Stops and Targets

I have received several private messages recently asking me about the range envelope and stop/reverse line relationships at Stops and Targets.  Since this is a topic that may be of interest to many, I have decided to make a single (very long) post.

So get comfy, here goes…

 

 

Stops and Targets consists of three major analysis systems that are running simultaneously.

  1. range trading
  2. trend following
  3. top and bottom spotters

The screen capture above shows where each indicator’s current data is displayed on the Stops and Targets Summary tab.

An easy way to remember ‘which one is which’ is to find the three (outlined in red on the image above) words: ‘range’, ‘trend’, and ‘spotter’.

Each individual system has its own time to shine depending on the current market structure.  Mercifully, Stops and Targets’ algorithms figure all of that out for us automatically, but all three system’s parameters are always displayed together on the Summary tab.

 

Today I want to talk about the components in two of the three systems: range envelopes from the range trading system and the stop/reverse lines found in the trend following system.  (I will leave a detailed discussion on top and bottom spotters for a later date)

Let’s start by defining terms for clarity…

A trending market is one where we see a series of higher lows and higher highs (bullish) or a series of lower highs and lower lows (bearish).

A rangebound market is one where price action is constrained inside of a trading range.

To emphasize… trending markets are going someplace and dragging both range boundaries in the direction of the trend; whereas, rangebound markets are mostly moving sideways and the range boundaries typically don’t move, except to contract.

It is critical to understand exactly which kind of market is in play–because trend following strategies that work wonderfully in a trending market can be annihilated inside of a trading range, and vice versa.

 

The best place to quickly find whether a particular timeframe is trending or rangebound is in the range envelopes section (see screen capture inset above).  There are arrow indicators to the left of the range envelope for each timeframe.  Sideways arrows (↔) () denote a range bound market and up (↑) or down () arrows  mark a trending market.

For the sideways arrows, red () shows a bearish bias and green (↔) a bullish bias inside of the trading range.  The bias in a rangebound market is determined by current price in relation to the stop/reverse line.

 

To further clarify the difference between a trending market versus a rangebound market… one can also look at the stop/reverse lines (see the screen capture inset above) in relation to the trend start price.  If the stop/reverse line is equal to the trend start price then it is a rangebound market.  If the stop/reverse line is greater than the trend start price then we have a trending bull market.  If the stop/reverse line is less than the trend start price, then we have a trending bear market.

  1. The long-term stop/reverse line of 2778.75 is equal to the trend start price and the range envelope section (see previous image) shows 
  2. The intermediate stop/reverse line at 2818 is less than the trend start price of 2870 and range envelope section shows (bearish trend)
  3. The short-term stop/reverse line at 2723.75 is greater than the trend start price of 2656.25 and the range envelope section shows   (bullish trend)

 

*Important!  The short-term algorithms are now calculated differently from the intermediate and long-term.  The short-term is now much more aggressive and I should point out something here that might help to clarify how the logic and strategy differs from long and intermediate timeframes to the short-term…

The short-term timeframe now moves trailing stops aggressively at the close of each daily bar to lock in daily gains from any short-term trending move.

Once there is a daily bar LOW that is HIGHER than the stop/reverse line, the stop/reverse line immediately moves higher with that low (higher lows indicate a bullish trend).

 

The opposite is true in a short-term bearish trend (a daily bar HIGH that is LOWER than the stop/reverse line immediately moves the stop/reverse line lower).

Remember my definition of a trend earlier… a bullish trend consists of HIGHER LOWS and higher highs and a bearish trend features LOWER HIGHS and lower lows.  See how that works?  Re-read this part if necessary.  It is important to understand that the range envelope boundaries move the intermediate and long-term stop/reverse lines, but the short-term stop/reverse line moves immediately on a daily bar close when either a lower high or higher low occurs relative to the existing stop/reverse line.  The stop/reverse line will therefore never be equal to a range boundary in the short-term.

The aggressive short-term trailing stop movement is VERY helpful–not only for short-term traders, but also to help establish a new position for higher timeframes with minimum initial risk.  The idea is to catch a ride on a fast short-term trending move and to aggressively move stops to maximize profit and to know exactly when to get out when that short-term trend flips whether it be in a trending or a rangebound market in higher timeframes.

So, to reinforce that point…stop/reverse lines in long-term and intermediate timeframes can only be moved by the associated range envelope.  The short-term stop/reverse line, however, is moved IMMEDIATELY whenever there is either a daily bar higher low or lower high relative to the stop/reverse line.  A cross of the short-term stop/reverse line is the most aggressive trading signal that most automated black box algorithms tuned to daily bar trading will use.  So, if you ever wondered what triggered those massive reversal rallies–then wonder no more.  For aggressive traders–keep a close eye on that short-term stop/reverse line to consistently stay out of trouble when the market rebounds from a pivot reversal on either side.

