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The Asia & China Internet Trading Weekly with Independent Analysis
Weekly for Wednesday August 27, 2008 Based on Mondays Close 19 pages
Edited by Daryl Guppy with contributions from A Gibbs, Suniel and P Rak
Guppy Trading Essentials Chart pak, Metastock , Ezy Charts & SuperCharts. Data from JustData, Paritech, CMC
Markets, Almax & theNextView
Note.
icons
heading,
material.
The
more
computer
CONTENTS
Selecting Stops pg1
Readers Questions Building Useful Timing
Indicators pg4
The 123 Pattern pg8
Chart Briefs UOB LTH (UOBH), Singapore pg10
CNBC Gone For Gold pg12
Metal Briefs Copper pg14
Index Briefs KLCI, Malaysia pg15
Newsletter Notes pg16
Portfolio Case Studies Money Management pg18
SELECTING STOPS
By Daryl Guppy
TRADING METHODS
EYEBALLING
Good trades leap off the chart. They are clear
trend trading opportunities, or clear trend breakout
opportunities. Specialist trades, such as parabolic
trends, are most easily seen when we look at the
chart.
Eyeballing makes use of the ability to use
experience and summarise a chart in the blink of an
eye. This experience comes from looking at many
charts every day. At first this appears to be a time
consuming process, but with practice, it is a fast and
efficient way to find clear simple, profitable trading
opportunities.
We train ourselves to apply this technique by
looking closely at the chart every time we have cause
to look at a stock for any reason. In time you will learn
to recognise clear trends, and clear chart patterns.
This is an important trading skill.
Eyeballing remains one of the quickest and
most effective ways to find profitable trading
opportunities.
The trade uses two stop loss signals. The first is a price volatility based count back line. In
current volatile markets, this signal is sometimes too tight. It remains an excellent measure of price
volatility but it is not always the best measure of trend behaviour. A close below the CBL line is a
warning signal of increased price volatility and potential trend weakness. This warning developed
when TRI-M re-commenced trading.
Note that the CBL should be calculated from the new high at $1.05. However the CBL is
correctly calculated from the previous high at $1.02. When calculated from $1.02 the stop loss is
located at $0.96. When the CBL is calculated from the high at $1.05 the stop loss is lowered to
$0.93. In this situation the higher value of the CBL calculation is used as the stop loss.
The second management method uses the TVL line. This trend volatility line uses the
trending information from the GMMA to develop a stop loss solution that is related to the volatility
of the trend. The TVL stop has not been triggered in this case study trade.
Nervous traders exit using the CBL price volatility signal. We remain with the trade. We use
the TVL as the confirming exit signal. We look for evidence of the stability of the trend as this is a
more reliable guide than price volatility in the current market. A move below the TVL line is a
confirmation exit signal.
This is not necessarily the most profitable trading solution. Our objective in these examples
is to show readers the consequences of the consistent application of trading plans and risk
management. The original trade plan notes are reprinted below.
TVL MANAGEMENT
The CBL stop loss is lifted to $0.96. A move below this level is an alert exit signal. This
developed during the week. The TVL line is used as the confirmation stop loss. The value of the
TVL line is not adjusted.
With the rising trend candidate, TRI-M, we can apply a TVL (Trend Volatility Line) analysis.
The TVL intersected the lower edge of the long term GMMA so a new TVL position is calculated.
The width of the volatility is measured with the pink line projected upwards. From the upper level,
the new TVL is set at $0.94.
TVL analysis is applied to the previous trend and shows previous compatibility with TVL
management. As the trend develops we can use the TVL to manage the trade. The initial trade
management uses the CBL line.
We have shown the
minimum
target
price
necessary to achieve a 1:3
risk/reward
ratio.
This
calculation
method
is
discussed in the RRR article in
this issue.
The risk and
reward ratio is calculated at
the minimum of 1:3. This trade
is added to the case study portfolio at $1.00 for a total cost of $20,000 with a position size of
20,000. The stop loss is at $0.96 and this puts $800 at risk. This is 0.8% of total trading capital.
SEARCH METHODS
Several weeks ago, we detailed the steps we use to complete a visual trawl through all
Singapore stocks. A visual trawl means quickly looking at each chart and building up a list of
potential trading opportunities. We find currently trading stocks by running a search using just the
DEADDAYS formula covered in previous newsletters. Then we save the list as a temporary
favourites list. Finally we open this list and flip through each chart using the forward button.
