Turtle Break-outs: Long and Short

About 25 years ago two traders decided to perform an experiment that turned into a trading system called Turtle Trading, as explained in the book Way of the Turtle among others.   The premise is to buy strength and sell weakness by looking at breakouts among non-correlated sectors.    The tough part is that most of the trades made will be stopped out for losses based on the mechanical limits.  The gains are usually made with one ot two holdings.

The quick and dirty rules are that traders look at sectors for breakouts above the 20-d or 55-d highs for long positions and below the 20-d and 55-d lows for short positions.  The original turtles had a finite number of items that could be traded, based on volume and availability. They used futures for Treasurys, S&P500, various currencies, metals, and grains.  You can read all the detailed Turtle rules here, but the fact is that this a fairly simple system that is easily mastered.

The advent of  liquid ETF's has made the Turtle system amenable to anybody with a home computer and a trading account.  The reason I bring this up now is that several of the major sector ETF's are exhibiting breakout behavior and are currently at the buy (long) or near the sell (short) level.


QQQQ is at the 55-d high of 35.35 signaling a Long.  This indicates that the Q's are a reasonable candidate to have significant upward follw though.  The stop-loss based on the Turtle system would be 33.90 (I can over how this is determined later).  If this goes up significantly, then the stop is moved to the 10-d low for "winning" positions.

SPY likewise is at the 55-d high level and may be poised for a breakout above 93.70 (NOTE: the resistance line on the chart is WRONG!)  If SPY ticks above 93.70, a buy can be entered.  The stop-loss is 89.14.

XLV health care ETF is near the 55-d breakout level of 25.84.  Stop-loss is 24.86.  I suppose individual stocks within the sector can also be considered, althought he increased volatility would necessitate a smaller position size based on the Turtle rules.

KRE the regional bank ETF is near the short trigger.  The 20-d low is 18.98 and a buy at that level would have a buy-stop at 21.46.  

Also, TLT is near the short level.

VLY is an individual regional bank stock that is near it's 20-d low of 11.72.  If the stock ticks below that level, a short position can be opened with a buy-stop of 13.38.

A couple words about position sizing.  The Turtle experiment gave each trader $1,000,000 to trade in order to allow adequate position sizing.  Significantly smaller trading portfolios can pose a problem which is not impossible to overcome.  The rules outline the process of using the Average True Range to figure "N" and "Unit size" to limit risk and volatility.  There is a website that will figure these numbers for any stock or ETF--- HERE--- which is quite handy since it basically tells you how much to buy for the size of your trading portfolio.  It's free with a sign-up!

Diversification among non-correlated sectors is also necessary and this is covered in the rules.  In the original study, the only stock exposure was through S&P futures, so care must be used to avoid loading up on stocks and stock sector ETF's.  

Also, the recent "re-flation" trade has given a nice run up on commodities and commodity currencies, so laddering into these sectors should be done slowly.  Sectors to include in the screen would be XLE, UNG, GLD, SLV, HYG, DBA, FXC, FXA as long candidates.  TLT, IEF as short candidates.  XLF and SMH are neutral at the moment.

The system relies on traders making every trade that is triggered according to the rules.  Only a few trades will actually be profitable and it's not possible to predict which ones will be stopped out and which ones will take off to Profitland, therefore the discipline must be followed. Twenty trades in a row may be stopped for losses, but the 21st might quadruple and account for the year's gains.  

Individual sectors within the S&P were not traded by the original rules, so any sector ETF's should be considered part of the S&P500 allocation, ie, very small position sizes!

More chop, more ambiguity

SPY is an enigma and trying to disambiguate this mess is a chore.  

Yesterday we looked at a bear flag, now I'm seeing a bigger bull flag.

This pennant will need to play out and the confounding issue is the 200d MA making it's appearance.  Will it be welcomed, or will it be ginormous resistance?

