0
FIGURE 10.1
 
    
NASDAQ Composite index-Daily
 
 
    
= —Proper Order: Db :
 
 
 
On the short side (Figure 10.2}, notice that in the downtrend from Marchthrough May 2000, there were Trend Qualifiers, such as wide-range barsdown, the moving averages had a negative slope, were in proper orderfor downtrends and there was Daylight between the highs and the mov-ing averages. Also notice there were setups such as Bow Ties, SimplePullbacks (SP) and Outside-Day Pullbacks (OD).IMarket Timing for Swing Trading 127
FIGURE 10.2
 
 
NASDAQ Composite ‘Index-Daily 05/24/2000" : :ng. Leaf foo BOW bere bets .... L5000 Faf use Tie SPO :: : / Snapback
        
 
 
Continuing in my discretionary analysis, I also look at the 50-day simpleand 200-day simple moving averages. I pay attention to these moving av-erages because they are well-watched by large institutions. In general,and unless I have some sort of other timing signal, I focus mostly on thelong side when a market is trading above its 50-day and 200-day movingaverages and focus mostly on the short side when the market is tradingbelow its 50-day and 200-day moving averages. I also watch for a transi-tion—that is, if a market is trading above both the 50 and 200 and thendrops below the 50, I question whether or not a new downtrend is begin-ning or if it’s simply a pullback.
 LL128 Chapter 10
FIGURE 10.3
 
NASDAQ 1 Composite Index-Dally_ 10/06/2000 |
 
Referring to Figure 10.3 below, notice that the Nasdaq traded well aboveits 50- and 200-day moving averages during its incredible run from Octo-ber 1999 to March 2000. Also notice that the bear market of 2000 beganwith a sharp drop below the 50-day moving average (b).
 
 
SYSTEM ANALYSIS
After completing my discretionary analysis, I then check to see if anysystems based on market indicators may be triggering. The followingthree systems: The Oscillator Swing System, Trin Reversals and CVRIll-Modified have historically shown a 60% to 70%-plus edge in predict-ing the stock market direction over the next three to seven days. Keep inmind that I do not trade these systems in and of themselves on a mechanical ba-sis. Rather, | combine them with my discretionary analvsis of the indicesto help put me on the right side of the market when initiating sw ingtrades. 
Market Timing for Swing Trading 129
OSCILLATOR SWING SYSTEM
The Oscillator Swing System (OSS) seeks to identify when the overallmarket is oversold (overbought) and seeks to go long (short) when themarket has an intraday reversal. The system uses the 3-10 oscillator. Thisoscillator, popularized by Linda Raschke, co-author of Street Smarts, issimply a three-period simple moving average minus a 10-period movingaverage.
I define an “overbought” market as when the oscillator has gone up forfive days in a row. Conversely, an “oversold” market is when the oscilla-tor has gone down for five days in a row. I then look for an open-to-closereversal. That is, if the market is oversold, I look to see if the market canreverse intraday and close above its open. Finally, like all patterns in thisbook, I avoid taking trades against the trend. Therefore, if the market is inan uptrend, as defined by having an ADX reading of 30 or higher and+DMI > -DMI, shorts are not taken. Conversely, if the market is in adowntrend, as defined by having an ADX reading of 30 or higher andthe -DMI > +DMI, then longs are not taken.
Here are the rules for the Oscillator Swing System:
For Buys
1. The market must not be in a downtrend, as defined by an ADX >= 30and —DMI > +DMI.
2. The 3-10 oscillator must have at least five consecutive down days.3. If the market closes above the open, go long on the close.
4. Exit on the close three to seven days later.
For Short Sales
1. The market must not be in an uptrend as defined by an ADX >= 30and +DMI > -DMI.
2. The 3-10 oscillator must have at least five consecutive up days.3. If the market closes below the open, go short on the close.4. Exit on the close three to seven days later.
Let’s look at an example before we review the results. 
130 Chapter 10
FIGURE 10.4
_———S&P 500 Index-CME(da 08/00- Daily ‘08/08/2000 - re eems beeeees a beceteeees 7 @. beleveeens proered cree : bese i beetesdeeeeces oe beveeee i 1540 ;
3-10 Ose. 21.73 6)
 