We look for these features in the initial visual search for trade opportunities.
Price is above the long term GMMA
The long term GMMA is moving upwards
Price has moved above a downtrend line
The trend is confirmed with the count back line.
As the list is constructed, certain stocks appear much more stronger that others. These are
noted as the visual scan progresses.
Once the final candidate is selected, the intention is to reduce the list by selecting stocks
that have the highest level of compatibility with our preferred trading method. In these case studies,
we want to apply the HCC trade management. Initially this uses the count back line to manage the
risk, and then shifts to using the GMMA TVL (Trend Volatility Line) to manage the developing
trade. We select for an entry point close to the CBL stop loss level.
The first step is to apply GMMA analysis to each chart. The next step is to apply CBL
analysis. Then we apply RRR analysis to help with final trade selection.
http://www.cnbc.com/id/23103686/site/14081545/
August 27, 2008
READERS QUESTIONS
INDICATORS
BUILDING
USEFUL
TIMING
By Andrew Gibbs
RELATED TOPICS
TIME IN THE MARKET
Trading objectives should be matched with
time in the market. The greater the time exposure weeks or months - the greater the risk of the market
moving in an unpleasant direction. Open positions
held for a long time must offer better returns for the
risk associated with the time in the market.
Trades offering smaller returns should be
closed when they have spent weeks failing to reach
your profits. Matching time in the market against
risk and with potential reward is a judgment call, but
unlike a safe, but low paying CMA account, the
market carries risk.
High risk markets are best traded for a
short time span with maximum, usually leveraged,
returns.
Risk management also means time
management.
The indicator you are about to learn about is designed to identify the end of a trend. You
will often hear that you should never try to pick the low of a move or the high of a move? What if it
was actually possible to do this on occasion? Lets have a look at the chart below.
The stock is CBA and the green arrows on the chart represent an oversold condition on the
Gibbs Value Index (You can use an RSI or Stochastic for a similar result). You can clearly see that
in most of the examples shown below whenever this indicator (in blue on the chart below) goes
below 20 it is generally followed by a rally in the near future. This is a leading indicator, we buy on
the bar following the green arrow. You will also notice that whilst this indicator is good, it is not
perfect. You can never avoid all of the minefields.
Rather than just taking my word for it I have put together 3 tables that show the result for
buying the stock on the open after an oversold condition has been met and exiting after 7 days, 17
days and finally 30 days. This tells us whether or not we are actually looking at something with a
positive expectancy.
The numbers above show Buying 35 of the top 50 ASX stocks and exiting after being in the
trade for 7 days. You can see we have a small positive expectancy. Below are the results for being
in the trade for 17 days.
And finally the next table shows the results for being in the trade for 30 days.
August 27, 2008
The tables clearly show a positive expectancy across multiple time frames, however on the
whole, holding for 30 days improved the average trade and % accuracy, along with the profit factor.
You will also notice that on the CBA chart I also had a second data stream underneath the
price chart. This represents Crude Oil. You will remember some weeks ago that I suggested crude
oil going lower is positive for stocks and vice versa. The suggestion then to make the show me
study better, is to only show an oversold condition when crude oil is in short term down trend. This
makes sense as we now have two conditions that should support the stock price. The results
below show buying the 35 selected ASX stocks on the following days opening price if we have an
oversold condition and when crude oil is trading lower than where it was 30 days ago.
The results above are quite good. We improve our average trade and increase our winning
percentage. The show me indicator is shown on CBA below.
August 27, 2008
A quick analysis above shows that we have sidestepped the higher risk trades and now
have a pretty solid signal. I would however like another crack at making the signal better again. In
fact we still have a lot of things we can do to improve both the indicator and the system.
Next week I consider the additional filters that can be applied to improve the results.
If you would like to subscribe to my FREE weekly newsletter please e-mail me at
Andrew.gibbs777@gmail.com with your full name and e-mail address.
From this higher swing low (point 3) price then resumes the
upward movement, thus confirming the change in the trend. A long
trade is then entered when price breaks the previous high formed at
point 2.
This may sound complicated, but the concept is very simple
and easy to use. Since this is all that the pattern consists of, it is very
easy to spot for a confirmation of the change in trend.
If we look at the fundamental reason for the forming of this
pattern, we can see why it works so well. The unfolding of the pattern
step wise, would be as follows
An indication of the change in trend is seen, when price
retraces the original down move. This can be confirmed with a simple trend line.
