Trading with Volume Analysis: Identify, Follow and Profit from - - PowerPoint PPT Presentation

Trading with Volume Analysis: Identify, Follow and Profit from Trends

December 18, 2012 Paul Duncan 703-509-5332 GREMS8544@GMAIL.COM Twitter: @GREMS8544 Subscribe to Dropbox: SUBJECT of email: “Dropbox”

Effective Volume Blog: http://www.effectivevolume.com GGT Blog: http://greekgodtrading.blogspot.com GGT TSP Blog: http://ggt-tsp.blogspot.com

General Disclaimer

• You are responsible for your own investment/trading decisions, not me nor any

representative of the Greek God Trading group. This group, as well as the portfolios and topics presented today as well as in the past, are no substitute for the services of a professional investment advisor. Investments recommended may not be appropriate for all investors. Recommendations are made without any consideration of your financial sophistication, financial situation, investing time horizon, or risk tolerance.

• Past performance is no guarantee of future results. Model and actual signals and

related analysis are for informational purposes only and should not be construed as an offer to sell or the solicitation of an offer to buy securities. Most financial instruments (stocks, bonds, funds) carry risk to principal and are not insured by the

• government. Anyone attending or viewing this session via electronic media for

investment purposes does so at his or her own risk.

• Data accuracy cannot be guaranteed. Opinions and analyses included herein are

based on factual observations and are believed to be reliable and produced in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Paul Duncan is not liable for any errors or inaccuracies, regardless of cause, or for the lack of timeliness of,

• r for any delay or interruptions in, the transmission thereof to the users.

Tonight’s Agenda

• Background
• How Does GGT Work?
• Reading the Tea Leaves: Where are We Now?
• Equity Selection
• Effective Volume
• Putting it All Together

For the New Faces: My Background

• Introduced to investing in 1984
• VectorVest user in 2003-2004
• Moved to Gorilla Trades and Ten Best Stocks 2005-

2006

• Returned to VV in late 2005 and continued to 2010
• Developed GGT 2007 – 2008; Significant

improvements w/ Bob Wilson

What is GGT? How does it work?

Recommendation New Long Affirmed Long Long Cash Affirmed Cash New Cash

• About every 30 days, each stock and ETF is optimized with respect to behavior over the last

year in terms of two moving averages on price and one moving average on volume

• Based upon end-of-day data, stocks and ETFs receive one of 6 recommendations
• NEW LONG recommendations require VOLUME + PRICE appreciation (supply decrease)
• NEW CASH recommendations require PRICE depreciation (supply increase)
• AFFIRMED LONG means that the stock/ETF is already a LONG, but has met criteria for re-

entry

• Only requires a fall

in price to drop from any of the LONG spots to New Cash

• Requires volume

above historical norms AND requires price increases above historical moving averages to move from any CASH spot to New Long

• 3 or -5 Strength

+4 or +5 Strength

Why GGT? What is so Powerful About the GGT Method?

• Method developed to address deficiencies in MACD and other

“static” TA methods

• Adaptive – constantly updated to change as markets and individual

securities change.

• Draw inferences on individual equities as well as on group behavior:

– overall trend of market as well as the equity in question – momentum of market/equity – acceleration of market/equity

• Aggregate all tracked stocks into two indexes

– the GGT Price Index – Long/Cash Ratio (LCR) Index

• Track various moving averages of these two indexes: 2d, 3d, 5d, 8d,

13d, 21d, 34d, 55d, 65d

• Track the SLOPES (momentum) and SLOPE OF SLOPES (acceleration)
• f each
• Voila! Clarity for the market / equity.

Where are We Right Now (12/17)?

• Price model suggests “LONG” since ~11/21 (65d slope turned positive)
• Some weakness in prices exists but overall, remain on the long side

Where are We Right Now (12/17)?