 
 
 
The ADX (not shown) in the June S&P futures is below 30, which sug-gests this market is not in a trend.
1. The 3-10 Oscillator of the September S&P futures rises for five consec-utive days.
The contract closes below its open. Go short on the close.Five consecutive days down in the 3-10 oscillator.The market closes above the open. Go long on the close.
Five consecutive days up in the 3-10 oscillator.
a 7 FF SN
The market closes below its open. Go short on close. Exit seven dayslater.
7. Five consecutive days down (ten total) in the 3-10 oscillator.
8. The contract closes above its open. Go long on the close. Exit sevendays later.Market Timing for Swing Trading 131
Here are the results over the past ten years using a continuous S&P fu-tures contract ($250 per point) and exiting on the seventh day. No stopsor money management were used.
Notice that the short-side performance is much less than the long side.This reflects the longer-term bull market. Should we go into a prolongeddowntrend, these numbers would likely reverse. 
132 Chapter 10
OSCILLATOR SWING SYSTEM: S&P 500 INDEX—CME-DAILY 01/05/1990-10/02/2000
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max. consec. winnersAvg # bars in winners
Max. intraday drawdownProfit factorAccount size required
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg lossMax consec. winnersAve # bars in winners
Max intraday drawdownProfit factorAccount size required
Performance Summary: All Trades
$207900.00$370587.50
14393
$18575.00$3984.811.22
107
~-$38550.002.28$38550.00
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade (win & loss)
Max. consec. losersAvg # bars in losers
Max. # contracts heldReturn on account
Performance Summary: Long Trades
$167537.50$259750.00
8359
$18575.00$4402.54445
97
~$38550.002.82$38550 .00
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
Performance Summary: Short Trades
$40362.50$110837.50
6034
$16075.00$3259.931.20
67
-$25400.001.57$25400.00
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
$0.00-$162687.50
50
~$20725.00-$3253.75$1453.85
37
1539%
$0.00~$92212.50
71%24
-$17975.00~$3842.19$2018.52
27
1435%
$0.00-$70475.00
57%26
~$20725.00-$2710.58$672.71
NO)
159% 
Market Timing for Swing Trading 133
TRIN REVERSALS
In Connors On Advanced Trading, Larry Connors published his TRIN Thrustsstrategy. This strategy seeks to go long when the NYSE TRIN indicator hada one-day thrust lower of 30% (or more) and seeks to go short when theTRIN had a one-day thrust of 30% or more higher. I found this system use-ful, especially when combined with other market indicators. However, inand of itself, I found the system generated too many signals for use inswing trading. Therefore, I decided to take the research one step further tofind a TRIN-based system that would generate fewer signals and showed anedge geared more towards the swing trader—that is, one that would predictmarket direction over three to seven days. Larry originally published my re-search in the October 1998, issue of his Professional Traders Journal. Specialthanks to’ Larry for allowing me to republish the system.
To those not familiar with the TRIN indicator, it was developed by Rich-ard Arms in 1967 and was originally called the Arm’s Index. The indica-tor is calculated by taking the ratio of Advancing Issues to Decliningissues and dividing that by the ratio of advancing volume to decliningvolume. This formula is illustrated below.
Advancing Issues / Declining IssuesAdvancing Volume / Declining Volume
 
If more volume is associated with advancing stocks than decliningstocks, the TRIN will be less than 1.0. Conversely, if more volume is asso-ciated with declining stocks rather than advancing stocks, the TRIN willbe greater than 1.00. Common Wall Street wisdom states that a TRINreading above 1.00 suggests a market is oversold and due for a bounceand that a reading below 1.00 suggests a market is overbought and dueto sell off. Be warned though, little money, if any, can be made by follow-ing “common Wall Street wisdom.”
Rather than look for absolute levels of the average TRIN, I define anoverbought market as when the three-day average of the TRIN is hitting20- to 30-period lows and an oversold market as when the three-day av-erage of the TRIN is hitting 20- to 30-period highs. As you likely know,just because a market is oversold doesn’t mean it can’t go lower. And,just because a market is overbought, doesn’t mean it can’t go higher.Therefore, once the three-day average of the TRIN is at one of these ex-I134 Chapter 10
tremes, I then wait for the moving average of the TRIN to turn. This sug-gests that a major reversal has begun to take place from a marketextreme.
Here are the rules for TRIN reversals:For Buys:
1. The three-day simple moving average of the NYSE TRIN must makeat least a 30-period high (shorter periods, say 20-period highs, willgenerate more but less accurate signals).
2. If today’s three-day moving average of the TRIN is less than yester-day’s (a “flip down” in the moving average) then buy the market onthe close.
3. Exit three to seven days later.
For Short Sales:
1. The three-day simple moving average of the NYSE TRIN must makeat least a 30-period low (shorter periods, say a 20-period low, will gen-erate more but less accurate signals).
2. If today’s three-day moving average of the TRIN is greater than yes-terday’s (a “flip up” in the moving average) then sell short the marketon the close.
3. Exit (on the close) three to seven days later.Market Timing for Swing Trading 135
Here we have several back-to-back examples using the system to timethe December 1999 S&P index futures.
FIGURE 10.5
S&P 500 In: dex-GME(da'12/99 Daily 10/29/1 999 ves ~ £4420oH Fo Bc Lasgo{! PNR tT
TRINW/Thres day SHA hn wb iponn
 
Created with SuperCharts by Omega Research © 1997
 
 
1. On 08/30/1999, the three-period moving average of the NYSE TRINindicator makes a 30-period high. On 08/31/1999, the moving averageturns down (today’s average is less than yesterday’s).
2. Buy the market on the close.3. Exit on the close seven days later.
4. On 10/06/1999, the three-period moving average of the TRIN makes a30-period low. On 10/07/1999, the moving average turns up.
5. Sell short the contract on the close.6. Exit seven days later.
7. The same day, 10/15/1999, the TRIN average turns down after hittinga 30-period high, signaling a buy signal.
8. Exit seven days later.136 Chapter 10
Here are the results using a continuous S&P futures contract ($250 perpoint) over the last ten years. Exits were a fixed exit on the close of theseventh day. No stops or money management were used.
Notice that the system historically has had a better than 70% accuracyrate on the long side and also shows some promise on the short side bybeing historically 58% accurate. These numbers reflect the longer-termbull market and would likely reverse when we encounter a prolonged
bear market. 
Market Timing for Swing Trading 137
TRIN REVERSALS S&P 500 INDEX—CME-DAILY 01/02/1990-10/02/2000
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec, winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winners
Avg # bars in winners
Max intraday drawdownProfit factorAccount size required
Performance Summary: All Trades
$201850.00$358387.50
13588
$35125.00$4072.591.22
97
-$23975.002.29$23975.00
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
Performance Summary: Long Trades
$137712.50$200475.00
7352
$16375.00$3855.291.29
67
~$17675.003.19$17675.00
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
Performance Summary: Short Trades
$64137.50$157912.50
6236
$35125.00$4386.461.22
76
~$32800.001.68$32800.00
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
$0.00-$156537.50
-$13100.00-$3330.59$1495.19
47
1842%
$0.00-$62762.50
71%21
-$7900.00-$29838.69$1886.47
27
779%
-$0.00-$93775.0058%26-$13100.00
$3606.73$1034.48
47
196%
  
