NYSE High-Low possible predictor of market top

The NYSE New Highs-New Lows index has been swinging greatly, peaking above 400 just before minor tops in the last 2 years.

It doesn't always work: sometimes it gives false signals. But overall it looks like it's worth keeping an eye on this. The theory behind this is described in this interview with Paul Desmond. When the number of stocks making new highs starts to falter, the index swings up and down.  This indicates that the market is starting to lose steam, the breadth of the rally is thinning, and only the major stocks are still going higher, while the rest are already declining.

Bought UNG at 5.31, sold at 5.10

Weekly: UNG has been declining for 2 and a half years.  The slope of the decline has been flattening and is now at zero.  It reached a bottom at 5.20 in October 2010, and is now near that bottom again. I think this is a double bottom.

Daily: MACD-H is ticking up. Effectively, UNG has been in a trading range since late October 2010, and Slow Stochastics indicates we are at or near the bottom of the current swing.

Target: I expect UNG to reach its 22-day MA in the next rally.
Stop: calculated at 5.10
Entry: 5.31

Sold at 5.10 on 2/24/11. This is where I had put my stop and the price dipped today to reach it barely, but just enough for me to make this the worst case loss.

Lessons learned are:

1. Arrogance does not make money.  I thought I could catch the bottom of UNG before a major rally, so I went long against a decreasing moving average and all signs pointing bearish. Do not trade against the trend.

2. Ignorance doesn't make money. I should have checked UNG:$NATGAS to see that UNG does not track the price of natural gas accurately, but it continuosly slides down. I had even read something about this in the past, but pig-headedly decided to ignore it. Stubborn ignorance results in a loss. Know what you are buying. Research, read and make informed decisions.

3. I could have made break even on this trade if I had moved my stop UP after the first $0.10 gain on day 1. Instead I left it where it was and lost the whole 2%. When long and the price moves up, move the stop UP.

4. Yesterday UNG was 5.25 and I could have sold then and limit my loss, but instead decided to keep hope alive and waited.  If a swing trade doesn't work out in 3-5 days, cut your losses and move on.

 2/25/11 UPDATE: To add insult to injury, so to speak, today UNG closed at 5.36. The lowest point it touched yesterday was 5.10, exactly where I had put my stop.  I don't know if this is just bad luck or something else. Maybe the 5.10 level was obvious and many others had done the same, and we all got taken in by a bottom fishing expedition of bears with insight into pending sell orders? Who knows.  Volume in the 5 minutes when 5.10 was reached was about 2 million shares. 

Trading = fishing?

The more I learn, the more I see similarities between trading and fishing. Not that I am a big fisherman, really, but what I mean is, it's more about what you don't do than what you do. Many times I am tempted to do something and to act on impulse. When I don't act on it, I never regret it. But when I do act, I often regret it.  That was the case last year before the end-of-April market dive and this week with the RSX trade. This is the second time that as soon as I see funds available in my brokerage account, I rush into a trade. Like a kid in a candy store. I really need to count to ten before acting. In the end, a missed gain is less expensive than a loss.  After a missed gain, I still have my capital.  But after a loss, some of it is gone.

Patience is the key to capital preservation.

Sold RSX at 38.21

I got stopped out this morning.  My stop was too tight: I set it only 1.8% below yesterday's close, and today it got tested right away.  The day low is 3.17, only four pennies below my stop! OK. It's time to figure out how to set stops properly.

Positives: stops do buy you peace of mind. There was no rollercoaster of what-should-I-do-now-sell-or-wait. When the stop got hit, the order went out. Just like a machine. I was a little bummed out, but not too bad, because the loss was limited.

Bought RSX at 38.88

Pros:
EMA(20) and EMA(50) are sloping up -> uptrend
EMA(20) is above EMA(50) -> uptrend
Price is above EMA(50) -> uptrend
Weekly charts indicates uptrend
MACD made multi-month high 2 weeks ago -> uptrend
CCI indicates oversold
RSI(4) indicates oversold
%B indicates oversold
Chaikin Money flow positive
Higher lows since Jan 1st
Has closed down two days in a row
Accum/Dist confirms uptrend

Cons:
Force Index(13) just turned negative
MACD sloping down suggests rally may be tired

Channel height: 3.93
30% of Channel height: 1.18
Target: 38.88 + 1.18 = 40.06
Stop: just below year open, at EMA(50), at 38.22

View current chart

Sold EZA @ 67.40

Two weeks ago I bought EZA at 69.50, and today I finally sold it at 67.40.  I have learned a few things from this trade.

1. I bought it at 1:30 PM, while my normal time is 3:30 PM. I was too impatient and could have gotten a slightly better price.
2. I also bought it before it got really oversold.  The indicators had barely gone in oversold territory. The point of this strategy is to buy ETFs that are in an uptrend and really oversold.  I was too impatient to get in the trade.
3. This ETF was not really in an uptrend on 1/19. It was easy to see but I ignored this fact, because I believed that this dip was like all other dips before it.
4. But especially, on 1/24 EZA did bounce, as expected, only not as high as I had hoped.  I should have taken my loss there. To be fair, I did stick to my declared exit strategy. But from then on, I stayed in the trade without knowing what to do next. That was the point to cut losses and move on. I told myself I was waiting for RSI(2) > 80 and RSI(4) > 60 and %B(20) > 0.4, but really, I did not know what was going to happen next.
5. One thing I did well was not to panic at the end of January when EZA went down to 65.  At that point it was outside of the envelope and at least I was able to wait until it reverted close to its average.

Vanguard accounts target asset allocation

The time has come to finally make a plan for an investment portfolio that has fallen into wishful thinking territory.  I have two accounts with Vanguard, and this is what I plan to do.

First of all, two assumptions.

The first is that the market is clearly in an uptrend, and the uptrend will continue for months.

The second assumption is that the market is really overbought these days, and I believe there is going to be a pullback of the SPX which will bring it below 1319 (today's) by the end of February.  This is the reason why part of my plan is to wait for the market to be cheaper before buying it.

By pullback I mean a drop of RSI(5) on the SPX below 40, or a drop that takes the SPX below 1305. The next level of support below 1305 is 1275.  If it were to drop below 1300 fast, it may find support at 1275.

I will look at weekly and daily chart and exercise some judgement when the time comes.

Rollover IRA

• At the next pullback of the S&P 500
• Go from current  40% VFINX, 49% VWESX, 11% cash
• To target asset allocation: 45% VFINX, 45% VFTSX, 10% VWESX

# Individual account

• At the next pullback of the S&P 500 (or the Russell 2000 Small Cap Index)
• Go from current allocation 74% VWEHX, 12% VWESX, 14% VWLTX
• To target allocation: 45% VFINX, 40% NAESX, 15% VWLTX
• Since the next pullback may extend over several days, the transition should be done in stages, e.g. adding to the new funds over three days, one third at a time.
• Add to VFINX at $SPX pullbacks, add to NAESX at $RUT pullbacks.

The exit strategy of last resort is described here.