IS THE ECONOMY SMARTER THAN THE MARKET? · The big danger is a snapback where the market retreats to the economic outlook, or the economy rises to catch up with the market. Politicians

May 2nd, 2020 A publication of Algobot Pte Ltd CRN201604500D. Copyright © 2020

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Weekly for Saturday May 2nd, 2020. Based on Thursday’s Close

CONTENTS

IS THE ECONOMY SMARTER THAN THE MARKET? pg1

POSITIVE LIST TRADING EXIT pg11 DAILY PRICE CHANGE RATIO ENTRY SIGNAL part 2 pg16

THE SUCKER RALLY pg20 NEWSLETTER OUTLOOK: TRADE WHAT YOU SEE pg24 PORTFOLIO CASE STUDIES: MONEY MANAGEMENT pg25

IS THE ECONOMY SMARTER THAN THE MARKET? By Daryl Guppy

Is the economy smarter than the market? This is the key question. With

massive unemployment, shuttered shops, businesses that will not reopen, and business that will reopen but not be able to recover from the cash flow drought and

collapse within months, the outlook looks grim. The big danger is a snapback where the market retreats to the economic

outlook, or the economy rises to catch up with the market. Politicians would have us believe the economy will catch up to the market with a snapback. Others believe the market will correct back to the struggling economy and this underpins the dead cat

bounce analysis.


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We simply do not know but as we have often said, we should trade what we see

on the chart and not what we believe. It’s an axiom we have been guilty of not following in recent weeks but it’s one we start to follow this week with more

examples. This is a volatile market, with the DOW, unbelievably, having its best month in

three decades. A volatile market is most effectively managed with volatility stops and

that means Traders ATR or Count Back Line. This is the basis of our new opportunity searches. We look for CBL and Traders ATR entry signals. This is covered in another

article. STARTING WITH “EXPERTS”

I have absolutely no problem is deferring to the experts, but I do not take their suggestions unquestioned. I prefer to assess them against my own chart analysis.

This week Goldman Sachs has identified its top underappreciated defensive stock picks that should perform well through the coronavirus crisis. The broker is known as tactically bearish short-term, and defensives form an important part of its portfolio.

They said Aurizon, Freedom Foods, Charter Hall Social Infrastructure REIT, Cleanaway Waste, St Barbara and Telstra were overlooked by the market, all down

25% from their year highs and each offering more than 19% upside based on Goldman Sachs’ target prices.

We examine each of these from a technical perspective applying chart analysis

because there is no room for more complex, and potentially confusing, analysis. If the opportunity is there, then it is there, plain and clear. We start with AZJ*.


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The dominant feature on the chart is the equilateral triangle. This is a pattern of indecision because it gives no clear indication of the direction of the breakout.

However, breakouts are often very strong and reach the projected targets quickly. The triangle is not perfect and includes some overshoot bars. The entry signal is

given near $4.66 by the move above the upper trend line. The upside target is the

width of the base projected upwards form the point of breakout. This gives an upside target near $5.17. Stop loss is the value of the trend line near $4.56.


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This puts $429 at risk, or less than 0.05% of trading capital. As the trend develops a different stop loss method will be applied. This may be an ATR or a trend line.

The trade may be executed as a CFD, although the available leverage is low. It may also be used to add to an existing longer-term open position in AZJ for those who

already hold this as an investment. BULLISH TRIANGLE

CQE* is a clear bullish triangle. It has a well-defined resistance level and a well-defined upward sloping trend line. The base of the triangle is measured and projected

upwards to give a price target. There is no complex analysis required for this clear bullish up sloping triangle pattern.


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Entry is taken near to the uptrend line at $2.25. The risk is reduced because the stop is the value of the upsloping trend line at $2.20. This puts $444 at risk or less than 0.04% of total trading capital.

Upside target is $2.72, and this gives a 20.89% return from this type of trade. WASTE OF TIME

CWY was quickly dismissed from consideration. It does show a confirmed uptrend line. It does not show any compression in the long term GMMA and this

suggests the downtrend pressure remains string. There is the potential for a breakout, but the previous candidates on the list offer better defined and clearer opportunities. In a volatile and unconfirmed market, traders err on the side of caution.


