Editor’s Note: Today’s article is penned by Nathan O. – our trend following expert. This week, we launched the Global Trend Capture service which offers trading signals based on Nathan’s proprietary trend following system.
The steel sector is an area that is improving both fundamentally and technically – so we asked Nathan to share any insight his system could shed on the group. It looks like a number of good trades are setting up!
If you’re interested in learning more about the Global Trend Capture service and how you can receive a risk-free 45 day trial, simply follow this link or click on the blue banner below. I’m confident that you will find Nathan’s comments insightful and applicable to both discretionary as well as mechanical traders.
Trade ‘em well!
Special Report: Steel Sector (Technically Speaking)
Recently I analyzed the homebuilder sector from a technical standpoint and showed my approach for rating funds through relative strength/weakness. The process typically takes only 15-20 minutes once I have narrowed down the choices. The “narrowing down the choices” process consists of essentially two methods.
Those two methods that help me make a decision are relative weakness or strength (which I covered) and time of consolidation. For time of consolidation I use weekly charts and we will look at two companies within the steel sector as listed below:
- AA (Alcoa)
- X (US Steel Corp)
Let’s examine each one, compare and I will give my feedback as I did with the homebuilder group.
I honestly believe if you wanted to trade with the least commitment of time (i.e. chart watching) trading break-outs from consolidation on weekly charts would be the way to go. I know it sounds too simple and boring for the average screen junkie, but this approach by itself is honestly a viable methodology.
It will become clearer within the charts as I point out the areas on interest. For practice you can pull up any ETF, currency or commodity to see the ebb and flow with your own eyes.
One of the primary benefits of weekly charts is the removal of noise. For consolidation purposes, weekly charts are a great tool to quickly see what phase the ETF is currently in. Even if you are a short-term trader, there is probably a benefit to seeing where what you are trading is at in the big picture.
For instance, if your price is hitting the bottom of consolidation on the weekly chart it may give a better probability of a long trade set-up (per your approach or system) vs. only focusing on the 5 minute or hourly chart to make your decision.
Even though I don’t make predictions or pretend to know where price is headed, if anyone asked me for an opinion on a sector, ETF or ETF within a sector the first thing I would do is pull up a weekly chart. Every bonus trade offered through the Global Trend Capture service was found by viewing weekly charts. I consider it one of the best screening tools available to trend traders.
TIME OF CONSOLIDATION
The tighter and longer the consolidation period the more interested I am in trading that chart. I like to see months of defined consolidation in as small of a range as possible.
When picking between competing ETF’s within a sector this is one of two primary methods I use in making my final decision. Let’s bring up the chart of Alcoa (AA) and mark some areas of interest:
The red boxes represent areas of consolidation. As you can see they don’t guarantee large moves or trends when broken; however, the pattern of consolidation to vertical movement repeats on almost every weekly chart.
Of the three, the second area of consolidation I would consider the best. This range is much tighter than the other two areas. I also marked declining swing highs (blue bars) to show the current downtrend on the weekly chart. Although I typically use daily charts for relative strength/swing high (or low) analysis, the fact that weekly swing lows are being broken tells us Alcoa is currently weak.
The low marked by the green arrow (if/when broken) would make the orange bar a valid swing high. The current price action on the weekly chart is not in consolidation and therefore I would not be interested at this time in a break-out entry (short or long) for this specific company.
Let’s look at US Steel Corp (X) and compare:
On a stand-alone basis we see that X has the same pattern of consolidation followed by vertical movement.
The first box is very similar to the current price action in terms of consolidation. It is also somewhat tighter and has my interest. In contrast to AA we see that US Steel has started putting in higher swing lows. If I were forced to enter a long position between the two stocks, I would choose X (upon a break above consolidation of course).
It is stronger on a relative basis and also is in a consolidation range vs. a downtrend with no consolidation like Alcoa. Price could very well break below consolidation, but my systems filter currently wouldn’t allow short trades on this stock.
You may be tired of me saying it, but there is no guarantee price will explode up if the upper range of consolidation is broken. These are simply tools I use to put the odds in my favor when choosing between competing instruments. Anything can happen, yet I would take the X long trade (if triggered) every single time over Alcoa based on relative strength and due to the consolidation factor.
Below is a weekly chart of CRBC (Citizens Republic Bank) that offered a trading opportunity to the Global Trend Capture subscribers (a trade we are currently in). You can see what drew my attention to this stock based on the consolidation below:
It doesn’t look as impressive on a weekly chart, yet the stock is up over 9.6% from our entry price. The stock had over 13-months of consolidation before finally breaking out of its trading range. We have profits locked in and will ride this one as far as it will take us.
While there is no way to avoid losses there are methods by which you can increase your odds/probability of a successful trade. These are a few ideas you can use in your own trading regardless of your approach. Feel free to contact me with any questions you have on this article at firstname.lastname@example.org