138
Chapter 10
CVR III—MODIFIED
The Chicago Board Options Exchange Volatility Index (VIX) measures theimplied volatility (a measurement of cost) of the short-term (30 days)at-the-money OEX options. Market sell offs are normally associated withhigh VIX readings as panic drives the cost of these options higher. Con-versely, during a gradual rising market, the VIX tends to drop as traders be-come complacent toward the market and option prices fall. Therefore, theVIX, in a sense, is a measurement of fear in the market. High readings (sug-gesting panic) normally occur near market bottoms and low readings (sug-gesting compliancy) normally occur near market tops. This makes the VIX agreat contrary indicator.
Larry Connors, CEO of TradingMarkets.com, has done extensive researchon using the VIX to predict short-term stock market moves. His ConnorsVIX Reversal (CVR) systems are based on the fact that volatility is mean(average) reverting. In other words, periods of higher-than-normal vola-tility are normally followed by lower or more average volatility. Con-versely, periods of lower-than-normal volatility are normally followed byhigher or more average periods of volatility. His CVR systems essentiallylook to position when the VIX reaches an extreme and begins to reverse
In 1997, while conducting research with Larry for Connors On AdvancedTrading, Larry and | discovered that once the VIX was 10% or more awayfrom its moving average, the stock market had a nearly 70% chance of re-versing over the next three-to-seven days as the VIX returned to moreaverage levels. Based on this research, we co-created the Connors VIXReversal ITI (CVR III).
I’ve taken this research one step further and require that the VIX not onlybe at least 10% away from its moving average but must also reverseintraday. This suggests that the market is not only at an extreme but alsohas begun to reverse from that extreme. This “intraday reversal” is sim-ply defined as the VIX closing below its open (suggesting volatility hasbegun to implode) for buys or for short sales, the VIX must close aboveits open (suggesting volatility has begun to increase).
Here are the rules for CVR IIJ-Modified:Market Timing for Swing Trading
For Buys1. Today, the low of the VIX must be above its 10-day moving average.2. Today, the VIX must close at least 10% above its 10-day moving aver-age.3. Today, the VIX must close below its open.4. Once rules 1 through 3 have been met, buy the market on the close.5. Exit (on the close) the day the VIX trades (intraday) below yesterday’s
10-day moving average (reversion to the mean).
For Short Sales
1.2.
Today, the high of the VIX must be below its 10-day moving average.y: 8 y 8
Today, the VIX must close at least 10% below its 10-day moving aver-age.
- Today, the VIX must close above its open.
Once rules 1 through 3 have been met, sell short the market on theclose.
Exit (on the close) the day the VIX trades (intraday) above yesterday's10-day moving average (reversion to the mean).
139I140 Chapter 10
FIGURE 10.6
 
 
 
 
1. The low of the CBOE Volatility Index (VIX) is greater than its 10-daymoving average.
2. The VIX closes below its open and its close is more than 10% above its10-day moving average. This suggests the VIX has reached an extremehigh and has begun to reverse.
3. Buy the market on the close.
4. The VIX trades back below its moving average suggesting that volatil-ity has dropped to more normal levels.
5. Exit the market on the close.6. The high of the VIX is below its 10-day moving average.
7. The VIX closes above its open and its close is more than 10% below its10-day moving average. This suggests the VIX has reached an extremelow and has begun to reverse.
8. Go short on the close.IMarket Timing for Swing Trading 141
9. The VIX trades back to its 10-day moving averages, suggesting thatvolatility has risen to more normal levels.
10. Exit the market on the close.
Here are the results over the last seven years using a continuous S&P fu-tures contract ($250 per point). No stops or money management wasused. Historically, the system has shown that the market has a 76%chance of reversing over the next three days. Like virtually all mechani-cal systems over the past few years, the results on the long side (84% cor-rect) are much greater than those on the short side (56% correct). Again,this reflects the bull market of the 1990s. This will likely reverse when weencounter a longer-term bear market.142 Chapter 10
 
