AlgoTrendTraders Weekly Report - February 5, 2024

Disciplined, Rules-Based Trading

Thomas Meyer, Editor
February 5, 2024
Email: algotrendtraders@gmail.com
Twitter: @AlgoTrendTrade1

Welcome to this week’s AlgoTrendTraders report.  Before getting into this week’s report, be sure to follow me on Twitter:  @AlgoTrendTrade1

I’ll post updates throughout the week.  The data and charts shown in this report are not meant to be recommendations and no buy/sell information is inferred. 

The New Tickers

As mentioned at the end of last year, I’m replacing three of the tickers we were following.  This week, we’ve replaced AAPL, GLD, and XOM with the following:

           CL1 – This is the generic futures symbol for West Texas Intermediate Crude Oil

           GC1 – This is the generic futures symbol for Gold
           TLT – This is the symbol for the iShares 20+ Year US Treasury Bond ETF

I chose these tickers as they cover large and important elements of the investment landscape.  There’s not a perfect 1:1 relationship between crude oil and the underlying oil stocks, but most of the time they trade similarly.

The gold futures contract is a purer look at the price of gold than what the ETF represented.

I considered using one of the bond futures symbols, but decided to go with TLT because it’s such a widely used proxy for long-term US T-Bonds.

Both CL1 and GC1 triggered new trades this week.  Oil is bearish and Gold is bullish.  Long-term T-Bonds are currently in a Neutral condition.

Please let me know if you have any questions about these.

SPY and QQQ Continue to Set New Records

The bullish trades in the major US market averages continue into their fourth months with solid gains last week.  We’re sitting in a great position as both trades are nicely profitable for us even if the market turns lower.  Almost each week, the exit moves a little higher and locks in more potential profit for us.

Same thing with Bitcoin.  It hasn’t done a lot the past month.  Looking at the chart, it seems to be consolidating in the low $40,000 level after the big runup at the end of the year.  After a couple of weeks with the exit price remaining the same, it moved higher this week.  This locks in a little more profit on what is already a nicely profitable trade.

Speaking of exit strategies…

Exit Strategies Updated

All the stops have been updated for the current trades.  Be sure to update your exits according to the rules you use.  

An X-Ray of the S&P 500 Sectors – Weakness Underlying the Major Index

Last week saw a couple of changes in the sector conditions, but the net effect was a wash.  There are still 7 Bullish sectors, 3 Neutral sectors, and 1 Bearish sector.

XLB (Materials) – Bullish Condition
XLC (Communications) – Bullish Condition
XLE (Energy) –  Neutral Condition
XLF (Financials) – Bullish Condition
XLI (Industrials) – Bullish Condition
XLK (Technology) – Bullish Condition
XLP (Staples) – Neutral Condition
XLRE (Real Estate) – Neutral Condition
XLU (Utilities) – Bearish Condition
XLV (Healthcare) – Bullish Condition
XLY (Discretionary) – Bullish Condition

Historical Results Are Underneath the Charts

The updated historical results for the tickers we follow in AlgoTrendTraders are listed underneath the charts.  They’re currently showing the trades with closing prices through February 4^th.

AI Answers About Trend-Following

For those new to AlgoTrendTraders, we have a list of questions we asked ChatGPT to answer about trend-trading and its advantages.  Be sure to read those to better your understanding of what we’re doing here.

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 is so powerful.

Always have your exit strategies prepared before you enter into any trade.

The Composite Table for February 5, 2024

Be Sure to Read the Disclaimer at the End of This Report

Here are the latest charts…

Trend-Trading Overview

The long/short signals are based on trend-following principles.  Very simply, stocks and commodities 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.

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.

This report gives 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 move to cash and avoid the 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. 

Disclaimer:

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.

Returns of AlgoTrendTraders Trading Signals Through February 4, 2024

ChatGPT Questions and Answers About Trend-Trading

What are the advantages of trend-trading in the financial markets?

“Trend trading is a popular strategy used by traders in financial markets, and it involves identifying and following the direction of market trends in order to profit from them. Here are some advantages of trend-trading in the financial markets:

1.     Potential for High Returns: Trend trading can offer high returns in a short period of time. This is because traders can enter a trade at the beginning of a trend and exit it at the end, capturing a significant portion of the trend's movement.

