Three Strong Stocks on Falling Volume
May 14th, 2008 by Corey Rosenbloom
Let’s look at three recent powerhouses that have been strongly pushing their way higher on less and less volume, which serves as a non-confirmation of higher prices.
First, Potash (POT):
http://blog.afraidtotrade.com/wp-content/uploads/051408-1558-volume3.png
This darling fertilizer stock which has been so strong through 2007 to present is now forming a potential blow-off top.Volume surged as price also surged and then on the current swing higher, volume markedly has declined.Though the chart remains in a superior uptrend, the sharp decline in volume is a warning sign.
Next, Urban Outfitters (URBN):
http://blog.afraidtotrade.com/wp-content/uploads/051408-1558-volume2.png
It is extremely rare to see a stock show this kind of almost perfect up-trending rising channel line, which gives a clean picture of where the stock is likely headed next (ease of entries and stop-loss management).
I would be less concerned of this stock reversing because it has yet to show a type of ‘blow-off’ euphoria, but higher prices are not yet being confirmed by volume (as prices drift higher, volume drifts lower).Let’s keep a watch on this one.
Finally, CSX Corp. (CSX)
http://blog.afraidtotrade.com/wp-content/uploads/051408-1558-volume1.png
CSX is a railroad/transportation company that has been in the news lately.The stock has recently surged to new highs (and is making one intraday) yet a both a volume and a momentum divergence have transpired.
I also wanted to show this chart to demonstrate how the rising 20 period moving average serves as key support and allows you to enter new positions into a trending market.
I found these stocks through technical scans at the Market Club - be sure to check it out and consider joining for more information and analysis.
Watch the stock prices but always try to listen to the “Voices of Volume” for a deeper understanding of what may occur next.
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Is Google Finding Support
May 13th, 2008 by Corey Rosenbloom
Let’s look at internet giant Google (GOOG) to see if the stock may be at support or resistance.
http://blog.afraidtotrade.com/wp-content/uploads/051408-0129-isgooglefin1.png
There’s a few patterns to note in the stock.
First, look at the triangle consolidation (not shown) that preceded the price reversal at the start of 2008.
Second, notice the stair-steps of lower lows that were met with a positive momentum divergence, also which preceded the price reversal.Momentum often precedes price.
Now, note that price ran higher following the large momentum (earnings) gap impulse, showing massive strength (price didn’t even attempt to fade or fill the gap).
Now, price is above the 20 and 50 period moving averages, and could be finding support at the 200 day moving average.If so, price could build a mini-base for higher prices about the $550 level.Should price break this level, it would mean a deeper retracement could be possible, but the momentum is strong with this stock.
Continue to watch this stock behemoth for signs of continuation!
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Clean Trends on FOREX Charts
May 13th, 2008 by Corey Rosenbloom
I’ve been doing some simulated trading on some FOREX cross-pairs and have been thoroughly impressed with the ‘trendiness’ that occurs with greater stability than stock index charts.I wanted to highlight three recent examples of this concept which is exciting to me.
A ‘trend’ is a series or progression of higher highs and higher lows with even or ‘comfortable’ swings between them (vice versa for a down-trend).There are few erratic moves and the price action is typically contained by a key moving average, especially the 20 period exponential.
The trend structure allows for clean and elegant entries, stop-loss placements, and profit target placement.These are the ideal environments for traders, but they set-up less frequently than traders like.
Might FOREX offer a greater degree of stable trendiness intraday?
First, let’s look at the Euro/Japanese Yen 5-minute chart on May 9th (you’ll need to click on these images so you can view the larger size)
http://blog.afraidtotrade.com/wp-content/uploads/051308-1730-forexclean1.png
Notice the price rolling over early in the morning (1:00am) and then the trend developing at 3:30am which progressed with a stable series of lower lows and lower highs, with each lower high terminating at the falling 20 period moving average (thus setting up a trade).
All trades profited and none were even threatened with the stop (traditionally above the 50 period average) being threatened.
Next, let’s view today’s action in the Euro/Japanese Yen cross (as of 11:00am CST):
http://blog.afraidtotrade.com/wp-content/uploads/051308-1730-forexclean2.png
We see the same pattern of a breakout and then when the moving averages cross (6:30 am) a large trend move (momentum move) is underway, with the 20 period moving average setting up good trade ideas.Price never breached this level and set up three quick and easy trades (without complicated mathematical indicators).
Finally, let’s step back a day to May 12th and view the Euro/US Dollar pair:
http://blog.afraidtotrade.com/wp-content/uploads/051308-1730-forexclean3.png
Again, we have a breakout and uptrend (as defined by the moving average orientation) and then price pulls back near the 20 period average and sets up trade ideas.The strength of the trend was so powerful that price couldn’t complete a full retracement to the key average.
I’m encouraged by what I’m practicing in the FOREX markets, and see potential here.Don’t be surprised to see me post more charts with clean entries/exits and targets in the near future!
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KNDL - Massive Head and Shoulders
May 13th, 2008 by Corey Rosenbloom
I’ve you’ve never seen a clear Head and Shoulders pattern, look immediately to Kendle International (KNDL).
The stock is forming a broad H&S pattern, and the Right Shoulder actually developed a mini-H&S pattern within it - it’s one of the strangest patterns I’ve seen.
http://blog.afraidtotrade.com/wp-content/uploads/051308-0603-kndl1.png
I annotated this chart for visual clarity.The black lines represent the larger structure and the red arcs represent the smaller, mini-pattern.
Price is now forcefully breaking the neckline of both the smaller and the larger patterns, and price could be headed much lower if the measuring implication holds.
Typically, we measure the distance from the Head (highest price) down to the Neckline (horizontal support line - not drawn) and then project that distance downward from the ‘break of the neck.’
In this case, the larger structure provides a distance of approximately $10 ($50 down to $40) and then if we subtract that from the neckline (around $40) then that projects price down to $30.These are rough estimates.
The smaller structure is on its way to achieving its target:$46 minus $40 equals $6, which is then subtracted from $40 to give us a mini-target of $34.
Let’s take the annotations off the chart and view the price structure itself:
http://blog.afraidtotrade.com/wp-content/uploads/051308-0603-kndl2.png
You can also point out a double top formation at the $51 level.
A sort of broadening formation formed from February until April (which also is a type of reversal pattern).
There are a variety of other patterns you could have identified in this chart, many of which were ominous patterns indeed.
It’s always good to find ideal patterns and then annotate them and store the files for future reference, with the goal being superior pattern recognition in real time as patterns unfold.
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Alcoa Breaks to New Highs
May 12th, 2008 by Corey Rosenbloom
Alcoa (AA), a Dow Jones component that manufactures aluminum and is taking advantage of the recent materials rise, broke key resistance to make a new high in 2008 today, and could continue higher to make potential all-time highs soon.
Let’s see what’s up:
http://blog.afraidtotrade.com/wp-content/uploads/051308-0547-alcoa1.png
The stock broke a rectangle consolidation period from $34 to $39 per share, giving us a $5 range. If we add the $5 to the break-out zone of $39, then this gives us a classic price projection of $44, which would challenge all-time high prices.
The stock has been doing well throughout May, and volume is surging to the upside, further confirming the rectangle break. Notice how volume trailed off as the triangle consolidation pattern formed - this is in line with the classic texts of technical analysis.
Let’s pull it back to the monthly chart for a clearer perspective:
http://blog.afraidtotrade.com/wp-content/uploads/051308-0547-alcoa2.png
First, notice the recent volume surge in the stock (black arc).
Next, notice that the $40 per share zone has been significant resistance for quite some time. In mid-2007, price surged above this level but quickly fell the same month, which actually registered a negative month close (akin to a failed breakout which led to a price reversal).
Now, price is eeking above the $40 per share resistance zone and will mark the first monthly close above this zone if the stock can hold onto its gains for the next two or so weeks.
Also, notice price forming a clean ascending triangle - the break of which (to the upside) would potentially project prices to $60 or beyond (long-term, of course).
This stock is certainly one to keep your eye on to see if price can continue its momentum and inch its way to new highs over the next few weeks or months. Of course, it’s good for the Dow to see such a stock having excellent relative strength.
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Intraday Semi-Trend Index Action
May 12th, 2008 by Corey Rosenbloom
Today’s US Stock Market Indexes surprised us with a semi-trend day.The day began with a perfect gap-fade and then gave us a ‘double-distribution’ trend day.Let’s look at it!
http://blog.afraidtotrade.com/wp-content/uploads/051308-0254-trendday1.png
In the DIA 5-minute chart, we see the day start with an opening gap that was filled and then the market trended in the direction of the original gap.Remember that gaps initially are momentum impulses, and we expect momentum to lead price action.It’s an excellent strategy to buy pullbacks in momentum moves.
Price then rose steadily and crested into a steady pullback to the rising 50 period moving average, setting up a better buy signal which rewarded the patient with higher prices.
I also pointed out this morning the “U-Turn Buy” that was developing on the indexes and I hope you profited from its development and resolution.Such ’steady’ moves can produce easy profits because the price action itself is so clean.
Let’s look at the 15-min SPY chart to get a better view of this pattern:
http://blog.afraidtotrade.com/wp-content/uploads/051308-0254-trendday2.png
The red arrow represents the lengthy momentum divergence which preceded the U-Turn (or Saucer) set-up.
The signal to enter would have been (aggressively) when price breached the falling 20 period moving average and (conservatively) when it breached the 50 period (first purple arrow).
The confirmation zone, or strong trade idea, came as price pulled back cleanly to the rising 20 period moving average following a new momentum high.The target would have been at least the 200 period moving average if not greater due to the structure of price.
Notice how - if you look at the daily chart - the $138.50 price area represented the daily 20 period moving average.The balance gently shifted from sellers to buyers - such moments are amazing to watch unfold in the marketplace.
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A Little U-Turn Buy Action with Gap Fade
May 12th, 2008 by Corey Rosenbloom
So far, the US Stock Market Index trading has been stable using simple strategies that I have discussed frequently on the blog.Let’s examine the U-Turn Buy (or Saucer/Rounded Bottom) action along with the classic Gap-Fade trade today.
http://blog.afraidtotrade.com/wp-content/uploads/051208-1805-uturn1.png
You can almost ‘feel’ the balance shifting through simple visual inspection of the price action alone to see that the strength of the selling weakened as the pace of the buying first met selling and then exceeded it.
The “U-Turn” or shift in price was complete (or confirmed) with a positive momentum divergence.
Also, on the daily chart, price sat at support where the even shift began, which further added confirmation to the potential for (short-term) higher prices.
Let’s talk about the gap-fade trade that worked out marvelously this morning:
http://blog.afraidtotrade.com/wp-content/uploads/051208-1805-uturn2.png
Quickly, the ideal gap-fade technique is the following:
1.Fade the gap down to yesterday’s close
2.Exit the ‘fade’ at the close and then reverse your position to trade in the direction of the impulse
3.Exit at the intraday high (or sell half the position there and perhaps play for a larger target with what’s left… if you’re aggressive).
These three parameters hit perfectly today, though it’s not always the case that they work out as ideal as today’s action has.I always recommend printing out and annotating any ‘near perfect’ patterns or trades that develop.
Let’s keep an eye on price for the day.Be sure to check out the Market Club for trading ideas and commentary.
Good trading!
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Market Status with Materials and Healthcare
May 11th, 2008 by Corey Rosenbloom
Happy Mother’s Day!Let’s take a quick view at the Dow Jones Index, along with two key sectors which I’ll put in focus today - Materials and Healthcare.
First, the Dow Jones ($INDU):
file:///C:/DOCUME~1/Corey/LOCALS~1/Temp/moz-screenshot-4.jpg
http://blog.afraidtotrade.com/wp-content/uploads/051108-1713-marketstatu1.png
The market failed at the resistance provided by the (now) falling 200 day moving average, and from prior support at the 13,000 level (which also serves as a sort of ’round number’ psychological resistance.
There is obvious support beneath the market, via the 50 period moving average along with the rising trendline drawn since March.Whether or not the market holds at these levels is the question, but I would guess that the support zones ‘appear’ on the surface to be stronger than the resistance levels, but the market often behaves in ways against the obvious solution.
Breaking 12,500 on the Dow could set up a retest of the lows at 11,700, but a clean break above 13,200 could set up an eventual retest of the 13,600 or perhaps 14,000 level.Trading at these levels will generate a good deal of media coverage, because there still are plenty of expectations that the market will (or should) be headed lower.
Let’s focus on two sectors now:
The Materials Sector (XLB), which has done very well this year, but could be forming a Head and Shoulders Pattern.
http://blog.afraidtotrade.com/wp-content/uploads/051108-1713-marketstatu2.png
Notice the key momentum divergence that has occurred as price cautiously probes new highs.The rounded swing action has formed a potential ’slanted’ head and shoulders pattern.A break of the neckline, via the ‘measuring rule,’ could take price down to the $40 level which would coincide with the rising 200 day moving average.
Unsurprisingly, Materials stocks have been doing well lately, including Alcoa (AA) and US Steel (X).
Let’s look at the worst performing sector of the year - the Health Care sector (XLV);
http://blog.afraidtotrade.com/wp-content/uploads/051108-1713-marketstatu3.png
The highest price of the year was formed around January 14th with the low being in mid-March.
A rectangle consolidation (continuation) pattern formed throughout February and met its measuring objective (which I also wanted to highlight) on the chart.
It could also be considered a ‘measured move’ via a type of horizontal strange (flat) flag style pattern, where the measured move is equal to the ‘pole’ or price action preceding the consolidation.
Price is now struggling to overcome key moving average resistance, but the worst could be over for this sector (provided it does not break beneath the $30 level on to new lows).
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Dollar Bumps Weekly Resistance
May 10th, 2008 by Corey Rosenbloom
The US Dollar Index staged an impressive rally on the daily charts, but is currently failing to surmount resistance via the strong 20 period moving average on the weekly chart.
http://blog.afraidtotrade.com/wp-content/uploads/051008-2000-dollarresis1.png
Notice how the falling 20 period moving average (exponential) has served significantly as overhead resistance, thwarting any rallies ever since late 2006.
Price recently tested the $74 zone, and is currently failing to penetrate the average, which could set-up a retest of the $71 area before a potential base of support is built… or the index could probe new lows.
At the same time the Dollar Index is set to make new potential lows, the CRB Commodity Index made a new high this week, potentially preceding a low in the Dollar.Oil led commodities higher, testing an all-time high of $126 per barrel.
http://blog.afraidtotrade.com/wp-content/uploads/051008-2000-dollarresis2.png
Let’s continue to watch these markets and how they may affect the overall US Stock Market, or particular market you’re currently trading.
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How to Increase Your Win Rate Easily
May 10th, 2008 by Corey Rosenbloom
How can you increase your % win rate for your trades by adjusting one of two parameters?Would it be worth it for your overall profitability?
I’ve been doing a fair amount of trading system development and optimization thanks to TradeStation, Tradecision, and Excel and have found some surprising initial results.
For the purpose of this post, let’s focus only on the % Win rate, which is the percentage of overall trades that turn out to be winners.Most newer traders assume that professionals have very high win rates because they make accurate market calls - but that’s not usually the case.
The more important statistic is actually how much money you make per trade vs how much you lose per trade, combined with overall drawdown stats. Keep this in mind, as maximizing your % Win rate may not lead to an overall net profitable system.
So, how can you increase your win rate easily and effortlessly?
1.Lower Your Profit Target
Lowering your profit target will often result in a higher win rate, but it can come at the expense of your net profitable rate, because it can eliminate large dollar wins.Sometimes, a handful of large dollar gains can be the difference between a winning and losing system.Nevertheless, lowering your targets will often increase your Win % rate.
2.Raise Your Stop-Loss Value
Increasing your stop-loss will also raise your % Win Rate due to giving the price more room to swing to achieve your profit target.This accounts for market volatility and could result in more profit targets being hit before stop-losses are.Of course, a few large losses also can offset the net profit of a system.
While adopting either (or both) of these strategies will (likely) increase your win % rate, your net profit may suffer, depending on the type of strategy you’re using.
I highly recommend ‘breaking the mold’ of the traditional 3 to 1 reward to risk ratio and testing different values to see what would happen to your system.While % Win Rate is not the most important statistic, realize that it is important, and knowing how different parameters affect the rate can help build confidence in your trading strategy.
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Interesting Intraday Action in AAPL
May 9th, 2008 by Corey Rosenbloom
Apple Inc (AAPL) showed some interesting patterns today on its intraday chart - I thought you might like to take a closer look.
http://blog.afraidtotrade.com/wp-content/uploads/051008-0009-interesting1.png
The day started with an overnight gap down that didn’t fill, although price achieved a 50% retracement.
Gaps that fail to fill can lead to larger trend moves in the original direction of the gap, which in this case took price to new lows.
There were two entries (trades) that could have been taken to the short side in that structure:
Both trades set-up as price retraced to the declining 5-period moving average (with a stop just above the falling 50 period MA).Generally, it’s best to play for a small target, but in the structure of a trend day, you can use a type of trailing stop strategy (trailed above the 20 period MA).
Price formed divergences into the noon hour, and the 1:30 time formed a higher low, setting up a potential “Sweet Spot” trend reversal trade (with the purple hour that triggered when price rose above the 1:00 swing high).
