RELATED THEORY--> |Advance/Decline Data | Up/Down Volume | Buying Demand/Selling Pressure |
                               |The PowerStocks TroughFinder | See TroughFinder Alerts at HeadsUP! Blog |
                               |See how advances and volume are related to TroughFinder signals |
                               |How to prepare when you see your first TroughFinder signal |

So far we have shown you how TroughFinder finds major market bottoms. But the signalling system we have devised for TroughFinder can also detect intermediate (smaller) troughs. The A-Signal and the B-Signal are compiled by us daily and alerts issued for major and minor troughs to the PowerStocks HeadsUP! alert Blog for our subscribers. More recently, with TroughFinder-II we launched the incredibly accurate C-signal into the equation. There is a signal about roughly every 2-3 months. In order for you to understand how to interpret the signalling system, let us go into more detail on the A, B and C signals.

The A-Signal represents cumulative selling intensity as measured by daily Decline/Advance ratios and Downside Volume ratios. Points are allocated to this signal line when days are encountered when either of these ratios exceed certain thresholds. Large ratios representing Lowry's 90% and 80% days attract additional points. After 12 trading days, the points expire as the opportunity presented by the selling wanes, and gets eroded by intermediate buying. You can interpret the A-Signal as your "measure of opportunity building up for a reversal". The higher the A-Signal the bigger the opportunity (and larger the sell-off). A-signals in general up-trending markets, generated by small corrections will be much smaller (measuring 1 up to maybe 4 in strength) than those generated in crashes (where they can climb to a giddy 20 or more). In bull markets (such as now) you can still trade profitably with A signals greater than 2 strength.

The B-Signal represents cumulative buying intensity as measured by daily Advance/Decline ratios and Upside Volume ratios. Points are allocated to this signal line when days are encountered when either of these ratios exceed certain thresholds. Large ratios representing Lowry's 90% and 80% days attract additional points. The points allocated to the B-Signal line expire the following day, unless the following day also generates B-Signal points in which case the points are added together (to reflect the power of back-to-back or "double-days".) In addition, the points allocated to the B-Signal line are deducted from the A-Signal line the following day, as the buying surge would have diminished the "opportunity". A maximum sized A-signal measures 6 in strength. You can interpret the A-Signal as a market reversal attempt if a B-Signal is present, or as a powerful surge in bull market momentum (a breadth thrust that propels the market higher like a rocket-ship) if the B-Signal is not present. During a market decline, when the A-Signal is showing, the size of the B-Signal plus the A-Signal stacked on top of each other represents the size of the potential market reversal. B-signals in general up-trending markets, will be much smaller (measuring 1 up to maybe 4 in strength) than those generated in crash reversals where they max out at 6 (or 12 if a double-day occurs). In bull markets (such as now) you can still trade profitably with B signals of 1 or 2 strength, provided the combined A+B signal strength is 3 or more. Obviously the bigger the signal the lower your risk of wrongly pegging the trough. In major declines with large A signals we insist on trading on B signals of strength 2 or 3 minimum to improve confidence of the reversal call.

To recap, a large A-Signal followed by a large B-Signal represents intense selling pressure suddenly accompanied by intense buying demand - the classic reversal signal as shown in our "Up/Down Volume and 90% Lowrys days" research on Bear Market bottoms and new bull markets. This should create a large TroughFinder signal when the two are stacked on the chart on top of each other. In strong bull markets or up-trending markets, sell-offs are much smaller and because of this we are willing to accept total signal strengths of at least 3 as opposed to crashes where we will demand large signals to trade with confidence. In major corrections we insist on B signals of at least strength 2 or 3 to confidently mark a trough reversal.

PRACTICAL RECAP
Let us recap a real live crash on the JSE to ease you into how simple the use of these signals are. Recall the example below shown in the first document you read about TroughFinder. Horizontal lines represent signal strength climbing in steps of 2. The A and B signals have not been stacked on top of each other, for ease of viewing.



