Welcome to The Ichimoku Trader newsletter!

Transcription

1 The Ichimoku Trader EII Capital Volume 1, No. 1 May 18, 2015 Inaugural Issue IN THIS ISSUE Inaugural Issue Welcome...1 Ichimoku: Introduction...2 Global Market Update...3 US Stock Market Gold Forecasts...5 Alcoa: The Trade And The Story Should I Invest In Bitcoin? Sector Analysis...7 Where Is The Money Headed? Seasonal Trades...9 Trading Psychology...9 Is Losing Bad? for Information: info@eiicapital.com Follow Us On Welcome to The Ichimoku Trader newsletter! Our goal is to present knowledge, information, and analysis that will be educational, informative and entertaining to both established and aspiring traders alike. Everyone that trades is driven by the common goal of success. How each trader achieves this goal is unique and varied. Some use fundamentals, some use technical analysis, some use a combination of both, and some use none of these and rely on structured strategies. One of the most exciting aspects of trading is that each trader defines his or her own path. Here at Ichimokutrade our primary approach to trading is dominated by the technical analysis system of Ichimoku Kinko Hyo which translates to one glance equilibrium chart. From this system we draw our analysis for forecasting price action, timing entries and exists, and managing risk. Ichimoku technical analysis is not the sole provider for all of us. We have a diverse group of traders that share experience and knowledge spanning fundamental analysis, sector rotation theory, options strategies, and seasonal patterns. The topics to be covered monthly by this newsletter will come from authors that are active traders across many world markets. Each will present their ideas and applications of trading approaches that have made them successful so that the reader may take away useful information and apply it to their own trading. As the issues progress we will have look backs at forecasts and strategies that have been presented in the past for review. Thanks for reading; enjoy, learn, and succeed! Page 1

2 Ichimoku: Introduction We wanted to begin the first issue with a brief breakdown of the components that make up the indicator set of Ichimoku. At its core Ichimoku is a trend following system but it can be used for far more than just tracking trending markets. Many confuse the lines of Ichimoku as moving averages when they are more aptly moving means as they are based on the 50% level between highs and lows of their respective periods. This distinction is key. The ability of Ichimoku to track true breaks of price ranges is what sets it apart in defining support and resistance levels where price will have high probabilities of holding or high probabilities of continuing. Our analysis of Ichimoku on price action is based on the premise that patterns of the past will repeat themselves within acknowledged probabilities. These probabilities have been extensively backtested and through time the experienced Ichimoku Trader will develop an instinct that goes beyond quantification. The skill of forecasting price action at a glance becomes a reality with applied practice. in green. We often use this line for our entries in pullback trades as well as a guideline for risk and money management while trading an instrument. Figure 2: Kijun Sen The Cloud The Ichimoku Cloud is the most definitive aspect of Ichimoku. It is made up of two lines. The Senkou A is 50% of the Tenkan Sen and Kijun Sen together. The Senkou B is the middle of the range of high and low of 52 bars. We represent the Senkou A in grey and the Senkou B as yellow. The space between the two lines is shaded to represent when one line is above the other in a bullish or bearish cloud. The cloud and its components are shifted forward by 26 bars. The Tenkan Sen The Tenkan Sen is the middle of the range of high and low of 9 bars on any given chart. We represent this line on charts in red. Figure 3: The Ichimoku Cloud Chikou Page 2 Figure 1: Tenkan Sen The Kijun Sen The Kijun Sen is the middle of the range of high and low of 26 bars. We represent this line on charts Chikou is derived from the closing price of each bar. It is shifted back 26 bars. We represent this line on charts in purple. Chikou is used as momentum to determine if a trend is strong or weak. When Chikou is above price we would consider the momentum of the trend to be bullish. When Chikou is below price we would consider the momentum of the trend to be bearish. When Chikou is moment touching price or another Ichimoku indicator we

