Scaled-in 20% of position in NMSAX

Today, IWM is still oversold, so I continued the scale-in I started yesterday.

Scaled-in 10% of whole position in NMSAX

IWM is oversold today, with RSI(5) < 30 and %B < 0.1. As per my 401k strategy for 2011, I am starting to scale in 10% of the funds destined for NMSAX. The plan is to add 20%, 30% and 40%, in the next three days, for as long as it stays oversold.

Bought EZA at $69.50

EZA was the best-looking oversold ETF of the day.  I should have waited until later to buy it, but I was starting to see a support forming at 69.50 and wanted to get in at the bottom. Lesson learned: discipline! If the plan is to do transactions after 3 PM, that's what you have to do.  Improvisation is the enemy of profit, more often than not.

Target is when 2 out of 3 of the following are true at or near market close (meaning after 3 PM):

• %B is above 0.4
• RSI(2) is above 80
• RSI(4) is above 60

The targets are based on four recent setups for this same ETF. The trade should last between 2 and 5 days.

Date	Price	%B	RSI(2)	RSI(4)	Days	Gain
2/8/2010	51.04	0.078	22.26	8.45
2/11/2010	53.79	0.495	79.79	63.51	3	5.39%
2/16/2010	54.4	0.65	76.61	65.36	5	6.58%
8/25/2010	57.33	-0.001	6.47	14.97
8/27/2010	58.48	0.279	78.56	54.16	2	2.01%
9/1/2010	60.56	0.719	93.82	80.21	5	5.63%
10/27/2010	66.76	0.063	4.661	20.14
11/1/2010	68.1	0.364	78.63	55.57	3	2.01%
11/2/2010	69.34	0.666	94.43	74.77	4	3.86%
11/30/2010	66.72	-0.019	11.2	22.96
12/2/2010	70.85	0.64	89.6	72.4	2	6.19%
12/3/2010	71.87	0.8	93.21	77.6	3	7.72%

StockFetcher screener

I'm evaluating the StockFetcher screener, using their 2.0 crippleware Flex version. It only shows 5 results, but it works for me, because all I really want is one.  By using a good filter, I don't have to go through many results to pick the one I like the most. This is the filter I'm using.


Show etfs where close is above MA(200)
and average volume(30) is above 50000 do not draw average volume(30)
and Bollinger %B(20, 2.0) is below 0.2
and RSI(4) is below 25
and RSI(2) is below 10
and draw MA(20)
and draw Bollinger Bands(20)

My 401k strategy for 2011

A recent read motivated me to put order in the chaos of my 401k.  I realized I needed rules, so I went ahead and defined my long-term entry and exit indicators. But before starting with the mechanics of the rules I will be following like a robot, I need to define asset allocation.  Everyone seems to expect a positive year for the S&P 500, but none imagines that it will be a straight line up.  For that reason, I want to use market timing indicators to avoid the damage resulting from the volatility that will inevitably happen this year.

My favorite choices for equity are a proprietary index fund based on the S&P 500 and NMSAX (based on the Russell 2000 small cap index, aka $RUT).  The rest are managed mutual funds with higher management fees that don't offer any real diversification and are not attractive to me.  

My choices for fixed income are GSHAX (high-yield corporate bonds), MFBFX (investment-grade bonds) and FBIDX (mostly treasuries, indexed, based on AGG).

I wish I had the opportunity to also invest in other asset classes, like commodity, sector, currency, or inverse indices, but these are mutual funds, and it's a limited choice, so we have to make do with what we've got.

This is my planned asset allocation:

• 90% long-term strategy: 50% NMSAX and 50% $SPX
• 10% long-term strategy: 100% GSHAX

The rationale for mixing 50% of each in the long-term strategy for equities is that one index is small cap and the other is large cap, they are correlated but $RUT has outperformed $SPX in the last ten years.  Some say that 2011 will be the year when large cap outperform small cap.  Maybe they're right, maybe not. I am trying to reduce risk by allocating them equally.  The important part will be to follow the rules when the time is right.

The rationale for GSHAX in the fixed income portion of the long-term strategy is that it provides a nice yield. It is highly correlated to $SPX, so it's not a good security to hold in a bear market, because it loses value.

