The AAPL Retracement
June 23rd, 2008 by Corey Rosenbloom
Apple Inc (AAPL) is a highly publicized stock which has exhibited a smooth trend recently.Is the most recent action in AAPL a steady retracement or a full-blown reversal?
Let’s look to the charts for some clues:
http://blog.afraidtotrade.com/wp-content/uploads/062308-1539-theaaplpull2.png
On the weekly structure, price has just completed a large run-up in price on declining volume (throughout 2008).Price is currently in a retracement mode, and appears to be finding temporary support at the $170 range, which corresponds with the weekly 20 period EMA.
Should this area fail, the next ‘line of support’ could be the rising 50 EMA, which is near $150 per share.Those desiring to be ‘long’ AAPL may find the $170 zone offers a potential support zone with a tight stop for entry.There are many other factors to consider, as well.
In terms of the swing ’structure’ of the weekly chart, price made a new swing low at $120 in early 2008 and has now made a lower high at $190, and some would argue the stock is now in a confirmed downtrend, an argument which would be strengthened via the break of the 20 and 50 period EMA.Until then, we still assume the structural uptrend.
What might the daily chart say to us?
http://blog.afraidtotrade.com/wp-content/uploads/062308-1539-theaaplpull1.png
I overlaid the Fibonacci retracement grid on the chart, as well as provided the lower panel “3/10″ MACD oscillator.
On this chart, $165 appears to be very strong support.This area corresponds with the rising 200 period moving average, and the 38% Fibonacci retracement, which is the first line of potential support during a normal retracement.
One concerning factor is the decline in price as it has made both lower lows and lower highs in price.Another factor to consider is the negative momentum divergence which preceded the price ‘rollover,’ or smooth transition from buyers (demand) to sellers (supply).I actually drew the arc to highlight this transition.
Key points to take away:
If you are wanting to get long Apple, there could be strong potential support around the $165 zone, should price retest this level.A strong penetration of this level would call the bullish arguments (from a chart standpoint) into question, and traders would need to hedge or cover losses at that point, as momentum could carry the stock even lower.
Risk could be higher now than it was previously, as well.
This analysis is for short-term trading tactics only, and make no reference or assumption to longer term investments or company fundamentals.
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Monthly Overview of the Major Indexes
June 22nd, 2008 by Corey Rosenbloom
Have you been keeping track of what the larger picture is on the charts of the major US Stock Market Indexes?If not, let’s take a moment to see what the Dow, NASDAQ, and S&P look like on their monthly charts.
S&P 500:
http://blog.afraidtotrade.com/wp-content/uploads/062208-1958-monthly1.png
The S&P is beneath its peak in 2000, and appears to be forming a similar pattern as it did before the 50% market drop (caveat - I am NOT forecasting such a drop).
Price is trapped between its key 20 and 50 period EMAs, and just a few more points lower would officially break its moving average support line, and would cause a major long-term sell signal.With one more trading week to go in June, a monthly close beneath this zone is certainly possible, and if that happens, it would be difficult to envision many bullish scenarios that could add comfort to investors.
Although price could still find support at this level and ‘bounce’ back up, be prepared to consider shifting long-term investments should this level be definitively broken.
Also, notice the momentum divergences that preceded the turns in the market.Volume is surging to the upside asinvestors are more uncertain about what to do.Notice also, that volume has declined on the recent upswing in price, which will likely be defined officially as a “true bear market rally”.
The chart of the Dow shows a very similar picture, only that price is actually higher than its 2000 peak.
Dow Jones:
http://blog.afraidtotrade.com/wp-content/uploads/062208-1958-monthly2.png
Price is testing its key rising 50 period EMA, but a monthly close beneath this level would potentially be a significant long-term sell signal.
NASDAQ (logarithmic scale):
http://blog.afraidtotrade.com/wp-content/uploads/062208-1958-monthly3.png
The NASDAQ chart looks different than the others due to the stratospheric rise of the technology stocks and the euphoria that occurred in 1999/2000.Price is just shy of 50% of the all time closing high, and extremely unlikely to take out that level anytime soon (as in, within the next few years).
Price sits above its 50 period moving average, which has served as support ever since 2004.Price appears likely to retest this level which is over 100 points away.
Keep in mind that I’m using a logarithmic chart for this index, so the height of the actual peak is much taller than the chart would convey.Without using a log scale, the bottom prices looked extremely small and insignificant for comparison purposes.
A large juncture in the market is just around the corner, so be prepared to alter your strategies should the market take a turn for the worse in the near future.It could be a harbinger of things yet to come if the charts indeed are similar to their counterparts around the year 2000.
On a promotional note, the free trial window to sign up for 2 weeks of unlimited, full access to the Market Club services ends Monday night, so sign up and test drive all the Market Club has to offer if you have any interest to do so before it’s too late.
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Probability of a String of Profits or Losses
June 21st, 2008 by Corey Rosenbloom
How does flipping a coin relate to trading probabilities?Simple, we can look at different probabilities of trading outcomes based on the distribution that results from a pure 50/50 chance outcome.
What do I mean?
Although the odds of a successful trade are rarely exactly 50/50, let’s assume that - for the moment - they are.Let’s say you take ten trades in a row.What can you expect to happen?
You can expect that 5 out of the 10 trades (or coin tosses) will ‘win’ (or, come up heads).What is the actual distribution like, though?
Did you know that the odds of having exactly 5 of the 10 trades (or coin flips) win is only 24.61%?That means that roughly 75% of the time, you’ll have a different result than what you expect!
To be fair, the probability of having 4, 5, or 6 winning trades (plus or minus 1 from the expected value) is 65%, which is in line with the standard “bell curve.”
What is the probability of having a run of 10 out of 10 trades be winners (or losers)?It’s only 0.10%.Rare, but it can happen.
Let’s look at the results from a randomized study I completed in Excel, based on flipping a fair coin 10 times, for 10,000 trials (something that might take months in the real world) and count the number of times ‘heads’ comes up in each of the 10 series of trials.
This will be similar to what you can expect if you took say 100 sets of 10 trades each and asked “how many trades can be expected to be winners?”
Let’s look at the distribution:
http://blog.afraidtotrade.com/wp-content/uploads/062108-1957-prob1.png
Remember, with odds of 50%, we would expect 5 throws out of 10 to come up heads.
We would expect the next most common values to be 4 or 6 throws out of ten to come up heads.
We would not expect many at all to turn up a series of 10 heads in a row (or 10 tails in a row).
Despite that, out of 10,000 series of 10 tosses, we had 10 runs of 10 tails in a row and 11 runs of 10 heads in a row.
What does this mean for trading?
If you can expect to win 50% of your trades, this would be similar to the distribution of possible outcomes, and their respective probabilities based on a series of winners or losers.Most of the time, you’ll fall one or two values away from the expected value (exactly 5 out of 10), but sometimes, you’ll get a string of losers or winners, just through probability alone.
What will happen to the distribution when I shift the odds up to having higher odds of a winning trade than losers?Recall that few situations produce exactly a 50/50 chance of producing a win over a loss.
Check back!
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The Arc of Opportunity is Almost Complete
June 20th, 2008 by Corey Rosenbloom
What is the Arc of Opportunity, you might ask?It’s reflective of the smooth, even transition that’s occurred recently in the Dow Jones Index. You could name it whatever you like, actually, such as the “Arc of Shame,” “Arc of Buying and Selling,” “Arc of Transition” or whatever seems catchy to you.Let’s look at it in its full glory.
http://blog.afraidtotrade.com/wp-content/uploads/062008-1558-sector11.png
This is a unique pattern that probably isn’t discussed in any textbooks, but the underlying logic is sound.
This represents an orderly shift from buyers to sellers in a clean, systematic way, as demand overcame supply, momentum decreased, and supply overcame demand in a rhythmic, almost ‘mirror image’ pattern.
I have been quite bearish on the short term because the potential of this situation occurring, which has played out according to expectation, but the up-days gave me difficulty in intraday trading - my bias was too strong to see how the market could go up, and that resulted in missed opportunities and small stop-outs.
We all need to learn that, even though the short term trend may be down, there is no such thing as “straight up” or “straight down.”
Nevertheless, this pattern (as I see it) is just about complete, and will terminate when price tests or breaks through the March lows.I’m not sure what - if anything - the Federal Reserve has up its sleeve to save the market again.
In January, it was the .75 rate cut.In March, it was the Bear Stearns bail-out and rescue.In June, it was….
Be very careful in the upcoming weeks, and remember that volume can be lighter during the summer and moves can sometimes be more erratic.
Nevertheless, I thought this pattern was very interesting and offered a clear pathway for price, which provided good trading opportunities, once you got the overall short-term direction correct.
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VMI - A High Flyer Crashes
June 20th, 2008 by Corey Rosenbloom
Valmont Industries (VMI) has been a steadily rising stock until recently, when bad news destroyed the tranquility of the recent rise.Let’s look at the charts for some clues and educational lessons.
http://blog.afraidtotrade.com/wp-content/uploads/062008-1654-vmi1.png
First, the stock broke above its downtrending moving averages in late March (double arrows), signaling strength in the stock.The breakout from consolidation led to a higher than average trend move in the stock, which was accompanied on volume that was not as high as could have been expected.
Notice the new momentum high in late April, and the “Impulse Buy” trade that set up.This was a textbook example of the trade, in that volume steadily declined as price pulled back to its key 20 period moving average, almost begging for you to enter the trade there and place a stop beneath the 20 period EMA.
As expected (but never guaranteed), the stock burst to life and a new trend leg up materialized.
A negative momentum divergence occurred here, as an early warning sign that the stock may have just moved ‘too far, too fast’ and that supply may be ready to come back into the market, as those traders/investors with large profits may be ready to realize those gains.
Price made a third ‘push’ up into a climax just before the surprise drop, and price has now violated its daily moving averages and the rise is potentially over for the time being.
The “three push pattern” and “triple momentum divergence” in no way forecast the shocking decline, but they were clues that buying pressure was weakening and selling pressure might be intensifying.
Let’s peek at the chart on the Weekly time frame:
http://blog.afraidtotrade.com/wp-content/uploads/062008-1654-vmi2.png
The situation may not look as bad here, as we have potentially strong support coming in from the 20 period weekly EMA, the $100 per share “round number” support, and the prior resistance zone at $100 which could serve as support now.
Regardless, this stock can provide valuable lessons in its patterns, regarding range consolidation, price expansion into trends, rapid expansion, and then potential rapid contraction.
Notice also how volume has been steadily rising since mid-2007.Whether or not you want to trade this stock, I would recommend studying its patterns for interesting insights you can use for other trading analysis.
Also, be sure to sign up for a free, full access two-week trial to Market Club if you’ve been wondering how the service could improve your trading decisions.
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Sector Performance for June and 2008
June 20th, 2008 by Corey Rosenbloom
What have your favorite sectors returned so far?Let’s take a look at Sector SPDR performance both for the month of June so far and the year 2008 so far.
For the month of June:
http://blog.afraidtotrade.com/wp-content/uploads/062008-1558-sector1.png
The Financial sector returned the worst performance for June, dropping almost 13% so far.The only sector to post a positive return for the month was Utilities, which did so just barely at 0.50%.
All other sectors returned roughly equivalent negative returns, with both Technology and Consumer Discretionary Spending losing roughly 7.5% each.
How have the sectors fared for the year 2008, now that it is almost half-over?
http://blog.afraidtotrade.com/wp-content/uploads/062008-1558-sector2.png
The Financial sector has declined over 20% so far, followed closely - and surprisingly - by Healthcare at a loss of 13%.
We hear of the “Credit Crisis” and “Housing Bubble Burst” but actually, Healthcare has posted the second worst sector decline of the year, which has escaped many media pundits.
The two best performing sectors of the year have been Basic Materials (up 7%) and - of course - Energy (up 9.5%).
Continue looking deeper within the sector trends for potentially profitable candidates to swing trade or perhaps use as a position trading vehicle.
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Insights from a Difficult Trading Day
June 19th, 2008 by Corey Rosenbloom
What do you do when you have a rough day trading the markets? What does a rough day look like?
Today was a rough day for me, as my style of ’scalping’ momentum trading, which relies heavily on impulse and moving averages, totally fell flat today in the DIA - the market I trade most actively (I trade the Dow-Mini futures, but the DIA often holds better educational lessons and shows up beautifully on StockCharts.com). Let’s see how the action broke down and why it was so difficult:
http://blog.afraidtotrade.com/wp-content/uploads/062008-0014-rough1.png
Let’s see if I can walk you through the day.
First, I begin with an ‘opening bias’ derived from last night’s analysis, meaning I have an expectation of what my first trade will be (will I be a buyer or a seller for my first trade?). I then wait for a subsequent trade to set-up before taking action with limited risk.
Because of my bias to the downside, I decided to be a seller. The opening gap provided an ample opportunity to do so and I picked up quick profits with the large ‘bar’ plunging down to yesterday’s open.
Typically, with a gap fade, you get a reaction back in the direction of the gap, so I tried to play the market back up which worked for all of 10 minutes before reversing, giving me a near break-even profit.
My trouble came at the first red arrow around 10:30. Because of the new momentum low, and because price failed to overcome the 20 and 50 period moving average, I got aggressively short on the red sell candle. Naturally, you can see this strategy didn’t pay, so I took a larger stop (thanks in part to overconfidence and an overly bearish bias).
And naturally, the market plunged back to test new lows on the day after surging above its key moving averages and confusing traders into thinking the market was going higher. While there was a small positive momentum divergence, I still expected lower prices and tried to trade the downside just before noon with the same idea in mind I had earlier - place a stop above the moving averages and play for a test of the prior lows, if not beyond.
You can see as well that this trade failed. With my daily limit hit, I decided to step aside and play the role of “analyst” instead of trader for the rest of the day.Personally, I trade best in the morning session, so I limit my afternoon trading only to the ‘irresistible’ set-ups or trend day trades.
I don’t do well in rangebound markets, which I’ll classify this day. I also don’t do well on days that violate my expectations, though I tend to do very well on days that conform to my overnight expectations.
In hindsight, which is always 20/20, the ‘ideal trades’ seem perfectly obvious, and I have annotated some of those with purple arrows and rectangles. There were plenty of simple ’single candle’ entries, such as hammers and shooting stars (and dojis). No matter how my trading day goes, I always annotate an “Ideal Trades of the Day” chart(s) - some of which I share on the open blog if there was a particularly interesting or educational pattern (or trade). I strongly recommend you do the same so as to internalize the patterns you’re trading.
Looking back, it looks simple. “Oh, we’re having a range day today! Let’s fade price any time it pierces an upper or lower Bollinger Band.” That strategy would have worked like clockwork, and often does on a range-bound, indecisive day. Conversely, the strategy gets killed on trend days (which I am more geared and tuned to trading).
We have to trade in real time with the expectations and limitations we’re given. We don’t know what type of day it will be (range, trend, flat, volatile) but we can have expectations and then change them as the structure unfolds, via Market Profile style tactics. You have to understand the types of days to know what strategies (or trade set-ups) have the highest probability of ‘working’ in that given environment of the day.
Also, for motivation’s sake, it’s often the ‘bad’ days (not that today was horrible) that give us the most insight and help us develop even stronger as traders.
Take the time to sit down and annotate your charts and compare your performance with the ideal performance, with the goal being pattern internalization for swifter and more appropriate action for the next trading day and beyond!
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Is Google Poised for a Larger Breakout?
June 19th, 2008 by Corey Rosenbloom
Google is currently ‘trapped’ beneath its key moving averages on the daily chart, and finding key support on the weekly chart. Might the recent consolidation pattern give way to a larger breakout sometime soon?
Let’s look at the daily chart to see the consolidation:
http://blog.afraidtotrade.com/wp-content/uploads/061908-1534-google1.png
Price is strangely trapped between its key moving averages, and is clearly using the 50 day EMA for support and has been trading tight to its 200 day moving average.
Typically, large volatility moves come from rangebound conditions, such as what we have in the daily chart. After the expansion move from March to early May, gaining almost $200, price is consolidating the gains it recently made.
One could even imagine a triangle consolidation (converging trendlines) being drawn around the price recently to help visualize the winding down of ‘value’ by buyers and sellers.
The weekly chart looks more bullish, as support is coming in from the key weekly moving averages:
http://blog.afraidtotrade.com/wp-content/uploads/061908-1534-google2.png
Notice the key consolidation (or overlapping) of the 20 and 50 period EMAs. Also, you might can see the slanted upper trendline more clearly on this chart. It almost looks as though it is building a descending triangle, which typically is known as a bearish pattern, but the price is finding support about its key moving averages.
Also, one word of note - notice the sharply declining volume that has taken place since April. Often, volume “dries up” during a consolidation period as ‘value’ is established and buyers and sellers are satisfied, and there is no ‘urgency’ to buy or sell. The moment price breaks this equilibrium, there could be urgency on one side of the market, which could birth a new short-term price move or trend.
We can never know for certain in advance which way a stock will make a breakout move, but you can place tight stops and play for a relatively larger target when price eventually ‘tips its hand’ and reveals the likely direction of future short-term prices, which could set up a profitable trading strategy with potential edge (small stop with large target).
For a little more detailed analysis on Google (GOOG), and application of Gann trading tactics, see Joel Stahl’s post “Gann Made Easy.”
Keep your eye on this stock to see what happens!
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Today’s Intraday Trading Tactics
June 18th, 2008 by Corey Rosenbloom
Today’s price action was in some ways similar to a trend day, but the price action wasn’t as clean as expected.Let’s look at some of the key trades we could have taken in today’s market price structure.
5-minute chart:DIA
http://blog.afraidtotrade.com/wp-content/uploads/061908-0001-trend1.png
First, the market began with an overnight gap of less than 100 points in the DIA.Odds favored a gap fade, but unfortunately the market didn’t fulfill our gap fade wishes, stopping us out for a small loss, but giving us valuable information that the overwhelming bias for the day was to the downside.
If a gap-fade trade gets stopped out, it’s often best to reverse the position to trade in the direction of the gap, with the assumption that the market was so strong in its impulse that it overcame the ‘gap fade traders’ and should be - in this case - heading lower for the day.You should have established a core position and then ’scalped’ to the downside as price retraced back to key moving averages.
The red arrow around noon brings up an excellent point.
“Should I place stops at moving averages or just beyond them?”
I always say that if you expect a trend day, establish a core position and then place your stop beyond the 50 period EMA.The key word is ‘beyond’ because a clean close above this average invalidates the structure of the trend day (with price being beneath both the 20 and 50 EMAs and making consistent lower highs and lower lows).
If your stop was too close, you were stopped out with frustrating results as the market screamed into new lows on the day.Aggressive traders could have actually established a short trade when price came back under the falling 50.Notice that price did not notch a 5-minute close beneath the average.
Nevertheless, as price meandered its way lower, setting up another short-sell trade around 2:00 with the hammer candlesticks, a positive momentum divergence formed, which clued you in that odds were decreasing for further downside play.
In fact, I’ve seen many times that intraday price lows form on positive momentum divergences, so aggressive traders could have used this opportunity to ‘bet’ on a price low and traded to the long side into the close.
Price indeed resolved its positive momentum divergence strongly to the upside, snatching away any core trade stops placed above the falling 50 period EMA… before rolling back over to close near its lows.
I must say that it was an absolutely frustrating day to trade this market.Not every day is perfect and will align to your strategy.But it’s key to have a strategy, have defined expectations, and to trade with risk managed in the environment price gives you.
I hope today was good to you, but if not, take the time to hand-annotate the charts you traded and see where the ‘idealized trades’ lied for the day so that you can recognize them and act on them faster in real time.
