Last week I reviewed why I have gone from negative to a positive viewpoint on Amazon (AMZN). Week-over-week, Amazon has moved from $336 to $327.26. This drop, however, does not concern me, and I remain positive on the name.
This week we are going to review a concept that we first discussed back on Sept. 5: bias
Bias is a very simple idea. Either you want to be long stocks, or you want to sell/short stocks. And right now, this concept is worth revisiting using gold, which has closed in positive territory for the past several days.
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Traders and investors often go wrong by fighting the bias. They try to own stocks when the bias is negative or short stocks when the bias is positive. The result is low-probability trades.
Your particular bias depends on your time perspective. An intraday trader may only look ahead 10 minutes, while long-term investors like Warren Buffett prefer monthly charts.
My friend Phil Erlanger has spent years explaining bias in his writings, videos and Erlanger Chart Room software.
Read this excerpt from Bloomberg’s “New Frontiers in Technical Analysis: Effective Tools and Strategies for Trading & Investing.”
Phil wrote a chapter that cuts straight to the point:
“Failing to determine bias is why most portfolio managers and traders go through periods where they dramatically underperform.
“The concept of Bias is such a simple one, but it is the critical step that most fail to consider. The chances of a positive long-term performance are greatly reduced without a disciplined approach to deciding which side of a market to trade.
“We think of bias as the ‘Big Picture.’ Is the condition of a market favorable to long trades or short trades? Generally, bias indicators are in a larger time frame than that which is used to trigger into a trade. For instance, indicators in a weekly or monthly interval are used to determine bias if a trader is using daily data to buy or sell.
“Bias indicators are designed to specifically answer the question of taking long or short opening positions. If short-selling is not a tactic that will be used, then the bias answers the question of taking a long or neutral stance in a particular market.
“Trading or investing in the direction of bias indicators is our first strategic step.”
Later in the chapter, Phil described how he tracks bias.
“The Displaced Moving Average Channel (DMA) is one of those indicators that, though simple in construction, is so powerful in application. A ‘displaced’ moving average (DMA) is simply a normal moving average shifted to the right or left. A displaced moving average can be computed based upon a stock’s closing price, high price and/or low price.
“The DMA Channel involves two DMA averages. These two averages form a channel that makes any trend changing event clear, as well as illustrates the strength of a trend under way. The first average is a 6-period average of price highs displaced 4 places to the right. The second is a 6-period average of price lows displaced 4 places to the right.
“The DMA channel can be used on any time interval, but there must be price high and price low data available for each interval.”
The above chart of the S&P 500 is used for descriptive purposes and also includes a DMA Oscillator that is green if the price is above the DMA Channel, yellow if it’s in the DMA Channel and red if it’s below the DMA Channel.
“A positive bias reflects times when only long trades are considered. If a price moves above the DMA Channel, then the bias is positive. However, using the DMA Channel as a bias should be confined to intervals larger than one uses for triggers.
“For instance, if you are trading an index using triggers based on daily data, use weekly or monthly data to determine the bias. If you are trading on an intraday basis, than the daily DMA Channel can be used to determine bias.”
(If you’re interested in seeing how James DiGeorgia and I trade indexes, and how we’ve been able to achieve a 95% win-rate in 2014, click here to learn more.)
Since we like to trade gold and its ETF, the SPDR Gold Trust (GLD), it makes sense to look at a weekly and monthly chart of GLD, as we like to use daily triggers to time buys and sells.
Last week GLD moved above its weekly DMA Channel. Note it turned negative the week of April 14. GLD moved into the channel but never closed above it to finish out a week.
Erlanger uses the end of the period to mark bias changes — instead of a signal that turned mid-period. I think this is a smart approach.
GLD is intriguing here because the weekly bias just turned positive for the first time in two months.
I’m amused how so many gold bugs are now getting bearish, saying the bounce from last week is not for real.
I should note that the monthly DMA Channel has yet to turn positive on GLD. Confirmation will come in the next couple weeks if the current move accelerates.
Those with a more-aggressive style can use a weekly DMA Channel to determine bias, and use the monthly to confirm it.
Remember, the shorter the time frame, the more signals you will get. That means you face greater likelihood of getting whipsawed.
The monthly DMA Channel generated six signals since 2005 on GLD. Meanwhile, the weekly DMA Channel generated 38 signals on GLD.
It is very easy to think gold or GLD has moved too far, too fast and needs to pull back. What matters are the indicators, though. And in the near term, they are looking favorable for higher prices.
Over time, the “technical trader” will outdistance the “opinionated trader” who lacks a system. To learn more about James’ and my unique “Alpha Intelligence” trading system, and its remarkable win-rate, simply click here now.
Cheers & Hit ‘Em Straight,
P.S. We started looking at the SPDR S&P 500 Semiconductor ETF (XSD) last month as a potential buy idea. Four weeks ago Thursday it opened at $70 and is currently at $74.72, up $4.72 or +6.72%, so it has moved up nicely since then.
XSD has pulled back week-over-week, as it was up +8.75% at this time last week. So, if you want to add this as new position, this could be a good opportunity to do so.
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