A Discounted View

Despite the title of this post, this is not another analogy between long-term investing and the story of the tortoise and the hare. Instead, in the trading world a Turtle is known as a protégé of Richard Dennis and William Eckhardt, who ran a Commodity Trading Advisor (CTA) business in Chicago during the 1970’s and 1980’s. These two traders conducted a trader training experiment based on disparate opinions on whether or not trading was an innate skill or could be developed. After the first round of successful training, another round of testing was completed with similar results. That is, the Turtle trader trainees were able to trade profitably using the set of rules taught by Dennis and Eckhardt. One of the trainees was Jerry Parker who went on to found and run Chesapeake Capital Management for the last few decades. His firm specializes in medium to long-term Trend Following  trading principles that he learned while in the Turtle program. In a recent interview Parker highlight...

"The Yen has a tendency to trend, take a timeout, and then trend again" - Stanley Druckenmiller, 2015 Since the end of 2015 USDJPY has been forming a trading range between 115 and 125. This past week the currency pair closed below 115 with a breakout to the downside. Clearly, many market participants have been monitoring these levels in anticipation of a swift move out of the consolidation that lasted over a year. Accordingly, most of the initial move was absorbed this week. However, there is still some room for the pair to decline to the next level of support around 110. Some technicians may argue that the consolidation resembles a Head and Shoulders pattern. While there is some reliability in pattern recognition, I believe it is more important to identify the meaning of a pattern. In other words, a Head and Shoulders arrangement is a sign of distribution often seen around price tops. In fact, USDJPY began forming a series of Lower-Highs and Lower-Lows on a weekly b...

At the moment, there may be some bullish divergence  emerging in the daily chart of the S&P 500 (SPX) and Russell 2000 (RUT). Divergence between a price and an oscillator can be a reliable harbinger of future price moves. Since the beginning of 2016 SPX has been in a strong, sustained downtrend. However, a pivot low was formed in the middle of January and now it appears as though another price pivot could be establishing itself in the beginning half of February. Granted, the price action year to date has formed a series of lower-lows which is often interpreted as a bearish sign. Yet, when there is bullish divergence in a price-based indicator it often leads to a swift reversal of prior price action. For example, in the chart below it can be seen how the price trend of SPX has diverged from that of two of its oscillators. That is, the oscillators have formed potential higher-highs since the beginning of 2016. This could be indicative of impending bullish price action in the...

“You always want to be with the predominant trend. My metric for everything that I look at is the 200-day moving average.” – Paul Tudor Jones Being able to determine the market’s primary trend will put the odds in your favor to properly position your portfolio for future events. There are many ways to accurately identify a trend, however using the 200-day moving average* is one of the simplest yet most effective strategies. In fact, most Trend Following firms employ trading strategies that take an entry and, possibly, an exit based on a specified percentage close above or below the 200-day moving average, respectively. Moreover, the 200-day moving average can be an effective trading signal for all markets since Trend Followers are typically registered as Commodity Trading Advisors (CTA’s) that have exposure to equities, fixed income, currencies, as well as commodities. Additionally, the 200-day moving average has been an effective signal throughout many market cycles. One s...

January can often be a telling month for the stock market. In fact, the results from several studies have shown how January’s performance can be a harbinger of future stock market returns for the year ahead. One such study is referred to as the January Barometer. Specifically this stock market test assesses the direction of the Dow Jones Industrial Average (INDU) after the first five days, then the balance of January, in order to make a statement for the expected performance of the stock market during the remainder of the year. For example, Jay Kaeppel published his results of the January Barometer in Technical Analysis of Stocks & Commodities and found that the direction of the first five days of January, confirmed by a continuation of that pattern throughout the end of January, is often followed by the same pattern for the rest of the year. Also, if the market were to post a positive return for the first five days but reverse trend and end the month in the red, the expectations...

“All through time, people have basically acted the same way in the market as a result of greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis.” – Jesse Livermore Trend Following is built upon the premise that trends exist in the markets.  These trends can be identified using specific criteria.  Traders can employ a systematic process, discretionary process, or a combination of those two trading processes.  Predicting price trends is nearly impossible and, as leading behavioral economists report, an “illusion” (CFA Institute). Further, consider the observations of Linda Raschke, a stocks and futures trader featured in The New Market Wizards: “In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future.  Mark that word – Nobody! Thus, the successful trader does not base moves on what supposedly will happen but reacts instead to what...