TAFX

Sector Relative Strength in Trading

As mentioned always, Technical Analysis is a method of probabilities, not certainties. Therefore, it is always better to add another form of analysis on top of it. This post serves to introduce the concept of Sector Relative Strength in improving trading profitability.

Relative Strength compares the performance of a stock, exchanged traded fund or mutual fund to the overall market. This comparison is use to identify counters that are outperforming or underperforming the market to make buy or sell decisions respectively. Some common markets use for references are the Dow Jones, Standard and Poor 500 and the Nasdaq Indices. Therefore what is Sector Relative Strength? It is the comparison of a particular sector to the market, represented by the S&P 500 Index. For example, figure 1 shows the performance of the Information Technology (IT) sector relative to the market. It can be seen that the IT Sector has been outperforming the S&P 500 index for the past few months. With this information in mind, more focus shall be put into screening bullish counters in this sector. Via my screener, a potential trade has been scanned out on Yahoo. On figure 2, Yahoo has recently formed a hammer candlestick pattern, confluence with previous resistance turned support at 41.38.

In summary, it is always good to adopt a top down approach in trading. This allows you to have a macroeconomic view of sector performances in identifying high probability trades in the right places.

Figure 1. Relative Strength of IT Sector with S&P 500 Index

 

Figure 2. Yahoo Chart

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Non-Farm Payroll and Straddle Trading

If you are into FX trading, you should have heard of the non-farm payroll (NFP) report. This report is released on the first Friday of every month and it presents statistics indicating the total number of paid employees in US except those working in farms, government, private households or non-profit organizations. As such, the NFP report is seen as a direct reflection of the US economy as well as a forecast for future consumer spending since the buying power of people is directly linked to their earning ability. With such significance, the NFP report release often sets off huge movement in the FX market as the strength of greenbacks is directly related to the performance of the US economy.

The 2015 January NFP report was released one week ago on 6 Feb (Friday) at 9.30 pm Singapore time. After reviewing the price movement data on previous NFP data, I realized that the news release can set off a strong movement of up to 100 pips in one direction. As such, I decided to use a straddle trade strategy to capture this movement on the USDJPY pair. Using a 5-min chart (Figure 1 shows a 3-min chart to better display the price movements), I identified a resistance level at 117.37 region and a support level at 117.20 region. Next, I placed a buy stop order and a sell stop order simultaneously at 117.62 and 116.95 respectively, 25 pips above and below the support and resistance level identified. The stop loss was set at 15 pips below/above the pending orders as seen in Figure 1. Upon release of NFP report, the price broke out upwards by as much as 93 pips within a short 3-minute time period as seen in the long bullish candle below as US economy performed better in January 2015 as it added more jobs than expected. However, as I set my risk-to-reward ratio at 1:2, the order was closed at 117.90.

However, I do realize the risk of straddle trading as there are always chances of pending orders being wrongly triggered by whipsaws. That is why I set my pending orders as far as 25 pips away from the current support and resistance to reduce this risk.

 

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Technical Outlook – Wilmar International

To begin with, let’s review technical analysis on Wilmar International Ltd that I shared during a Saturday session (18 Oct 2014). I remember the market to be rather bearish and I was on the lookout for any potential opportunity for a trend reversal. As you can see from the chart, the price made lower low around $3 while RSI displayed a higher low, which suggests a potential trend reversal. I entered the market at $3.05 and exited the market at $3.22 in the box.

The analysis by fundamentalist further supported technical analysis by reiterating that Wilmar is undervalued. A few factors highlighted include the fact that it is involved in a well-diversified agri-business with a strong foothold in China and India. The company was also expected to make quarter-on-quarter recovery in its sugar and soybean-crushing operations. I would say that most of the time I use a combination of both technical and fundamental analysis in my trading philosophy.

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My personal view on UOL Group Ltd is with hope for a market correction following a highly bullish season. Weekly MACD is bullish over the past few months and prices have soared tremendously. With overbought indication as evident in stochastic, I will take a wait and see approach with this in my watch list.

 

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9th – 13th February Technical Outlook

Last Friday NFP data were positive, sending the dollar further up north. The 95.00 to 95.20 level currently serves as a resistance. We do have a potential Bat pattern setting up around that region too. For traders who wish to look for shorting opportunity on the Dollar Index, keep an eye on the 95.00 – 95.20 region.

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Looking at the most traded pair – EURUSD, we do have a potential setup this coming week too.

Price has completed a double top divergence setup. We can wait for a 2618 setup around the 1.4120 level to ride on a trend continuation trade.

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On GBPUSD, we have two ways of potentially trading it. Price has currently found support at the level with RSI oversold. Trading looking for a trend continuation setup can potentially wait for a completed double bottom divergence to buy into the market.

For counter-trend trader, there is a completed double top divergence. Wait for a 2618 setup around the 1.5295 level to short on the market.

