ETF
Short Squeezes, Turnaround Tuesday and ETF Day Trading
By Larry Connors | TradingMarkets.com | October 05, 2011 08:57 AM
That was a terrific 400-point reversal yesterday and the market is now back in neutral territory with the 2-period RSI of our Country Fund ETF Universe at 40.18 and the Main ETF Universe at 48.22.
Yesterday’s rally was a very normal, bear market, short squeeze rally where they allowed the shorts to pile in the previous few days and even further in the morning and then, from a rumor about a bailout of Europe, the buyers came in (some with fresh money but likely even more from panicked short sellers).
Again this is normal and if it follows a traditional path, it could go a few days. If this does occur, we’ll look to be heading into the weekend with some indices short positions. In the meantime, the longer term trend is down, we have the Advanced Micro Devices (AMD | PowerRating) and Direxion Financial Bull 3x Shares (FAS | PowerRating) positions with options, and we’re in a good position no matter which direction the market takes for the remainder of the week.
Special Notice – Today at 1 pm ET I will be doing a 30 minute webinar discussing an ETF Day Trading Program we’ll be teaching at the end of the month. This program has historically thrived in high volatility environments like the one we’re in now and yesterday alone in actual trading there were accounts (in real time) which saw gains of 10% and higher.
If you would like to attend today’s ETF Day Trading webinar (or receive a copy of the recording), please call our office this morning at 973-494-7311, ext. 1.
The above is from Larry Connors’ Daily Battle Plan.
To learn more about the Daily Battle Plan, click here for more information.
Larry Connors is founder of TradingMarkets.com
Cramer: Off the Charts: Tech-Buying Season
Jim Cramer does a decent job of analyzing the relative performance of SOXX vs. QQQ, and discussing what that might mean for the next few weeks / months in the tech markets.
Price vs. Time-Based Pullback Strategies
Buying pullbacks based strictly on price levels isn’t working at all these days, thanks to HFT domination. We saw a great example on Tuesday, with the SP-500 undercutting natural support near 1150, shaking out deep dip buyers, and then miraculously closing back above support. The same thing is happening with individual stocks, which are ripping right through support levels that would have held just fine in May or June. But wait a day and, presto chango, the stocks pop back above those broken levels.
This algo-driven stretch in support and resistance requires that traders shift from price-based into time-based pullback strategies, in which tiered buys are entered when the major indices and the broad market hold their lows and then cycle higher (and vice-versa for short entries). It also means holding your nose and buying stocks that have broken support levels, assuming that new support will set into place during the next up cycle.
If you’re a swing trader, I recommend keeping a close watch on the daily 5-3-3 index Stochastics, which do a great job identifying 3 to 5 day price swings. Day traders can shift down to 60-minute charts, using the same Stochastics settings.
Finally, keep on watching the 50-bar and 200-bar EMAs on the 60-minute SP-500 index futures 24-hour session chart. These levels have been absolutely golden, issuing major tell after major tell in the last six weeks.
Larry Connors: How to Sell ETFs Short 101
How many ways were there to sell short the S&P 500 last week, as the market climbed deeper and deeper into overbought territory below the 200-day moving average?
Whether your trade of preference was the SPDR S&P 500 ETF (SPY | PowerRating) or, for those in restricted accounts, the SPY’s inverse, the ProShares Short S&P 500 (SH | PowerRating), the results on Friday were the same: another profitable trade for short term swing traders trading ETFs with Larry Connors’ Daily Battle Plan.
As Larry wrote in a four-part series for TradingMarkets.com earlier this year.
What we want to do, and what you want to do as a trader with your own money, is ultimately to be able to have certain rules in place to help you answer the questions: is a market in an uptrend? Is a market in a downtrend? And how do I appropriately allocate capital during each of those markets?
To read the rest of Larry’s four-part series on ETF Trading and the Daily Battle Plan, click here.
This last trade in the S&P 500 was a textbook high probability trade from Larry Connors’ Daily Battle Plan. Correct 80% of the time since inception in October 2008 – and with an accuracy rate of 80% in 2011, as well – Larry Connors Daily Battle Plan is a great way for traders way to add a quantified, long and short, ETF trading strategy to their overall swing trading portfolio (and if you are not trading more than one strategy in your portfolio, click here to read “Why a Portfolio of Strategies Beats a Portfolio of Stocks.”).
If you are looking to start trading exchange-traded funds, then Larry Connors’ Daily Battle Plan is a great place to start. Click the link below to launch your free, 7-day trial to Larry Connors’ Daily Battle Plan today.
