Stock Exchange: What Is The Foundation For Your Trades?

The Stock Exchange is all about trading. Each week we do the following:

• discuss an important issue for traders;
• highlight several technical trading methods, including current ideas;
• feature advice from top traders and writers; and,
• provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review: Do You Trade Extreme Market Moves?

Our previous Stock Exchange discussed our approach to avoiding extreme market movers and the risks associated with them. It’s important to apply discipline in trading strategies to avoid unnecessary volatility and risks.

This Week: What is the Foundation For Your Trading?

For our trading programs at NewArc, we’ve been using a combination of finite software programs and automated algorithms, combined with our in-depth economic and market analysis. However, artificial intelligence (“AI”) and algorithmic trading are increasingly becoming a key ingredient across almost every sphere of market trading. For example, Nicholas Kitonyi discusses the blend of AI and online stock trading at equities.com. He states:

“The global online trading marketplace has grown rapidly over the last two decades with momentum going a notch higher since the turn of the current decade. This is particularly due to the emergence of dynamic startups in the space that seek to disrupt various aspects of the industry.

While some startups have targeted solutions to mitigate increasing cases of cyber crime, others have focused on creating trading algorithms that can help traders to make more money. This is what brought about the emergence of Expert Advisers, or simply, EAs. And over the last ten years, things have picked up some steam with a growing number of trading robots, Robo-advisers and AI-based trading systems slowly beginning to take over.”

He also highlights several software products and tools that are now available online to help traders and brokers in executing quicker and more efficient trades.

PR Newswire shared a new market report published by Transparency Market Research that shows how more and more traders are moving to the use of AI and algorithms in their trading.

“The global algorithmic trading market was valued at US$ 8,373.4 Mn in 2016 and is estimated to expand at a compound annual growth rate of 10.2% from 2018 to 2026, reaching US$ 21,807.6 Mn by the end of the forecast period. According to the report, North America was the largest contributor in terms of revenue to the algorithmic trading market in 2016. This is primarily due to strong technological advancement and considerable application of algorithm trading in several end-users such as banks and financial institutions across the region.”

Another post in IT-Online considers the need for traders and advisory firms to industrialize research and development at the institutional level. Research conducted by the Statistical Science Department at the University of Cape Town (UCT) and the School of Computer Science and Applied Mathematics at the University of the Witwatersrand showed that even when predictable patterns seem to exist (in the market) they are not easily profited from because of various business model and institutional constraints in each institution.

Also worth considering, there was an interesting post on the Top 5 Alternative Trading Strategies in capital.com. It suggests the five alternative strategies listed below and also evaluates the pros and cons of each:

1. Trade the news
2. Holding Trades overnight
3. Trading what you know
4. Diversifying Portfolio
5. Employing Trading Psychology

And while many traders are evolving with these market changes, many more will continue to do so in the years ahead

Model Performance:

Before reviewing our models’ stock picks for this week, here is a look at the weekly performance of our proprietary trading models, as our readers have requested:

We find that blending a trend-following / momentum model (Athena) with a mean-reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

For more information about our trading models (and their specific trading processes), click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

Expert Picks From The Models:

This week’s Stock Exchange includes expert commentary provided by Avi Gilburt and his team of StockWaves analysts at ElliotWave Trader.

Holmes: I bought Nordstrom, Inc (JWN) this week. I thought the dip was a good buying opportunity.

ElliotWave: JWN is holding support in the $59 region allowing for at least a vth of a C of (Y) targeting $74-$78 region. From there it could try to hold support again in the $61-$59 region but could be FAR more bearish.

Please see our analysis chart below.

Holmes: Well, I may not stay in the stock for too long though. My average holding period is six weeks.

Athena: I purchased shares of Fortinet, Inc (FTNT) on 9/21 when the price was down. I expect the strong momentum in the price to continue.

ElliotWave: FTNT has a lot of resistance in the 93 region but could certainly extend toward 110+ as long as 82.50 region holds. It should be coming into a wave 3 top though inside a (3) or (C) of a larger Primary degree 3rd and is already quite extended. The abnormal extension here could be due to investor confusion with the popular video game Fortnite (see our analysis chart below).

Athena: That supports my view of continuing momentum for the stock.

Road Runner: This week, I purchased of shares of Veeva Systems, Inc. (VEEV). As usual, I caught the trade at the lower end of a rising channel, as shown in the following chart.

ElliotWave: VEEV we have in the (5)th wave off the 2014 low. Inside this we are counting as a non-Over-Lapping ED, so the 3 should be nearing a local top in the 110-120 region and can get a deep 4 back to mid 80s and the 100/200 MAs. It should then get a final 5th of (5) toward 120-130s but that is likely to be a much more significant top which could start to reverse quickly sometime in 2019. Support from there even if L/T bullish could easily be back down in the 60-50 region.

Road Runner: Thanks for that perspective. And for your information, I expect to move out of this stock on a positive note in about four weeks.

Felix: I do not have any trades to share this week. However, I am sharing my rankings of the Dow 30 stocks.

Oscar: And here is my ranking of the High Liquidity ETFs with price*volume multiple over $100 million per day.

Conclusion:

Whether your trading strategy is based on economics, market dynamics, artificial intelligence, or something entirely different–it is always crucial to have a strong foundation (backed by excellent market knowledge and a good back up of technical resources). It’s also important to recognize the foundation is changing for many market participants, particularly as the use of artificial intelligence proliferates. And recognizing the changing opportunities and competition can help solidify the strength of your own trading foundation.

Background On The Stock Exchange:

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.

Trade Alongside Jeff Miller: Learn More.