3 would consider momentum to be weak or neutral. price has moved in a wide consolidation pattern. Though we have been consolidating, the market has remained bullish. Initially, the support at was held each week. Now, the support has risen to With the support rising, the market is bullish and slowly trying to make new high s every week. For now, this will continue until the weekly price closes below the support of Figure 4: Chikou In the complete rendering of Figure 4 of a candlestick chart with Ichimoku we would say that this instrument is in a strong bullish trend. Price is above the cloud. Price is above the Tenkan Sen which is above the Kijun Sen. The future cloud is bullish. Momentum is strong bullish. From these basic principles of what a trend looks like with the Ichimoku indicators we derive our rules for analysis, forecasting, and trading. In future issues of The Ichimoku Trader we will dive into more specific applications of Ichimoku in forecasting instruments and trading. In the next issue we will look at one of the key strengths of Ichimoku analysis across multiple timeframes to determine support and resistance levels that price may respect. Figure 1: TDAmeritrade Ichimoku Weekly chart of E-Mini SP500 Futures Figure 2 shows the Daily chart of the E-Mini SP500 futures. In Ichimoku, the sentiment is defined by where price is located in regards to the cloud. If price is above the cloud, the sentiment is bullish. If price is below the cloud, the sentiment is bearish. Notice, price has not been below the cloud since October of This market will continue to be bullish until price closes below the Daily cloud. Global Market Update This is the first of the Global Market Updates for the Ichimoku Newsletter. In this section we will cover some of the Global Stock markets. US Stock Market For the US Stock Market, we will analyze two instruments to give us a complete picture. The instruments we will be analyzing will be the E-Mini SP500 Futures and the $VIX CBOE Market Volatility Index. The first instrument we will analyze is the E-Mini SP500 Futures. Figure 1 shows the weekly Ichimoku chart for E-mini SP500 futures. For the last 14 weeks, Figure 2: TDAmeritrade Ichimoku Daily chart of E-Mini SP500 Futures Figure 3 shows the CBOE Market Volatility Index. It has an inverse coorelation with the US Stock market. If the market goes up, the $VIX goes down and vice versa. We have been using the $VIX in conjunction with the E-mini SP500 to give us early indications on market direction. Page 3

4 Since the beginning of this year, we have been posting the $VIX chart on Twitter and determining the market direction on a weekly basis for day-trading/ swing trading. Three levels have been marked on the chart: 20.73, 15.88, and Notice, price is hanging around at the support but price has yet to touch it. Once price hits this support, we will see if there is any weakness on the day trading/ swing trading time frames of the E-mini SP500. If weakness is seen, we will go into defense mode where we will tighten our stops on our bullish positions and/or take some contracts/shares off. One may also begin to look for short term bearish positions to hedge their portfolio. Germany Figure 5 shows the weekly Ichimoku chart for the German Stock Market Index. It has undergone a major pull back and trying to recover now. After reaching the major pull back support of , the stock market has been consolidating. In order to retest the high and possibility break it, price has to break the major resistance at Figure 3: TDAmeritrade Ichimoku Weekly chart of $VIX Futures Gold Many people analyze Gold in order to determine what is going on with the fundamental side of the markets. Figure 4 shows the Weekly Ichimoku Chart for Gold Futures. Since February of this year, Gold has entered a consolidation pattern. The support has been around and the resistance has been the Kijun Sen indicator (Green). Initially, the resistance was but in the last two weeks, the resistance has risen to Price will continue to consolidate in this wide range until either the support or resistance is broken. Figure 5: Esignal Ichimoku Daily chart of German DAX Stock Index Japan Figure 6 shows the Daily Ichimoku chart for the Japan Nikkei Stock Index. The stock market is in a bullish trend. However, there are now signs of weakness, where the market may start a major bearish pull back. If the support at breaks there is a high probability that a major pull back will occur. If resistance at is broken then price will have a high probability of reaching the next resistance level around Figure 4: Tradestation Ichimoku Weekly chart of Gold Futures Figure 6: Esignal Ichimoku Weekly chart of Japan Nikkei Stock Index Page 4

5 Forecasts Alcoa: The Trade And The Story For this forecast we will be looking at Alcoa (AA) in its past two years of price action to analyze what the future might hold for the price of its stock. Yet at this time the prospects were very bleak for Alcoa. SEC violations, the fact that AA had just been kicked out of the Dow Industrial Average, and overall pessimism dominated the discourse. Few of the fundamental analysts were able to see past the current bad news. The story begins back in One of our primary trading strategies is the Ichimoku Cloud Breakout. Some of us call this our bread and butter as they make most of their profits through this strategy alone. On October 25th, 2013 Alcoa (AA) closed for the week above the Ichimoku Cloud on the Weekly timeframe for the first time in over two years. This signaled the potential end of the bearish trend begun in August Regardless of coverage over the next six months the breakout trade continued on a tear. Only into July 2014 at the top did reporting on Alcoa warm. Figure 1: TDAmeritrade Ichimoku Weekly chart of AA Noveber 15, 2013 At the time aside from optimistic words by the CEO and a few press releases about government contracts, the financial media was not covering Alcoa with much favor. The next significant event was when the breakout on the Weekly triggered by price breaking the high of the bar that had first closed above the cloud. Figure 3: TDAmeritrade Ichimoku Weekly chart of AA July 11, 2014 Figure 2: TDAmeritrade Ichimoku Weekly chart of AA January 10, 2014 So what happened after everyone finally began thinking bullish? AA consolidated, ranging between $13.71/share and $17.75/share between July 2014 and February 2015 before tanking. Those that read and Page 5