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Markets Continue their Downward Arc
June 18th, 2008 by Corey Rosenbloom
Today brings more selling into the marketplace, which represents a continuation of the interesting, clean arc price has recently formed. Let’s look at it.
The Dow Jones has fared the poorest of the four major US Indexes:
http://blog.afraidtotrade.com/wp-content/uploads/061808-1554-arc1.png
You can see the clear arc from early March until present that price has formed, as momentum has cleanly and effortlessly shifted from the buyers (bulls) to the sellers (bears).In late May, I had a target for the Dow to test at least 12,000 and price is testing that area today on a new downswing in price.
It is possible the index could test its March lows, and a failure at that level would be devastating for the bulls.
Notice the negative momentum divergence which is resolving in the market with lower prices.Momentum continues its downtrend as well as price.
The Russell 2000 has fared better than the other major indexes, but let’s look at the NASDAQ which is also in the process of breaking down and beginning a potential new arc lower.
http://blog.afraidtotrade.com/wp-content/uploads/061808-1554-arc2.png
The negative momentum divergence also preceded the reversal, as price failed to climb above its falling 200 day moving average.The index formed a double top at 2,550 and appears likely to continue its newly confirmed downtrend.Price has formed a lower high and lower low, and now trades beneath all key moving averages, assuming the price will close beneath the 50 period EMA today.
Keep caution in this market, and pay close attention to open long positions.There is still money to be made on the long side in select areas, but the broader market trend appears to be reverting itself to the downside.
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POT and MON Surge to New Highs
June 17th, 2008 by Corey Rosenbloom
Agriculture darling stocks Potash (POT) and Monsanto (MON) surged to record highs today, on the shoulders of yet another surge in agriculture prices.Let’s look at these high-flyers.
http://blog.afraidtotrade.com/wp-content/uploads/061708-2352-ag1.png
While not making a new momentum high, Potash (POT) indeed made a new price high shy of $240 a share, blasting past its prior swing high of $220.
Fertilizer stocks have been rising in anticipation of the need to plant new fields of corn and soybeans in the Mid-west, an area that has been devastated by floods recently.All the fields of crops that have been destroyed have helped surge commodity prices (including corn) to new all-time highs as well, adding upward pressure on food prices and hurting companies who rely on such commodities to make goods.
However unfortunate the situation is, fertilizer and agriculture based stocks and ETFs have been doing exceptionally well.
Let’s look now at Monsanto (MON):
http://blog.afraidtotrade.com/wp-content/uploads/061708-2352-ag2.png
We see a similar upward trending pattern to Potash, only not as sharp.Price still managed to surge 5% today, despite the downward pressure in the overall market.
One may want to watch these stocks and the grain industry as well for potential trades, including retracements or other breakaway moves.
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Goldman Sachs Indeed Fades Upside Gap
June 17th, 2008 by Corey Rosenbloom
Goldman Sachs (GS) reported earnings that beat expectations, yet the stock completed a classic “Gap Fade” as I suspected it might. Let’s take a snapshot of today’s action so far.
http://blog.afraidtotrade.com/wp-content/uploads/061708-1544-goldmansach1.png
The one-minute chart shows the gap-fade trade clearly, such that instead of BUYING when the earnings news was reported early this morning, your best trade would have been to “fade the gap” to play for a temporary reversion to yesterday’s close, which was exactly what happened.
Your first instinct may be to run out and buy because the stock beat expectations, and that may very well work into today’s close or beyond, but the initial high probability trade was to fade the gap, as I suspected in yesterday’s post on the three views for Goldman Sachs.
What exactly happened from a news perspective?
Jordan Khan (Seeking Alpha) explains it point by point in his article “Goldman Sachs Trounces Earnings Estimates“.
A highlight:
Consensus estimates called for profit of $3.43 per share, but Goldman actually reported $4.58 per share, topping expetations by 34%!
There may indeed be more trades available in this stock for active traders, but the classic “gap-fade trade” was successful yet again, despite the overwhelmingly good news that the stock reported. Investors and traders anticipated such good news, as is evidenced in the daily price surge over the last three days.
Trading news is extremely difficult for newer traders, and can result in out-sized gains and out-sized losses. Always employ caution when trading news events, especially in higher priced, volatile stocks.
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Three Views of Goldman Sachs Before Earnings
June 16th, 2008 by Corey Rosenbloom
Financial giant Goldman Sachs (GS) reports earnings tomorrow, and while they’re expected to report lower profits, investors see a silver lining in the earning reports, and have been bidding the stock higher.What could happen tomorrow?
Let’s take a three-timeframe view of the stock before earnings, starting with the 15-minute chart, which reflects the ‘bid-up’ that has happened in anticipation of the earnings release.
http://blog.afraidtotrade.com/wp-content/uploads/061608-2303-gs1.png
We see the chart preceding with a positive momentum divergence as price broke to new highs (on the chart), and the positive momentum condition has carried through until today, when we see our first lower peak in the oscillator as price actually formed a new high.
The negative divergence that is the dominant technical picture (on this chart) is alarming, but one knows that actual price reactions from earnings are highly unpredictable and no chart can accurately forecast what’s about to happen - they can only give us potential clues.
Nevertheless, the educational lessons to take away from this chart include the classic ‘bull flag’ example which was near picture-perfect, and the rising momentum conditions in a regularly ’swinging’ market, with the 20 period EMA serving as trade entry and risk-management.The chart has formed a negative momentum divergence and a potential double top.
It may prove that the best strategy was to buy in anticipation of the earnings and sell today just before they were announced.There’s especially a lot of hype surrounding what’s possible to happen tomorrow.
Keep in mind that the stock already has risen almost $35 from its previous downswing, as evidenced in the daily chart structure:
http://blog.afraidtotrade.com/wp-content/uploads/061608-2303-gs2.png
There was a positive momentum divergence which preceded the recent strong upswing in price, which was likely driven by little more than trading on anticipation of a favorable (or at least, ‘not as bad’ earnings report) to ’scalp’ some quick profit before the report was released.
Notice the volume has been increasing steadily as price formed a potential ‘double bottom’ at the $160 level.Volume has picked up, confirming higher prices… but recall that many people are speculating on this stock because it has been featured in the media so prominently.
The daily structure is still ‘officially’ in a downtrend but could also be defined as being in a ‘trading range’ consolidation environment.Price is above its key 20 and 50 period EMAs, which cannot be ignored as being bullish.
Let’s see if we can glean additional clues from the weekly chart:
http://blog.afraidtotrade.com/wp-content/uploads/061608-2303-gs3.png
Price could be in the first stages of a trend reversal back to the upside, after forming a potential higher low.The weekly structure of the price is still in a confirmed downtrend, having made lower lows and lower highs with price being beneath its key 20 and 50 period moving averages.
Price is currently just beneath its key 20 period EMA, so should the stock gap above $190 tomorrow, this would call the downtrend into question, especially if bulls can rally price above $205 in the next few weeks.
Otherwise, failure at these levels could lead to another sell-off.It’s difficult if not impossible to make an accurate assessment, given the volatility that’s possible tomorrow both to the upside and the downside.
My suggestion would be to wait to see if there’s any sort of gap and try to fade the gap, provided it’s less than 2% or so.Even that could be a risky strategy with so many professional and amateur eyes focused on this financial stock.
If you’re trading this stock, or holding it overnight, prepare for the potential for a large volatile move tomorrow, and be ready to adjust should the worst-case-scenario occur for whatever your position may be.
Also, for curious traders looking for something new, be sure to take advantage of the free two-week trial to the Market Club full services without obligation.Many people have signed up already and are able to test drive the site with unlimited access.You can even see what the current “trade triangles” are saying about Goldman Sachs (GS) and other key stocks!
Whether you’re trading or watching, be safe in the face of earnings announcements.It may seem great to wake up with a large profit in your account, but always be prepared for the worst case scenario ‘just in case.’
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Does Fading the Gap Work in APPL?
June 16th, 2008 by Corey Rosenbloom
Can you be profitable using the simple “Fade the Gap” strategy in Apple Inc (AAPL)? Let’s find out.
To recap, a gap is defined as an overnight price move greater than $0.25, in which case the trade is to ‘fade’ the gap and trade against it and exit when price reaches yesterday’s close. The stats I provide record open to close, and whether or not the price of a given gap was filled intraday at any point or not. The strategy is for intraday trading only.
Let’s see!
From January 1st, 2000 to Friday, June 14th, 2008, here are the results:
Does fading a $0.25 gap work percentage wise?
Answer = Yes
Of the 2,055 trading days, 1,002 days showed some sort of gap (580 up and 422 down).
Of these 1,002 gap days, 592 gaps filled, (340 up and 252 down) for a total of 59.08% of all gaps filled.
It actually would have been MORE profitable to fade upside gaps, despite the strong upward rise in the stock.
Next, let’s look at a $0.50 gap.
Does fading a $1.00 gap work percentage wise?
Answer = No
Over the last 8 years, there were 293 gaps greater than $1.00 (175 up and 118 down).
46.42% of these gaps filled (n= 136) ; (79 up and 57 down).
What if we considered the last three years only?
Apple (AAPL) rose from a 2006 low of $50 to a 2007 high of $200. What if we looked only at that quadrupling in price, plus the trading days into 2008 (current)?
Since 2006, of the 608 trading days, 473 have resulted in an overnight gap greater than $0.25.
Of these 473 gaps, 310 have filled, meaning 65.54% of the gaps filled (196 of the 310 up gaps filled and 114 of the 163 down gaps filled).
What about gaps greater than $1.00 over the last three years?
Of the 185 gaps greater than $1.00, 94 gaps filled, for a percentage of 50.81% of all gaps filled (58 of 122 up gaps filled while 36 of 63 down gaps filled).
You can see that as the size of the gap increases, the percentage of gaps filled decreases, which has been shown by other studies.
Fading a gap in Apple (AAPL) that is $0.25 or less can be a profitable strategy from the percentages themselves, but one would need to test stop-loss strategies to ensure true profitability.
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Two Week Complimentary Trial to Market Club
June 15th, 2008 by Corey Rosenbloom
I am very pleased to announce that I have arranged for all readers to have a 2 week complimentary trial to INO’s premium MarketClub service.
This is an exceptional offer that the company provides only once per year!
From President Adam Hewison:
Over the past 6 years, MarketClub has provided thousands of members with unique tools that have put them into triumphant trades, and gotten them out of losing ones. Stock, Futures, and Forex traders, from beginners to experts, get the edge they need to succeed from MarketClub.
Today you have the chance to join this unique and powerful service for 2 full weeks without spending a dime. They want you to have an inside look into the power of MarketClub for a full 2 weeks!
No payment info is needed for the trial, just your commitment to give MarketClub your focus and attention for the FULL 2 Weeks. If you enlist today, you will have the maximum time allotted to use and learn MarketClub. There are special bonuses at the end of the trial which are yours to keep regardless of whether
or not you decide to become a full member.
Afraid to Trade readers, click to sign up for a two-week free trial of the Market Club service.
I hope you take advantage of this opportunity and enjoy your trial membership.
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Is Gold Topping or Basing?
June 14th, 2008 by Corey Rosenbloom
Gold has been featured prominently in public news stories, but the price has actually fallen almost 20% from its peak.Has the shining precious metal formed a top… or is it building a base from which to rally higher soon?
Let’s take a couple of perspectives:
http://blog.afraidtotrade.com/wp-content/uploads/061408-1710-gold1.png
On the daily chart, a down trend has been clearly established and confirmed, yet price has (currently) formed a higher low and is finding support via its 200 period moving average near the $860 per ounce territory.This will be a critical area to watch to see if prices stabilize here… or break down for more depreciation.
After three Momentum Lows, price has continued as expected to the downside, but the May momentum low was a higher low as price made a larger downswing, meaning a positive divergence was in play.Price just formed a new (relative) momentum high at the end of May, which could be a sign of strength yet to come, but time will tell.The picture is a little murky to slightly bullish on the daily chart, provided we stay about $850 per ounce.
Let’s look at the weekly chart:
http://blog.afraidtotrade.com/wp-content/uploads/061408-1710-gold2.png
If we examine this chart, we observe price as being in a long-term confirmed positive up trend, and still is.
A flat momentum divergence preceded the drop in price, and the May low registered a new momentum low on the chart, which may or may not be followed by a new price low, the logical spot for support being the rising 50 period EMA at around $830 per ounce.I will consider this the “line in the sand” in so much as if the gold bulls can hold this level convincingly, higher prices may yet be ahead.
If $830 fails and price breaks convincingly beneath $800 in the near future, then we could expect lower prices, as this would confirm a downtrend in price on the larger time frame.
If you desire to trade gold but do not want to open a futures account, you may use the GLD exchange traded fund which currently stands just shy of $86 per share.
With Fed Chair Bernanke expressing his concern about inflation, you would expect gold prices to rise, as gold is a good hedge against inflation.The US Dollar Index is strengthening and could be reversing to the upside, which will put pressure on gold (and crude oil) prices.Short term treasury yields appear to be rising as well, which could put further pressure on the precious metal.
With all these intermarket forces at work (and more), it will be fascinating to see what happens!
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A Final Bottom for the Dollar?
June 13th, 2008 by Corey Rosenbloom
Is the US Dollar Index in the process of bottoming?Has it formed one already?What does this mean for the overall market and for commodities?Let’s look briefly at the charts.
First, the ’structure’ of the Daily US Dollar Index:
http://blog.afraidtotrade.com/wp-content/uploads/061308-1903-afinalbotto1.png
Notice the price making lows at $71 but always failing to exceed those lows.Now, look at the structure of a higher high, and three higher lows.
There is clear congestion at the $74 level, but should dollar bulls break through this level, odds are that price will continue in the upside and the birth of a new uptrend on the daily chart will be officially confirmed.
Here’s a look with some indicators overlaid on the price:
http://blog.afraidtotrade.com/wp-content/uploads/061308-1903-afinalbotto2.png
Price is above the key (flat) 20 and 50 period moving averages, and a lengthy positive momentum divergence precedes the current action.Also, a clear up-trend line can be drawn under the three rising lows in price, forming a potential ‘ascending triangle’ pattern which usually resolves to the upside.
Let’s look at the structure of the weekly chart to glean any clues:http://blog.afraidtotrade.com/wp-content/uploads/061308-1903-afinalbotto3.png
While we observe here a textbook example of a perfect (or ideal) downtrend, price is now forming positive momentum divergences and breaking above its 20 period weekly moving average, which has served as significant resistance all throughout the downtrend.Also, the MACD line (black) is crossing above zero while the trend (red) line has clearly turned up.
All this signals the potential for good things yet to come for the US Dollar index if it can capitalize on the environment and continue rising, which looks likely.
A stronger dollar would likely put pressure on some commodities, including gold and oil.That would be good news, in that oil prices coming down (off their stratospheric, possibly ‘blow-off’ rise) would be good news not only for average drivers, but possibly for the stock market as a whole.
Adam Hewison of Market Club just released a video entitled “Gold, Crude, and The Dollar - These Three Markets Could Change Everything” in which he discusses what possible trend reversals in these interrelated markets would mean.The video requests a free sign-up, but no obligation beyond that.Also, a reminder that starting Monday, I will be posting a link to sign up for a two-week free Trial to the Market Club services which will be interesting and exciting.
Let’s keep our eyes on these markets and what possibly lies ahead!
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Yields and the Curve - A Quick Look
June 13th, 2008 by Corey Rosenbloom
Short-Term treasury yields have been rising lately, driving bond prices down and potentially confusing investors who escaped the stock market in the recent past to escape the downward volatility.It is time to switch?
Many investors and financial adviser instructed their clients to buy bonds to ride out the upcoming market volatility, some doing so as early as August of last year.That was a factor in driving bond prices up and yields down (along with the Federal Reserve slashing interest rates), and indeed the US Stock Market experienced some downside volatility into 2008.Many advisers purchased short-term notes (2 years or so), expecting this would be market correction lasting about that duration, and then rotate clients back into the stock market.
But with that portion of the bond world being potentially ‘overcrowded,’ are these same advisers now at risk and shifting out of the short-end of the bond market, helping push yields higher?Remember, the Federal Reserve has not yet hiked interest rates, but are signaling a “wait and see” environment.While there are certainly many more reasons why yields may be headed higher, let’s take a look at the charts:
http://blog.afraidtotrade.com/wp-content/uploads/061308-1645-yields1.png
Two-Year Treasury Note Yields have risen from a low beneath 1.5% in March now to a 2008 high at 3.00%, with the yield doubling in four months.Bond prices (not shown) have seen a corresponding fall as well.
Investors who locked in rates last year are still collecting their interest payments, but if you just now entered say a bond ETF, chances are you’re down a little bit on the position in terms of price movement while the US Stock Market recovered (at least since March).
One thing to note about yields (and bond prices) is that they tend to trend much stronger and solidly than the Equity Markets.According to the chart shown below, which dates back to 2000, you can see that yields have much smoother action, and when a change in direction is signaled (especially on the monthly chart), that direction tends to persist.
http://blog.afraidtotrade.com/wp-content/uploads/061308-1645-yields2.png
There was really only one aberation in the smooth trend - that being in late 2001 around the time of the September 11th attacks, when investors perhaps overshot the ‘flight to quality.’Nevertheless, at all other times in the chart, there really have been few retracements - only pure trend.
One thing to note is that yields often don’t ‘change direction on a dime,’ but instead flatten out and form rounded patterns before changing direction.The most recent change (with the doji) represents a ‘change on a dime’ pattern, but nevertheless, the monthly trend appears to be changing.
Yields found a bottom at the lowest levels of the decade, which also occurred just below 1.50% and now appear to be headed higher (bond prices appear to be headed lower).
Remember that if you purchased an actual 2-Year Treasury Note, you should not be concerned by daily or weekly price losses that your Note (bond) is showing.At redemption, you will receive the full value plus interest.If you’re in a bond ETF however, the situation is different, and you’re at greater risk of price fluctuations.
We’ll continue to watch these developments and what they might mean for the overall Stock Market.
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What’s Happening to AAPL?!
June 12th, 2008 by Corey Rosenbloom
With one hour left until the close, Apple Inc (AAPL) is down 4.5% for the day and just over 7% for the week.Let’s look at the chart to see if we can get any clues to where the selling might stop.
First, the intraday 5-minute chart to see what is going on with the price action and accelerating selling pressure:
http://blog.afraidtotrade.com/wp-content/uploads/061208-2010-apple1.png
Price is exhibiting a “trend day down” where price begins at one extreme and - so far - is ending at the other extreme.The definition is confirmed by the fact that price found continual resistance at its falling 20 period EMA (which also gave you clean, low-risk entries into the prevailing and fast moving downtrend).
What did this selling pressure and momentum do the daily chart?Is there a target there?
http://blog.afraidtotrade.com/wp-content/uploads/061208-2010-apple2.png
With all the recent seemingly bullish news for the stock, the technicals (chart patterns) did not confirm the news.In fact, large funds may actually be using the good news as an excuse to liquidate - only their methods are either being exposed or exacerbated by other selling.
Notice that, no matter how bullish you got on this stock, an obvious momentum divergence preceded today’s ‘massive’ (if it can be called that) sell-off.This absolutely did not come as a surprise.A double-top formation complete with negative momentum divergence was a clear warning sign that ‘things just weren’t right’ with this stock in the short-term.
I’ve placed a target of $160 which is the 200 period moving average and the zone of the April retracement top.That could be the next logical chart area of support, but we will always watch day to day to see what happens to the stock.
