The 4% Indicator and This Week’s Trading Levels

Futures and futures options trading involve substantial risk, and therefore are not suitable for all investors.

With all the uncertainty hitting global economies, it's no wonder that financial markets are experiencing more ups and downs than high rises elevators. However, it's certainly a great environment for the nibble short term trader. But for long term investors and trend followers, it's been a nightmare.

I've been involved with financial markets for nearly 20 years and have picked up a few simple trading techniques and strategies that help me identify trends. Trend following is a good technique in itself and can be potentially very profitable when you catch a nice wave so to speak. But how do you identify trends in equities?

I remember that I had read and kept an article written by Michael J. Collins called "The 4% Indicator Revisited" in Technical Analysis of Stock & Commodities 2009 magazine. In the article he revisits, creates and tests a trading model based on Martin Zweig's 4% Trading Indicator that was mentioned in his 1986 book called, Winning on Wall Street.

In his book, Zweig discusses a simple indicator to help investors follow the price trend of the markets called the 4% Indicator. As Mr Collins wrote, "Zweig illustrated that for the the 22 year period ended late 1988, if an investor followed this indicator, a modest $10,000 investment would have grown to more than $233,000! This is approximately 15% compounded annual rate of return."

The 4% indicator uses the Value Line Composite Index to generate the buy and sell signals. This index is mainly made up of mid-cap stocks and thought to be more representative of true market movements. It can be found online.

The rules are simple:

A buy signal occurs only when the weekly close of the Value Line Composite Index is at least 4% higher than the previous week's close.

A sell signal occurs only when the weekly close of the Value Line Composite Index is at lest 4% lower than the previous week's close.

If the index doesn't move 4% in either direction, you do nothing and check it again the following week.

As I mentioned earlier, Mr. Collins created a trading model to test if the 4% Indicator had what it took to perform well during the past decade. Mr. Collins decided to use the exchange traded fund IWM, which represents the Russell 2000 Index, as a proxy for the Value Line Index. He back-tested the model starting January 2001 to the end of October 2009 and the results were amazing.

Granted these are hypothetical trades and past performance does not predict future results, however, using this 4% Indicator and only trading, long and short, the IWM exchange trade fund of the Russell 2000 Index, $1,000,000 account grew to more than $5,000,000 in less than 9 years, producing a total return of more than 400%. What was interesting to me was, it only made 29 trades in 9 years - 18 profitable and 11 losses.

Also to note, the model showed the strategies held on to winners four times as long as it did losers. And it appears investors experienced less risk as measured by standard deviation using the 4% Indicator model vs buying and holding the indexes. Simply, it produced 20 times the return of the respective benchmarks while incurring lower risk.

I mention this strategy and article because the IWM ETF used for Mr. Collins' trading model represents the Russell 2000  Index. However, it's logical that IWM can be substituted by the mini Russell 2000 future (TF Z1) and can be used to trade the 4% Indicator.

Again, although past performance is no guarantee of future results, it seems that the 4% Indicator is an easy and time tested tool that can help you spot trends in equity index futures markets.

So what is the Value Line Index telling us this week? Nothing. Last week's move was only 2.4% higher. The last signal was a sell signal on Friday, September 23rd. Accordingly, you would have exited the previous long trade and initiated a short of TF Z1 at the open on Monday, September 26th. Granted, this trade wouldn't be working now, however, there is still a long week ahead to confirm whether this trade is a winner or loser.

The signal itself is a good indicator and doesn't guarantee success but it could be a simple one that you can use to help you identify trends when there are none in sight.

If you have questions about this indicator or any of the information I post, please feel free to call me directly at 866.312.4965.

Rob

Below you'll find my trading levels for today and the week. I've made a few updates to my grids and would love some feedback. What do you think?

Weekly Trading Levels for 5/23 – 5/26

Futures and futures options trading involve substantial risk, and therefore are not suitable for all investors.

Good morning all

Hope you had a great weekend.

It's probably fitting that we see equity and commodity futures getting hit this morning following a weekend that was supposed to bring us the end of the world. For many in Joplin, MO, I'm sure it seems like the end of the world following the devastation that happened there yesterday. Thoughts and prayer going out to you and the rest who have been devastated by tornadoes and floods. It's certainly an interesting time to be alive.