6 based their decisions on the news alone stayed out of the beginning, entered at the end, and would be at a loss by the end of March 2015 hitting near a 52 week low on Friday March 27th. With most people late into this two year run sweating it out what could Ichimoku tell us on the longer term, Monthly timeframe? Figure 4: TDAmeritrade Ichimoku Monthly chart of AA May 2, 2015 Price found support at the Monthly Kijun Sen which was at $12.69 representing the 50% retracement of the whole two year trend by making a low of $12.65 and proceeding bullish through the month of April. Ichimoku traders that had been stalking this instrument for a pullback entry would have found their opportunity. The exact bottom went unreported but since then there have been plenty of musings to read about in the press including a resounding endorsement from CNBC s Jim Cramer lauding Alcoa as A Star is Born! Should I Invest In Bitcoin? No. You do not invest in it; you trade it. Bitcoin is NOT an investment vehicle, has never been, and was not technically intended as such. While the technology is revolutionary and many believe that it could fundamentally change international money exchange the way that the Internet changed shopping, Bitcoin itself is not an asset class a typical investor should look to hold. The exchanges upon which traders can buy and sell and thus dictate the relative fiat currency value of each unit of Bitcoin are decentralized and completely unregulated. Putting capital into these exchanges to trade carries 100% risk. Holding onto Bitcoin itself also requires a fair degree of technical know how to do so safely. There are online platforms such as Coinbase that make secure Bitcoin storage more user friendly but responsibility remains up to the owner to secure their wealth. If their Bitcoins are compromised there is virtually no technical or legal recourse to recuperate such losses. Many traders over the last few years have bought in hopes of Wall Street getting hungry. These idealists have woefully underestimated the importance of fiduciary responsibility placed upon institutions to protect their shareholder s assets. It is not a lack of foresight as much as a lack of structure. However, investments in Bitcoin are being made. Notable ones are billionaire risk loving entrepreneur Richard Branson s investment in Atlanta based Bitpay, a Bitcoin merchant services company. More recently Goldman Sachs announced a $50 million investment in Circle Internet Financial. Figure 5: TDAmeritrade Ichimoku Daily chart of AA May 1, 2015 So what does the future hold for AA? Like all things we see it in terms of probability. Ichimoku traders are eyeing a high probability first target of $15.20 which is the Weekly Kijun Sen in the near term. Upon breaking there is then a high probability to retest the two year high in the long term. Page 6 -Wes Bennett Some traders still feel like now is the time to get in early hoping to capture a historicly precedented 19,000% return (yes, nineteen thousand from 2011 to the top). They take such news of investment as bullish for the fiat equivalent value. Unfortunately this is not the case. Institutions and seasoned investors are investing in companies that operate around Bitcoin; not in Bitcoin itself. Adoption, another sign seen as bullish by Bitcoin fundamentalist traders, is actually the reverse. Merchant

7 services companies enable vendors to receive Bitcoin and potentially hold it but with volatility and recent depreciation in the fiat equivalent value nearly all immediately exchange their Bitcoin with fiat effectively selling into the market and bringing the price down. The investment strategy commonly termed as sector rotation has paid dividends to many investors. The underlying assumption being that the business cycle which reflects the changes in an economy can be a key determining factor to the equity sector performance over a certain time-period. The economic cycle has 4 distinguishable phases: Peak, Recession, Trough and Recovery. Figure 1 illustrates the path of the business cycle. Figure 1: TradingView.com Ichimoku Weekly chart of BTCUSD May 4, 2015 So how does on trade Bitcoin? Some platforms such as Bitfinex and BTC-e allow traders to operate on margin and take short positions. The shorthand for the instrument isbtcusd. BTCUSD has been in a bearish Weekly trend since August The best trades remain short setups off Daily resistance levels. -Wes Bennett Always maintain your sense of confidence, but keep it in check. -Paul Tudor Jones Sector Analysis Where Is The Money Headed? The great Benjamin Franklin once said, investment in knowledge pays the best interest. Figure 1: The Business Cycle Each phase is characterized by a certain level of economic growth (positive or negative). By no means are we here to pinpoint which economic phase the United States is in currently - we ll leave the government and academic economists at the National Bureau of Economic Research to pinpoint that. However, what we can identify is historical trends that occurred during each corresponding time period. At the end of the day, all the knowledge of the world is great but in the words of Kevin O Leary, tell me how this can make me money. As traders, we at EII Capital echo Mr. O Leary s feelings. The notion behind Sector rotation is to hold an overweight position in strong sectors and underweight positions in weaker sectors. There are 10 distinct sectors which can be used as an allocation basis for portfolio. Figure 2 highlights the sectors and its corresponding historical performance in phases of the business cycle. Academia suggests sectors can be classified into 2 main groups: defensive and cyclical. Consumer staples, Healthcare and Utilities are examples of defensive sectors due to the idea that the consumer will still have to eat, drink, take their medicine and need electricity to survive despite lackluster economic growth. Page 7