1.  Intense selling starts with multiple A-signals, no buying of consequence in sight
2.  Intense selling frequency increases, evidenced by multiple A-signals of strength 2
2.  B signal of strength 2 marks first trough
3.  Panic selling, high intensity of 5 and 6 followed by "calm before buying storm" lull
4.  Strong B signal, strength 3 marks major trough
5.  Powerful wave of B signals thrusts market higher (signalling blow-off peak)
6.  First A signal for a long time after powerful series of B signals hints at market top
7.  Heavy selling of intensity 3 drives market down a slope, signalling a major correction
8.  A-signal of 4 marks panic trough but small B signal of 1 keeps us out this bear trap.
9.  Crash-class panic selling intensity 8,9 marks major "waterfall" bottom
10. Back-to-back "double-day" B signals mark trough 3 days after ground zero
11. A typical post-crash profit-taking selling bout followed by B signal marks trough

That was fun, wasn't it? Try pick the patterns out yourself this time on the 3 crashes that preceded the major JSE market-top on May 2008.



Don't you just wish you had this in your toolbox when this volatility was going on? Never mind, there's plenty more where that came from and if anything, we're in for more volatility in the future. Armed with your ETF's and TOP-40 Warrants/Futures you're going to have a lot of fun with this. See the last section on this page 'Trading with TroughFinder" for more details, but first read through the rest of this instructional note.

The signalling system, as we publish it on WJP for our subscribers is shown below since the last major trough in February 2009 (only A and B signals shown.)



TroughFinder signals are represented by vertical bars. The A and B daily signals are stacked on top of each other and thus the height of the vertical bars represent the strength (intensity) of the overall A+B signal.

USING THE TROUGHFINDER CHART TO FIND MARKET REVERSALS
You can see that selling intensity (red A-Signal) built up to a crescendo in the last major 03 March trough to the left of the chart. On 26th February buyers rushed in, triggering thresholds that resulted in the B-Signal tripping. You can see the first vertical green bar peeking out on the top of the red bars on the left of the chart. This was our first sign we were nearing the bottom and was quite a strong signal, measuring an intensity of 10. As you can see the signal was a couple of days premature (and the B-signal was only strength of 1 so we wouldn't have acted on it) but even if you acted on it you would have an amazing story to tell your colleagues!

To improve accuracy and avoid false signals, we like to classify major signals (depicted by the orange arrows) as meeting all the following criteria :  

1. An overall A+B signal strength of 6 or more
2. A minimum A signal strength of 4 (adequate amount of sell-off and opportunity)
3. A minimum B signal strength of 2 (adequate intensity of the buying demand marking the reversal)

These "major signals" are the ones used in our 12-year backtests covered at the beginning of this section and are depicted by bright orange arrows for the test period in the above chart. As you can see these were all EXCEPTIONAL signals. For minor signals, as experienced in an up-trending market (characterised by much smaller selling bouts) we can relax the above conditions, but in general major signals offer more confidence than minor signals.

MINOR TROUGHS ALSO ACCEPTED!
As you can see from the chart, there were many excellent smaller signals that did not meet the major signal criteria. After the market correction had settled and the JSE started trending up there were brilliant minor signals on 4th May (right after the 2nd major orange signal), 15th and 19th May and 17th,19th August.

Of all 21 signals depicted above only the one on 1st June was wrong, but note that the A-signal was only 1 point and the B-signal 2 points for a total signal of 3 points. We advise against acting on signals where the A-signal is less than 2, especially for large B signals. Using this rule, NOT A SINGLE SIGNAL ABOVE WOULD HAVE RESULTED IN YOU LOSING MONEY. At worst you had to wait for the market to base itself for 1 or 2 weeks but 2 weeks after every signal resulted in a major market move upwards.

As the market reverses and the bull market gets under-way we will be willing to accept smaller and smaller signals and accept B-Signals of 1 magnitude even.

One final note - sometimes an A-Signal is not accompanied by a B-Signal yet it still accurately pegged a market trough. You must always view the A-signal as "opportunity" and many of our subscribers trade on A-Signals of 3 or 4 more to "scalp" the market even in the absence of a B-Signal. They look at the Advance/Decline and Up/Down volume charts on WJP (sample shown below for advance/decline data) to find their own signs of returned buyers (ie accepting lower thresholds of returning buying demand than TroughFinder would) Some of the minor signals we spoke of above are shown below with arrows.



