The End of an Era
January 17th, 2008 by Corey Rosenbloom
Folks, this may be it â
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Titans Apple and Google have fallen
January 17th, 2008 by Corey Rosenbloom
Market leaders and high-fliers Apple Inc (AAPL) and Google (GOOG) have fallen dramatically from their all-time highs of late 2007, which is a major reason why the broader markets have turned negative. Let’s look at their daily charts:
http://blog.afraidtotrade.com/wp-content/uploads/011708-1546-titansapple1.png
Google has fallen $140 from a high of $740 to a test of $600 yesterday. Due to the recent triangle break and moving average breakdown, combined with the 20 period MA crossing under the 50 period, a test of the rising 200 period average near $560 is indeed possible given further market weakness.
The daily trend is confirmed as down, due to the moving average orientation and the price swing structure (series of lower lows and lower highs).
Apple is showing a near identical pattern:
http://blog.afraidtotrade.com/wp-content/uploads/011708-1546-titansapple2.png
Rather than a classic triangle consolidation as in Google, Apple is breaking down from a rising wedge pattern, which has also broken beneath the key 20 and 50 period moving average, and the 20 looks to be crossing beneath the 50 today.
Although trading solely based on the moving average will always produce late signals and occasional whipsaws, some funds and traders use crossovers as their main trading entry/exit signal. These funds/traders will likely be entering new shorts in Apple today if that is indeed the case.
A test of the 200 period MA is rather feasible, but not certain. Such a test would take price to near $145.
As a bonus, here is a chart of Potash (POT), a very popular and ‘high-flying’ fertilizer/agricultural stock of 2007:
http://blog.afraidtotrade.com/wp-content/uploads/011708-1546-titansapple3.png
Potash also appears to be breaking down. Price carved out a new momentum low after forming a quick divergence. Price is now beneath the 20 and 50 period MA, yet their orientation is still bullish and the trend still remains up.
Potash has only made a lower low, and to be confirmed as a downtrend, would need to make a lower high and then swing back to take out the lower low.
http://ino.directtrack.com/42/470/41
The service at INO Television has videos and information which can be extremely helpful in learning about new techniques, such as short-selling and put option strategies (as well as credit/income generation with options in volatile market conditions).
Don’t be afraid to short if need be. If you’re afraid to short, consider buying a very small amount of put options.
Trade well!
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The Market is Toying with Us
January 16th, 2008 by Corey Rosenbloom
Seriously, I was surprised at the rampant volatility in the market today, with large upswings and downswings, a gap impulse that was faded, and a very weak close.
All you can do is learn from it and that’s exactly what I intend to do â
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Goldman Sachs Triangle Throwback Trade
January 15th, 2008 by Corey Rosenbloom
Goldman Sachs (GS) recently formed a consolidation coil or triangle, and recently set up a classic “throw-back” or second chance high probability entry.
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Notice the absolutely clear triangle consolidation from November until early January, and the subsequent break in mid-December.
I posted previously about the triangle break as a potential opportunity to trade GS short (or sell any long position you were holding).
Triangle breaks are often susceptible to what’s known as “throw-backs” which mean that, instead of trending sharply downward at the direct break, price meanders back in a retracement swing to retest the breakout point or, more commonly, the apex or peak of the triangle that formed.
Breakouts are actually lower probability trades than throw-back trades. Throw-back trades often offer higher probability opportunities to enter a position.
Throw-backs also tell us why it’s generally unsafe to trade with ultra-conservative stops (those that are far too close to your trade entry price). A stop for the consolidation break should actually be on the opposite side of the triangle, which may be too much risk for some traders to handle.
A break at $210 should have been accompanied by a stop around $225 that decreased either as the trade moved in your favor, or with the upper declining line of the triangle pattern.
Notice how the stop is much tighter and more logical (and more conservative) than the initial break-out.
The “Throw-back” trade called for entry near $215 with a stop above $220. Initial targeting would have been the distance from the height of the triangle, or about $45 (the distance between approximately $200 to $245 or $250).
See for yourself if you would like to learn more about this trade, and potentially incorporate it into your growing trading arsenal.
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Bearish Indications from Sector Rotation. Recession?
January 15th, 2008 by Corey Rosenbloom
The Sector Rotation Theory is again showing majorly bearish money flow patterns into the most defensive sectors possible.
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The Utilities, which offer attractive dividends and who also perform well in conditions of falling interest rates, have increased 15% in the last 65 days as the market has turned bearish. Utilities greatly outperforms all other of the nine major US Stock Market sectors.
There is a three-way tie (which sounds similar to the US Presidential Primaries) for second in the Energy, Consumer Staples, and Healthcare sectors.