Future markets as a whole are getting hit this moring. Surprise ... surprise, things in Europe aren't so great after all. This goes to show you can only sweep financial problems under the rug for so long before you have to deal with them. Hopefully Congress is monitoring this as we may have to deal with it sooner than later too.

Trading Levels

Equity index futures are down big this morning. As I've mentioned in the past, TFM1 is the leading indicator for equities to me. If you look at a daily chart, you'll notice TFM1 has formed a text book Head and Shoulder pattern. We're going to open at the neckline (814ish). A close under this level could send this market on a one way trip to 775.00. We'll see if that happens.

Below you'll find daily and weekly trading levels. Equity futures are weak and I can't see traders rushing in to hold up equities. If you have questions or comments about my commentary or trading levels, feel free to contact me directly - 312.224.7882 - Rob

Weekly Trading Levels

Futures and futures options trading involve substantial risk, and therefore are not suitable for all investors.

May Day has a new meaning in the United States now that it marks the day Obama killed Osama.

About 9:30 cst last night, CNN started breaking that President Obama HAD to speak to the Nation. An hour later equity index and Dollar index futures were flying higher as the President reported that almost 10 years after he masterminded the attacks on the World Trade Towers, Osama bin Laden was dead.

Index futures tempered by this morning. The dollar index is still trading higher but looks to be trying to find a base more than anything else. It certainly is an interesting start to May following an April that saw index, metal and energy futures sky rocket.

Trading Levels

Below you'll find today's Daily numbers as well as this week's Weekly numbers. To note, index futures are trading well above my weekly numbers thanks in large part to trader's reaction to Bernanke's speach last Wednesday - the flight to "quality" in large caps. This is bullish equities short term.

TFM1 is trading at all time highs while the others still have room to go with NQM1 having another 100% before seeing 1999/2000 highs. As you know I consider this a leader and since March 09 lows, it has. However it will be interesting to see if TFM1 has enough horse power to pull the rest of equity index futures with it. If I were a betting man, I'd say the odds are against it.

Using today's Daily numbers, ESM1 and TFM1 rallied above their respective R1's follow President Obama's announcement last night. They didn't hold above those levels and need to in order to build off last week's action. At this point, going long is still the trade of choice however I wouldn't consider it until both these markets trade down to their respective Daily Pivots - 1360.83 and 863.20.

If ESM1 and TFM1 drift down to their daily Pivot levels and don't collapse as they trade through them, look to BUY THE PIVOT for a late morning/early afternoon move.

If you have questions or comments, feel free to call me - Rob - 312.224.7882.

Thanks President Obama and way to go Troops!

Futures and futures options trading involve substantial risk, and therefore are not suitable for all investors.

Yesterday I laid out a scenario where I thought ESM1 would trade up to the 1350 level ahead of the FOMC announcement at 11:30 cst and to short ESM1 on the report at 1346.50. The exact opposite happened in that ESM1 traded lower ahead of the announcement and Benanke's Q & A then rallied up through 1346.50 and topped around 1354 range.

This brings up an interesting phenomenon that's been going on where traders/investors are buying large cap stocks with international exposure as a flight to safety. Not Treasuries. Not the Dollar. But large cap stocks and silver and gold! If this is the case, and it seems like it is, one can infer that equity index futures are, at least in some part, artificially higher that they would be if traders/investors focus solely on corporate earnings.

That doesn't mean equity index futures are coming down any time soon. But it does mean that if you're trading these futures markets, you need to know your exit strategy when things normalize.

Trading Levels

I have a calculation that measures over bought and over sold conditions on a daily basis. It's not an absolute measure but it has some substance. Today, 3 of the 4 stock index futures have overbought readings. Only TFM1 is neutral. Given that this level is neutral, I don't see a significant sell off today but it's possible as what sometimes happens following the FOMC announcement. This morning's weakness should give way to hangover optimism following yesterday's rally. Yesterday's highs for ESM1 and TFM1 may be tested early this morning based on what I'm seeing now.

