Here are two charts of a relatively new ETF, one that trades Lithium as a basket of miners.
They are presented here as an example of what you can expect when a fast “run up” goes off. In the case of a “Bubble” market, the same patterns are seen, but the range of prices is much higher. (Rather like we’ve seen recently in Silver).
Each ‘price bar’ is either clear or red. Red means prices closed down that day. Clear (or black box) means they closed higher. The little lines outside the ends of some boxes mean “price went that far mid day, but closed inside that price”. (Click on the charts for a larger version to see that better). Notice that on bottom spikes you often get a long line dangling down. Those are called “kangaroo tails” as price bounces away from its tail like a kangaroo. (Traders can be silly some times ;-) Hey, it’s the official jargon, I’m just reporting it!) Often times near tops you will get little “stars” or small boxes with a small line both up and down.
First up, my basic “Trade Chart”. This is my standard “first look” chart. It has DMI at the bottom. That is a slower trade indicator that tells you how strong a trend is, and in what direction. The blue line is DMI+ and gives the strength in a positive direction. The red line, DMI-, shows ‘negative strength’, and the black line is ADX that gives overall force of the motion.
It is a slow indicator, so often tells you what has been, not so much what will be. The major use is to look for inflections of the lines and their size number. When ADX is over about 25, there is a significant trend. ‘Trend trading’ using MACD works better. When ADX is about 20 or less, any trend is very weak. Do “swing trades” using Slow Stochastic or similar fast twitch indicators to trade the bobs and weaves.
On this chart I have MACD (Moving Average Convergence / Divergence). As I’m most often looking for “trends” to “trend trade” it is the usual indicator. If I want to trade something on a faster basis or for swing trades, I’ll swap it for Slow Stochastic (that is actually a fast indicator…).
At the top is RSI. Relative Strength Index. It is more of an “overbought / oversold” warning light. When it gets up to 80, things are often going to dip. Down at 20? Likely a bottom. But you will notice that during strong bubbly runs it will cycle between 50 and 80, and during long decents between 20 and 50. So remember to decide “Is this a strong run up or down?” before interpreting RSI.
OK, first chart (a static copy):
Here we can see how there was a lot of talk about Lithium about the time the fund was launched. It ran up in a minor “bull run” (not quite as arcing up as a bubble exponential rise, but still pretty fast).
You can also see how the Simple Moving Averages of price each start only after enough “ticks” of data exist to calculate it. Price over 24 period over 48 period over 72 period SMA. Classic Bull Run. Many traders use a 50 day Simple Moving Average and some use a 200 day SMA. There is some benefit to tuning the SMA length used for individual tickers. basically, it’s a matter of syncing with whatever the folks trading that market “in size” are using. I find these numbers work for my style with most of the things I trade. On a 10 day hourly chart I use a 12, 24, 36 set, though…
OK, what happens to price as it approaches that top? Once or twice it backs off and touches the blue 48 period line. Those are “corrections”. Also notice how a ‘fit’ of a curve through the price data would be a curve whose slope slowly flattens. That’s price gain slowing, and a normal top forming “soon”. (In a “Bubble Ticker” the prices rise away from the SMA stack in an exponential climax called a ‘blow off top’. Then plunge back dramatically). We have a bit of a ‘blow off top’ when we get to the first peak of prices. There is a dramatic pull away from the top SMA line. Then comes the plunge back to the second line. Simply classic.
After that, prices ‘wobble sideways’ just a little while. This is usually, though not always, followed by a “retest” of the highs. Prices rise again trying to exceed the prior peak. (If they do, then another ‘leg higher’ usually follows. The buyers were not discouraged enough by the drop and there is more money to be made from letting them buy it back up then shorting them out of their positions a second time…) At a typical top, there will be a retest that “fails” as this one does. It just can’t get higher. In Mid-February when it approaches that “retest”, smart money steps out and waits the verdict… Once it is clearly through and in a new rising trend, you can buy back in. Why do that? See that plunge just after the price matches…
We now “retest” those prior lows from the last dip. Prices wobble sideways and the SMA lines start to merge. First they go flat to near zero slope. I call that a ‘topping weave’ as the SMA stack is no longer well ordered. The trend is gone from the ‘trend trade’ and it slowly shows in each moving average. Drop trend trading rules when that happens and swap to ‘swing trades’ or ‘day trades’. Pick up the pace of any trades (or find a new trending ticker to trend trade). In this case, prices bounced along that lower SMA line until they managed to “punch through”. At that point, it’s now a “failure to advance” (those two top points of about the same height) and a “new down trend” is almost a certainty. Short sellers will jump on this and drive prices down for a while (which you see as the down spike in Mid March). Then there will be ‘return to the SMA stack’ from below. Prices rise back to the SMA lines (usually the 48 day) and then fall away to the downside again. Now begins the series of “lower highs and lower lows”.