In terms of being interesting, I wanted to highlight the strange consolidation pattern for the 2:00 hour.Price was literally sandwiched between the falling 50 and rising 20 period moving average before breaking out to the upside just after 3:30.It’s rare to see price respond so starkly to these averages in such a clear pattern.
Also, notice the new momentum highs at 1:00 and 2:00 (momentum precedes price, meaning that intraday swing price highs were likely yet to come).
Apple has been doing exceptionally well on the daily chart, but could be encountering resistance which is setting up a sell swing (or brief retracement).There’s plenty of volatility and price range in this stock to do well as an intraday trader, but if you want to play the daily chart, you might consider options strategies.
It could be another good year for Apple and I’ll continue to update you on patterns and trends I see developing in this and other stocks!
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Crude Oil and Trade Triangles
May 9th, 2008 by Corey Rosenbloom
Crude Oil tapped above $124 intraday today, marking yet another new record high for the crucial commodity. Is there a potential way to analyze and trade this development with Market Club’s Trade Triangle Technology?
Adam Hewison today released a new brief info-movie for your benefit. I thought it was funny that he described crude oil as “The gift that keeps on giving… or taking.”
http://blog.afraidtotrade.com/wp-content/uploads/050908-0103-commodities3.png
Further, he writes:
With crude oil hitting historic highs today, I thought it would be a good idea to do a short video updating you on our “Trade Triangle” technology and the signals we have generated in the June crude oil contract.
This five-minute video will give you an insight into how you can approach the crude oil market using MarketClub’s “Trade Triangle” technology. This approach takes a great deal of the emotion out of trading which is crucial for any successful trader.
I hope you enjoy the video and learn how to employ our technology into your own trading.
Check out the video “May Crude OIl” and also other videos (link at the video page) for other “Trader’s Educational Whiteboard” brief videos.
Beyond this video, be sure to check out the page “Market Club Introduction” and consider joining this beneficial and affordable service.
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Commodities Race to New Highs
May 8th, 2008 by Corey Rosenbloom
Do you know where commodities have been lately? Does it matter to the market? Let’s take a look at a few select commodity indexes to see the new highs made on some of these indexes today.
First, the Goldman Sachs Commodity Index:
http://blog.afraidtotrade.com/wp-content/uploads/050908-0103-commodities1.png
Notice the extreme price movement that created the surge which took this index to new highs.
Now, let’s compare this to the more popular (and probably more widely followed) $CRB Index:
http://blog.afraidtotrade.com/wp-content/uploads/050908-0103-commodities4.png
Notice it made new intraday highs but closed right on new high territory. Price may be forming an ascending triangle (bullish) pattern, as the lower trendline appears strong because it has been tested at least four times.
Let’s examine two commodities - one to be serious, and the other to be fun.
Crude Oil Prices ($WTIC):
http://blog.afraidtotrade.com/wp-content/uploads/050908-0103-commodities3.png
Crude Oil has been frequently mentioned on the news as making new highs.
The Bull Flag (not shown, but mentioned previously on this blog in my price projection post: “Crude Oil Gushes to New Highs” - I called for a target near $124 per barrel) has resolved and achieved its price target, and so that is no longer the dominant technical chart pattern in play now. The recent surge resembles some sort of ‘blow-off’ top complete with momentum divergences (also not shown).
Finally, let’s look at an index you’ve probably never seen before - The Goldman Sachs Livestock Index:
http://blog.afraidtotrade.com/wp-content/uploads/050908-0103-commodities2.png
I wanted to show this chart ($GVX) because of the amazing and remarkable gaps (that can occur with these commodity markets) from early to mid March. Recall that futures market can go “lock limit up” where trading ceases for the day and few orders can be filled. It’s an interesting twist to futures trading that can scare away new traders.
Nonetheless, the index itself is near new highs (2007 showed highs of $250), the price action is interesting and very volatile - but it serves as an interesting contrast to the many stock and index charts you’re used to examining.
For more insights on commodities, futures trading, and even stock trading (including proprietary trading signals, analysis, scans, and trader interaction), join the Market Club.
For some real ‘heavy lifting’ analysis software, check out Tradecision - readers receive 15% off the one-time purchase (no monthly fees).I’m still mastering this amazing software tool available to retail traders.
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VIX Off 2008 New Lows
May 8th, 2008 by Corey Rosenbloom
The $VIX (Volatility Index) is bouncing off new lows for 2008 in a sign that traders and funds have become less fearful in the current market environment.
Perhaps they are unwinding their hedges or engaging in some sort of risk-seeking or ‘cooling off’ period, but it is interesting to note that it took the VIX 6 months to make a new low in 2008.
http://blog.afraidtotrade.com/wp-content/uploads/050808-1724-vixofflows1.png
http://blog.afraidtotrade.com/wp-content/uploads/050808-1724-vixofflows2.png
The VIX actually tested a low made near Christmas of 2007 and could be finding support at that level as the main US Stock Market indexes find resistance on their daily charts.
There is a tight range for the indexes, as they are generally beneath their falling 200 day moving average and above their 20 and 50 day moving averages.
Conversely, the VIX is beneath all key moving averages and is in a confirmed daily downtrend while the S&P has been in a short-term uptrend since mid-March.
If you’re not familiar with how to analyze the VIX, or why it’s inverse the S&P 500, check out Bill Luby’s post at the aptly named VIX and More site entitled “Ten Things to Know about the VIX”.
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Intraday Foibles
May 8th, 2008 by Corey Rosenbloom
I was quite impressed by the strength of the bears in swiping the US Indexes lower on Wednesday, giving the bulls only a marginal chance for any sort of retracement.I recommend saving today’s charts for the files under “strange price action” for future review.
Let’s look first at the DIA:
http://blog.afraidtotrade.com/wp-content/uploads/050808-0736-intradayfoi1.png
Price made its intraday high just above yesterday’s close, which formed a shooting star (bearish reversal) candle pattern.After consolidating into the 11:30 time slot, the market broke to the downside and consolidated in a slightly rising formation (actually flat on the SPY) which broke sharply and quickly to the downside.
Bulls only neutralized selling pressure, and did not overcome it, as evidenced by the strange ‘flat-line’ price action into the 2:00pm hour before the bears took full domination of the intraday price action, pushing the indexes to new lows on surging volume before making one final push downward to close near the session lows.
In terms of ideal trades, one could have entered short on the shooting star candle at yesterday’s close at 10:30 and targeted the 200 period moving average.
One could have ‘gotten short’ again when the Bollinger Bands narrowed at 1:00 and entered playing for a breakdown in price with a stop above the key moving averages.
A second such trade could have been entered around 2:00 (actually any time before that once you recognized the price retracement and flat-line price action - akin to a rectangle).
Price breakdowns can give you large targets, and with the swift action, you may have been tempted either to take a small target or try to fade the action when you felt it ‘bottomed’ but momentum often precedes the price and the new momentum (and price) low at 2:30 was a clue that the actual price low was likely yet to come.Indeed this was the case.
I focused on the rectangle consolidation patterns on the SPY chart below:
http://blog.afraidtotrade.com/wp-content/uploads/050808-0736-intradayfoi2.png
It’s unusual to have two rectangle consolidation zones back-to-back, and also unusual to see price form such a clean stair-step pattern without meaningful retracements against the prevailing trend.
File this day for your future reference and study price action to gain greater clues into your own interpretation.
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Indexes at Support or Resistance?
May 7th, 2008 by Corey Rosenbloom
Are the Indexes at Support or Resistance?Today’s action would lend to the “Resistance” camp, but let’s take a closer look.
Let’s start with the daily chart of the Dow Jones Index:
http://blog.afraidtotrade.com/wp-content/uploads/050808-0315-resistance1.png
With this chart, I have Resistance plotted via two areas:
1.The declining 200 day moving average
2.The horizontal trendline via prior support/resistance
I have Support plotted also via two areas:
1.Rising (up-sloping) trendline beneath price action
2.The Rising 20 and 50 day moving averages
So which is it folks?
Let’s look at the S&P for a similar situation:
http://blog.afraidtotrade.com/wp-content/uploads/050808-0315-resistance2.png
In this, I’m showing sort of a ‘rising wedge’ potential pattern.Generally, rising wedges are bearish patterns, but it’s difficult to draw an exact converging trendline pattern that makes up the wedge.It’s more akin to an upward sloping trend channel, but still a break beneath the lower trend AND the moving averages would be bearish and set up a potential retest of March lows.
Let’s pull the daily chart back just a bit and compress the bars to see how many valid trendlines we may be able to draw on the Dow Jones (and similarly in the S&P 500) Index:
http://blog.afraidtotrade.com/wp-content/uploads/050808-0315-resistance3.png
At first glance, you may be asking what I have done on this chart.
I’ve drawn two (current) resistance lines (red) and two support lines (black).
Notice that three of these lines converge - along with the 50 day moving average - at or near 12,700.
There is a lot more going on than I’m showing on this chart, but even still, there are a variety of trendlines that can be drawn (not to mention Gann and Fibonacci retracements as well).
It’s best to keep your analysis simple, but it’s interesting to not how many seemingly ‘obvious’ chart points are setting up now.It will be interesting to see and trade the resolution!
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Current Yield Curve Turns Bullish
May 7th, 2008 by Corey Rosenbloom
Although it’s not discussed extensive, the Yield Curve has now normalized to levels that have historically preceded large bullish moves for the overall market. The last time this pattern occurred was in 2003.
Bill Luby at VIX and More recently identified this pattern as well with a good, brief analysis in his post “The Yield Curve looks like May 2003.“
Let’s look at the current (and past) Yield Curves and see what may be in the cards for the broader stock market.
Yield Curve BasicsThe Yield Curve refers to the different yield values on different fixed income vehicles, specifically the difference (plotted as a line graph) of the 3 Month, 2 Year, 5 Year, 7 Year, 10 Year, 20 Year, and 30 Year yields.
“Normal” Yield Curves form when the 3 month yields are far beneath the 30 year yields (which reflects normalized conditions) meaning you’ll take less income (yield) from a 3-month commitment (such as a CD or short-term T-Bill) than you will with a 30-year commitment (such as a bond). The value of yields increases at each successive type of vehicle.
A “Flat” Curve occurs when there’s little to no difference between short term and long term yeilds.
An “Inverted” Curve occurs when short term yields are higher than long term yields. In this case, it would be to your benefit to lock in your capital for short-term rates (perhaps 3 months to 1 year) at a higher yield than locking it up for 30 years. Also, on the other hand, higher interest rates on loans are more expensive for businesses which cut into profits.
Typically, “Normal” or steep yield curves precede bull markets (as the Fed controls shorter term rates easier than longer term, and lower rates are beneficial for consumers and businesses).
You can learn more about these conditions at a variety of web links, including an explanation from Fidelity Research.
Let’s look at the current “Yield Curve” courtesy StockCharts.com:
http://blog.afraidtotrade.com/wp-content/uploads/050708-0319-recentyield1.png
Let’s look at the “Yield Curve” in March 2003 and put it into perspective relative to the S&P 500 in 2003:
http://blog.afraidtotrade.com/wp-content/uploads/050708-0319-recentyield3.png
To flip the perspective, let’s look at two “Inverted” Yield Curves in 2000 and 2007:
http://blog.afraidtotrade.com/wp-content/uploads/050708-0319-recentyield4.png
Now, let’s look at the most recent “Inverted” Yield Curve which permeated throughout most of 2007 (before the “fall”):
http://blog.afraidtotrade.com/wp-content/uploads/050708-0319-recentyield5.png
Are bullish times ahead? Uncertain, but the conditions - at least from the yield curve - are more favorable than they were thanks to the Federal Reserve aggressively slashing interest rates to stimulate the economy.
Continue to watch this for more insights and potential clues for the future.
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Tuesday Intraday Index Fun
May 6th, 2008 by Corey Rosenbloom
Wow!What an interesting day it was for active traders.Yet another gap was filled and a sort of unexpected trend day emerged.Let’s look!
Dow Jones ETF (DIA) 5-minutes
http://blog.afraidtotrade.com/wp-content/uploads/050608-2345-intraday1.png
Today opened with a sharp intraday gap down, which spent the first 10 minutes continuing downward.I prefer to wait for 3 bars (15 minutes) before entering a gap-fade trade and I have increased confidence of a fill when the gap is less than $1.00 (100 Dow points).Today’s gap was just over $0.50.
I typically place a stop 1/2 the distance to my target, which is always yesterday’s closing price.As I showed earlier today, the odds favor a gap fill, but the odds of filling decrease along with the size of the gap.
Nevertheless, this is always the first trade to place with a decent gap-fill fade trade.The trade achieved its target with only a small pullback just after 11:00am.It would have been fine to exit the trade at a 50% retracement, which corresponded with the falling 50 period moving average (or at least take ‘half off the table’).
Strong-willed traders held on for the full fill, which typically produces a powerful retracement (or reversal) back IN the direction of the gap.When this doesn’t happen, it often signals a more powerful trade (or signal) in the opposite direction, which was the case today.
Price supported at yesterday’s close (purple spotted line) and then rose to form a momentum divergence which then pulled back again to yesterday’s close and the rising 50 period moving average.
If you expected a trend day based on the price action up to this point, this would have been an ideal point to add to a core trade or go on leverage with a high-probability scalp trade.Price gave you this scalp before faltering and closing near (or just on) the highs of the day.
Bears were strongly discouraged today as bulls claimed yet another victory.The market is clearly climbing the proverbial “Wall of Worry.”
For reference, here is the action on the S&P 500 ETF - SPY.
http://blog.afraidtotrade.com/wp-content/uploads/050608-2345-intraday2.png
As I always recommend, print out the daily action and locate the key trades you feel provided excellent opportunities via your understanding of price action and market structure.Annotate the chart by hand to get a better feel of price action and incorporate these patterns into your experience so you can recognize them better in real time.
For additional ideas, join the Market Club (which has been very popular as of late) for scans, signals, analysis, and commentary across different markets.
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Smaller Opening Gap Statistics
May 6th, 2008 by Corey Rosenbloom
Today marked yet another opening gap that filled in the major US Stock Market Indexes. Gaps are one of my favorite opening patterns to play because they can provide a dual edge for traders. By ‘dual edge’ I mean they can provide a higher % win rate and also generate more profits when correct than losses when incorrect. Let’s look at the statistics for smaller index opening gaps and then view a chart of the whole spectrum.
Previously, I examined Large Opening Gaps on the US Indexes (specifically the DIA, or Dow Jones ETF) from January 3rd 2000 to the present (n=2,065 trading days) and found the following:
37% of DIA gaps (n=121) greater than $1.00 filled (which generally creates a negative edge depending on your stop-loss strategy)
44% of DIA gaps (n=16) greater than $2.00 filled (which creates a positive edge if your stop is around $0.50 to $1.00 or less on losing trades)
67% of DIA gaps (n=3) greater than $3.00 filled (which creates the dual edge concept)
But what about smaller gaps?
60% of DIA gaps (n=1,087) of at least $0.25 filled (again, creating a potential dual edge)
57% of DIA gaps (n=839) of at least $0.35 filled (potential dual edge)
52% of DIA gaps (n=507) of at least $0.50 filled (slightly with a dual edge)
43% of DIA gaps (n=237) of at least $0.75 filled (eroding the dual edge concept)
38% of DIA gaps (n=188) of at least $0.85 filled
The following chart shows $0.05 increments and the corresponding percentage of gaps filled for each gap:
http://blog.afraidtotrade.com/wp-content/uploads/050608-1735-gapfill21.png
(click for larger image)
The % of gap fills decline as the size of the gap increases, but around $1.50, the trend reverses (due to the fact that fewer gaps occurred at these levels which skews the percentages).
Keep checking back for more insights about the classic Gap-Fade strategies and other statistics and charts from previous decades on how this strategy performed.
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Fallout Begins from MSFT and YHOO
May 5th, 2008 by Corey Rosenbloom
Microsoft officially withdrew its offer to acquire Yahoo, after Yahoo continued to hold out for a higher offer.The fall-out from this decision has already begun.
AP Business writer Michael Liedtke reported Yahoo (YHOO) stock plunged 15% this morning, yet it is recovering some of its gains.
“The sell-off wiped out nearly half the gain in Yahoo Inc.’s stock price since Microsoft Corp. made its initial offer on Jan. 31 in an effort to challenge online advertising and search leader Google Inc. The downturn left Yahoo’s market value about $14 billion below Microsoft’s last offer.”
Liedtke also wrote a news story Sunday night which I found interesting, entitled “Yahoo CEO on the Hot Seat after Rebuffing Microsoft’s $47.5 Billion Bid“.
Liedtke, like so many others, anticipated a large drop in Yahoo’s price Monday morning:
“It will be a daunting challenge , as Yang will be pointedly reminded Monday when investors are expected to show how little they think of Yahoo without a takeover bid on the table. Faced with resistance from Yang and the rest of Yahoo’s board, Microsoft withdrew its offer over the weekend.”
“Disillusioned shareholders are bound to question whether the rejection of Microsoft’s sweetened $33-per-share offer was driven more by emotion and ego than sound business sense.”
“Clearly there’s frustration,” said Darren Chervitz, co-manager of the Jacob Internet Fund, which owns Yahoo stock. “I am not even sure if Yahoo cares about its shareholders because they didn’t show much regard for shareholders’ best interests in this process.”
