Thomas Meyer, Editor
September 13, 2021
Welcome to this week’s AlgoTrendTraders report. Before we get into this week’s report, be sure to follow us on Twitter. During the week, we update Twitter with charts of additional stocks, ETFs, commodities, and cryptos. Please share the algotrendtraders.substack.com link and the Twitter handle with your friends and colleagues.
The Stock Market was Down for the Week, but We Locked in More Profit
Wait Tom, what do you mean? How can the market move lower, but you locked in more profit?
That’s the beauty of trend-trading. As trends remain in place for weeks and months, each week will normally see a move higher in the underlying exit price. For instance, even though SPY dropped a little in price this week, the exit price on the trade moved higher from $426.47 to $428.49. QQQ saw the same thing happen with its exit price moving up from $352.93 to $354.89.
The exit price is the most important price in managing your trades.
Working to Keep Things Simple
We’re going to move the overview of the AlgoTrendTraders 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.
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.
Be sure to prepare your exit strategies before you enter into any trade. That’s the key to successful investing.
The Composite Table for September 13, 2021
SPY (S&P 500 ETF) moved lower last week, but it remains in a Bullish condition. The stop moved up to $428.49 which is 0.8 Expected Moves (EM) from Friday’s close.
QQQ (Nasdaq 100 ETF) also moved lower last week, but it too remains in a Bullish condition. The stop moved up to $354.89 which is 1.1 EM from Friday’s close.
ARKK (Ark Innovation ETF) moved lower for the week and continues to trade in the middle of the yellow channel Transition Zone (TZ) under its 200-day moving average. It remains in a Neutral condition. There is no trade this week in ARKK.
GLD (physical gold ETF) closed lower last week and is now in the lower half of the TZ. It remains in a Neutral condition. There is no trade in GLD this week.
BTC (Bitcoin) closed lower for the week near the $45,000 level. It remains in a Bullish condition. The current listed stop for Bitcoin is $40,951.38 which is now 0.4 EM from the weekly close. BTC is still trading above its 200-day moving average, but has lost upward momentum.
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 trade.
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 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 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.
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.
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 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. Each 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 on 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.
In the next section, we give you an example how to adjust your mutual funds to use these signals and risk parameters we follow each week.
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.
Applying the AlgoTrendTraders Formulas to Your Mutual Funds
One of the most popular funds in 401(k) plans is the Fidelity 500 Index Fund (ticker symbol FXAIX). This is a fund that is a clone of the S&P 500 Index. It’s going to have most of the same characteristics as the S&P 500 ETF (SPY) we follow in this report.
FXAIX closed this past Friday at $155.11. Here’s how to manage the exit strategy for FXAIX using the statistics we have in this report for SPY.
First, we want to determine the normal volatility for FXAIX. That’s the Expected Move (EM). This week, the EM for SPY was 4.89%. We’ll take the price of FXAIX and multiply by the EM to determine the numeric value.
$155.11 x 4.89% = $7.58 (rounded off)
Currently, the stop for SPY = 0.8 EM from the Friday close. Let’s determine the amount of FXAIX that’s equal to 0.8 EM.
$7.58 x 0.8 = $6.06
Now we can subtract 1.2 EM from the closing price of FXAIX to determine the proper exit price.
$155.11 - $6.06 = $149.05
If FXAIX closes below $149.05, that means the uptrend and the momentum have been broken according to the system and you should move to a cash position. It doesn’t mean that a new bearish trend has begun. FXAIX will be trading inside the Transition Zone and waiting for a new trend to develop. When a new uptrend begins, you could re-enter into the position.
You can use these same steps for any of your mutual funds that are similar to the ETFs we follow in this report.
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.