• LCR model suggests “LONG” since confirming 11/30 (65d slope turned positive)
• First indications of moving long around 11/21, then again on 11/26 (27th strongest

move in LCR)

• LCR considers PRICE, VOLUME, and price Rate of Change (RoC)
• Some recent weakness in LCR was demonstrated, but overall, remain on the

long side

GGT Deploys 4 Timers

• Short-term timer – uses a simple 4d MA on the LCR value.

Long if above the 4d MA, Cash if Below. Good for re-entry timing; terrible by itself because it does not consider market direction longer than 4d.

• Intermediate-timer – uses Elder methodology to look at

13d EMA of the Force Index, 13d EMA of the pricing slope, and 34d EMA of the pricing slope. If all are positive then

• LONG. Individually, not the greatest timer, but will keep

you out of trouble overall.

• Long-term timer – uses the simple cross of the 13d MA and

65d MA. Very robust for calling overall market direction, but gives up gains since is relatively slow to enter/exit.

• Combo Timer – uses a combination of the Intermediate and

Long-Term timers to provide a robust method to get in and

• ut. Outperforms individual timers.

Where are We Right Now (12/17)?

• Despite some recent weakness, Monday 12/17 closed signaled “re-entry”.
• Long-term 13d/65d timer already long
• Intermediate-termed Elder timer in mixed state – not everything confirming either

direction

• Short-term timer was in CASH, but transitioned LONG

GGT Combo Timer

GGT Combo Timer Performance

• Combo = Combine Elder

and 13/65d cross

• Go “Long” on:

– 13d and 65d cross from below – If Elder NOT Cash

• Enter if 4d Short-Term Moves

Long, OR

• Enter if 2d, 3d, 5d LCR are

transitioning to Long (or 2d and 3d LCR already long)

• Go “Cash” if:

– 13d and 65d cross from above – Elder transitions to Cash

Signaling on Price Transitions – What is Expectation for Entering 12/18?

Price Slope Model from Previous Slide

Signalling on LCR Transitions – What is Expectation for Entering Late 12/18?

LCR Slope Model from Previous Slide Entering @ This Point 23% - 33% Success Rate

Market Trend Conclusions:

• As of 12/17 close we are in a long-term LONG signal, and

the short-term and intermediate-termed timers have just transitioned LONG.

• The Combo Timer has been LONG since 11/30
• Re-entering when signaled when we were already long with

the conditions of 12/17 has worked marginally (19-54%) in the past entering new positions now is advised but with caution.

• The most favorable time to enter is when

1) the short-term timer fires (everything in cash prior) & when the intermediate timer fires mixed (or long), 2) then add when the intermediate timer fires long, 3) then fully commit when the long-term timer fires long

• Note that the Combo Timer will transition Long when 2)

and 3) above move Long

Recap

• We have a method of determining the overall

trend of the market (GGT Price and LCR Slope Models)

• We have a method of determining our chance of

success of entering the market given the overall state of the market (momentum, acceleration) (GGT Transition Edges for Price and LCR)

• We have a method to exit the market when the

wheels come off the wagon (GGT Combo Timer)

• How to pick equities to enter?

Picking Equities

• Start with Sound Technical Pedigree:

– Closing Price above 200d MA Price – 50d MA Price > 150d MA Price > 200d MA Price – 200d MA Price in an uptrend (positive slope) for last 4 weeks of trading – Closing Price within upper quartile (upper 25%) of 52-week HI price (if 52wkHI = $100, then price > $75) – Upper quartile of 52wk HI price > lower quartile 52wkHI price (if 52wk = $100, then upper quartile boundary is $75 and quartile = $25. If 52wk LOW is $60, then $60 + $25 = $85 > $75 and TEST FAILS). This quartile test ensures that we are picking stocks which have already demonstrated the ability to move. – Above 50d MA Volume on day of entry AT THE TIME OF ENTRY AND greater than 50,000 shares – Above $1 in price

TradeStation* Leader’s Table – 12/18

*ELD available for free – simply ask and we’ll discuss offline. It’s hard- coded to your TS license.

