Follow-Up: Protecting Your Income At Age 70-Chart Number 2This is a follow-up of a chart I published at the end of July, 2019.
Basic Trading Techniques Explained (For This Example I Charted-Berkshire Hathaway on July 30th, 2019).
To those of you who follow my published charts, thank you. I have not been writing for quite some time. This is because in September of 2018 I became very ill. I had a severe infection that caused me to have Bell’s palsy. This affected my equilibrium and sight; I was bed-ridden for 7 months and virtually blind. I am slowly getting better, very slowly. What I wrote in July, 2019, still applies:
For those of you investing in wealth management mutual funds I have chosen to show you-BRK.B-(Berkshire-Hathaway). If you are young, in your 20’s or 30’s, I feel-BRK.B is an excellent choice. If you are in your 60’s or 70’s, I feel differently. If you need the income, I feel a 2.75% or 3.0% FDIC or NCUA insured bank or credit union CD is a very wise choice. Why? When the P/E-multiple of the-S&P 500-is above 20 to 25 times earnings, this is very high by any historical standard. The norm is 13 to 15. Last July I believed stocks were extremely over-priced and would fall.
I believe BRK .B-is a fund that will continue down. I have prepared this tutorial for you for two reasons: to keep you from continuing to losing money in a weak position, and to allow you to set up a chart of your own. Then, when you see a "hot tip" on TV, you can determine if the financial asset is worth YOUR MONEY.
1. Establish the direction of the trend. An effective way to do this is to use a 150 to 180 point regression line. This can be weekly, daily hourly (any time duration you wish to trade). Nevertheless, a 15-minute chart is not nearly as strong as a daily or weekly period . You can base the regression line on the close, but I like open, high, low, close divided by four.
2. Use a price channel, two if possible. Most trending stocks repeat within a channel. I like a 20-day channel, and I have found that if a 20-day channel is violated on the low side, this triggers “sell stops” from traders. The next channel is a 50 day. If this fails on the low side, the established trend may reverse.
3. Ichimoku Cloud . This is a great indicator and I recommend that you use it. If the cloud is red-this is a caution sign.
4. Mean reversion. If you study financial instruments, in this case stocks, they tend to oscillate up and down around the “mean”, or the regression trendline . If a stock is at the upper band of a 20-day price channel , do not chase it, because it is likely to “revert to the mean”. Better yet, if you have an up-trending stock, let it fall (at least) to the lower band of the 20 day price channel . Why? Because the price will tend to “revert to the mean”.
5. ADX . The ADX is a green line, red line, and black line. If the green line is on top, the trend is up. If the red line is on top, the trend is down. The black line indicates the strength of the trend. For example, if the black line is rising, the trend (up or down) is getting stronger. Always use some form of trend quality indicator. Another such “trend quality” indicator is “Aroon”.
6. RSI or Stochastics RSI . These indicators will guide you in the “mean reversion” you plot. For example, the RSI at 80 will tell you that what you are plotting is “over-bought”. Caution: an RSI indicator, in something that is “breaking out to the upside”, can remain over-bought for long periods. You should use some of your other indicators, such as the “Awesome Oscillator”, to guide you on trend reversal. The "AO" is a series of green and red horizontal bars that show you strength and weakness in a stock.
7. The Choppiness Index (CHOP) is an indicator designed to determine if the market is choppy (trading sideways) or not choppy (trading within a trend in either direction). CHOP is not meant to predict future market direction; it is an indicator to be used to for defining the stock’s trendiness only. Higher values equal more choppiness , while lower values indicate directional trending. This is used with….chop zone.
8. I use a chop zone indicator that is green for up-trend, red for downtrend, and white for no trend. If you combine this color-coded format with #7 above ( choppiness ), a green color with a “chop” indicator line that is falling would indicate a strong trend. If the chop line breaks below the lower band, this indicates a statistically significant event (up for green, or down for red). This will tell you that the trend is very strong.
On the above chart there were multiple sell signals at the end of February, 2020. Study them. You may avoid losses in the future.
Remember : Stocks often "over-shoot" on the upside and on the down-side. Wait for a "double bottom" or "head and shoulders bottom" rather than a "V" bottom. Why? A double bottom will demonstrate a possible "retest of the lows". Then, look for a "cup and handle" formation to detect a possible reversal off the bottom. Always wait for a bottom to form, - do not try to catch a falling knife (the stock market) with butter. I hope these trading tips help you.
May all of your trades go well. Don.