8 with probabilities pointing for it to hold here. Figure 3: TDAmeritrade Ichimoku Weekly chart of XLU May 15, 2015 Figure 2: Fidelity Investments (AART) analysis of historical sector performance within the business cycle We then started looking into potential buying opportunities within the sector. Among the components of XLU we narrowed the list down to picks: Figure 3: Duke Energy Corp (DUK) and Figure 4: DTE Energy Co (DTE). Price is what you pay; value is what you get. Whether we re talking about socks or stocks, I like buying quality merchandise when it is marked down. - Warren Buffett Mr. Buffett has provided us with numerous memorable quotes and each one seems to be backed by wisdom. The idea of buying quality merchandise when it is marked down seems like a no-brainer. So we applied that philosophy to the financial markets. Sure we could tell you how the Consumer Discretionary Sector continues to be a great play for us (and we hope for you too) given that names such as Disney (DIS), Yum Brands (YUM) and Starbucks (SBUX) continue to outperform the broader-market but we are forward looking. Keeping Mr. Buffet s ideology in mind, we analyzed all 10 sectors to identify where we would be looking to allocate our money next, i.e. is there quality merchandise that is marked down? Figure 3 illustrates the Utilities Select Sector SPDR Fun ETF (XLU), we noticed that the sector is down approximately 7% YTD underperforming in comparison to the other 9 sectors. We noticed that the overall sector is sitting at a key support level (sitting on top of a bullish Ichimoku cloud) Figure 3: TDAmeritrade Ichimoku Weekly chart of DUK May 15, 2015 Figure 4: TDAmeritrade Ichimoku Weekly chart of DTE May 15, 2015 Each chart possesses the characteristics that we look for prior to seeing a bullish technical bounce off a support level. The resistances (i.e. profit taking levels) have also been highlighted on each instrument. Of course, none of these are guaranteed investments that you should be allocating your Page 8

9 life-savings too, but definitely worth a second look to assess if its fits your portfolio if you haven t already done so. While others are selling in May and going away on vacation, which may work for them we d rather still make money during that time. If everybody is thinking alike, then somebody isn t thinking. -General George S. Patton, Jr. Seasonal Trades May Pranav Khattar Cigna (CI) has a bullish seasonal pattern from May 24th thru June 8th. Over the last 10 years this stock has gone up 2.51% on average and up 20.57% at maximum with a maximum drawdown of 4.55%. The reward/risk ratio is not ideal for a trade in itself but one may be able to find opportunities and setups within this seasonal pattern. Ideally we would like for price to get to a MTF (multiple time frame) support before entering. $ is the MTF as shown in Figure 1. At this level we have 4hr, daily and weekly Ichimoku levels as support. The following prices are calculated assuming that price will be around $ by the close of May 23rd. The average move would be to $132.93, the max move would be to $ and the max drawdown would be to $ next couple of days, we should see the Tenkan Sen and Kijun Sen flip on the daily chart to bullish which would make an ideal pullback setup to retest the previous high of $135. Our entry will be at $129.69, our initial stop will be and our target will be $135. This will give us a 3:1 initial reward/risk ratio. -Hiren Patel Trading Psychology Is Losing Bad? The lessons we learn in life directly relate to trading. Why? Psychology is a huge component to trading whether people believe in it not. One of the biggest reasons why traders cannot consistently make money is due to emotions. When a loss is taken, the trader goes into an emotional state which affects their trading. The majority of the time the trader does not recognize they are in a new emotional state and continue to trade. Eventually, the one loss leads to the trader not following their trading plan and compounds into more losses. One negative event leads to more negative events. So why does losing affect a trader? Why is losing negative? Believe it or not, most of us are taught this concept from birth. We are taught losing is bad. From academics to athletics, losing is bad! How many times when you were growing up, you were told losing is bad? How many times was a losing event reinforced with another negative event? Did you ever get appraised for losing? It is ironic that we are taught this philosophy and then also taught that as you grow older, you will become wiser. Well, how do you become wiser? The only way you can become wiser is to make mistakes and learn from them. The mistakes, in theory, are losing. So if losing is bad and you can only become wiser from learning from losing, how do these statements go hand in hand? They can t! Figure 1: TDAmeritrade Ichimoku Daily chart of CI May 18, 2015 Monthly and weekly timeframes remain strong bullish. $ will line up with the weekly Tenkan Sen, daily Kijun Sen and 240 minute Senkou B. In the In order to become wiser, you have to lose. The key is learning from the loss. If you don t learn from the loss then losing is bad. The more losses you experience in life, the wiser you should be- Page 9