Picking Equities – Con’t

• Next, Ensure Basic Fundamentals are in Place:

– Increasing Revenues

• Year – over – Year (YoY)
• Sequential quarters (last quarter, this quarter)
• Last year’s quarter this time period over this year’s quarter

– Increasing EPS

• Year – over – Year (YoY)
• Sequential quarters (last quarter, this quarter)
• Last year’s quarter this time period over this year’s quarter
• Sources:

– TradeStation ($), Briefing.com ($), HGSI ($), – Yahoo, Google, FinViz (but you get what you pay for there)

TradeStation Leader’s Table – 12/18

Charting the Course – The Leader’s List

Outperformance started when timers started firing ~ Nov 21- 26 Note that the average is consistently above MAs (strong group)

Picking Leaders Methodology

• Typically update the Leaders List on the

weekend and post to GGT Dropbox.

• Scan for stocks meeting technical and

fundamental criteria, as previously specified.

• This list becomes the base for the next signal

and will add/subtract to the stocks as they rotate in and out of having favorable setups

• BUT, simply being a “Leader” is not enough.

How to actually move into the stock?

GGT’s View of the Leader’s List – 12/17

• Most are ranked “Long” or “Affirmed Long”. This is good,

but we may be late on many of these.

• HDB triggered “New Cash” with close of 12/17 markets.

Must understand why not participating.

• LGND is relatively new – look at progression from Affirmed

Cash (Red “C”), to cash (Red Square), to New/Affirmed Long within last two days.

Culling the List – Deciding in which Leaders to Invest

• Method 1: Review individual Elder criteria

– Market in an up trend – 13d MA Price slope is positive (moving upward intermediate term) – 34d MA Price slope is positive (moving upward longer term) – 13d Force Index Positive (positive demand with average daily price changes and volume moving upward) – -2d Force Index NEGATIVE (short-term pullback)

Method 1 (Elder) Con’t

• Set BUY LIMIT, DAY ORDER ONLY at previous day HIGH

+ few pennies (some use $0.10). Using HIGH is more conservative than:

• Set BUY LIMIT, DAY ORDER ONLY at previous day CLOSE

+ $0.01. This is considered aggressive.

• Stock, if showing strength, will recover from short-term

pullback and resume upward march. You will enter as described above.

• Stock, if continuing short-term pullback, will NOT clear

your BUY LIMIT, and the LIMIT will expire at the close

• f normal markets. IF stock remains on scan (Elder

criteria met), you will reset order criteria to NEW (but lower) HIGH or CLOSE, as your risk tolerance decides.

Real Time Elder Scan in TradeStation

• Note that when this

real-time scan was captured (about 2 pm EDT 12/18) only HFC was signaling any potential ability to enter.

• Recall that HDB is “New

Cash”. Note RT13 (13d EMA slope) is NEGATIVE, as is 13d Force Index (FI13)

Elder Scanning Capability

• HGSI – .CHT template is available on the HGSI

web site, and you can manually step through each one. Alternatively, can use Warehouse and Filters to view after you load the list.

• TradeStation – simply ask for the ELD and I’ll

provide it to you, but it is hardcoded to your TS license so you can’t distribute it.

Effective Volume – Method 2

• What is Effective Volume?
• Developed by Pascal Willain, Effective Volume looks at

volume transactions in relation to bid/ask prices. By tracking bid/ask change on each bar, considerable visibility is available on the buying/selling of equities.

• Effective volume separates volume actions into Large

Effective Volume (LEV), which is the institutional buying/selling of a stock, and Small Effective Volume (SEV or SmEV), which is the small investor’s buying/selling (retail or small funds)

• http://www.effectivevolume.com (registration required

to enter site, but is free. No, you will NOT get

• spammed. Registration keeps the Google spiders from

crawling his web and learning your email addresses.)

Pascal’s EV Web Site

• Has about 1100 stocks under coverage.
• Has pay-for-view content; subscription is

reasonable and valuable (IMHO). Equates to something like $50/qtr or $149/yr or so (we can check this – doing it from memory at 37,000 feet).

