Book Reviews, Trading

Book Review of Market Evaluation and Analysis for Swing Trading by David Nassar and William Lupien

The full title of this book is Market Evaluation and Analysis for Swing Trading: Timeless Methods and Strategies for an Ever-Changing Market by David S. Nassar and William S. Lupien (2004).

David Nassar founded MarketWise (now defunct, old CXO review here), and William Lupien is the former chairman and CEO of Instinet.

Two things that I picked up from this book are the double divergence (I liked the fact that the book covered the two types of divergences compared to just one), and using three moving averages to determine what stage an instrument is in. The moving average stage analysis looks interesting, something to check out when I’ve some time.

The book is written in a somewhat conversational way that leads to chunky amounts of text, but not in a more succinct or point form to communicate points clearly. That leads to some problems:

  • Various strategies were presented using a single example of that strategy. Reading through a narrative of a single example doesn’t work in trying to get the key rules of a strategy.
  • Without clear bullet points, there would be confusing bits here and there. E.g in the moving average crossover strategy, the stop for the long trade is at “50 percent of the range between the prior day’s open and close or at the prior day’s open” while the stop for the short trade is “Again, protective stops should be placed above the prior day’s close”. Those are three different things.

The book also tries to cover more breadth, but sacrificing depth. As such, experienced traders may not get as much out of this book.

True Ranges

  • Bullish True Range = new day (higher) high – prior day high
  • Bearish True Range = new day (lower) low – prior day low

Moving Average Lengths (Short, Intermediate, Long)

  • Long-Term Investors: 50-day, 100-day, 200-day
  • Intermediate-Term Traders: 20-day, 50-day, 100-day
  • Short-Term Swing Traders: 10-day, 20-day, 50-day
  • Micro Day Traders: 20-period, 50-period, 100-period (10-min chart)

Divergence Types

  • Bullish
    • Type 1 (Bottom): Price lower lows, Stochastic higher lows
    • Type 2 (Continuation): Price higher lows, Stochastic lower lows
    • Double Divergence:
      • Three swing lows A, B, C for price, and efg for Stochastic.
      • B is higher than A, so higher low. C is lower than B, so lower low. Also C is lower than A, so C is lowest swing low.
      • f is lower than e, so lower low. g is higher than f so higher low. Also g is higher than e, so g is the highest low.
      • Essentially, A, C, and eg, is a Type 1 divergence. A, B, and ef, is a Type 2 divergence. B, C, and fg, is a Type 1 divergence.
  • Bearish
    • Type 1 (Top): Price higher highs, Stochastic lower highs
    • Type 2 (Continuation): Price lower highs, Stochastic higher highs
    • Double Divergence:
      • Three swing highs A, B, C for price, and e, f, g for Stochastic.
      • B is lower than A, so lower high. C is higher than B, so higher high. Also C is higher than A, so C is highest swing high.
      • f is higher than e, so higher high. g is lower than f so lower high. Also g is lower than e, so g is the lowest high.
      • Essentially, A, C, and e, g, is a Type 1 divergence. A, B, and e, f, is a Type 2 divergence. B, C, and f, g, is a Type 1 divergence.

Buying on Pullbacks using Multiple Time Frames

  • In-line with primary trend
    • Enter in the direction of the primary trend, i.e. all MAs (10-, 20-, 50-day MAs) should be heading in the same direction.
  • Wait for pullback
    • Enter after a stock in a stage 2 uptrend (daily chart) experiences a low-volume pullback.
  • Enter when intraday chart goes to stage 2
    • Look at 15 days’ worth of 10-min bars, wait for the stage 4 downtrend to complete, then let the stock enter a stage 1 accumulation, and enter just as the stock enters a new stage 2 uptrend in the intraday time frame.
    • Enter when the stock price > 20-period MA > 50-period MA > 100-period MA.
  • Stop
    • Place protective stops just under support levels on the 10-minute chart as soon as we enter the trade.
    • Look at 45 days of 60-min bars to identify S/R levels for profit objectives and R/R estimation.

Moving Average Cross Strategy

  • Long
    • Price > 50-day MA, Price > 100-day MA, overall market in decline
    • Trigger buy when on the 5-day, 5-min chart, 10-period MA crosses above 20-period MA
    • Entry should be above the prior day’s close but below the prior day’s high to allow you to profit between the prior day’s close to high.
    • Place stop at 50% of the range between the prior day’s open and close, or at the prior day’s open.
  • Short
    • Price < 50-day MA, Price < 100-day MA, overall market in up swing
    • Trigger short when on the 5-min chart, 10-period MA crosses below 20-period MA
    • Entry should be below the prior day’s close but above the prior day’s low.
    • Place stop above the prior day’s close.

Using the MACD

  • Use MACD line for longer-term horizon, not for short-term trading.
  • Use the MACD Histogram for short-term, not for longer-term.

Identifying the Stages Using Moving Averages

  • Definition
    • x/y/z means x-day MA >= y-day MA >= z-day MA
    • High breakpoint = lesser of (a) high closing price of the last 45-days, or (b) high closing price of the current stage if the current stage is stage 1.
    • Low breakpoint = greater of (a) low closing price of the last 45-days, or (b) low closing price of the current stage if the current stage is stage 3.
    • Stage x-1 = early Stage x
    • Stage x-2 = mid Stage x
    • Stage x-3 = late Stage x
  • 50/10/20 = Stage 1-1
  • 10/50/20 = Stage 1-2
  • 10/20/50
    • Previous Stage == 1
      • Close <= High breakpoint = Stage 1-3
      • Close > MA10 = Stage 2-1
      • Close > MA20 = Stage 2-2
      • Else Stage 2-3
    • Previous Stage == 2
      • Close > MA10 = Stage 2-1
      • Close > MA20 = Stage 2-2
      • Else Stage 2-3
    • Previous Stage == 3 or 4
      • Stage 1-3
  • 20/10/50 = Stage 3-1
  • 20/50/10 = Stage 3-2
  • 50/20/10
    • Previous Stage == 1 or 2
      • Stage 3-3
    • Previous Stage == 3
      • Close >= Low breakpoint = Stage 3-3
      • Close < MA10 = Stage 4-1
      • Close < MA20 = Stage 4-2
      • Else Stage 4-3
    • Previous Stage == 4
      • Close < MA10 = Stage 4-1
      • Close < MA20 = Stage 4-2
      • Else Stage 4-3

Take Advantage of Tax Loss Selling and Window Dressing

  • Phenomenon
    • Statistics show that starting in mid-December each year, small-cap stocks begin to coil themselves into a position to dramatically outperform large-cap stocks early in the new year. Tax loss selling is the sole reason for this phenomenon.
    • With tax pressures gone and the wash sale rule in effect, investors who wanted out of the trade are out and will remain so for the 30-day period. Once this period ends, many participants will re-enter the market to buy the same issues they lost money on.
    • For the past 50 years, November, December, and January have constituted each year’s best 3-month span.
    • Traders do best to lean into small-cap positions starting in mid-December to take advantage of the January effect.
  • Search criteria for candidates that are 50% losers and prone to being oversold. Also the $5 mark is where stocks become marginable and optionable.
    • 52-week high >= $10
    • Current price <= $5
    • Current price <= 1.1 * 52-week low
    • Market cap >= $25M
  • Use a time stop
    • When a spring uncoils, it will happen very fast or not at all. Therefore, if we don’t see a notable change within the first 15 to 30 days, these issues are excised, usually with little or no loss.
  • Sizing
    • No more than 15% of your trading capital to this strategy.

-END-

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