David Penn is Editor in Chief of TradingMarkets.com
Pair Stock With ETF to Capture Yield, Growth
NEW YORK (TheStreet) — Dividend investing is becoming increasingly popular as the U.S. equity market continues to log more years without meaningful advancement. Too many people make the mistake of seeking out yield at the expense of price appreciation which is a big mistake. Investors can use both ETFs and individual stocks to construct a narrow-based portfolio that captures both yield and growth potential.
The materials sector is a good place for this exercise as it takes in a lot of themes, brings in a lot of different foreign countries with favorable attributes and has good, long-term prospects behind it — in my opinion that makes it a good sector to add volatility to the portfolio.
The materials sector has a very small weighting in the S&P 500 so it is unlikely that someone would need to pick six different holdings, two could easily do it. There are not a lot of big dividend payers in this sector but there are some.
There is not much yield to be had from any of the broad-sector ETFs. The iShares S&P Global Materials Sector ETF yields about 2.2% but that is only a little more than the S&P 500. As a note, the Materials Sector SPDR shows a trailing yield of 3.7%, however this appears to be skewed by an usually large dividend last September. For a comparison, the very similar iShares DJ US Materials Sector Index Fund yields about 1.5%.
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So the idea is to pair one ETF and one common stock with some yield, such that the combo yields an average that is greater than the market — I think adding 100-150 basis points in yield above that of the SPX can still allow a portfolio to be reasonably diversified and capture some good yield which is very important over the long term.
As alluded to above, in choosing a materials sector ETF, I would want something I felt would capture the global theme, or some relatively important slice of the global theme, and some volatility. One example in a broad-based fund is the EG Shares Emerging Markets Metals and Mining ETF . It is heavy in China, Brazil, South Africa and Russia. The countries are far from one-way trades, but there is a lot happening in the sector with all of these countries. Longer term it would be reasonable to think that if things work out for the materials sector, they would work out for EMT as those four countries continue to be important.
A narrower example could be the Global X Silver Miners ETF . Again just an example, there are many other specialized materials sector ETFs to go with instead of SIL.
The two funds provide valid access to the sector, one way or another, have each done differently over the last 12 months (SIL up a lot and EMT up a little) but neither has paid much of a dividend, 1% give or take. That there is not much yield is not a bad thing if they deliver some magnitude of the growth they have delivered over the past few years. Demand for resources globally and the ongoing infrastructure build out in many countries creates visibility for the sector will continue to provide meaningful price appreciation.
One example of a stock with a yield that could work here is Southern Copper ). The stock has been around for a while and even though there were a couple of small dividends in 2009 the company has proven it is committed to paying a large dividend with the yield currently at 7.7%. The dividend has been lumpy and should continue to be lumpy as the company is obviously beholden to copper prices. Over the last five years the stock is up 107% compared to about 25% for MXI and a decline of 7.5% for the SPX — none of those figures include dividends. The 107% is nice of course but it should be noted that SCCO fell far more than MXI or SPX from the 2007 peak.
The company has generally tracked the price of copper (both are quite volatile) so barring some major management goof it is likely to continue to track the price of copper for better or for worse and while the dividend is not a certainty the company’s track record for this is good.
The idea would not be to blindly buy a couple of things mentioned in an article but to do your own research to seek out what segments, funds and stocks resonate with you. Be careful not to make dividends the top priority as this leads to yield chasing, which often ends very badly. But if handled well, this type of combination can produce a yield far above the broad market.
http://finance.yahoo.com/news/Pair-Stock-With-ETF-to-tsmf-2693345094.html?x=0&.v=1
John Murphy’s Key to Success: Simplicity
by JimWyckoff
Murphy said he relies heavily on five or six “useful” technical indicators, including relative strength indicators, trendlines, moving averages, Bollinger bands, classic chart patterns such as triangles and double tops, and Fibonacci retracement levels.”You must trade a combination of technical signals, not just one” indicator, said Murphy. He said that many times he’ll set up a “good” column and a “bad” column regarding technical studies. If the “good” column has the overwhelming evidence supporting a selected trade, Murphy will enter the trade. But if the evidence supporting a trade is not strong enough, he’ll bypass the trade.
Murphy correctly called the topping of the U.S. semiconductor stock index (SOX) during midsummer (of the year this story was written). His reasoning was plain and simple: the SOX uptrend line was broken, followed by a double-top formation. “The first sign of a top is breaking of an uptrend line,” he said.