2.     Reduced Risk: Trend trading allows traders to reduce their risk by avoiding counter-trend trades. By following the trend, traders can avoid the pitfalls of trying to predict market reversals and can stay in profitable trades for longer periods of time.

3.     Simplified Trading: Trend trading is a relatively simple strategy to implement. Traders only need to identify the trend direction and enter trades in the same direction, making it easier to execute and manage compared to other trading strategies.

4.     Objective Decision Making: Trend trading is based on objective technical analysis, which takes emotions out of the decision-making process. This helps traders to avoid making impulsive decisions based on fear or greed and stick to a disciplined approach.

5.     Wide Range of Markets: Trend trading can be applied to a wide range of financial markets, including stocks, commodities, currencies, and bonds, allowing traders to diversify their portfolio and find opportunities in different markets.

However, it is important to note that trend trading is not foolproof and carries some risks, including false breakouts and sudden trend reversals. It is important to manage risk by using proper stop-loss orders and position sizing techniques.”

What limits the widespread adoption of trend-trading?

“Despite its advantages, there are several factors that limit the widespread adoption of trend trading in the financial markets. Here are a few:

1.     False Breakouts: False breakouts can occur when a market appears to be trending in a particular direction, but then suddenly changes direction, resulting in a loss for the trader. These false signals can cause traders to lose confidence in the trend trading strategy and abandon it altogether.

2.     Emotional Bias: Even though trend trading is based on objective technical analysis, traders can still be affected by emotional biases such as fear, greed, and overconfidence. These biases can lead to impulsive trading decisions, which can result in losses.

3.     High Volatility: Markets can be volatile, and sudden price movements can trigger stop-loss orders, resulting in traders being stopped out of their positions. This can happen even if the overall trend remains intact, leading to missed opportunities.

4.     Time-Consuming: Trend trading requires constant monitoring of market trends and technical indicators, which can be time-consuming. This can be a challenge for traders who have limited time or resources.

5.     Limited Returns: While trend trading can offer high returns, it is not a get-rich-quick strategy. The returns are often gradual, and it may take time to build a profitable trading record.

6.     Unpredictable Market Conditions: The market conditions can change unexpectedly, and market trends can reverse suddenly. This unpredictability can make trend trading a challenging strategy to execute, as it requires traders to be agile and adaptable to changing market conditions.

In summary, while trend trading can be a profitable strategy, it is not without its challenges. Traders need to be disciplined, patient, and able to manage risk effectively to succeed with this strategy.”

How do you trust trend-trading algorithms?

“Trend-trading algorithms are computer programs designed to identify and follow market trends, and they are increasingly popular among traders in financial markets. Here are a few things to consider when trusting trend-trading algorithms:

1.     Backtesting: Before using a trend-trading algorithm, it's important to test it thoroughly using historical data. Backtesting involves running the algorithm on past market data to see how it would have performed. This can give you an idea of how well the algorithm works and how much risk it carries.

2.     Transparency: A trustworthy trend-trading algorithm should be transparent, with clear rules and parameters that can be easily understood. The algorithm should also be able to explain its trading decisions and provide a clear rationale for why it takes certain positions.

3.     Performance Metrics: When evaluating a trend-trading algorithm, it's important to look at performance metrics such as Sharpe ratio, drawdown, and win rate. These metrics can give you an idea of how well the algorithm has performed in the past and how much risk it carries.

4.     Independent Verification: A trustworthy trend-trading algorithm should be independently verified by a reputable third-party. This can help to confirm that the algorithm works as advertised and can be trusted.

5.     Regular Monitoring: Even if a trend-trading algorithm has a good track record, it's important to regularly monitor its performance to ensure that it continues to work as expected. Traders should also be prepared to make adjustments or switch to a different algorithm if necessary.

6.     Robustness: Trend-trading algorithms should be robust and able to handle unexpected market conditions, such as sudden volatility or news events. They should also be able to adapt to changing market conditions and adjust their trading strategy accordingly.

In summary, when trusting trend-trading algorithms, it's important to consider factors such as backtesting, transparency, performance metrics, independent verification, regular monitoring, and robustness. By carefully evaluating these factors, traders can choose an algorithm that they can trust and rely on for their trading strategies.”

