Trader Mike

Since I’m such a fan of moving averages for investing / trading I thought this post about the Google 15 was pretty cool. The “Google 15″ is a widget / gadget which you can add to your Google Homepage to help you lose (or gain) weight. I like how they use moving averages to help people stay on trend (emphasis is mine):

The Google 15 encourages you to get on the scale every day by calculating a moving average from your daily weight. We then plot this average alongside your daily scale weight and a goal weight that you set–this gives you a better idea of your weight trend by masking most of the …

I’ve had several people ask me for more details about my trading process and the software that I use. Hopefully this post will answer those questions. Please leave any other questions n the comments section. I’m going to run through the hardware and software that I use as well as how I manage the actual trades.

What I’m Trying to Accomplish

As you know on any given day there’s a ton of market data to process. I try to get the computers to do as much of that work as possible. My focus is first on identifying the ‘tone’ or direction of the day — bullish (up) or bearish (down). Once I’ve done that the computers help me to find the best setups for the market conditions.

charts of The Nasdaq, Chicago Mercantile Exchange (CME), Consumer Discretionary Select Sector SPDR (XLY), Alcan (AL), and the S&P 500 Percent of Stocks Above 50 Day Moving Average:

I was surprised to see that the Nasdaq made a golden cross today. Unfortunately I don’t think that pattern is actionable. But since I pointed out the death cross several weeks ago I thought it was only fair that I point out the golden cross. It is a good (bullish) sign though that the 50-day moving average is back above the 200-day. That’s just one more thing the bulls can feel good about. And the bears have to be concerned that support didn’t break today……

Last week I mentioned that there would be a death cross on the NASDAQ very soon. There’s an article over at MarketWatch that talks about the death cross that was made yesterday:

Looking ahead, if you were going to draw a line in the sand, there’s a not-too-distant area on the Nasdaq that will be worth tracking. As the daily chart above illustrates, its 50-day moving average currently holds at 1,991 and its 200-day moving average rests at 1,992.

So those two areas hold just 1 point from one another and make for completely obvious resistance. Yet perhaps even more notable, is that those two moving averages just formed a bearish …

Worden has an indicator called T2108 which plots the percentage of stocks above their 40-day moving averages. In effect it works as an overbought/oversold indicator for the market. This is an indicator that Duru and I like to check when we get strong moves in the market. I was just instant messaging with him about it and we were trippin’ off of how fast this bad boy is dropping. This indicator doesn’t spend much time above 80 or below 20. Once those levels are hit the market usually reverses pretty quickly. It hit 19.99 today… down 26% from yesterday. The chart shows just how widespread the selling is right now:…

Once again the early morning buying enthusiasm gave way to selling. I’ve been thinking that the S&P 500 had to touch its 50-day moving averages for a couple of days now. It finally tagged that line a few minutes ago. The index sprung right off of the 50, but who knows if that bounce will hold. It sure seems like too neat of a bounce to me.

The NASDAQ is in a more interesting position. It has resistance from its 50 DMA and the 2100 level just overhead. Interesting times…

Here’s my answer to the following question which was posted in my comments yesterday by Gary:

I’ve signed up for an evaluation of TC2000, which I was previously unaware of. However, after studying Worden’s videos and Help Contents on individual indicators, I’ve tried to find out if they would recommend where I could find info on how to interpret the combined indicators in regards to buy or sell points. Their reply was that they had none. Could you point out some of the useful indicator combinations that you’ve found to be reasonably accurate for determining buy/sell points?

For information about how to use indicators to determine buy/sell points it’s probably best to read some books on technical trading. A great …

I can’t wait for this book to drop (December 3, 2004). I’m very curious to see what O’Neil has to say on this subject. In ‘How to Make Money in Stocks’ he barely touched on the subject. Here’s the Editorial Review from Amazon:

About the AuthorWILLIAM
J. O’NEIL has distinguished himself as a champion of the individual investor by providing them with innovative, sound, and effective tools and methods necessary for investment success. His investment books, including the bestselling How to Make Money in Stocks and The Successful Investor, outline in detail the CAN SLIM investment research tools that enabled Mr. O’Neil to buy his own seat on the New York Stock Exchange in 1963 and start his own institutional …

Moving averages (MAs) are very simple, yet extremely useful tools for investors. A moving average is simply the average of a series of numbers over a period of time which is constantly updated by dropping the oldest value and then adding the newest value and recalculating the average. So a 5-day moving average of stock prices would add up the closing prices for the last 5 days and then divide that total by 5. After the next trading day, we would drop the oldest day and calculate the average with the latest days’ price in its place. So over time the average moves as new data is added and old data is dropped. There are other, more complex, types of MAs (exponential, triangular, variable, and weighted are some of the more popular ones ) but for this discussion we’ll focus on the type I just described, which are called ’simple (a.k.a. arithmetic) moving averages’.

What MAs do is smooth out fluctuations in prices, thereby making it easier to spot trends. We’ve all heard the expressions “the trend is your friend” and “trade with the trend” but often it’s difficult to identify the trend. That’s because stocks don’t move in straight lines as well as the fact that the trend may be different depending on your time frame. For this discussion I’ll define three different time frames as follows: