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TRADING SYSTEMS


KLA-Tencor Short-Term Mechanical Buy Signal

09/29/09 09:11:46 AM
by Donald W. Pendergast, Jr.

The entire technology sector has been near the top of the list in terms of relative strength for some time now. Here's a short-term swing trade buy signal for one of the biggest names in the semiconductor fabrication business.

Security:   KLAC
Position:   Buy

Even though the broad markets are likely to head lower during the next month or two, I still have to acknowledge a great, low-risk bullish setup when I see it. Some stocks actually buck the broad market trend, and KLA-Tencor (KLAC) has been chugging steadily higher for more than six months now along with the rest of the technology sector. Let's take a look at the daily chart and examine the key technicals (Figure 1).

FIGURE 1: KLAC, DAILY. Confirming a mechanical trading system's entry signals with other technicals such as money flows, trend strength, and cyclical tendencies may help system performance over the long term.
Graphic provided by: MetaStock.
Graphic provided by: WB Detrend EOD from ProfitTrader for MetaStock.
 
You may have already read my STOCKS & COMMODITIES March 2009 article, "Trade System Evaluation." In it, I made a convincing case for reversing the standard moving average convergence/divergence (MACD) trading system's entry and exit triggers to create a very stable, reasonably profitable trading system, one that performs in both bull and bear markets.

Well, the system has fired a buy signal today for KLAC; even better, we have several other technically confirming factors that make the decision to take a long entry here that much easier. First, note the strongly trending money flow patterns -- both short and long term -- as depicted by the Chaikin money flows (CMF) (34 and 100) at the bottom of the chart.

Next, the MetaStock CS Scientific expert advisor (gray ribbon near bottom of chart) is confirming that a long entry may be the preferred course of action. At the top of the chart, the dynamic duo of the detrend oscillator (blue histogram) and the double-smoothed stochastic (red line) may be suggesting that some sort of a daily cycle low has been put in. Finally, although it's not a prerequisite to taking this trade, note how close the price is to a breakout of the Gann buy swing line (green lines surrounding the price bars).

Trading this system according to the basic system rules is very simple: just buy at Tuesday's open and then hold the trade until the normal MACD system (available in just about every trading software package ever created) issues a buy signal and then exit the trade at the following session's open. For extra risk control, also consider placing a stop-loss 10% below your trade entry price, just in case the trade doesn't proceed as planned. In addition, due to the real possibility of a broad market reversal to lower levels, try not to risk more than 1% (or even less, maybe 0.75%) of your trading account equity on this trade. See Figure 2.

FIGURE 2: PROFIT SUMMARY. Sometimes, the simplest trading concepts yield the best outcomes. This system simply takes the normal MACD entry and exit triggers and reverses them with very surprisingly results.
Graphic provided by: Compuvision's TradeSim Enterprise.
 
Just for fun, here's how the reversed MACD system performed on the NASDAQ 100 component stocks from March 6, 2009, through August 26, 2009:

Starting equity: $25,000
Ending equity: $33,007
Commissions: $0.008 per share, with $1 minimum per side
Number of trades: 68
Wins: 51
Losses: 17
Average trade: $118
Profit factor: 6.16
Avg win to avg loss: 2.05
Maximum pct. drawdown: 2.18%
Consecutive winners: 14
Consecutive losers: 4

These are impressive statistics for a long-only system, but remember that the testing period covers one of the strongest recovery rallies in US market history. Still, it's good to know that this system averages about 64-68% winning trades over a 18-year period, through two bull and two bear markets of historic proportions.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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