Month: July 2020

Nasdaq Inside Support Zone

by

In my July 14th post, "Nasdaq Pullback Begins?", I mentioned some possible areas of downside support.  That day prices fell below the fib cluster 1 zone, but closed above it.  This was a bullish sign.  Five of the next seven days saw that zone continue to hold, again bullish.  Finally, on Friday, prices moved lower into the top of the fib cluster 2 zone before closing back inside the fib cluster 1 zone.  Also, the 34 EMA wave area has moved higher since my last post.  The fib cluster 2 zone now sits inside it.  This 10414 to 10159 area offers strong support.  If prices manage to break lower, then next up would be the 50 DMA  ~ 10043, followed by POC ~ 9950, and finally the monthly pivot @ 9937.25.  This is a big week for the markets with tech earnings, the FOMC meeting, and GDP.  Let's see if these support levels hold.

Chart_20-07-26_18-53-37

Cocoa Nears Possible Resistance

by

Cocoa is approaching a possible resistance zone, which could provide a favorable short.  First, let's look at the bigger picture.  The weekly chart shows Cocoa has been in a down trend since February.  This sell-off is dominated by a shallow ABCD pattern with almost 3:1 right-handed skewing.  This represents a strong trend with strong momentum.  The 3 downside targets of this pattern are 2094 (met), 1981 (not met), and 1694 (not met).  It would be better if none of the targets were reached, but the bearishness of this pattern suggests we could see further downside targets hit.

Next up we take a look at the daily chart.  We want to focus on the move down from the June swing high.  This sell-off has two ABCD patterns.  The first is a double top and the second has medium retracement.  This suggests a weak trend, which is why we are seeing prices rally.  However, the daily chart is still bearish.

Now that we see bearish tones on both the weekly and daily charts, we want to look for sell side trades.  I'm not interested in fighting the trend.  My analysis has narrowed down the following zone as potential resistance: 2221 to 2280.

Let's take a look at what's inside this area:

-fib symmetry, retracement, and extension cluster of previous ABCD patterns

-3 separate point of control (POC) levels

-34 EMA wave on the daily chart

-seasonal tendency of Cocoa is to see a mid July to mid August sell-off.

Therefore, I would look for sell trades inside this zone.  Aggressive entries would be in the lower half of the zone.  Conservative entries would be in the upper half of the zone.  You should place stops above the top of the zone.  Targets would the recent 7/8/20 swing low of 2092, 1981, and 1694.

Chart_20-07-20_10-07-23

Trading System Drawdowns

by

Drawdowns are a loss of capital after a series of losing trades.  They are calculated using equity curve peaks and troughs.  New equity curve highs will reset them.  You can calculate them as dollar amounts and/or percentages.  Both come in handy and are essential to monitoring a trading system.  Some rules of thumb for maximum drawdowns are 50% of equity or 50% of best yearly performance. The other important component is the time it takes to recoup a drawdown.  This is measured from peak to new peak.  Whether you are a trader or an investor, drawdowns are inevitable.  When one does occur, it's important to put the percentage and days into context.  Is the current percentage within the range of previous years? Or is it the biggest one for your trading system? Is it near the maximum allowed? Is the length of the drawdown within the range of previous years? Or is it currently the longest one for your trading system?

The reason I'm writing this article is because my 3-tiered trading system recently went through a larger than normal drawdown.  My conservative fund dipped 12.93%, my moderate fund dipped 13.23%, and my aggressive fund dipped 12.50%.  This system has been trading in simulation since January 2019 and these dips were the systems’ largest to date.  Was this the start of a trading system failure? Should I lose faith in it and stop trading? That's where the statistics come in handy.  Even though they were experiencing their largest declines, they didn't check one of two boxes for maximum drawdowns.  First, did it reach 50% of equity? No.  Second, did it reach 50% of best yearly performance? I had to look back to 2019 and the answer was no.  The 2019 returns were 57.61% for the conservative fund, 60.25% for the moderate fund, and 54.17% for the aggressive fund.  The drawdown levels to watch would be 28.81%, 30.13%, and 27.09%, respectively.  Luckily, I stuck with my system and all 3 funds recently made new equity curve highs.  BTW, all are also in the top 10% of all funds traded at Collective2.

The use of drawdown statistics can help prevent you from pulling your invested money too soon or from you losing faith in your own trading system.  Remember that next time you find yourself in a drawdown as either a trader or an investor.

Nasdaq Pullback Begins?

by

NQ September futures (Nasd 100) are up over 52% since its 3/23 low.  This market is on fire.  But is a pullback starting? Yesterday we got a bearish engulfing candle at its monthly R2.  We have bearish momentum on the MACD.  If yesterday's high of 11058.50 holds, then how low can we go? The first thing I like to check is the symmetry of the recent pullbacks.  Doing so gives us two clusters.  The first cluster is between 10571.50 and 10443.75.  The second cluster is between 10286.75 and 10214.50.  Any pullback into these two areas is considered bullish because it is in symmetry with all the other ones since March.  However, if it falls below the second cluster we can expect a bigger correction to be taking place.  The next level of support to watch would be the 34 EMA wave, which includes the point of control level of 9950.35.  This is the biggest volume area since the March rally.  A move back into this zone could be a buying opportunity.  Finally, for a little perspective on this giant rally, a move all the way down to 9365.28 would only be a 38% retracement.  This big of a correction would still keep the daily chart in good shape.

Chart_20-07-14_07-40-41

30 Year Bond Nears Possible Support

by

The 30 Year Bond September futures contract has seen a strong up trend since June 5th.  Since that time, this market has made two ABCD patterns.  Both patterns have neutral retracements, which indicates a strong trend.  Using fib extensions and projections, the minimum target range for this upwards move is 182 13/32 to 184 4/32.  We can look for buy set-ups in support zones since prices have yet to reach this target area.  One such area is between 178 14/32 and 177 13/32.  This area contains the following:

--Fib cluster
--34 EMA wave
--2020 point of control (POC)
--50 DMA
--upward sloping trend line
--dominant ABCD pattern's swing high

This zone offers a low risk, high reward buy trade.  You could get aggressive and buy in the top of the range or be more conservative and buy in the middle of the range.  The trade set-up fails below 177 5/32.  Profit targets would be the recent swing high @ 181 14/32, the ABCD fib projection @ 182 13/32, the ABCD fib extension @ 183 10/32, and the ABCD fib extension @ 184 4/32.

Chart_20-07-13_08-51-56