Failure to make a new low.
Price rallying again from here, creating an anticipation of a reversal.
Breach of the previous high, confirming the reversal. At this point, everybody is going
long creating the extra momentum for the upwards trend. This is because traders, who
had anticipated the downtrend to continue, would have placed their stops above point 2
of this pattern. And when these stops are hit, these breakout traders will tend to cover
their positions by going long, driving the price up with thrust.
Once this pattern has been spotted, let us define some very simple rules for managing the
trade.
The entry should be taken only on the break of the point 2 the previous high (or low
as the case maybe)
The stops to be placed beneath the low of point 1. Aggressive traders may even place
the stops below the higher low at point 3, but it is always better to give price enough
room to move without hitting the stops.
While this pattern does not give any projected target, a minimum target can be
estimated by a simple thumb rule. Calculate the distance from the point 1 to point 2 in
the formation. Add this to the low of point 3, and this should be the minimum distance
that price will travel to.
The setup of the entire pattern from point 1 to 3 could take place in 3 bars or as long as
20 bars. But the rules of pattern remain the same. A point to keep in mind here is that
the more number of bars involved in the setup, bigger should be the move. This is not a
fixed rule, but more often not, this concept is followed by the price.
Allow the pattern to prove itself before entering a trade. If point 3 forms below the point
1, the pattern is negated. Similarly price has to break the high of point 2 for
confirmation. There will be times when price will consolidate within the area of points 2
& 3, without giving any indications of the direction. At such times it is better to stay out,
till price action confirms a direction.
In this example we can see that price is initially in an uptrend. Price then moves down and
a simple trend line break will give us the indication of a change of trend. It is here that we label the
swing high as point.1 of the formation.
In this new downtrend, we then have a swing low from where price retraces up again in the
direction of the previous uptrend. We label this as point.2 of the formation.
Now at this point, even though we have the two initial points of the formation, we are not
sure if this is a retracement of the uptrend, or a reversal to the downtrend. The confirmation comes
when price makes a swing high, which is lower than the high of point1 (the point.3). This tells us
that price does not have the momentum to break the previous high, thus indicating a change of
trend.
If you notice, we mentioned that it only indicates a change of trend. This could just be a
consolidation where price could be pausing before resuming the uptrend again. This is where we
wait for the confirmation. As soon as price breaks the low of point.2, we enter the trade.
As per our conditions, we place our stops above the point.1 of the formation, and estimate
the minimum distance that price should go to. As we can see, price easily surpasses the minimum
distance, giving a good short trade.
Here we have a 123 formation for an uptrend also, giving us a better understanding of the
pattern. The rules remain the same as above, and we can see the effectiveness of the pattern.
The most recent development shows a reversal from a medium-term downtrend which
bottomed out gradually above a support at 18.40. The reversal was also gradual, resulting in a cup
and the start of a handle pattern under a lip resistance at 20.10.
However, though the handle started to develop, over the last three days the pattern broke
down and prices are currently well on their way back to the 18.40 support. This has invalidated the
cup and handle pattern and suggests that the consolidation between 18.40 and 20.10 is now the
dominant feature in the stock, until a breakout in either direction develops. The failure of the bullish
pattern is another example of the current tendency in the markets for unreliable and volatile
breakouts, and considerable general uncertainty.
UP CONDITIONS
The failure of a relatively high probability bullish pattern, such as a cup and handle,
increases the probability of a consolidation phase. The GMMAs confirm this as the moving average
groups which had recently completed a bullish crossover and were turning upwards are now once
again converged, and trending broadly sideways consistent with consolidation and uncertainty. The
narrow long-term group also indicates very little support in the event of a retreat.
A rebound from 18.40 is likely to result in a return to the 20.10 resistance, with the potential
for an ongoing breakout above this resistance. This is also consistent with the overall (though
reasonably poorly defined) uptrend in this stock.
Hence, opportunities in this stock are most likely to come from short to medium-term
uptrends which commence on rebound from a support and have a likely target at the closest
overhead resistance, with the potential for a continuation to the next resistance. This is consistent
with the strong support/resistance control evident in this stock. At this point, it is necessary to
recognise that the separation of these support and resistance levels is not especially wide, for
instance around 8% from 18.40 to 20.10, and another similar separation to the 21.70 level which
capped the previous medium-term uptrend.