As for the weekly chart?It also showed some signs of advanced weakness going into today that, perhaps now, have become more obvious.
http://blog.afraidtotrade.com/wp-content/uploads/061208-2010-apple3.png
The biggest ‘red flag’ from this longer-term chart was the non-confirmation from volume flow as price continued to trek its way higher.As prices increased, volume decreased, meaning the higher prices were likely supported by fewer and fewer buyers.What happens when the last buyer is satisfied?Or at least the aggregate buying pressure is satiated?Price has much higher odds of falling.
The $160 target seems just beyond the rising 20 period EMA here, so the $165 level could hold on this chart.A word of warning to the bulls - if the $160 level fails, the next logical support zone would be the rising 50 period moving average, which currently stands around $150.
Has Apple’s moment in the sun truly fallen?Or is this just a temporary pause in a broader up trend?The odds seem to be shifting to the bears in the short-term but we’ll continue to watch any new developments in Apple with great interest, as I’m sure you will as well.
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Transports Driving off a Cliff
June 12th, 2008 by Corey Rosenbloom
The Transportation Index plunged beneath key support, after making a large run-up in price that was quite impressive.Let’s look at $TRAN, railroad stock CSX, and the XAL Airline Index.
Transportation Index:
http://blog.afraidtotrade.com/wp-content/uploads/061208-1651-1.png
We see the powerful and strong uptrend that has developed throughout the year coming into doubt recently, thanks to a ‘three-swing’ or ‘three-push up’ pattern complete with a negative momentum divergence (and two new momentum lows).
In fact, our momentum oscillator just registered its lowest reading of the year, as price broke through trendline support (not drawn), and the 20 and 50 period moving averages.Today, price is rallying back, but let’s see if we can overcome these hurdles and close strongly above the 50.My guess is that we’re poised to test the flat 200 period average soon.
Next, railroad stock CSX has held up strong in this environment, but it too has the potential of being ‘derailed’:
http://blog.afraidtotrade.com/wp-content/uploads/061208-1651-2.png
Notice the mighty and powerful uptrend that has sustained itself throughout 2008.
Price made an almost continual rise from mid-March until late May, but now a few key momentum divergences are starting to catch up with the stock as the buyers have temporarily dropped the ball.
Although price broke the strongly rising 20 period moving average, the 50 period seems to have contained the downward swing so far.The question is - will it hold or not?
Finally, let’s look at the horrific spiral of the Airline Index (XAL):
http://blog.afraidtotrade.com/wp-content/uploads/061208-1651-3.png
While the broader Transportation Index is the picture of a powerful uptrend, ironically its component the Airline Index is the perfect picture of a downtrend.
Notice how the 20 period EMA has contained the price all the way down.The 50 period has comfortably rested above the price, and has not come into play since early February.With the potential for soaring gas prices, expect this index to be under further pressure.
One may ask, “How much further can an index go, if it’s already at 18?”The answer is of course unknown, but if trading in these stocks, it’s probably best to wait for some sort of bottoming pattern or true trend reversal (higher high + higher low) before committing hard earned capital in an accumulation process.That may be fine for investors, but traders need to rotate capital into stocks and sectors that are outperforming.
We’ll continue to watch these developments closely.
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Trading Today’s Trend Day Down
June 11th, 2008 by Corey Rosenbloom
As I indicated earlier this morning, due to the double-doji pattern, odds favored price expansion today, with the bias being to the downside.How could you have turned that bias into profits and traded the trend day?
Let’s take the S&P 500 as a proxy (you would use the SPY or the DIA … or perhaps the futures for trade execution):
http://blog.afraidtotrade.com/wp-content/uploads/061208-0339-trend1.png
The main point of a trend day is to “get the trade on early” and play for a larger target than normal.Because the bias was to expect a trend day, you should have been looking for early entry.During a true trend day, price opens at one extreme and closes at the other, so theoretically, any trade execution should yield a profit if held until the close.I like to manage intraday positions more aggressively (or conservatively, depending on your definition).
Nevertheless, a core trade is established when you feel the weight of the evidence is sufficient to establish the day as a trend day.I exit core trades when the price breaches the falling 50 day moving average on the 5-minute chart, or at the close of the day.
In this case, the core exit was taken around 2:30, which wound up being nothing more than a ’shake-out’ trade.The positive momentum divergence that formed for the duration of the day led me to believe that buyers may be stepping in intraday.This was not the case, but having the market close lower didn’t bother me because my rules dictate entry and exit.
There were a few key opportunities to ’scalp’ the price, or play for smaller targets with limited losses, being when price retraced back to its falling 20 period moving average.The stop goes above the falling 50 with the target being the most recent swing low.The market gave us at least three of these opportunities today. These give an opportunity to use limited leverage to play for a relatively high probability small target.
The positive momentum divergence built, but alas it turned out to be a false signal, as traders rushed for the exit into the close, unwilling to hold positions overnight.
Trading a trend day successfully can add quick profits with minimal effort to your trading account.
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Double Doji - Should Resolve with Larger Move
June 11th, 2008 by Corey Rosenbloom
Interestingly enough, the S&P 500 Index formed two doji candlesticks over the last two sessions, revealing a market experiencing indecision, which should give way to a larger trend move today or soon, so be expecting some sort of range expansion day.
http://blog.afraidtotrade.com/wp-content/uploads/061108-1453-doji1.png
Beyond the two doji ‘indecision’ candles, we have a negative momentum divergence, and a new roughly confirmed downtrend (lower high and lower low and confirmation) on the daily chart, and price is beneath all key moving averages.
I would wager odds favored lower prices, and a potential retest of the 1,280 lows before long.Volume also rose on the days of indecision, which indicates churning and a potential struggle between buyers and sellers.Eventually, one side will lose the temporary battle and price should expand into a range expantion, or possible trend-style day.
The Dow Jones looks even worse from a bullish standpoint:
http://blog.afraidtotrade.com/wp-content/uploads/061108-1453-doji2.png
It looks more bearish from a trend standpoint, but price found significant resistance at the converging 20 and 50 period moving averages, and the negative momentum indicator is more ominous than that of the S&P.
The NASDAQ (not shown) managed to underperform, and carve out two negative days previously.
Be prepared for potential price expansion either today or at some point going into the weekend.It’s very interesting to have two dojis back-to-back.
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Gas at the Pump $5 by End of 2008?
June 10th, 2008 by Corey Rosenbloom
What are the odds that the average cost of a gallon of gas at the pump will cost $5.00? While that’s hard to discern now, a solid 86% of Americans in a CNN poll released today said that possibility was at least somewhat likely.
http://blog.afraidtotrade.com/wp-content/uploads/061008-1538-gas1.png
Here are some key quotes from the Washington Post article “Fuel Prices Challenge Cars’ Reign:”
“… cash-strapped Americans are changing vacation plans, consolidating errands, and turning to carpools and mass transit.”
“… with crude oil trading at more than $134 a barrel yesterday, more gasoline price increases are probably in the pipeline as refiners and retailers attempt to pass crude oil costs along to motorists, industry analysts warn.”
There are seen and unforeseen effects:
“In a society nurtured on cheap gasoline, the high fuel prices are having disparate effects: the end of free pizza deliveries at major franchises, a plunge in the sales of sport-utility vehicles, a steep drop in the price of houses that are far from jobs or mass transit.”
Interestingly enough, the major airlines currently have done an about-face:
“The biggest U.S. airlines, squeezed by massive fuel costs, imposed domestic fare increases over the weekend, only to roll them back yesterday to avoid losing passengers.”
The authors put the situation in daily, easy to understand monetary terms:
“The cost of the 44-mile round trip between Fairfax City and downtown Washington has risen to $8.93 a day from $6.78 last year for a commuter driving a car with average fuel efficiency.”
It takes roughly $9.00 per day just to get to and from work if your commute is around 100 miles, which is a reality for many Americans.
Finally, here’s a quick look at the daily price of crude oil prices (futures) per barrel:
http://blog.afraidtotrade.com/wp-content/uploads/061008-1538-gas2.png
We will continue to watch this situation very closely, and what it may mean for specific sectors, and the broader economy in general.
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AAPL Falling, Rising, Confusing
June 10th, 2008 by Corey Rosenbloom
I thought it would be benficial to share two perspectives on the recent news and stock market price action in Apple Inc (AAPL) and what it might mean for the future.
First, Jim Goldman at CNBC Tech Check in his article “Apple:The Day After” writes the following:
“Investors can be a quirky bunch, especially when we’re talking about Apple, and especially when they’re “trading” instead of investing.”
“Yesterday, they were all over the map: plunging, recovering, plunging, settling the day with a mild loss even in the face of what could be one of the most exciting platforms — not products, but platforms — this company has ever unveiled. Investors might have gotten it, but traders wanted more.”
I like the distinction he makes between traders and investors here and in the article.
“But what a difference a day makes, as investors — and those traders — start to appreciate the bigger picture here: iPhone is a platform, like the Mac and iPod before it. It is a phone….”
Also, Adam Hewison at the Market Club commentary posted an educational whiteboard video descriptively entitled, “AAPL:June 2008 Update” on what happened and what may be in store for the stock which is definitely worth watching.
“Is the hype already built into the price?Or will the price go much, much higher?”
Adam shows historical buy signals from their ‘trade triangle’ technology, and discusses the current signal as well as current support and resistance levels and the current trend and what may be some good price targets or risk-management (stop-loss) levels.He also uses Fibonacci retracements to discuss possible pull-backs.
Remember that joining the Market Club gives you access to the analysis, commentaries, scans, and active trade triangles (including scanning for new signals) as a member, including real-time reports and interaction.
There will be a free two-week trial of the service offered this weekend, and I will post the details on that when it becomes available.
Finally, I wanted to share a portion of an email sent from a reader overseas describing his personal experience trading Apple’s announcement yesterday:
“I decided to stay up for the entire Apple conference last night to watch the stock movements and see what I could learn from it (as well as trade it). Staying up for it meant sleeping at 3am (not unusual these days).”
“As the conference opened and Steve Job’s demos began we saw that massive downward spike. The rate at which it fell was stunning. All I was hoping at the time was for it to rebound at $180 at some point later in the day so I could buy my puts at a reasonable price. The conference started off with long boring demos of software kits, etc and coincided with the fall.”
“Coincidentally (or not) the upward recovery only began once the actual iPhone demo was announced. Once the conference was finished and the iPhone price was announced, the fall began again.”
“For me, I broke my promise to myself and bought PUTS *before* the words “iphone 3g” were uttered. I had originally told myself to wait (which would have been better in hindsight but I was concerned about missing the potential downswing).
I found the account fascinating, as it described a personal element to the intraday stock movement chart I displayed yesterday in my post, “AAPL Intraday - Why Didn’t it Rise?!”
Apple continues to intrigue many traders and investors, and I’m fascinated by their reactions, and so I’ll continue to watch this situation and the news surrounding it as it develops.
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AAPL Intraday - Why Didn’t it Rise?!
June 9th, 2008 by Corey Rosenbloom
Apple Inc (AAPL) announced today that it will begin selling improved iPhones at reduced prices, which would seem like wonderful news for the stock, but the prices were wildly volatile, erratic, and closed 2% lower for the day.Why?Let’s take a look.
http://blog.afraidtotrade.com/wp-content/uploads/061008-0158-appleiphone1.png
According to the AP Article “Apple Unveils faster iPhone - Chops Price” (and many more released today), Apple unleashed its 3G wireless phone complete with GPA, which should mean more people will be buying iPhones soon.
First, news of this release was widely anticipated, and the stock has already had a nice run-up in price, and savvy traders don’t wait for news to begin buying.In fact, once news is released, savvy traders already have a profit and use the news (or those buying from it) to unload their positions into the anxious new buyers.Could that have happened today?
From an intraday trading standpoint, price opened with an opening gap of a small magnitude, and so the first inclination is to fade the gap, which unfortunately was stopped out quickly for a (hopefully) small initial loss, and the downtrend was established early on.
Price was beneath its key moving averages and failed to rally above the 20 EMA on the first test at 10:30 am.This was the first major clue that the day’s bias would be to the short-side.
Price did break the 20 twice after this point, but failed exactly at the falling 50 period EMA, which was the ‘turning point’ for the bearish bias.The second test formed a doji (reversal) candlestick, and then news was released, which was digested quickly (to the downside, unfortunately) as price slammed down to new intraday lows and formed a climax reversal.
Traders reassessed and then price bursted above the key averages… only to peirce them once again and form a double-bottom pattern complete with a positive momentum divergence, shattering any hope of further downside action.The stock had a volatile ride, but made a clean dash higher into the close.The intraday range was roughly $8.00, which led either to quick profits, or massive frustration, depending on how well traders fared in these conditions.Trading news can be extremely difficult, but often the prevailing structure of the technicals can give us clues (but never certainties).
Where does Apple stand on the daily chart?
http://blog.afraidtotrade.com/wp-content/uploads/061008-0158-appleiphone2.png
Price has rallied sharply since the March lows, but has done so into a potential double-top formation, complete with a negative momentum divergence.Volume picked up today as price fell, which is a potential bearish sign.Also, price formed a new momentum low near the end of May, which could signal a test of the May lows or worse if the double-top pattern materializes itself. Bulls have work to do if they expect to push the price higher, but don’t count Apple bulls out so quickly.
Apple likely will continue to be a darling (or at least ‘most watched’ or favorite) stock, so keep your eyes on any possibilities on this rising giant and what it could mean for the overall stock market.
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Stops, Profit Targets, and Total Trades Taken
June 9th, 2008 by Corey Rosenbloom
I have been discussing trading strategy research I have conducted, which examines the relationship between your stop-loss chosen to the profit target chosen.In the past, I have discussed Win Rate and Net Profit - but let’s pause to view the 3 systems’ total trades taken based on the relationship.
Please visit my earlier posts for a full description of the parameters and methods:
Does a 95% Win Rate Result in Net Profitability?
Fixed Stop-Loss and Fixed Profit Targets (effect on Win Rate)
Net profitability is a factor of a variety of inputs and considerations, one of which is total number of trades your system takes over a course of time.
The following graphs show total trades taken in a “long only” and “one trade at a time” only comparison of strategies tested with the DIA (Dow Jones ETF) from 1998 to present.You’ll need to click on these charts to view them better.
Momentum Long Entry Strategy Total Trades Taken:
http://blog.afraidtotrade.com/wp-content/uploads/060908-1539-trades1.png
MACD Strategy Total Trades Taken:
http://blog.afraidtotrade.com/wp-content/uploads/060908-1539-trades2.png
20 Day Moving Average Cross Total Trades Taken:
http://blog.afraidtotrade.com/wp-content/uploads/060908-1539-trades3.png
As expected - and is no surprise - with a Stop-Loss of $1.00 (100 Dow Points) and a Profit Target of $1.00, all three strategies traded the most frequently, with the corresponding value of $20 having the least number of trades.
The Momentum strategy at the 1 to 1 level traded twice as actively as the Moving Average Cross, and actually more than three times more actively than the MACD strategy.
You can scan the chart for relationships that develop, and identify “what-if” scenarios, such as “How many trades might I expect to take if I raise my profit target but keep my stop constant at $3.00?” or “What would happen if I lowered my stop-loss to be more conservative and kept my profit target the same?”
Admittedly, a Stop-Loss greater than $10 is often logically unfeasible for traders, but for investors, it can come into play.Also, it’s important to know the relationship and see if that matches up with expectations as the stop (or profit target) is increased beyond what you normally would trade.
Also, knowing this relationship is important because each individual trade will generate commissions and slippage, neither of which are good for net profitability.If you’re shown a system which is net profitable, but for some strange reason, the vendor did not include number of trades taken, you should be suspicious because the system may be unfeasible to trade profitably due to the effect of the numerous trades taken which produce very small gains that fail to overcome commissions.
Unless you’re employing some sort of scalping strategy, it’s generally better to keep total trades lower in your strategy unless the average winning trade is much higher than the average loser.This is certainly open for debate, but nevertheless it is critical to consider this factor when designing or implementing your own trading strategies.
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Blog Roundup of Friday’s Market Activities
June 8th, 2008 by Corey Rosenbloom
What have some of the other bloggers and writers said about the market activity and ramifications of Friday’s actions? Let’s find out!
The Big Picture: More on May 2008 Employment
“If you want to spin a story out of this, it could be that people are re-entering the labor force because they’re having a hard time making ends meet.”
Kirk Report: The Worst Is Behind Us Trade
“Along with a lot more Fedspeak next week, the calendar is going to be on the busy side with reports on pending home sales, Beige Book, retail sales, business inventories, consumer sentiment and the consumer price index.”
TraderFeed: Getting Off the Performance Roller Coaster
While not technically about Friday’s action, my guess is that many of you feel as if you’re stepping off a roller-coaster after last week, so Dr. Brett’s article is timely.
Infectious Greed: Bad Day in the Markets
“There is something about the conjunctival redness of this market heat chart (via Finviz) today that is overwhelming:”
Adam’s Daily Options: Sell In June?
“So if you see a gap open up today on the Jobs Report, this from Jason Goepfert suggests you should short with both hands.” Adam called Friday’s action early on, but the gap was actually down, not up, but the ’shorting with both hands’ strategy worked the same.
Fallond’s Stock Picks: Stockcharts.com weekly review
Declan reviews a variety of charts annotated from StockCharts.com which shed light on future possibilities.
Quantifiable Edges: When Months Start Bad
While not technically about Friday’s action, Rob finds patterns in weak beginnings to months.
As I said previously, Friday’s action was interesting for a variety of reasons (fundamentally and technically) and so I suggest gathering as much information about it and documenting it as possible.
Thanks to NewsFlashr Business Blog section for the ease in scanning over 50 top stock market/investment blogs on a single page.
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The Dollar and Oil
June 7th, 2008 by Corey Rosenbloom
The headline from last week will be the sudden surge in crude oil prices, but let’s take a moment and view this development along with the implications for the US Dollar Index.
Crude Oil Prices:
http://blog.afraidtotrade.com/wp-content/uploads/060708-1938-dollaroil1.png
This is an excellent example of why it’s best not to try to anticipate market tops or bottoms.It also strongly reaffirms the basic market principle “Trends Have Greater Odds of Continuation than of Reversing.”Each time the crude oil prices retraced, they actually became a better buying opportunity, rather than a chance to ‘buck the trend’ and ‘get short.’
Nevertheless, prices pulled back just beneath their rising 20 period moving average, which has happened four times this year since rising above in February - each time provided a good buying opportunity.
The surge Friday may or may not be unsustainable, and a variety of market pundits will argue both sides of the prediction, but the 8% rise in prices was remarkable, nonetheless and helped dominate the news cycles and sent the broader stock market indexes plunging 3% for the day.
Crude Oil prices exhibit a classic example of a strong, powerful uptrend that could be used in any textbook definition of an uptrend.
What does this mean for the US Dollar Index, which looked potentially poised for a recovery?
http://blog.afraidtotrade.com/wp-content/uploads/060708-1938-dollaroil2.png
Dollar bears screamed “not so fast!” this week, staving off what could have been an impressive recovery and daily trend reversal to the upside, which would have been a remarkable development.
If there is to be a reversal, it will come slightly later than it could have arrived without the sharp rise in oil and gold prices this week.
The $73.5 level corresponds with the falling weekly 20 period moving average, if you’re wondering why that zone appears to be a magic level.That weekly average has provided strong resistance in the past, and did so recently as well.
A bearish potential double-top (short-term) formation occurred, complete with a negative momentum divergence, which could signal a test of the March/April lows or even just beyond, especially if oil continues its ascent.
We’ll keep close tabs on these markets and of course how their interplay affects the broader US Stock Market.
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The Damage Done Across the Board
June 6th, 2008 by Corey Rosenbloom
Today’s 3% market plunge wrecked havoc on the otherwise bullish conditions of the broader US Indexes.Oil rose drastically, and other commodities benefited as the Dollar Index fell as well.