On moving averages for individual stocks, Murphy likes to use the 50-, 100-, and 200-day moving averages. If the 200-day moving average on an individual stock is broken on the downside, “big trouble” is in store for that stock. Also for stock sectors, he said if a 50-day moving average breaks down, “that sector is in trouble.”
Charting a stock market sector divided by the S&P 500 is a favorite method the veteran technician uses to determine if a given sector is underperforming the broad market. (Examples: SOX index divided by S&P 500 index, or NASDAQ index divided by the S&P 500 index.)
Another good technical indicator is the Moving Average Convergence Divergence (MACD), said Murphy. The MACD uses exponential moving averages, as opposed to the simple moving averages used with an oscillator. Gerald Appel is credited with developing the study.
Longer-term technical signals are more powerful than shorter-term signals, said Murphy. “Longer-term charts give you the value of perspective,” he said.
Many traders consider Murphy’s book, “Technical Analysis of the Futures Markets” to be the bible of technical analysis.Murphy heads his own consulting firm, based in Oradell, N.J.
http://www.traderplanet.com/articles/view/16-john_murphy_s_key_to_success_simplicity
Why I Add to Winning Positions
Many traders find a great trade setup; take the trade, and then watch. If the trade goes in the opposite direction – if the trade does not do well many traders will consider adding to the position.
Averaging down, adding to a losing position, it does not matter what it is called, it is basically taking more of a losing position. It is no different than making reservations for a restaurant that you don’t like because the food made you ill and the staff was rude. It sounds funny but it is true. By adding to a losing position you are asking for more of what you don’t like.
Now, let’s consider this scenario. Let’s say that you make reservations for a restaurant, you show up to find your table waiting for you, the staff are wonderful and the food is great. Would you only eat an appetizer because you didn’t want to “ruin the experience?” Would you leave early because you don’t want to have “too much of a good thing?”
You probably wouldn’t if you are like most people.
But this is exactly what many traders do – they add to losing positions (often maximizing the loss) and they rarely add to positions that immediately go in the expected direction.
Think about what that means for your trading account. That means that when you are right you are not maximizing profits and when you are wrong you are increasing your losses.
One great way to increase your profits is to add more positions as the trade goes in the expected direction. This is a lot like making reservations for that great restaurant – you know the food is good and you want some more!
Many traders can exponentially improve their profits by simply adding to winning trades and resisting temptation to add to losing positions.
Here is an example from this week. With this trade I sold the EUR/JPY at 137.00 and targeted the red line down at 136.00. I could have simply sold the EUR/JPY and waited for the market to hit 136.00 – and then I could congratulate myself and be very happy since the trade made 100 pips. But instead, because the trade went in my direction I added to the trade and made 280 pips instead. This is how it unfolded. I took one position at 137.00 and then I put additional sell orders in at 136.50 (one position), 136.40 (one position), 136.30 (one position), 136.20 (two positions) and 136.10 (two positions).
Instead of 100 pips on the winning trade I had several positions 100+50+40+30+(20×2)+(10×2) = 280 pips. Notice how I did not immediately add to the trade, but instead decided that if the trade went 50 pips in the expected direction I would allow the additional sell orders to kick in.
What would have happened had this trade immediately gone against me? Well, I would have only lost on the first position, thereby limiting my losses. I think it is important to wait for the market to give you feedback before you start adding to a winning position, so I always place additional orders at least 50% closer to the profit target than the initial position.
Think how much more money you would make if your losing trades were more than 87% smaller than your winning positions … it is a lot like making reservations for that excellent restaurant, over and over again.
Walter Peters, PhD is a professional forex trader and money manager for the DTS private fund. In addition, Walter is the co-founder of Fxjake.com, and often coaches other traders. If you would like to learn more about Walter’s trading strategies, take a look at Walter’s upcoming webinar.
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ETF Trading with Larry Connors: Bear Market Behavior Taking Hold of the Markets
An overnight, global sell-off is weighing on the futures early this morning as the bear market behavior begins to take hold. With so many stocks under their 200-day ma, the path of least resistance is down until a reversal occurs.
For those of you trading from the signals within The Machine, you’re beginning to see the healthy gains on the short positions – especially in stocks. This would be expected especially this early into the bear cycle as its beginning to replicate the same behavior seen in 2001-2002 and also 2008.
The market is likely going to require some sort of major event, either political or a string of unexpectedly strong economic reports, to reverse course from here.
The above is from Larry Connors’ Daily Battle Plan.
To learn more about the Daily Battle Plan – including access to Larry’s daily ETF trading signals, click here for more information.