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Gold Plunges on Strong NFP

Gold tumbled on Friday on positive Non-Farm Employment numbers. An encouraging U.S jobs reports provided strong support for the dollar when data indicated the U.S adding 257K new jobs in January, far exceeding estimates at 236K, causing the gold to decline more than 3% on Friday. The positive jobs number has led to speculation that strong U.S data can increase the possibility of a rate hike when the Fed convenes in June which could further discourage investors from putting their money on the ‘safe-haven’ asset.

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From the above daily chart, as of Friday’s closing the price now sits nicely on at a resistance turned support level (1232.76) and is further supported at the Fibonacci Retracement 61.7% levels.

However, Chinese had registered a record trade surplus in January with imports falling 19.9% which was the most in five years following a fall in commodity prices and weak domestic demand. Exports had slide 3.3%, leading to a net trade surplus of $60 Billion. Given that the trade balance is the largest buyer of gold, this could lead to a price rebound in the short term and provide some lift for Gold.

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BOJ and the Yen – Jeremiah Li

Recent news on Friday as the yen hits 7 year low against the dollar. The basis is due to the increase in monetary base announced by the Bank of Japan and the increase in risk assets.

Market sentiments have moved the yen trading range from 105 – 110 to 110 – 115.

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Currently the Japanese Yen is at 112.75 and the momentum seems rather strong. The last time it was at this price was in 2007.

Still the overall trendline since 2000 – 2014 shows a downward trend as of now.

Depending if there is a breakout from that trend or not, will be good to determine whether to buy or sell the yen.

After the announcement by BOJ, another announcement was released by the Government Pension Investment fund stated that it will increase its holdings of foreign stocks to 25% from 12%, unexpected to many which will likely cause more people to sell the yen.

It is a good time to consider selling the yen against a bullish currency for a short-term period. But as the yen slowly reaches it’s resistance level, such trades should be monitored closely or placed with a stop loss in the event of a reversal.

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Price Action + Candlestick Analysis – Wei Liang

Last week, Research Analyst Xin Yang shared about a trade he made on the NYSE on a stock named Wageworks Inc. The reasons he believed this stock was going to rise was due to a couple of reasons as mentioned below:

  1. A hammer candlestick pattern with extreme long low shadows which signifies strong buying pressure
  2. Confirmation of previous support levels
  3. High volume, signifying high liquidity

I recently made a trade based on very similar principles, which I will illustrate now through a chart. This company, named Chemtura Corp, is also trading on the NYSE. Of course, with technical analysis, it is not very important to know the industry the company is operating in or what it’s business structure is since the emphasis is on using price movements to determine the short term sentiment towards the stock. But just for additional information, Chemtura is a diversified global developer, manufacturer and marketer of performance-driven engineered specialty chemicals. The Company’s products are sold to industrial manufacturing customers for use as additives, ingredients or intermediates.

With that, I shall jump back into the technical analysis.

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As you can see, looking at the chart above, we have a repeat occurrence of Point 1 and 3, i.e. a hammer candlestick pattern in addition to high trading volume. On the immediate subsequent two trading days after the candlestick pattern, we can see prices already moving upwards. Of course, we do not know whether these prices can be sustained; after all, trading always involves risk-taking. However, we can reduce the risk element by making calculated and analytical guesstimates of what the recent price movements are telling us.

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In the past 1 year, there weren’t many clear cut support lines (point 2) at the price level which the hammer candlestick pattern bottomed off at, with the exception of the most recent one (right-most). So I decided to look at the 2-year historical chart to determine whether there was any significance of this price level. It turns out that there were numerous instances where this price level acted as either support or resistance, as shown in the blue circles in the chart above. It is important to note that theory states that a support can turn into a resistance upon the breaking of support and vice versa.

 Of course, all these seems to fit in nicely with the principles, hence making it seem as if I am all set to make a tidy profit from this trade. However there are definitely some factors to consider in this particular trade:

  • Does the recent bouncing off of price against the support line have significant relevance?
  • Is the company going to release news (earnings, new products, M&A etc) that might have a drastic short-term impact on prices?
  • What is the level I should take profit at?

With that, I leave you to analyze my latest trade (please do leave comments if you wish haha) and myself to continue to track the development of this stock. Peace out.

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Importance of simple Price Actions and Support / Resistance – Xin Yang

In this blog post, I am going to share the first US trade which I had done earlier May this year. This post serves to bring out the importance of technical analysis in prediction of stock prices.

As a firm believer of technical analysis, I believe that it is unnecessary to know the fundamentals of a company in trading. However, a trader will need to know when is the company releasing its earnings report as this event can cause drastic gap ups/ downs. What a trader needs are just the following: Price Actions and Volume. With these two factors, it is sufficient to give a good analysis of a stock price.

Say for example, I came to know about this stock Wage Works via Chart Nexus Stock Screener Trial Version. I did not know what this stock does and still, eventually place a trade on it as it matches my trading set ups. After a month of holding, the stock went up and I sold it for a profit of 20.8%. So what prompt me to place a trade on this stock?

  1. A hammer candlestick pattern with extreme long low shadows which signifies strong buying pressure
  2. This candlestick pattern confirms the support with a prior gap at 33.93
  3. Volume exceeds a combined average volume for the past 5 days, which signifies strong participation of buyers.