The Russell 2000 and the NASDAQ are still above or testing their rising daily key moving averages, but the Dow is well beneath these key zones, and poised to head lower.
http://blog.afraidtotrade.com/wp-content/uploads/060708-0047-decline1.png
The Russell 2000 is still the relative strength leader, and stands just above its key rising 20 period moving average, but bulls lost ground above the rising 200 period moving average, carving out a potential false breakout.
The Dow has the worst technical (chart) picture of the four major US Indexes:
http://blog.afraidtotrade.com/wp-content/uploads/060708-0047-decline2.png
The Dow fell just shy of 400 points today, taking it down to 12,200, a level not seen since late March.
I actually overheard someone say today “Well, the decline wasn’t that bad because yesterday the market was up so much.“While technically true I suppose, the Dow is still 200 points lower than where it opened yesterday, and any buyers yesterday are ‘underwater’ at the close of today’s action.
Regardless of whether today’s action was ‘bad or not,’ a 400 point decline in the Dow Jones Index calls for further attention, especially in an environment where the larger time frame trends are turning lower and the Dow stands roughly 500 points away from new 2008 lows.
What happened from a Sector perspective today?
http://blog.afraidtotrade.com/wp-content/uploads/060708-0047-decline3.png
Financials underperformed by the largest measure today (losing 5.32%) while the ‘leader’ (not surprisingly) was the Energy sector, which actually lost almost 2% today.The ramifications of the negative news were bad enough to drag even oil-based stocks down today (Exxon-Mobil - XOM - actually lost 2.5% today, not much different than the Dow Jones).
Finally, what happened with bonds?Investors took the opportunity to unload stocks and flee to the safety of bonds, such that bond prices rose while yields fell in similar percentages to the broader stock market.
http://blog.afraidtotrade.com/wp-content/uploads/060708-0047-decline4.png
The US Dollar Index fell by almost a full percent today, while gold prices surged in a trend day up 3%.
Mark today as a historical day, print & annotate your charts, and read what various commentators have to say about today’s action.
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Intraday Plunge Shocks Bulls
June 6th, 2008 by Corey Rosenbloom
With two hours of trading left, the US Stock Market indexes have shed over 2% of their value from yesterday’s close.Let’s learn a lesson from the intraday price movement so far and see where the charts may wind up for the day.
First, the @YM Dow Mini June Futures Contract 5-minute chart:
http://blog.afraidtotrade.com/wp-content/uploads/060608-1907-intraday1.png
Be sure to click the image for full size.This chart was created with TradeStation and shows the Dow-mini futures contract shedding over 300 points from 7:00am this morning.
The lesson from the chart is the developing momentum divergence, which is calling for a pause or potential ’rounded’ or ‘rolling’ reversal in price to stall future massive intraday selling.
The zone labeled “trapped” provided excellent opportunities for ultra-short term traders to have well-defined support and resistance levels for scalp-style trading - behaviors I engaged in on the 1 minute chart which showed clean price swings despite the prior down move.We expect consilidation after a large down move so there’s nothing wrong with playing short-term support and resistance that develops in the rangebound consolidation phase that is expected after a large volatility move (especially if you missed the large move for whatever reason).
Most traders indeed did miss this move because it was an ‘overnight occurrence’ that was reflected with a large gap in the index ETFs.The “gap fade” strategy isn’t as attractive with gaps greater than 1%.
Be on guard for any afternoon breakout, but for the moment (until something changes), it wouldn’t surprise me to see a continued trading range with some sort of trend move of some sorts into the close.
Where does this leave us on the daily chart?I mentioned previously that the market - particularly the Dow Jones - was facing an interesting juncture.It appears the move was as the charts (and I) expected when price tested its converging 20 and 50 period moving averages - a move to the downside:
http://blog.afraidtotrade.com/wp-content/uploads/060608-1907-intraday2.png
Next stop:I interpret the odds to favor a test at least of the 12,000 zone, which now stands only 300 Dow Points away.I made that market call (Market Beginning a New Down-Swing) embarrassingly just before yesterday’s 1.5% surge.Now, I don’t feel so silly with the market engulfing yesterday’s gains and more.
It will be interesting to see what happens when the dust settles, and what the technical damage (if any) will be to certain key stocks and sectors.
As always, check out the Market Club for additional resources, scans, and commentary.
Note - the market actually gapped lower, however the way the Dow Jones is calculated, the index charts never show any gaps (which leads to visually appealing, though technically inaccurate charts).
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WMT: An Unexpected Stock Breaking to New Highs
June 6th, 2008 by Corey Rosenbloom
With the backdrop of potential recession, record oil prices, credit crisis, and other negative news, retail giant Wal-Mart (WMT) not only has broken to new highs for 2008, but is pennies shy of a fresh 6-year high, ascending 26% for 2008 alone!
Let’s look at the charts to see what so many people have been missing:
http://blog.afraidtotrade.com/wp-content/uploads/060608-1418-wmt1.png
Price began 2008 near $47 and closed yesterday at $60 per share.While the broader stock market indexes are struggling to break-even for the year, Wal-Mart has soared to new lofty highs for the year, marking a stellar and impressive gain for such a steady, “Blue Chip” stable stock.
One would envision consumer spending being reduced by the myriad of bad economic news that many people cite, but Wal-Mart stock price either is rising ‘despite the wall of worry’ or in direct defiance of it.Maybe we’re not as bad as so many people seem to think?
Nevertheless, the daily chart shows a powerful and sustained uptrend beginning at the first of the year, evidenced by price being above and supported by its rising 20 and 50 period moving averages - a pattern which continues to this day.
The monthly chart shows another impressive picture:
http://blog.afraidtotrade.com/wp-content/uploads/060608-1418-wmt3.png
Price is pennies shy of the 2002 price high (which also occurred during unfavorable economic times.If you notice, price plunged to lows via the September 11th attacks and actually never looked back since then throughout the remainder of 2001 and the start of 2002… before returning almost to the post-attack prices.
In this background of uncertain economic conditions, Wal-mart has again rallied strongly despite economic concerns.It may be that a larger percentage of consumers flock to the discounts of Wal-Mart when economic times are difficult, which in turn boosts their stock through increased revenue.After all, with the groceries, medicines, and cosmetics (and so much more) they offer, those would be considered consumer staples materials that we all must buy, despite economic conditions as they exist.
Looking back, after a similar (almost identical) rapid month-over-month rise, Wal-Mart fell just as much into the year 2002.
Will history repeat itself this time?
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Remarkable Recovery Leads to Interesting Juncture
June 5th, 2008 by Corey Rosenbloom
Who expected such a large recovery would occur today?Let’s take a peek at some of the daily chart action in the broader indexes for clues as to why this intraday rally was so remarkable.
First, the Small Cap Russell 2,000 daily chart:
http://blog.afraidtotrade.com/wp-content/uploads/060608-0223-rally1.png
As mentioned previously in Small Caps Strongly Outperforming, the Russell 2,000 Index slammed past the falling 200 period moving average like it wasn’t even there and has rocketed just beneath new highs for 2008.
In a period of seemingly economic turmoil and recession, the Small Cap Index is mere points away from annual high.Fascinating.Generally, in times of economic uncertainty, the Larger Cap (Blue Chip) indexes outperform because of their ability to ‘weather the storm’ - maybe the storm has passed.
This continues to be a remarkable development, one we will continue to watch with great awe.
Next up is the similarly outperforming NASDAQ Index:
http://blog.afraidtotrade.com/wp-content/uploads/060608-0223-rally2.png
Similar to the Russell, the NASDAQ also has burst just shy of new highs above its 200 day moving average.There appears to be far more support beneath price (via the key moving averages) than resistance, and the technical picture has improved vastly as a result.Bulls have indeed surprised bears and pummeled them since the March lows.
The NASDAQ index is very close to new highs for 2008 as well.
Finally, let’s look at our friendly Blue Chip index of 30 solid stocks to see how it has held up:
http://blog.afraidtotrade.com/wp-content/uploads/060608-0223-rally3.png
The reason I consider the rally ‘remarkable’ is because price is very close to invalidating a confirmed ’sell swing’ that is projected to take price down to 12,000.The strength of the intraday rally was likely caused by panicky short-sellers (or perhaps hedgers) exiting their positions, which fueled higher prices in the short-run.
One cannot ignore the previous day’s doji (as I did with my greater than normal bearishness) as a precursor to today’s rally.I must admit I took some stops due to my downward bias I tried to project on the market today.It was an impressive rally indeed.
Price now finds itself with an interesting dilemma.The Russell & NASDAQ are showing ‘clear skies ahead’ in terms of their technical picture.The Dow Jones, however, is showing nothing but potential resistance ahead.These ‘non-confirmations’ are puzzling to traders, and I must admit it has me intrigued as well.
The market is at an interesting juncture at the moment, and it will be fascinating to see which way price eventually resolves and to perhaps take part with the price action yet to come should a new and clear trend arise.Stay tuned!
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Ten Year Yields Still Rising
June 5th, 2008 by Corey Rosenbloom
The Yield on the 10-Year Treasury Note continued its ascent after an orderly pullback occurred this week following a break to new highs of 2008.It appears it is set to continue to higher yields.
The 10-Year T-Note Yield Chart (currently stands just above 4.0%)
http://blog.afraidtotrade.com/wp-content/uploads/060508-1414-yields1.png
Price is in a confirmed short-term uptrend, and stands above its 20 and 50 day moving averages after making a new swing high crest and piercing its 200 day moving average.
The recent retracement to the rising 20 day moving average served as a successful test and the yield could be set to continue its uptrend for the time being.
This would be inline with recent reports that Fed Chairman Bernanke is more concerned with inflation now, and is rather unlikely to lower rates further unless “the economy falters severely.”
To combat inflation, the Federal Reserve often raises interest rates in an effort to produce a tighter monetary supply policy.The Bond market often forecasts economic conditions and Fed policy decisions prior to their occurrence.
According to the Reuters article:
Berrnanke described overall inflation as “significantly higher than we would like,” the second straight day in which he sounded a warning on inflation, which financial markets took as a firm signal that interest rates are likely on hold for some time.
The 10 Year T-Note Price shows the opposite chart, which might be about to break support and descend to new 2008 lows:
http://blog.afraidtotrade.com/wp-content/uploads/060508-1414-yields2.png
Price successfully tested the rising 200 period moving average to the downside, but has retraced back into moving average resistance via the falling 20 and 50 day moving averages.Price is still in a confirmed downtrend, and has been falling since mid-March (which corresponded with the lows in price in the US Stock Market).
We will continue to watch these developments, and what it may mean for the US Dollar, Interest Rates, and of course the US Stock Market.
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Small Caps Strongly Outperforming
June 4th, 2008 by Corey Rosenbloom
For those of us who mainly follow the “Big Three” US Stock Market Indexes, you might be surprised to find that the Russell 2000 - Small Cap Index - has outperformed the S&P and Dow Jones, and is closer in recent performance to the NASDAQ.
Let’s see the Russell’s recent dominance:
http://blog.afraidtotrade.com/wp-content/uploads/060508-0350-russell3.png
I’m showing the actual price performances of the S&P 500 (blue) and Russell (Red and Black).Notice how the two major US Stock Market indexes have tracked extremely closely throughout most of 2008, but what’s starkly evident is how the two indexes have diverged sharply since mid-May.
The most recent price swing in the Dow and S&P have made a lower high, while the Russell has made a higher high, and could be on track to make new highs for 2008!Who saw that coming?
The Dow has performed poorly in comparison as well (not shown on these charts).
Let’s take a quick look at the amazing strength of the Russell 2000:
http://blog.afraidtotrade.com/wp-content/uploads/060508-0350-russell1.png
Price closed higher today, but is trapped starkly between the rising 20 and the falling 200 period moving averages.Where will price break next?
Momentum essentially is flat, and when price swings are so narrow as they are in the index, the momentum oscillator is essentially useless for analysis purposes (of momentum highs, lows, or divergences).
It will be interesting to watch whether price surges above resistance or breaks beneath its support zones, and what that might mean for the ‘main’ stock market indexes.
Keep your eye on this most interesting development.
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CMT Level II Passed
June 4th, 2008 by Corey Rosenbloom
I am excited to announce that I received word today that I had successfully passed the Chartered Market Technician Level 2 examination, offered through the Market Technician’s Association.
The test was rather difficult, and required various textbook style assignments (reading full books) and taking notes across broad topics.
Mostly, the test material centered on the following:
Relative Strength Analysis
Inter-market Analysis
Elliott Wave Theory
Candlestick Patterns and Analysis
Statistics
Point and Figure Charting
Chart Pattern Recognition and Interpretation
Sentiment and Application
Indicators and Construction/Application
Cycles
… and so much more.
There are three examinations to the designation, meaning there’s one more to go and it’s a lengthy essay-based written examination.
I’m loving what I’m learning, and I recommend the structured educational component the curriculum provides, as it has given me a step-by-step process of what’s important in the field of Technical Analysis, and it has vastly broadened my awareness and appreciation of alternate techniques or methods of application.
For more information, visit the MTA Website (www.mta.org) and consider if the program might be right for you if you’re in for serious study of Technical Analysis and market chart analysis.
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Net Profit Results of Fixed Stops and Targets
June 4th, 2008 by Corey Rosenbloom
Earlier, I’ve been revealing results of my recent studies into the relationship of fixed stop-losses and fixed profit targets, and how the affected win rate.Now it’s time to see what the effects were on Net Profitability!
Revisit the previous posts for full study details:
Revisiting Stop-Loss and Profit Target Affect on Win Rate
Does a 95% Win Rate Result in Net Profitability?
Quick Recap:
DIA daily from 1998 to present, testing three long-only entry strategies:
Momentum
MACD
20 period SMA Cross
Each trade was 100 shares and assumed $4.00 in commissions and slippage.
The following are the relationships of Net Profitability of the Relationship - Stop-Loss fixed values (in $1.00 increments, or 100 Dow Points) are on the bottom with Fixed Profit Targets also in $1.00 (100 Dow Points).
Keep in mind that a “Buy and Hold” strategy would have returned around $5,500 in overall profit (trades = 1)
Let’s look at the Momentum Surface Relationship Chart:
http://blog.afraidtotrade.com/wp-content/uploads/060108-1713-netprofit1.png
The Momentum strategy was the most profitable of the three (which helps confirm the axiom “Momentum Precedes Price”), and there were a few peaks (in light green) that almost beat the Buy and Hold Strategy estimates.
Most of these values were in the $6 Profit Target with a $8 stop-loss.That was the general area of the relationship where the highest concentration of Net Profitability was found (likely because of the higher number of trades generated).I’ll discuss absolute profit values in a future post.
Next, let’s look at the classic MACD Crossover Study:
http://blog.afraidtotrade.com/wp-content/uploads/060108-1713-netprofit2.png
We see that we get into more trouble here with the MACD study, because a larger than normal portion of the chart results in a negative outcome (the bright red).In fact, where the Momentum study was profitable, the MACD study directly was not (was weakest).
In fact, the largest net profit (the highest value of which was $7,135 with a target of $15 and a stop at $1) was concentrated in the lower stop-loss levels with a corresponding target of $15.Any target near the $15 area did well with a correspondingly lower stop, which would be what we expect.
Finally, let’s view the 20 period simple moving average cross-over study:
http://blog.afraidtotrade.com/wp-content/uploads/060108-1713-netprofit3.png
Again, we see a large concentration of ‘red,’ meaning negative net profitability at the lower range of the chart with small stops and small profit targets.Notice the band of green that occurs when the target is $2.00 and the stop is anywhere between $8.00 and $20.00.
Once again, the highest value occurred near the $15 target with stop from $3 to $6, which was similar to the MACD Cross strategy, which makes sense because the MACD strategy is similar to the MA Cross (only the strategy technically uses a dual-crossover).
Nevertheless, the highest net profit of $4,860 occurred with a target of $17 and a stop-loss of $19, which is absolutely not a feasible strategy at all (it only generated 5 trades in a 10 year period and had an 80% profitability rate).Even then, it didn’t beat the buy and hold estimations.
Now that you can view the broader relationship based on the relationship between a fixed dollar stop-loss and profit target, we will begin to explore these matters deeper in upcoming posts.
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Market Beginning a New Down Swing
June 3rd, 2008 by Corey Rosenbloom
It’s time for lower prices in the major US Indexes!So there are no guarantees, but the odds seem to favor a higher chance for more downside action in the short-term future.Let’s see why:
First, the Dow Jones Daily Chart:
http://blog.afraidtotrade.com/wp-content/uploads/060308-2354-downswing1.png
Price failed at the confluence of the 20 and 50 EMAs
Price formed a reversal candle pattern (doji, bearish engulfing, evening star - call it what you will)
Price is in the middle of a mini-bear-flag, with pattern target near 12,000.
Price also formed a sort of ‘falling three method’ bearish continuation candle pattern.
The Fed announced it is more concerned with inflation and unlikely to cut rates further.
There is more ‘room’ to the downside than the upside.
Moving averages have now formed as resistance.
Possible Target:At least 12,000
Let’s view the S&P for a similar structure:
http://blog.afraidtotrade.com/wp-content/uploads/060308-2354-downswing2.png
I cheated and drew a ‘dark arc’ on the chart, which shows the larger structure of the price swings rolling over, forming a lower high, and just points away from carving out a new swing low, which would confirm a mini-short term downtrend on the daily chart, reversing the ‘bear market bounce’ we just experienced.
Recall that the primary trend is still down.
Let’s be defensive and see what happens (or position ourself possibly aggressively to the short side).
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Full Linda Raschke Seminar - Five Trading Patterns
June 3rd, 2008 by Corey Rosenbloom
The Market Club Blog recently posted a full audio seminar complete with downloadable PDF booklet from trading legend Linda Raschke.
Entitled Five Basic Trading Patterns and Their Application to the Market, Linda discusses some of her best patterns she uses in her daily trading activities.
In the presentation, Linda describes the following patterns and set-ups:
[*]Double Tops/Bottoms[*]Divergences[*]Anti Minor[*]Sling Buy/Sell[*]First Cross Buy/SellThe introduction states:
Understanding these enduring market setups provides you with a solid foundation for trading technically. They simplify analysis for the beginner and give the aggressive trader added confidence. Linda has used these patterns as the core of her intermediate-term analysis but they work well on any timeframe.
Linda is probably my favorite trading educator - I’ve attended three live courses of hers -and I recommend taking any opportunity to hear her presentations, as they are extremely informative and presented in an exciting, engaging format.
Thank you to the folks at INO.com (education) and Market Club (charts and analysis) for making this video free for public use.
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The Dreaded Black Swan Chart Formation
June 3rd, 2008 by Corey Rosenbloom
Barry Ritholtz at the Big Picture recently identified a potentially treacherous chart pattern which could have significant ramifications for the future.
View the “Dangerous Black Swan Chart Formation” here.
Actually, the chart is a joke, and a funny one I might add, which shows a black swan (a la Nassim Talim’s work The Black Swan) interspersed over the daily chart of the S&P 500.It’s one of those instances that adds a little levity to chart analysis.
I also had to post the ‘analysis’ by Trail who interpreted the chart pattern as:
Black swan? Ha! If you had been around charts and technical analysis as long as I have, you would recognize that as a speckled turkey. It has only appeared 7 times in the last 97 years of market history. Always followed by a market correction of at least 32%, along with cranberry sauce and a long weekend.
Check out the chart for a good laugh!