And for more on ETF trading, be sure to visit us here to check out the book that Stocks, Futures and Options (SFO) Magazine called one of the best trading books of 2009: High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading.
Larry Connors is founder and CEO of TradingMarkets.com.
Avoid These Four Technical Pitfalls
| Everyone is a chart reader these days, but the venerable practice isn’t as easy as it looks — there are just a few ways to make money but a thousand ways to be wrong. This is especially true now that all sorts of fundamental types are staring at price patterns because their 9-to-5 discipline no longer works. The devil is in the details with pattern analysis, because no two charts are exactly alike. And above all else, chasing the same patterns that everyone else sees in the books, or on the Web, it is a straight shot to the poorhouse. But that doesn’t stop legions of amateur technicians from throwing cash at the same losers over and over again. In reality, observant technicians can find good trading opportunities with relatively little effort, because they know exactly what to avoid when looking at similar sets of patterns. This is an advanced skill set that’s missing with the majority of folks who believe they possess magical powers because of their chart divinations. With this admonition in mind, let’s talk about stock scanning and your evening research. Chart database programs offer advanced tools that search quickly for your needle in the market haystack. Many traders think the purpose of these nightly scans is to find perfect positions that can be mindlessly executed, but nothing is further from the truth. The most accurate scans just take you to the next step, where you’re forced to discover the trading opportunity for yourself. This “last yard” of effort is where armchair technicians fail miserably, because their unskilled eyes try to fit all sorts of random chaos into predictive patterns that, in reality, aren’t so predictive. The most effective way to overcome this form-fitting bias is by embracing subtlety when you’re flipping through the price charts. You can start by internalizing these four cautionary patterns that are lying in wait to steal your money. Bunny Slopes
There’s little profit when price rises or falls in an overly gentle pattern. Conversely, real opportunity comes when strong tension between bull and bear energy gets released suddenly, trapping one side and triggering sharp directional movement. Of course, this is nothing more than opportunity cost translated onto pattern analysis. The good news is it takes only a second or two to identify a weak angle of attack on a price chart. Ironically, trading bunny patterns during periods of high volatility is a bona fide defensive strategy, because it limits risk. Perhaps that’s why you’ll find so few of them after last year’s market crash. Border Disputes
Stand aside when price action gets caught at, or in between, big moving averages. These conflict zones eventually yield trades, but patience is required because the battle can go on for weeks. For example, notice how Broadcom (BRCM – commentary – Cramer’s Take) has chopped along the 50-day moving average for almost three months now while everyone waits for it to break out or break down. In particular, focus on interplay between price and the 50-day and 200-day moving averages as you flip through the charts. You’ll often see ping-pong action as price bounces back and forth between the two major barriers. Not surprisingly, these pivots will provide interesting swing trades as long as you don’t overstay your welcome. Davy and Goliath
Conflicting patterns in different time frames trap many traders in very bad positions. These trend relativity errors occur when you see a great pattern but miss the larger support or resistance that’s going to screw up the trade. Avoiding this error is simple. Look above and below the entry price for the setup that’s catching your eye. Then do the math. Realistically, how far can price travel before it runs into a major brick wall? If that number is less than 3 times the distance to your logical stop loss, avoid the trade entirely. This sounds easy, but marginal traders have a really tough time staying out of trouble with this pattern, because it looks too good to pass up. Trend Mirrors
What happened in the past has a major impact on what happens in the future, so look to your left before taking the trade. Trend mirrors point out all the past debris that will affect price movement right now and into the future. In particular, current action responds to pivots created by old highs, lows and gaps with startling reliability.
In truth, price reacts a lot more than it acts. In other words, prior reversals and gaps generate major swings during current price discovery. With this in mind, smart technicians gauge the adverse impact of all prior highs/lows, gaps, volume spikes, and candle shadows when they’re examining an interesting pattern right here in the present.
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| Alan Farley writes The Swing Shift three times per week for RealMoney.com. RealMoney.com and TheStreet.com also publish “Alan Farley’s The Daily Swing Trade”. Discover profit opportunities others don’t see with this outstanding daily advisory newsletter. For more information, The Daily Swing Trade |
10 Ways ETFs Can Grow Your Portfolio
Although they would not admit it, most portfolio managers take a core/satellite approach when managing their equity portfolios. The part of the portfolio that might mirror the overall market could be considered the “core” and the part of the portfolio that deviates from the overall market can be considered the “satellite” portion. When you hear portfolio managers say they are trading around their “core” bank holdings - or they are currently overweight oil stocks and underweight technology stocks, or they have a small cap tilt to their portfolios - they are essentially taking the core/satellite approach.