Today we showed that there is renewed belief in negatives as the market sold off after a bad long-bond auction.  Point DD on the Mamis chart, so aversion may be close which speaks against the bull flag scenario.

While this plays out, I've increased my cash position and will day trade it for a bit to mitigate risk.

Bearish picture still intact, but conflicting

SPY.  I hate to appear so negative about everything... really I'm not that pessimistic about the planet and I'm net long at the moment.  But here is the pattern, call it whatever you want: descending triangle, not really a pennant, forming a lower high, whatever.

MACD is bullish, volume has been decreasing on the upswings.  Some conflicting messages being thrown out which is typical when the market is choppy.

How do we play it?  Mixture of longs and shorts and alternate as the market swings.  On days like this, go short and take profits on longs.  When the market is down 2-3%, then do the opposite.  I have a list of stocks that are short bias and another list long bias which I'm trading around.  

Shorts: M, JCP, STI, MA, EMR  among a few others

Longs: PEGA, JNJ, FCX, SLV, GLD among others as well as stock and bond mutual funds

Considerations: short MA, and some real estate names be rolling over.

Bear Flag Updated

SPY bear flag that is not completely formed is shown on the 65-minute chart.  Recent high of 92.80 and recent low of 88.28, gives a target of 84-ish.

We also see other bearish features including developing head and shoulders and also a lower high from 5-21.  While the volume has not dropped off recently, it is quite a bit lower in the past couple weeks as the market has topped out.

Declining Vix may signal complacency.

Bear Flag Homework

Eric has asked that I look at the bear flags on the 2-day and 5-min interval charts, which is actually a great exercise to see if I can discern a pattern in my feeble right brain.

I could not get a 2-day interval chart, so I'm using the daily on the first exercise.  Let's first define a bear flag.  From Chart-stocks:  "Bear Flag is a sharp, strong volume decline, several days of sideways to higher price action on much weaker volume followed by a second, sharp decline to new lows on strong volume." 

SPY daily chart shows the prolonged low-volume upswing from the March lows.  The average volume has declined over these weeks.  This seems like a rather long time interval for a bear flag... big purple crayons... but it does follow the principle that buyers are losing conviction and the easy money is made, which signals that the market is ripe to roll over.

Also, there is a double top-- actually a lower high-- noted from the past two weeks.  The moving averages are showing that a snap to the downside is due.  MACD had a crossover on May 13th.  Bearish.

SPY 5-minute shows a similar pattern starting from Thursday's low and the upswing has been on low volume.  The Friday afternoon pattern shows a meandering sideways market most of the afternoon on extremely low pre-holiday volume.

Target to the downside is 84 based on a near-term high of 92.70 and the recent low of 88.40.

SPY and the Pivots

SPY had low volume and hung out below the R1 level all day.

Pivot line is 89.10 and that was the lower target if this broke down.

The last bull run at 15:15 failed and the market failed.  Besides a small bear flag at the VWAP, everything went down.

Fortunately, I was positioned in shorts of M (Macys), SPG, MOS and HRB.  When the SPY hit 89.15, I took profits, except HRB which I'm holding.

Let's hope Macke's okay

Although he doesn't always have actionable information, Jeff Macke has been one of the more entertaining personalities, a diversion from the boredom of business television.  Such pervasive sarcasm and cynicism can take it's toll, however, and the news is that Macke is feeling it.

Maybe it's just a whacked-out thyroid... see a doctor, stat.  
Snap back, dude.  It's only a game.  

SPY strong, but looking tired

SPY has been strong since last half hour yeaterday, but now showing lower high and bouncing off trendline.  The VWAP was aggressively defended at 11:30 and likely this will hold today.

SPY falls thru support...

SPY has broken down from the high that Teresa Lo called the most anticipated high ever.

I took some self-flagellation about the chart I posted on May 6th, so I'll post it again with the update.  I had drawn in the green lines as a prediction, and altho we had a headfake above trend, the breakdown eventually happened.

