt) which leads to higher inflation which leads to an eventual increase in interest rates - bad for stocks. P/E ratios still seem high - SPY(15), IWM(18), QQQQ(23). Q1 earnings are around the corner as well and they won't be pretty but just remember, all they have to do is beat the pathetic expectations. Bottom line is whether or not the 'worst case scenario' has been fully baked into price yet. Nobody knows. So, long story short, this is yet another reason why fundamental analysis sucks. I will wait for the SPY to retrace to 75 and see if that level holds.

Unstoppable

2009-03-26T15:51:00.005-05:00

This rally has been unstoppable. Fortunately, this silliness will come to an end - but remember that the market is operating on its own time frame, not yours.

In the very short-term the bias remains bullish. I am doing my part at least, to put an end to this - via voodoo magic blue lines, drawn for you, on the charts below (click charts to enlarge) - which will undoubtedly act as fiery hellstorms of resistance.

Keep the prevailing trend in mind. I will still be looking to add to my short position, via SSO, if SPY gets to its trendline, as drawn below.

By the way, as the govt is working tirelessly to 'loosen' the credit markets, read this: Bespoke

QQQQ

SPY

SPY - with fibs (drawn from the gap down on 10/03)

GS - resistance at trendline & 200 day MA

X - resistance at trendline & 50 day MA

RAILS - low risk setups

2009-03-25T18:35:00.007-05:00

Several low-risk setups:
UNP

CSX

NSC

BNI

Gap Fill

2009-03-25T15:38:00.003-05:00

We had a nice gap fill today, almost to the tick (chart 1). This day was painting a perfect reversal...until the wildly suspicious last hour of trading.

The second chart shows the line in the sand (85). In the short term there is obviously some respectable buying pressure; however, the risk/reward on the upside is getting increasingly thin - especially between 83-85.

60 day SPY

1 year SPY

% of stocks above 200 day MA

30 Day RSI - back to 50

2009-03-24T16:46:00.007-05:00

The shaded areas in the following charts (click to enlarge) indicate periods when the 30 day RSI has traded above (or at) 50.

Lately, anytime this metric has gotten to 50; however, the underlying index has quickly retreated. Of course, just like every time, this time is different...

After Monday's rally, SPY is now trading above its 50 day MA. I read a good point about this 7% day. To paraphrase: 'even in the strongest of bull markets, you don't see 7% up days. You see these violent short covering rallies in bear market rallies, period.'
That said, realize that this rally may very well continue for a couple months but don't lose sight of the big picture. Selling seemed a little weak today but yesterday's high held as well - I would consider today more bullish than bearish. Where this week finishes will be significant.

SPY

QQQQ

Cautiously Optimistic

2009-03-23T16:21:00.008-05:00

If we get to SPY 86-89 I will be adding to my shorts. I remain cautiously optimistic that we head lower - as I see 10 reasons to go lower for every 1 reason to go higher. I am not attempting to time this move - it could be one day or one month - but will continue to add to my short position at each key level of resistance.

SPY

UPDATE: Biggest Dow Point Gains and Percent Gains

VOLUME BY PRICE

2009-03-20T16:50:00.004-05:00

The blue bars on the left (click on the SPY chart) represent the Volume By Price - which represents supply/demand - which represents support/resistance. Notice how perfectly the blue bar, 2nd from bottom, correlates to the most recent KEY LEVEL of resistance at 81.
SPY

Below are three good range bound stocks that can either be shorted on continued weakness or bought on strength.
USD

MA

AAPL