Finally, let's get to the long-term tactical asset allocation, which applies to 100% of my assets. This is based on my long-term entry and exit indicators. Let's start with being in a bull market and fully invested. Every Friday, I should check my exit indicators. If none is giving a signal, stay the course. If one is giving a signal, be on alert. If two are giving a signal move 25% to cash. If three are giving a signal, go to 50%, and so on. 

In a BULL market
One exit signal	-> Be on alert, stay 100% invested
2 exit signals	-> Go to 75% invested
3 exit signals	-> Go to 50% invested
4 exit signals	-> Go to 25% invested
5 exit signals	-> Go to all cash, you're in a bear market now

In a BEAR market
One entry signal	-> Be on alert, stay 100% cash
2 entry signals	-> Go to 25% invested
3 entry signals	-> Go to 50% invested
4 entry signals	-> Go to 75% invested
5 entry signals	-> Go to 100% invested, you're in a bull market now

NOTE: I could use FBIDX instead of cash as a safe haven.  It will depend on what the FBIDX chart looks like at the time of need.

One last thing I need to define are goals. In 2011, I will contribute about 13% of the current 401k balance. In addition to that, I am aiming for a 12% gain. With some approximation, it should correspond to a final balance that's about 20% higher than now.

So now, only one question remains. Based on this strategy, as of today, I should be 100% invested, but I'm not.  Should I buy now, or wait for the next favorable entry point? $SPX and $RUT have been gaining without substantial breaks for the last two months, since the 4% correction in mid-November 2010. I am looking at RSI(5), Wm%R(14) and CCI(20) and they all indicate overbought conditions on both indices. $RUT is at 807 and $SPX is at 1293.  I think they are both ripe for a correction.  I think that a correction will certainly happen, for sure, but the question is, will the price break below today's level? Because otherwise it would be pointless to wait for it.

I have decided that the less risky course of action is to wait for RSI(5) to drop below 30 before going in and for %B to drop below 0.1 before scaling in progressively 10%, 20%, 30% and 40% each day, for as long as it stays oversold. I may have to wait another month, or maybe a week. But at least I have a strategy now, and rules that I can follow like a robot, instead of being driven by emotion.

Market bullish reversal indicators

After a bear market, when fear is entrenched and despair rules the day, there comes a time when it is fit to get back in the market.  These are the signs that a wise investor should be on the lookout for.

1. The 50-week MA of the weekly CBOE Options Put/Call ratio ($CPC) crosses below one.
2. If the 20-week MA of the weekly Percentage of NYSE Stocks above their 200-day MA ($NYA200R) crosses above 50, it indicates that the market is moving higher and will probably continue to do so for a while.
3. When the Wm%R(63) of the weekly S&P 500 crosses above 50, it may be time to get back in, especially if confirmed by a positive CMF(63) or ROC(40).
4. When the market gains 19% from a recent low, it's a likely sign that the bear market has reversed itself and a new upward trend has been established
5. Bullish divergence between the 20-day MA of NYSE Advance-Decline Issues ($NYAD) and $NYA. This happens when $NYA forms a lower low but the MA(10) of $NYAD for a higher low. Normally, lower lows should confirm each other between these two indices. When they don't, the $NYAD suggests the new direction of the trend.

These are the last times these signals occurred.

Signal	Date	S&P Close
$CPC	2/27/2009	735
$NYA200R	8/7/2009	1010
Wm%R(63)	8/21/2009	1026
19% gain from bottom	3/23/2009	822
$NYAD bullish divergence	3/13/2009	756

Would have bought EPU at $46.10...

... if I had cash available, but I'm still waiting for the last sale to be settled. Target would have been 48.07 (the 38.2% retracement of the latest slide).

1/18/11 update: today EPU closed at 47.10, for a 2.17% gain.  It's still not oversold enough, with RSI(2) below 70 and RSI(4) below 55, so I would have held it for another day.

1/27/11 update: today EPU closed at 48.39, which would have been a 4.96% gain over the original 46.10. Something must have happened because today volume was 6 times the average.