Now where do we go?

The question posed is: what do we see first, 90 or 87?

My vote is 87 (75% chance.)

By Monday (50% chance.)

I'll make a call, god I hate to be wishy-washee!

Long: BP on a pullback

BP Long on a pullback.  The fed wants some inflation and we'll surely get some with any recovery.

Unless Obama outlaws the internal combustion engine (hmmm, not a bad idea, really), we'll still need oil.

BP is the best of a weak crowd right now and sports a 7.3% dividend for safety junkies.  Boring and not meant to be traded in and out.

I'd still wait for apullback or get half a position here with the plan to add later.

Long: JNJ

JNJ Long at 55.10.  Let's face it, we still need some longs to balance all those short positions, and this one should do okay even if the market churns for a few months.

Yield is 3.6% (better than Treasurys) and even if we socialize medicine folks will still need band-aids.  Other products such as heart stents should do okay, too.

Long opportunity: PEGA

PEGA Long at 24.21.  Let's assume the world does not end tomorrow.  This is a software company that had 28% revenue growth this year and earnings that are galloping along... not too shabby for Armageddon recession.

Sure, it trades at a premium, but it has no debt and $4/share is cash.

Lottery ticket that could double, get acquired... or go to zero (doubtful).

My 2 cents on macro: if this economy recovers, intellectual property will pull us out of the tailspin.  Our greatest resource is still human capital and companies that can increase those returns for their clients will outperform.

Update II : JCP short (again)

JCP announced earnings that disappointed and I took profits this morning.  Now it has gone on another tear, and I'm looking to short again...

Got it at 27.68.

Update: Short JCP; RYLPX sold

Yesterday, I presented JCP as a short opportunity before the earnings number.  This morning it came out in-line but the stock has dropped $2, so I am taking profits for a quick one.  If this climbs back above $26, I may go short again.  My target is $22.

As an aside, I also sold a small cap mutual fund, Royce Low Priced Stock Fund (RYLPX), that I have owned for years.  This 4-star rated fund managed by W. Whitney George is up about 7.5% this year and has averaged 9.8% over the ten years I have owned it, which puts it in the upper 4% of the category.  The excellent returns are due in large part to its heavy exposure to mining stocks.  I am selling now because this is my trading account and I want to increase cash for now.  I may buy some shares in this fund in my non-trading account if/when the market pulls back.

SPY hits subtle warning phase

SPY is telling us that it's tired.  Head and shoulders, bear flag, subtle warning...

On the 65-minute.

I was reviewing Mamis' bottom formation and drinking a few beers....

and this is the weird stuff.  The SPY 65-minute chart looks like the inverse of the Mamis bottom,

so I'll call it the "Simam Top".  Look at the next chart for the inverse of the SPY...

Inverted SPY chart from above on the 65-minute scale.  This shows that recent top as the Mamis Point C "bottom."

Mamis' Point D is the denial of positives, so the inverse is the denial of negatives, correlates with the positive action despite the crappy employment numbers and continue excess capacity, not to mention the undercapitalized banks.

Inverse Point DD is the "renewal in belief in positives", and I think that is pretty close to where we are at now, or maybe Point E (Glee).  When it breaks thru the blue trend support, that would be the inverse Point F, and instead of "positive action met with suspicion", I'd guess it would be "negative action met with disbelief."

The question is whether we are at Point E now which would correspond to Mamis' Averson (call it "Glee"?) or is this a Point DD on the way to Glee?

I'll have to think about the inverse emotions and sentiment that would go along with the other points on this graph.

Okay, I'll stop drinking beer now when I look at charts... but if I'm right on this, I may have to get a Kegerator installed in my kitchen.

Update: Short HRB

HRB short has been held for a few weeks and has performed well.  Now it seems oversold and profits can be taken or stops tightened.

Sorry I did not do a chart on this previously, but this one looks like it could go away.  There really is no support in sight and earnings estimates have been revised downward weekly.