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Fascinating Intraday Action
June 2nd, 2008 by Corey Rosenbloom
Today’s intraday price action gave us a major lesson in price patterns, volatility, and clean high probability trade set-ups.Let’s see what we could have learned today in the SPY.
http://blog.afraidtotrade.com/wp-content/uploads/060308-0231-fascinating1.png
First, the day began with an overnight gap, which led to a stop-loss if you tried to trade back into the gap.Often, when a gap-fade trade fails, this sets up considerably higher odds that the day’s action will then unfold into a Trend Day style environment, which calls for aggressive tactics.
Indeed, the day resembled a trend day move which exhausted itself to the downside in a clean ‘measured move’ formation and triple momentum divergence.
With the market plunging lower and stabilizing into the noon hour, you should have been looking to play short, which set itself up with the price pullback (consolidation) to the falling 20 period moving average which set up the “Impulse Sell” trade that came after a new momentum low.
In this case, the trade gave significant profits quickly as the 5-minute period volume high was actually made around 12:30 in an interesting, climactic sell pattern.
Despite lower prices, the momentum oscillator formed a higher low, creating a divergence that clued us that the price action had lower probability of heading lower.In fact, the divergence set up a quick countertrend “scalp” back (long) to the 20 period moving average.
Price then completed its intraday reversal to the upside by breaking above the 20 and 50 period moving averages, preventing the day from closing at the lows of the session.
Also, one could have noted a type of bear flag (more like a pennant) that occurred prior to the mid-day sell-off.
Always annotate charts of interesting patterns or interesting days so that you can internalize the patterns better to make quicker, more accurate trading decisions.
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Gap Fade Statistics for May
June 2nd, 2008 by Corey Rosenbloom
With the month of May winding down, it’s now time to see how many days resulted in an overnight gap, and how many of those overnight gaps filled, giving us clues as to whether or not the “Gap Fade” strategy continues to work.
Using Excel and daily data for the DIA (Dow Jones ETF), I define an overnight gap as a price differential of at least $0.20 (20 Dow Points) to classify as an overnight gap. I will, however, look at other values for the month.
For the 21 trading days in May, 2008, here are the results:
TOTAL Number of Gaps: 13
TOTAL Number of Gaps Filled: 7
Un-filled Gaps: 6
% Of Gaps Filled: 54%
Gap-Ups Filled: 6
Gap-Downs Filled 1
What happens if we define a gap of $0.50 (50 Dow Points)?
Total Number of Gaps: 4
Total Number of Gaps Filled: 2
% of Gaps Filled: 50%
The largest monthly gap that WAS filled was +$1.33 on 5/2/08.
The largest monthly gap that WAS NOT filled was -$0.71 on 5/20/08.
Here are the monthly culmulative totals for 2008 from January to the end of May:
Total Number of Gaps ($0.20): 67
Total Number of Filled Gaps: 43
% of Gaps Filled: 64.18%
If we get a little more conservative with our definition, and define a gap as $0.25 (25 Dow points instead of 20), then the percentage of filled gaps only changes to 64.06%.
See the other monthly posts for more information below:
January Gap Fade Statistics
February Gap Fade Statistics
March Gap Fade Statistics
April Gap Fade Statistics
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The Five Components of Successful Trading - Whiteboard
June 2nd, 2008 by Corey Rosenbloom
What are the Five Components of Successful Trading? Adam Hewison details these five points in a recent, brief educational video.
I’ll give you a hint - Adam’s #1 Rule, as is mine, is stated “Know Your Risk!”
What are the other four components? Adam writes:
In this edition of Traders Whiteboard, we will be looking at five key components that you need to be successful in your trading. The ones we have picked out today are not on every pro trader’s suggested list, so I think they will be a surprise to you.
We consider these five components to be incredibly important to anyone’s trading success, most of all yours.
The Five Components of Successful Trading
If you have missed our other Traders Whiteboard lessons, not to worry! We now have a total of eight lessons that you can benefit from and they’re available here.
The Full Trader’s Whiteboard Series
Feel free to check out the other educational posts. Also, be sure to visit and consider joining the Market Club if you have not done so, or at least visit the What you Get page to see if the Market Club daily services could be of benefit to you.
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Does a 95% Win Rate Result in Net Profitability?
June 1st, 2008 by Corey Rosenbloom
Earlier, I discussed Win Rate as a factor of Fixed Stop-Loss and Fixed Profit Targets, and I showed how it was easily possible to achieve a 95% win rate… but now it’s time to see if these outcomes lead to net system profitability.
Please refer to the earlier post for the full descriptions and parameters of the study, but here is a summary:
DIA daily chart from 1998 to present
Momentum Long Entry:Buys when indicator momentum crosses zero and stays above for one bar
MACD Cross: Buys when MACD Line crosses above the Signal Line
20 MA Cross: Buys when price closes above, after crossing above a 20 period SMA
TradeStation and Excel
I specifically asked you if a system which clearly generated a 95% win ratio (meaning when you play for a target of $1 while using a stop-loss of $20) yields a net profit.Thank you for those who responded with your thoughts.Let’s see the answers now:
Fact:I assume TradeStation commissions in the calculation, which means for every 100 shares, a round-trip commission would be $2.00 and I also assume $2.00 slippage just to be safe and to mirror real-life execution.This means that $4.00 was eliminated from all trades (a $100 profit would actually be recorded as a $96 profit while a $100 loss would actually be recorded as a $104 loss in terms of the net profitability calculation).
All trades are fixed at 100 shares, meaning a $1.00 profit in the DIA would result in a profit of $100 per trade.
Let’s refresh (Win Rate or % profitable with a $1 target and $20 stop):
Momentum: 96.50% (115 trades)
MACD: 95.08% (61 trades)
20-MA Cross: 94.73% (76 trades)
On to the results:
Playing for $1.00 ($100) while risking $20 ($2,000) per trade does yield a 95% win rate for all three systems I tested, but here are the results of Net Profitability (dollars gained) by the 10 year strategy trading 100 shares:
Momentum: $2,591 (115 trades, 4 losers)
MACD: $33 (61 trades, 3 losers)
20-MA Cross: -$150 (76 trades, 4 losers)
Let’s take the pure results and add back $4 per trade to see what would have happened before commissions and slippage per trade:
Momentum: $3,051 (115 trades, giving back $460)
MACD: $277 (61 trades, giving back $244)
20-MA Cross: $154 (76 trades giving back $304)
Congratulations to reader Cedric who provided us a formula who most accurately estimated the results.His comment read:
Isn’t it just:
(Win %) * (Profit Target) - (100% - Win %) * (Stop)
So for the $6/$2 with the Momentum (roundest numbers):
0.26 * 6 - (1 - 0.26) * 2 = 0.08 (Net Profitable)
A tiny edge, but an edge nonetheless. Although most brokerages would eat that tiny edge up in fees.
Wes was also right with the logic :
If you risk $20 to make $1 then with a win rate of 95%, out of 100 trades you will lose 5 times for a loss of $100 and you will win 95 times for a gain of $95. I guess you can go broke being right.
By the way, the DIA was near $70 at the start of the 10 year period and ended recently near $125, for an increase of $55, meaning if you had bought and held 100 shares of the DIA when these three test periods started, you would have ended near $5,500.
The Momentum study, with the highest win rate and net profitability rate, achieved half that total, despite taking 115 trades and achieving a 96.5% win rate.The Momentum study actually experienced 4 losing trades.With the other two strategies, you roughly broke even, net of fees.
I’ll continue to address this topic, and will provide the Excel charts for Net Profit and other factors relating to the tests, including number of trades, average trade size, average bars (days) in a trade, etc.
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Dry Ships Hits a Rock
May 31st, 2008 by Corey Rosenbloom
Popular stock Dry Ships Inc (DRYS) recently formed a major trend exhaustion (possible reversal) pattern that is worth further study.Let’s look at this pattern and what it may mean for the stock.
http://blog.afraidtotrade.com/wp-content/uploads/053108-1937-drys1.png
Price rapidly increased from $20 to $130 throughout 2007, while collapsing at the end of the year, which brought us to the price lows of $50at the beginning of 2008.
Now, price has resumed its daily uptrend and formed a clean swing pattern that took price back to $115… but wait!
Earlier this month, price formed an exhaustion or euphoria pattern which will become one of two patterns:
1.A trend reversal (meaning lower prices are yet to come)
2.A clean retracement (meaning higher prices are yet to come)
What’s interesting to me is the cleanliness of the patterns that occurred.There are two overarching patterns that set-up that I want to draw educational attention:
1.Exhaustion Gap
2.Bearish Engulfing Candle
Both of these would signal greater odds for the trend reversal case, but there is an interesting overriding factor.
There appears to be strong support via the 50 and 200 period moving average on the daily chart; the 20 period moving average at $80 on the weekly chart; and the recent swing high at $85 from the prior price swing.
Note also that there was a new momentum high on the price chart, meaning higher prices could be yet to come PROVIDED that the recent pattern was not a euphoric (or climactic) trend reversal where everyone who wanted to buy, has already bought, meaning there are few if any further buyers to push price higher.
Let’s continue to watch this development and how these interesting potential reversal patterns might play out with such solid support beneath price at the $80 level.
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Revisiting Stop-Loss and Profit Target Affect on Win Rate
May 30th, 2008 by Corey Rosenbloom
What is the larger relationship between your stop-loss strategy and your profit target method?I tested three strategies and evaluated the change in win rate - % Profitable Trades - across 400 tests per strategy and present the abbreviated results here.
First, let’s define the methods:
DIA Daily chart from Jan 1 1998 to May 29, 2008 for almost 10 years worth of data.
TradeStation custom strategies - optimized data imported into Excel Surface Charts.
Comparing the cross-tabulation of 400 studies (per examination) on the %Win Rate (profitable trades).
All strategies were ‘long only’ entry strategies.
First, let’s look at the Momentum Long Entry Strategy (buys when indicator “Momentum” crosses the 0 line and then price appreciates one day after this cross occurred).
http://blog.afraidtotrade.com/wp-content/uploads/053008-1910-profitable1.png
Next, let’s examine the MACD Cross Strategy (buys the open of the next bar when the MACD line crosses above the exponential average signal line of the MACD):
http://blog.afraidtotrade.com/wp-content/uploads/053008-1910-profitable2.png
Finally, let’s examine the 20 Period Simple Moving Average Price Cross Strategy (buys when price crosses above the 20 day simple moving averages and closes above it for one day).
http://blog.afraidtotrade.com/wp-content/uploads/053008-1910-profitable3.png
Be sure to click each chart for the full-size image.
The relationship I discussed earlier is clear and makes logical sense.
The larger your stop, the greater your win rate.
The smaller your profit target, the greater your win rate.
In fact, in all three tests, you could achieve a 95% or better win rate if your stop-loss was $17 to $20 with a profit target of only $1.This result held true in all three tests (with the Momentum test showing the most robust high win-rates).The Momentum strategy actually showed a win-rate greater than 90% for any value above an $8 stop-loss (with a corresponding profit target of $1).
Keep in mind that using the DIA, $1.00 corresponds with 100 Dow Points.This essentially means that with each entry, you play for 100 Dow points with a stop-loss 1,700 to 2,000 Dow Points away.
As expected, the win rate plunged to 6% across all tests with a Stop-Loss of $1 and a profit target of $20.
What was the % win rate of all strategies when the target was $1 and the stop was also $1?
Momentum: 51.5% (361 trades)
MACD: 46.22% (106 trades)
20-MA Cross: 54.3% (151 trades)
Let’s look at the classic “3 to 1″ reward to risk relationship (target = $3 with stop = $1)
Momentum: 29.38%(211 trades)
MACD: 27.27% (99 trades)
20-MA Cross: 35.11% (131 trades)
How about the corresponding “3 to 1″ with looking at a target of $6 and a stop-loss of $2?
Momentum: 26.00% (100 trades)
MACD: 25.33% (75 trades)
20-MA Cross: 23.80% (84 trades)
And for fun, what about the ‘for-test-only’ value of a $1 profit target with a $20 stop?
Momentum: 96.50% (115 trades)
MACD: 95.08% (61 trades)
20-MA Cross: 94.73% (76 trades)
Was the system net-profitable for the maximum values tested?In other words, with a win-rate of 95% or better, what was the overall net-profit?
That’s to be discussed in a later post, but I wanted to pose the question:
What do you Think?
Do you think any (or all) of the strategies will yield net profitable results with such a high win-rate?
Stay tuned to find out!
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TIPS Bond Fund and 20 Year Falling
May 30th, 2008 by Corey Rosenbloom
Yesterday, I examined the 10 Year Note, commenting that it had broken resistance.Now, let’s look at two bond funds to see how prices are being affected, and also view a strong correlation between the 10 Year Note Yield and the S&P 500 Index.
First, the TIPS Bond Fund:
http://blog.afraidtotrade.com/wp-content/uploads/053008-1652-tips1.png
iShares writes:The iShares Lehman U.S. Treasury Inflation Protected Securities Bond Fund seeks results that correspond generally to the price and yield performance of the inflation-protected sector of the United States Treasury market as defined by the Lehman Brothers U.S. Treasury TIPS Index.
This bond fund formed a potential head and shoulders pattern and is at an important technical (charting) juncture.
I have drawn two potential necklines for the Head and Shoulders pattern, both of which are now broken to the downside.The interesting juncture is the rising 200 day moving average just beneath the price.The fund supported on that level on Thursday, and is currently testing the horizontal neckline - it will be interesting to see which level holds and what that might mean for the fund and the overall market.
Some readers mentioned the TLT 20+ Year T-Bond fund (also iShares) and I wanted to examine its performance as well.
http://blog.afraidtotrade.com/wp-content/uploads/053008-1652-tips2.png
While not forming a clean Head and Shoulders (potential) reversal pattern like the TIPS fund, the longer-term bond fund has indeed been breaking down from a consolidation zone beneath its key 50 and 200 daily moving averages, and the fund has broken clearly to the downside and made new lows for 2008.
Price could rally back to test the 200 day, but if the breakout is valid, this could likely mean the following:
Bond Prices will continue to fall
Bond/Note Yields will begin to rise
The Fed could start raising rates again
If Money is flowing out of bonds and into the stock market, that is bullish for the US Indexes
Speaking of the US Stock Market, let’s look at the recent strong positive correlation with the S&P 500 Index (and Dow Jones and NASDAQ) and the 10 Year Treasury Note Yields.
http://blog.afraidtotrade.com/wp-content/uploads/053008-1652-tips3.png
S&P 500:Green
10 Year Note Yield:Red
Notice the performance of both markets in 2008, and how they have been strongly correlated.
Strength in the market has resulted in larger inflows into the market likely from bonds, which drives bond/note prices down and thus yields up.The bond and stock markets are not always this correlated, but tend to be more so in conditions of economic uncertainty.
Let’s continue to watch this relationship play out in the broader markets, and what the potential for higher yields (and interest rates) mean for other related markets.
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10 Year Yield Breaks Resistance - Higher Rates Ahead?
May 29th, 2008 by Corey Rosenbloom
Today, the yield on the 10 Year Note sliced upwards through its declining 200 day moving average, signaling a potential reversal in trend and the possibility of higher rates yet to come.
Daily Chart ($TNX):
http://blog.afraidtotrade.com/wp-content/uploads/053008-0345-10yearyield1.png
After forming a strange sort of double bottom, complete with a positive momentum divergence, the yield, now just under 4.1%, appears headed higher as price has just completed a trend reversal on the daily time-frame and has breached its falling 200 day average (both bullish signs).
The Fed has hinted that it has finished its campaign of lowering interest rates, and the market may already be pricing in this information and the potential for rate hikes in August or afterwards, especially if the economy were to continue to improve.
Rising rates have the effect of stimulating the US Dollar Index, and potentially causing some weakness in the commodity bull markets (including oil and gold, potentially).One would imagine this development would be relatively good for the broader US Economy and Stock Market.
Higher rates will drive bond prices lower, especially if economic conditions improve and money continues to flow from the bond market into the stock market.
To see the larger picture, let’s glance at the weekly chart:
http://blog.afraidtotrade.com/wp-content/uploads/053008-0345-10yearyield2.png
Not only has price (yields) broken resistance on the daily chart, but on the weekly chart as well, after a positive divergence preceded the recent strong up-swing.
Price has breached the weekly 50 period moving average after rising above the 20 period average, both of which were bullish for yields (subsequently bearish for note prices).
We’ll continue to watch this development with great interest for a variety of reasons, all of which are related to inter-market analysis and the implications for the stock market and other related markets.
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Wachovia Tests New Lows
May 29th, 2008 by Corey Rosenbloom
Let’s do a quick check on Wachovia Bank and the XLF Financial Index to see what interesting development has happened this week.
First, Wachovia’s (WB) weekly structure chart:
http://blog.afraidtotrade.com/wp-content/uploads/052908-1637-wachovia1.png
Price made a new intra-week low this week, testing just below $24 per share, but it did so on a developing positive momentum divergence (not drawn).The trend is still sharply down, and the regional bank stock has fallen over 50% from its 2007 highs prior to the “Credit Crisis” taking hold.
This structure will be difficult to overcome.
Let’s peek at the Daily Chart:
http://blog.afraidtotrade.com/wp-content/uploads/052908-1637-wachovia2.png
Price broke a rectangle consolidation pattern to the upside (I actually drew in two possible bottom trendlines for the triangle pattern), but not only did the pattern fail to meet its price objective, but the pattern has now become a ‘busted’ pattern which tricked the buyers into participating before rolling back over insidiously and breaching its key 20 and 50 period moving averages first to the upside and then to the downside.
Traders on both sides of this stock (long and short) were frustrated by that fake-out move I’m sure.What could be forming now is a potential “Double Bottom” formation in the stock.
With Wachovia testing new lows, the XLF Financial Sector actaually is making higher lows, which could bode well if that development leads to further price appreciation.
http://blog.afraidtotrade.com/wp-content/uploads/052908-1637-wachovia3.png
The Index is making a higher low above its March lows, which could signal a potential reversal coming up, but the price has flatlined (consolidated) more than trended, which could be a sign of larger accumulation or some other form of price stabilization.
Let’s continue to keep our eye on this development, because many traders believe “Where the Financials Go, So Goes the Market.”
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Momentum Shifting Upwards, but How Far?
May 28th, 2008 by Corey Rosenbloom
If you’re following the intraday charts, momentum seems to be diverging to the upside as selling pressure is waning and buying pressure seems to be picking up, as the shift from supply to demand is comfortably shifting.
Let’s look at the 30-minute chart of the DIA:
http://blog.afraidtotrade.com/wp-content/uploads/052908-0142-momentumshi1.png
Although it’s clearly a short-term shift, we see at least three positive momentum divergences preceding the saucer, U-Turn, or rounded bottom formation occurring in this major market ETF.Price has now broken above its key 20 and 50 period moving average on this chart, yet remains trapped beneath them on the daily chart (remember short-term momentum precedes long-term momentum).
The signal to exit the short position was given when price cleanly breached the falling 20 period moving average at the close of yesterday’s trading (on this particular time frame).
Let’s take it down to today’s action for a very interesting curvature of price action:
http://blog.afraidtotrade.com/wp-content/uploads/052908-0142-momentumshi2.png
Price made two support/resistance curves, showing the non-linear support and resistance during the day which made for an interesting but rare pattern.Of course it looks clear in hindsight, but it’s not so easy to trade or recognize in real-time.That’s why classifying patterns and annotating them at the close of the day can help with pattern recognition in real time for your given time frame.It’s extremely helpful to combine time frames for a larger picture of potential price action or price structure.
How far might this momentum shift take us?