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ATR BREAKOUT

SBM is a good example of an ATR breakout with an entry signalled around $2.25 when the long-side ATR moved above the short side ATR. Aggressive traders

who missed the first entry conditions join the uptrend as price drops towards the value of the ATR. This is joining an established uptrend rather that taking a larger risk in the early stages of the breakout. The breakout trend is confirmed by GMMA

analysis. The long term GMMA has turned upwards and has been successfully tested as a support feature on two occasions.


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For case study purposes the entry is at $2.43 with the stop loss at the value of

the ATR line at $2.38. This puts $411 at risk or less than 0.05% of total trading capital. Target is near $30.00, but the trade is managed with the ATR line.


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HANG UP TLS remains in a downtrend with a well-defined downward sloping triangle. This shows none of the bullish features traders are looking for, so these types of patterns

are ignored.

XJO CONTEXT UPDATE

Here’s an update from last week on the context of the current fall as compared

to the 2008 collapse. As noted, we suspect that the current rebound is the mother of all dead cat bounces. Note the dead-cat bounce in 2008. On the weekly chart you can

see how this developed as a six-week rally.


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The most important feature of note is the speed of the current fall. In 2008 the fall played out over a year. This fall is playing out over a few weeks. That’s materially different as discussed in the strategy notes. This is not GFC. It’s the Great Panic. GFC

solutions will not work, and that impacts on how we re-enter the market.

UPDATE ON WHAT WE ARE DOING As noted in following articles, we are easing back into this market with a

defensive approach.

1) Identify sustainable rebound activity suitable for short term trades and applying tight stops.

2) Use Traders ATR and CBL as the entry conditions. 3) Look for stocks that did not overreact to the market fall and which have

maintained steady low volatility trend behaviour.

4) Enter near to the stop loss levels to reduce risk. 5) Manage as a short-term trade with tight protect profit stops.

6) Identify support points and potential buy points for investment style accumulation

Our current strategy is cautious trading until there is absolute proof this is not a

sustained dead cat bounce because the macro economic situation runs counter to the market behaviour.


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You can download the ATR indicator for MT4 at https://www.mql5.com/en/market/product/29683 Use this to improve your trade risk

management.

CASE STUDY EQUITY CURVE

The case study trade 5GN is closed for a profit of $227.27 or 1.14%. The case

study portfolio return is $54,142 or 54.1% for the period starting July 1, 2019 and ending June 30, 2020.

For the year starting July 1, 2018 – 2019 the case study portfolio return is

$91,794 or 91.79%. For the year starting July 1, 2017-2018, the case study portfolio return is

$115,330 or 115.3%. For the year starting July 1, 2016-2017, the case study portfolio return is $92,464.15 or 92.5%. For the year starting July 1, 2015- 2016, the case study portfolio return is $156,450 or 156.45%.

Equity trade size is generally kept constant at $20,000 in the case study portfolio so it is easier to compare the case study trades over this and other years.

Unless otherwise noted in the trade management notes, all equity case study trades are managed on an end of day basis, with the exit taken at the best reasonable price on the day after the stop loss is triggered.

Warrant and CFD trades are generally kept constant at $10,000. Warrant and CFD trades are closed on an intraday basis using a guaranteed stop loss as this is a

primary method of managing derivative risk. FX trades are generally kept constant at $5000. Stops are managed intraday.

This capital allocation reflects the risk in each of these asset classes.

https://www.mql5.com/en/market/product/29683


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POSITIVE LIST TRADING EXIT By Daryl Guppy

We introduced two sample trades last week. Both are trend breakouts, but the

nature of the breakout is different in each example. They were trades with tight stops

because we remained nervous about the market uptrend strength.

5GN The first example is 5GN. We consider these factors.

The rally we joined has slowed and the price closed below the ATR stop loss

line. Whilst there is a strong potential to test support from the long term GMMA, we instead take an exit on the day following the close below the ATR line.

The exit is taken near $0.89 and gives a small profit of $227.27 or 1.14%. This highlights the increased risk in trading breakouts and the need for tight stops.


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The collapse in the trend started before the Market collapse so it was an

established downtrend. The price fall did not accelerate when the market collapsed so the downtrend

remained steady and intact This means that standard measures of trend behaviour, GMMA and ATR can still

be applied.

The short ATR is a 2*ATR because market conditions suggest more caution is needed in entry decisions, so we apply a wider and slower entry signal.

We wait for the ATR crossover, using a 1*ATR long.


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Entry is taken at $0.88. The ATR stop is at $0.81. This puts $1590.91 at risk.

This level of risk can be reduced by reducing the position size to $10,00 but in this case study we leave the position size at $20,000.

TBR

There is no change to the management of this case study trade. The ATR stop

loss value is lifted. Some traders will put a sell order in placed just below the target level. This may be adjusted as price moves closer to the target level. In a string trend

the sell is removed and used as a calculation point for a trailing stop loss. The second trade example is TBR. The uptrend breakout has continued

strongly, and the trade management method does not change. This is a classic trend

breakout trade that is largely unaffected by the market collapse. We consider these elements in making this type of trade entry.


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This is an established downtrend. There is no sudden collapse when the market collapsed. This behaviour is uncorrelated with the market.

This means that standard measures of trend behaviour, GMMA and ATR can still

be applied. The short ATR is a 1*ATR because the trend stability does not show the broader

market volatility. We wait for the ATR crossover, using a 1*ATR long. We wait for GMMA crossover confirmation.

We wait for the breakout to move above the trend line value.

The plan was to hold off entry until after the Easter break using a low-ball entry price near $5.42. This advance order was filled on the day before Easter. The stop loss

was set at $5.12. This puts $1,107.71 at risk. This level of risk can be reduced by reducing the position size to $10,000 but in

this case study we leave the position size at $20,000. The progress of this case study trade will be updated in next weeks newsletter.


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https://lp.gomarkets.com/trade-better/


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DAILY PRICE CHANGE RATIO ENTRY SIGNAL part 2 By P Doggett

Markets change. Techniques that worked stop working and are replaced with

new techniques. However, the discarded techniques may come back into fashion and become compatible with even newer market conditions. We hoard trading methods

and drag them out from time to time to see if they are back in fashion. This article provides a method that is well suited to bullish market conditions. We reprint the original notes as a starting point. Editor

When I think I am on the verge of a new trading technique, one of the first

questions that I ask myself is this: “Will this technique work if I want to go short as well as go long?” A reader has asked this very question regarding the Daily Price Range – Daily Price

Change Ratio or RCR for short. The same reader has asked, how do I find these types of set ups in the market. Let’s answer both questions.

First of all, let’s look at whether or not the RCR will work in falling markets as well as in rising markets.

If you try to apply the RCR as it appeared in this newsletter on 11 June 2011, in down markets, it won’t necessarily work in the way you expected. I have back tested using the same set of rules and found some short comings. For example, I rarely

found a “down” day following a high volume down day that achieved a range-change ratio greater than 70%. I also found that setting the Stop at the intra-day high of the

high volume day only got me whipsawed back out of the stock pretty quickly because the market bounces upward with more gusto than it drops.

There are probably several reasons for this. The main one as far as I am

concerned with however, is that bull and bear markets are different in nature and therefore a Long strategy generally won’t work in reverse as a Short strategy because

the emotions and the arousal traders feel in bull markets are different from those experienced in bear markets.

For example mildly bullish news often causes stock markets to rise, but mildly

bearish news rarely cause markets to drop. Why is this? Well, generally speaking, studies on personality have shown that people are by and large, optimistic about most

things. So it follows that traders typically look to the positive in all announcements. Besides, much of the literature in the market tells us that eventually the market will always head higher, so it ingrains the perception in the wider public that if you merely

buy and hold, then by some magical law of nature, the market (and therefore your shareholdings) will inevitably rise in value over time.

But rather than get bogged down in a philosophical debate as to why bull and bear markets act differently, lets move on and show how the RCR can be applied in bear markets or in falling stocks rather than in rising stocks.

The only thing we need to do is to make a slight alteration to our first two rules. Just to recap from last week, we stated the following:

Rule #1: Find a high volume day. It must be on a day that has a positive or higher close based on the previous days closing price (it has to be an “up” day) and it must be the highest volume day for at least the past 5 consecutive trading days

(inclusive). Rule #2: The day after the high volume day must be an “up” day (the share

price must end at breakeven or higher than the previous day’s closing price). This “up” day must have a daily price range and daily price change ratio greater than 70%. Fig 2 shows us Rules #1 and #2 being satisfied at the start of May, using ADY as an

example.


