Jan 242014
 

Technical Chart Analysis Of  Moving Average Fake-Outs

 

CMCSA BIG PICTURE – MOVING AVERAGE FAKE-OUT

-Daily-Big-Picture-Moving-Average-Fake-Out

This is a daily chart of CMCSA (Comcast).

  1. It has been in a strong upwards trend for a long period.
  2. Price got into deeper pullbacks as accumulation took place.
  3. The steeper trend lines show that trend accelerated after the deep pullbacks.

CMCSA SMALL PICTURE – MOVING AVERAGE FAKE-OUT

CMCSA-Daily-Small-Picture-Moving-Average-Fake-Out

This is a close-up chart of CMCSA. To highlight the moving average fake-out trading setup, we plotted three moving averages (14, 30, 50).

(Learn: Moving Average Fake-out Trading Strategy)

  1. All three moving averages are sloping up. This indicates a bullish market bias.
  2. Prices tried to pullback but could only move sideways, implying a lack of bearish conviction.
  3. The current bar tested the 14-period moving average and gave a bullish fake-out signal. A recent trend line is supporting the current bar as well.

MOVING AVERAGE FAKE-OUT ANALYSIS

CMCSA is definitely trending up. While the trend is accelerating, there is no sign of trend exhaustion (for e.g. extreme volume).

In this bullish context, the pullback to the 14-period moving average presents a decent fake-out setup. If price exceeds the high of the setup bar, it will trigger a bullish fake-out trade.

Jan 242014
 

The moving average fake-out trading setup was introduced by Mark Fisher. This trade setup is called the moving average fake-out as it uses moving averages to find false counter-trend moves. As Mark Fisher mentioned in his book, you may use the rules to establish a position or a trading bias.

Pivot point/Typical Price = (High+Low+Close)/3

RULES FOR LONG FAKE-OUT

  1. All three SMAs of pivot point sloping up (14-period, 30-period, 50-period)
  2. Pullback down to 14-period SMA without crossing below 30-period SMA
  3. Enter long when prices rise above the lowest prior high above the 14-period SMA

RULES FOR SHORT FAKE-OUT

  1. All three SMAs of pivot point sloping down (14-period, 30-period, 50-period)
  2. Pullback up to 14-period SMA without crossing above 30-period SMA
  3. Enter short when prices fall below the highest prior low below 14-period SMA

WINNING TRADE – MOVING AVERAGE FAKE-OUT TRADING SETUP

Moving Average Fake-Out Winning Trade

Moving Average Fake-Out Winning Trade

This is a daily chart of AON Corporation listed on NYSE. All three moving averages were sloping up (color change from red to green). Prices continued to rise above the moving averages. This was followed by a sideways movement to the 14-period moving average, giving us the moving average fake-out setup. We placed a buy stop order above the high of the first bar that tested the 14-period moving average. The order was triggered the next day and led us into an extended bull trend.

The trade setup bar that tested the 14-period moving average had a long bottom tail. It is a sign of bullish support after the moving average fake-out. The next day was a bullish outside barwhich confirmed the support found at the moving average.

LOSING TRADE – MOVING AVERAGE FAKE-OUT TRADING SETUP

Moving Average Fake-Out Losing Trade

Moving Average Fake-Out Losing Trade

This is a daily chart of Korea Composite Stock Price Index (KOSPI) which tracks all the stocks listed on the Stock Market Division of the Korea Exchange. The three moving averages sloped up to confirm the bullish price action. Then, we saw a pullback down to the 14-period moving average. Prices tangled with it for two days before gapping up to trigger the buy order (at the blue horizontal line). The trade moved against us immediately. A few days later, a strong gap down forced us to exit with a loss.

This moving average fake-out setup was a reasonable one. The first bar that tested the 14-period moving average was a bullish reversal bar. It was followed by a bearish inside bar which was the second attempt to push prices down. These were bullish signs.

However, the climatic bullish action before the pullback might have been a concern. Climaxes tend to lead to either reversal or sluggish movement. Each of the three bars following our entry gapped up before closing down, which was extremely bearish. Hence, we had more than enough warning to get out before the large gap down (which changed the slope of the 14-period moving average down).

