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TRADING SYSTEMS


Walgreen Goes Long

12/18/09 09:04:05 AM
by Donald W. Pendergast, Jr.

Walgreen, one of the largest retail pharmacy outlets in the US, is offering short-term traders an interesting long setup in its common stock.

Security:   WAG
Position:   Buy

The most attractive feature of a mechanical trading system is that it can help you develop self-discipline and patience, two essential characteristics that are a must for every successful trader. Currently, a very simple short-term oscillator system —long only— has issued a long entry signal for Walgreen's (WAG) common stock, and given the healthy long-term relative strength of this stock, this may be a worthwhile setup for those interested in a relatively short holding period. Look at WAG's daily chart (Figure 1) first:

FIGURE 1: WAG, DAILY. Buying a strong relative strength stock near key trendline support is a fairly low-risk trading strategy, particularly if a proven mechanical system is simultaneously issuing a buy signal.
Graphic provided by: MetaStock.
 
Perhaps the most striking feature of this daily chart is the perfect trendline that has acted as meaningful support for WAG shares on several occasions during 2009's megarally. Given the bullish short- and long-term money flows (Chaikin money flow (CMF)(34) and (144), respectively) in WAG, the appearance of a short-term oscillator buy signal right near a well-established uptrend line appears to be about as low risk as they come in the world of short-term trading. The system used here is similar to a short-term stochastic (say, a fast stochastic set at five to seven periods) and tends to generate trades that last for three to seven trading sessions on average before either hitting the profit target (the upper trigger line of the short-term oscillator, set at about 80-85) or stopping out for a loss. WAG also features very good relative strength against the Standard & Poor's 500, so all in all this looks like a good trade for impatient types who like to see trades resolve in a minimum of time.

FIGURE 2: WAG RESULTS. No rocket science here, just the backtested results of a simple short-term oscillator pullback system, traded from the long side only over the past 12 months. WAG came through very nicely, with an 8-3 W/L ratio and $855 in gross profits (without slippage or commissions).
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Enhanced System Tester v.11.
 
Figure 2 shows the backtested results for this simple system, traded over the past 12 months on a variety of large-cap stocks. Walgreen's shares did pretty well when traded on a long-only basis, winning on eight of 11 trades. The average win/average loss ratio is a bit skinny, coming in at 0.95 to 1, but it still made decent money — about $855 before commissions and slippage on a $10,000 initial capital allocation per trade. An 11% initial stop-loss was used for each trade, but no trailing stop was deployed.

The rest of the stocks in the test also did well, with WAG performing about average within the group. Keep in mind that this is a long-only system and that we've had an inordinate amount of bullish trending moves in the broad market, especially over the past nine months, so don't expect to get the same kind of returns if the market goes into another bear market phase during 2010. I don't recommend that the average trader sell stocks short, but if that's what you want to do, please backtest, forward test, test, and then test your strategy again to make sure it will hold up in the real world when real money is on the line. By the way, this backtest was performed with the enhanced system tester that comes standard with MetaStock v. 11.



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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