Rising Energy (oil, gas, etc) prices are bearish because they serve as a virtual tax on businesses and consumers.
Rising Consumer Staples stocks are bearish because large funds and traders are moving their money into the security that these stocks provide. Even in recessions, we must still buy toothpaste, food, tobacco (for those who do), home cleaning supplies, etc. When Consumer Staples (up 9.58%) significantly outperform Consumer Discretionary (down 9.35%), this is an extremely bearish omen. Consumer Discretionary stocks include gaming, hotels, luxury goods, travel, automobiles, etc. The idea is that, in bad times, we can reduce spending on these items while we cannot do so on necessities.
According to one view of the Sector Rotation Model, where are we in the current rotation of funds?
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We are likely somewhere in the teal (light blue) box, and I have drawn the solid vertical blue line to indicate where I think we might be as well. Utilities are starting to outperform, while Energy, Consumer Staples, and Healthcare Services have been doing well for some time now.
This would indicate that the Stock Market is in a bear market, and the US Economy (green arch) is beginning Early Recession. This would match well with the TV pundits that are pondering whether or not we’re already in a Recession.
These charts are courtesy StockCharts.com founded by John Murphy. Murphy frequently discusses Sector Rotation insights as well as education on Inter-market analysis, and I am providing an example of a video presentation from INO.com TV (discussed briefly in my earlier post):
http://blog.afraidtotrade.com/wp-content/uploads/011508-1632-bearishindi31.png
This presentation, and many other videos are available to you there (membership page). It’s actually $12 per month for unlimited access, or $8 per month with a full-year membership. I am very much enjoying my membership so far and the vast number of presentations available to me there. I only wish I had more time to watch additional videos!
I strongly encourage you learn more about the potential forecasting value of Sector Rotation Theory, as it served to me as one of those “lightbulb” educational moments when was first introduced to the concept of money flow and institutional movements into and out of key sectors at definitive points in the business cycle and economy.
Sector Rotation Theory can be of benefit primarily to the longer-term investor, but also is is extremely applicable to swing traders and even day traders who hone in on key stocks in key sectors that they expect to move in the next few days.
Whatever the resolution, we’re in for some interesting times ahead!
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Apple Shows Classic Gap Fade
January 15th, 2008 by Corey Rosenbloom
I love it when trades work out as close to perfect as possible. Apple Inc (AAPL) exhibited a classic 1,2,3 Gap Fade play this morning that allowed for major profits for aggressive traders:
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The 1,2,3 Gap Play is as follows:
1.
First trade with a gap is to FADE the gap and play for yesterday’s close. Generally, it’s best to give a few minutes of shake-out and enter when price begins to close the gap. Aggressive traders can enter to fade a gap immediately, but placing stops can be difficult
2.
Gap Fill (first trade exit with profit) and reverse trade to play the initial impulse, which was a down impulse. This is based on the principle “Momentum Precedes Price” in that the initial gap is a large momentum impulse and the ‘fade’ is the retracement. Once the gap is filled, this sets up the classic “Impulse Sell” (or “Impulse Buy”) trade. The target can be the original intraday price low, or often just beyond that. New momentum lows (indicated by the blue oscillator) mean that odds favor that new price lows are yet to come
3.
Impulse Sell exit with profit. The new momentum low reading correctly forecast lower prices, and did so rapidly, so nimble traders were able to take advantage of most of the move. The “3″ signifies the Impulse Sell trade’s exit with profit. No more trades can be made based on the 1,2,3 pattern.
Gap plays need to be traded aggressively and with confidence, and realize that if the first trade is stopped out, odds switch to favor continued price movement in the original direction of the impulse, and that the price action for the day will be that of a “Trend Day” structure.
Also, realize that gap fades require no indicators at all, other than price itself. Complex indicators can degrade the edge present in this simple strategy.
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154 Expert Traders Right On Your Own Computer Anytime
January 14th, 2008 by Corey Rosenbloom
A fellow blogger referred me to the Video Education and Classroom section at INO.com, which contains video and audio lessons complete with workbooks and PDF file lesson hand-outs for over 500 videos available to you On-Demand.
http://ino.directtrack.com/42/470/77
I also recently joined the site, so I will possibly be reviewing some of the videos I watch and giving brief commentary on the site and its services.
From what I can find with my initial look-over, INO TV currently offers fifteen “channels” from the Beginner (channel 1) to advanced trading systems (channel 11) with channels for options traders, currency FOREX traders, futures, stock, and day traders. INO also addresses psychology and money management.