In conclusion, as a technical analyst, knowing and getting a ‘feel’ of price actions is very important. Therefore, training our eyes to understand and read various chart patterns is the first step of being a successful technical analyst.

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Trading on Multiple Time Frames – Du Yan

Remember the clichés “the trend is your friend”? Yes, I’m sure many of you traders out there have heard of this perhaps-the-oldest adage in trading. You see, one of the most important aspects of trading is really about identifying the trend which represents the mood of the market. Trading with the trend in your direction immensely reduces the risks you are exposed to and increases the chances of winning. I mean, think about it, if the market is bullish, a rational trader should almost certainly take a long position to take advantage of the uptrend.

Just as what many indicators, e.g. Moving Averages, MACD and RSI, traders employ aim to achieve, the concept of multiple time-frame analysis strives to give traders a broader view of the market trend such that traders may locate trading opportunities aligning with the overall trend of the market (buying opportunities in a bullish market and selling opportunities in a bearish market). It is thus an important technique in chart-reading but often neglected as traders move into more advanced techniques.

In essence, in the case of forex trading, multiple time-frame analysis requires a trader to study the pair of currencies on charts of different time frames before entering into a trade. For instance, a trader normally trading on a daily chart should not only consider the daily chart for the financial asset he is trading on, instead, he should also study charts of other time frames, such as weekly and monthly charts. Just what you probably often hear, the world of trading is full of flexibility, as such, there is no fixed rules on how many charts of different time frames should one choose to use. It really depends on an individual trader’s own trading preferences. However, there are some general guidelines that I have summarised which one may consider when it comes to using multiple time frames.

  • Use at least 3 different periods, e.g. 15-minute, 60-minute and 240-minute combination. This serves as a long-term, a medium-term and a short-term time frame.
  • Different time frames should be 4 times apart, e.g. 15-minute as a short-term time frame and 60-minute as a medium-term time frame.
  • Trade in the trend shown on the long-term time frame and enter the market using the short-term time frame.

Now, let me try to demonstrate the way multiple time-frame analysis helps me decide if I should enter into a trade or not enter into a trade using the above guidelines.

When I trade on a 240-minute time frame, I choose to look at a daily-chart as my long-term time frame. The chart below shows a EURUSD pair on 24/10/2014. The daily chart shows information in the past 6 months on the EURUSD pair and it showed a clear downtrend where the price stayed steadily below both the 20 and 50 EMA since early May 2014 with the exception of a small spike in the beginning of July. This gives me a clear idea of the market sentiment.

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Next, the 240-minute chart will be my medium-term time frame where I zoom in to check the smaller movements on the currency pair. These movements cannot be easily observed on a longer time frame but may contain important information which helps me to plan my trade. For instance, it is seen in the EURUSD 240-minute chart below that there is a strong horizontal support at about 1.2622 which was tested two times on 10 Oct 2014 and 15 Oct 2014. The EURUSD is now trending towards to the support.

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Finally, I zoom further down to my 60-minute chart which is my short-term time frame. I use the short-term time frame to execute my trade as price movements are most clear in this time frame of the 3 I chose and this should allow me to pick a good entry point. If we look at the EURUSD chart below, it is more visible that the price is trending towards the horizontal support at about 1.2622 and it can be further seen that there are some consolidations between 23 and 24 Oct 2014 as the price fluctuated above the horizontal support.

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Finally, combining the information obtained from all three charts, I understand that the overall trend is a downtrend but the price is trending towards a strong horizontal support level. A short position may thus be taken once there is a breakout to below the horizontal support. The breakout may be observed on the 240-minute chart and the 60-minute chart may be used to pinpoint the breakout point to execute the trade. The short position has significantly lower risks as the overall downtrend has already been identified and this trade is placed in the direction of the overall trend which is less likely to reverse.

In conclusion, a multiple time-frame analysis should always be adopted in planning a trade as it gives more reassurance to the accuracy of a trade by allowing a trade to be placed in the direction of the trend.

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E mini Russell 2000 (futures) – Lester Mok

On 21st October 2014, there is a very strong uptrend as we can see from the 1512 volume chart. Trend is like a huge tide and we must aim to ride the waves. By observing the 56-volume chart, we can see that there is continuous divergence which has been indicated by the two yellow lines. The two yellow lines are heading for different directions and this shows us that price will continue to move up strongly.

At 10:44:30pm, the second blue bar appears and it is advisable to enter the market at this point. We do not enter in the first blue bar on the 56 volume chart because we are unable to confirm whether it is a definite signal or a “noise”.

For this trade,

  • Entry point = 1105.0
  • Stop loss = 1104.4
  • Target profit = 1106.0

After entering the market, we can see from the chart that there is a retracement until it forms a HL at 1104.7. It is important to trust your parameters and hold on to the trade. Some people might exit the market at this point to cut their losses to only 3 ticks. However after holding the trade, we will realize that we will eventually hit our target profit at 10:48:30pm.

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