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Trading Diary
February 25, 2004

These extracts from my daily trading diary are for educational purposes and should not be interpreted as investment advice. Full terms and conditions can be found at Terms of Use .




USA (24th)
The Dow Industrial Average closed at 10566, below support at 10600. Long tails over the last 3 days signal some buying support but low volumes indicate that this is moderate.
The intermediate trend is uncertain. A fall below support at 10400 would be bearish.
The primary trend is up. Resistance is at 11300 to 11350. A fall below support at 9600 would indicate the start of a down-trend.



The Nasdaq Composite tested support at 2000 before closing 5 points higher at 2005. The weak close and strong volume confirm the existence of buying support. 
The intermediate trend is down. Narrow consolidation above the 2000 support level would be a bearish sign, indicating that buyers have insufficient strength to stage a rally.
The primary trend is up. A fall below support at 1640 would signal reversal.


 


The S&P 500 closed slightly lower at 1139. The long tail and higher volume signal increased buying. A rise above the day's high of 1144 would be bullish.
The intermediate trend is uncertain. A rise above 1155 would be bullish. A fall below support at 1120 would signal a down-trend.
The primary trend is up. Expect strong support at 1000. A fall below 960 would signal reversal.



The Chartcraft NYSE Bullish % Indicator fell sharply to 84.33%.




Gold
New York (Feb 25 04.47): Spot gold recovered to $403.70.
The intermediate trend is down.
The primary trend is up. A fall below $370 would signal reversal.




ASX Australia
The All Ordinaries recovered slightly to 3346. The long tail and higher volume signal buying support. A rise above today's high of 3350 would be bullish. A fall below last Monday's low of 3333 would be bearish.



The intermediate trend is up and we are likely to see a test of resistance at 3425 to 3450. A fall below support at 3320 would be bearish.
The primary trend is up. Support is at 3160.

Stock Screening - Retracements
 Many traders basic trading style relies on buying dips in an up-trend and, conversely, selling rallies in a down-trend. A retracement (or dip) is a move counter to the direction of the up-trend. The ideal retracement has:
  • a short duration (no more than 3 or 4 days);
  • contracting bars, signaling that sellers interest is waning;
  • declining volume, confirming the lack of interest from sellers; and
  • a final downward bar with a narrow range and low volume.
The presence of a final "shakeout" bar with a long tail and a weak close, or a "compressed spring" bar, with a narrow range and strong volume, both indicate the presence of sellers in larger numbers and may, therefore, be more prone to failure. We will cover these in more detail in a later issue.
In screening for retracements, we first of all need an indicator to signal the presence of a trend. In this example I have chosen a Moving Average Crossover but readers may prefer to use MACD or Directional Movement filters instead.
  • Moving Average Crossover: 10-day and 50-day moving averages; bull signal within the last 9999 days. 
    I had better explain the 9999 days: if you want all stocks where the fast MA is above the slow MA, insert 9999; if you want only stocks where the fast MA crossed above the slow MA today, insert 1.
Then we add a filter to detect retracements of no more than 4 days ( a retracement of 15 days is not going to be of much use to us). Welles Wilder's RSI oscillator is ideally suited for this purpose. It compares upward and downward price movements over a short time period. An alternative is the Slow Stochastic oscillator.
  • RSI 5-Day (Wilder) Crossover of 80/20 Percentile: select bear signal within the last 4 days.
    The oscillator time period is relatively short-term and should pick up most minor dips in an otherwise healthy up-trend. We select the bear signal as we want to screen for stocks where the RSI is turning down. And we limit the return to signals in the last 4 days: retracements that started more than 4 days ago do not fit our criteria.
There are two caveats to the above:
  • Never enter a trade on the strength of a stock screen. Always analyze the individual charts to assess whether the stock returned is a suitable candidate.
  • Never trade against the direction of the market or the sector (in some cases the industry). Always assess the direction of the market before setting your screens. And always compare to other stocks in the sector.






About the Trading Diary has been expanded to offer further assistance to readers, including directions on how to search the archives.

Colin Twiggs


We typically trade our beliefs about the market
and once we've made up our minds about those beliefs,
we're not likely to change them. And when we play the markets,
we assume that we are considering all of the available information.
Instead, our beliefs, through selective perception,
may have eliminated the most useful information.

~ Van K Tharp: Trade Your Way to Financial Freedom.



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Colin Twiggs

Author: Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.

He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.