Let’s see the fall-out on the charts, which has proceeded as expected so far (expectation: Yahoo plunges, Microsoft trades higher, Google surges higher):
First, the intraday action shows this to be the case:
http://blog.afraidtotrade.com/wp-content/uploads/050508-1626-fallout4.png
Let’s look at their individual daily charts for any clues:
Yahoo Inc (YHOO):
http://blog.afraidtotrade.com/wp-content/uploads/050508-1626-fallout1.png
Microsoft Corp (MSFT):
http://blog.afraidtotrade.com/wp-content/uploads/050508-1626-fallout2.png
Google Inc (GOOG):
http://blog.afraidtotrade.com/wp-content/uploads/050508-1626-fallout3.png
Remember that when there’s a take-over offer, the following pattern is expected:
Company MAKING the offer :Usually Declines in a gap
Company BEING ACQUIRED: Usually Rises (surges) in a gap
Also, any other companies directly affected move as well (for example, they were teaming up against Google’s search engine dominance).
In this instance, when a take-over attempt FAILS, then the unwinding of this pattern occurs, which is what we are seeing today.Each stock also attempted a ‘gap fade’ after the initial overnight impulse.
This is such an interesting story, and one that has taken on new urgency now as the fall-out could be large from these developments.Let’s continue to watch the situation unfold.
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AAPL Surges and Impresses
May 4th, 2008 by Corey Rosenbloom
Apple Inc (AAPL) continued its winning streak into May after rising from $120 in March to $180 in May. It’s rare when we see a stock carve out the pattern Apple has, and so we need to look at this pattern to learn from it now.
http://blog.afraidtotrade.com/wp-content/uploads/050408-1542-aaplrise1.png
After plunging almost 50% in early 2008, price built a clean base, created a U-Turn Buy (or saucer, or rounded bottom) before surging higher in two equal waves separated by a shallow pullback into key support.
There were a key techncial (visual/charting) entries that got you into this stock, otherwise it was just “buy high, feel odd about it, sell higher.
The first was a technical break above the base which was confirmed by a key positive momentum divergence. This entry allowed you to play for a large target (betting on a reversal) and came as price broke above $130.
It may have been more ‘comfortable’ however to wait for a clean break of the falling 50 period moving average, which occurred just beneath $140.
Most trend and swing traders prefer to enter on a ‘pullback’ in price, and I highlighted this ‘perfect pullback’ opportunity when it occurred as price formed a doji at the 50% Fibonacci retracement then pulled back cleanly to the rising 20 period moving average.
After that, there really weren’t clean technical entries and if you bought at the clean, low-risk levels, it was your job to ‘hold on’ for as long as possible as price continued to surge higher each and every day.
Price is on its way possibly to test all-time highs, and if so, that would be an extremely positive sign for the broader indexes.
Let’s look quickly at how Apple (AAPL) respected its Fibonacci Retracement Levels:
http://blog.afraidtotrade.com/wp-content/uploads/050408-1542-aaplrise2.png
Price made no stopping at the 38% retracement (near $150) but actually did falter and reverse (for an entry signal) at the 50% retracement. The Doji candle (which almost was a ’shooting star’) gave you a clue that price was likely to test support via a rising moving average.
Price successfully tested the average, traders responded by buying (so many people are watching and trading this stock) and then price continued with multiple gaps up to its 61% retracement. This retracement level gave a long reversal day (falling about $10) but the next two days caused price to surge above this level as well.
Apple has cleared its classic (or popular) Fibonacci retracement and the new trend is clearly and cleanly up.
Adam Hewison at the Market Club does a great job of following this stock and analyzing it for you, so check them out for deeper commentary.
Congratulations to those of you who have been trading this stock successfully, and for those who have been on the sidelines, analyze the stock and price patterns deeper to see what lessons you can learn from this amazing and emerging giant.
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Inside a Dark Cloud Cover
May 3rd, 2008 by Corey Rosenbloom
With Candlestick analysis becoming more popular and accepted, I thought it would be interesting to take you inside a Dark Cloud Cover candle pattern. Let’s peek inside the candle.
I mentioned that Google recently formed a Dark Cloud Cover pattern. Let’s discuss it before we see it.
A “DCC” is a reversal pattern that must have a prior uptrend to confirm its existence (it must have something to reverse!).
Further, there must be an overnight up-gap which is indicative of a short-term buying climax that exhausts demand.
Third, the price must reverse, fill the gap, and then continue its trek downwards.
Finally, the intraday price action must retrace at least 50% of yesterday’s range.
Those are the rules for determining what a “DCC” is.
Factors that increase its potential predictive value:
If volume is light on the first candle and strong/heavy on the second;
If the gap up is noticeably high yet is still filled;
If the second candle closes deeply (but not 100%) into the first candle (if it closed beneath yesterday’s range, it would be a more powerful “Bearish Engulfing” pattern)
Let’s look at the ideal pattern:
http://blog.afraidtotrade.com/wp-content/uploads/050308-1743-googleimpre2.png
The green/red lines represent idealized intraday price action that form the two daily candles.The dotted line divides the two days’ price action.
Now, let’s look at an actual example I mentioned previously in Google (GOOG):
http://blog.afraidtotrade.com/wp-content/uploads/050308-1743-googleimpre3.png
We can see that the recent Google price action almost formed a bearish engulfing pattern, but because price closed above yesterday’s open (but greater than 50% of yesterday’s range), the pattern is the ominous sounding “Dark Cloud Cover.”
Understanding the psychology and construction of famous candlestick patterns can help you make more informed decisions as you analyze the struggle between buyers and sellers and what certain candle patterns may mean for the near-term price action in a stock.
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Google Surges, Forms Dark Cloud Cover
May 3rd, 2008 by Corey Rosenbloom
Google Inc (GOOG) has been on a powerful move up, surging from $440 to $600 in less than a month.Following the upside $80 gap recently, the stock has impressed investors by adding another $80 points since the gap.But let’s look at the current action to see if this is sustainable.
http://blog.afraidtotrade.com/wp-content/uploads/050308-1743-googleimpre1.png
The price action has been nothing shy of stellar since March’s bottom near $420.
Google consolidated and formed sort of a saucer bottom (complete with positive momentum divergences) before launching into the stratosphere to regain lost ground.The stock has continued higher without a significant retracement.
While the action of the last few days gives bulls hope, the stock did form a Dark Cloud Cover Candlestick formation, which typically is a sort of bearish reversal pattern.
Caution:Candlestick analysis should not be heeded alone - confirm signals with other analysis before acting.
I’m sure most of us have been watching Google eagerly and with great wonder.If you haven’t bought yet, I would gently suggest waiting for some sort of retracement, because as price surges higher, risk surges higher as well.
With the stock above its 200 period moving average, the bullish camp has more to celebrate, but it will be interesting to see how long they can literally dominate the sellers (bears) in the stock.Keep your eye on this stock!
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Dollar Rallies and Gold Falls
May 2nd, 2008 by Corey Rosenbloom
In a twisting reversal of fate, the US Dollar Index is coming off new lows after building a potential base while gold prices are coming off new highs after a climax top and potential top formation. The intermarket relationships are in full force. Let’s look!
http://blog.afraidtotrade.com/wp-content/uploads/050208-0640-golddollar1.png
http://blog.afraidtotrade.com/wp-content/uploads/050208-0640-golddollar2.png
Notice the ‘mirror image’ occurring in this post. That’s because the US Dollar and Gold prices trade with a very strong negative correlation (in the neighborhood of -.80). A rally in the Dollar Index will often cause profit taking in Gold.
Gold is traditionally a hedge for inflationary concerns, and a falling dollar is generally inflationary (and good for commodities). This has been the relationship for quite some time, but the Dollar is trying to stage a comeback at best or at least a counter-swing rally, and gold prices are acting as expected.
Also, the $CRB Index is coming off its highs and Crude Oil prices have fallen from $120 down to $110 as of May 1st.
Continue to watch these markets for signs of reversal in trend, and what falling commodity prices and a strengthening US Dollar will mean for the US Stock Market (hint - it’s bullish).Check out the Market Club signals and analysis for gold, oil, and other futures markets to help you with your own analysis.
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Major Index Gaps and Fills
May 2nd, 2008 by Corey Rosenbloom
With my new Excel function, I’m able to go back and scan any type of gap and examine whether or not it filled or not. Let’s look quickly at large index gaps and see the odds of those filling.
I tested the DIA (Dow Jones ETF) and looked at a variety of gap sizes from 2000 to present.
First, I looked at gap sizes greater than $1.00 (100 Dow Jones Points).
Since 2000 (1,944 days), there have been 121 gaps greater than 100 points, and 42 of these have filled.
That’s 34.7% of these gaps greater than 100 points filled (17 up-gaps filled while 25 down-gaps filled).
If we look at gaps greater than $2.00 (200 Dow Points) we find the following:
There have been 16 gaps greater than 200 points, and 7 of these have filled, meaning 43.75% of these gaps filled.
How about gaps greater than $3.00 (300 Dow points)?
3 such gaps occurred, with 2 gaps filling (67% filled).
What about $4.00 gaps (400 Dow points)?
2 gaps occurred, while 1 of them filled (50%).
As a fact of trivia…
January 22, 2008 opened with a $4.26 down gap which did fill.
September 27, 2001 opened after the September 11th attacks with a $5.95 gap which did not fill.
Stay tuned! More gap opening and price filling statistics to come!
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Some Surprising Trend Day Action
May 1st, 2008 by Corey Rosenbloom
Perhaps unexpectedly, the market gave us a powerful trend day up today.Let’s look at it and see where it leaves us in the broader picture:
http://blog.afraidtotrade.com/wp-content/uploads/050208-0054-somesurpris1.png
I’m showing the S&P 500 ETF (SPY) here for a proxy of the intraday action.
Markets usually start a trend day by gapping, but this trend day snook up on most traders, myself included!
The market didn’t respect its moving averages but instead plowed through these areas of potential resistance without looking back.The only pause of the day came when price retraced cleanly to its rising 20 day moving average and then fell back to test its 50 period (standard after a large volatility move up - you get retests to deeper and deeper moving averages before a reversal occurs).
For me, the only ‘trades of the day’ occurred at the retest of the 20 and 50 period moving averages.One could have put a ’support buy’ trade on at noon, but there was little justification in the structure to know how far price would go.This was a day for trend-traders and was likely quite difficult for ‘fade-traders’ or other styles of intraday trading.
Where does this day leave us on the indexes?
http://blog.afraidtotrade.com/wp-content/uploads/050208-0054-somesurpris2.png
All major US Indexes are beneath their key 200 period moving average, but the Dow is wedged right up against it with the other indexes not far from it.We could expect a quick pause at this level, but if the market shrugs off the expected resistance moving average tests provide, look out higher because this would be a sign of massive and unexpected strength on the side of the bulls (buyers).
I wanted to highlight the DJ Transportation Average ($TRAN) again, as it soared 3.5% today.Often, it’s said “where the transports go, the market follows.”
http://blog.afraidtotrade.com/wp-content/uploads/050208-0054-somesurpris3.png
Price is just shy of its July 2007 closing high beneath 5,400.A close above that level would signal impressive strength and would be a very welcome event for the bulls who have driven the market higher with great force.Again, most of the strength comes from the Railroad stocks.
Finally, Let’s look at the sectors that did well today.
http://blog.afraidtotrade.com/wp-content/uploads/050208-0054-somesurpris4.png
The Consumer Discretionary Sector (XLY) rose nearly 6% today!It was followed closely by Technology (XLK up 4.2%) and Financials (XLF, up 3.5%).
From a sector rotation standpoint, this is very bullish news from these sectors.
“One day does not a trend make” they say, but these gains from these sectors occur during times of general optimism, and so we can’t take these gains for granted.
There may be more health to the market than some are seeing currently.
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Gap Fade Stats for April
May 1st, 2008 by Corey Rosenbloom
With May 1st upon us, it’s time to look at the number of overnight gaps and gap fills in the DIA (Dow Jones ETF) for the month of April.
I am testing for overnight price changes greater than $0.20 (20 Dow points) in the ETF.
Of the 22 trading days in April, 14 resulted in an overnight gap greater than $0.20, and of these, 9 gaps ‘filled.’
Thus, 67% of the trading days experienced an overnight gap, and of these, 64% of the gaps filled at some point intraday.
Here’s a quick summary:
14 trading days gapped (up or down)
9 of these gaps filled
6 “up gaps” filled
3 “down gaps” filled
5 gaps were not filled at all.
So far for 2008 (to keep a running total):
64 days have resulted in an overnight gap of at least $0.20
41 of these gaps have filled intraday
23 ‘up gaps’ have filled
18 ‘down gaps’ have filled
23 gaps have not filled
77% of days had a gap of $0.20
64% of these gaps have filled.
See previous month totals below:
January Gap Fade Statistics
February Gap Fade Statistics
March Gap Fade Statistics
(Note: I am now using a spreadsheet I created in Excel which makes calculation easier, more accurate, and faster than doing it by hand)
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A Look Inside the Transports
May 1st, 2008 by Corey Rosenbloom
As I mentioned previously, the DJ Transportation Average is outperforming the Dow Jones Industrial Average, which generally is bullish for the overall market.
Let’s peek inside the average to see which components of the Transports are doing the best.
Let’s break it down into the Air Freight and Railroads, and their percentage performance since the start of 2008.
First, the Air Freight:
http://blog.afraidtotrade.com/wp-content/uploads/050108-1650-transports1.png
CH Robinson (CHRW) has outperformed the other major air freights including FedEx (FEDX), UPS Inc (UPS), UTi Worldwide (UTIW), and Expeditors Int’l (EXPD).
The Air Freights spent the middle of the graph flat before rising later into April with the current market rise.
Next, the Railroads:
http://blog.afraidtotrade.com/wp-content/uploads/050108-1650-transports2.png
The true strength from the Transportation Average comes from the Railroads (remember Warren Buffett buying up some railroad stocks not too long ago - he was precient as usual).
With gas/oil costs rising, some companies have shifted to the lower costs afforded by the railroads to get their goods where they need to be.As such, railroad stocks in general have benefitted from higher transportation costs (via gasoline).
The two top performers, Genesse & Wyoming (GWR - up 50%) and CSX (CSX - up over 45%) have outperformed most other stocks in the broader indexes this year.Chances are you probably haven’t heard of these names yet, but as they continue to rise, you may hear more about them.
Let’s look at the top performer - Genesee & Wyoming (GWR):
http://blog.afraidtotrade.com/wp-content/uploads/050108-1650-transports3.png
The lowest price of the year was around January 6th, 2008 and the highest price was just last week, indicating a very strong and pervasive uptrend in the stock.
I recommend the Market Club for more insights and scanning tools that can help you find ‘hidden strength’ in stocks most people aren’t watching yet.
Keep an eye on these stocks and these sectors, and what they might mean for the overall economy.
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Stunning Intraday Action
April 30th, 2008 by Corey Rosenbloom
How did you do on today’s Fed day?Days like this can remind us why volatile conditions can either be very rewarding or very draining for your account.Let’s see what happened and where the dust settled:
file:///C:/DOCUME~1/Corey/LOCALS~1/Temp/moz-screenshot-3.jpg
http://blog.afraidtotrade.com/wp-content/uploads/050108-0228-intradaydia1.png
On the intraday chart of the DIA, the Fed announcement (they cut .25 to 2.00%, as expected) came at 2:15 EST.Initially, the market surged higher on sharply higher volume.Then, traders changed their mind (they can do that, can’t they?) and then aggressively sold off the market into the close.
Newer traders who bought because they were told “Fed cuts are good for the market” were left confused by the swiftness and aggressiveness of the afternoon sell-off.
I make it a practice not to trade Fed days.In the past, I’ve had software freezes where the program literally shuts down because it can’t deal with all the rapid price changes.If you have a day-trading position on, you can imagine how stressful this situation can be.
I prefer to make smaller, more consistent gains rather than try to win big on what in essence is a random big luck of the draw.Even in this case, if you wanted to get short, the initial up-impulse may have triggered your stop-out of the position, and it would have been difficult to get short with a good fill on the downside.And there was no guarantee the downside would come as swiftly as it did.My guess is that most at-home traders who played this move did so on the long (buy) side.
Where does this leave the Dow now?
http://blog.afraidtotrade.com/wp-content/uploads/050108-0228-intradaydia2.png
We’re still above key support, but odds now favor some sort of downward reaction (retracement) against the recent upward sloping trend channel (gray dotted line).Maybe somewhere around $126?Key support looks good at that price zone, but breaking beneath $125 (and especially $124) could set up a highly probable test of the $116 lows.
With the Fed out of the way, it may be time to get back to some normal conditions.Still trade with caution and learn from the lessons of today.
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How to Trade a Rectangle Consolidation
April 30th, 2008 by Corey Rosenbloom
Rectangle consolidation patterns can lead to amazing profits and are relatively easy to recognize on a chart.Let’s learn more about this chart pattern.
Eaton Corp (ETN) recently broke out of a rectangle consolidation pattern, which gives us an example of how we could trade such chart patterns.
http://blog.afraidtotrade.com/wp-content/uploads/043008-1653-eaton1.png
Sears Holding (SHLD) broke a long-term rectangle that led to large gains in 2005:
http://blog.afraidtotrade.com/wp-content/uploads/043008-1653-eaton3.png
The defining characteristic of a rectangle pattern is the ability to draw two clear parallel trendlines that are tested on both sides by price.Volitility winds down during this time as the stock ‘builds a base’ for an eventual breakout.