Any trades based on a support rebound should be accompanied with a very tight stop loss,
necessary in the current uncertain environment. Trades can be managed with reference to
support/resistance levels, any developing short to medium-term trendline and appropriate stop
losses (initially on a close below the nearest support, shifting to the trailing CBL stop loss).
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DOWN CONDITIONS
Failure of the 18.40 support will signal a likely medium-term downtrend back to previous
downtrend lows around 17.10. Failure of this level will signal a more severe downtrend with likely
downside supports at 16.30 and 15.25, while rebounds from these levels may signal a developing
reversal.
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12
There is a strong probability gold will develop another sideways pattern similar to the
sideways pattern in 2007 June. In this condition, gold will use the $785 to $840 level as a trading
band. This pattern of support suggests gold can fall to this level and move sideways. Optimists
draw a long term trend line starting in July 2005 and touching the lows in June 2007. This trend line
provides support in the $785 to $840 region.
The plunge in recent weeks has exhausted the nuggets of opportunity found in March
through July. The move below the TVL line confirms a significant trend change. This is unsafe and
shifting ground. The key uptrend continuation signal is a move above $840. The warning signs of
further rotten ground is a fall below support near $785, or a fall below the value of the long term
trend line.
A fall below the TVL line at $860 is a signal for a change in the long term uptrend. The
strongest support level is between $650 and $700. A sustained fall below support at $780 has a
long term downside target near $650 to $700.
The strong trend in gold has its own characteristics and traders must understand this
behaviour. The trend is influenced by American dollar weakness, but this is not the most important
feature of the trend. Traders watch for the price behaviour within the horizontal support areas. Its
time to hang onto your hard hats and trade the volatility of price behaviour rather than the trend
behaviour. Capture the nuggets while waiting for the line of lode to reveal itself again with a move
above the TVL line.
13
14
15
The neckline, or base of the head and shoulder pattern uses the extreme low in August
2007 and the low in March 2008. These extremes in the low, and the spike nature of the high that
creates the head suggests we need to apply pattern projection targets with some caution. It doesnt
alter the bearish nature of the pattern message, but it adjusts the way targets are set.
A straight forward application of the pattern target measurement sets a downside target
near 780. This target is not an historical support level. Support is located near 800 so this is the
higher probability downside target. This is an extreme technical target.
The high probability outcome is a retreat to consolidation support between 930 and 970
followed by the development of a trend rebound pattern. There remains the potential for a sharp
temporary fall towards the head and shoulder target near 800. The sudden temporary falls in
March and August 2007 and again in March 2008 show how it is possible for this behaviour to
develop. This is consistent with the character of the Malaysian market.
NEWSLETTER NOTES
WHO WRITES THE NEWSLETTER?
The newsletter is written by five groups of people. They are united by their interests in the market,
their genuine trading experience and their willingness to share their experiences and ideas. They know that
by exposing their ideas to the scrutiny of other traders that they will improve their own trading results. One of
the benefits of writing for the newsletter is the way it forces you to more carefully define your trading plan.
The five groups of writers are:
Daryl Guppy. The notional case study portfolio is drawn from these articles. This also includes
the analysis approaches I use in trading current markets.
Regular columnists. These writers include Petra Rak, Gavin Hewitt, A Gibbs, John Atkinson,
Suniel, J Mitchell and S McCarthy. They are all private traders active in the market and their
analysis and research reflects their experience.
High profile writers and authors. We bring you the most recent work completed by authors like
Alan Hull, Louise Bedford, Martin Pring and others. These are knowledgeable and respected
traders.
Freelance writers. These are ordinary traders just like you. They struggle with the same problems
and develop their individual solutions. Often they write on just a single trading approach or issue.
Their knowledge gained from hard experience in the markets helps us all to become better
traders. Trading is a lonely business and sharing experience makes the task easier.
Readers. Many of the ideas for articles come from readers. The Readers Questions section is a
regular response to questions sent in by readers. Many articles are also commissioned on the
basis of questions and issues raised by readers. Your support helps to write the newsletter you
read and make it relevant.
In selecting articles we prefer those that are consistent with the approaches discussed by Daryl
Guppy in his books and workshops. However we still discuss other trading approaches, such as Gann,
Fibonacci etc. The objective is to provide readers with a traders perspective on these techniques so they
can made a better decision about how appropriate these techniques may be for their own trading.
Red-K-Line is essential reading for traders interested in understanding how China trading is
different from trading in Western financial markets.