• Will grant a 30-day free look around if you tell

him you saw it here.

• Pascal is prolific – considerable valuable content

available for free to read about EV at his site.

Sources of EV

• TradeStation Plug in. ELD costs a “donation” to

Pascal of ~$50 or so. Historically, he has used the monies to support children in need. More details

• n his web site.
• www.chartmill.com Not nearly as flexible or

detailed as the source (Pascal), but useful and free if looking at really long term charts (6 month). It is possible to search on stocks using EV criteria, which can be useful to a few who are skilled in EV as well as confusing to those who are not (time frame is far too long IMHO).

SAM – December 14th

SAM – December 14th

LOPE – December 14th

LOPE – December 14th

SCS – December 14th

SCS – December 14th

Method 2: Paul’s EV Selection Criteria

• The equity MUST meet the Leader’s Criteria (this is the source list,

so KEEP IT UPDATED).

• For a beginner or more conservative approach:

– We want the longer-termed LEV to be substantially higher than the short-term SmEV. This shows institutional accumulation has already taken place, e.g., vesting has already occurred. This is a foundation approach. – We want the short-termed LEV to be DIVERGING POSITIVELY from the SmEV. This shows new, recent attention is being paid to the equity by institutionals. – Ideally, PRICE is constant or drifting downward – institutional buying is NOT attracting attention. – PRICE hugging the VWAP (Volume-Weighted Average Price) is a tell – in large-volume stocks only institutionals have the power to negotiate with market makers, and the VWAP is often a good price that buying/selling can be conducted.

Method 2: Paul’s EV Selection Criteria (con’t)

• For an advanced user or a more aggressive approach:

– We want the longer-termed LEV to be substantially LOWER than the short-term SmEV, AND, we want some big-lot buying. Value of the 1-minute bar must be in the millions $$$, the higher the better. SAM is a good example

• f this – time to float a trial balloon.

– We want the short-termed LEV to be DIVERGING POSITIVELY from the SmEV. This shows new, recent attention is being paid to the equity by institutionals. – It is best if price remains constant or seems to “hug the VWAP” – this is another validator that institutionals are involved.

Method 3: Elder + EV

• There is a not-so-infrequent situation when

Elder’s criteria is met (Method 1), price begins to slip, setting up an Elder entry, AND, EV starts to build in a stealthy manner.

– Right-side of classic “Cup and Handle” formation

• Positively diverging LEV on a short-term scale,

PLUS all Elder criteria being met is a very good setup and needs to be seriously considered.

Putting it All Together (3 Slides Left)

• 1. Know the trend in the market above all else.

Don’t swim upstream. “Fish swimming upstream get eaten by the bears” – Duncan

• GGT Price slope and LCR slope models provide

this (and they’re free!)

• Watch the slope of the 65d EMA of a major index
• r tracking ETF (SPY, IWM, QQQ). If the slope is

positive, then we’re in an uptrend. The converse is true too. If we’re being whipsawed the slope will be horizontal

Putting it All Together (Con’t)

• 2. Choose quality equities that have sound

technical setups as well as fundamentals.

– Don’t bottom fish. – Don’t look for a deal. – Pick an equity that is within striking range of making a new 52wk high – GGT template criteria provided – USE IT.

Putting it All Together (Con’t)

• 3. Use GGT to determine the “state” of the stock.

– If it’s in a form of CASH recommendation, watch it carefully for a breakout. It’s already a leader, and it can’t stay stealthy for long. – If it’s a form of LONG recommendation, Method 1 is to use Elder’s methods to determine if a short-term pullback (set your BUY LIMIT). – Method 2 is to use Effective Volume to determine how “attractive” the stock is to institutional investors. – Method 3 is simply a combination of Method 1 and Method 2 – if Method 1 = TRUE, and Method 2 shows accumulation in face of declining prices – this is a high- probability opportunity.

STOCK REVIEW USING EFFECTIVE VOLUME