The tight price in the pattern is said to be ‘in equilibrium’ or ‘in value’ as buyers and sellers generally agree that those levels represent a fair price and will trade at those levels.
Generally, volume falls as the pattern develops, but increases towards the end of the pattern and sometimes surges on the eventual breakout of the range.
Let’s look at how we might trade this pattern.
The Ideal Rectangle Consolidation Pattern:
http://blog.afraidtotrade.com/wp-content/uploads/043008-1653-eaton2.png
Once you recognize a rectangle and can draw parallel channel lines, add the stock to your watchlist and keep your eye on it should it break out.
Alternately, you could aggressively place a buy stop above the upper channel and a sell-stop (to enter short) once price breaks the lower channel.You’ll either need your program to place stops automatically, or you’ll need to enter them manually once the position triggers.Alternately, you could place an “alert price” with any number of software or websites.
Let’s assume an upward break.Place stops conservatively just beneath the upper trend channel (for a high reward/risk ratio), or aggressively place them beneath the lower trend channel (giving the market room).
I prefer to enter on a ‘throwback,’ which often gives you greater odds of continuation and gives you better fill and generally removes the urgency to enter (which leads to higher slippage and eliminates ‘chasing’ the market).Throwbacks don’t always occur, and so you’ll need to see for yourself which tactic you prefer.
Generally, a conservative target would be the height of the rectangle added to the breakout price to establish an initial target.Rectangles can be reversal patterns, and so you might sometimes want to use them to establish a position trade, but I prefer fixed targets when trading them.
It’s generally accepted also that the ‘longer the consolidation, the greater the eventual breakout’ so you can take the length (distance) of the rectangle into consideration when making price projections (some people turn the rectangle up - vertical - and then use that as a price projection).
These are interesting patterns and can allow you to have a little fun when a stock breaks out of a consolidation area and makes a new run.Not all rectangles ‘work,’ but they can offer excellent risk/reward characteristics that allow you to add a new tool to your trading arsenal.
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IBM Impresses Investors
April 29th, 2008 by Corey Rosenbloom
IBM has been roaring its way to new highs recently to levels not seen since 2000.Let’s see the chart of this impressive stock, which has made new highs as the stock market indexes fell in 2008.In fact, its lowest point this year was early January!
http://blog.afraidtotrade.com/wp-content/uploads/043008-0316-ibm1.png
Price broke above what can be considered a pennant, flag, or triangle consolidation pattern.Either way, it resolved into a continuation pattern, as price was supported by the rising 20 period moving average.The resolution was quick and forceful to the upside, which occurred on very high relative volume.
Price is currently retracing part of its gains, but it wouldn’t surprise me to see price support about the $120 level.Momentum on this swing was a little lighter than on the previous swing (hence the divergence) but price built a base from early March until now for making a new run higher.
Let’s pull it back to the weekly chart:
http://blog.afraidtotrade.com/wp-content/uploads/043008-0316-ibm2.png
There is a lengthy upward sloping trendline, which has been tested both the upside and downside.
Price now sits just beneath that line after the recent large upward move.Momentum also made a new weekly high, and again there could be strong support from prior highs about the $115 to $120 level.
In this environment, I’m sure the buyers are happy to see a technology stock performing so well.Continue to watch this stock.
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Transports Outperforming Dow
April 29th, 2008 by Corey Rosenbloom
The DJ Transportation Index ($TRANS) is outperforming the Dow Jones index, which is an interesting development that has implications for Dow Theory.
http://blog.afraidtotrade.com/wp-content/uploads/042908-1739-transportso1.png
Dow Theory stresses the ‘confirmation’ between the DJ Transports and the DJ Index itself (meaning both must make a higher high to signal a ‘Buy Signal’ and vice versa).
According to the theory, the Transportation Index has completed a higher high but is shy of its July 2007 closing high of 5,400 (which is 200 points away).
If you look back at a weekly chart, the Transports peaked a few months ahead of the market - so are they leading the market higher this time?
Some say that “the transports lead the stock market” which is a general occurence rather than a hard rule.
Nevertheless, the Relative Strength (bottom panel) is increasing as the Transports outperform the Dow Jones Index.
Also, notice how the Transports have supported on successive pullback to its 20 period moving average (the sign of a strong uptrend).
Notice also the ‘higher low’ that the Transports made in March when the Dow retested its January lows.That was a positive non-confirmation of lower (Dow) prices.
It’s an interesting development that requires further analysis, so be sure to keep your eye on the Transportation index for more potential clues.
(Note:Railroad stocks are keeping the index higher)
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The Disciplined Investor Podcast Series
April 29th, 2008 by Corey Rosenbloom
Not long ago, I discovered Andrew Horowitz’s website The Disciplined Investor which probably has become most known for its Podcasts.
So far, Andrew has hosted 54 episodes and has addressed a wide variety of topics, including many interviews with fellow bloggers and financial minds in the industry.
Most impressive to me, he recently interviewed former Labor Secretary Robert Reich on Super-Capitalism, which touched on a broad array of interesting economic topics.
He has also interviewed
Brian Shannon of Alpha Trends (ep. 40)
Adam Warner of Adam’s Daily Option Report (ep. 50)
Tim Knight of Slope of Hope (and founder of Prophet.net - ep. 47)
Barry Ritholtz of The Big Picture (ep. 46)
Gal Arav, creator of NewsFlashr (ep. 50)
And many other individuals.
The podcasts themselves pop-up in iTues via this Subscribe link but you can also go to his website and download them via mp3 or for Zune as well.
Podcasts offer an alternative to websites, because they can be downloaded and taken with you wherever you go, be it in the car on the way to work, on the subway, or while exercising at the gym.
Andrew’s podcasts are professionally produced, with top talent interviews, and he is becoming a leader in the emerging financial podcast world.
No Comments | add comment
Support Confluence
April 28th, 2008 by Corey Rosenbloom
There’s an interesting confluence of support coming in on the Dow Jones and S&P 500 Averages.Let’s look:
http://blog.afraidtotrade.com/wp-content/uploads/042908-0438-supportconf1.png
S&P 500:
http://blog.afraidtotrade.com/wp-content/uploads/042908-0438-supportconf2.png
On both charts, three proposed trendlines have all come together to a point, which sits just under the current index prices.
It’s interesting to have such a confluence.Also, the key 20 and 50 period moving averages also have set-up just beneath the price which could also provide key support to price.The 20 period has recently crossed above the 50 (which is bullish).
It’s just an observation, but it would fascinate me to see price shatter all these support levels.
Recall that price is still in somewhat of a downtrend, and is still beneath its key 200 day moving average, which is bearish.
The S&P needs to clear 1,400 and the Dow needs to clear 13,000.If bulls take these levels out, we could have a retest of the prior swing highs.
Failure at these levels will push price down to retest the prior lows, and could even precede further.
It may be better to wait until a move is underway before joining, rather than trying to anticipate which direction you think it will break.
The Fed’s upcoming decision could be enough to propel the indexes out of this range and into a direction with conviction.Until then, be safe!
2 Comments | add comment
Moving Average Respect Example
April 28th, 2008 by Corey Rosenbloom
In my trading, I utilize moving averages to determine trend, support/resistance, and price structure.
The example today from the FOREX Australian Dollar / US Dollar cross (AUD/USD) showed an excellent example not only of how price can respect its key moving averages, but of momentum divergences as well:
http://blog.afraidtotrade.com/wp-content/uploads/042808-1843-respectingt1.png
This is a 5-minute chart of the cross, which shows price beginning the morning (5:00am) flat before crossing under its key moving averages and then each successive pullback was resisted by the key 20 period EMA.
A momentum divergence formed until 8:00am, at which a large volatility move pushed price to a new momentum high and crossing above its key averages.
The moving averages themselves crossed, and each successive retracement back to the key 20 period EMA was met with support (providing a simple trade set-up to play for a small target with a small stop/risk).
As price traveled higher, yet another momentum divergence formed, warning that the buyers were lacking power to push the cross higher, and that successive pullbacks had reduced odds of holding support at the key 20.
TradeStation now offers simulated trading, and I’ve been doing some work with FOREX and finding very satisfying and encouraging results.This example shows how key averages can support or even create low-risk trading decisions.
No Comments | add comment
Correlation Between Yields and Stocks
April 27th, 2008 by Corey Rosenbloom
Can the relationship between 10 Year Note Yields and US Stock Prices reveal risk seeking and risk averse behavior of funds and investors?
Earlier, I posted a few charts on the topic, so be sure to refresh with those for more information:
Stock Correlation with the 10 Year Yield
A Look at Bonds, Stocks, and the Fed Rate Cuts
The Bond Market and the Stock Market compete for investor capital, and when certain conditions apply, money will often flow directly from one market into the other, as investors perceive opportunity, or want to control their risk.
While there are a plethora of outside variables that affect these two markets, and there is virtually no way to explain price movements between the two markets perfectly, I did a correlation study between the two markets to see what the correlation resembled over the last few years.
For my test, I compared the weekly S&P 500 prices with the 10 Year Treasury Note Yield ($TNX).
The logic is as follows:
Yield prices are inversely related to bond (or note) prices, meaning when yields rise, bonds are falling. Conversely, when yields are falling, bonds are rising.
While there are many other variables, if investors see the future of the stock market as being ‘too risky,’ or they perceive bond yields high (or some combination thereof), then they will sell some stock and buy bonds (thus driving yields down).
When the stock market is falling, generally people will be exiting the market rapidly and buying bonds, thus seeking safety from falling equity prices. Again, this ‘defensive’ action drives up bond prices and thus decreases yields.
The opposite is true. After the market has fallen for some time and begins rising, and everything seems ’safe’ again, investors will exit bond positions (driving down prices and causing yields to rise) and buy equities (driving stock prices higher).
Now, for the quick and painless correlation study, I separated the prices and compared them by years and ran a simple correlation analysis in Excel for each year period. Let’s look at the results:
http://blog.afraidtotrade.com/wp-content/uploads/042808-0330-yield1.png
(click on image for larger picture)
What we see is that the correlation is only strong (at least in the last 8 years of price action) during down years in the market.
Here’s a chart of the two markets:
http://blog.afraidtotrade.com/wp-content/uploads/042308-0459-stockcorrel3.png
Quick Facts about Correlation:
An “r-value” or correlation is expressed from -1 to 1.
Two series with a correlation of 1 would be 100% correlated (or equal, such that both rise or fall together).
Two series with a correlation of -1 would be 100% negatively correlated (as one rises, the other falls).
Two series with a correlation value of 0 would be not correlated at all.
Typically, anything above 0.50 has a ’strong positive correlation’ and anything beneath -0.50 has a ’strong negative correlation.’
In 2002, the S&P and 10-Year Yields were almost fully correlated (they had a value of .91).
2001, another bad year for the market, showed a correlation of .71.
2008 (4 months only) has been a bad year for equity markets, and the correlation has risen to .62 (strong positive yet again).
2006, a relatively good year for the stock market, showed a slightly negative correlation, meaning - for a period - as stock prices rose, bond prices rose too (meaning yields fell). This correlation was not extremely strong, however.
While this is not enough data to draw meaningful conclusions, it does appear that on the surface, yields and stocks correlate in down markets where fearful investors sell their stock positions and buy bonds (driving yields down).
It’s an interesting topic, and one I plan to study more in depth. I’m learning enough about Excel functions to become slightly dangerous!
1 Comment | add comment
« Previous Page — Next Page »
The Disciplined Investor Podcast Series
April 29th, 2008 by Corey Rosenbloom
Not long ago, I discovered Andrew Horowitz’s website The Disciplined Investor which probably has become most known for its Podcasts.
So far, Andrew has hosted 54 episodes and has addressed a wide variety of topics, including many interviews with fellow bloggers and financial minds in the industry.
Most impressive to me, he recently interviewed former Labor Secretary Robert Reich on Super-Capitalism, which touched on a broad array of interesting economic topics.
He has also interviewed
Brian Shannon of Alpha Trends (ep. 40)
Adam Warner of Adam’s Daily Option Report (ep. 50)
Tim Knight of Slope of Hope (and founder of Prophet.net - ep. 47)
Barry Ritholtz of The Big Picture (ep. 46)
Gal Arav, creator of NewsFlashr (ep. 50)
And many other individuals.
The podcasts themselves pop-up in iTues via this Subscribe link but you can also go to his website and download them via mp3 or for Zune as well.
Podcasts offer an alternative to websites, because they can be downloaded and taken with you wherever you go, be it in the car on the way to work, on the subway, or while exercising at the gym.
Andrew’s podcasts are professionally produced, with top talent interviews, and he is becoming a leader in the emerging financial podcast world.
No Comments | add comment
Support Confluence
April 28th, 2008 by Corey Rosenbloom
There’s an interesting confluence of support coming in on the Dow Jones and S&P 500 Averages.Let’s look:
http://blog.afraidtotrade.com/wp-content/uploads/042908-0438-supportconf1.png
S&P 500:
http://blog.afraidtotrade.com/wp-content/uploads/042908-0438-supportconf2.png
On both charts, three proposed trendlines have all come together to a point, which sits just under the current index prices.
It’s interesting to have such a confluence.Also, the key 20 and 50 period moving averages also have set-up just beneath the price which could also provide key support to price.The 20 period has recently crossed above the 50 (which is bullish).
It’s just an observation, but it would fascinate me to see price shatter all these support levels.
Recall that price is still in somewhat of a downtrend, and is still beneath its key 200 day moving average, which is bearish.
The S&P needs to clear 1,400 and the Dow needs to clear 13,000.If bulls take these levels out, we could have a retest of the prior swing highs.
Failure at these levels will push price down to retest the prior lows, and could even precede further.
It may be better to wait until a move is underway before joining, rather than trying to anticipate which direction you think it will break.
The Fed’s upcoming decision could be enough to propel the indexes out of this range and into a direction with conviction.Until then, be safe!
2 Comments | add comment
Moving Average Respect Example
April 28th, 2008 by Corey Rosenbloom
In my trading, I utilize moving averages to determine trend, support/resistance, and price structure.
The example today from the FOREX Australian Dollar / US Dollar cross (AUD/USD) showed an excellent example not only of how price can respect its key moving averages, but of momentum divergences as well:
http://blog.afraidtotrade.com/wp-content/uploads/042808-1843-respectingt1.png
This is a 5-minute chart of the cross, which shows price beginning the morning (5:00am) flat before crossing under its key moving averages and then each successive pullback was resisted by the key 20 period EMA.
A momentum divergence formed until 8:00am, at which a large volatility move pushed price to a new momentum high and crossing above its key averages.
The moving averages themselves crossed, and each successive retracement back to the key 20 period EMA was met with support (providing a simple trade set-up to play for a small target with a small stop/risk).
As price traveled higher, yet another momentum divergence formed, warning that the buyers were lacking power to push the cross higher, and that successive pullbacks had reduced odds of holding support at the key 20.
TradeStation now offers simulated trading, and I’ve been doing some work with FOREX and finding very satisfying and encouraging results.This example shows how key averages can support or even create low-risk trading decisions.
No Comments | add comment
Correlation Between Yields and Stocks
April 27th, 2008 by Corey Rosenbloom
Can the relationship between 10 Year Note Yields and US Stock Prices reveal risk seeking and risk averse behavior of funds and investors?
Earlier, I posted a few charts on the topic, so be sure to refresh with those for more information:
Stock Correlation with the 10 Year Yield
A Look at Bonds, Stocks, and the Fed Rate Cuts
The Bond Market and the Stock Market compete for investor capital, and when certain conditions apply, money will often flow directly from one market into the other, as investors perceive opportunity, or want to control their risk.
While there are a plethora of outside variables that affect these two markets, and there is virtually no way to explain price movements between the two markets perfectly, I did a correlation study between the two markets to see what the correlation resembled over the last few years.
For my test, I compared the weekly S&P 500 prices with the 10 Year Treasury Note Yield ($TNX).
The logic is as follows:
Yield prices are inversely related to bond (or note) prices, meaning when yields rise, bonds are falling. Conversely, when yields are falling, bonds are rising.
While there are many other variables, if investors see the future of the stock market as being ‘too risky,’ or they perceive bond yields high (or some combination thereof), then they will sell some stock and buy bonds (thus driving yields down).
When the stock market is falling, generally people will be exiting the market rapidly and buying bonds, thus seeking safety from falling equity prices. Again, this ‘defensive’ action drives up bond prices and thus decreases yields.
The opposite is true. After the market has fallen for some time and begins rising, and everything seems ’safe’ again, investors will exit bond positions (driving down prices and causing yields to rise) and buy equities (driving stock prices higher).
Now, for the quick and painless correlation study, I separated the prices and compared them by years and ran a simple correlation analysis in Excel for each year period. Let’s look at the results:
http://blog.afraidtotrade.com/wp-content/uploads/042808-0330-yield1.png
(click on image for larger picture)
What we see is that the correlation is only strong (at least in the last 8 years of price action) during down years in the market.
Here’s a chart of the two markets:
http://blog.afraidtotrade.com/wp-content/uploads/042308-0459-stockcorrel3.png
Quick Facts about Correlation:
An “r-value” or correlation is expressed from -1 to 1.
