Launch Pad is a very valuable resource to any trading methodology because it provides to the trader, a Zero Lag indication of exactly what is taking place in the market for your specific equity. It is constructed by converting the moving average into a horizontal white line placed into the chart as a zero axis. Any divergence away from this moving average produces the corresponding green or red bars. The height of each bar indicates the magnitude of the divergence. All moving averages and smoothing filters have some lag as a component of their output. Because we are measuring the difference from the moving average that todays price has produced the moving average lag is completely removed from the output and the indicator becomes an immediate signal of the divergence of the current price from the moving average trend.
The Launch Pad Technical Indicator, utilizes the tendency of stocks that have dropped below the center-line of a moving average, to snap back to the center-line and then exceed that center-line by approximately the same magnitude as the prior drop. This is referred to as, reversion to mean. You can see clear evidence for mean reversions in all stocks, equities and publically traded financial instruments. Launch Pad, makes the visualization of these opportunities obvious. As you will see in the trading rules below, stocks already in a long term up-trend offer the best targets of opportunity. This make them desirable stocks to enter and because this pullback now provides a new, more favorable entry opportunity, the pent up demand to own this stock, combined with this new entry opportunity, often pushes these stock much higher than your entry price. Your average short term profit expectations for this signal are a move above the zero line that is proportionally equal to the prior move below the zero line or two times the equitie's most recent low below the center line. Launch Pad alerts traders to these frequent and profitable reversion/divergent opportunities, allowing us to visualize, quantify and then capitalize on these obvious and unmistakeable Launch Pad signals.
Most of us, at one time, have jumped on a trampoline. Your bodies’ weight expands and stretches the elastic bands as you jump up and down. At the bottom of this cycle, the bands will start to contract back to their natural state. This opposing force then moves your body back upward with enough force that you actually move much higher than the horizontal plane of the trampoline, literally throwing you into the air. Bungee cords, rubber bands, and springs are all examples of the same principle. Please notice the similarities between this description and the description above of the exact same movements stocks experience when pushed below the resistance produced by their moving average.
The description of this process in physics was defined by John Hooke. If a spring or elastic band is compressed or extended by some displacement from equilibrium, the spring will exert a force proportional to this displacement in the opposite direction. In the illustration on the right you can easily see that as the weight (force) increases the springs extends further as the weight is increased. The further the spring is extended the more strength it will snap back with, when this weight is removed. Hooke’s Law, describes this process and provides us with a very good analogy. Our actual calculation is very different from the calculation provided by Hooke's law to determine the elasticity of physical objects, but clearly provides the same timely and profitable entry-points. The Launch Pad indicator allows us to see, quantify and then capture opportunities created by a stock's movement below and then snapping back above the stock’s moving average.
The Launch Pad indicator measures and displays the elasticity of a stock by displaying the Laguerre moving average as a normalized horizontal white line on the zero axis. The close of the day is then plotted as positive or negative bars, with the same magnitude as the value produced by taking the difference between the close of the day and the most current moving average value. This produces a histogram that displays negative divergence from the horizontal zero line as red bars below the moving average and green bars for the positive divergence above the zero line. The greater the magnitude the lighter and brighter the bar's color will be in the chart.
Launch Pad enables the visualization of stocks that have been pushed below the zero, white line (1 & 2), representing the normalized moving average and have a strong potential for dramatically and rapidly advancing. Our “Launch Pad” indicator utilizes a Laguerre filter or moving average (0 Line) as the base line and then determines how much above or below this base line, each days trading action has moved away from this center-line. With the Launch-Pad and StockDotGenie's graphic representations and the following trading rules, it becomes easy to consistently and repeatedly capture the profits presented by these opportunities.
1) You want to utilize this technique on stocks in a strong, established upward trend. Shorts want to see a sustained downward trend. 1) In the chart above is the Long Laguerre filter length utilized in the SDG Twists Indicator. Because of the unique attributes of the Laguerre filter there are no exact correlations between the gamma settings of this indicator and the exact number of days it would corollate with if it was a simple, exponential or weighted moving average. This long term Laguerre filter represent approximately 70 days. It will turn red when the trend has turned negative.
2) Indicates the first two candles that have diverted away from this stock prior positive trend.
3) The TWISTS indicator utilizes a triple cross-over moving average to generate buy and sell signals. A gold dot indicates a transitional price between the negative state (red dots) and positive signals (green dots). Gold can be interpreted as a alert flag signaling you to enter this trade on the next green indicator dot. If the indicator transactions between red and then directly to green, you are also seeing a buy signal.
4) Launch Pad provides you with a visual conformation of the forces associated with the downward pressure exerted on the stock, moving it below the moving average as well as it’s reversion potential that the stock’s price action has produced. The positive potential is at least equal to the negative deviation from the moving average. This same indicator also clearly indicates exactly when the stocks price swings past it’s normal state, i.e., the moving average represented by the zero line. This produces an immediate indication of when the reversal of price has occurred and clear entry signals.
Pass Band Multi Filter displays if the stock is 5) consolidating or congested, 6) oversold or 7)overbought. You want the condition to coincide with the direction of your intended trade; oversold in a positive setup and overbought in a short setup. This example produced a strong 6) oversold green background flag. For additional information on this indicator please review the page on the Pass Band Multi indicator here.
8) An increase in volume at the point of cross over becomes a strong conformation of your entry decision. It underscores the pent up demand that can easily be transformed into strong momentum.
The overall market should match the direction of your intended trade. The sector that you stock resides within should also be up. Screen for these stock within sectors that are moving in the direction of your intended trade. This is easy to determine on finviz utilizing their market overview page and there map page.
This dip produced an entry opportunity that was confirmed by the Pass Band Multi indicator, touching the oversold line. The Launch Pad indicated strong divergence belwo the zero white line. This combined with the stocks prior strong, long-term strength, produces a significant opportunity to capture a reversion to mean event. Incorporate Hooke's law into this set-up and that same opportunity can produce significant profits in an exceeding short amount of time.
Find stocks 1) in a strong up-trend, 2) in strong markets and segments, that have 3) price actions dropping below their moving average. 4) Over sold indicator within the Pass Band Multi indicator is a positive conformation of this. 5) Look for an increase in volume at the cross-over point when using the Launch Pad indicator. 6) Check for news that may have a long term negative impact on this stock which would explain it’s new negative price action. 7) Determine when the earnings release date is and avoid the trade if it is within the time frame that would still see you in this trade. 8) Monitor the stock for an overbought situation and sell at least half of your holding at that point.
This set-up or pattern is often seen in the days preceding the release of earnings. Cautious or uncertain traders will often exit their trades prior to earnings causing the exact same dip in price that we are looking for in this strategy. Always check to see if the pullback in price is being caused by an impending earnings release. If it is, your risk has gone up significantly unless you have a very though understanding of the companies fundamentals, including there current and future earnings prospects.
StockDotGenie has a page devoted to an earnings release trading strategy called Stock Rocket Earnings, which you can find here.