In Search of Nirvana

Many investors and traders have in essence given up, feeling they cannot compete with the big Wall Street Houses, employing PhD’s in Physics and Mathematics to model the markets over very short time periods.  Probably one of the reasons, after the financial crisis, is simply Wall Streets unwillingness to accept the risk of holding, as a part of doing business.

What we can do is look to swing trade stocks and/or sectors and rotating out of some and into others when our rules say to do so. I will be spending some of my spare time attempting to design a system of selection, entry, and exit for the sector SPDRs.  I will begin by utilizing some proprietary PrudentTrader indicators. In this way if we are successful in our endeavor, members will posses a distinct advantage.

Let’s begin today by discussing a PrudentTrader proprietary indicator and the two ways in which I graph the data for presentation purposes. The indicator is based upon one, many are familiar with; advancing minus declining volume. The Prudent Trader difference is our data is dollar weighted.  This is an attempt to capture institutional activity.

I express this data in two ways for members, first as a daily Buying Power= Up Volume/(Up Volume+Down Voume+Unchanged volume) and its converse Selling Pressure= Down volume/ (Up + Down + Unchanged volume). If I plot the daily data it becomes too difficult to read and make decisions from. If however, I smooth the data over a period of time I get a somewhat better picture.

iShares Core S&P Small-Cap (IJR):  The blue line represents the Buy Power, Orange Sell Pressure from above. You can see that in early 2016 during the markets “debacle” the buying Power in the small caps overtook the selling pressure, an early bullish indication.

I can also express this data as a cumulative formula, adding and subtracting from the totals on a daily basis.

With this expression I like to look at the slope of the moving average, is it increasing or decreasing? As long as it increasing, our position is OK. Two things I notice here, first the moving average is no longer increasing, it’s flat and apparently trying to turn down and secondly we have essentially a triple top (in the indicator) with now and October/November.

My thought at the moment is to utilize these data points as a condition prior to employing an entry exit tool. In other words if the moving average’s rate of change has turned positive employ a strategy such as SAR to enter/exit. We’ll see and experiment when back testing commences.

I encourage members and non-members alike to participate, Join us on the journey and offer your thoughts and ideas, perhaps together we can establish a great method for us.