That pattern holds until we have a ‘clear bottom’ with a new “bottom weave” of the SMA lines. Basically, the inverse of the topping weave. Until that bottom, it is SMA lines in inverted order with price on the bottom (and sporadically retouching the mid-stack line).
There are also times when a ticker is simply “fully valued” and just goes “flat sideways”. It doesn’t really enter a dive, but “rolls” up and down around a fair value point. In those cases the “topping weave” just seems to continue for a very long time. “Swing trade” the rolls as there is no “trend” to trend trade (up or down).
So what is LIT going to do? Turn into a “flat roller” or drop? At this point we don’t know, so we treat it as a ‘swing trade’ until the trend trade indications resolve. (Inverted SMA stack and some strength to the movement as shown in the ADX line).
This guy is a little tricky to use. Usually when it hits 80, things are headed down. In a very strong trend he will “hang high” for quite a while (as you see in the start of this chart). THE best use is shown at that “retest of the top” in mid February. Notice that RSI has come off 80, but did not get back up to it at this price matching point? That “stepping down” RSI from 80 to lower at the ‘retest’ is what I use to trigger my “trend is over” decision. Typically time to leave the trade behind.
As the ticker goes to a ‘flat roller’ RSI will wobble each side of the midline. At a bottom, it will get ‘near 20’ then have a ‘stepping up’ on the retest of the bottom. It is your earliest indication of a change of trend.
Now look at MACD. It has a black “histogram” that you can use if you like. It shows the same thing as the relative positions of the red and blue lines. In a strongly trending ticker, MACD will have the red and blue lines both positive values, with a near flat slope, and weaving sideways. As in October and early November. When it gets a significant slope to the lines, pointing up or down, the crossovers give you enter / exit indications. If below zero, MACD is saying “Negative trend”… Near zero the trend is near zero and you can’t effectively trend trade.
Now look at that start of the run up. MACD has very positive slope, moving away from zero to a positive value, with the “mouth” between the two lines open and pointing up. Blue on top. At the top, we get a fairly clear “mouth down” with red on top. (Mid January 2011) In between there is a lot of sideways weave, and an ‘exit’ call on the dip. At that “failure to advance” second top, MACD has hit zero headed down. Be out of the long side. (That is, don’t own the ticker).
At the mid March plunge, there is a “crossover to blue on top” with a significant positive slope and “mouth up”. That’s a “counter trend rally” and you can buy, but sell when prices touch the SMA midline again.
Toward the end of the graph MACD is just weaving sideways near zero. Not much use as not much trend is happening. No real trend to trade. Time to swap to “swing trades” of faster time scale.
DMI / ADX:
This indicator shows longer term trends and strength. The ADX line for overall strength, the DMI lines for up / down relative strength. So at the start we’ve got a high ADX. VERY high. Some of that is an artifact of it being a new ticker, some from the fast rise a couple of months in. That says “use MACD and trend trade to the positive side”. In mid November, at that dip, we have a brief “red on top” and the positive trend is called into question. You can either choose to stay with the trend trade (on the presumption this is just a ‘dip’ or ‘correction’ – valid since we’ve had no top call, no ‘failure to advance’, no string of prior corrections implying folks are ready hold the ticker through a decline) or you can briefly swap to a ‘swing trade’ motif during the dip.
Notice that ADX returns to positive slope through the end of December, then in January “kinks down”. That’s the early indication that the last run is over. That “kink”. We don’t yet have “red on top” but we’re being told “strength is leaving the trend”. Later, after that failed “retest of the high”, we go to DMI- red on top and enter a negative trade regime. Short the ticker or find somewhere else to trade. Finally at the end of April start of May the red and blue lines start to weave and ADX is regularly hanging under 20. All trend trades are over, it’s time to use swing trades or day trades only.