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In the Long strategy, we find a high volume day first, and then look forward in

time, to the next trading day to find an “up” day (when the closing price is equal to or higher than the previous day’s closing price).

We have to make some minor adjustments to Rules #1 and #2 in down

markets or if we are intending to sell Short. Our original two rules change as follows: Rule #1: Find a high volume day. It must be on a day that has a lower close

than the previous day’s closing price and it must be the highest volume day for at

least the past 5 consecutive trading days (inclusive). We use this day and the previous day (if it satisfies Rule #2 below) to calculate the RCR. This day must have a

daily price range and daily price change ratio greater than 70%. Rule #2: The day before the high volume day occurs, must also be a “down”

day (the share price must end at breakeven or lower than the previous day’s closing

price). In effect we have to look backwards from the High Volume day when we are

dealing with falling markets or intending to sell short to satisfy rather than look forward from the High Volume day as we did when intending to go long.


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We have to calculate the RCR. To do that we use the closing prices of the two

bars to derive our Change figure and we get our Range by deducting the intra-day high from the intra-day low on our High Volume Day.

You will notice that the RCR comes to 69.4%. This does not quite meet our 70% minimum ratio. This example has been used however, to demonstrate the need for us to be flexible enough to accept a half a percent short fall. I could have simply

used the JBH example taken from the 16 and 17 December 2009 (where the RCR was in excess of 100%) and never have brought the above example to your attention, but

I think it is important to see where some leeway can be given because trading the market is not an exact science. We now set our Stop-loss at the intra day high of the previous days price bar.


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As I said earlier, I back tested the RCR technique using the original rules in down markets and I was unable to satisfy Rules #1 and #2 for various reasons. But making the adjustments as outlined above, I had far more success with various stocks

over various time frames ranging from 2007 – 2011. In the above example, the RCR is now calculated using both days, pretty much

as we showed in the previous article. Using our days shown in Fig. 4, our RCR calculation would look like this:

So now onto the second of the reader’s questions. “How do I find these stocks

to trade?” Well in both instances I use an inbuilt feature of my charting program that allows me to do a search for the Daily Highest Volume changes. Once the top 50 tops in this category have been found by my program for me, I do an eyeball scan of them

all, looking for price bars that appear likely to satisfy Rule #1 and Rule #2 at a glance. I then investigate further and calculate the RCR manually.

Secondly, as I trawl through and eyeball each individual stock my ASX200 watch list, I look out for price bars that appear likely to satisfy Rule #1 and Rule #2 and investigate further when I think I’ve found something.

When back testing this technique for both my own personal curiosity and for last week’s article, I randomly selected time frames and stocks. There was no rhyme

or reason for it, but this is the best way to back test. Don’t attempt to deliberately seek out stocks or set ups that you think will prove your theory. Come up with your theory, then see if the market contains the evidence required to support your theory.


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Through this process I found that the RCR technique, for those wanting to go Long in the market, favoured stocks that were coming off a low. It wasn’t planned, it

was purely the direction that the development of the rules and the back testing sent me in.

THE SUCKER RALLY By Karen Wong

What goes up and never comes down? A person’s age. The more common phrase is what goes up must come down. If something is increasing or rising it will eventually decrease or fall. It’s a gravity concept equally valid for describing what

many view as a sucker’s rally in the current market. A sucker’s rally is found in a bear market and appears on the chart as a short

term rally followed by a reversal of price to the downside. Once price starts moving down and makes a low, lower than the previous low a Dead Cat Bounce pattern is

confirmed. Like the Dead Cat Bounce the sucker rally is identified in hindsight. In the midst of a market rally we want to find clues as to whether the rise in

price is the start of a bigger uptrend or a temporary rise before another dramatic

plunge. Looking back on the Tech crash and the GFC market crash there was one indicator keeping traders out of any potential sucker rally.

Many readers have heard of using 2 moving averages in what is known as a Golden Cross. A Golden Cross is when two moving averages cross over one another. Applying the concept of these 2 moving averages to an index utilizes the Golden Cross

as a market filter. In this example we are using a 9 period Exponential Moving Average or EMA and a 21 period EMA to apply it to the XJO Index also known as the

ASX 200. According to the Market Index website, the Golden Cross values of the 9 period EMA and the 21 period EMA works well as a filter in the Australian Market.