REVIEW – MOVING AVERAGE FAKE-OUT TRADING SETUP

The moving average fake-out trading setup is a trend pullback trade setup. The use of multiple moving averages is usually redundant. Fortunately, this trade setup uses only three moving averages which is about the most my brain can process. In addition, the periods 14, 30 and 50 are all intermediate periods that are relatively meaningful.

A short period is just a proxy of price itself and only serves to confuse price action; a long period lags as a trend indicator and does nothing to filter ranging conditions. By focusing on the slope of these three intermediate period moving averages, Mark Fisher created a nice package of multiple moving averages. Look at the KOSPI chart above beyond the losing trade and you will see that this trading setup kept us out of ranging price conditions. Slope of moving averages hardly agree for any trade to take place.

A key feature of Mark Fisher’s moving average fake-out setup is the use of pivot points instead of closes for the moving averages. Using pivot points does not make much difference except for some smoothing. In fact, the closing price of each day holds important information as it is the price that all players contributed to by the end of each trading session. However, for intra-day charts, especially for non-time-based charts including tick and volume charts, that have their bar closes determined arbitrarily, using pivot points may make more sense.

The moving average fake-out trading setup is also a tool to determine a trend bias. Mark Fisher suggested this approach to augment other methods mentioned in his book,  ”The Logical Trader“.

Jan 242014
 

The Holy Grail is of course, not the Holy Grail, but was named so by Linda Bradford Raschke and Laurence A. Connors for its simplicity. This setup is quite popular as both of them are prominent traders.

RULES FOR LONG HOLY GRAIL

  1. 14-period ADX be above 30 and rising
  2. Look for retracement down to 20-period SMA
  3. Place buy order at the high of the bar that touches 20-period SMA

RULES FOR SHORT HOLY GRAIL

  1. 14-period ADX be above 30 and rising
  2. Look for retracement up to 20-period SMA
  3. Place sell order at the low of the bar that touches 20-period SMA

WINNING TRADE – HOLY GRAIL TRADING SETUP

Holy Grail Winning Trade

Holy Grail Winning Trade

This is a daily chart of Hewlett Packard listed on NYSE. The bottom panel shows ADX rising above 30. ADX measures trend and this criterion identifies strongly trending markets. In this trending stock, we saw a pullback to the 20-period SMA and we entered at the high of the bar that touches the SMA. The trend continued beyond this chart and gave a profit potential of around $9.00 per share.

The ADX only served to confirm what prices showed. The series of 13 bullish bars was all that anyone needed to see the upward trend. The marked bar was an great entry point as the day actually gapped down significantly before rebounding up within the day. An extremely bullish sign.

LOSING TRADE – HOLY GRAIL TRADING SETUP

Holy Grail Losing Trade

Holy Grail Losing Trade

This is a daily chart of EUR/USD spot forex. Again, ADX rose above 30, indicating a strong bullish trend. Prices then retraced to the 20-period SMA for a Holy Grail long setup. We entered on the high of a bullish reversal bar only to be stopped out two bars later.

This entry looked good with a nice bullish reversal bar as the signal, coupled with a possible failed downside breakout of the trading range at the top. But the increasing number of dojis showed a lack of buying pressure prior to the pullback. Also, before the marked reversal bar, we saw a verybearish outside bar. After entering the trade, the entry bar became a doji which was enough to get more conservative and nimble traders out of the trade to limit their losses.

REVIEW – THE HOLY GRAIL TRADING SETUP

This setup finds retracements within strong trends. While you don’t really need ADX to see strong trends as strong trends are hardly subtle, ADX keeps new traders out of trouble and provides a convenient way to scan for trending stocks.

Using ADX > 30 to identify trends has two drawbacks. First, a high ADX can mean that the trend is overdone and may reverse soon. Traders may enter at the worst possible price. Second, some more gradual and protracted trends may unfold entirely without ADX ever crossing above 30. This will result in a large number of missed trades.

Connor’s book explains how to re-enter a trade and to look for a second retracement. The authors explain the concepts underlying a variety of trade setups very clearly.

Source: Street Smarts: High Probability Short-Term Trading Strategies