So that’s how I evaluate this kind of chart each and every time I look at a ‘ticker’. With practice, you get it done in about a minute. Sometimes much less.
Some times the indicators will have a disagreement. Sometimes you need to pick one over another. And sometimes you need to swap to different indicators to get a clear reading. If it’s just too muddy to know? Well, you don’t have to trade THAT ticker. You can try some other one…
This chart is my “second look”. It gives different information that can confirm an idea from above, or cast doubt on the advisability of that trade.
OK, I’ve added Bollinger Bands (those two skinny red lines) around the prices. During a Bull Run up, prices will track along the upper Bollinger Band. At a top, they will often make a brief excursion outside, then pull away sharply to the downside. At bottoms, a small excursion outside to below, then a pull away to the upside. When a ticker goes flat, the Bollinger Bands get closer together as volatility leaves and prices will wobble between them (as seen at the far right where the SMA stack is weaving and price is going nowhere).
Williams % R
This is very similar in what it indicates to MACD. Some folks find one easier to “read” than the other.
Basic trade is “enter or exit on a midline cross”. As a secondary use, you can see how the width of a block above or below the midline shows the strength and direction of the trend. At the start, W%R is above the midline almost all the time. Strong bull run, get in and stay in. In November it has you trade out in the dip, and then get back in (as a “whipsaw”) and as we get to the top we find the “positive time” or width is getting less between each ‘in / out’ call pair. Time to start swapping away from a ‘trend trade’ and toward a ‘swing trade’ faster indicator set.
The weakness of W%R shows up in that Jan Feb time, and shows why I use it as a secondary instead of a primary indicator. It trades you in during the Mid-Jan rise but trades you out again just after that major drop day. It happens again in Feb when you get traded back in just in time for the plunge day and if you are not trading fast or watching close, get clipped. So remember to set your overall context before just doing what an indicator says. If you did the context set right, you were thinking “top retest get out early” and not waiting for a W%R signal / confirmation…
In Feb / Mar you can see how more of the blue is below the midline more of the time. It’s a negative market time for that ticker. Then at the end we have short spikes each way. No trend, just swings…
This is a fast indicator. When you swap to “swing trades” it calls the swing. But first, what does it do in a trend trade? Look at the start of the graph as prices are just rising. He’s doing 50/80 swaps / crossovers and just wipsawing you into / out of positions all the time for no good reason. Now look near that topping point where we were worried about trend fading (and where W%R was trading a bit late). Catches more of the up days, and avoids more of the down days, but at the expense of very frequent trades.
OK, this is a ‘new ticker’ so volume will general build over time. It starts off with modest volume. But near the top, you can see the “pile on” at the semi-blowoff-top point. Black bars are “up volume” – buyers on days the ticker closed higher. Red bars are “down volume”. Times when prices ended lower. BIG up volume into that first peak. Now look under that second “retest” peak. Very low volume. The buyers are not there. Bail. Fast. And what do we see in following days? Big down volume. Especially at the bottom spike days, you get a large red spike. Then on “up days” very little volume. The trend is going decidedly to the ‘just get out and stay out’ side. At the far right, volume is drying up. Major traders have gone elsewhere to play.
This is a decent model for how to use these charts and indicators, even on something as volatile as a metal commodity in a tech driven flashy market. I expect we will see similar actions in SLV going forward from this “POP” point. At some point there will be a ‘retest’ of the highs. All the “Silver Bugs” will start hollering about how they KNEW they were right all along and start gloating about how it wasn’t really a POP, just a correction.
Don’t be fooled by it. Keep to the discipline of the Trade Rules.
Feel free to trade back in after a plunge and catch a rise (like that one from mid-March to star of April). Just don’t expect it to last forever and be ready to jump back out if up volume is weak and down volume strong, if ADX continues to “hang low”, if DMI+/- is in a weave, if MACD is just hanging near zero …
Watch the indicators and they will tell you which phase you are in. Bull Run. Bear Run. Flat Roller. Or even if it’s a tradable “correction” where you enter on a Slow Stochastic fast trade then see a new “trend develop” and hang in for a while longer.
When in doubt, come back here and compare the silver chart to this example and see what looks familiar and what doesn’t.
Some live SLV charts for comparison:
These will likely be much more dramatic as the rise has been more dramatic. At any rate, it will be fun to watch and see the “compare / contrast” between them.
And, just for completion, a live basic chart for LIT: