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Brad Kenagy
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History/Trading Style: I have been investing for 6 years. The subjects I focus primarily on are building custom portfolio's of ETF's, Technical analysis of stocks and ETF's, and value investing, as well as other topics.
  • Warning! Dow, And Transports Signal Correction Is Coming. 4 comments
    Apr 3, 2013 12:33 PM | about stocks: SPY, DIA, IYT

    A long term technical indicator I use which compares the returns of the Dow Jones Industrial average (NYSEARCA:DIA) and the Dow Jones Transportation average (NYSEARCA: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 (NYSEARCA: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.

    Stocks: SPY, DIA, IYT
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Comments (4)
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  • Bulls I Win, Bears You Lose
    , contributor
    Comments (2) | Send Message
     
    Your disclosure doesn't say your short anything. When are you planning on going short?

     

    When the candle was above the upper price band, when there was a signal, it would have been good to go short about 20 days later.

     

    And it looks like when the candle is below the upper price band, when there's a signal, it would be good to go short about 4 days later.

     

    So maybe about 19 days from now, will be the top.

     

    Only three data points so far, but looks cool. Thanks for sharing.
    4 Apr 2013, 04:27 AM Reply Like
  • Brad Kenagy
    , contributor
    Comments (1467) | Send Message
     
    Author’s reply » I only have to disclose what I am short if I mention it in the article, but since you asked the I have hedged my equity positions with a broad government bond ETF (PLW), and with the ProShares Short MSCI EAFE ETF (EFZ). I like EFZ because 63% of the holdings are from Europe and I think Europe has more pain in store for it.
    4 Apr 2013, 10:19 AM Reply Like
  • Brad Kenagy
    , contributor
    Comments (1467) | Send Message
     
    Author’s reply » Ok my indicator was signaled on April 2nd, and today was the 20th trading day since my indicator was signaled. Will be interesting to see what happens, since 20 days after coincides with the start of "Sell and May theory"
    30 Apr 2013, 08:47 PM Reply Like
  • futures614
    , contributor
    Comments (13) | Send Message
     
    Thanks Brad,

     

    I always look forward to your insightful articles, comments, etc. You have been a big help in pointing me in directions to conduct my due diligence. Thanks for sharing.
    4 Apr 2013, 09:53 AM Reply Like
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