Saturday, February 14, 2015

Active-Trader - Seasonal Low in Energy

Welcome back Active Traders and Wealth Builders.

Every once in a while a trend change comes along that's so obvious, those who miss it are just not paying attention.  And the recent turn in energy prices is one such example.  Let's examine the evidence.

To your left is a 24 year seasonality chart of crude oil.  Its seems pretty obvious that low point on the chart is right about mid to late February which is hopefully just about the time you are reading this blog post.

Now your first instinct might be that its time to load up on oil.  I'm not a futures trader and I don't find the leverage to be either necessary or useful.  In fact the opposite is the case, the leverage can shake you out on the slightest wiggle. I had the same experience with Forex and I find its better to just avoid highly leveraged vehicles.  The only exception would be options on equities which I can trade right out of my equities account and risk the same or a smaller amount that I would with a straight stock position in the underlying.

As for the best way to trade energy, let's break out TC2000 and examine a few alternatives include energy ETF's USO, DBO and energy equity ETF's XLE and OIH.  A look at those in the scan on the left show that OIH and XLE are actually positive for the year while energy commodity ETF's are actually down for the year.  More significant, look at the dividend yield of OIH and XLE to find a positive number versus the dividend yield for the actual commodity EFT's which is - zero.

This brings up the core problem with investing in actual commodities and that is called negative carry.  Put another way that means it costs money to hold crude oil and other energy assets.  This is reflected in term structure of future's contracts where farther dated contracts are usually priced higher than nearer dated contracts to reflect the cost of storing the commodity for delivery on that future date.  This term structure can erode the return of holding commodities over a period of time even when the price holds constant.  Take a look at performance of USO and you will see that it does a poor job of matching the overall return characteristics of crude oil due to the cost of carry and other costs such as maintaining a portfolio of future contracts to construct the index.

So what the answer?  Energy stocks of course.  Energy stocks have a positive carry as reflected in the dividend paid by the stocks themselves.  And you can see those results clearly in the returns above for the year as well as in the dividend yields themselves.  There are probably even smarter ways to trade energy like selling puts, or put spreads or selling calls against your positions to bring in extra income.  But I am not an expert on energy companies and until I get to know more will be happy to invest in energy ETF's OIH and XLE.

One more tip for you - bring up a chart of OIH inside Thinkorswim and select Style, Chart Mode, Seasonality.  You will see a chart that looks like the one on the right.  Notice how OIH starts the year at a low and then tops out some time between August and September.  There's your seasonal high and when its time to take profits.  And there you have it a way to play energy ETF's with a better than even chance of coming out ahead - particularly when you factor in the dividends.

So go out there and dump your USO and buy some XLE and OIH.

And have a great week ahead.

Sunday, February 8, 2015

Active-Trader - Free Fib Lines for Thinkorswim!

Welcome back Active Traders.

With this post I am pleased to announce that the Fib Lines indicator for TOS is now available at no cost to members of my Yahoo group!  This is quite an accomplishment considering that last year at this time I was just starting to unravel the mysteries behind this indicator.  And now - barely one year later - I am giving away free copies of the indicator for both TradeStation and TOS!

Included with the indicator is support for over 130 symbols including the major Exchange Traded Funds DIA, SPY, QQQ and IWM, the Dow 30 stocks as well as most of the Nasdaq 100.  Also note that there was no way to protect the script so the beginning and end of Wave 1 and full source code for the indicator is provided.

If you would like to get your hands on the indicator, simply send an e-mail to and follow the directions in the e-mail reply.

There are some limitations in this version which I could not provide which are included in the version on TradeStation:

1) I was unable to display the slanted line which shows the beginning and end of Elliot Wave 1

2) I was unable to label the Fibonacci percentage levels for each of the lines.  For example, the green line in the AMZN chart above is the 361.7% Tree line.  While these labels serve to de-mystify the indicator, they do not detract from its usefulness.

Be sure to let me know any feedback as well as requests to add new symbols.

Good luck and good trading.

Sunday, February 1, 2015

Active-Trader - Questions on Fib Lines

Welcome back Active Traders.

Last weekend I got the Fib Lines indicator working under Thinkscript under TOS. I have some more work to do before I can make those available to members of my yahoo group.  But to whet your appetite, this screen shot shows the complete fire and tree line levels for QQQ and you can clearly see the beginning of Wave 1 at 24.98 and the end at 50.60. Recall that the remainder of the lines can all be calculated once those 2 values are determined.

Blog reader Jay posted some questions about the Fib Lines shown here and how they related to screen shots from free videos posted by John Carter as part of Simpler Options web site.  I thought it would be a good opportunity to address those questions and talk a bit about the steps used to determine the lines.

When I first started calculating the Fib Lines, I compared my levels versus those from the Carter videos with the belief that the levels had to be "right". In some cases (such as NFLX) my values matched Carter's within a point or 2.  In other cases (such as QQQ shown above), I could not come up with levels which match Carter's.  But in the end it doesn't matter.  What matters is how well the levels correspond to price behavior.

In the process of working on the indicator, I determined the levels for about 135 stocks, the major ETF's plus the Dow 30 and most of the Nasdaq 100. I got into a type of rhythm where in many cases in under 1 minute I could find levels which worked perfectly.  For an example of levels which work, check out this chart of MMM.

The skeptic in you might say - this is "classic" technical analysis, show me the cases which work and ignore all those which do not!  And you might be right - but keep in mind that the Fib Lines are not a Holy Grail, just one more clue into unlock the mystery of what underlies price action.

Finally to address the last part of Jay's question - why might the levels need to be re-calculated over time?

Recall that Elliot Wave analysis is based on an idealized price move - 5 waves up and 3 waves down.  In that model, at the bottom left of the chart, pessimism is at its maximum, and there are few buyers.  As the move develops, more buyers come in, and the price action follow the idealized model (more or less) with fibonacci levels and relationships being demonstrated by overall crowd behavior.  At the end of the sequence, the pessimists are once again in control and a new low in price is formed.

Once the 5-wave sequence has completed, the original predictive power of wave 1 is over, and a new cycle begins and perhaps a new identifiable Elliot wave 1.  And since the Fib Lines are based on the beginning, end and magnitude of Elliot Wave 1, the Fib lines would need to be re-calculated.  In many symbols I reviewed, those lows occurred at the depths of the financial crisis back in 2008 when many of the symbols I reviewed put in their wave 1 lows.

Other times, prices reach the end of the sequence (423.6% level) and exceed that price.  How do we handle that situation?  Based on the opinion of the analyst, it might be required to move out to a higher time frame a consider the original extend of wave 1 to be too small, and chose a beginning and end of wave 1 based on a larger time frame.  We had to do this recently in Facebook because I think - over the long haul - those prices are going much higher.  Recall that Elliot Wave is an art, and not a science and requires human intervention.  And therein lies the magic.

Have a great week ahead and good trading.