Two series with a correlation of 1 would be 100% correlated (or equal, such that both rise or fall together).
Two series with a correlation of -1 would be 100% negatively correlated (as one rises, the other falls).
Two series with a correlation value of 0 would be not correlated at all.
Typically, anything above 0.50 has a ’strong positive correlation’ and anything beneath -0.50 has a ’strong negative correlation.’
In 2002, the S&P and 10-Year Yields were almost fully correlated (they had a value of .91).
2001, another bad year for the market, showed a correlation of .71.
2008 (4 months only) has been a bad year for equity markets, and the correlation has risen to .62 (strong positive yet again).
2006, a relatively good year for the stock market, showed a slightly negative correlation, meaning - for a period - as stock prices rose, bond prices rose too (meaning yields fell). This correlation was not extremely strong, however.
While this is not enough data to draw meaningful conclusions, it does appear that on the surface, yields and stocks correlate in down markets where fearful investors sell their stock positions and buy bonds (driving yields down).
It’s an interesting topic, and one I plan to study more in depth. I’m learning enough about Excel functions to become slightly dangerous!
1 Comment | add comment
« Previous Page — Next Page »
The Disciplined Investor Podcast Series
April 29th, 2008 by Corey Rosenbloom
Not you can also go to his website and download them via mp3 or for Zune as well.
Podcasts offer an alternative to websites, because they can be downloaded and taken with you wherever you go, be it in the car on the way to work, on the subway, or while exercising at the gym.
Andrew’s podcasts are professionally produced, with top talent interviews, and he is becoming a leader in the emerging financial podcast world.
No Comments | add comment
Support Confluence
April 28th, 2008 by Corey Rosenbloom
There’s an interesting confluence of support coming in on the Dow Jones and S&P 500 Averages.Let’s look:
http://blog.afraidtotrade.com/wp-content/uploads/042908-0438-supportconf1.png
S&P 500:
http://blog.afraidtotrade.com/wp-content/uploads/042908-0438-supportconf2.png
On both charts, three proposed trendlines have all come together to a point, which sits just under the current index prices.
It’s interesting to have such a confluence.Also, the key 20 and 50 period moving averages also have set-up just beneath the price which could also provide key support to price.The 20 period has recently crossed above the 50 (which is bullish).
It’s just an observation, but it would fascinate me to see price shatter all these support levels.
Recall that price is still in somewhat of a downtrend, and is still beneath its key 200 day moving average, which is bearish.
The S&P needs to clear 1,400 and the Dow needs to clear 13,000.If bulls take these levels out, we could have a retest of the prior swing highs.
Failure at these levels will push price down to retest the prior lows, and could even precede further.
It may be better to wait until a move is underway before joining, rather than trying to anticipate which direction you think it will break.
The Fed’s upcoming decision could be enough to propel the indexes out of this range and into a direction with conviction.Until then, be safe!
2 Comments | add comment
Moving Average Respect Example
April 28th, 2008 by Corey Rosenbloom
In my trading, I utilize moving averages to determine trend, support/resistance, and price structure.
The example today from the FOREX Australian Dollar / US Dollar cross (AUD/USD) showed an excellent example not only of how price can respect its key moving averages, but of momentum divergences as well:
http://blog.afraidtotrade.com/wp-content/uploads/042808-1843-respectingt1.png
This is a 5-minute chart of the cross, which shows price beginning the morning (5:00am) flat before crossing under its key moving averages and then each successive pullback was resisted by the key 20 period EMA.
A momentum divergence formed until 8:00am, at which a large volatility move pushed price to a new momentum high and crossing above its key averages.
The moving averages themselves crossed, and each successive retracement back to the key 20 period EMA was met with support (providing a simple trade set-up to play for a small target with a small stop/risk).
As price traveled higher, yet another momentum divergence formed, warning that the buyers were lacking power to push the cross higher, and that successive pullbacks had reduced odds of holding support at the key 20.
TradeStation now offers simulated trading, and I’ve been doing some work with FOREX and finding very satisfying and encouraging results.This example shows how key averages can support or even create low-risk trading decisions.
No Comments | add comment
Correlation Between Yields and Stocks
April 27th, 2008 by Corey Rosenbloom
Can the relationship between 10 Year Note Yields and US Stock Prices reveal risk seeking and risk averse behavior of funds and investors?
Earlier, I posted a few charts on the topic, so be sure to refresh with those for more information:
The Bond Market and the Stock Market compete for investor capital, and when certain conditions apply, money will often flow directly from one market into the other, as investors perceive opportunity, or want to control their risk.
While there are a plethora of outside variables that affect these two markets, and there is virtually no way to explain price movements between the two markets perfectly, I did a correlation study between the two markets to see what the correlation resembled over the last few years.
For my test, I compared the weekly S&P 500 prices with the 10 Year Treasury Note Yield ($TNX).
The logic is as follows:
Yield prices are inversely related to bond (or note) prices, meaning when yields rise, bonds are falling. Conversely, when yields are falling, bonds are rising.
While there are many other variables, if investors see the future of the stock market as being ‘too risky,’ or they perceive bond yields high (or some combination thereof), then they will sell some stock and buy bonds (thus driving yields down).
When the stock market is falling, generally people will be exiting the market rapidly and buying bonds, thus seeking safety from falling equity prices. Again, this ‘defensive’ action drives up bond prices and thus decreases yields.
The opposite is true. After the market has fallen for some time and begins rising, and everything seems ’safe’ again, investors will exit bond positions (driving down prices and causing yields to rise) and buy equities (driving stock prices higher).
Now, for the quick and painless correlation study, I separated the prices and compared them by years and ran a simple correlation analysis in Excel for each year period. Let’s look at the results:
http://blog.afraidtotrade.com/wp-content/uploads/042808-0330-yield1.png
(click on image for larger picture)
What we see is that the correlation is only strong (at least in the last 8 years of price action) during down years in the market.
Here’s a chart of the two markets:
http://blog.afraidtotrade.com/wp-content/uploads/042308-0459-stockcorrel3.png
Quick Facts about Correlation:
An “r-value” or correlation is expressed from -1 to 1.
Two series with a correlation of 1 would be 100% correlated (or equal, such that both rise or fall together).
Two series with a correlation of -1 would be 100% negatively correlated (as one rises, the other falls).
Two series with a correlation value of 0 would be not correlated at all.
Typically, anything above 0.50 has a ’strong positive correlation’ and anything beneath -0.50 has a ’strong negative correlation.’
In 2002, the S&P and 10-Year Yields were almost fully correlated (they had a value of .91).
2001, another bad year for the market, showed a correlation of .71.
2008 (4 months only) has been a bad year for equity markets, and the correlation has risen to .62 (strong positive yet again).
2006, a relatively good year for the stock market, showed a slightly negative correlation, meaning - for a period - as stock prices rose, bond prices rose too (meaning yields fell). This correlation was not extremely strong, however.
While this is not enough data to draw meaningful conclusions, it does appear that on the surface, yields and stocks correlate in down markets where fearful investors sell their stock positions and buy bonds (driving yields down).
It’s an interesting topic, and one I plan to study more in depth. I’m learning enough about Excel functions to become slightly dangerous!
1 Comment | add comment
« Previous Page — Next Page »
Dollar and the Dow Positions
April 27th, 2008 by Corey Rosenbloom
Let’s look at the price positions of the US Dollar Index and the Dow Jones Index to gather clues about possible moves next week:
First, the Dollar:
http://blog.afraidtotrade.com/wp-content/uploads/042708-1625-dollarandth1.png
The Dollar Index rallied (strengthened) last week, after forming a tight coil and has broken above its key 20 period moving average. Price is finding preliminary resistance at the falling 50 period average, but an ‘oversold’ bounce was highly likely.
The trend has not changed, which is obvious from the weekly chart, and until proven otherwise, the index remains in a downtrend.
Nevertheless, a stronger dollar should be bearish for commodity prices which could be good for the market.
Speaking of the Market, let’s look at the Dow Jones Index:
http://blog.afraidtotrade.com/wp-content/uploads/042708-1625-dollarandth2.png
I’ve drawn three lines on the chart.
First is the resistance line at 12,800 and support line at 12,200 which also form a parallel trend channel that has bound price virtually throughout all of 2008.
Price is now testing and breaking above the upper trend channel line (this upper line actually goes back further as a horizontal line, and the 12,800 level is quite significant).
The third line I have drawn is a rising trend channel which began in mid-March which has now met the upper resistance channel and formed a sort of ascending triangle from which price is now breaking upwards as well.
IF (and that is a big ‘if’) the triangle pattern is an actual pattern that meets its upside target, price could reach 13,800 based on the distance from the height of the triangle (just over 1,000 points) added to the breakout price. That seems far-fetched to me, but that is the implication of the pattern resolving.
Also, notice that there is potential overhead resistance via the falling 200 period moving average.
A ‘flat-line momentum divergence’ also has developed as price has inched its way higher. As price made newer relative highs, the momentum oscillator did not confirm these new prices but instead made almost equal swing highs, which set up a non-confirmation.
By the way, all the chart analysis we do could be validated (with an upside break) or disconfirmed when the Fed announces monetary policy early next week. In fact, the market could have been increasing over the last few weeks in anticipating of another cut or positive mention from Bernanke.
Check out or Join the Market Club for more analysis, scans, and signals as well as deeper analysis for the upcoming week. I’ll be updating more this week on candidates or commentary from Adam Hewison there.
Be careful next week if you’re a newer trader and don’t understand how the Fed can move markets suddenly.
No Comments | add comment
Potash Continues to Impress
April 26th, 2008 by Corey Rosenbloom
Potash (POT) is a stock I have been following for over a year now, and it has continued to be an impressive stock that has treated its investors phenomenally. What happened last week and why was it important?
Potash beat earnings expectations by $0.22 last week, and increased its outlook for the future.
“The world’s largest fertilizer company by capacity, Potash Corp. produces the three primary plant nutrients. It is No. 1 in potash capacity, No. 2 in nitrogen and No. 3 in phosphate.”
With those two factors behind it (exceeded estimates and raised guidance) you would think the stock would surge - even gap - on that news, right? Well, yes, but that’s not what happened.
The stock fell 5% that day and then continued to fall further the next day, declining almost $30 before finding support for traders to get better positions.
Sometimes, it’s best to fade the news, no matter how great the news is. Let’s look at the charts:http://blog.afraidtotrade.com/wp-content/uploads/042608-2244-test1.png
Notice the consolidation period which occurred through most of February and March which resolved into the ‘trend move’ or price swing to the upside. The moving averages have provided key support for this stock for quite some time.
Let’s look at the stratospheric rise of Potash Corp:
http://blog.afraidtotrade.com/wp-content/uploads/042608-2244-test2.png
Don’t you wish all stocks behaved as nicely as this one?
This stock shows how it can be rewarding to find a solid stock, perhaps from a fundamental analysis scan, and then hold your conviction for as long as possible, or until a clear reversal signal is given.
Until price breaches the rising 20 period EMA, odds generally favor higher prices. Be sure to watch for a potential ‘blow-off’ top as more and more people get involved or interested in this stock. When everyone sees and expects the same thing, odds are the trend is about to end.
No Comments | add comment
Stock Market Overview
April 26th, 2008 by Corey Rosenbloom
Let’s take a quick ‘fly-by’ of the major US Stock Market Indexes for clues about what may happen next week:
http://blog.afraidtotrade.com/wp-content/uploads/042608-0627-stockmarket12.png
Some observations about the daily chart of the S&P 500:
Price is testing upside resistance via horizontal line.
The 20 and 50 period moving averages completed a bullish cross (green arrow).
There is semi-strong support via an upside trendline (not drawn) off the March lows.
The moving averages could provide support when/if tested.
The falling 200 period moving average is bearish, and could provide resistance should the market trade higher.
There’s a slight flat momentum divergence with price as it swings higher.
Let’s pull it back to the Weekly Chart:
http://blog.afraidtotrade.com/wp-content/uploads/042608-0627-stockmarket22.png
Quick observations about the S&P Weekly chart:
Price is trapped between the key 20 and 50 period moving averages.
The falling 50 may provide a bit of preliminary resistance
Price supported on the 200 period weekly average.
The recent up-swing is occurring on reduced (relative) volume (bearish non-confirmation)
There appears to be a strong resistance level (via horizontal line) about the 1,430 level.
Conclusion:
Remember that the Federal Reserve makes its policy announcement next week, and is generally expected to cut rates 25 basis points. This could be bullish for the market, but is the market already pricing this expectation in?
Be careful next week – “Fed Days” can be very volatile and unpredictable (especially for newer traders).
No Comments | add comment
Dollar Recovery Could Shake Commodities
April 25th, 2008 by Corey Rosenbloom
This week, the US Dollar Index has recovered slightly, and price finds itself above key resistance and attempting a new swing high. What might this mean for commodities?
First, the US Dollar Index is breaking above a consolidation pattern, which was preceded by a positive momentum divergence. Should price break the $73 level, the next upside resistance target would be $75.
http://blog.afraidtotrade.com/wp-content/uploads/dollar2apr25.png
Notice the strong support level just above $71.
Recall that the Dollar Index and the CRB (Commodity) Index are inverse relationships. A strengthening dollar (or at least an upside rally or counter-swing up) would be bearish for commodity prices.
In other words, an upswing here would lead to lower gold and oil prices, and potentially rice, wheat, and other commodity prices (not all commodities trade alike).
Let’s look at the CRB:
http://blog.afraidtotrade.com/wp-content/uploads/crb3apr25.png
Indeed, as the dollar rallied, commodities fell. Price seems destined to test its 20 period moving average at $410, but something more ominous could be on the horizon.
Notice the negative momentum divergence – as price made a higher swing high (barely), momentum actually made a lower swing high, indicating loss of momentum.
Also, the pattern comes as price may be forming a double top reversal pattern. If indeed this pattern completes, price could break down and retest the rising 200 period moving average near $355 or $360. That would be an interesting development.
Keep watching these two indexes for clues of strength and weakness, and realize that any bearish signal on one could be confirmed by a bullish signal on the other.
And of course, falling commodity prices – in the economic environment we’re in – would likely be bullish for the US Stock Market.
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US Dollar and Commodities
April 24th, 2008 by Corey Rosenbloom
One of the major intermarket relationships is that of the US Dollar Index and various Commodity Prices. Generally, the US Dollar trades strongly inverse commodity prices.
Let’s look at it before discussing it further:
http://blog.afraidtotrade.com/wp-content/uploads/042508-0357-usdollarand1.png
Typically, a falling US Dollar index is inflationary, and inflation occurs with higher commodity prices (I am using the CRB Index in this example, though there are other indexes some traders prefer).
Commodities refer to gold, crude oil, wheat, rice, silver and other prices that don’t necessarily trade together as a unified whole, but often share similar trends.
It’s important to note that the CRB Index has made new highs while the dollar has made new lows. This is a fascinating relationship to track, and you can track it with individual commodities.
Remember that some commodities are ’safe havens’ from inflation, and gold is one of those. Oil is quoted in US Dollars, so that when our index falls, oil prices rise accordingly due to currency aspects.
A country’s currency speaks to the health of the economy (what does that say about the current state of the US Economy?), but a weaker currency isn’t horrible news for a country.
Multi-national companies (think big, blue chip stocks) often do well due to favorable conversion rates back into US Dollars, but sometimes small cap stocks are hurt by a weaker currency.
American tourists fare poorer shopping overseas than do those visiting the US and converting their home currency into dollars. But that is for another post.
Let’s continue to view the inverse relationship on a lower time-frame:
http://blog.afraidtotrade.com/wp-content/uploads/042508-0357-usdollarand2.png
There is much to learn about intermarket relationships, but it can often help to begin your analysis with the Dollar (currency) trend and then build from there.
It’s not as important where you start your analysis, because it all revolves back around to itself.
Continue to study how the relationship of stocks, bonds, commodities, and the Dollar (currency) plays out and shifts over time – in so doing, you may find trading opportunities (or confirmation) you didn’t consider previously!
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Selected Tech Stocks Trapped at Resistance
April 24th, 2008 by Corey Rosenbloom
I wanted to highlight a few key technology stocks that are bumping up against overhead resistance, whether via the 200 day moving average or prior price levels.
Let’s start with everyone’s favorite: Apple, Inc ( AAPL ):
http://blog.afraidtotrade.com/wp-content/uploads/042408-1550-selectedtec1.png
AAPL is actually trapped between two levels of prior support/resistance, and should have massive support about the $145 area, which is derived from prior resistance and the 20 and 50 weekly exponential moving averages.
Resistance comes in the form of prior support (which may not be all that difficult for traders to clear).
Notice also the non-confirmation by volume on the most recent price swing higher, which has taken us to further resistance (not shown) via the 61.2% Fibonacci retracement level just beneath $170 per share.
Adam Hewison of MarketClub recently analyzed both Apple and Amazon prior to their earnings announcements, and the video demonstrates some of the key features (including an inside peek!) of being a member of Market Club (and shows their ‘trade triangle technology’ signals and scans).
Ebay (EBAY):
http://blog.afraidtotrade.com/wp-content/uploads/042408-1550-selectedtec2.png
Ebay is having trouble overcoming its 200 day moving average, which also is a level beneath the most recent price consolidation (value) zone of December 2007.
The large impulse move up off a double bottom, along with potential support from the upcoming 50 period moving average, could bolster this stock.
