Weekly Grail Report

The charting system of Ichimoku Kinko Hyo was developed by a Japanese newspaper man named Goichi Hosoda. He began developing this system before World War II with the help of numerous students that he hired to run through the optimum formulas and scenarios – analogous to how we would use computer simulated backtesting today to test a trading system. The system itself was finally released to the public in 1968, after more than twenty years of testing, when Mr. Hosoda published his book which included the final version of the system.

Ichimoku Kinko Hyo has been used extensively in Asian trading rooms since Hosoda published his book and has been used successfully to trade currencies, commodities, futures, and stocks. Even with such wild popularity in Asia, Ichimoku did not make its appearance in the West until the 1990s and then, due to the utter lack of information in English on how to use it, it was mostly relegated to the category of another “exotic” indicator by the general trading public. Only now, in the early 21st century, are western traders really beginning to understand the power of this charting system.
– IchiWiki

Even though I haven’t stopped using them, I haven’t written about Ichimoku charts in a long, long time. It’s time for me to correct that oversight. I was inspired to start posting the charts again after I noticed that stockcharts.com has a new article about them. The article does the best job I’ve seen in presenting how to use Ichimoku in a concise but complete way. If you’re at all interested, take a few minutes and read the article.

But here are the basics:

Source: stockcharts.com

I’m only going to use the English translation of these terms. The red line is the “standard line.” The blue line in the “turning line.” When the turning line is above the standard line, it’s bullish. When the turning line is below the standard line, it’s bearish.

The green line that lags behind is the “lagging line.” When it’s above the price of 26 days ago, it’s bullish. When it’s below the price, of 26 days ago, it’s bearish.

There are also the “leading lines” to the far right of the chart. When the first leading line (green) is above the second leading line (red) it’s bullish. When the opposite is true, it’s bearish.

Finally, there is the heart of the Ichimoku system — those red and green cloud-looking things. They are called — you guessed it — “clouds.” When the price is above the clouds the trend is up. That’s bullish. When the price is below the clouds the trend is down. That’s bearish.

That’s it. I know the chart looks complicated at first, but it really is that simple.

So let’s look at the Ichimoku charts for some major markets, starting with the stock market:

Everything about the stock market is bullish. The price is above the clouds. The turning line is above the standard line. The lagging line is above the price of 26 days ago. And the first leading line is above the second leading line, creating a bullish green cloud looking forward. It’s hard to beat that combination.

The only thing that gives me pause about the near term prospects for stocks is that the price is so far above the clouds that the market could correct a good 5% and still present a bullish looking picture. That’s certainly not a particularly large correction, but it’s enough to make me reluctant to rush in and commit more cash at the moment.

So I would like to see one of two things happen: Either the market does correct a few percentage points or it moves sideways for awhile letting the clouds move closer to the price.

The bottom line for stocks: bullish but pricey.

Bonds:

Man, that’s ugly. Treasury bonds look terrible. I guess when you’re over $12 trillion in debt (the U.S. government debt) lenders start demanding a higher interest rate before they’re willing to lend you any more money. Makes sense to me.

Bonds are almost the mirror image of stocks. The price has fallen clearly below the clouds. The turning line is below the standard line. The leading cloud has turned a bearish red. The lagging line is very slightly above the price of 26 days ago, but only barely. And it’s falling fast.

I may look to get short bonds — probably in the ATR portfolio — by buying a leveraged bearish ETF like TBT. We’ll see.

But I’m wondering if the bond market is telling us to expect higher inflation down the road. I don’t know, but it certainly doesn’t bode well for the deflation predictors.

Gold:

Gold is a kind of a mixed bag. The price is in the clouds — neutral. The turning line is below the standard line — bearish. The lagging line is below the price of 26 days ago — bearish. And the leading cloud is green — bullish.

It sure wouldn’t take much of a move to the upside for the price to clear the clouds and paint the picture as clearly bullish. And as I write this — an hour or so before the open — gold looks like it may open somewhat higher. Or it may turn down and head back below the clouds. So I’ll be watching gold closely.

Silver:

Silver looks better than gold. If fact, if it has any kind of higher close at all it will clear the clouds and all Ichimoku signals will be bullish.

I don’t hear much talk about silver these days. But remember that if  (maybe I should say when) the precious metals get really hot again, silver will probably way outpace gold.

Junior mining stocks:

All systems are go for the junior mining stocks. I would like to see the price more clearly rise above the clouds, but that will happen on a higher close.

Oil:

Oil has been selling off recently, but still is clearly bullish.

And, finally, the U.S. dollar:

I think the only thing that’s been holding gold back is the  bullish chart for the dollar. Can gold go up along with a strong dollar?  You betcha. In fact, priced in Euros, gold is skyrocketing right now. But it would certainly help gold for the dollar to start declining again. I think it will, I just don’t know when.

Okay, that’s Ichimoku — translated as “one look.” It enables us to see the entire picture at a glance. Very useful charts.

Let’s move on to see what’s going on with the various Grail strategies…

ATR Trading

ATR is less than 30% invested at the moment. I’m sure I’ll add more positions this week. Stay tuned.

COT Strategy

The Blees numbers haven’t given us any actionable buy signals in awhile. But the portfolio is over 70% invested, so there’s certainly no hurry.

By the way, I really don’t think natural gas is going to zero. It just looks like it is.

RSI Reversal Strategy

You talk about quiet — this one has been downright sleepy. After the controversial health care bill became law, I thought we’d see a lot more volatility in the markets last week than what we saw. It just goes to show that predictions are worthless.

But RSI can go from 0% invested to 100% invested in a heart beat. So if you trade this one, don’t let it catch you napping. It can get very busy, very fast.

Magic Formula Strategy

The Magic Formula is over 70% invested. I really, really would like to see a stock market correction before I add more positions, but as usual the market doesn’t care what I want.

I’ve been purposely been buying very volatile small cap stocks for this portfolio. That’s why you’ll see a stock like ONTY go down 29% in a month and stop us out. But you’ll also see a stock like CBPO go up by a like amount in the same period of time.

I’m buying small, volatile stocks because we’re using stop losses in this portfolio. Therefore, we can control risk.  And it’s usually the small stocks that have the best potential of doubling, tripling and more. It doesn’t mean I won’t buy some large caps because I probably will. But I do have a preference for the little stocks that are too small for Wall Street analysts to analyze to death.

Long Term Timing

The Long Term Timing portfolio is 100% invested and will remain that way at least until the end of the month. Then we’ll look to see where positions are in relation to the 10-month moving average to see if any changes need to be made.

Gold/XAU Ratio

The gold/xau ratio closed on Friday at 6.86. The mining stocks remain really cheap. And, believe it or nor, they won’t always stay that way.

Have a prosperous week. Oh, Friday is a holiday. Volume will start to get light as we move toward the end of the week.

Larry