Memorial Day Thoughts

As you know I don’t live in the United States anymore. But during my twenty years in California I remember Memorial Day weekend as a great opportunity for people all over the nation to jump into their cars, RVs and motor homes to take advantage of the three-day weekend. Many have planned ahead for months to enjoy  this weekend and I recall camp-outs, parties, fun at the lake, strolls at the beaches or just a little R&R. As Americans enjoy a lot less vacation days than in more socialist Europe this is completely understandable. And hence most folks make sure to plan some of their vacation days around the big ones – either Memorial Day, Thanksgiving Day, or of course Christmas.

For those who of you who chose to stay home you may take advantage of dozens of  ‘Blow Out Sales’ on everything from mattresses to cars. I remember ads in every newspaper, commercials on TV or banner reminding us to ‘Celebrate Memorial Day’ by going out and consuming as much as we can. The majority of you (or us – I was one of you) don’t even find those statements conflicting, or understand what Memorial Day is really about.

Let’s take this opportunity to remedy this unfortunate situation. A memorial is usually held in memory of something, usually a person who has died or an event that required sacrifice or instilled suffering. Memorial Day was always the 30th of May until 1968 when Congress changed it to the last Monday in May so to allow for a three day weekend, now known as Memorial Day weekend. As a nation we should set aside this time to reflect and remember  our brave military men and women who gave and continue to give their life in combat. This should require effort and serious thoughts and not celebration or mindless shopping.

Now let me stop off my little soap box and let’s get to the charts. On the medium to long term equities side nothing of note has changed so I won’t be wasting your time by regurgitating the charts I already presented over the past two weeks. Instead I’ll throw out a quick freebie for everyone and take it as an opportunity to introduce the NR4 and NR7 indicator. Here’s a quick intro right off stockcharts.com:

Narrow range patterns come from Toby Crabbel’s book, ” Day Trading with Short Term Price Patterns & Opening Range Breakout”. Even though the book, which was published in 1990, is currently out of print, many of its ideas are still effective. In particular, the NR4 (Narrow Range 4) and NR7 (Narrow Range 7) patterns are quite popular with short-term traders. The philosophy behind the pattern is similar to the Bollinger Band Squeeze: a volatility contraction is often followed by a volatility expansion. Narrow range days mark price contractions that often precede price expansions. Even though Crabel traded mainly futures, traders can apply these techniques to stocks, indices and ETFs.

Strategy

This strategy starts with the day’s range, which is simply the difference between the high and the low. Crabel used the absolute range, as opposed to the percentage range, which would be the absolute range divided by the close or the midpoint. Because we are only dealing with four and seven days, the difference between the absolute range and percentage range is negligible.

Crabel focused on two different narrow range timeframes: four days and seven days. An NR4 pattern would be the narrowest range in four days, while an NR7 would be the narrowest range in seven days. It is a very short-term pattern designed to initiate a trade based on an “opening range breakout”, which is another term from Crabel’s book. The ORB is based on the price range in the first five minutes of trading, which is a too short-term for this article. Instead, chartists can look for an upside breakout when prices move above the high of the narrow range day and a downside breakdown when prices move below the low of the narrow range day.

I personally prefer NR4 because I use them in context with some of my other price patterns. Someone actually asked me about using NR4 with Net-Lines a few weeks ago and I meant to put together a post on it for a while now. Today was a great opportunity as I managed to track and trap a few in the wild:

Soybeans actually painted an inside day + NR4 combo four session ago – and look what happened once we got a downside breach. This time around we’re getting one near a possible floor pattern and I would be mostly interested in a long break out here. Also note that we got a NLSL reversal – which in theory leans the odds toward the long side. However, I have not backtested this so take this with a grain of salt. I have an inkling that there may be an edge in NR4 + Net-Line breaches but it needs to be back tested across various markets and instruments. Once I have my full setup up and running again I will definitely spend some time on this.

Natgas – almost the inverse setup. Do you see the last one way back 15 days ago? We actually had a double inside day plus an NR4 – no surprise that we got a long cande up, which after a NLSL retest went all the way.

On to currencies – I am also seeing similar patterns on that front, which is interesting. EUR/JPY – the blue dot means it’s a NR4 and the inside day setup is clear. As you may guess I would prefer a long breach.

And finally the CAD/JPY – this is actually the first chart I grabbed and I still had the dots in yellow, sorry about that. But do you see how our last inside day setup was also an NR4? Coincidence? I think not – especially given that long candle to the downside that followed it. Now we had another ID/NR4 setup two days ago and today seems to give us a second one with an even smaller trading range. Suffice to say that I am very much looking forward to seeing this one resolve.

That’s all for today – enjoy the rest of your long holiday but please don’t forget to spend a little of your time remembering those who made the ultimate sacrifice for their nation. Let it be an inspiration for all of us to stand up and fight for freedom and liberty. Not just on Memorial Day but every day of the year. And together as a nation – not divided as some of our politicians would like to see us.

Cheers,