Currently, both ESM1 and TFM1 are trading at their respective daily Pivot, 1348.83 and 854.07. I'm a skeptic of this Fed charged rally but you can't fight the Fed. Bill Gates doesn't have enough money to fight the Fed. However, if these markets can't trade up to yesterday's highs and make new ones, we could see a nice sell off today where today's Pivots are violated following the failed rally.

As always, if you have questions or care to discuss strategy, please call me directly at 312.224.7882 - Rob

Futures and futures options trading involve substantial risk, and therefore are not suitable for all investors.

I'd like to pass along something I didn't realize earlier, the FOMC announcement will be out at 11:30 cst with Bernanke taking the spot light in a Q & A session at 1:15 cst. Can't wait to see the softballs being thrown during that meeting.

Index futures are up following decent earnings from GLW and WHR. Also lending a bid is the positive reaction from traders to a better than expected Durable Goods report that saw a 2.5% increase vs the 2.3% expected.

Stocks will probably go up a lot today because AAPL announced it will start selling the white iPhone. Look out now time to raise GDP estimates!

Seriously, traders will be jockeying for positions ahead of the Q & A session which should increase volatility. I expect a wild reaction following the Q & A despite Benanke's attempts to convince the world that The Fed is following a strong Dollar policy. It's my opinion today's sideshow will be just that, a joke of a sideshow. The question will be if he alludes to more QE to keep you from saving and force you to put that money at risk or will he signal a chance in policy that might actually raise the Dollar and interest rates. According to his "strong Dollar" policy, that won't happen.

Trading Levels

ESM1 finally broke over the 1337.75. As I write this, this market is trading 1346ish. Today's R1 is 1346.50. As I mentioned yesterday, it's funny that we're trading at yearly highs ahead of Bernanke's snowjob. Unless hedge funds and bankers know something we don't (which is very possible) there is more downside risk to index futures traders that there is up.

I'll be looking for ESM1 to trade higher this morning. I would speculate it's go as high as 1350 ahead of the 11:30 cst if not ahead of Bernanke. If that's the case, I'll be looking to SELL ESM1 at 1346.25 STOP. Protective Buy Stop once filled will be the high prior to being filled.

If you have questions or care to discuss real time strategies, feel free to call me at 312.224.7882.

Futures and futures options trading involve substantial risk, and therefore are not suitable for all investors.

I know I sound like a broken record but equity index futures are trading higher this morning, mainly on good earnings reports from the industrial sector (F, MMM). These results aren't very surprising considering the nose diving Dollar.

ESM1 looks like it will take another shot at breaking out over the 1337.75 level it's been struggling against for months now. The fact that it's happening days before The Fed is expected to make a decision on rates and supposedly to detail Its QE II exist strategy is interesting to say the least. I wish I could be less obvious but equity index futures will either explode higher or collapse lower. I don't see sideways trading an option.

Speaking of options, the scenario detailed above is perfect for using an option strategy called a Long Straddle. A long straddle is used when you expect a significant move higher or lower in a particular market but are unsure of direction. The strategy entails buying a call and a put of the same strike and same expiration. If you would like to discuss this strategy ahead of the FOMC announcement Wednesday, feel free to contact me.

In the meantime, below you'll find today's trading levels. If you intend to trade them or have found your unique way of trading them, please contact me.

Trading Levels

Today's bias is higher. Light volume should allow longs to profit. Using levels below for ESM1, look for slight pullback under today's R1 of 1334.08. Once under, look to Buy ESM1 at 1334.25 STOP. Protective Sell Stop is 1330. 25. Call with questions - 312.224.7882 - Rob

Weekly Trading Levels

Futures and futures options trading involve substantial risk, and therefore are not suitable for all investors.

Below you'll find this week's Weekly Trading Levels. If for any reason you don't see these numbers posted on Sunday night or Monday morning, please contact me directly - 312.224.7882. I do have them available however I sometimes can't get them posted in a timely manner. But I do have them so feel free to ask - Rob

Weekly Trading Levels Starting 4/25/11

Futures and futures options trading involve substantial risk, and therefore are not suitable for all investors.

The Holiday Rally is on! If I'm the average investor, I don't know whether to cheer or to cry. On the one hand, my portfolio, whether it be a real portfolio or 401k, is growing assuming you're indexed to the market. On the other hand, the real value of those gains, the money in your wallet and the money in your bank is losing value at an alarming rate. Who's to blame? The Federal Reserve Bank and its bankers.