Red-K-Line teaches you which strategies work in Chinese markets.
Red-K-Line is essential for expats who are interested in trading the China market.
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Red-K-Line is essential reading for those who want to be ready to participate in China
market trading when the market opens
With a real-time success record of 72%, Red-K-Line is the most successful China market trading
weekly publication available in English.
Full newsletter details are available on www.guppytraders.com/RKLChina
chinaorders@guppytraders.com for a free sample copy of Red-K-Line, English version.
V3 GTE
VERSION 3 UPGRADE OF GUPPYTRADERS TOOL BOX AND CHARTING ARE AVAILABLE FOR FREE
TRIAL DOWNLOAD FROM WWW.GUPPYTRADERS-ESSENTIALS.COM
These products are now available for downloading and purchase.
Upgrade features include:
Jason Mitchells JICD% Indicator. First released in our newsletters, this indicator gives a
trading advantage.
Invert chart function as discussed in Trend Trading and Trading Tactics. Eliminate your
bias with this tool.
The GTE Charting program and Toolbox is designed to work with a variety of data formats. The
toolbox is a small utility application that gives traders access to a selection of Guppy tools and indicators that
might not be included in the charting program they are currently using.
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Security/Counter/Stock
Tri-M Singapore
Price
Qty
Pur Value
1.00
trend trade
20000
Newsletter date
Close
20000
Cur Val
0.95
19,000
-
Percentage
1,000
-5.00
NOTE: The case study portfolio is reset to a nominal $100,000 in trading capital in April
2007
Profit since April 1, 2008 , $5,236 or 5.2% return on trade equity.
SUMMARY MONEY MANAGEMENT
Profit April 1, 2007/March 31, 2007 = 63% return on trade equity.
Profit April 1, 2006/March 31, 2007 = 70.8% return on trade equity.
Profit April 1, 2005/March 31, 2006 = 59% return on trade equity.
Profit April 1, 2004/March 31, 2005 = 38.8% return on trade equity.
Profit July 1, 2000/December, 2000 = 32.2% return on trade equity. (6 months only)
Profit July,1999/ June, 2000 = 69.9% return on trade equity.
Profit July,1998/ June, 1999 = 54% return on trade equity.
Profit July 1997/ June, 1998 = 66% return on trade equity.
From 1997 to December 2000 we ran a Singapore/Malaysian section in the Australian edition of the newsletter.
The results above are from the case study trades for that period.
Direct investing in the stock market can result in financial loss. Historical results are no guarantee of
future returns. Results reflect absolute trading stop loss discipline. Case study trades are monitored and
managed in real time and management reports are delivered every week in the newsletter. Except where
noted, all case study trades and notional examples using reasonably attainable entry and exit points.
Unlike an actual performance record, simulated results do not represent actual trading. Also, since the
trades have not actually been executed, the results may have over or under compensated for impact, if
any, of certain market factors, such as lack of liquidity. No representation is being made that any account
will or is likely to achieve profits or losses similar to those shown. Full trade summaries, with charts, are
provided every six months.
DISCLAIMER AND COPYRIGHT
Guppytraders.com (ACN 089 941 560) Pty Ltd is not a licensed investment advisor. This publication, which is generally
available to the public, falls under the Financial Media Advice provisions. The information provided is for educational
purposes only and does not constitute financial product advice. These analysis notes are based on our experience of
applying technical analysis to the market and are designed to be used as a tutorial showing how technical analysis can
be applied to a chart example based on recent trading data. This newsletter is a tool to assist you in your personal
judgment. It is not designed to replace your Licensed Financial Consultant or your Stockbroker. It has been prepared
without regard to any particular person's investment objectives, financial situation and particular needs because readers
come from diverse backgrounds, with diverse objectives and financial situations. This information is of a general nature
only so you should seek independent advice from your broker or other investment advisors as appropriate before taking
any action. The decision to trade and the method of trading is for the reader alone to decide. The author and publisher
expressly disclaim all and any liability to any person, whether the purchase of this publication or not, in respect of
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subscription period by 90%. Contributed material reflects the personal opinion of the authors and are not necessarily
those of the publisher. Articles accurately reflect the personal views of the authors. Stocks held by the authors are
marked* and are not to be taken as a trading recommendation. This is not a newsletter of stock tips. Case study trades
are notional and analysed in real time on a weekly basis. Guppytraders.com does not receive any commission or benefit
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