Microsoft (MSFT):
http://blog.afraidtotrade.com/wp-content/uploads/042408-1550-selectedtec3.png
Unlike some other stocks in its group, Microsoft broke convincingly above its 200 day moving average and out of a two-month consolidation (value) zone. Also, it appears Microsoft has built a sufficient base from which to rally.
Amazon (AMZN) is having trouble, but appears to be in good shape:
http://blog.afraidtotrade.com/wp-content/uploads/042408-1550-selectedtec4.png
The stock could be breaking a potential ‘ascending triangle’ but it needs to break that pesky 200 day moving average to go convincingly higher. Notice the two recent high volume days on the up (buy) days which are typically positive for stocks.
Key support is likely to come in – should we trade lower – at the $75 per share level, via a rising trendline and the convergence of two moving averages.
This stock could be poised for a large move up.
Finally, Super-Stock Google (GOOG) is having trouble it its 200 day moving average:
http://blog.afraidtotrade.com/wp-content/uploads/042408-1550-selectedtec5.png
Not even an $80 day is safe from the resistance of the 200 day moving average! Seriously, Google is having a little trouble at this area, but recall that any large impulse move (such as a gap) typically has a counter-reaction against it as traders digest new levels and consolidate gains. We love to buy on retracements, remember, and few are comfortable at such higher prices so look for a retracement of the original overnight gap impulse.
Also, be sure to keep an eye on these and other stocks that are forming similar patterns, because there will be leading stocks and lagging stocks that can provide you opportunities for profit.
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Monthly View of the SP 500
April 24th, 2008 by Corey Rosenbloom
Let’s pull the camera back on the market to see where the S&P is on a monthly chart for broader insights:
http://blog.afraidtotrade.com/wp-content/uploads/042408-0722-monthlyview1.png
Currently, price is trapped between its 20 and 50 period exponential moving averages.
The last time this happened was in 2001, right in the middle of a major bear market move. Are there similarities this time as well?
The averages often provide key resistance and support to advancing (and declining) moves, and as a market changes trend, deeper and deeper retracements occur.
The 1,400 area has strong resistance on the daily and weekly chart, but did you know it was also a strong area of resistance on the monthly chart as well?
Currently the 50 period EMA is providing support to the market, and it has yet to close beneath this key average yet.
Also, notice that the last five months in the market have closed lower than they opened. Early 2007 gave us the last occurrence of a back-to-back monthly decline, and before that we’d have to go back to early 2004.
The last time the market declined five months in a row was early 2002. April currently is poised to give us our first higher monthly close for the year.
Notice also how volume in the market has trended higher, only to spike radically higher at the start of 2008.
To end, let me simplify the graph above by plotting only the 20 month exponential moving average:
http://blog.afraidtotrade.com/wp-content/uploads/042408-0722-monthlyview2.png
Three times since 2000, the market has crossed (with a close above or below) its 20 month moving average. Each time, the ‘trading signal’ or position (posture) signal was rather accurate.
The market crossed and closed beneath this important average in January, 2008. Was this another larger signal to exit longer-term positions?
Bulls would certainly like to see a clean close (or a series of closes) above the key average, but until then, the market may remain ‘guilty until proven innocent’ by rising above this often watched average.
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Gold and the US Dollar
April 23rd, 2008 by Corey Rosenbloom
Continuing our brief study of intermarket relationships, let’s look at two markets with a powerful negative correlation: The US Dollar Index and the Gold Market.
Gold traditionally is a hedge against inflation, and inflation often is correlated with a weak dollar and higher commodity prices across the board (which is the environment we see now).
As the dollar declines, commodity prices (including gold) often rally, linking the inverse relationship. Let’s zoom down from a monthly chart down to the daily chart:
http://blog.afraidtotrade.com/wp-content/uploads/042408-0453-goldandtheu1.png
Notice the shift that occurred at the ‘turn of the century’ where gold prices were at their lowest levels of the last decade and the US Dollar Index (along with the Stock Market) was making new highs. The market shifted in 2001 (as the recession began) and the price of gold (per ounce) has never looked back.
The US Dollar, on the other hand, is another story. The Dollar index peaked at 120 and is now 41% lower than it was at its peak. Gold, on the other hand, rose from $250 (per ounce) to a peak above $1,000 an ounce, rising 400% in the same 8 year period.
This also means that the value of a US dollar is worth much less in terms of gold prices than it was in 2,000. In 2000, if you were offered $1,000 in gold that you stored away, if you cashed in today, you would get back $4,000 (if converted into dollars). Of course, those dollars are worth less today than they were then, so it may be better to keep the investment in gold! But that is for another lesson.
Let’s keep our focus on these two markets for the meantime.
Weekly charts show the same strong inverse relationship:
http://blog.afraidtotrade.com/wp-content/uploads/042408-0453-goldandtheu2.png
Again, the picture is the same. Since early 2007, gold prices have almost doubled while the US Dollar Index fell 20 points (weakening against other currencies).
If the US Dollar Index reverses trend, then expect gold’s trend to pause or reverse as well. Until that happens, the current trend remains in force.
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Stock Market and Gold Correlation
April 23rd, 2008 by Corey Rosenbloom
Intermarket analysis is a fascinating branch of market research, and I wanted to show you the performance of gold and the US Stock Market.
http://blog.afraidtotrade.com/wp-content/uploads/042308-1517-stockmarket1.png
There’s been an inverse relationship, such that when gold rises, the market is generally falling and vice versa.
Gold is traditionally seen as a hedge against inflation, and inflation typically is seen as being negative for the stock market.
Also, in uncertain economic times (especially with a falling US Dollar), gold is a more attractive investment than US Stocks and so the two asset classes, much like stocks and bonds, compete for your investment capital.
This correlation holds on the longer time frame charts as well:
http://blog.afraidtotrade.com/wp-content/uploads/042308-1517-stockmarket2.png
Notice that gold prices in 2006 around $600 were not a problem for the stock market. As signs of recession began to emerge, and investors began to be ’spooked’ by deteriorating financial conditions, larger investors likely began rotating out of the US Stock Market and into other markets such as gold, bonds, etc.
We see the rotation accelerate as the stock market began to fall going into 2008, when the price of gold ’skyrocketed’ from just under $700 per ounce to over $1,000 per ounce in March 2008. The S&P fell from a peak of 1,575 to just above 1,250 during the same period.
The recent fall of gold prices has contributed – with other factors – to a rise in the current stock market since March.
While there may be some correlation between gold prices and the US Stock Market, gold prices are much more inversely correlated with the US Dollar Index.
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Stock Correlation with the 10 Year Yield
April 23rd, 2008 by Corey Rosenbloom
I’m not sure how much you follow intermarket correlations, but there’s one relationship I’d like to highlight to you.
The S&P 500 Index has been extremely correlated with the 10 Year Treasury Note Yield ($TNX), and continues to be so today.
http://blog.afraidtotrade.com/wp-content/uploads/042308-0459-stockcorrel1.png
Generally (as demonstrated over the last 100 years, but not over the last 10 years), rising yields are bad for the stock market and falling yields are good for the stock market, but yields and the S&P market have traded near lock-step since just before 2008 began.
Recall that bond yields are inverse to bond prices, so there are implications here for the bond market as well. Bonds and stocks often compete for investor funds, and assets flow back and forth between these markets.
Notice that on the recent rally (from Mid-March), Yields have risen with the market, meaning bond prices have fallen, adding to the correlation (money has flown out of bonds and into stocks, driving yields down).
To show you how recently the correlation began, let’s view a weekly chart:
http://blog.afraidtotrade.com/wp-content/uploads/042308-0459-stockcorrel2.png
Let’s pull it back to 2000 on a monthly chart:
http://blog.afraidtotrade.com/wp-content/uploads/042308-0459-stockcorrel3.png
Notice how the 10 Year Yields follow the stock market decline from 2000 into 2003 swing for swing.
Also, notice that 10 Year Yields hit the same level they did near the 2003 stock market bottom.
As yields fell along with stock prices, investors shifted more and more into bonds (causing bond prices – not shown on these charts – to go higher).
It’s a fascinating correlation, and one to which you might want to pay attention.
(Rates closed today at 3.72% - that’s what the $37.20 on the left side of the chart means)
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A Day of Divergences and Interesting Trades
April 22nd, 2008 by Corey Rosenbloom
As I always recommend, take a look at your chosen market and chosen time frame and annotate the action and ideal trades for the day, so you can better analyze these patterns in real time.
Let’s look at the DIA (Dow Jones ETF) on the 5-minute chart (any of the 3 major US Stock Indexes have similar intraday patterns).
http://blog.afraidtotrade.com/wp-content/uploads/042308-0321-adayofdiver1.png
Let’s take it point by point.
The day opened up with a downside gap of 30 Dow Points, which would lead you to enter a ‘gap fade’ trade. Unfortunately, this trade didn’t ‘work out’ as expected and many traders had their stops hit.
1. A large resistance area, and moving average overlap trade (combined with a new momentum low ‘impulse sell’ trade) triggered a potential ’short-sell’ entry (target: intraday low or just beyond)
Price then began to falter beneath the key 20 period moving average, and with negative breadth, led you to continue to trade to the short side.
2. Annotation #2 identifies what I call an “F You!” trade (for those who are curious, the “F” stands for “fade“). I was short going into this trade and had a tighter stop than I should (combined with a larger position than I should) and a quick upthrust in price nailed all ‘properly placed’ stops and zapped away positions in less than a minute. Actually, ideal stops should have been placed beyond the falling 50 period average, but in the heat of trading, we don’t always do what we should.
I’m fine with stops, but not fine with trades that complete an “F You” pattern. This occurs when there is an obvious set-up and obvious stops that quickly comes up and fills the liquidity of resting stop orders and THEN reverses extremely rapidly and quickly back IN the direction that people expected. This development tends to frustrate traders and sometimes disillusion them.
These occurrences are rare, but if you miss them, then they can provide elegant entries. I had to chase the market down, which also was probably unintelligent, but this is why I write “idealized trades of the day” – to allow me (and you) to see patterns in calmer times outside market hours so that we can recognize them and trade them with confidence during market hours.
3. Following the large downward impulse (as expected), there was a slight retracement that resembled a 45 degree angle. That’s a bear flag! The flag broke down just before reaching resistance and achieved its price target, which wound up being the intraday low
4. Price also retraced to the falling 50 period moving average, setting up the potential for a ‘final’ trend trade as price began to build a base to trade higher and reverse. Notice the numerous positive momentum divergences that developed through the day.
5. Finally, price consolidated beneath the key 20 and 50 period moving averages, and this highlights how MAs can serve as support and resistance. Also, breakouts from consolidation can lead to higher prices (especially following positive momentum divergences).
Today was a great and interesting day that – like most days – provided many opportunities for profit. Print out your favorite chart and market and annotate it based on your understanding of trade set-ups and likely price behavior so that you can be ‘quicker on the draw’ during the trading day.
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Announcing INO TV in Detail
April 22nd, 2008 by Corey Rosenbloom
Now you can view trading seminars from the comfort of your home, or in the office or anywhere else there is a high-speed internet connection.
I benefit each week from this service because it gives access to archived presentations from trading experts on a large variety of topics on trading, investment, money management, psychology, strategy development, etc.
I have also used the service to gather small study groups together at my home to view a presentation, take notes, and then discuss ideas with others that we generated from the material together. It can also become an interactive process which stimulates deeper learning and provides motivation to delve deeper into the content.
Topics include detailed information presented in one and a half hour presentations focusing on Point and Figure charting/tactics, Elliot Wave Theory/application, “Back to the Basics” with presenters discussing ideas from the “Founding Fathers” of Technical Analysis, Gann trading techniques/indicators, risk control along with money management strategies, cycle analysis/techniques, ‘pattern’ trading, indicator construction/application, and so much more.
Some of these videos have supported the educational content I am studying for the CMT Designation.
Here is a quick, concise ‘blurb’ straight from the website itself:
Here’s what you get:
* 11 Channels … countless opportunities
* Unlimited 24/7 worldwide instant access
* Over 154 online experts and counting
* Over 413 online seminar workbooks
* Over 547 online trading seminars and counting
* Over 1,000 hours of valuable online trading material
Here’s how you will benefit:
* Learn at your own pace
* Easy listening and learning style
* You will be learning a valuable lifetime skill
* It’s available now and it’s worldwide
The service and access to all this quality information is yours for $99 per year, or $49 per quarter, which is less than half the cost of the plane ticket alone to take you to a free conference on trading.
I strongly support INO TV, use it frequently for my own development, and recommend it for the amazing value of the service.
Here are a couple of links to check it out for yourself:
The “Home Page” and log-in page for INO TV (be sure to check out “What You Get” and the “Testimonials” for more information.
Finally, the “Sign-Up” and join membership page (including bonus offer)
Feel free to comment or email me with any questions and I’d be happy to address them. I believe in ‘overcoming fear through education’ and this is exactly what the service provides for you. You also support Afraid to Trade when you support INO TV.
Also, I will provide descriptions and recommendations throughout the week on some of my favorite videos I’ve watched so far. I truly believe this is an opportunity and deal you shouldn’t pass up.
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AAPL Insights
April 22nd, 2008 by Corey Rosenbloom
Apple Inc (AAPL) completed its buy signal and is running into potential overhead resistance which could temporarily halt the growing up-move in the stock.
http://blog.afraidtotrade.com/wp-content/uploads/042208-1539-aaplinsight1.png
The buy signal I highlighted previously worked even better than I anticipated, with price gapping up multiple days to reach the first profit target – the resistance line at $170.
Traders, you may want to consider taking at least some profits at this level and waiting for a clean break above this level before trading higher, but that all depends on your strategy and risk-management parameters.
http://blog.afraidtotrade.com/wp-content/uploads/042208-1539-aaplinsight2.png
Also, I do want to highlight a divergence.
The recent move off the February lows has expanded each week on relatively lower volume, which is a technical non-confirmation of higher prices.
Let’s look at this two ways:
1. Higher prices are not attracting new buyers and the rally is suspect or at least due for a deeper retracement
2. The capitulation bottom of early 2008 zapped away all the ‘weak’ holders in a climax reversal, and so this must be considered when addressing ‘relative volume’
In other words, there’s no way to match or exceed climactic volume – this would be the more optimistic approach and the first statement would be pessimistic.
Keep your eye on this stock and let’s continue to watch or trade the exciting emerging developments.
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Rising Intraday Support
April 21st, 2008 by Corey Rosenbloom
I thought the rising support pattern provided by the 20 period moving average was interesting and wanted to show the diagram.
http://blog.afraidtotrade.com/wp-content/uploads/042208-0444-risingintra1.png
I’m showing the DIA (Dow Jones ETF) on the 15-minute chart with a 20 and 50 period exponential moving average.
While I often trade off the 5-minute chart, I view the structure of the higher time frames (yes, a 15-minute chart is a slightly higher time frame for me!). Higher time frames can develop biases or expectations for you, and can also provide risk management points and trade entry points.
The typical interpretation is to identify the trend structure on the higher time frame and then time your entries and exits (targets too) on lower time frames.
For example, if a 30 minute chart shows a resistance level just ahead, and your 5-minute chart gives you a buy signal, you may use the resistance level on the 30-minute chart as a target for when the market might reverse.
Anyway, let’s look at the above chart.
Notice how price is supported as it trends higher by the 20 period moving average. As price gaps higher and forms a U-Turn sell (or rounded top), retracements (pullbacks) are deeper but still are supported by the rising 50 period average.
Trend reversals are often preceded by such ‘loss of momentum’ situations where price retraces deeper and deeper before ‘rolling over.’
Nevertheless, I thought this was an interesting example for you to review.
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Inside a Momentum Divergence
April 21st, 2008 by Corey Rosenbloom
I use momentum divergences as a large part of my trading, and I thought I’d take you inside a momentum divergence so you could understand the concept better.
First, let’s start with a definition.
Price can be defined as the aggregate value of all participants in a market as they express their hopes, desires, fears, and other considerations as they establish positions (whether as hedged positions or outright directional positions).
Momentum can be defined as the speed or force of prices traveling in a given direction.
Thus, price may be moving higher, but doing so at decreased speed or decreased force (or urgency). If this situation develops, we would consider this to be a ‘momentum divergence,’ in that momentum is registering an opposite reading to price direction.
One may also think of it as throwing a ball into the air. As the ball reaches the apex (the highest point), the ball slows down its speed accordingly before stopping and then reversing… slowly traveling down at first but then gathering speed as it heads closer to the ground.
In this example, I am showing a positive momentum divergence via Harley Davidson (HOG) at the beginning of 2007. Notice that price is trending lower, and we can see this through a series of lower lows and lower highs. It’s best to view momentum divergences in comparison with swing highs and swing lows in price, combined with the overall direction.
http://blog.afraidtotrade.com/wp-content/uploads/042108-1802-insideamome1.png
Notice on March 12th how price makes a lower low on a pronounced and strong price swing down, which registers in our momentum oscillators as making a lower low as well. For this example, I’m demonstrating the 3/10 Oscillator, ROC (Rate of Change), and MACD Histogram.
A counterswing up occurs until around March 19th, and then a new downward impulse occurs. However, this particular downward impulse – although it took prices lower – failed to do so with the strength (or magnitude or length) of the previous price swing.