10 come if you take the time to learn from the mistake. So how do we learn from the loss? You have to find the origin of the mistake. If you become emotional, you will never be able to find the origin. Instead, you will concentrate on the negative consequences of the event instead of why it occurred. Once information is learned, you have to make sure the mistake does not occur again. If you don t, the mistake will occur again and at that point, the mistakes will become a habit. My mentor in life after I graduated from college told me one thing. My first job should not be one for money but more towards experience. The more experience I get fresh from college the faster my career will be accelerated. Your job should allow you to make mistakes as long as you learn from them. In the first four years of my telecomm career, I made a lot of mistakes. Mistakes that I welcomed and didn t fear. In 2000, I was rewarded with a new position with a huge salary. Even though my resume showed 4 years of experience, my technical expertise was equivalent to 10 years of experience. I didn t realize it but I had changed my childhood personality of being a follower to becoming a leader. Leader are always the quiet ones. They are not fearful in making mistakes. If a mistake is made, they do not become emotional. They understand the long term gain of the knowledge is more valuable than the short term loss. Did you know the following: Albert Einstein: He did not speak till age 4, he did not read till age seven. He was labeled Page 10 mentally slow, unsociable, and adrift forever in foolish dreams. However, he won the Nobel Prize in 1921 in Physics Michael Jordan: He was told Boy, who are kiddin? You can t slam no ball? Michal Jordan was also cut from his high school basketball team. Dr. Seuss: 27 publishers rejected his first book. However, Dr. Seuss become legend through children s books. Charles Darwin: He gave up a medical career and his dad told him You care for nothing but shooting, dogs, and rat catching. arles Darwin become the father of modern biology. What does all this mean for you as a trader? If you have to ask then keep your day job. You are a follower! The only way a trader is going to be a consistent successful trader is to stay humble and learn from their mistakes. There is no perfect system out there. Trading is about probabilities. Losing is part of the game and always be. The question is can you learn from you mistakes and not keep on losing on the same chart pattern over and over? The more you don t learn, the more it becomes a bad habit! Today, my kids will be taught different from birth. They will not be taught losing is bad. Instead, losing is ok as long as you learn from it. Knowledge is winning! -Manesh Patel Thank You for your time! Please look for our next newsletter next month, June To subscribe request to: info@eiicapital.com Disclaimer. The Ichimoku Trader newsletter contains or may contain references to other companies. E.I.I Capital Group makes no representations, warranties or endorsements whatever about any other companies, or any products or services of those other companies, even if the products or services of those other companies or their Web sites are described or integrated with E.I.I Capital Group products or services. You use this newsletter and all E.I.I. Capital Group (and affiliated) products and services at your own risk. In no event shall E.I.I. Capital Group be liable for any special, incidental, indirect or consequential damages of any kind, or any financial losses or damages whatever, including, without limitation, those resulting from loss whether or not we have been advised of the possibility of such damages, and regardless of the theory of liability. This newsletter could, and likely does, include some technical and other inaccuracies and errors. Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. There is a possibility that you may sustain a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options futures or forex); therefore, you should not invest or risk money that you cannot afford to lose. U.S. Government Required Disclaimer - Commodity Futures Trading Commission. Futures and options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don t trade with money you can t afford to lose. This website is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REP- RESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY, SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. Testimonials appearing on this site are actually received via submission. They are individual experiences, reflecting real life experiences of those who have used our products and/or services in some way or other. However, they are individual results and results do vary. We do not claim that they are typical results that consumers will generally achieve. The testimonials are not necessarily representative of all of those who will use our products and/or services. The testimonials displayed are given verbatim except for correction of grammatical or typing errors. Some have been shortened, meaning; not the whole message received by the testimony writer is displayed, when it seemed lengthy or the testimony in its entirety seemed irrelevant for the general public.