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The Golden Cross Market Filter rules are simple:

(1) Buy when the 9 EMA is above the 21 EMA

(2) Avoid buying or sell when the 9 EMA is below the 21 EMA.

The Golden Cross filter is not a stand alone system. Used together with an existing strategy it is useful as an added confirmation when making the decision to trade or

not to trade. Let’s observe the application of this simple strategy on a couple of historical

market crashes.

Figure 1

Source: Market Index In the Tech Crash of 2002/ 2003, the Golden Crossover occurs at the marked star

where the EMA 9 in red crosses down under the EMA 21 in blue. This is followed by the two rallies marked at 1 and 2. We see the EMA 9 continue below the EMA 21.

Using the Golden Cross filter rule we should avoid buying in this market. The rallies at 1 and 2 are actually sucker rallies, confirmed as price turned downwards. When price finally makes a bottom and recovers you see the EMA 9 crossover above the EMA 21.

Any trader who reentered the market from this point on joined in the recovery. Remember the Golden Cross filter rule tells us to buy when the EMA 9 is above the

EMA 21.


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Figure 2

Source: Market Index

Let’s look at the GFC Crash of 2008/2009. The Golden Crossover is at the

marked star. The EMA 9 crosses below the EMA 21. Again at the area of the rallies marked at 1 and 2, the EMA 9 is still under the EMA 21. It’s a Golden Cross filter signal telling us to avoid buying in this market. These 2 rallies reveal themselves to be

nothing more than sucker rallies. The downtrend in price continued. Getting back into the market at the cross over of the EMA 9 rising above the EMA 21 allowed a trader to

enter into the market as prices started to recover.


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Figure 3

This is the state of the current market at Figure 3. We are still in the rally phase and the EMA 9 is still beneath the EMA 21. Applying the Golden Cross filter rules we

should avoid buying at this time. It is risky to reenter the market unless you have a good strategy for trading market rallies such as the ATR trend crossover with tight

stop losses. If price reverses and makes a low that is lower than the previous low at 4403 a

Dead Cat Bounce pattern is defined. The potential sucker rally is in turn confirmed by

this pattern. Spotting a sucker rally demonstrates what goes up must come down.


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NEWSLETTER OUTLOOK: TRADE WHAT YOU SEE By Daryl Guppy

The ATR on the XJO shows a pullback to the ATR value, followed by a

rebound away from the ATR. This is confirmation of an uptrend.

The behaviour of the XJO means we need to reposition the uptrend line.

The pull back and rebound confirms trend continuation so we need to redefine the trend in the light of this activity. This is also consistent with the ATR behaviour.


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These two indicators suggest uptrend continuation. However, as noted

in the manage notes, there remains a contradiction between economic conditions and market behaviour. We continue with short term trading from the long side with tight stops and tight protect profit stops is appropriate.

However, we also remain alert for a resumption of the downtrend. There is a diminishing possibility of a dead-cat bounce.

PORTFOLIO CASE STUDIES: MONEY MANAGEMENT

Starting cash position $100,000 - no brokerage or slippage 2% of risk = $2,000

NOTE Entered date is the newsletter date which contains the case study discussion.

OVERALL PROFIT TO DATE

The case study trade 5GN is closed for a profit of $227.27 or 1.14%. The case

study portfolio return is $54,142 or 54.1% for the period starting July 1, 2019 and ending June 30, 2020.

For the year starting July 1, 2018 – 2019 the case study portfolio return is $91,794 or 91.79%.


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The case study portfolio return is $156,450 or 156.45% for the period starting July 1, 2016-2017. Note that this includes 6 to 21 trade results. The case study portfolio return is $92,464.15 or 92.5% for the period starting July 1, 2015- 2016.

Equity trade size is generally kept constant at $20,000 in the case study portfolio so it is easier to compare the case study trades over this and other years. Unless otherwise

noted in the trade management notes, all equity case study trades are managed on an end of day basis, with the exit taken at the best reasonable price on the day after the stop loss is triggered.

CUSTOMER CAUTION NOTICE AND COPYRIGHT Algobot Pte Ltd (CRN 201604500D) Pte Ltd is not a licensed investment advisor. This publication, which is generally available to the public, falls under the Singapore 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

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Documents

IS THE ECONOMY SMARTER THAN THE MARKET? · The big danger is a snapback where the market retreats to the economic outlook, or the economy rises to catch up with the market. Politicians