There is a low short-interest ratio, so not much worry about this getting away on a market rally.

Short: FNF

FNF is a title and escrow insurance company which moves with the housing market.

Testing the 200d MA and longterm support for the third time.  A fall through it could be dramatic.

Short: JCP

JCP short opened today because I see further weakness in retail as credit remains tight.

Although I'm a little late on this one, I think that it should test support at 22.84 and may fall through.

Sentiment "very bullish"

Objective sentiment survey may be oxymoronic but it has been the Holy Grail of navigating this market.  According to this survey by Investors Intelligence cited by Frank Veneroso:

Bullish sentiment had a recent peak in October 2007 at the market peak with survey indicator at 87.  Pessimism was greatest in March 2009 with this particular sentiment indicator at 6.  No real surprise there.

So where are we now?  

At a level of 80.   

In the same reference, Veneroso points out that in the worst recessions of the last two centuries, the market bottom was not reached until industrial production bottomed, thus countering the conventional wisdom that the stock market leads the economic upturn by several months.

Time to jump in the market now?

I guess the question is how long sentiment readings can stay above 80.  Also, do "less worse" economic indicators such as employment and manufacturing mean that we are out of the woods?  Regardless of the answers to these questions, the easy money in this rally has been made and risk in the market has increased.

SPY defies gravity

SPY breaks above the upper trends today, thus invalidating my call for a pullback.  Sure, this could be a head fake but the moce is impressive regardless.

The bank stress tests announcement tomorrow afternoon should be fairly anti- climactic with the controlled leaks by the feds the past two days.  I guess we can all act surprised just to humor our public officials.  Thanks guys.  Nobody in Washington is taking any chance that a pullback might rock this teeetering house of cards.

Blatant market manipulation notwithstanding, we seem to have renewed confidence in the capital markets with zombie banks going parabolic upon announcing that they have to raise capital equal to the GDP of half the globes' nations.  

Richard Berntein, formerly of Merrill Lynch, speaking on Bloomberg today (via http://invivoanalytics.com ), points out that a new bull market would have new leadership.  Since we are seeing the same old tired nags leading this race, he surmises that this is a bear market rally and implies caution.  Bernstein also noted the excess capacity in housing, autos, the financial industry and almost all other sectors as well, and notes that it will take "years" to burn this off.  Deflation is here for a while.

The credit induced orgy of consumer spending is likely a thing of the past, so new leadership is necessary for a recovery.  Tech companies with little debt who make essential items for our economy seem like reasonable strategies for a new bull.  

Okay, calling tops is a fool's errand, and that's a lesson we'll have to re-learn a few times.  Keep hedged, longs and shorts, as always.  I would say "sell the news" on the banks stress tests, but alas, there is no news.

HOTT: take profits after hours

HOTT was presented as a short this morning before market.  It tanked after hours and I took profits of 14%.

HOTT: Short the retailer (UPDATE below)

HOTT on the daily chart shows a rolling over pattern after a stupendous run with all the retailers.  From a technical standpoint this looks overbought and ready for a pullback.

Eric wanted me to look at a retail stock that could falter with a market correction or pullback.

HOTT trades at a rather high PE of 27 trailing earnings and 19 forward, expecting a 15% earnings growth rate.  

The bullish case can be made that it has a teen clientele which tends to be recession- proof and the stock has high short interest ratio of 7.9 days.  Also, analysts have recently increased their earnings projections for next year.

HOTT on the 65-minute chart shows a steady down trend with a low volume bear flag developing today.  Careful traders would wait for this to break below 12.14 to enter a small short position and add to it below 11.60.

The next support is 9.00 if the retail market melts down.

UPDATE  6:00 pm 5-6-09:  HOTT dropped 14% after hours, I took profits.

SPY's low volume "melt-up"

SPY has shown a very constructive pattern with higher highs and higher lows with healthy pull backs along the way.