Tutorial: Exchange-Traded Fund Investing
But what about the average investor? Exchange-traded funds (ETFs) provide an easy way of implementing a core/satellite approach. We provide 10 reasons why this strategy can trump securities-only portfolio management strategies.
What Does the Portfolio Look Like?
ETFs provide a simple way to implement a professional style approach to portfolio management. ETFs form the core of the portfolio and provide diversification. Then, you select individual stocks that are expected to outperform the benchmark to form the satellites around the ETFs. Typically, an investor might put 50% of his equity portfolio in an ETF representing a market index and 50% in individual securities. There is no hard and fast rule about the percentages, but the greater the percentage of the portfolio that is in the core holding, the more the overall portfolio will behave like the overall market.
10 Reasons to Consider a Core/Satellite Investment Strategy using ETFs
For investors who manage their own accounts, a core/satellite strategy combining securities and ETFs is often better than a portfolio of only securities for the following reasons:
1. Better Diversification
Typically, the average investor who buys stock tends to have a poorly diversified portfolio. There is often a concentration in sectors or types of stocks with very similar risk characteristics. Using an ETF to buy a core position provides instant diversification and reduces overall portfolio risk. (For more insight, read The Importance Of Diversification.)
2. Improved Performance
It is widely accepted that a large portion (more than 50%, by most accounts) of professional money managers underperform the stock market. The average individual investor typically fares worse. An investor who sells some stocks and replaces them with a broad-based ETF core holding may be able to improve the overall performance of the portfolio. (For related reading, check out Pump Up Your Portfolio With ETFs.)
3. Easier Rebalancing
A change in an investor’s asset mix is easier to implement when you use an ETF as the core position. If an investor wants to increase his or her equity exposure, the purchase of additional shares of an ETF makes it easy to do without having to buy additional shares for current holdings. (To read more on portfolio rebalancing, see our related article Rebalancing Your Portfolio To Stay On Track.)
4. Easier to Monitor and Understand
The more stocks in a portfolio, the harder it is to monitor and manage; after all, there are more investment decisions that have to be made and more factors to be considered. With an ETF or index fund representing a core position, the number of stocks can be decreased, resulting in a portfolio that is less complex and easier to understand.
5. More Tax Efficient
A portfolio containing all stocks tends to generate more trading activity as the market and investment outlook changes. With more trading activity, more capital gains will be realized and more taxes paid. ETFs are very tax efficient and, with a larger proportion of the portfolio in a single core ETF, fewer capital gains will be triggered. (Investors should consider the impact of taxes on their returns. Be sure to read A Long-Term Mindset Meets Dreaded Capital-Gains Tax for more information.)
6. Lower Transaction Costs
With fewer stocks, there will be fewer trades and fewer commissions. The small annual management fee ETFs carry is easily recovered from the savings on commissions. In an account at a full service broker, the reduction of commissions could be dramatic. This might be why many investment advisors do not like ETFs. (For more on ETF benefits, read Uncovering The ETF Wrap.)
7. A Decrease in Volatility
For the typical investor with an ETF representing a core holding, the overall portfolio will likely be less volatile than one made up entirely of stocks. (Learn to adjust your portfolio when the market fluctuates to increase your potential return in Volatility’s Impact On Market Returns.)
8. Allows For Better Focus
In any well designed and diversified portfolio, an investor will have to invest in sectors or stocks that he or she does not like, but is required to own for diversification purposes. Using an ETF for a core position provides the necessary diversification, allowing the investor to focus on stocks in his or her preferred sectors. (For more on sectors, read Sector Rotation: The Essentials.)
9. Can Implement Sophisticated Investment Strategies
Investment strategies such as enhanced index strategies, risk budgeting, portfolio insurance, style tilts, hedging strategies and tax loss harvesting become easier to implement with a core/satellite approach.
10. Improves The Knowledge of the Investor
The proper implementation of a core/satellite strategy requires a certain degree of knowledge and understanding about risk, market indexes, benchmarks and portfolio management techniques. As investors gain the knowledge and experience of applying a core/satellite strategy, the process will, in the end, make them better investors
Conclusion
With the introduction of ETFs, the use of a core/satellite strategy becomes a very practical strategy for the average investor to implement. It will not only make investment management easier, but the underlying portfolio will also be better diversified and future performance will likely improve.
For further reading on portfolio management techniques, be sure to read Equity Portfolio Management Mechanics.
Read more: http://www.investopedia.com/articles/exchangetradedfunds/08/core-ETF.asp#ixzz1V7KV4EJz