Market bearish reversal indicators

Long positions in the stock market should be scaled back when two or more of these indicators are flashing red.

1. The 50-week MA on the weekly CBOE Options Put/Call ratio can be used to detect when excessive bullishness has reached its maximum.  When the line crosses above 1.0, it suggests it's time to get out. (When it crosses back below one, it may be time to get back in.)
2. When the 20-week MA of the weekly Percentage of NYSE stock above their 200-day MA ($NYA200R) falls below 50, it's a good indicator that trouble lies ahead.
3. When the Wm%(63) of the weekly S&P 500 drops below -50, it may be time to get out, especially if confirmed by a drop below 0 of CMF(63) and ROC(63).
4. When the market drops 16% from a recent high, it's a good indicator that a bear market has started and it's best to get out to limit the loss.
5. One dip of the NYSE High-Low index ($RHNYA) below 9 is a warning sign. Two dips in less than 3 months are a red alert, and they suggest it's time to get out.

These are the last times these signals were given, in order by date:

Date     $SPX Signal
08/06/07 1467 $RHNYA
09/07/07 1453 $CPC
11/12/07 1439 $NYA200R
11/21/07 1416 $RHNYA
12/31/07 1468 Wm%R(63)
01/22/08 1310 16% drop
01/23/08 1338 $RHNYA
07/03/08 1262 $RHNYA

It's interesting that the NYSE High-Low index was the first and the last to give bearish signals.  The last one it gave was only two months before the market crash of October 2008. If the first five signals had been used as sell signals, an investor would have progressively moved out of $SPX and into cash from August to December 2007.

Investing rules

Talking of investing rules, I must admit that my 401k at the moment is in a state of anarchy. In this post by Cullen Roche on The Pragmatic Capitalist I read today, there are five good rules, listed at the end, that I really should implement.  Let's make that my goal.  The rules, in brief, are:

1) Stay flexible, admit your mistakes, cut your losers loose.
2) Seek non-correlated asset classes for true diversification.
3) Don't be emotionally biased.
4) Never stop learning.
5) Create your rules and follow them like a robot.

This is my assessment of where I am now with regards to these rules:

1) I am in the process of admitting my recent mistakes, but not quite there yet.
2) There's not much choice in my 401k. It's basically junk bonds, investment grade bonds, an S&P 500-indexed fund, a Russell 2000-indexed fund, and some expensive international equity funds.
3) I am definitely a sinner of emotionally biased decisions, because I don't have rules.
4) Working on that...
5) This should be the next thing I do. Look at my choices, define my strategy, and implement it.

Sold ECH at $74.40

Today ECH was showing two of the four conditions for a trade exit, as defined in my previous post. The RSI(2) was above 70 and the Close was above the 5-day MA. In addition, RSI(4) was 53, very close to the target at 55.  In any event, my goal was two out of four, today it was reached, and the gain was 3.76% in two trading days.

I wasn't able to get the close price of 74.50 because... I don't really know.  Here's what happened.

At about 3:30 PM I tried to enter a stop limit order at 74.56, but Zecco rejected it, saying I didn't have enough shares to sell.  I checked the number, and it was correct.  Confused, I tried a few more times, and then freaked out a little bit and called customer service.  In a few minutes they told me that this happens when there is a previous sell order.  Duh! I had to cancel my stop loss order I had placed when I opened the position.  Then I entered a new stop limit order, which was accepted.  Oh, joy! But the last sale was staying at 74.39, and I wanted 74.40 at this point.  More than everything, I really wanted to sell, did not want to keep them for another day (which may have been a mistake, but goals are goals, I'm trying to be disciplined here).

So while I'm watching the last sale stay fixed at 74.39, my order is executed at 74.40, and I only find out at about 3:58 PM when I'm really ready to dump them at whatever price.  Two minutes later, somehow, the last sale becomes 74.50, although the 5-minute chart doesn't really reflect it.

Conclusions? What have I learned?

1. Must cancel all sale orders before attempting to enter a new one.
2. Must check order status after entering an order - not the last sale quote.
3. Selling is harder than buying.
4. Setting the sale price is tricky, still haven't figure out how to do it.