The sentiment has changed from bearish to bullish over the past few weeks and now managers are calling for everyone back into the pool.  Very confident.  I'm sure they all dressed up their portfolios in time for the April statements coming out this week (I got mine and it's full of wonderful stocks that have done so so well these past 8 weeks!)  So if these managers had not bought last week before April 30th, why would they buy now?

Although the banks stress tests are coming out Thursday and rumor is that 10 of the 19 banks will need to raise capital, no fear!  XLF goes stratospheric.... on low volume.  For all the bullish talk from Pisani and Kneale, we didn't see a whole lot of participation in the recent leg up this week.

The SPY has bounced off the lower trend line 3 times since the "Hal Turner" April 20th near-term bottom.  The previous trendline (upper red) was lost but now recently regained again.  The middle red trendline is the one to watch.  Also, the 200d MA is the Holy Grail on everyone's radar, but seems miles away and attainable only after much more constructive work on these pushes higher.  Can it be done?  And when it's reached, then what another parabolic rise?

A drop below this trend could see renewed confidence in the bears who will sell the news of the stress tests and the NFP.   My hunch is that we get the overdue pullback soon (S&P futures are down 11 as I type), perhaps to 89 or lower and then we need to all watch the trend lines to see which one is violated.

Full disclosure: I'm net short various components of  XLF and SPY as of noon today.  Stops on the swing trades are set, but truly I think this sucker breaks down.  Oh yeah, most important: don't ever take trading and investment advice from knuckleheads on the internets like me.

GENZ: short opportunity

GENZ had significant break down in March with an FDA warning about the condition of its plants and the delay of a drug for Pompe's disease.

The general market upturn has carried GENZ to some extent, but the technicals are not good.

GENZ more recently is showing a pennant formation.  The question is whether this will resolve upward or downward.

My take is that with the longer term down trend in the stock, this should test the long term support of 51 and may break through it. 

The risk/ reward favors a short here, but a break above the blur trend line would change that thesis.

SPY drifting with pullback due

SPY is due for a technical pullback based on several factors, especially if it breaks below pivot of 90.07 with any volume.

1. Lower highs and lower lows

2. Bearish MACD on short term indicators

3. Descending triangle or pennant(?)

4. Complacency borne of bullish sentiment shift.

The problem with this thesis is the low volume and the massive momentum from yesterday.  S1 is 89.17 and it would take an act God or Osama bin laden to get us there today, but 89.50 is not out of the question.  

Doubtful that short sellers will take on this beast, but perhaps profit-taking today or tomorrow before the NFP and Stress Test release.

SPY gets whipsawed...

SPY played out a sloppy head and shoulders of sorts, but not sure what happened after hours.

The magic 87.50 was violated on the downside and then re-gained with the "smart" money at the close.

I think we go lower on Monday, but I have little conviction.  

Terranova is taking out his checkbook and buying tech stocks for their dividends.  Okay.

SPY head fake????

SPY is giving a head fake.... 

The suspense is killing, but the MACD, XLF and IYR didn't buy that break above 88.

VWAP is 87.40

S1 is 86.54

Pivot is 87.78

This thing won't die (yet)

SPY breaking above down trendlines, but still below the neckline of the head and shoulders.  Checking MACD sees a bullish devergence... quiet market is hard to read.  

XLF and IYR lagging SPY.

SPY on the right shoulder

SPY is working on the head and shoulders that Eric called a couple days ago.  He gets the credit but not the blame if it doesn't work out.  Now we see another smaller pennant and the odds are this one resolves down, but I'm heeding the adage to not short a quiet market.

This will have to prove itself with a break below the red trendline.  I'll add more short position if it breaks below th 87 mark which is the one *everyone* is watching.

Subtle warning? was asked last night.  Will overt warning come this afternoon or Monday morning?  Art Cashin looking at the McClellan Oscillator called for an abrupt move one way or the other by today.

Risk management.