Not very far, if we believe the moving averages on the daily chart represent a key area of supply or resistance, which tends to happen in a trending market:
http://blog.afraidtotrade.com/wp-content/uploads/052908-0142-momentumshi3.png
I drew a green arrow to show the short-term shift described above, which has relatively limited play to the upside.The $126 or $127 level could serve as price resistance, which could limit your price targeting on this or smaller time frame charts.
The lesson from this example is that while a short-term pattern may look extremely attractive, always check higher time frames for patterns or potential support/resistance to see how much potential your smaller time frame trade set-up (or structure) might have.
It will be interesting to note what happens when price reaches these above levels, and if buyers can overcome them, it would be against the odds as we interpret them here at these levels.
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INO TV - the Logical Choice Video
May 28th, 2008 by Corey Rosenbloom
Adam Hewison posted a ‘logic grid’ video regarding the INO Television Educational services, which I use and recommend for traders.
Entitled, “INO TV, the Logical Choice,” Adam describes the benefits of the videos that comes with membership (only $99 per year or $49 per quarter) that grants you access to over 500 video seminars (90 - 120 minutes per video/audio) from leaders in the investment and trading field, as well as over 450 e-books ready for download for review later.
I have been using the service since early this year and still am impressed by the sheer amount of information and presentations available to you on topics such as Elliott Wave, options trading, introduction to Technical Analysis, Cycles applications, Fibonacci, Profitable Patterns - all taught by major educational trading leaders such as Martin Pring, John Murphy, John Bollinger, Linda Bradford Raschke (5 videos!) and many, many more.
In the brief video, Adam describes the service in more detail and creates a logic grid square (similar to Pascal’s Wager) which shows the utility (benefits) of using or not using the service, and the risk to reward that is possible (like a trade set-up).
I am a solid supporter and strongly recommend you check out the educational seminars and wealth of trading information that is available to you through this extremely affordable annual service - it beats paying over $1,000 to attend a free trader’s conference only to hear a dozen or so presentations over a weekend (something I’ve done at least 5 times!). To go to the service directly, visit INO TV (Four presentations free of charge and obligation).
Thank you to Adam and everyone at INO TV for making this possible.
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Clean Overnight FOREX Trend Trades
May 28th, 2008 by Corey Rosenbloom
Often, the Foreign Exchange currencies markets (FOREX) offer cleaner trends and simple set-ups for astute traders, and I wanted to show an example of one of these clean examples that occurred last night on the Euro/US Dollar cross.
http://blog.afraidtotrade.com/wp-content/uploads/052808-1650-forex1.png
(Click for full size image)
Even if you don’t trade FOREX, the patterns in this chart are worth studying.
Going into the midnight hour, the EUR/USD pair was in an uptrend but beginning to show signs of divergences, signalling a potential top (not shown).
At 2:00am, price made a new momentum low, as well as a new swing low, which clued us in that a trend reversal might be on the horizon, and to monitor the next swing for confirmation.
Indeed the next up-swing, just after 2:30am, formed a hammer (or slightly a doji) candle at the 20 period moving average it had just breached.That was another warning sign that the trend might be changing, which was then confirmed (horizontal arrow) as price took out the recently formed swing low beneath the 20 and 50 period moving average.One could put on a core trade here and play for a large target, or could begin playing the down-swings only as they developed.
The next swing down made yet another momentum low, forecasting higher probabilities for continuation of the newly developed trend.The next entry came at 4:30am with two doji candlesticks at the falling 20 period moving average.Typically, in a strong trend, the 20 period EMA will serve as a clean area to enter a trade and play for the most recent swing low (conservatively) or just beyond it.
The next swing low occurred at 5:30 with price at the daily S1 pivot line (pink dots) which set up a spot to close the short trade, or (aggressively) play long to target the falling 20 period moving average.
Once price indeed did retrace to this average, it was time again to get short and play for the same target structure (conservatively for the prior swing low only, or just beyond it).
All stops are placed conservatively above the 20 period EMA or aggressively beyond the 50 period EMA.
You would continue to play the structure of the downtrend as it continued until:
1.Price breached the 50 period moving average
2.The moving averages crossed
3.Price made a higher low and a higher high
The trend structure did just that shortly after this chart was taken, and the price did crest above the averages, only to retest the prior low at 1.56160 by 9:00am.Nevertheless, both the core trade and the swing trades yielded profit, and aggressive trading tactics (leverage at the key entry points which is then taken off as price retests lows) could have yielded even more profits.
Otherwise, this was just a fun examples of how trades develop and how to trade a trend structure with simplicity as it develops.
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Fixed Targets and Stops - Effect on Win Rate
May 27th, 2008 by Corey Rosenbloom
When testing a trading strategy or idea, it is helpful to know what the Win Rate (also known as the %Win) is, and what factors might affect this portion of your results.
But before we get too deep into the type of strategy you’re examining, it’s important to note the relationship between your profit targets and your stop-loss strategy to see what the effect will be on each of your results.For this post, let’s specifically examine the Win Rate, or the Percentage of Winning Trades.
For the strategy, I used a momentum style strategy, where the indicator known as “momentum” had crossed above zero and rose for at least one day (bar).The program was instructed to buy at market the next day and then play for a fixed target (optimized) with a fixed stop-loss (optimized), both in incremental dollar terms from $1 to $20 (a total of 400 tests were calculated on the DIA - Dow Jones ETF from 2004 to 2008).
Let’s view our % Win Rate to see what the relationship between our fixed stop-loss values and fixed profit targets becomes.
http://blog.afraidtotrade.com/wp-content/uploads/052808-0033-winrate1.png
(Click for full-size image)
The Fixed Profit Target is scaled on the vertical (right) axis (in dollar terms) while the Fixed Stop-Loss parameter is scaled on the horizontal axis (also in dollar terms).
What if I told you I could help you achieve a 95% win rate?!It’s absolutely possible, but not net profitable (as we’ll see in a future post).According to the test, you can set your stop-loss at $20, $19, $18, or $17, or $16 with your profit target at $1 for a 95% or better win rate.Unfortunately, this system generates fewer relative trades and the few trades that lose eliminate 20 profitable trades.
The opposite is true with a profit target of $15 to $20 with a stop-loss of $1.
While some trend following systems can capture that type of risk/reward relationship, it is better to lengthen your stop beyond $1 and have a more realistic risk/reward ratio.
Nevertheless, according to the test, the best win rate (% Win) comes with a profit target from $1 to $6 with a corresponding stop-loss value between $13 and $20 (which is the area I have boxed in on the chart).
When looking at the suitability of a system, the number or percentage of winning trades is only one factor, and perhaps may actually be a much smaller factor than the total dollars gained per win vs the total dollars lost when a trade is stopped out.
I will continue to run tests to see if this relationship holds across different time frames and markets but in general, the results lean towards the following:
The Larger the Stop, the Higher the Win Rate
The Smaller the Profit Target, the Higher the Win Rate
There is an optimal combination (per strategy tested) that leads to net profitability, but at the surface, win rate alone is not sufficient to guarantee profits, even with a very high % Win Rate.
Check back for more findings as I delve deeper into system testing and the relationship between stops and targets.
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Six Steps for Setting Daily Goals
May 27th, 2008 by Corey Rosenbloom
We tend to perform better when we set concrete goals, so that we can create a pathway of action to achieving these goals. Here is a quick list of steps to take to set and to achieve daily goals. Here are six steps to set effective daily goals to help guide your routine each day.
Without goals, it can become very difficult to focus on the task at hand, and during the trading day, we’re likely to be tossed around from different tasks to the next without a unifying direction. We’re simply drifting from one activity to the next and likely not spending quality time on any one aspect of our day.
1. Establish your Main Objectives for the day
Do this ‘first thing in the morning.’ A calendar or day-planner is helpful for this activity. What #1 and #2 things do you want to accomplish by the end of the day? Set deadlines if need be.
2. List Smaller Steps to help Achieve these Goals
If you want to read and take notes on two chapters on a book on trading that day, set aside a specified time to do so. If you want to make three ‘good’ trades that day, identify the time of day that you’re most likely to find a set-up that you understand. Whatever your larger goal is for the day, establish smaller steps and set aside specific time during the day to achieve it.
3. Review your Longer-Term Goals Daily
You may have trading account goals, or educational goals, but it is essential to have longer term goals from which you build shorter-term goals to accomplish in the interim, which boosts confidence and progresses you further down your pathway to these goals.
4. Post Visual Reminders of Long-Term Goals
You need to keep reinforcing to yourself what you’re ultimately trying to accomplish. Seeing it once is not as effective as seeing it repeatedly in a day. You want the goal to become ingrained within you so that you work in tandem to fulfill the goal day by day - little by little, so as not to be overwhelmed.
5. Cross out Goals as You Complete Them
There is a satisfaction we get from physically crossing out goals, knowing that we have achieved them. Give yourself this satisfaction when you have accomplished any of your daily goals, weekly goals, or monthly goals. It will help boost confidence to keep you going.
6. Set Deadlines and Rewards for Completed Goals
If you achieved more than you expected for the week, treat yourself with a good weekend. If you were particularly successful in a day, treat yourself or your family that evening. Don’t behave like a robot - indulge your passions and keep motivation high. Set deadlines for goals to achieve so that you can have expectations of potential reward. Deadlines can structure your actions in ways mere goals cannot.
As new traders, it may be best not to set monetary or percentage goals at first, because our trading results (especially short-term) are out of our direct control. It is best to focus your efforts on achievements that you can control, such as educational goals, performance goals, or other specific activities that don’t depend on ‘chance.’ You can read a book in a week; you can study a new chart pattern; you can read 5 economic reports per day; you can annotate chart patterns each night, etc.
Take time to envision what you want to accomplish and then start taking steps immediately to do so!
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Trading Bots and Skill Analytics Launched
May 27th, 2008 by Corey Rosenbloom
The Tyro Trader, who formally wrote for the Tyro Trader Blogspot, has recently launched a new blog dedicated to information pertaining to automated trading “bots” and his experience as he develops and trades an automated system.
The new site is entitled “Trading Bots” and has great potential and should hold the interest of those developing, or wanting to learn more about automated trading.
So far, Tyro has links to articles on automated trading and is detailing his experience as he develops and puts these systems into actual practice.
“Individuals have the luxury of trading manually or using automation. The big hedge funds and quant houses aren’t so lucky. Automation is giving individuals more opportunities, not less.”
Also, I discovered another site that is dedicating itself to system development and testing, entitled “Skill Analytics.”Author Damian writes, “This blog is intended as a way for me to journal my own exploration of computerized financial trading systems.”
Both sites are new and have great potential, so if you’re interested in automated trading or systems trading/research, visit the sites and follow their journeys.
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Sell in May and Go Away - Views Since 2002
May 26th, 2008 by Corey Rosenbloom
We’ve heard the market adage:“Sell in May and Go Away!” but does it really work?Historically, the market has performed better from the October - May period than it has from May to October, but I wanted to show you the last few years starting with 2002 and conduct visual inspection of this strategy.
Success is based on Index price being higher in May than in October.
Let’s start in 2002: - YES, the strategy worked perfectly
http://blog.afraidtotrade.com/wp-content/uploads/052608-1649-may1.png
2003: NO, the strategy failed
http://blog.afraidtotrade.com/wp-content/uploads/052608-1649-may2.png
2004: YES, the strategy worked (though not perfectly)
http://blog.afraidtotrade.com/wp-content/uploads/052608-1649-may3.png
2005: NO, the strategy failed
http://blog.afraidtotrade.com/wp-content/uploads/052608-1649-may4.png
2006: NO. However, May registered the annual high before falling 8%, but the bottom occurred in July, not October.
http://blog.afraidtotrade.com/wp-content/uploads/052608-1649-may5.png
2007:NO - However,The high (before October) occurred in July, keeping you out of the mid-year decline, but you would have lost money buying in October.
http://blog.afraidtotrade.com/wp-content/uploads/052608-1649-may6.png
Based on this lookback to 2002, prices were higher in May and lower in October 2 out of 6 years.
Interestingly enough, if we change October to September, then the strategy worked 4 out of 6 years.
In every year observed except 2003 and 2005, there was some sort of turbulent move to the downside during the summer months, and selling in May would have prevented this downside move in the Index.
This is an unscientific observation, and is mainly created to inspect visual performance of the S&P 500 index over these years with a special emphasis on the time period between May and October.
Whether or not ’selling in May, 2008′ will be beneficial is yet to be seen, but we’ve already had a large volatility move to the downside earlier this year and we could still have more should the economy continue to slide.
Nevertheless, the tendency for the market to perform poorer during the summer is interesting to review and does have historical precedent (see CNN Money article “Sell in May and Go Away” and many other sources).
According to the article, “Over the past 50 years, from the end of October to the end of May the S&P 500 index has gained a cumulative 2,806 percent (7% per year)…. Now, what would happen if you bought in May and sold at the end of October? The S&P 500’s cumulative gain over that period for the past 50 years is 24 percent (0.4% per year).“
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VIX Inflects off Lows
May 25th, 2008 by Corey Rosenbloom
The VIX (Volatility Index) inflected off 2008 lows and support just as the US Stock Market met resistance, which set up a nice confluence that could have clued you in to odds of lower prices in the broader indexes recently.
First, let’s see the Weekly Chart to see when the last time we reached these levels and the potential support that was met at 16.
http://blog.afraidtotrade.com/wp-content/uploads/052508-1726-vixinflects2.png
The 200 period weekly moving average came into play last week as the index tested this level just as the Indexes tested their 200 period average as potential resistance.
The VIX has fallen from near 26 to 16 since March, 2008.When the VIX hit the 16 level, it reached a level not seen since July, 2007 (almost one year ago).
Let’s look at the Daily chart to glean possible clues there:
http://blog.afraidtotrade.com/wp-content/uploads/052508-1726-vixinflects1.png
The index is clearly in a downtrend (as the market has been in a short-term uptrend) and could be facing overhead resistance.Because the VIX has a tendency to be more ’spiky’ than the Indexes, it is much more difficult to peg resistance zones than support zones, but in a trend, moving averages can provide support or resistance to prices.
Prices fall faster than they rise, and so the VIX has a tendency to rise faster than it falls (as this chart clearly indicates) so should there be further downside in the US Markets, expect this index to spike as well.
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Dollar Index Rolls Over
May 24th, 2008 by Corey Rosenbloom
Some traders imagined new life for the US Dollar Index, and while that may be the case long-term, in the short-term, the Index has created a false breakout only to roll back to the downside and could make new lows.
Let’s look at the daily chart:
http://blog.afraidtotrade.com/wp-content/uploads/052408-2204-dollarroll1.png
While a positive momentum divergence did precede the breakout of the 20 and then 50 period moving average… price rolled over to shatter both averages once again, and is poised to test prior lows and could exceed those lows.
A negative momentum divergence preceded the break beneath these averages.
What clues could the weekly chart have told us to help with our forecasting?
http://blog.afraidtotrade.com/wp-content/uploads/052408-2204-dollarroll2.png
Although price may have looked strong on the daily chart, we see that price merely made a clean price swing back to the falling 20 period weekly moving average, which has served as significant resistance over the last few years.In fact, for FOREX traders, this could have been an elegant entry into some of their favorite currency pairs as the structure turned back down to form a price swing to the downside.
Price is coming off a new momentum low, which could also forecast lower prices are yet to come.
Also, the trend of the dollar is important not only to FOREX traders, but for commodity traders, as we saw the $CRB Index notch yet another weekly all-time high on Friday, thanks in part to Crude Oil’s stratospheric rise this week.
Continue to watch the set-ups and structure of the Dollar Index for potential intermarket relationship trades or investments.Check out the Market Club for signals, commentary, market scans, and information.
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Ideal Intraday Trades before the Holiday
May 23rd, 2008 by Corey Rosenbloom
Let’s jump right into the intraday action and ideal trades (looking from the benefit of hindsight) that formed throughout the day.
Let’s examine a new format, using the Dow Mini futures contract (@YMM08) viewed using what I see each day on TradeStation:
http://blog.afraidtotrade.com/wp-content/uploads/052408-0243-ideal1.png
(Click for full size image)
Price was already on a move down when the cash market opened and the selling stabilized into the ‘close,’ forming a trading range type of environment.
Strangely enough, the ‘ideal trade’ set-ups, looking with hindsight, occurred as simple “Bollinger Band Fade-Trades,” meaning go long whenever the price reached the bottom of the Bollinger Band indicator and go short when price reached the upper band (recall that bands are 2 standard deviations from a 20 bar mean).
The ovals represent ideal trades within the intraday structure.
There was a positive momentum divergence which occurred through three price swings as the morning opened which led to a quick counter-trend ’scalp’ trade long and the momentum oscillator, as well as the moving averages, became essentially useless as price formed a consolidation zone (parallel trend channels - not drawn) from 12,470 to 12,520.
Once we anticipate the type of day we expect (range-bound or trend), then we can hopefully adjust our trading tactics and indicators which make the most sense to use, as well as adjust our risk level and trading aggression (or conservatism).
Despite the consolidation zone for half the day, the market actually formed a type of “Trend Day” where the price opens at or near the highs and closes at or near the lows of the day.The consolidation at the end of the day made for an interesting looking chart for Market Profile traders.
Pulling the camera back, we see that the Dow Jones Index is in a much more bearish orientation than it was last week.
http://blog.afraidtotrade.com/wp-content/uploads/052408-0243-ideal2.png
The negative momentum divergence which had been building is now resolving to the downside, with price breaking its areas of support via the 20 and 50 period moving averages, as well as the prior support about the 12,700 area (which was prior resistance).This area is now invalidated on the chart due to the weakness in price and the close beneath this zone.
Visually, the chart appears to have more ‘open space’ beneath price than above, meaning odds have now shifted to favor lower prices in the short-term.We’ll continue to watch to look for signs of continuation or growing momentum to the downside and adjust risk levels accordingly.
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Five Volume Principles to Guide Decisions
May 23rd, 2008 by Corey Rosenbloom
Volume analysis is an important part of any trader’s routine, and it’s important to know some key principles about volume to help you arrive at potentially better conclusions or possibilities about future price action.
The most often stated principle is that “Volume Goes with the Trend,” meaning we would expect to see higher volume (relative) occurring during upswings in a rising stock or market (trend), meaning there is increasing interest or an increasing number of participants (buyers) taking part in the move to push prices higher.
Also, for similar reasons, we would expect to see less volume, or a relative decline on volume on price retracements in an uptrend.These represent logical pauses in a price move and are helpful in keeping prices from being overextended, which could lead to profit taking (another form of price retracement) or possibly short-sellers entering (playing for reversion to the mean).
Here are some other thoughts about volume principles that are based upon the above concept:
1.Volume can Lead Price
Similar to a momentum divergence, a new high in price needs to be confirmed by at least relative increases in volume, if not new (relative) volume highs as well.If new price highs are clearly not confirmed by new (relative) volume highs, then this is a warning signal that the new price highs might not last long.The On-Balance Volume (OBV) indicator is essential for some traders due to its potential to lead price.
2.Massively Rising Prices with Massive Increases in Volume are often Unsustainable
This goes back to the principle “Trends End in Climaxes” where a sudden rush of euphoria causes all who want to join to be ‘all in’ and thus unable to push prices higher.As we know, most people are bullish at the top and bearish at the bottom, and when there’s a ‘last ditch effort’ to get into (or out of) a stock, the classic sign is some sort of price blow-off which usually is marked by a stratospheric rise in volume - don’t get caught up.
3.Price Consolidation after a long Downtrend with Increasing Volume is Bullish
This scenario represents accumulation, in that funds are meeting any selling pressure buy accumulating all available shares, and thus “they know something the mass public doesn’t” or otherwise will catch onto later which could lead to the birth of a new trend.