CVR3-MODIFIED S&P 500 INDEX—CME-DAILY 04/26/1993-10/02/2000
Performance Summary: All Trades
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg loss
Max consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
Total net profitGross profit
Total # of tradesNumber winning trades
Largest winning tradeAverage winning tradeRatio avg win/avg lossMax consec. winnersAvg # bars in winners
Max intraday drawdownProfit factorAccount size required
$150512.50$203750.00
6348
$21300.00$4244.791.20
123
~$33175.003.83$33175.00
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade (win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
Performance Summary: Long Trades
$105937.50$146087.50
4538
$21300.00$3844.410.67
103
~$28400.003.64$28400.00
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade(win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
Performance Summary: Short Trades
$44575.00$57662.50
1810
$10800.00$5766.253.52
63
~$9825.004.41$9825.00
Open position P/LGross loss
Percent profitableNumber losing trades
Largest losing tradeAverage losing tradeAvg trade (win & loss)
Max consec. losersAvg # bars in losers
Max # contracts heldReturn on account
$0.00-$53237.50
15
-$19275.00-$3549.17$2389.09
36
1454%
$0.00-$40150.00
84%7
-$19275.00-$5735.71$2354.17
17
373%
$0.00-$13087.5056%8-$5225.00~$1635.94$2476.39
uh
454% 
Market Timing for Swing Trading 143
WALK-THROUGH
Now that I have defined the steps I go through to gauge the overall mar-ket, let’s walk through a period in early January 2000 when we had mul-tiple buy signals.
FIGURE 10.7
 
 
 
 
 
After trading well above its 50-day and 200-day moving averages forquite some time, the Nasdaq begins to correct. On January 5, 2000, theNasdaq Composite forms a third back-to-back (1), (2), (3) Trend Knock-out (TKO).I144 Chapter 10
Looking to the S&P 500, I see that it has probed below its 50-day movingaverage but reversed and rallied to close right at the average.
FIGURE 10.8
 
S&P 500 Stock Index- Daily” 01/05/2000 (C=1402.10 DOz a cose ctisenbeeeiedbcee opel vos ey 1460 F
 
 
 
 Market Timing for Swing Trading 145
On the close of trading of 01/05/2000, a CVR III-Modified buy signal istriggered.
FIGURE 10.9
 
Volatility Index (Cboe)-Daily 01/08/2000.
  
 
 
 
1. The low of the VIX is above its 10-day simple moving average.
2. The VIX closes 10% above the 10-day simple moving average (rule 2)and closes below its open (rule 3).I146 Chapter 10
An Oscillator Swing System buy signal is also triggered on the close of01/05/2000:
FIGURE 10.10
 
S&P. 500 Index. -GME(aa.03/00-Dally. ath 1500 |2 pe | |
 
 
 
1. The S&P futures are not in a downtrend by a having low ADX read-ing of 18 (not shown).
2. The 3-10 oscillator drops for five consecutive days.
3. The S&P futures close above their open.Market Timing for Swing Trading 147
On 01/05/2000, the three-day average of the TRIN suggests that a buysignal is near:
FIGURE 10.11[ ]
 
 
 
 
 
1. The three-day average of the TRIN hits a 30-day high.
*
2. The TRIN drops sharply, suggesting that we could get a buy signal (aflip down in the three-day average of the TRIN) within a day. 
148 Chapter 10
Now that we know the overall market is set up to rally, we take the nextstep and begin looking for the strongest sector(s).
FIGURE 10.12
 
| AMEX Biotech h Indlex-Daily 01/05/2000 C=364. 22
  
 
 
 
1. The AMEX Biotech Index (BTK) is in a strong uptrend.2. The index has a sharp sell off.
3. On 01/05/2000, after probing lower, the index rallies to close well.This intraday reversal suggests the correction is over and the sector ispoised to resume its strong uptrend.Market Timing for Swing Trading 149
Now that we have the overall market and sector behind us, we look forindividual stocks in the sector that are set up.
FIGURE 10.13
 
 
 
 
1. Alexion Pharmaceuticals (ALXN), a biotech, is in a strong uptrend.2. The stock pulls back.
3. On 01/05/2000, after gapping lower, the stock reverses to close well.This intraday reversal suggests the correction is complete and thestock is poised to rally. We will look to go long tomorrow at 29 3/16,1/16 above today’s high.LL150 Chapter 10
Gilead Sciences (GILD), a biotech, sets up as a Bow Tie (Chapter 7).
FIGURE 10.14
 
 
 
 
 
1, The moving averages converge