As we approach the end of April, I thought it would be interesting to review some of the ideas that we have generated in recent weeks using the Checklist Trading process. Whilst it has been challenging in parts, on the whole the performance has been positive with the majority of our Checklists keeping us on the right side of the action.
Of course, while we have full belief in our process, it is important to remember that our Checklists are not designed to provide signals and shouldn’t be traded as such (though they usually indicate the correct bias, timing always requires discretion). Thats why we try to demonstrate their correct application in the weekly Trading Club videos, which you can learn from to put into action yourself.
Each of the following Checklists are taken from the April Checklist Report, prepared on the 27th March for the month ahead (we will be updating these for the new May Checklist Report for Trading Club members next week). First up, lets take a look at market indicators.
The Market Indicators Checklist remained near neutral heading in to this month, suggesting mixed performance between 'risky' and 'safety' assets. Until recently this had strongly favoured owning risk assets (e.g. stocks) over ‘safe’ assets (e.g. government bonds), which clearly played out in the markets.
The following hourly chart showing the relative strength of the S&P 500 ETF (SPY) to the US Treasury ETF (UST) demonstrates how 'trading the range’ of this spread presented several profitable opportunities. The annotated arrows show long trades only when the spread was oversold, as the Checklist score was tilted slightly above neutral at +0.5 (you might have looked to also short overbought conditions, perhaps in half size, depending on your personal risk tolerance). This is one of the technical trading strategies that we discuss in our Million Dollar Traders Course, which you might want to check out.
Next up, US equities. Our Equity Market Checklist had shown a recovery to +2.5, from a weaker reading the month before, suggesting that stocks could be poised to make a comeback...
In the chart below, you can see the rally that coincided with this off the lows when the April Checklist was prepared around the 27th March. Admittedly, we did see a big black candle yesterday, but the general trend up until that point had been strongly positive (just as the Checklist showed).
In currencies the relative position of each currency in our ‘league table’ was unchanged on the previous month, with the US dollar on top, and Japanese yen at the bottom. The greenback has seen its score improve notably in the past 3 months, and as our Club members know, we have been watching patiently for price to rally (as the Dollar Index did, gaining over 2% - more on this in a moment). Elsewhere, the Canadian dollar was also seen as weak according to our process, but was supported during the month by the resilience in crude oil.
Putting this in to practice, this set up a really interesting setup at the beginning of the month in USDJPY. With the pair trading around 105, and the Checklist favouring a long dollar-yen position, it was great to see the rally to over 109 take place in just a couple of weeks...
In fact, as you can see over an intraday time frame, this strong uptrend provided several more opportunities for short term traders to load up on their position during pullbacks throughout the month.
USDCAD sold off during the first couple of weeks of April, despite our Checklist favouring the long side. However, a golden opportunity presented itself to patient traders when the pair reached an oversold condition on the daily RSI, which set up an ideal entry point for buying ahead of the sharp rally that followed (remember what I said earlier about timing?). So, by combining process with opposite price extremes, you can see how great trades are made...
Elsewhere, the was not much to see in the Euro, with EURUSD remaining in the range it has been in since February (save for dollar strength, the Euro side of the equation behaved broadly in line with the neutral score on our Euro Currency Checklist).
In commodities land, gold was scored neutral (or slightly negative for the pessimists out there!)...
On a daily chart, you can see the several failed attempts to break 1360, which we highlighted as a level to potentially sell this month in an earlier video...
The weakness was more apparent on a shorter time frame, with the arrows indicating points where a short setup provided several opportunities to sell the top side of the range as intraday fluctuations neared 1360. There were at least 4 trades here this month, all of which were profitable using our Checklist as our bias.
And just when you thought it couldn’t get any better… in line with the reality of trading, we end on a low point! Our Crude Oil Checklist showed a negative score this month, favouring shorts in crude, but as you can see in the accompanying chart, the market was news-driven and supported by geopolitical tensions.
We added oil to our short watchlist last week around $67, when it appeared to be approaching overhead resistance. The futures squeezed higher towards $70 before coming back towards our entry level, which is probably more of an opportunity for shorter term traders to get out at break even (’scratch’) and move on to another trade. Nevertheless, it will be interesting to see how this plays out in the medium term, as the market is rather extended. (The eagle-eyed amongst you might see how price initially conformed to our negative score with selling earlier in the month, but having gone on to make new highs, price was largely in conflict with our process this month - but such is trading!).
In summary, I have demonstrated several profitable opportunities presented by our Checklist process this month. Of course, nothing in reality is ever ‘perfect’ and there are no assurances in trading. What it does show is the value of doing thorough research importance of following a process to put the odds in your favour over the long run. If you would like to learn more with us, you can check out our Trading Club memberships and MDT Course.
I hope to see you for more next week!
James Helliwell | Chief Investment Strategist
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