On-Demand content is offered at your convenience 24/7 from a host of popular educators including Lawrence McMillan, Linda Raschke, Mark Douglas (Trading in the Zone) Larry Williams, Adrienne Toghraie, and many others. I haven’t completely looked at the whole list but there are a few educators whom I have met and hold in highest respect and I look forward to watching those videos and refreshing my knowledge and learning new techniques.
Most videos contain an audio MP3 file you can download permanently and listen to on the go with any portable music device (iPod, iPhone, Zune, etc).
The people at INO.com provide two PDF booklet bonuses when you sign up and it’s an extremely affordable service for what you get.
There are two plans, one being a quarterly price of $50, and the other being a full-year membership at $100 total, which saves $100.
Further information is provided via their “What You Get” page.
I look forward to providing more information in the future from what I learn from the site and the service.
So far, this is the best value for education I’ve encountered, given that I have happily paid over $1,000 per conference including travel and hotel to attend perhaps a dozen or more seminars exactly like these offered any time. It would have helped to know such resources existed earlier!
If you are a current INO.com TV subscriber, feel free to comment or contact me with your insights.
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Bull and Bear Flag Examples
January 11th, 2008 by Corey Rosenbloom
Although the next chart may seem garbled, it is actually detailing recent simple bull and bear retracement patterns on the 15-minute chart. This serves as a great educational example:
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I also call bull and bear flags “lightning bolts,” though technically I should only call bear flags lightning bolt patterns because of the equivalent downwards thrusts.
Recap: Bull and Bear Flags call for a “measured move” which sets up a key trade based on the price action alone. They are some of my favorite patterns in technical analysis due to their simplicity, ease of stop placement, and exact target location.
Notice the first bear flag which is a sharp retracement against the momentum/price downthrust.
An ascending triangle (which has slightly better odds of resolving/breaking out to the upside) formed which indeed did get a price/momentum up-thrust, which was corrected by a near perfect bull flag (around 2:00 Jan 10).
Price then impulsed down with today’s opening gap and then continued to trend lower all day. A nice and near perfect bear flag formed into the close.
Here’s an isolated example of today’s 5-minute chart:
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This example was a more 45 degree angle flag, but the measured move and ejection (breakout) from the retracement (especially from resistance at the declining 50 period moving average) was near ideal.
Once you begin to understand these patterns, they literally leap off the chart at you and call your attention to them when they’re forming.
Besides that, I think they’re fun!
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Oil Falls off Record Pricesâ
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[ 本帖最后由 hefeiddd 于 2009-3-23 09:51 编辑 ]
US Dollar Index Corrects Nicely off Weekly Resistance
January 6th, 2008 by Corey Rosenbloom
Fewer patterns are more pure than the recent price rejection at upper resistance via the falling 20 period moving average in the US Dollar Index. It is an example of how to use two time frames for confirmation.
First, let’s look at the structure of the daily chart with a few possible thoughts:
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First, we see a new momentum high around December 10th, forecasting higher index prices are yet to come, and a consolidation flag further confirmed this impulse with a break and ‘measured move’ to the upside which actually terminated in two perfect targets:
[*]The “Equal Swing” or “Measured Move” of the forecasting value of the potential flag formation[*]The weekly resistance level due to the weekly declining 20 period moving averageWhy should traders not have been extremely excited at the early break above moving average resistance on the daily chart?
Because price still had to clear the hurdle of resistance via the weekly 20 period moving average.
Let’s see how the “larger structure” affected the otherwise ‘bullish’ daily chart:
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We see a near ‘perfect’ pullback trade as price found resistance at the declining weekly moving average. Daily chart readers were not justified in rampant bullishness.
The structure of the higher time frame (weekly chart) is still in a pronounced and clear downtrend, and one cannot become majorly bullish on the US dollar (from a technical analysis standpoint) until the structure of the moving averages and of price swings changes.
Until then, we can expect trends to continue until they are clearly reversed. That’s not the case so far in the US Dollar Index.
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Divergence Resolved in Apple
January 5th, 2008 by Corey Rosenbloom
Apple (AAPL) recently completed an ideal momentum divergence which has resolved to the downside.
Imagine momentum divergences as you would a coiled spring that is building up pressure. To release the pressure, the spring must resolve to a neutral position, but it doesn’t always have to do so all at once.
Apple recently showed us how divergences with price and momentum are resolved nicely to prior support zones.
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Notice the “swing” nature of price, as price made two recent “higher swing highs.” The momentum oscillator (bottom panel) failed to confirm new price highs, and under the market principle “Momentum Precedes Price,” we could have expected a resolution (or counterswing) to the recent price highs. In other words, we could expect a temporary price rejection of the recent swing high.
Divergences do not imply trend reversals, or in fact reversals of any kind of their own. Divergences are indicative of losses of momentum on the side of the market that is currently predominant.
