Update BRK, Apple and Netflix

Hi there,

Here is an update on three stocks I recently have been watching.

First of all, last week I wrote a short blog post about support and resistance for the b share of Berkshire Hathaway. As we can see since then support has held, the stock bounced back and has been trending upwards for the last few trading days. In any case drawing support and resistance lines is highly subjective and often the lines will be broken. Nevertheless, there seem to be good risk/reward ratios entering a trade near support and resistance levels and thus this I think this to be a useful tool in the toolbox of a trader.

Unbenannt

Since the strong sell-off of Apple stock after earnings announcements the share has bounced back marginally during the last trading week. The 10 days SMA has changed direction and is upward sloping. The MACD signals a bullish cross-over and the RSI of 44 still indicates that the stock is oversold. I will continue watching this stock and wait for a cross-over of the 50 and 10 days SMAs –  a big price move still is necessary for that though. sc

Finally, once again Netflix.

Similarly to Apple the stock crashed after earnings announcements and since then has been in a trading range after having declined even more. The last week has been characterized by an up-move. The MACD just indicated a bullish crossover however the 50 days and 10 days SMAs are flat, indicating indecision. Further development will be interesting to observe.

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Lets see how this is going to continue.

Best,

Nils

Support and Resistance

Hey there,

Today I just want to mention a short thought.Since I still own some shares of the Berkshire Hathaway´s B shares some weeks ago I started looking for support and resistance levels. I found the corresponding support and resistance levels to be 140 and 145 USD respectively. This was just before the stock actually broke above its resistance level and started an uptrend for several days. This breakout seemed like a strong bullish indicator. The strength could not be uphold however and there has been a negative development since then with the stock retracing back to its support level. This point seems to offer a good risk/reward ratio and it has to be seen whether support can be hold or whether the downtrend will continue.

Unbenannt

Best,

Nils

Nature versus Nurture – The Turtles

Is it possible to learn what it takes to be a great trader or are traders born and possess innate abilities?

This is an important question to answer. After all, if it is impossible to acquire the skills necessary to be a great trader why invest all the time trying to improve? Why not admit that its pointless and that only a selected group of individuals is able to generate above average returns?

Micheal Covel´s book “The Complete Turtle Trader – The Legends, The Lessons, The Results” tells the story of the Turtle experiment, an experiment designed in order to answer this specific question. Can ordinary people be trained to become great traders?

In the 1980s legendary commodities trend trader Richard Dennis and his colleague William Eckhardt debated this very same question. While Dennis was convinced that it was his system that had made him successful and that anybody could learn to apply it Eckhardt disapproved saying that Dennis´ character had enabled him to succeed. The result of this disagreement was the Turtle experiment. The two men posted an ad in the New York Times saying that they were looking for trainees. They obtained an incredibly diverse group of people with backgrounds ranging from Harvard MBAs to security guards to professional gamblers. After four weeks of being trained by Eckhardt and Dennis himself the trainees were given 1 million dollars each and were to apply the trading rules acquired. The returns are astounding. While not all Turtles have become successful traders the performance of all of them in the first years managing Dennis´ money  were impressive. Some of the Turtles continued managing money and have become billionaires in the process. It seems like the experiment proved that nurture beats nature in trading.

But what was it that the turtles learned from Dennis?

The turtles learned to apply a trend following system. They tried to recognize trends and ride them. They did not try to predict the future. Instead of trying to buy low and sell high as conventional wisdom would suggest the goal would be to buy high, selling higher, and to sell short low, covering even lower. This trading activity considerably varied from the the public perception of how traders spend there days. During the trading activities of the turtles days could pass without any trading. Their signals would not be triggered and thus they could not trade. When the trades finally manifested the situation could change completely and launch highly active days. Another aspect of the turtle´s trading system that would not be expected generally is the winning percentage of the trading system – or conventionally said: ” The Turtles were wrong the majority of the time!”. People want to be right all the time. Thus,  they want a system with a very high winning rate. However, trend following only guarantees a win rate of about 40%. This means that 60% of your trades will be losers. As a consequence cutting losses, sizing your bets and riding the big winners is of paramount importance.

For their entries the Turtles used two breakout systems. The shorter term system one (S1) indicated an entry by a four week (twenty days) break-out of the price. The position would be exited in case of a two weak break-out (10 days) of the opposite direction. These signals would be used for both long and short positions. For system one (S1) there was a filter however. The Turtles would not take the entry if the last breakout generated a winner. If the trade before the breakout was a loser the entry would be taken.If this made them skip an entry and the market would continue to trend system (S2) two could be used. This used a eleven weeks (55 days) break-out for entry signals and a four weeks breakout of the opposite site as a exit signal.

But the entries were not that important. What was important is risk management and knowing when to exit. For that a measure of volatility – N-  was conceptualized. N would be the average trading range (ATR) of the last twenty days. This was an important measure because it would allow the Turtles to buy more contracts of less volatile commodities and invest less in more volatile commodities. On each trade only 2% of trading capital would be risked which was equal to 2N – thus 2N would be the stop loss of each trade as well. If the trader would trade an account of 100000€. Buying apple breaking out at 100€ with an ATR of 8 the number of stocks that could be bought would be 100000*0.02 / 2*8 = 125 with a maximum draw-down of 2000€.

These were the main rules the turtles were following allowing them to achieve incredible returns. As Dennis said it is not the rules that makes a good trader. What is difficult is to stick to ones rules when the own account is down 50%. In this situation it is easy to abandon the own rules and give up. But being disciplined in these markets is what makes great traders.

Best,

Nils

 

Earnings Season

This year´s earnings season strongly impacted the stock-price development of various well-known companies. While the stock price of Facebook gaped up post earnings announcements the stocks of Apple and Twitter have been under severe pressure since their “disappointing” earnings announcements.

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Apple

  1. The RSI of 27.74 indicates that the stock is clearly oversold.
  2. The stock is trading below the 200, 50 and 110 days SMA. Especially the fact that it is trading that far beneath the 10 days SMA might make it snap back since the stock usually trades close to the 10 days SMA.
  3. The MACD indicates a bearish signal.
  4. The support level of 92.5 has been hold

Firstly, I am glad that I followed my rules and excited the stock early losing “only” 1% of my trading capital. Holding on to this loser would have been devastating. Secondly, the stock seems attractively priced at the current level. Both the RSI and the 10 days SMA indicate a counter movement. However, I will wait for the 10 days- 50 days crossover system before buying into the stock.

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Twitter

  1. The RSI of 30.24 clearly indicates that the stock is overbought and thus might signal buying.
  2. The stock is trading below the 200,50 and 10 days SMA and just as Apple is trading far below the 10 days SMA.
  3. Currently the stock trades at support levels of the all times low of 14.
  4. The MACD clearly indicates a bearish signal.

It will be interesting to see how the stock price of Twitter will behave in the time to come. Can we expect a recovery given the indicators or will the trend continue and completely smash the stock ?

Let´s see.

Best,

Nils