The signal with the big green arrow marked "4" was a TroughFinder major signal that corresponds to Signal-22 in the section right at the top of the page (the 11 year back-test). You can see the A-Signal was generated ON THE DAY of the trough (green arrow on chart on right) and the confirmation B-Signal 5 days later (chart on left). Also shown on the above charts are 4 other smaller signals that ALL corresponded with localised troughs.

MARKET THRUST
You can view the A+B combined signal strength, represented by the height of the vertical bars in the chart as the "thrust" imparted to the market - the bigger the push, the more the market moves up. New bull markets require sufficient initial thrust to allow them to "escape earth's gravity" Martin Zweig mentions this constantly in his book (with particular reference to the A/D ratio), but it is only now with the TroughFinder chart that you can visually appreciate this investing greats' wisdom.

Even when not in a market correction (ie no A-Signal showing) the presence of B signals act as confirmatory "booster thrusts" to a strong bull market. But when the market has been going up for quite a while and you see a major B signal on its own, this is a warning of a "blow-off" where the last of the laggards, who have been sitting on the sides during the whole bull run finally relent and climb into the market to catch some of the action. By then valuations are out of kilter and smart money is selling off their shares to the dumb money. See signal #5 in the practical recap 2 sections back and also read "The importance of stock market cycles" to understand and be aware of this phenomenon.

To see  how Advance and Decline ratios, Up and Down volume ratios, demand and supply and net volume reversals all relate to each other and TroughFinder signals, it is suggested you read "Using the JBAR report for risk-reduced profitable trading".

THE C-SIGNAL (SELLING PRESSURE REVERSALS)
TroughFinder-II, launched on 15th September 2009, introduced a C-Signal, which is also an excellent predictor for minor troughs. C-signals are based on large negative to positive reversals of Net Advance Volume (NAV). NAV is daily upside-volume subtract daily downside volume. If the advancing stocks for a day amount to 200 million shares and the declining stocks amount to 300 million shares changing hands then the NAV is -100 million shares. C-signals are generated when we experience a 5-day period in which we have a NAV of at least -135 million shares reversing to a NAV of greater than zero.

C-Signals represent large swings from selling pressure to buying demand that are not always detected by a B signal for smaller troughs. C-signals sometimes show when there are no A or B signals and often overlap with  larger TroughFinder B signal alerts. C-signals can show up a day or two earlier than the B signals, showing troughs even earlier for more profitable entry. An example of a chart with C-Signals is shown below with A-signals in red, B signals in green and C-signals in yellow:



Your BUY signal is depicted on any day when you have either of the following conditions (in order of strength and importance of signal)

(1). All of A, B and C signals showing.
(2). Any two signals showing
(3). A C-Signal showing

You can see that C-signals in almost all instances, flag a local trough within a remarkable 1-2 days. On 31 July, we had no A signal showing but some B signals popped up. When we saw a B signal pop up on the same day a C signal popped up we knew we had a high confidence event. As you can see this was an excellent signal. On 04 July we had a largish A signal of 4 showing and on 05 July a C signal popped up - one day after a major trough. This was a stunning bullish signal.

IMPORTANT : C-signals are more useful in upward trending markets to pick out minor troughs. Technically they are a lot weaker than B signals. We are not going to pay a lot of attention to C signals in a major crash or correction as this will just get us caught in bear traps. You can safely assume that in a correction of more than 10%, TroughFinder logic will ignore C-signals and not even display them on the chart.

TROUGH-FINDER COMBINED WITH MCCLELLAN
It is not uncommon for the McClellan indicators (and hence SwissClock) to show bearish conditions when suddenly a TroughFinder signal flashes a BUY. SwissClock/McClellan are medium term timing signals (4-6 months trading horizons) to assist in entry in oversold conditions and exit in overbought/weak market conditions. TroughFinder-II is a very short-term signal and is much quicker at detecting troughs than SwissClock (within 1-4 days in fact).

