Alright so let's put this Triple Screen strategy through it's paces.
To the left you'll see the chart produced by QuoteTracker (click to enlarge), for "AA" Alcoa Inc (formerly ALuminum COrporation of America). It's set to look at my long term horizon. Each Candlestick bar represents 1 week of trading action. At the top is price data in
Heikin-Ashi Candlestick format, below that trading volume, below that a
MACD with divergence histogram, followed by a
Directional Movement Indicator, and lastly an
Elder Ray oscillator.
So what do all these things tell us? I'll start at the top and work my way down.
- The price data shows a recent top followed by 3 weeks of decline (the last candlestick is this week and doesn't include Thursday or Friday), over the past 6 months there has been a fairly steady increase in price aside from a 1 month dip from mid February to mid March. AA is currently in a downtrend.
- The Volume data shows an increase in volume during the latest upward surge starting in April. After that the volume declined, foretelling the slowing and eventual reversal. Of course during the most recent slide the volume has declined as well, implying that it too is running out of steam. AA is in a downtrend that is starting to slow.
- The MACD histogram shows the steady incline during the April surge. However, it is important to note that while the stock price reached a new high the MACD histogram did not rise above it's January levels (a lower stock price). This also implies that the April surge was coming to an end in early May. The histogram shows a sharp downtrend and is confirmed the second week when the MACD line crosses to below it's signal (light blue falls below the orange). Shorter term average prices are falling faster than longer term prices. The histogram changes sign during this crossing if the lines are hard to see. AA is in a downtrend.
- The green line (ADX) in the Directional Movement indicator is a sign of "trendiness", when it is upward sloping the current trend is becoming more established. Values above 40 indicate a trend that has been in effect for some time. After a slight dip in March the uptrend returned, and in May it started to collapse again. While this current dip resembles the dip in March, having it fall from above 40 implies the longer trend itself is coming to a more permanent end. AA is in a downtrend, potentially a significant one.
- The Elder Ray oscillator shows the strength of "bulls" and "bears". The light blue line represents the "bulls" and is usually positive. Again the price peak in early May was not supported by an equally higher peak in "bull" strength. During the recent decline the "bulls" lost strength while the "bears" gained strength. The most recent week shows the "bears" losing strength even though the "bulls" aren't gaining (again this weeks data isn't complete and is also a shorter trading week). AA is in a downtrend that is losing strength, since the "bulls" aren't stepping in to take control the price patter will probably oscillate listlessly until one side gains momentum again.
A majority of the indicators show a downtrend. A majority also show that downtrend is losing steam. I can't tell if the trend will reverse itself, or simply dissipate into "sideways" narrow oscillations, let's look at the middle term horizon and see if it can tell us.
Here is the second 'screen'. Here each screen represents 1 day of activity, it spans the past 30 days. It doesn't make use of Heikin-Ashi smoothing. Below the price data is, again, trading volume. Followed by an
Elder Force Index oscillator, a
Slow Stochastic oscillator, and a
Chande Momentum Oscillator. I'll start from the top and work my way down again, with the exception that I'll be leaving the EFI for last.
- The price data shows the downtrend starting May 11th. The down day on May 10th is the uptrend finally 'giving up the ghost'. The short surge starting May 24th undid a point and half or so of the fall. The last two days have closed "down" but the 31st still opened at the same (higher) price as it did on the 30th, the 31st also failed to close as low as it did on the 30th. AA's downtrend (and the "bears") are losing steam.
- The volume confirms the price data. Since the start of the fall on May 10th the volume has decreased. Each short surge up quickly died out. The volume of each downturn has also been steadily decreasing. AA's downtrend is slowing down.
- The slow stochastic serves two purposes. The most important is that the slope of the stochastic verifies the slope of prices. From May 11th through the 18th the slope of the stochastic as been downwards, this coincided with the majority of the downward price movement. The very brief upturn May 15-16th didn't phase the stochastic slope, this indicates a good place to sell short as the temporary price increase is doomed to be short lived; this occurrence is a "bearish" divergence the prices went up but the stochastic stayed in it's downward trend. The second purpose of the stochastic oscillator is that it shows "over bought / sold" conditions, over 80 the stock is "over bought" under 20 it is "over sold". These signals are not as clear if the stock is in a significant trend (hence the first screen). Since the first screen established the stock was in a downward trend the "buy signal" generated by the "below 20 and rising" condition can be ignored. This doesn't imply it has no meaning just that it is no longer a good "buy signal". The stochastic falling below 80 and further falling below it's signal line is a strong "sell signal", since the first screen indicated a down trend May 10th or 11th would have been good times to sell short (or buy a put option). The "bearish" divergence on May 16th was another good "sell signal". The latest uptrends are not good times to sell short since the stochastic is sloping upward along with prices. The best times for profit have passed, and AA's downtrend is losing strength.
- The CMO oscillator serves the same purposes as the stochastic, it is calculated slightly differently in an attempt to capture smaller movements. You'll note that the brief upturn on May 16th had a discernible effect on the CMO. Also the most recent days have altered the slope as well. I'm using the CMO primarily as a confirmation of the stochastic and for all important indicators it concurs. The conditions for oversold and overbought for the CMO are -50 and +50 respectively. AA's downtrend is losing strength.
- Last the EFI is very sensitive to combined price and volume action. It's purpose is to signal as many buy / sell opportunities (in this case sell). To avoid false signals sell orders would be placed below the day's price action so that it is only activated when the trend is confirmed by the price moving the direction predicted. The EFI produced sell signals on May 11th (crossing to negative and continuing after the end of the uptrend), May 16th (the significant uptick), May 21st (crossing to positive) and May 24th (crossing to positive). Orders placed after closing on May 11th and 16th would have been executed as prices continued to fall the following days. Furthermore the signals on the 11th and 16th were confirmed by the stochastic and CMO. The best profit points for AA's current downtrend have passed.
Conclusion? The boat has sailed on the AA downtrend, hence no need to employ the third 'screen' and examine intraday hourly prices. The second week of May was the prime time to enter a trade. If the weekly downtrend somehow continues and the daily oscillators show divergences or "overbought" sell signals, it may be a good time to re-enter; volume will have to be particularly strong to confirm though. Whether the downtrend will fully reverse into an uptrend is unclear. A
new agreement was reached with union workers today, so I'll watch to see if this has a lasting effect beyond today's price increase (charts did not include today's market activity).
Up next, probably another example ...
Current TradesWhat is it? BlahBlah
Ticker: XXXX
Cost: $X.XX
Value: $X.XX
Exit Point: $X.XX
Trading Account SummaryCurrent Balance: $X.XX
Current Value: $X.XX
Highest Value: $X.XX
Lowest Value: $X.XX
Highest Drawdown: XX%
