Trading Plan: Robotic Investing Stock Market Analysis

Trading Plan: Robotic Investing Stock Market Analysis

July 31, 2018 0 By Jeremy


Trading Plan: Robotic Investing Stock Market Analysis

This is post #3 in a series of posts outlining my Robotic Investing Trading Plan. Each of these posts combined (and the ones to come), will outline my full trading business plan.  Make sure you subscribe to get notified when new articles in the series gets posted. The series of posts is based on the Van K. Tharp business plan methodology as outlined in:

Robotic Investing Stock Market Analysis

As a systematic rules-based investor and trader, I let each of my strategies guide my trading decisions.  For example, in my TQQQ strategy, I buy and sell based on moving average trends.  Each of these systems are designed to work with whatever the market is going.  Therefore, the stock market analysis I do is not super involved or detailed.

I buy and sell ETFs based on price.  I am not a fundamental or a macro-economics investor.  That is why my stock market analysis is 100% based on what the price action of the market has been.  This part of the Robotic Investing Trading Plan explains my stock market analysis process.

Monthly Stock Market Analysis – Moving Averages

The time-frame I use for my analysis is monthly.  I do look daily, and will check out the price action of the market using daily data, however monthly is my go-to.  As an investor with goals and objectives that are longer-term, looking at the big picture using monthly data focuses me on the right level of detail.

I use TC2000 to conduct my stock market analysis.  The first step is reviewing monthly charts across a few different markets:

Stock Market Analysis - Monthly TC2000 ChartsEach chart on this layout includes three different moving averages:

  • Yellow: 10-month moving average
  • Pink: 3-month Moving average
  • Red: 1-month moving average

Using those moving averages – and primarily the 10-month moving average – I am able to see what the predominant trend is on that market.  In the image above, we can see that both the Nasdaq 100 and the S&P500 are trading above their monthly moving averages.  That tells me that those markets are in an uptrend.  That also explains why I am currently (as the time of this writing) holding TQQQ as an ETF in my portfolio.

With this stock market analysis, I can also see that VSS is in a downtrend and probably not a great investment at this time.

Monthly Stock Market Analysis – Guppy Charts

The second tool I use for my stock market analysis is Guppy Charts.  These charts look at the weekly data for different markets and provide me with further confirmation on the strength of a particular trend.

I look at these charts monthly because I want to get see whether that trend the monthly charts above are starting to break down or not.  Here is a Guppy Chart for QQQ:

Guppy Charts in TC2000 - QQQAnalysis of this chart tells me that the Nasdaq 100 is in a strong uptrend right now.  There is good separation between the red (short-term moving averages) and blue lines (longer-term moving averages) – notice that white space between the lower red line and the upper blue line.

There is also good separation between each of the red lines (and blue as well).  When you see that the trend is strong.  If you notice the red lines between April and May 2018, you will see that the shorter term trend was starting to break down.  I would not act on that as my TQQQ system did not tell me to get out, but it was giving me some warning signs.  If those red lines dropped into the blue lines then I would have really been watching for the signals in my rules-based strategies.

Monthly Stock Market Analysis – Market Breadth

Another  tool I use to get a sense of the market is called the T2108.  T2018 is an indicator available in TC2000 that calculates the percentage of stocks that are above the 40 day simple moving average.  This is a short-term indicator, and when I use it in combination to the monthly moving averages and Guppy Charts it is easy to get a feel for what the market is doing.

What the indicator tells me is how optimistic or pessimistic the market is.  It does this by analyzing the number of companies that are trading above their 40 day moving average.  When more companies are trading above the average, that suggests that the bulls are in control and momentum is up.  Alternatively, when more companies are trading below the average, then that is a negative indicator.

That data is then put into an overbought or oversold context.

The way to read the T2108 is simple.  When the indicator shows the market at a reading of 70 or higher, that indicates the market may be overbought and traders should be cautious on a shorter-term perspective.  When the reading drops below 20, that is an indication that the market is oversold and there may be a bounce.

I do not use this to trade, however it does give me one piece of information to consider when conducting stock market analysis.  Here is what T2108 looks like in TC2000 with the SPY chart below it to show what happens during different readings of the indicator.  Notice in February 2018 when the indicator dropped below 20 and the subsequent rise in SPY:

Stock Market Analysis - T2108

Finally, I also use a measure of market breadth.  To get more information about that please be sure to check out this post, where I discuss market breadth and my system for reviewing Market Internals.

Specific Details about My Stock Market Analysis Process

With the tools explained above, I admit that I do review these charts every day.  Not to determine what to do, but to get a further feel for what is happening with the market.

After market close, I fire up Tc2000 and go through the following steps:

  1. Open up my monthly chart tab and review where the prices are for each asset compared to the 10-month, 3-month, and 1-month simple moving averages.  If they continue to trade above the moving averages, then I can confirm the market uptrend and if not, then that is a market downtrend.
  2. I then open up my Guppy Chart tab and cycle through the weekly Guppy Charts to see what the short-term and long-term moving averages are saying.  As these charts are weekly, they can tell me if the long-term trend is breaking down.
  3. Review the market breadth to determine if the market action is positive or negative.
  4. Finally, I look at the T2108 indicator to get a sense for where the market is on a shorter-term basis.

The combination of all these tools in my stock market analysis process paints a good picture of what the market is doing.  I am then able to trade according to my rules-based investment strategies with more confidence and conviction.

Next Steps for the Robotic Investing Trading Plan

This process help me get a good sense of where the market is at any given time.  I actually don’t care what it tells me – my systems help me trade no matter what the market is doing.  What I care about is confirming the type of trend we are in which help support the trades I make.

When I combine this data with my mission and goals & objectives and market beliefs, I am set up for a solid trading process.

I would love to hear how you analyze the market. Please use the comments below to answer the following two questions:

  1. What indicators do you use to get a sense of what the market is doing?
  2. What tools do you use to do this analysis – TC2000, Strockcharts?

Featured Image: Bali, Indonesia by Thomas Depenbusch (Depi)

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