4.Price Consolidation after a long Uptrend with Increasing Volume is Bearish
For the opposite reason, after a long rise in price, if price consolidates for a long period of time, yet volume increases, this means that funds are distributing their shares to the numerous buyers who can’t push prices higher, and when the buying pressure eases off, the price would be more likely to fall (or start a new downtrend) than continue rising.
5.Massive Volume on a New Significant Price Low is Bullish
This signal could represent a capitulation from buyers which is being met by aggressive accumulation by funds or traders, but most likely simply represents a ‘throwing in the towel’ on the part of the buyers who can’t take the pain of lower prices any longer.Strangely enough, when volume spikes massively on a large volatility down-move in price, this often signals bottoms, especially if the price closes higher on the day or at least closes in the upper range (such as the surge on January 22, 2008).
Listen to the “voices of volume” and what they may be saying about recent price activity, so that you may have a fresh clue about what may be happening in the ever-changing saga between buyers and sellers in the marketplace.
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Defensive Sector Posturing Occurring
May 22nd, 2008 by Corey Rosenbloom
Let’s take a look at the recent sector money flow performance to see if we can glean any clues for the broader market, especially regarding risk-seeking or risk-avoiding behavior by larger funds.
http://blog.afraidtotrade.com/wp-content/uploads/052308-0410-defensivese1.png
The 10 day rotation has taken money into the areas traditionally known as ‘defensive’ sectors, including Health Care, Consumer Staples, and Utilities.
Energy (thanks to record crude oil prices) came in just slightly second to the Utilities stocks (which tend to do well in environments of low interest rates), while the Financial sector fell almost 4%, in a negative sign for the broader market.
If these trends continue, we could expect further broad market weakness.
Let’s look at the sector money flow for the year to date to see if there are any clues in its development:
http://blog.afraidtotrade.com/wp-content/uploads/052308-0410-defensivese2.png
While I don’t have these bars clearly labeled, the Financial sector has performed the worst in 2008, shedding 13% while the energy sector has gained almost 11%.Higher energy prices tend to be bearish for the broad economy as consumers and businesses cut back on spending in other areas to compensate.
The only other sector positive for the year is the Materials, which has been boosted in part by new record highs in commodity prices.
The one strange ‘anomoly’ as I see it for the Sector Rotation model is the Health Care losses so far this year - typically that sector holds its own in a declining economy according to the model but this year has been an exception so far.It may be worth looking deeper on that point.
Continue to watch money flow into and out of sectors according to the model for clues as to what might be a better place for your money, as well as what the model might be saying about the broad economy.
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StockCharts New TickerRain Feature
May 22nd, 2008 by Corey Rosenbloom
I’m a big fan of John Murphy’s StockCharts.com charting website, but the company has outdone itself with a new feature I just discovered entitled “TickerRain.”
What is TickerRain?
It is an interactive page where StockCharts.com algorithms ‘rain’ (drop down in animation) the most recent ticker (stocks or index) symbols that are being viewed by site users, updated in real time, which then stacks results on a horizontal axis to provide depth.
Why is it Useful?
Beyond the fact that it is clean and neat, it can serve not only as a short-term sentiment indicator, but as an idea generator, especially for day-traders or even end-of-day (evening analytics) traders looking for potential new stock ideas. It’s also a good way to pass a few minutes watching different symbols of stocks fly across the screen.
In the 20 minutes it took me to write this post, the most popular symbol searches for that period were the following:
Apple, Inc (AAPL)
QID (ProShares Ultra-Short QQQQ)
CHK (Chesapaeke Energy)
$VIX (Volatility Index)
BIDU (Baidu.com)
GLD (Gold Trust Shares)
Not only is it helpful information, but it’s extremely interesting information, especially if there’s a major shift in sentiment flooding into (or out of) a stock or index.
Nevertheless, it’s always fun to see what your fellow traders are viewing on the charts.
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AAPL Retraces to Support Zone
May 22nd, 2008 by Corey Rosenbloom
Apple, Inc (AAPL), which has been on yet another amazing price run for 2008, recently retraced to its sharply rising 20 day moving average, which sets up a potential low-risk entry for traders.
Let’s see this zone:
http://blog.afraidtotrade.com/wp-content/uploads/052208-1601-aaplretrace1.png
The last time Apple retraced to support was near April 14th, which set up a ‘confluence of support’ trend retracement entry.
These signals are popular for traders and even longer term investors because they provide low-risk entries into a strongly trending stock.The stop is placed a comfortable distance beneath the key moving average while the profit target is often much higher than the risk (in dollars or percentages) taken by the usage of the stop-loss price (which, in this case, would be near $175).
Although we can never know which trades will work, this sort of structure creates edge even if 50% of the trades fail.The edge is generated by the amount gained with the winning trades vs the smaller amount lost each time with the losing trades.
Notice on the chart that the recent retracement was preceded by a developing negative momentum divergence.Momentum divergences warn of retracements only, and do not signal imminent trend change.
Continue to watch this powerful stock for potential clues for the broader market.
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Intraday Leverage Ideas
May 21st, 2008 by Corey Rosenbloom
With the day’s action complete, let’s look at the key points you could have added to a core position, or traded for quick scalp profits during the highly expected downswing in the market today:
http://blog.afraidtotrade.com/wp-content/uploads/052208-0123-trenddown1.png
First, there was a prevailing bearish bias going into the day from the structure of the daily chart on the Indexes (failing at resistance, forming dojis/shooting stars, prolonged up-swing, etc).This should have clued you in to higher than normal expectation for a potential trend day or at least some sort of continuation of the selling we experienced Monday.
With that bias, it was your task to find high probability, low-risk trade ideas that allowed you to participate in the sell-swing with conviction or perhaps a larger than normal scalp position.
The first such ‘ideal’ trade came around 10:30 with price making a new momentum low and price retracing gently to a confluence of resistance via the 20 and 50 period moving averages.The doji at these levels set up a powerful clue that odds favored lower prices, which set-up a low-risk trade.
Price formed a second new momentum low (and new daily price low) at 11:00 and formed a counter-rally back up to moving average resistance (which formed a bear flag style pattern).The perfect bearish move didn’t form until later than expected, and price actually rallied unexpectedly up to the falling 50 period moving average which psyched out many traders.I recommend placing stops just beyond the 50 period average in trend days, and my core stop was threatened, but not triggered, which wasn’t a fun experience, but patience paid off.
You never know which swing will go beyond your expectations, and you may not even hold on for a full price swing, but sometimes the market sets up a trade and exceeds your profit target goals, giving a windfall profit.The 2:00 ‘plunge’ was such an occasion.The selling pressure materialized and before long, a dramatic new low formed for the day which was accompanied by a new momentum low as well.
Price then retraced to the 20 period moving average again, with lower prices predicted from the new momentum low which materialized shortly thereafter, yet a positive momentum divergence formed at the new price lows, indicating that selling pressure might be mitigating a bit.This also corresponded with the market close, which was the signal to exit most intraday positions anyway.
Today was an excellent opportunity for active traders, but it takes courage and discipline to take the signals as you interpret them.Print out today’s intraday action and annotate your understanding of price action, indicator signals, and potential trades you might have taken (or actually took).Through repetition of seeing patterns, you will likely gain confidence.
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Rough Intraday Selloff
May 21st, 2008 by Corey Rosenbloom
I figured we might get some continued downside in the broader market today, but I’m always surprised at how swift and rapid these sell-offs actually are.Let’s take a quick look at the action so far as we near 2:30 EST in the trading day.
I’ll be using one chart created ‘on the fly’ from Tradestation, showing the DIA’s 5-minute chart with the Breadth window overlayed on the chart:
http://blog.afraidtotrade.com/wp-content/uploads/052108-1926-roughintrad11.png
(Click for full-size image)
I’ll try to analyze the action later this evening, but the day began with a near perfect bear flag into resistance (via the combined 20 and 50 period moving averages) which set up a nice trade (which was confirmed by a new momentum low - this is my “impulse sell” trade).The target was the intraday S1 pivot (pink line) which was exceeded.
I still expected lower prices and held a core position with a stop just above the falling 50 period MA which came ever so close to being executed, but I’ve found to play core positions with a looser stop because large moves in the intraday market are often preceded by a ‘false’ swing which often take out close stops.
Nevertheless, price fell back down into a new impulse down to the bottom of the Bollinger Bands before swinging back up to form yet another classic “doji at resistance” trade set-up which surprised those who took the trade with a large intraday windfall profit (with the target above the S2 Pivot, which was quickly exceeded).
We’ve formed a new momentum low and a large impulse down.The 15-minute chart (and somewhat on the 30-minute chart) showed a classic bear flag for the intraday action so far (check it out).
I’m also including a ‘real time’ (intraday) image from StockCharts.com which shows that the DIA rests at the rising 50 period moving average (while the Dow Jones - not pictured - actually went beneath this level today).
http://blog.afraidtotrade.com/wp-content/uploads/052108-1926-roughintrad2.png
Let’s see how this wild day (but welcome because of its increase in volatility) resolves into the close.
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Crude, Crude, Crude
May 21st, 2008 by Corey Rosenbloom
This morning while scanning the Newsflashr Business Feeds section, I noticed that virtually every major news organization was reporting on Crude Oil prices breaching $130 per barrel for the first time. Most of the headlines were of this variety:
“Crude Surges Above $130 on Supply Concern” - Fox Business
“Oil Tops $130 for First Time” - BBC
“Oil passes $130 for the first time“- CNN
“Oil tops $130 Haunted by Future Supply Worry” - Reuters
“Oil rises above $130 for the first time” - USA Today
And my personal favorite…
“Oil Soars to $130, What Will Congress Do?” - ABC News
There are other headlines on the Newsflashr site, which allows you to view headlines at a glance from top news sources, then allows you to click to read the stories that interest you. It’s a whole new way of reading the news.
With all these stories, I thought it would be helpful to show you the recent charts in Crude Oil and make a few quick observations:
http://blog.afraidtotrade.com/wp-content/uploads/052108-1527-crude1.png
If you ever wanted a classical technical analysis definition of an uptrend (series of higher highs and higher lows) then this chart is it. While prices do not rise in a straight line, they do experience temporary consolidations or pullbacks in the upwards price drift, which actually creates trade set-ups and low-risk ideas.
The rising 20 or 50 period moving averages often halt any retracement in price, as does certain Fibonacci retracement values (38%, 50%, or 62%) which can create powerful trade set-ups when combined with another support zone.
Crude Oil indeed made yet another new price high which was confirmed by a new momentum high. We are seeing the higher prices that were forecast (as a probability) from that recent May 12th NMH. Barring some major fundamental (supply/demand) change, odds still favor continuation of the prevailing trend.
Let’s see how strong this trend is on the weekly chart:
http://blog.afraidtotrade.com/wp-content/uploads/052108-1527-crude2.png
Price has more than doubled since the beginning of 2007, with the momentum oscillator continuing to make new momentum highs right along side with price (suggesting further continuation).
Adam Hewison of the Market Club just released a new video entitled “10 Trades and $32,000 Later….” how the service has fared (exceptionally well) using trading signals via their ‘trade triangle technology’ for the year to date.Seriously consider joining if the service would be of assistance to you.
The price swing from $90 per barrel to $130 was a sustained advance with only two weeks during that time being negative.
If you count the weeks, in 2008, Crude has gained 14 weeks, declined 5 weeks, and ‘tied’ 1 week. Those are amazing statistics for any commodity or market! Unfortunately, higher prices in this market affect the broader economy, and higher crude cuts consumer and business cash flow, which reduces relative buying power across the board.
The contrarians exist, and with so much headline exposure, it would be hard not to be at least slightly contrarian, but fighting such a strong trend can be damaging to your account.Continue to check back and keep your eye on this market and what it could mean not only for the overall market, but for yourself or your business.
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Bears Take Their Intraday Swipe
May 20th, 2008 by Corey Rosenbloom
The US Stock Market Indexes fell 1% today, after selling off into the close on Monday’s trading, causing price to trade at lower levels far quicker than it rose to these levels. Let’s look at the Dow for clues regarding potential structural trades you could have taken.
http://blog.afraidtotrade.com/wp-content/uploads/052108-0038-decline1.png
The price began the morning with a sharp overnight gap which was little surprise given the rapid sell-off into yesterday’s close. Price also formed a near perfect bear flag into the close, yet the ‘elegant entry’ wasn’t signaled due to price gapping through the lower trendline of the pattern.
After surging lower in alternating, narrowed price swings, the action leveled off before making a final ‘flush’ to new lows around 2:00 when the growing positive momentum divergences ‘kicked in.’
During a trend-day style environment, it’s important to recognize the conditions early, get the trade on, and scalp around a core position, while playing any retracement to the 20 period moving average as a new entry.
In fact, there were some classic doji candle patterns that formed at or near the falling 20 period average that allowed for some very high probability (small target) trades with very little risk.
http://blog.afraidtotrade.com/wp-content/uploads/052108-0038-decline2.png
I have magnified many of the doji style patterns during the day, including the rare “tri-star” doji pattern that formed around 11:30.
The 12:30 doji at resistance via the 20 period moving average formed yet another golden trade and the final doji-style pattern came after 3:00 as price retraced up to the falling 50 period moving average.
Also, let’s look at the larger intraday structure via the 15-minute chart to see how much ground price lost over the recent down-swing:
http://blog.afraidtotrade.com/wp-content/uploads/052108-0038-decline3.png
Price declined to levels not seen since the 13th of May.
As mentioned earlier, the price rests at potential support via the 20 or 50 period moving average (depending on the index) so it will be interesting to see the development from here.
(The Dow was the weakest index of the day, falling 1.5% to the S&P 500 and NASDAQ’s just under 1%.Oil prices reached new lifetime highs again today, gaining over $2 per barrel).
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Market Finally Tests Lower Prices
May 20th, 2008 by Corey Rosenbloom
After failing twice at its 200 day moving average, the US Stock Market indexes tested lower levels, and do so with a sharp sell-off.
Let’s view the larger picture of where price is on the Dow Jones Index:
http://blog.afraidtotrade.com/wp-content/uploads/052008-1834-markettest1.png
The most recent action is not the end of the world by far.Price appears to be rolling comfortably as the demand/supply relationship is quietly shifting in a rounded formation.
Price is failing to surmount the falling 200 day moving average, but at the same time, the 20 and 50 period moving average appear ready to meet the decline with potential support.Combine that with the potential support of the February ‘double top’ highs (near 12,700) and that area (or at least into the consolidation area just beneath it) could be yet another support zone.
A negative momentum divergence has formed as price has carved its way slowly higher.
The weekly chart shows further support at these levels, which may halt significant further downside action:
http://blog.afraidtotrade.com/wp-content/uploads/052008-1834-markettest2.png
I can’t remember the last time I’ve seen so many lines converge both above and below the price as we’re experiencing now.
The red down trendline connects price highs which was recently broken, and could serve as support.
The rising black line connects price lows which is still (currently) in-tact and could serve as support (though I feel it’s more likely to get broken soon because of its steepness).
The flat black line connects prior price lows (and current price highs) and also corresponds with the important ‘psychological’ level of 13,000.
Also, the 50 and 20 period weekly moving average are converging near 12,750, which could further serve as support.
It’s such an interesting time as an analyst right now, but as a trader, it’s so hard to anticipate what’s about to happen next.
The good news is that no matter which position you take (whether prices will continue higher or reverse and go lower), the places to position your stops (in case you are wrong) are so close to your entry either way that the risk is low and the reward is high, provided one of those levels gets battered and price makes a trend move higher or lower from here.
Let’s keep our eye on these developments until price (traders) can figure out which direction it will resolve.
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Link: Closer Look at Profit Targets
May 20th, 2008 by Corey Rosenbloom
The IBD Index blog recently posted a wealth of data on system testing and permutations of percentage stop and percentage profit target in relation to the IBD 100 list, S&P 500, NASDAQ, in a recent post entitled “A Closer Look at Profit Targets.”
The blog also has a large collection of posts on other aspects of system testing and design and - as the title suggests - focuses most of the analysis on the Internet Business Daily top 100 stocks list.
Before you get excited and think you can view the IBD 100 for free, the author is not allowed to post the contents of the stock list to the blog, but he keeps track of the performance of the index and how investors might use the strategy for better profit.
In this post, he tests a variety of combinations on fixed stop-loss percentages (from 2% to 10%) and fixed percentage profit targets (from 4% to 40%).This is a concept I have been examining as well, but have been focusing on fixed dollar and Average True Range functions for stops and targets.
He sorts results by:
Expectancy by Dollar Risked
Profit Factor
Efficient Expectancy Ratio
There are a few surprises in the data that you might not have otherwise been aware.
The author writes:
“…stops have a larger impact on a system than do entries and the manipulation of stop combinations is one of the most effective methods of tailoring a system to one’s needs.”
and…
“There is no magical combination of numbers, no “Holy Grail”.
Check out the entire post for full charts and detail.
(Credit to Rob Hanna’s post “System Discussion from Other Blogs” at Quantifiable Edges for providing the initial link to this post and others - and appreciation for linking to my post as well)
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Intraday Reversal Action Stuns Traders
May 19th, 2008 by Corey Rosenbloom
Today’s action was stellar both for the bulls and the bears, turning what looked like a trend day up into yet another end-of-day sell-off into the close.Let’s look at some possible trade ideas that you could have taken within this structure.
http://blog.afraidtotrade.com/wp-content/uploads/052008-0213-intraday1.png
I had expectations for price movement to the downside at the open, but those were quickly destroyed as price surged higher after an initial pullback into moving average support.
The first ‘ideal’ trade would have been the pullback to the 20 period moving average and the break of the ascending triangle pattern around 11:00 which called for a potential ‘measured move’ of the prior price action.
A second style flag formed around noon (which was the profit target for the prior trade) which also broke to the upside, but the higher prices formed a lengthy negative momentum divergence, which resolved with force to the downside as price violated first its 20 and then 50 period moving average.
Aggressive traders could have played off this momentum divergence, but there was little justification to play for such a large target as the market gave us.
Price then retraced rather cleanly into the ‘zone of confluence’ where the 20 and 50 period moving averages crossed, which set up a very high-probability trade to the short-side (which could also be identified by doji patterns at resistance, and could have even been called a ‘bear flag’ which fell just shy of its target).
I actually drew the ‘bear flag’ pattern, where the measured move would have taken price down to yesterday’s close but the 200 period moving average contained price and formed a potential bear flag into the close.
The action on the NASDAQ (QQQQ) chart was a bit more painful for the bulls:
http://blog.afraidtotrade.com/wp-content/uploads/052008-0213-intraday2.png
Without delving too deeply, a rising wedge-style formation persisted as each higher peak in price was met with a decline in the momentum oscillator until the divergence gave-way to starkly lower prices (and a similar bear flag style pattern).The NASDAQ actually closed lower on the day, while the Dow was buoyed by strength from Exxon Mobil (XOM) and Chevron (CVX) - crude oil prices hit yet another high this afternoon.
With the indexes at resistance, and such a harsh sell-off as we experienced today, it will be interesting to see if the bulls (buyers) can muster any sort of recovery in the face of these factors.Let’s see!
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Hear Corey on the Disciplined Investor Podcast
May 19th, 2008 by Corey Rosenbloom
http://www.thedisciplinedinvestor.com/blog/wp-content/uploads/2008/05/corey-rosenbloom1.jpgAndrew Horowitz of the Disciplined Investor site (well-known for his weekly Podcasts and new book The Disciplined Investor) interviewed me last week and has posted the interview as a portion of his most recent Podcast in his series.