SwissClock , which is McClellan derived, uses 19 and 38 day EMA’s of advance/decline data and will often only reflect a major trough a few days after TroughFinder, as the McClellan Oscillator (MCOS) needs a few days of good advance data to claw its way out of the red zone (and once it has done this the Summation Index will finally point up). TroughFinder is at best 1 day late in detecting a trough but no more than 5 since it looks to hard selling followed immediately after by strong buying.

If we are only seeing a C-signal (these are weaker than strong B signals), and we fail to see further TroughFinder B-signals from the current correction, and McClellan/SwissClock continue to depict bearish conditions, then this is a signal to us that the correction is not over. It is very rare for McClellan indicators not to begin to show bullish signals after some good B signals, since B-signals are high probability major trough events. So in this respect we view the McClellan/SwissClock indicators as general 4-6 months market health/trend indicators and we view TroughFinder as a tool with superb immediacy in identifying troughs (entry points).

TroughFinder almost always puts you in a position to trade profitably, the question is time-frame. We thus use McClellan to verify TroughFinder trade entries. If after a B or C signal, McClellan starts turning bullish again this means we have a major trough that will give us a nice long trade horizon as the market is recovering strongly in the medium term supported by breadth. If after a B or C signal, McClellan remains “iffy” it just tells us to keep tight stops and manage the short term trades tightly as we are still in a risky period (i.e. we might be dealing with a minor pull-back as opposed to a major trough). It is not uncommon for subscribers to trade ENTRIES with TroughFinder and EXITS with SwissClock/McClellan, since TroughFinder offers no assistance with trade exits.

TRADING WITH TROUGH-FINDER
You can directly capitalize on BUY opportunities presented by TroughFinder by speculating with Exchange Traded Funds (ETF's) such as SATRIX-40 or SATRIX-RESI. These can be purchased like ordinary shares through your on-line brokerage.

If you have a larger risk appetite you can trade TOP40 Call Warrants such as Standard Banks' TOP CAK. These are cost effective to trade (R50 per trade with Standard Bank) but are highly geared instruments, meaning if the market goes up 2% you can gain 20% (assuming a 10:1 gearing). Of course if your timing is out and the market drops 2% then you lose 20% of your investment. Many of our experienced subscribers also trade TOP40 Futures contracts based on TroughFinder signals.

Since TroughFinder signal bottom reversals, to other investors this could be the signal to load up on some more of their favourite shares, more commonly referred to as "buying into the dips".

One thing we have purposely not spoken about is "When to sell?" If you're an investor looking for market reversal confirmation or buying on the dips in a bull market then you will be using our investment timing models and strategy screens such as Piotroski to drive your selling decisions. But if you trade more short term (less than 6 months horizons) then you're looking for a market-top version of TroughFinder (we call this PeakFinder.)

Creating, back-testing and perfecting these timing strategies is hard, time-consuming work and PeakFinder is going to be even harder to crack than TroughFinder which took us several months to complete and perfect. This is because peaks are slow drawn out complacency and greed driven affairs that give little visible clues to sudden drops, whereas market drops are rapid panic driven affairs where, as you have seen from our research, there are many cues available to time the reversal. Traders are advised to cast their eyes to the SELL signals generated by the Bullish Percentage Index or SwissClock Timer in the interim. SwissClock doesn't fire a SELL on any whim or market weakness, so what you may want to do to find localised peaks is watch the McClellan Summation Index and use its flattening out or turning down as your sell signal. More experienced subscribers will watch the McLellan Oscillator for first sign of weakness as their sell signal.

TroughFinder alerts are posted to the HeadsUP! blog for our subscribers, and all the major components of TroughFinder, such as advance ratios, volume ratios, demand/supply etc are published every 2nd day in the PowerStocks Market Breadth Analysis Report (JBAR) . TroughFinder can be conservative at times (it has an accuracy record to protect) so many of our subscribers use the JBAR report to trade more aggressively when TroughFinder is sitting on the sidelines.


RELATED THEORY--> |Advance/Decline Data | Up/Down Volume | Buying Demand/Selling Pressure |
                               |
The PowerStocks TroughFinder | See TroughFinder Alerts at HeadsUP Blog |
                               |How to prepare when you see your first TroughFinder signal |
 
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