I drew two hashed lines to show the length of the downward price swing and how it set-up the classic divergence. With price making a lower low, but doing so on less speed or force than the prior price low, a positive momentum divergence forms, which is picked up by our oscillators.
Each of the oscillators (and there are more we could use) makes a higher low while price makes a lower swing low. This warns us that the sellers are losing force (or ‘power,’ conviction, momentum, etc) and that a reversal in price may be setting up. If anything, divergences warn us to take profits if we have them in a position.
It is important to note that divergences alone do not signify trend reversals – they merely indicate a weakening posture of the dominant force (be it buyers or sellers) and that the next counterswing could be stronger than prior counterswings. Sometimes divergences do indeed precede trend reversals, but it’s best to use them as warning signs and allow price to complete a reversal before repositioning.
I’ll be discussing how to use divergences in more detail in future posts. Be sure to check back for more information.
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Markets – Truly a Leading Indicator?
April 21st, 2008 by Corey Rosenbloom
Barry Ritholtz at the Big Picture recently asked the question: “Are Markets a Leading or Lagging Indicator” which addressed the commonly held notion that markets lead economics (or financial conditions as they develop).
Barry states, “There are so many varied inputs into equity markets — sentiment, trend, liquidity, momentum, valuation — anyone of which can be dominant at any given moment.Merely assuming markets are giving you a 6 month heads up into the future, based on recent action, is often unwarranted.”
He further addresses data from the housing market (and ‘credit crunch’) market declines and takes us back to 2000 when the market rallied into a recession and then bottomed near the start of the economic recovery.
Ritholtz concludes that markets can both lead and lag, which challenges conventional wisdom. “But getting the correct interpretation involves careful review of the charts, sentiment reads, liquidity, momentum, market internals, and other data.”
In other words, it’s not as simple as reading a stock market peak and declaring “the economy is about to decline” or observing a potential market bottom and declaring “the worst is over.”
Markets are increasingly affected by globalization and do appear to becoming more correlated as information reaches so many trading desks across the world simultaneously.
Also, with the proliferation of hedge funds as well as computerized algorithmic trading, the classic ‘purpose’ for investment (or trading) has deteriorated from what it was 20 or 30 years ago.
While funds do still invest on their belief about the future prices of equities, computerized trading programs and the open access to more market participants distorts these views.
Also, with the acceptance and rise in popularity of technical analysis methods, more traders are analyzing prices strictly due to mathematical indicators and visual chart patterns which seek to exploit certain aspects of market psychology of participants. Such trading creates unexpected and often unintended price movements which have very little to do with equity valuation or fundamental analysis. This further removes the link between the stock market and the economy.
This is a fascinating concept and I am glad Barry is addressing the point and sharing a few of his views.
As with most things in the stock market, nothing is as simple as it seems at first glance.
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A Focus on Key Sectors
April 20th, 2008 by Corey Rosenbloom
In the previous post, I specifically mentioned the Technology sectors as being one of the worst performers year-to-date, and the Industrial sector as being one of the best. Let’s take a look at those in a little more detail to see if we can gather a few clues:
http://blog.afraidtotrade.com/wp-content/uploads/042008-1954-afocusonkey1.png
The Technology Sector, supported by similar patterns and excellent performance by Apple (AAPL), Google (GOOG), and others, appears to be on its way to complete a ’rounded bottom’ or perhaps ’saucer bottom’ and the likely pathway could lead to higher prices yet to come.
Notice the near-symmetrical rounded shape of the price action combined with a positive momentum divergence that has been developing since the beginning of the year. The key reversal day of January 22nd helped quite a bit as well.
Longer term, the picture is similar to the major US Indexes:
http://blog.afraidtotrade.com/wp-content/uploads/042008-1954-afocusonkey2.png
Also, I mentioned the Industrial Materials Sector as surprising me to have the best performance year-to-date. Let’s look:
http://blog.afraidtotrade.com/wp-content/uploads/042008-1954-afocusonkey3.png
The Industrial Materials (XLB) has made new highs, in part thanks to strength from commodities and world-wide demand. Nevertheless, volume is declining on the recent march to new highs which serves as a temporary non-confirmation.
The daily chart shows a classic bull flag completing its measured move:
http://blog.afraidtotrade.com/wp-content/uploads/042008-1954-afocusonkey4.png
Keep an eye on these sectors to see where strong (and weak) stocks within them might trade to give you fresh, potentially unseen opportunities for profit.
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Recent Clues from Sector Rotation
April 20th, 2008 by Corey Rosenbloom
Let’s take a quick look at what the sector analysis is saying.
First, let’s look at year-to-day (76 days) returns for the nine major SPRD sectors according to StockCharts.com:
http://blog.afraidtotrade.com/wp-content/uploads/042008-1851-recentclues1.png
The Materials (up 6.5%) and Energy (up 5.6%) sectors have outperformed all others, while the Health Care (down 10%) and Technology (down 10.5%).
While the Sector Rotation Model would expect Technology stocks to be down in a defensive (or down) overall market, it is surprising to me to see Health Care stocks (which typically are used as a defensive posture and/or don’t follow normal sector rotation patterns) to be down just as much. This development bucks the expected direction.
Now, let’s look at the Sector performance relative to the S&P 500 Index:
http://blog.afraidtotrade.com/wp-content/uploads/042008-1851-recentclues2.png
Again, we would expect Energy stocks to do well going into a defensive market, as this sector tends to ‘top out’ as the economy tops out due to the increased spending cuts that consumers and businesses take due to higher fuel costs (and transportation costs).
It’s also a little surprising to see Materials stocks – which often do well in mid to late economic expansions – performing higher than energy stocks.
These developments warrant further investigation in my opinion.
Sector Rotation analysis can give you a ‘heads up’ about where the larger money could be flowing as the economy (and stock market cycle) progresses from one stage to the next.
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Indexes Close at Resistance
April 19th, 2008 by Corey Rosenbloom
Last week’s price action (particularly that of Friday) sent the major US Indexes to test key resistance, a break of which would change the calculus and give more strength to the bulls.
http://blog.afraidtotrade.com/wp-content/uploads/042008-0017-indexesclos1.png
1,400 on the S&P 500 Index proves to be yet another powerful force that price is testing. Should price cleanly break this zone, I would expect continuation to a target #1 of 1,440 and then 1,500.
The Dow Jones Index, however, hovers just beyond its key resistance level:
http://blog.afraidtotrade.com/wp-content/uploads/042008-0017-indexesclos2.png
A weekly view of the Dow Jones Index places the picture into a more favorable light for the bulls:
http://blog.afraidtotrade.com/wp-content/uploads/042008-0017-indexesclos3.png
There are still various obstacles for the bulls to overcome, but for now, we have to give last week’s victory to them. It’s now up to them to defend and consolidate their gains.
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Sweet Intraday Action for the Bulls
April 18th, 2008 by Corey Rosenbloom
Today’s price appreciation was nothing shy of stellar for the down-trodden bulls. Let’s take a look at some of the key points:
http://blog.afraidtotrade.com/wp-content/uploads/041908-0327-sweetintrad1.png
Although price made more of a rounded top formation, the day clearly closed over 100 Dow points higher than yesterday’s close – almost all of which was a result of the day’s overnight (or morning) gap.
Gaps that don’t fill often give you play (to trade) in the direction of the gap for easy profits, and in fact, many of such days result in one-sided ‘trend-days’ where the market opens at one extreme and closes at the other. Today gave a surprising ‘twist’ (or literally, a turn) halfway through the trading day which caught trend-day traders off guard.
Because the day’s action was so interesting on a variety of intraday charts, let’s look at a handful of today’s movers:
http://blog.afraidtotrade.com/wp-content/uploads/041908-0327-sweetintrad2.png
Oops – Google’s (GOOG) intraday action was so amazing that yesterday’s intraday action literally pales in comparison to the gap. Google advanced just under $90 today (20%)! Extremely impressive, and it serves as a warning that volatility hasn’t left the market just yet.
Up next is Caterpillar (CAT):
http://blog.afraidtotrade.com/wp-content/uploads/041908-0327-sweetintrad3.png
Caterpillar Inc gives us a better picture of what a typical ‘trend day’ looks like in a common stock. Trend days often begin with a (relatively) large overnight gap and then price continues higher in a variety of waves until the close of the day. Essentially, during a known trend-day, you ‘throw a dart’ and join the trend because the expectation is that the market will close at or near its highs for the day.
Next, Citigroup (C) gave us an interesting twist on a ‘trend day’ and ‘U-Turn’ day:
http://blog.afraidtotrade.com/wp-content/uploads/041908-0327-sweetintrad4.png
The price action, with the exception of the early reaction against the gap, formed one of the clearest ’rounded top’ patterns I have seen on a chart. The two halves of the day were virtual mirror images of each other. This is one of those stocks in which you could have lost money buying near the middle of the day, as the mid-day zone carved in the intraday high (there’s little way to know that until later, which is why it’s essential to trade with stops beneath key moving averages if the situation arises).
Finally, let’s end the intraday action by viewing which sectors did the best today for potential clues about what to study over the weekend:
http://blog.afraidtotrade.com/wp-content/uploads/041908-0327-sweetintrad5.png
It may surprise you to know that – despite Google’s stellar $90 rise today – it was Industrial stocks that carved out the best sector performance (up 3%) today. Actually, Financial sector stocks outperformed Technology stocks today, as did the Consumer Discretionary sector. This might be surprising news to you if all you heard about the day’s news was Google, Google, Google.
Look deeper within these sectors to find potential stock gems to trade in the coming weeks should the market continue higher.
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The Disciplined Investor Interviews Robert Reich
April 18th, 2008 by Corey Rosenbloom
Andrew Horowitz at the Disciplined Investor blogsite recently posted a Podcast Interview he conducted with Robert Reich, a current professor of public policy (UC Berkeley) who has served in three presidential administrations, including Secretary of Labor under President Bill Clinton.
I’m a follower of politics and so I was captured by the headline and had to listen to the interview because Reich is a big name both in politics and economics.
In the interview, they discuss a broad range of topics under the heading “Super-Capitalism” and also address:
Long Term Recession Odds (and possible Depression); the next economic problem; “Who should Obama replace Bernanke with” (quite ambitious!); worldwide food shortage; and unions.
Andrew conducts a weekly podcast which can be accessed via his Disciplined Investor site (top right and also in the posts).
Be sure to browse around other interviews from prior podcasts he has conducted with such blogger guests as Adam Warner, Brian Shannon, Tim Knight, Barry Ritholtz and many, many more!
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Caterpillar Claws through the Competition
April 18th, 2008 by Corey Rosenbloom
Not to be outdone today, Caterpillar Inc (CAT) also clawed its way higher today via overnight gap thanks to better than expected earnings.
http://blog.afraidtotrade.com/wp-content/uploads/041808-1633-caterpillar1.png
Caterpillar is a Dow Jones Index component, and is a heavy machinery company that does business across the globe. Overseas sales have boosted this company’s profit margins, despite a slowing American economy and potentially reduced demand for the need for construction and heavy machinery to fulfill construction needs. Remember that a weak US Dollar often benefits large multinational companies.
According to an Associated Press article this morning, “Heavy equipment maker Caterpillar Inc. said Friday that demand for its global mining and energy products pushed first-quarter earnings up 13 percent, far surpassing Wall Street estimates. Its stock surged.
The results showed continued weakening in North America, where the economy has weighed on sales, but better-than-expected strength internationally as Caterpillar sales overseas benefited from the weak dollar.
Caterpillar said it earned $922 million, or $1.45 per share, in the January-March period compared with $816 million, or $1.23 per share, in the year-ago quarter. Analysts surveyed by Thomson Financial had been expecting earnings of $1.33 per share.
Revenue rose 18 percent to $11.8 billion from $10.02 billion a year earlier — fully $1 billion above analyst estimates. Sales increased 4 percent in North America and 30 percent internationally.”
A peak at the weekly chart shows longer-term strength and the high possibility that the stock will reach and exceed all-time highs soon:
http://blog.afraidtotrade.com/wp-content/uploads/041808-1633-caterpillar2.png
I did want to highlight that the January 2008 (around the 22nd) weekly “candle” pattern was a significant one. Notice where the large white candle gaps lower than the previous red (sell) candle and almost ‘engulfs’ the red candle. Had the stock completed a full ‘engulf’ where the close would have exceeded the previous week’s open, this would have been a powerful bullish engulfing pattern.
Instead, the pattern was a “Piercing Pattern,” which often is a strong bullish reversal pattern where a stock gaps down, exhausts supply (sellers) in a shock move, and then creates a vacuum to the opposite side (buyers) which closes deeply within (at least a 50% penetration) of the previous week’s candle.
This was also considered a “Key Reversal” week or a capitulation bottom example. Call it what you will, it was a powerful reversal signal, and since that day, price has scarcely looked back.
Let’s see how price behaves when it does test the prior high. Should it break the high, I would say there’s definite life in this stock. Keep an eye on it!
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GOOG: Who Saw That Coming?
April 18th, 2008 by Corey Rosenbloom
Google Inc (GOOG) has accomplished the unthinkable via a massive overnight gap (no chance of that being filled today!) due to earnings, which has caused the stock to shatter resistance, confirm a higher low, make a higher high, and confirm the stock as likely emerging into a new uptrend.
http://blog.afraidtotrade.com/wp-content/uploads/041808-1618-googwhosaw1.png
According to an Associated Press article this morning, “Google won back Wall Street with first-quarter earnings and revenue growth that surpassed analysts’ predictions, propelled by an aggressive push outside the United States.
The pleasant surprise, delivered late Thursday, lifted Google’s recently sagging shares by nearly 17 percent, or $75.89, to $525.43 at the open of trade Friday.
“This is mostly a relief rally,” Stanford Group analyst Clayton Moran said. “People are relieved that things aren’t as bad as they thought.”
From a technical analysis (charting/visual) perspective, the stock has cleared the resistance via the 50 and 20 period daily moving averages I discussed earlier, and has also confirmed a higher low and – no doubting this one – made a higher ’swing’ high, which has confirmed the stock into a new uptrend, albeit the confirmation point ($490) was well exceeded. I mentioned if the stock could solidly break $500, the bulls would be happy and – as long as they can keep this gap from attempting a fill over the next few days or weeks, I would say this stock has new life to it.
Keep in mind that the stock gapped up into potential resistance via previous swing high and low levels.
Let’s glance at the weekly chart, which has price going into moving average resistance there:
http://blog.afraidtotrade.com/wp-content/uploads/041808-1618-googwhosaw2.png
I have to admit, even though I thought Google would be going higher, I had no idea it would go this higher this quick. I bet a lot of traders where impressed (or shocked) by this development.
Volatility is back!
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Crude Oil Gushes to New Highs
April 17th, 2008 by Corey Rosenbloom
Stock Market bulls can’t be overjoyed with the reality that crude oil prices hit yet another all-time high today, closing just shy of $115.00. Unfortunately, a potential bullish pattern completion will take prices even higher.
http://blog.afraidtotrade.com/wp-content/uploads/041808-0245-crudeoilgus1.png
If indeed the recent price consolidation throughout March was a type of ‘flag’ or consolidation pattern, then the approximately $24 point swing – if added to the bottom of the lower trend channel – will take prices from $100 up to potentially $126. The blue arrow truncates beneath the actual projection zone.
It looks like the potential move is about half-complete IF this possible technical pattern is to resolve. One wonders if price can indeed make it that far, and if it does, what the overall effect will be on the broader economy.
Will gas prices at the pump go to $4.00 per gallon? If so, and this could very well be the case, how much will consumers and businesses cut back on other spending? What will continue to suffer as a result?
Let’s pull back the camera to the weekly chart and see the stellar price rise that crude oil has been able to perform:
http://blog.afraidtotrade.com/wp-content/uploads/041808-0245-crudeoilgus2.png
Even if you only trade the stock market (or are a stock selector) be aware of the trend of crude oil prices and other commodities, and also be aware of the specter of inflation and what that might mean given a slowing economy. Typically, commodity prices fall as a result of reduced demand during an economic downturn or recession, but we’re not yet seeing signs of that.
Instead, most commodity prices are surging like never before (rice has doubled over the last year – corn has been on a stellar run over the last two years).
Typically, the Fed raises rates to combat inflation, but to do so would be to jeopardize an already weak American economy.
Keep your wits about you and try not to get too caught up in this potential commodity bull market!
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Another Peek at the US Dollar
April 17th, 2008 by Corey Rosenbloom
The US Dollar Index is still under pressure, and can’t manage to rise above its falling 20 day moving average.
http://blog.afraidtotrade.com/wp-content/uploads/041708-1747-anotherpeek1.png
Each time, price has found resistance about this average, and the index has yet to close above it since early February.
Of note, a triangle consolidation pattern has formed, which – depending on how the converging trendlines are drawn – price may be breaking now back to the downside in a continuation move.
Price is close to notching a new closing low and not immensely far from a new all-time low.
A weaker dollar generally helps large, multinational countries, but a weak currency generally is not a good sign for a nation’s economy. Strong economies tend to have stronger currencies, and in fact, most currencies continue to strengthen against the US Dollar (some of which are making lifetime highs).
Continue to keep an eye on this situation, as a turn back to the upside could likely be a ‘good thing’ for the broader US economy and stock market.