Andrew’s Podcasts are becoming a leader in the field, and appeal to a wide variety of investors and traders. He has previous interviewed Robert Reich (former Labor Secretary), Adam Warner (Adam’s Daily Options), Brian Shannon (Alphatrends Blogspot) and many, many others. Be sure to check out the whole series of Podcasts.
In my interview, we discussed how fear developed and how one trade shaped my career for the better (forcing me to be humble and ‘disciplined’ in my approach to the markets). Further, we discuss some crazy adjustments to inflation numbers and also discuss avoiding seminars that appear ‘too good to be true.’ I also discuss Andrew’s recent book and why I was able to learn from it and why I will be recommending it to newer investors.
I’m a short-term trader, but Andrew takes that into account and describes the broader process of wealth accumulation and protection over one’s lifetime - an area that I tend to ‘push off until later’ due to my short-term focus on the markets, but it’s a topic with which we all should be more concerned.
We end by discussing the current sector rotation trends and what I feel needs to happen to get more bullish on the market.
The full podcast is entitled “Making the Grade with Afraid to Trade” and I’m thankful for Andrew for the opportunity and enjoyed the experience. Be sure to subscribe (link opens in iTunes) for updates when new podcasts are released.
Check it out!
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How to Spot Winning Trades with Market Club
May 19th, 2008 by Corey Rosenbloom
e Market Club, known for their ‘trade triangle technology,’ is becoming more popular and widely known, and I wanted to share a couple of screen shots and a recent message and video by Adam Hewison.
First, I wanted to show the “Welcome Screen” which contains direct links to your portfolio, ’smart scan,’ Trade School (Education), Blog, and Data Central.The screen also provides news updates and recent internal blog posts for members.
http://blog.afraidtotrade.com/wp-content/uploads/051908-1622-marketclub1.png
Second, I wanted to share a screenshot of Adam analyzing a stock and the technical signals that are available at a glance for a stock that takes into account short-term and longer term momentum and trend.It makes scanning extremely easy and allows you to view chart details of a stock quickly to determine if further analysis is needed:
http://blog.afraidtotrade.com/wp-content/uploads/051908-1622-marketclub2.png
Finally, Adam released a video entitled “How to Spot Winning Trades with Market Club” where he walks you through the process of how to use the service, scan the database of stocks, futures, and FOREX pairs (depending on your preference), and how to evaluate the results of the scan and how the ‘trade triangle technology’ works to help you increase your probabilities of finding a potential winning trade.
From Adam:
“I am often asked how I find winning trades in the market. I can easily answer that question in one word: MarketClub. Just like the thousands of other MarketClub members, I use our “Trade Triangle” technology every day to spot stocks, futures, precious metals and foreign exchange markets that are ready to move.
In this new video, I’m going to show you exactly how to find potential winning trades using our “Trade Triangle” technology.
This short video will get to the point quickly. That’s what I most like about MarketClub, it’s fast, and our “Trade Triangle” technology is definitely a winner with investors. The website shows me quickly and easily what markets are ready to move with only a few clicks of a mouse.
“How to Spot Winning Trades with Market Club”
Take the time, watch the video, and if you have any questions you can call us or find more information and videos at MarketClub.com. Enjoy the above video and give us your feedback when you have a chance.”
I find the service useful for scanning capabilities that generate fresh ideas, and also to confirm the analysis I do.The indicators are applicable for monthly, weekly, and daily charts, which allows you to craft the larger picture for the potential movement in a stock or a market.
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Five Steps to Backtesting Successfully
May 18th, 2008 by Corey Rosenbloom
We know that backtesting our ideas and strategies in the markets can lead to improvements in trading results - some would consider the process essential - but where do we start and what progression must we take?
I’ve been testing out different ideas and strategies over the last few weeks and have eliminated some ideas I thought might work (but didn’t) and have opened my awareness to ideas I thought were impractical (but worked).
Here’s a quick list of steps to backtest a strategy or trading idea.
1. Clarify the Concept in your Mind
2. Define Rules for the Concept into a Programming Language
3. Run backtests with different parameters across different markets
4. Visually inspect buy and sell signals for logic and clarity (fact-check)
5. Evaluate the System and Continue to Backtest
http://blog.afraidtotrade.com/wp-content/uploads/051808-1738-backtesting11.png
1. Clarify the Concept
There are different types of systems, including volatility breakout, trend following, mean reversion and you need to know what you’re testing and why. Are you looking to see what happens when a Stochastic gets ‘oversold’ and you buy? Are you looking to buy when two moving averages cross? If so, what does that say about the larger picture of your strategy? Clarify what you want to examine in your mind before you examine it so that it can direct your thinking.
2. Formally Set Rules (program them)
At this stage, you may need assistance, but most software applications already have ‘canned’ strategies or indicators you can use. This step can also be as easy as “insert strategy” when it’s already pre-defined or downloaded from a website. Otherwise, you need to familiarize yourself with the respective language and formalize entry and exit signals.
3. Test Your Strategy Across different Markets
Also, test it across different time intervals and data. For intraday data, it’s best to test 2 years or more; for daily data, expect to test at least 5 or more years, and for weekly data, test over 10 years or more. Also, try to incorporate some sort of defined bull market, bear market, or sideways (consolidation market). Note and compare results in each condition.
4. Inspect the Buy and Sell Signals
Sometimes, a system may look great on ‘paper’ but when you look at the buy and sell signals, there’s something odd that leaps off the page at you. For example, what if your system got you short a few days before the 1987 crash? One signal could show a massive profit which was due to chance which skews that data. Also, make sure your signals are being executed where you expect. If you want to test out a 20 period Bollinger Band, make sure you use that indicator on the chart and see where signals were executed. I had trouble with a Point and Figure strategy I tested and noticed the signals were being executed at unexpected places.
5. Evaluate and Continue
You define what’s most important to you - be it % Win Rate (which is not as important); $ Net Profit; Maximum Drawdown; Annualized % Return; Number of Trades, etc. Only you can define what’s important. Net Profit may not be the best single statistic, even though it may seem logical to maximize this. Look deeper in your data and continue testing until you have a clearer understanding of how your system works and whether the program is capturing what you expect to see.
Don’t expect one test to end all for you. Backtesting is a continual process in which you must guard against over-optimization and strive for robustness at the expense of grandiose profits. I’ll keep sharing some of my experiences with you as I continue to backtest different ideas and strategies.
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A Look Under the Market Hood
May 17th, 2008 by Corey Rosenbloom
The market has been strong since its March 2008 lows, but let’s take a peek under the hood at the Market’s Internals to see if there’s underlying strength or weakness.
First, the the recent NYSE Advance/Decline Line:
http://blog.afraidtotrade.com/wp-content/uploads/051708-1603-internals1.png
The important fact to note about this chart is that the line made a new high for 2008 and rose steadily in line with the market from the March lows.This could be a sign of strength in the market
Now the weekly AD Line:
http://blog.afraidtotrade.com/wp-content/uploads/051708-1603-internals2.png
The Weekly AD Line broke out of a downward trend line and again made new highs for 2008.
Notice how the AD Line led the market top, in that the high on this chart was formed in June 2007 yet the Market peaked near October, when the AD Line was clearly beneath that earlier peak.Now we are seeing a break of the down trend (lower lows and lower highs) which could be an early sign of strength.
StockCharts says the Advance/Decline Line is “One of the most widely used indicators to measure the breadth of a stock market advance or decline. The AD line tracks the net difference between advancing and declining issues. It is usually compared to a market average where divergence from that average would be an early indication of a possible trend reversal.”
http://blog.afraidtotrade.com/wp-content/uploads/051708-1603-internals3.png
In the weekly “New High - New Low” Index ($NYHL), we see only a minimal recovery, as few stocks have been able to surmount the losses they took earlier this year.While the line has turned positive, it has done so only slightly.Many stocks including the US Market Indexes fell over 20% from the October peak and it will take strong strength and sustained buying to stage a broad-based recovery to advance this line significantly.
Notice also that this indicator peaked in July 2007 and by the time the actual market peaked in October, the indicator clearly was showing weakness at that time with fewer stocks making new highs.
Looking under the hood, we see some strength, but keep in mind that the indexes appear to be at critical resistance levels via their ‘line in the sand’ average (200 day moving average).I would like to see the indexes clearly break that level before getting super bullish, but if I had to make a bet, I would say the price would experience a short-term reversal at these levels and test some lower prices - that’s a common expectation.
Should price defy expectations, it could knock a lot of traders off balance and higher prices could result as the market defied the odds yet again and caused more and more shorts to cover their positions.
Check out Dr. Steenbarger’s Wednesday post entitled “Gauging Market Strength after a Move to New Highs” for further information on recent market internals.
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Indexes Confused - Trapped
May 16th, 2008 by Corey Rosenbloom
Today marked a day of relative indecision for the US Stock Market.The Dow & S&P are trapped just beneath their 200 day moving average, and formed a strange doji pattern at this level, while the VIX reached new lows for the year.
Let’s look at these developments:
http://blog.afraidtotrade.com/wp-content/uploads/051708-0217-intraday1.png
S&P 500:
http://blog.afraidtotrade.com/wp-content/uploads/051708-0217-intraday2.png
The NASDAQ actually closed higher than its 200 day average, while these two indexes found resistance there.Dojis (where the close and the open are almost identical) are signals of ‘indecision’ and can precede short-term reversals in price.
The only issue is that there is seemingly strong support beneath price via the rising 20 and 50 day moving averages on both indexes.Volatility has been contracting and price swings have narrowed.
Also, one could say ‘fear’ is leaving the market due to the VIX (Volatility Index) making new lows for 2008:
http://blog.afraidtotrade.com/wp-content/uploads/051708-0217-intraday3.png
One could imagine the complacency at these levels as hedge positions are unwound.Also, the market has risen quite steadily since early March, and traders may be lulled into a potentially false sense of security.Let’s see if the bears can have their say, since the bulls (buyers) have been rather victorious for the last few weeks.
As always, check out the Market Club for additional resources and ideas.
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New Apple Store Unveiled
May 16th, 2008 by Corey Rosenbloom
Apple’s new store in Boston, MA was opened to the public Thursday evening and I must say I was amazed at the beauty and aesthetic appeal of the storefront.I wanted to share a couple of pictures:
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(Courtesy Apple Insider)
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(Courtesy Apple.com)
They’re building a new Apple store in my hometown of Huntsville, AL which should be ready by the end of Summer - I must say I can’t wait.
In the Boston store, the first floor is dedicated to Mac computers; the second floor is dedicated to iPods and iPhones; and the third floor is used for service and workshops.An impressive glass spiral staircase connects the three floors.
With such beautiful and appealing stores as these, is it any wonder their stock has been on such an impressive run lately?
http://blog.afraidtotrade.com/wp-content/uploads/051608-1600-applenewsto3.png
Price has almost traveled $100 from the February lows.The actual appreciation is closer to $75, but price is still on a strong and pervasive uptrend.
Currently, price seems to be pausing and slowing its rapid ascent, as the acceleration of prices slows gently.Investors have described AAPL as “a new breed of stock” which may be the case, but remember that unexpected events can happen so it’s best not to place all your investment eggs in one basket, no matter how wonderful the company or stock seems.
Nevertheless, Apple has continued to reward its investors and customers with great elegance.
(Thanks to Jarred M. who showed me the pictures for the new store)
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Intraday Trend Day Yet Again
May 15th, 2008 by Corey Rosenbloom
The market indexes gave us another strange styled trend day today, with the market opening on the lows and closing on the highs while providing excellent retracement entry trades along the way.Let’s examine it:
http://blog.afraidtotrade.com/wp-content/uploads/051608-0309-trendday1.png
While traditional (or powerful) trend days begin with an opening gap, today’s price action opened very close to yesterday’s close.I would guess most people (myself included) didn’t expect a powerful up-move was in the works today, but we must play the structure as best we understand it as it develops.
Nevertheless, one of the first trades of the day was a ‘fade back to the open’ day as we were expecting a range-bound style day.This set-up around 11:00 with the target being either yesterday’s close or the 200 period moving average.
A ‘buy’ trade (again, expecting a range consolidation day) was entered targeting the intraday high which was exceeded, and price began to wind back down to equilibrium near the 20 and 50 period rising moving averages.A ’support’ or retracement style trade could have been entered here with a stop beneath the moving averages, but there was little justification to play for a ‘big win’ or even a trend style trade.nevertheless, aggressive bulls were rewarded as they pushed prices to new highs suddenly into the close.
I also wanted to highlight two ‘range contraction’ plays on the QQQQ (NASDAQ) index:
http://blog.afraidtotrade.com/wp-content/uploads/051608-0309-trendday2.png
These are also known as “Bollinger Band Squeeze Plays” which often lead to larger moves as price expands out of a tight consolidation area.Bollinger Bands are based on standard deviation functions (typically of the last 14 bars) and as bar range narrows, so does the standard deviation function.
Squeeze Plays are one of the rare set-ups that allow you to play for larger targets intraday.Two such ‘plays’ happened on the index charts today (especially the QQQQ’s).
Today’s trading has taken us above (or just at) the 200 period daily average on the major US Stock Market Indexes!Let’s see if bulls can continue to push prices higher, as they’ve done so without a major pause (retracement) yet.
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Indexes Trapped though NASDAQ Outperforms
May 15th, 2008 by Corey Rosenbloom
The US Markets remain trapped beneath their 200 day moving average but above their rising 20 period average.
A breakout is likely, but in which direction will it occur?
Let’s look at the SPY (S&P 500 ETF):
http://blog.afraidtotrade.com/wp-content/uploads/051508-1823-trapped1.png
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The 200 period average is declining while the 20 is rising, and price is in a strong uptrending channel line.
Moving averages can serve as support and resistance, which is the situation currently, but one of these zones has to break – and I believe the break will occur sooner rather than later.
The SPY has support from prior price highs around the $138 (1,380) level, which also corresponds with the rising 50 period moving average.
Price has already made a large price move up, so it is difficult to imagine it trending even higher, but the very fact that it is doing so is shattering many bearish expectations.
Let’s look at an interesting divergence within the NASDAQ Index and its QQQQ ETF:
http://blog.afraidtotrade.com/wp-content/uploads/051508-1823-trapped2.png
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The NASDAQ slightly resembles the technical picture of the S&P, in that price is finding support at the rising 20 and resistance and the falling 200.
However, the QQQQ is actually stronger (technically) than the index itself because it has managed to close and trade higher than the 200 period average…:
http://blog.afraidtotrade.com/wp-content/uploads/051508-1823-trapped3.png
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Also, it’s interesting to note that the Relative Strength line of the NASDAQ vs. the Dow Jones Index has been rising (meaning the NASDAQ has outperformed the Dow since the March bottom):
http://blog.afraidtotrade.com/wp-content/uploads/051508-1823-trapped4.png
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This clues us in to potential risk-seeking (or greater risk appetite) by the larger players in the market.
Also, one must take into consideration the impact that surging prices from Google (GOOG) and Apple (AAPL) has had on the NASDAQ index lately.
Let’s continue to watch these relationships for further clues as to what might be in store.
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AAPL Divergence and Resolution
May 15th, 2008 by Corey Rosenbloom
Apple Inc (AAPL) suffered just as other stocks yesterday, and fell victim to the ‘end-of-day’ plunge Wednesday.Although it’s virtually impossible to know how far a price move will go or how quickly it will occur, Apple signaled a momentum divergence that could have clued you in that the risk (short term) increased for intraday traders.
Let’s look at Apple’s (AAPL) 15-minute price chart:
http://blog.afraidtotrade.com/wp-content/uploads/051508-0305-trenddaytur4.png
As price carried higher, each subsequent swing was met with lower peaks in the momentum oscillator (which is evident in price itself by comparing the length of the impulse swings).This was a clue that the bulls were losing strength temporarily to push price higher.
Eventually, price formed a sort of ’rounded top’ or rolling top formation that broke down as price breached the rising 50 period moving average.There was no guarantee or even sign the the sell-off would be so violent, but the eventual target when the trend rolls over and price breaks through the rising 50 period moving average is the rising 200 period moving average (the pattern repeats itself).
This target was achieved much quicker than most people anticipated, and price staged a pause at that level into the close.
Again, keep your eye on price and control downside risk in positions, no matter how strong the stock is fundamentally when you’re ‘day-trading’ stocks.
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Trend Day Turned Upside Down
May 15th, 2008 by Corey Rosenbloom
Today’s intraday action began with the promise of another trend day in the market, but ended on a terrible note, reversing the action into the close and causing a cascade off intraday highs for most stocks.
Let’s peek at the action via the DIA (Dow Jones ETF):
http://blog.afraidtotrade.com/wp-content/uploads/051508-0305-trenddaytur1.png
Trend days often start with an overnight gap (or in this case, large momentum impulse) which sets the stage for further ‘one-sided’ action.Typically, once you recognize that conditions favor a trend day developing, you want to establish a ‘core’ position early and then trade around it, typically adding to it (or playing small positions) at subsequently pullbacks (retracements) to the rising 20 period moving average.
The official ’sell-signal’ for a trend day (to abandon the trend) is when price solidly or convincingly breaks its rising 50 period moving average, which occurred around 3:00pm.I don’t recommend trying to trade counter (against) trend days.
The NASDAQ (QQQQ) suffered a worse beating than the S&P 500 or the Dow Jones:
http://blog.afraidtotrade.com/wp-content/uploads/051508-0305-trenddaytur2.png
After a large volatility move up (and gap), price had one last bit of strength in making new highs before plummeting like a waterfall into the close.Today’s action showed why it’s important to trade with stops, because if you kept a core trade on (or almost any long position) and walked away unprotected by a stop, you came back shocked to see your profitable trade turn sour… very sour today.
The price action in Google is an example of how horrendously some stocks were slammed today:
http://blog.afraidtotrade.com/wp-content/uploads/051508-0305-trenddaytur3.png
After an initial upside gap and successful trading, Google fell from $590 to $576 in just over an hour.
The market is telling us that volatility has not quite left the ‘building,’ and that we should always keep watch over open positions and not get overconfident in the marketplace.
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Gold Loses its Luster - Sell Signal Confirmed
May 14th, 2008 by Corey Rosenbloom
With the US Dollar Strengthening, Gold prices have been falling lately and have officially confirmed a strong sell signal on the daily chart.Let’s view this action:
Gold ($GOLD) Daily Chart:
http://blog.afraidtotrade.com/wp-content/uploads/051508-0235-goldsell1.png
There’s a few things I want to highlight on this chart.I have literally highlighted (and expanded) the most recent sell signal in the contract.Price is in a confirmed daily downtrend and the most recent swing down formed a retracement which terminated at the falling 20 period moving average.
To confirm this sell signal, price formed two doji (reveral) formations (magnified in the right corner) before forming a large red (sell) candle.Price - via this development - is expected to travel downwards and test the rising 200 day moving average at $840 per ounce or even lower (provided the most recent momentum swing is closer to a bear flag development).
Adam Hewison’s “Trade Triangle” (indicator combination) technology spotted this development and he posted a quick 2 minute video entitled “Sell Signal in Gold” that I think you would find valuable.Market Club members receive these and other videos and signals as they develop.Adam is great at keeping you informed of developments you might otherwise miss.
Let me pull the perspective back for you to the monthly chart which provides a new potential price target before the trend could resume (although it will take some ‘backing and filling’ to get there):
http://blog.afraidtotrade.com/wp-content/uploads/051508-0235-goldsell2.png
The target is the rising monthly 20 period moving average at around $775 per ounce.The weekly structure (not shown) supports this and gives a slightly higher target.
Either way, gold looks like it has slightly further to fall before it rises.Continue to keep an eye on this important precious metal, as it has potential implications (bullish) for the stock market.
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