See how all that works?  The better one understands how a tool works–the more effectively that tool can be utilized.  Stops and Targets is indeed a wonderful and extremely useful tool–and you, of course, are the craftsman 🙂

 

So, now that we are all up to speed on exactly how range envelopes and stop/reverse lines work, let’s take a close look at the current summary (as I type at 11:22 PM) for the S&P 500 Futures at Stops and Targets…

 

 

 

In our screenshot example of the S&P 500 Futures above we can see in the ‘range envelopes’ section that:

  1. The long-term timeframe is in a trading range between 2603 and 2947 with a bearish bias ().
  2. The intermediate timeframe (monthly) is trending bearish () below 2818
  3. The short-term (weekly)  is currently trending bullish () above 2723.25

 

The sorted order of the stop/reverse lines determine the Multitrend Rating.  In this case we have intermediate over long over short.  That yields a BULL 6 rating from Stops and Targets:

E-Mini S&P 500 Futures Option is rated BULL 6, indicating a short-term rally in an intermediate bear market.

 

Taking that information together we can see, at a glance, that the broad market is currently experiencing a short-term rally that started at 2656.25 on 26-Nov-18.  That rally is occurring inside of an intermediate trending bear market whose stop/reverse line is currently at 2818.  Both of those are happening inside of a long-term trading range between 2603 and 2947.

Sounds like a jumbled up mess, right?

No, not at all.  That is just the ways things are at present as the broad market struggles to recover from the massive September takedown.  This kind of mixed market is not clear at all for most pundits… but it’s all crystal clear to us, thanks to Stops and Targets!

The higher timeframes always trump lower–so the most important factor to consider is the long-term trading range, which is currently between 2603 and 2947.  In my recent posts I have pointed out emphatically the importance of 2603 going forward.  It’s no surprise then that we are seeing a short-term rally underway from near the bottom (2603) of the long-term trading range.

However, this short-term rally still has some work to do in order to overcome an intermediate trending bear market.

In the short-term timeframe, Stops and Targets will continue to push the short-term stop/reverse line higher with each new higher low on the daily bars–but when price eventually crosses underneath the last higher daily bar low the short-term will flip to bearish.  That is VERY important, so be sure to watch the short-term stop/reverse line–as that is what is in play until/unless the market can flip the intermediate stop/reverse line higher and thereby break the intermediate bearish trending pattern of lower highs and lower lows.  Do you see it now?  Short-term rally in an intermediate bear market.  Hopefully some of you are now saying, ‘I see the light brother!’  If so, that would make me very happy.  🙂

…my .02

 

 

Addendum:

If Stops and Targets has been doing things right then many of you may not have even noticed that a MAJOR strategy revision upgrade has been gradually introduced over the past year.  It has been very slowly phased in to allow continuity–but is now completely implemented.  This is the most sophisticated upgrade to the core logic since Stops and Targets began over ten years ago.  The short-term timeframe is significantly more responsive now (as explained above) and so the Multitrend classifications (Bull 1, Bear 10, etc.) cycle through much more quickly now than before and that is a very good thing!

 

 

I thought it might be illustrative to show a step-by-step progression through key signals from the top in September down to the October bottom and then back to where we are today.  Follow the charts below in sequence to get a feel for how Stops and Targets analysis works…

 

click image to enlarge

At the recent market top on 9/21 (see the screen capture above) we got a countertrend sell signal across all three timeframes (along with a Top Spotter alert) at 2947.  The short-term stop/reverse line was moved to the daily bar low (2932) at the close to lock in gains.

Notice also that the rising intermediate (2851.25) and long-term (2698.25) stop/reverse lines were equal to their rising range envelope bottoms, which indicated a fully trending bull market…

 

 

click image to enlarge

The very next trading day on 9/24 a short-term sell signal and short-term trend change occurred under that line (along with a Top Spotter confirmation).  Since the daily bar high at 2930.25 was less than the existing stop/reverse line, the stop/reverse line was moved to the new lower high.

Note: The market did not close above the initial 2932 short-term sell line at any time over the next eight trading sessions before the actual selloff started on 10/4…

 

 

click image to enlarge

The rising intermediate stop/reverse line fell at 2870 on 10/10, followed by the long-term stop/reverse line at 2778.75 on 10/18.

The pullback ultimately bottomed on 10/29 at 2603 on a perfect touch of a parallel trendline channel shown as blue lines on the chart above.

That same day we had range bottom countertrend BUY signals at 2603 for all three timeframes.  Pretty cool, huh?

Notice how the short-term stop/reverse line followed the entire move down to ultimately end up at 2692.75, which was the last lower high before the bottom was set on 10/29…

 

 

 

click image to enlarge

A cross above 2692.75 started a rally up to 2818, which was a perfect gap fill.  The short-term stop/reverse line on that day was set to 2795

 

 

 

click image to enlarge

The very next trading day, the short-term trend flipped bearish on a cross under 2795

 

 

 

click image to enlarge

From the sell signal at 2795 the latest bottom came at 2626 on 11/23 to form what could eventually become a bullish ‘W’ pattern.  Note that the short-term stop/reverse line was set to 2656.25 at the close…

 

 

click image to enlarge

The very next trading day on 11/26 we got a short-term stop/reverse line buy signal at the same 2656.25

 

 

 

click image to enlarge

…and that last short-term buy signal at 2656.25 now brings us to today, where we see a short-term counter-trend sell alert at 2754.50 (check out that signal on the current short-term tab).  At the close of trading yesterday (11/29) the short-term stop/reverse line now sits at 2723.25.

A move above 2754.50 would invalidate the counter-trend sell signal, but a move under the short-term stop reverse line would be a sell.

Now are you seeing how it all works together after the sequence of charts above?

Keep a close eye on the short-term stop/reverse line going forward.

😉

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