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All 11 Trader’s Educational Whiteboard Videos
April 17th, 2008 by Corey Rosenbloom
Thanks to the educational department of Market Club, who have compiled all 11 “Trader’s Educational Whiteboard” series into one location for ease of access.
You can view all 11 Educational Videos in a theater-style format, where you can easily progress to the next video.
All videos are presented by Adam Hewison, and last approximately 6 to 8 minutes in duration.
Topics include (but are not limited to):
Keep it Simple and Straight
Apple Insights (and Secret Weapon)
Basics of FOREX Trading
How to Place Stops
The Importance of a Game Plan
And others.
You may also access the videos via a blog post page which provides a little more detail for seven selected educational posts.
Keep checking back to get the latest free material from the Market Club, or consider signing up for a membership to be treated to even more educational material and commentary, along with a stock scanner, trade signals, technical analysis screener, online portfolio/watchlist, and more!
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Another Trend Style Day Emerges
April 16th, 2008 by Corey Rosenbloom
Wednesday’s price action resulted in a type of “Trend Day” which gave nimble and aware traders an excellent opportunity to profit.
http://blog.afraidtotrade.com/wp-content/uploads/041708-0507-anothertren1.png
Let’s take it point by point.
1. The morning opened with a gap just at 100 Dow points ($1.00 on the DIA). This was your first clue that we might have a trend day develop. The gap also occurred well outside yesterday’s range (reference my earlier post “Three Types of Morning Openings“).
It’s sort of like a tornado forming. You get the initial watch and then the clouds get darker and the pressure changes, but none of that guarantees a tornado will develop. While there’s no guarantee, the odds now shift to favor the development.It’s rare to have a trend day that doesn’t begin with an overnight gap.
With the ‘dark clouds’ upon us, we should be anticipating the instability to break in one direction. Either we get a gap fade, or we break into a trend day. If you tried to ‘fade the gap’ today, that was perfectly justified (I did so myself initially) but you needed to keep a closer stop due to the +100 point gap and be prepared to flip your position to capitalize on the potential birth of a trend day.
Sure enough, price couldn’t pull back and the buyers thrust price higher and that, combined with surging volume, clued you in that the day’s action could end on its highs.
2. During a trend day, it’s relatively safe to BUY any pullback or retracement, especially initial retracements to the key 20 period moving average. Place your stop beneath the average.
3. If you don’t get initial surges, or if price stalls, it will be safe to assume that the next moving average period will likely hold, and so you could have placed a similar ‘buy’ trade at the rising 50 period moving average. Each subsequent reaction gets a little deeper before the market reverses. Testing the 50 period average decreased the odds a bit that the day would resolve into a trend… but even those reduced odds weren’t enough to stop the bulls.
The market surged the last two hours into the close, completing the trend day structure. Today’s action shows the potential power of trends, and how it often is a failed initial strategy to fade a trend day if it has odds of developing. Even though it looked like price may be headed lower (as of 2:00), the trend was still up and the market let you know how strong it really was, closing on the highs of the day.
We’re getting more trend days each month, so if you’re not certain about how to trend them, study them deeply and prepare yourself should we get another one soon!
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Link: Mid-Size Gap Ups
April 16th, 2008 by Corey Rosenbloom
Rob Hanna at Quantifiable Edges conducted a study dedicated to mid-size index gaps that I wanted to share.
Rob defined a mid-sized gap as 0.25% to 0.75% in the SPY (S&P 500 ETF), and tested the results going back to 1993.
Of the 3,626 trading days, Rob found 613 “mid-sized gaps” to the upside which happened to occur in uptrends and 223 mid-sized gaps up in downtrends (his definition of up-trend was based on price being above the 200 day simple period moving average while down-trend was defined as price being beneath it).
“Of those gaps up 356 (58%) filled at some point during the day.”
“Of those mid-sized gaps up , 165 (73%) filled at some point during the day.”
I love how he ends his research-based article:
“When deciding how to approach a gap up in the morning, make sure you consider at least two things:
1) Long-term trend of the market.
2) The size of the gap.
They both matter.”
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GOOG Has Trouble at Resistance
April 16th, 2008 by Corey Rosenbloom
Media darling stock Google (GOOG) has staged a decent recovery off its March 2008 lows, but is the stock showing new signs of life?
http://blog.afraidtotrade.com/wp-content/uploads/041608-1846-googhastrou1.png
Before getting ultra-bullish on Google, I’d like to see it close perhaps a couple of days above the key resistance line and also the declining 50 period moving average, both of which converge at $480.
To the eye, it looks like Google has indeed formed a bottom, complete with momentum divergences and consolidation. That may indeed be the case, but it’s still best to wait until the ‘preponderance of evidence’ is in your favor, which would mean waiting just a bit longer to see if the current down-swing forms a higher low. Should this happen, that would add to your confidence that the stock has put in a potential bottom.
The $480 resistance zone is critical for the stock to overcome. It may be a high-flyer, but stocks do tend to follow some basic technical analysis (charting/visual) parameters – at least use them for confirmation and risk-management.
A clean break above $500 would be even better for the bulls and probably for the overall market! Bulls, keep your fingers crossed!
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CROX Gets Bitten – Twice Shy
April 16th, 2008 by Corey Rosenbloom
Crocs Inc (CROX), makers of the unique, comfortable shoes, has suffered yet another downside gap today. What should you do with the stock – if anything?
http://blog.afraidtotrade.com/wp-content/uploads/041608-1641-croxgetsbit1.png
Notice the strong down-trend which has been prevalent prior to the start of 2008. Since then, the stock experienced two downside gaps which were unfilled (also known as continuation gaps – the February gap may also be deemed a “measured gap”).
This showed that momentum was strong to the downside as sellers were unrelenting in their campaign to rid their accounts of this stock.
The weekly chart shows an even more negative picture:
http://blog.afraidtotrade.com/wp-content/uploads/041608-1641-croxgetsbit2.png
According to the Associated Press (April 15th): “Crocs Inc. announced guidance cuts that one analyst termed “stunning,” amid lower-than-expected demand. Crocs reduced its first-quarter outlook far below analyst expectations late Monday, citing weak sales and costs.”
Adam Hewison provides more information regarding CROX in his brief educational video entitled “I Love Their Shoes but I Wouldn’t Buy Their Stock!”
Here are a few brief excerpts from the video commentary:
“We have been negative on Crocs (CROX) since November 2, 2007 when our “Trade Triangle” technology signaled a change in trend at 44.10. The downward trend for this stock in the past six months has been relentless.”
Hewison provides simple commentary to complex situations:
“One of the great things about MarketClub’s “Trade Triangle” technology is how it keeps you out of stocks when the market is headed south. Most investors tend to trade from the long side of the market, so their greatest risk and their Achilles heel has got to be when a stock they’re holding turns down.”
“Normally when this happens the fundamentals still look very strong. However, when you use our “Trade Triangle” technology you don’t have to guess at the trend anymore.”
Check out the video and moreover, see if Market Club’s service (which has earned my approval), trading signals, and daily news/commentary are right for you.
Oh, and always be careful of overhyped stocks! CROX was one of the darling “can do no wrong” stocks of 2007.
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Fascinating Intraday Action
April 15th, 2008 by Corey Rosenbloom
As a trader, I thoroughly enjoyed today’s intraday swings and price action. Let’s take a closer look:
http://blog.afraidtotrade.com/wp-content/uploads/041608-0021-fascinating1.png
The day began with an overnight gap just outside yesterday’s range (just above yesterday’s high) and immediately filled, giving the first opportunity of the day for a high-probability trade.
When the ‘gap fade’ trade ended, one could have played (long) in the direction of the original impulse, which only gave a 50% move before reversing and breaking the lower trendline of a new bear flag pattern which terminated just above moving average resistance.
It’s impressive that the intraday low is formed at the termination (completion) of the ‘measured move’ of larger bear (and bull) flags, and this was indeed the case with this flag which actually spanned the intraday high and low.
The rest of the day’s action rotated within these ranges, turning back up in a ‘rolling bottom’ pattern which took price above the key moving averages (I would have expected more downside at moving average resistance. Price rejection of further downside laid the ground for shorts to cover and new longs to enter, providing a ‘pivot point’ or turning point for the day).
Price then surged above the averages and found scant resistance around yesterday’s close while forming a new bull flag which quickly got its ‘measured move’ before reversing down to find support yet again at yesterday’s close.
Price made a final push to the upside and formed a more manic bull flag which also achieved its target.
There were other opportunities in the action of the day that I haven’t highlighted (or else the chart would be full of annotations) so I suggest you print out today’s action and apply your own analysis based on your experience and insights.
As always, feel free to check out educational resources from INO TV (video education from top traders) and Market Club (analysis, trading signals, scans, portfolio, etc).
Be careful, as this week has been deemed an “Earnings Week!”
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Gap Fade Becomes Bear Flag
April 15th, 2008 by Corey Rosenbloom
Today’s trading so far has been a dream come true for me. My two favorite patterns have played themselves out ultra-cleanly and as close to text-book as you can get.
Let’s see what I mean:
http://blog.afraidtotrade.com/wp-content/uploads/041508-1708-gapfadebeco1.png
Earlier, I pointed out the Gap Fade Trade the market gave us like a gift this morning. The market wasn’t finished giving – that’s for sure.
The second set-up of the day came in the form of a rather massive and sudden bear flag which rose just above moving average resistance.
I describe more detail about this set-up in my educational post “How to Trade Bull and Bear Flags.”
As much as I have learned through education and experience, it seems strange that these two extraordinarily simple patterns and set-ups have made me the most money in my account this year.
I keep wanting all these esoteric and complex strategies and indicators to make it worth what I have learned about them but it often pays for retail traders to stick to simple knowledge and set-ups.
The more you see these patterns play out, the more confidence you’ll have in yourself when you perceive a pattern unfolding and you will join in with less hesitation.
Each time you see a clean or interesting pattern you recognize, print out the chart at the end of the day, annotate the pattern, and keep a ‘hard copy’ folder (or file) that gives you easy access to all the times you’ve observed the set-up.
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Market Cleanly Fills the Gap
April 15th, 2008 by Corey Rosenbloom
Today’s price action so far has been nothing shy of stellar and ideal for those who love to ‘fade the gap’.
http://blog.afraidtotrade.com/wp-content/uploads/041508-1608-marketclean1.png
If you would like to know what a clean and ideal gap fade trade looks like, then keep this one for your records.
The market opened with a relatively large impulse up that was smoothly and quickly faded, with only two ‘up-candles’ on the way down (this is a 5-minute chart of the DIA – Dow Jones ETF).
Generally, I give 10 to 15 minutes (2 to 3 bars) before entering a gap fade and I place a stop 50% of the distance to my target, which is yesterday’s close.
In this case, entry would have been near $123.70 with a target near $123.20 (which is $0.50) and I would place a stop at or just above $124.00.
Recall that the reason I love gap fades is because they give a sort of rare ‘dual edge’:
First, the odds of filling (provided the gap is less than 100 Dow Points) are higher than 50% and
Second, the profit you gain when the gap fills is higher than the money you lose when it does not.
Also, gap-fades have the added benefit of being extremely easy to recognize, place targets, and stops and you don’t need a complex strategy or complex indicators.
For more information, see my previous posts:
Gap Fade Statistics for January (70% of gaps filled)
Gap Fade Statistics for February (53% of gaps filled)
Gap Fade Statistics for March (70% of gaps filled)
Gap fades are one of the market’s jewels in my opinion. This strategy likely won’t work forever, but in the current environment, it seems to be working quite handsomely for aggressive traders.
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AAPL Pulls Back for a Potential Buy
April 14th, 2008 by Corey Rosenbloom
Apple Inc (AAPL) – from a technical analysis standpoint – may be retracing enough for a potential buy signal, as I had highlighted previously.
http://blog.afraidtotrade.com/wp-content/uploads/041508-0424-aaplpullsba1.png
Earlier in my post “Apple Continues its Ascension,” I hinted that APPL could be a potential buy if it were to pull back to the $140 area into moving average support. I also highlighted that this development (the pullback) was increasingly likely due to the extended price swing to the upside.
Now that price is coming up on the ‘buy zone,’ aggressive traders may want to watch this stock closer for potential opportunities. I would project support to be coming in from three sources:
The rising 20 period moving average
The flattening 50 period moving average
The 38.2% Fibonacci retracement (just above $142)
If you do decide to take a long (buy) swing-trade in AAPL, I would suggest that you stop be placed beneath $140 or perhaps as low as $135.
The Weekly chart also confirms these potential areas of support:
http://blog.afraidtotrade.com/wp-content/uploads/041508-0424-aaplpullsba2.png
As always, if you feel this may be a good opportunity, but don’t feel you can purchase a $140 stock, consider using potential options strategies if you have used them in the past. Otherwise, you may try this trade in a demo or practice account.
(Disclaimer: I have no position in APPL stock)
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Three Types of Morning Openings
April 14th, 2008 by Corey Rosenbloom
Knowing how the market (or a stock) opens in relation to yesterday’s trading can give you a clue about what’s likely to happen for today’s trading. What are the three types of openings and what might they mean?
1. No Change
http://blog.afraidtotrade.com/wp-content/uploads/041408-1631-threetypeso1.png
This is the most typical opening, where today’s open is either equal or very close to yesterday’s close.
When this happens, it increases the chance that the day will be more neutral or rangebound, and decreases the chance that the day will be a trend day.
2. Gap, But Within Yesterday’s Range
http://blog.afraidtotrade.com/wp-content/uploads/041408-1631-threetypeso2.png
When a market gaps up or down, it is indicative that there has been some sort of supply/demand imbalance that has changed overnight. Perhaps it was a news announcement or some other stimulus, but the gap is not too distant from yesterday’s close.
It is often better to trade against the gap, betting that it will ‘fill,’ which can establish an early morning trade. These instances increase the odds that a gap will fill.
Also, odds still favor some sort of consolidation (or rangebound) day, but the odds for a trend day are slightly higher than for the typical (no change) opening.
3. Gap Outside Yesterday’s Range
http://blog.afraidtotrade.com/wp-content/uploads/041408-1631-threetypeso3.png
Gaps of this nature show potentially significant supply/demand imbalance, or that a major announcement or event has changed the calculus of traders’ expectations. Perhaps one side is being ’squeezed’ and that the other side is showing dominance.
Gaps outside yesterday’s range have lower odds of filling, especially if they occur significantly outside yesterday’s range.
Such gaps increase the odds that the day’s trading will lead to a trend day, where the market (a stock) will open at one extreme and close on the other extreme. The odds that the day will resolve into a trading range are much lower than the other types of openings.
The type of morning opening gives you clues about what is likely to happen (or not happen) for the rest of the trading day.
For enhanced analysis, and education consider joining the Market Club! Also, learn lessons from master traders including in-depth lessons on how to trade overnight gaps through INO.com premium education.
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Blockbuster Offers to Buy Circuit City
April 14th, 2008 by Corey Rosenbloom
In a surprising move, Blockbuster Inc (BBI) offered over $1 Billion to buy Circuit City (CC) to create a potential “game-changing retail concept” to merge media content with electronic devices.
MarketWatch (and other sources) reported today the announcement which has the approval of Carl Icahn, an activist shareholder with a seat on Blockbuster’s board.
According to the article, “Jeffrey Logsdon of BMO Capital Markets downgraded Blockbuster to market perform from outperform following the announcement, saying the bid creates a two-front war.”
The proposal comes on the heels of a vast restructuring at Circuit City, which has shaken up its management ranks, overhauled operations, slashed expenses, and boosted its customer-services efforts in an effort to keep up with rivals like Best Buy (BBY).
“We fail to understand the strategic value of the company’s hostile bid for Circuit City and believe the combination has the potential to divert management and financial resources from the company’s nascent recovery,” he said in a note.”
Interestingly enough, the article challenges how Blockbuster will finance this large transaction, which is over 5 times the amount it has reported in cash as of last quarter (Blockbuster reported having $184 million in cash as of last quarter).
Margaret Brennan at CNBC raised concerns with her brief report entitled, “Blockbuster’s Offer… There are So Many Questions.” In her article, Brennan asks,
“Why would Carl Icahn choose to finance the $1 billion Blockbuster bid?”
“Why bid for retail brick and mortar space at a time when the video industry is going digital?”
“Now that Circuit City appears to be in play, who else will enter the arena?”
Let’s look at the charts of the stocks in play. As expected, the company MAKING the offer suffered a decline while the company potentially being acquired experienced a large upside gap (almost +50% at the intraday high):
Blockbuster (BBI) Daily:
http://blog.afraidtotrade.com/wp-content/uploads/041408-1854-blockbuster11.png
Blockbuster (BBI) Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/041408-1854-blockbuster21.png
http://blog.afraidtotrade.com/wp-content/uploads/041408-1854-blockbuster31.png
Circuit City (CC) Daily:
http://blog.afraidtotrade.com/wp-content/uploads/041408-1854-blockbuster41.png
Circuit City (CC) Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/041408-1854-blockbuster51.png
Keep in mind other stocks such as Netflix (NFLX) and Best Buy (BBY) may also be affected in the short or longer term by this announcement and take-over should it succeed.
With Microsoft (MSFT) offering to buy Yahoo! (YHOO) and AOL/Time Warner offering a counter-measure (TWX), and the ramifications for Google (GOOG), it’s enough to keep the news traders busy for quite some time!
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