NYADV MA-10 can be used to find entry points in SPY

This is a chart of the 10-day MA of $NYADV (number of issues that advanced in price on the NYSE).  It looks like crosses down the green line at 1350 are good indicators of entry points in SPY (or other similar securities based on the S&P 500 index).

Bought ECH at $71.70

ECH was so oversold today, it actually fits the criteria of four of my favorite ETF strategies. In fact, I have a hard time deciding what criteria to use for determining the target for my exit strategy. Since the buy criteria fit four different strategies, I am going to wait until two of the exit criteria are realized.

A nice surprise today was to find that Zecco takes up to but not necessairly 3 trading days to settle trades, so today I already had the proceeds from yesterday's sale in cash.

The 6-day decline in this country ETF is due to the Chilean government intervention in the exchange rate between USD and the Chilean Peso (CLP).

Another really good candidate for a trade today was THD. I ended up picking ECH because it was more oversold, but THD's chart looked more like a stable trading range.

Favorite ETF Strategies

RSI4 < 25

Enter when:
- Price above MA200
- RSI4 at close < 25
- Position is already open and RSI4 at close < 20 (optional)

Exit when:
- RSI4 at close > 55

Note: works better in the short setup.


RSI2 drops 3 days in a row

Enter when:
- Price above MA200
- RSI2 has dropped 3 days in a row from a value < 60
- RSI2 < 10
- Position is open and price closes lower (optional)

Exit when:
- RSI2 > 70

Note: works better in the short setup.


%b < 0.2

Enter when:
- Price is above MA200
- %b at close has been below 0.2 for the last 3 days
- Position is open and %b at close is still below 0.2

Exit when:
- %b at close is above 0.8


RSI2 < 10

Enter when:
- Price is above MA200
- RSI2 at close < 10
- Position is open and RSI < 6 (optional)

Exit:
- Price at close > MA5

Note: works better in the short setup.


Scaling in

Pre-condition:
- Price above MA200

Enter 10% when:
- RSI2 at close < 25

If next day price at close is lower, add 20%.
If next day price at close is lower, add 30%.
If next day price at close is lower, add 40%.

Exit when:
- RSI2 at close > 70

How to choose among many candidates

Choose country over sector, and sector over commodity or currency or bond ETFs.
Choose the ones with the strongest signals (lowest RSI in long setup).

Sold LRCX at $48.78

Sold LRCX at $48.78 for a gain of 2.91%.

Things I have learned:

1. I should have bought at the end of the day, or at the least after 3:30 PM.  I would have gotten a better entry price.
2. Sticking to the plan is essential.  Several times in the last three days I have thought of closing this position at a loss, so I could take on others that looked more promising.  In this case, being patient paid off.
3. It takes days for the trade to settle, so while I wait for the cash to be available on my account, I can research my next trade.
4. I sold with a market order when the bid was 48.80, but to my surprise, Zecco executed it at 48.78. So they don't necessarily execute a sale at the best bid. The next time, I should use a limit order.

1/12/11 UPDATE: Today LRCX is getting up over 50.20. I know it's a bit of hindsight now, but I think I should have waited to sell until more overbought conditions had developed.  The 5-day MA cross may be too premature. That was the target I had set, and I respected it, and that's cool.  But I should consider setting higher targets next time.  This could have been an almost 6% gain.

Bought LRCX at $47.40

LRCX looked promising this afternoon, so I bought some at 47.40. If things go bad, it might drop below 46.39, for a 38.2% Fibonacci retracement, or even to 44.42, for a 50% retracement, but I expect 46.39 to act as support.  The recent drop from 51.46 was mostly due - I believe - to a downgrade by a GS analyst. It's a downgrade from outperform to neutral. The target of my trade is when the price goes above the 5-day EMA.

AGG forming a bearish flag?

More obsessing over AGG. It looks like it's developing a bearish flag.  The length of the flagpole, from A to C, is about 2.60.  If the price breaks below the lower green line, there should be a drop of about 2.60 from that break.  Flags can take weeks to develop. This one is only a couple of weeks old, and it may not even be a flag after all. Check back in a week or two to see what happened.