Brad Kenagy's  Instablog

A long term technical indicator I use which compares the returns of the Dow Jones Industrial average (DIA) and the Dow Jones Transportation average (IYT) has flashed a SELL signal as of yesterday. The indicator consists of the following:

1. Comparison of the percent change in the Dow to the Transports.

2. Multiple comparisons of the trend of the Simple moving average, and exponential moving average for the Dow.

3. Lack of Positive volume.

4. Lack of meaningful money flow.

5. Use of Price channels.

Overall using those 5 indicators, I get twelve criteria that make up my indicator. I created this indicator two years ago and it has proved extremely reliable. The indicator is only triggered when all 12 criteria are met. This has only occurred 3 times before yesterday since January of 2004, which is when data starts for IYT. So a total of 4 occurrences during a 9 year span. After each of the previous signals stocks had meaningful correction, with one of the three being extremely severe. In the charts below I will show what happened after each signal was triggered.

The first Sell signal was triggered on 9/19/2007, extremely close to the previous all-time high. What makes this different from other the two other occurrences, besides the current one, is that the whole candle is above the upper price band [red line], and subsequently that was near the top and stocks fell substantially afterwards.

(click to enlarge)

The second sell signal was triggered on 4/19/2010 and had a correction of about 12% over the two months following the sell signal. Also, notice from the chart below that the candle is below the upper price band [red line].

(click to enlarge)

The third sell signal was triggered on 4/26/2012, and has a correction of around 8.4% over the following month and a half. Again the candle was below the upper price band.

(click to enlarge)

The fourth signal that occurred yesterday, had its candle ABOVE the upper price band, which has only occurred the last time the market was near an all-time high and fell substantially afterwards. Only time will tell how big the coming correction will be. But using history as a guide, I would be very wary of the Dow, Dow Transports and stocks (SPY) in general.

(click to enlarge)

For those that have the thinkorswim platform here is the code for my custom indicator, that you can copy and paste into a new study:

Declare Lower;

input price = close;
input length = 200;
input displace = 0;
input malength = 9;
input exlength = 50;
input mflength = 21;
input movingAvgLength = 1;
input displace2 = -1;
input blength = 20;

def UpperBand = Highest(high[-displace2 + 1], blength);

def MFI = Average(moneyflow(high, close, low, volume, length), movingAvgLength);

def SMA = Average(price[-displace], malength);
def AvgExp = ExpAverage(price[-displace], length);
def AvgExp2 = ExpAverage(price[-displace], exlength);
def Dow= close("DIA");
def transports= close("IYT");

def chng1=((dow-dow[1])/dow[1]);
def chng2=((transports-transports[1])/transports[1]);

def ind= (chng1-chng2)*100;

plot data=IF((if(ind>1,1,0)+
if(chng1*100>.5,1,0)+
if(chng2*100<-.5,1,0)+
if(close>avgexp,1,0)+
if(sma>avgexp,1,0)+
if(sma>sma[1],1,0)+
if(sma>avgexp2,1,0)+
if(volume<volume[1],1,0)+
if(avgexp2>avgexp,1,0)+
if(MFI<70,1,0)+
if(close>avgexp2,1,0)+
if(open[1]<upperband[1],1,0))==12,1,0);

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Contest Rules

Every person that enters picks 1 stock/ETF that meets the below selection criteria by the CLOSE on MARCH 8th. Picks should be posted in the comment section of this instablog. No Stock Pick Repeats!! Once a Stock is chosen by a user, no one else can choose that stock. I will be taking the first 64 Entries I receive for the contest. I will calculate returns from the close on Friday March 1st. and for each subsequent round I will calculate returns from the Friday close of that given week. I have created a Google spreadsheet for the trading challenge, and is able to be viewed by everyone.

Bracket Link: https://docs.google.com/spreadsheet/ccc?key=0AphdhVxTO0uudGd4RUg5bjNud1VGU00tb3hQcjVmdEE&usp=sharing

Seed Ranking

As anyone who watches the NCAA tournament knows each team is assigned a seed number ranging from 1 to 16. So for this contest I will calculate each seed by the following method:

• I will base each users seed by their article count, so based on 64 user, the top 4 people with the most articles will get 1 seeds, the next 4 will get two seeds and so on.
• For users that have not submitted an article I will put their name in a spreadsheet and use a random generation tool to determine their seed.

Stock/ETF Selection rules:

1. Only LONG or SHORT a stock, and No shorting a ETF.
2. Price of atleast $1/share
3. For stock they must have a market cap of atleast $100 million
4. Traded on the NYSE, NASDAQ or AMEX
5. No leveraged ETFs
6. No Closed-End-Funds

Good Luck Everyone!!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Contest Rules

Every person that enters picks 1 stock/ETF at the beginning of the month. Picks should be posted in the comment section of this instablog post And each round of the contest lasts one month.

Stock/ETF Selection rules:

1. Only LONG or SHORT a stock, and No shorting a ETF.
2. Price of atleast $1/share
3. For stock they must have a market cap of atleast $100 million
4. Traded on the NYSE, NASDAQ or AMEX
5. No leveraged ETFs
6. No Closed-End-Funds

To advance to the next round (month) here would be the rules:

• Your stock pick MUST have a higher return than that of the (SPY).
• Your stock pick MUST have a positive return for the month.

So, only the best stock pickers will advance, the contest would keep going until there is 1 winner.

The goal is to highlight the best stock pickers on seeking alpha who necessarily dont have a huge number of followers but have real stock picking skills.

Below are two tables, the first the table of players from January, and the second is a table with everyone who made it to the next round with their picks and opening prices [open prices retrieved from Yahoo Finance]

February Results:

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.