All I can say is that the Fed better raise rates ASAP! They won't though because the problems in the United States as well as around the world are real. It's my opinion that had they done it in 2004 we wouldn't be in this mess. But No. Political posturing won out.

However the fears are the same now as they were then - raising rates will retard if not kill economic growth. I agrue, what growth? Funny how all the current positive comparisons only refer back to 2008 numbers - a year in decline. Why? Because in many cases, the current numbers, employment, GDP, earnings, you name it, wouldn't compare favorably when things were doing well.

Trading Levels

I'm not a believer in this holiday induced rally. That being said, I'm inclined to sell this rally but only at higher levels.

As I write this, ESM1 is approximately 1332.00 and an economic report is due out at 9 cst. If ESM1 is trading below today's R1 (1331.42) say 1329/1330, I'll be looking to BUY ESM1 at 1332.50 STOP with a profit target near 1335/36. Sell Stop would be the low before the report. Later in the day, I'll be looking for mid/late day sell off ahead of the weekend.

If you have questions or are going to trade my levels below, please contact me first - 312.224.7882 - Rob

Happy Easter!

Futures and futures options trading involve substantial risk, and therefore are not suitable for all investors.

Playing catch up here this morning. Equity index futures are starting the day quietly but in positive territory following yesterday's sell off. Much is being made out of S&P's warning about our economic problems but it's nothing new. Those of you following my writings regularly may remember my post from March 22nd where I mentioned:

"The headline on this weekend's IBD was "US Could Lose Its AAA Rating by 2018". It speaks of a CBO report saying that under Obama's plan, the debt service obligation of his budget would total $725B or a little over 18% of the projected federal revenue. Moody's has an 18% interest to revenue threshold which they use as a preliminary tool to determine a country's debt rate. All I can say is that a lot can happen before 2018 that can make the above report fact or fiction." - Pivot for Profits March 22,2011

In regards to this warning, I still believe there's a lot that will need to happen before the United States of America loses it's AAA credit rating. Fear mongering and political jockeying is well under way so stayed focused on reality not speculations.

That being said, the reality of our situation is that the housing market is done and about to be well done heading to burnt. I say this despite this mornings report on March Housing Starts which rose 7.2% or by 549K units vs 520k forecasted. Permits rose 11.2% to 549k vs 540k expected.

Trading Levels

Following yesterday's action today seems to be shaping up as a 'what now' day. Let's keep in mind yesterday was also the first day following  April options expiration and that equities have been on a 2 year rally heading into the heart of earnings season. I can't see much happening today one way or another mainly because IBM and INTC report after the close. In my opinion, IBM will need to blow out earnings to set a bullish tone following the recent weakness in equities.

That being said, using the today's levels along with the weekly levels posted earlier, I've identified a key level for today's trading in ESM1. That level is 1307.75. As long as we stay under this level, ESM1 should remain weak. We rally and close above it, the uptrend will resume barring any adverse reactions to earnings.

For TFM1, there are two levels that you can use to trade ESM1 as well as to gauge market direction for the day. Today's Pivot is 819.10 while the weekly S1 is 819.78. TFM1 is trading 822ish as I write this. Assuming this market holds above 819.00, equity index futures should at least be flat to slightly higher today.

To the upside, the weekly Pivot for TFM1 is 825.92 and today's R1 is 824.80. A move higher though 826.00 should carry all equity futures higher into the close. Despite my inclination to short these markets, I believe a rally is a more likely outcome for today than a sell off. Again, IBM is reporting at the close. Big Blue represents a lot about many things business as well as economic.

If you're going to trade my levels below or any of my future ideas, please call me first - toll free 866.312.4965 direct 312.224.2882

Weekly Trading Levels: 4/18

Futures and futures options trading involve substantial risk, and therefore are not suitable for all investors.

You'll excuse the delay however Uncle Sam was waiting.

Below you'll find this week's Weekly Trading Levels for all the major stock index mini futures as well as mini crude and natural gas.

If you're going to trade my levels below or any of my future ideas, please call me first - toll free 866.312.4965 direct 312.224.2882

Weekly Levels