Trader’s Narrative

In a previous post I introduced the Great New Pattern. At that time, I used Accredited Home Lenders (LEND) as an example. I thought I would present a new stock that has shown not one but two instances of panic selling. And why one is the GNP and the other is not.

By the way, a big thank you to Chairman Maoxian who kindly provided the charts.

The stock is the ADR of Compañía Anónima Nacional Teléfonos de Venezuela (VNT) - the national telephone company of Venezuela. The first example happened in earlier this year:

As you can see, it closed down three days in a row and then gapped down massively. This is not really the Great New Pattern because we want to see back to back down days with each one ideally, showing more intense selling. Which is then followed by a crescendo of volume proving that the meltdown is drawing more and more people to sell in a panic.

It is important to look at failures - and not just idealistic examples - when learning a new pattern in order to better be able to distinguish between the two in the future. Anyone who pretends that one can’t learn anything from less than ideal setups is either ignorant or trying to lead you down a garden path.

The second example is VNT in 2005:

This one fits much better with the Great New Pattern playbook. In fact, its almost perfect. The only thing missing is the volume pattern.

So lets see. In late July 2005 VNT falls off a cliff. It gaps down some but the prices close strongly lower with wide ranging bars. Volume picks up with each successive down day with the spike corresponding to the most wide range day in the chart. Finally selling subsides when in early August we see the first candle close up in what looks like a wide range hammer.

After that, volume recedes while price recovers nicely. And that’s the Great New Pattern!

By the way, if you try to punch up VNT on your charting platform, you’ll probably get an error. This is because the megalomaniacal Chavez nationalized Compañía Anónima Nacional Teléfonos de Venezuela (caNTV). On May 9th 2007, the NYSE reacted by halting and then delisting the ADR shares of VNT which represented 7 regular shares on the Venezuelan stock exchange.

Similar to the GNP, another blogger (Stock Monster) trades what he calls ‘Rockets’: stocks that are down two days in a row. He doesn’t reveal the exact filter but it isn’t “rocket” science to come up with one - couldn’t resist

A few weeks ago Maoxian was going over his call in mid September 2006 to lighten up on the energy sector. As it turned out, that was the time to actually put money to work. I piped in saying that if you were watching the bullish percent chart for the sector, you would have noticed that it was very oversold (at around 20-30%).

In case you missed it, earlier I went over how you can use the bullish percent indicator to time the market.

In any case, the Chairman brought up a great point in reply: that bullish percent charts can misguide at times of major trend change. As I mentioned before, a bullish percent chart can go all the way from 0% - that is, no component of the index being in a point and figure buy formation; to 100% with all of them being in bullish formation. So eventhough we key off specific extremes like 20-30% for lows (bottoms) and 70-80% for highs (tops) there is no reason why the indicator has to bounce off those levels. Or any reason why it can’t simply sit at a level and remain there for as long as it wants to.

S&P 500 Energy Sector Bullish Percent Index (1999-2002)

Looking back through time, sure enough, we find examples where the bullish percent chart of the energy sector did fall below the 20% level. In fact, in July 2001 it fell to 10.53% and in the aftermath of September 11, 2001 it fell to an unheard of 3.80% !! Within a year, it was back at those “unheard of” levels: 6.58% (July 2002).

So we obviously can’t just push “BUY” when it hits 20%. I don’t think you should consider any indicator, no matter how great its historical performance, in isolation and let it dictate your trading decisions by itself. Although it makes matters more complex, we increase the chances of success by layering several indicators on top of each other and only going long/short when there is maximum agreement among them.

But assuming that you had gone long on a signal (at the 20% level) as a trader you would only have lost as much as your stop loss. You do have a stop loss, right? In late July 2001, when the energy bullish percent index and the sector itself continued lower you would have had a logical rethink. Your losses in that case would have been quite limited.

In the broader market, in recent years the Nasdaq (COMPQ) bullish percent’s “low” extreme has usually been around 35% while in the years 1999-2002 it’s low was 20%-25%. This isn’t surprising when you consider that recently we have been in a bull market, while back then we were in a bear market. In a bull market, we are apt to see more shallow pullbacks and to see the indicator spending much longer meandering in the higher ranges as overbought leads to more overbought. So you shouldn’t treat the bullish percent levels as absolute, but rather as guidelines which give a feel for how overbought or oversold the market is.

Nasdaq Composite Bullish Percent Index (1999 - 2002)

The most important point I can leave you with is that in order to get the most out of the bullish percent indicator, we must first recognize whether we are in a bull market or a bear market. That may seem to be a tall order but with a few tricks, tips and indicators it isn’t that difficult. Of course, nothing is guaranteed but being on the right side of the market isn’t as impossible as economists and EMH theorists would lead you to believe.

There is especially one little known indicator which has an uncanny ability to point out the genesis of bull markets. Care to guess which it is? I’ll cover it in a little while if you can’t anyway (hint: it starts with a “C”)

I was going to keep this to myself… but what can I do? I’m a saint. I give, and give and give. And then I give a little bit more

You may consider yourself a true fanboy if you have read every single thing on Maoxian.com But you’d be wrong. That’s because there was a site before the Chairman started his current blog. Way back to the bubblicious year of 2000. Way back before a certain ‘Matt’ decided he needed better software with which to ‘blog’. Way back then, Chairman Maoxian held court in some pretty simple but zen-like html digs (site design was borrowed from Dack Ragus I believe). Anyway, the site was filled with market commentary, trading setups and specific trades (with actual blotters!).

Many believe this old site to have been lost to the mists of time. But I’m going to tell you how to find it. If all you know about the Chairman’s trading style is ‘dummy trading’ prepare to be dazzled. I won’t give it all away but he apparently had a penchant for the short side. My favourite parts are probably the ‘Charts From Hell’ and ‘Short-Term Trading Lessons’.

So where can you find it?

Here. At the Internet Archives. Where else?

Just click on the date you want and burrow deep into the ‘old site’. There is a lot there and I’ve found only a few images or charts that don’t load.

For extra fanboy points use a website extractor, like HTTrack, to grab a complete copy for your hard drive.