AlgoTrendTraders Free Weekly Report - May 23, 2022
Disciplined, Rules-Based Trading
Thomas Meyer, Editor
May 23, 2022
Welcome to this week’s AlgoTrendTraders report. Before we get into this week’s report, be sure to follow us on Twitter: @AlgoTrendTrade1
We’ll post updates throughout the week.
The information in this report is very valuable. Please share this newsletter with your friends and colleagues who can also benefit from an intelligent, disciplined, rules-based trading system. And if you have a question, feel free to send an email. We’ll be glad to clarify anything that’s not clear in the reports.
QQQ is in an Oversold Condition
QQQ closed almost 4 Expected Moves (EM) below the bottom of the yellow channel Transition Zone. When a ticker moves to an oversold (or overbought) condition, we change our exit strategy to use a trailing stop. The reason for this is that when an oversold condition is in place, there’s a high likelihood of a reversion to the mean. In the case of QQQ, it would not be surprising for it to sharply rise by 10% or more in a short period of time. Of course, it can also continue to move lower.
In an oversold condition, our goal is to try to capture more profit more quickly. If we had continued to use the normal stop, it would have been set this week at $348.57. instead, in the oversold condition, we’re initiating the trailing stop at $319.02 which is calculated as the Friday close plus 2x the EM ($15.17 x 2 = $30.34). If QQQ drops below the Friday close during trading this week, be sure to adjust your exit strategy accordingly.
No Other Changes
After another week of wild swings, none of the tickers we follow have changed their condition. SPY, QQQ, and Bitcoin remain in Bearish conditions. ARKK and GLD are in Neutral conditions.
For those wanting to know more about Trend-Trading
The overview of the AlgoTrendTraders system is underneath the charts. Those familiar with our methodology can get right to the trades. If you’re new to trend-trading, be sure to read this introductory section. This will help you understand the concept of trend-trading and why it’s so powerful.
Each week, we show you the Composite Table that has the week-ending price, current volatility, and the updated exit strategy for each of the ETFs and Bitcoin. We repeat this a lot because it’s the most important element for successful investing…
Always have your exit strategies prepared before you enter into any trade.
The Composite Table for May 23, 2022
SPY (S&P 500 ETF) closed lower last week and it remains in a Bearish condition. The current exit strategy on the bearish trade is 433.67 which is 3.5 Expected Moves (EM) from the Friday closing price. It’s close to an oversold condition, but not there yet.
QQQ (Nasdaq 100 ETF) also closed lower last week and it too remains in a Bearish condition. QQQ is in an oversold condition as it’s almost 4 EM below the bottom line of the yellow channel Transition Zone (TZ). As we mentioned above, this means we move to a 2.0 EM trailing stop. The trailing stop is initiated from the Friday closing price of 288.68. Before the market opens on Monday, this puts the current exit strategy for QQQ at 319.02. If QQQ drops lower than the Friday close, the stop will also move lower. We’ll update this on Twitter during the week.
ARKK (Ark Innovation Fund) closed lower for the week, but it remains in a highly oversold condition and in a Neutral condition. There is no trade this week in ARKK.
GLD (physical gold ETF) closed higher last week. GLD is now inside the upper half of the yellow channel Transition Zone (TZ) and remains in a Neutral condition. There is no trade this week in GLD.
BTC (Bitcoin) closed lower for the week and remains in a Bearish condition. The exit strategy for this bearish trade is now 41,057.91 which is 2.9 EM from the Sunday closing price.
Be Sure to Read the Disclaimer at the End of This Report
Here are the latest charts…
In this weekly free report, we give you the trading signals for five of the most popular investment tickers. The signals are based on trend-following principles. Very simply, stocks stay in trends until they don’t. Trends can last a short time or they can last for months and even years at a time.
This is not a “get-rich-quick” scheme
If you’re looking to make a ton of money in a short time, you’re going to be disappointed. Trend-trading is not fancy; it’s boring, and takes time to be successful. This is a system that relies on a historically-proven process to generate solid returns on winning trades and avoid large losses on losing trades. We’re definitely the tortoise, not the hare.
Trend-following systems don’t try to guess what the next move in the markets might be. Instead, we measure the markets each week and use our algorithms to determine the current trend and the exit strategy for the current trades.
This system is the same one that was used in two paid investment newsletters for the past few years. Each of the newsletters had several different tickers, but the S&P 500 and Nasdaq 100 were used in both. Here are the updated results through September 10th from the trading signals given in these two indices since October 2019.
This means the average gain per trade in the S&P 500 (SPY ETF) was 6.66%. Had you been able to make all seven trades according to the signals, the potential gain was more than 45% with very little downside risk. For the Nasdaq 100 (QQQ ETF), the average gain was even greater at 7.20% per trade. That’s a total potential gain for the 8 trades of more than 57%. Again, the downside risk during this time that included the quickest bear market in history was limited.
The largest individual winning trade in the S&P 500 was the bearish signal generated in early March 2020. The largest winning trade in the Nasdaq 100 was the bullish signal generated in May 2020 that lasted until February 2021.
The key to the winning trades greatly outperforming the losing trades is the risk management system. If a trade moves against us, we’ll get out of the trade with a small loss. But if a trade trends higher for months at a time, we have the ability to build up substantial profits.
AlgoTrendTraders uses both trend and momentum to generate the trading signals. The yellow channel you see in the center of the charts is called the “Transition Zone”. When a stock is above the yellow channel, it’s in a Bullish condition. When it’s below the yellow channel, it’s in a Bearish condition. When it’s in the middle of the channel, it’s in a Neutral condition and there is no trade.
Selling is More Important Than Buying
Every trade has a pre-determined exit strategy. This is based on the normal volatility of the underlying ticker. Each stock has its own unique volatility. And, volatility is dynamic. It’s constantly changing. Each week, we look at the previous 52 weeks of price movement to come up with its normal weekly volatility. This is called the “Expected Move”. The Expected Move equals one week of the normal volatility of the stock or ETF being measured. Every week, the exit strategy for each ticker is updated.
The system is based on the weekly closes of the underlying tickers. All trading information and volatility calculations are based on weekly volatility. By using weekly calculations, the system ignores the day-to-day noise in the markets and is able to give better signals.
It’s easy to see the periods of time that volatility increases and decreases. As the yellow channel Transition Zone widens on the charts, the volatility is increasing. The opposite is true; when the Transition Zone narrows on the charts, the volatility is decreasing.
The best time to enter a trade is when a new signal is given. This gives you the greatest opportunity to get into a trend that could last a long time. Though it’s possible to get into a trade after a trend has been in place for a while, the risk in that trade is elevated. Consider using 1/2 or 1/3 of your normal investment for these situations.
For this report, we give signals that can be followed by both novice and more experienced investors. Novice investors can use these signals to help them manage their 401(k) and retirement plans by adjusting the signals for SPY and QQQ to match the mutual funds in their plans. Though you won’t be able to short these indices when they become bearish, you can stay away and avoid devastating losses from bear markets.
Experienced and sophisticated investors can use leverage or options, but the risk is substantially greater. Never risk more money than you can afford to lose.
The information published in this newsletter should not be used to make personal investment decisions. We are not licensed by any federal or state entity to give investment advice. We do not know your personal financial situation. Investments should be made only after consulting with your professional investment advisor and only after reviewing the prospectuses or financial statements of the companies in which you’re considering investing.