Who are some of the best trend-traders over the past 125 years?

“There have been many successful trend-traders over the past 125 years, but here are a few notable examples:

1.     Jesse Livermore: Jesse Livermore was a legendary trader who made a fortune by following trends in the stock market in the early 20th century. He was famous for his ability to read the market and his patience in waiting for the right opportunity to make a trade.

2.     Richard Dennis: Richard Dennis was a trend trader who became famous in the 1980s for his Turtle Trading experiment. He recruited a group of novice traders, taught them his trend-following strategy, and they went on to make millions of dollars in the financial markets.

3.     Ed Seykota: Ed Seykota is a trend trader who is known for his technical analysis skills and his ability to develop trading systems that follow trends. He is also known for his philosophy of "ride the trend" and letting profits run.

4.     Paul Tudor Jones: Paul Tudor Jones is a hedge fund manager who has made billions of dollars by following trends in the financial markets. He is known for his macro trading strategies and his ability to anticipate market trends before they happen.

5.     Stanley Druckenmiller: Stanley Druckenmiller is a billionaire investor who made his fortune by following trends in the financial markets. He is known for his macro trading strategies and his ability to anticipate changes in economic trends before they happen.

These trend traders have different styles and approaches, but they all share a common philosophy of following market trends and letting their profits run. They have shown that trend trading can be a profitable strategy when executed with discipline, patience, and risk management.”

A Personal Note – Why I’m Doing This Newsletter

There are a few reasons.  One, preparing the charts every week helps me with my own personal investments.  Two, creating the newsletter forces me to be disciplined as there’s a deadline that has to be met. 

And here’s the biggest reason…. I have over 30 years’ experience as an investment professional.  I’ve seen a lot, made just about every mistake there is, and have come to the realization that many individual investors are misled by the big Wall Street firms.

I’m sure you’ve all heard from the ivory tower financial “gurus” that buy-and-hold is the best way to make money in the stock market.  And just looking at the numbers over a long period of time, the results of buy-and-hold are good.  But there’s a big problem that’s not addressed.

Unless you’re very wealthy, at some point in time, you’re going to need to access your investments to live.  Retirement, medical issues, college for children and grandchildren, vacations, donations to causes important to you.  We all have a timeline that’s going to end one day.  We don’t know when that will happen.  If you practice buy-and-hold, there will come a time that you could lose 30%, 40%, 50% or more.  It’s happened in the past and will definitely happen again (maybe really soon). 

If you lose a large amount of money, what happens to the things you need and want your investments for?  I’ve seen it happen with many people over my 3-decade career.  People getting ready to retire, they relied on buy-and-hold, and then the bear market hit and their portfolio value drops substantially.  They’ve now got 2 choices…. they can still retire, but the amount of income they could count on would drop dramatically… for the rest of their life!  Or they could go back to work for 4 or 5 years and then retire.  Neither choice is a good one to have to make.

I first learned about trend-following almost 20 years ago.  It was right after the dot-com bear market and people lost a ton of money.  The biggest reason was they didn’t have exit strategies set in place.  At the time, I was a financial advisor for one of the big firms.  I saw my clients lose a lot and all I could do was parrot what had been told to me… “Don’t worry, the market always comes back.”  It was a pretty helpless feeling.  And I knew there had to be a better way.

Trend-following is not perfect.  You’re not going to have 100% winning trades.  It requires discipline and patience.  It’s boring.  And there are a lot of times you’ll be in cash waiting for the next trend.

My experience is that trend-following gives investors the best opportunity in the long-run to make a good return in the market and still control downside risk.  It took a long time to learn and I’m still learning.  Most importantly, I’m in better control of my investments.  I know what the exit is on every trade before I get into the trade.  I’m more disciplined.  I don’t have to guess what I’m going to do.

So why give it away?  Because I want to see people help themselves become successful!  Trading SPY and QQQ isn’t exciting, but so far, the trades in these ETFs have been good over the past few years.

Nobody knows what will happen in the future and if this system will be profitable or not.  You have to believe in the system and have the discipline to stick to it.  If the market whipsaws higher and lower for the next period of time, trend-following will probably lose money.  But if a few trends turn out to be long and last months at a time, the opportunity to profit from those trends should be there.