They simply mean that odds are favoring a counterswing, and the opposing force (in this case, the sellers) now have a stronger than normal opportunity to exert their influence over the price.
Recall that price moves in waves and counter-waves. Divergences merely lend greater confirmation that a counterwave is coming and that a short-term trade (often a “scalp” relative to the observed timeframe) can be entered with better than normal probability of success. Divergences are good for a small target only.
Also, recall that any divergence trade you take will be countertrend by its very nature, and thus a tight stop needs to be placed in the event that the trend reasserts itself with force â
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Trend Day Down Forming
January 4th, 2008 by Corey Rosenbloom
As mentioned previously, early recognition of a trend day can lead to significant intraday profits, especially if you use leverage or margin.
Today is showing signs so far of some of the conditions that precede trend days.
First, we had the expected release of a major economic report which has been known to shock the market and cause large price swings and prior trend days.
Second, a large downward gap occurred in the major US indexes and some stocks that indicate possible trend days. Recall that the first play is to fade opening gaps, and if they can’t be faded to retest yesterday’s close, odds favor continuation in the original direction of the gap.
You can also look at average volume to see if volume is significantly higher this morning than other mornings, and you can also compare sizes of 15 minute and 30 minute opening bars. Confirmation can also be obtained through the TICK, TRIN, VIX, Breadth, etc.
Let’s drill down first to the one-minute chart (which I never recommend trading) to see the structure at a very tiny level:
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Notice the large opening gap. The first ‘instinct’ is to fade this gap but notice how price consolidates beneath key moving averages and eventually breaks below the range, signaling a trade to play on continuation.
Price could never (as of yet) rise above the falling 20 period moving average, which is an ultimate sign of weakness.
In the 5-minute chart, you can see that volume was higher today than yesterday during the morning session, as was the initial range.
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Finally, the 30 minute chart shows a crude little bear flag pattern:
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Trend days are rare, but lead to greater profit potential due to the price structure and ‘wave’ structure that occurs. It’s often best to avoid overcomplicating the simple structure with complex indicators, and just shorting any pullbacks to key moving averages, as well as establishing a core position the minute you realize we have conditions that favor trend day development, and scalping (or swing-trading) around that core position.
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Link: Will the Real SPY Analysis Please Stand Up
January 3rd, 2008 by Corey Rosenbloom
Bonddad at the Bonddad Blog recently posted brief analysis entitled “Will the Correct SPY Please Stand Up?” that offers multiple perspectives on the current technical chart/perspective of the S&P 500 Exchange Traded Fund, which also highlights why technical analysis is more of an “art” than a science.
The current analysis of market conditions is indeed slightly difficult, given that there are multiple ways to interpret the action from various perspectives and pattern recognition.
A pattern that develops and eventually unfolds may (and often does) take on characteristics of other smaller or similar patterns in its development.
For example, if the SPY is indeed forming a diamond pattern, then it must form a broadening pattern first.
A second possibility is that an ascending triangle will first form what appears to be a double top formation.ÂOther patterns require the formation of similar patterns as well.
Bonddad looks at various charts and ponders whether a diamond, double top, broadening pattern, or simple triangle is currently forming on the SPY.
For me, his post is excellent in the fact that it highlights the fact that analyzing the stock market from a technical (charting) perspective is more complicated than “read pattern in book, see pattern on chart, trade pattern, make money.”
It’s more like “learn pattern, see pattern, trade pattern with protective stops, adjust if your stops are hit, observe new developing pattern, trade new pattern with protective stops, repeat.”
The underlying notion is that there are no guarantees, but only probabilities.
That’s why this game is so fun to those who love it!
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Trend Day down in Dow Jones
January 2nd, 2008 by Corey Rosenbloom
Today’s action was a classic example of the “Trend Day” concept, where price swings carry the index value lower, and up-swings become key opportunities to ‘get short’ or re-establish a core position.
DIA (Dow Jones ETF) 5-minute chart:
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We had a large momentum impulse to the downside to start the day, and the failure of price to retrace (give back) this impulse set the stage that the odds favored a rare ‘trend day’ over a consolidation or other type of day.
Usually, pullbacks (retracements) to the 20 period moving average set up key shorting opportunities with minimal risk, but price was so weak for most of the day that it could never fully reach the 20 period MA.
The quick ‘volume/price burst’ at 2:00 Eastern allowed price to retrace to the 50 period moving average before selling off.
Momentum divergences (not shown) were apparent prior to the upswing in price as sellers were finding it more difficult to drive prices lower.
Run your own analytics and annotate the day’s chart your own way to gain better insights as to trend days and what they mean.
Early identification of a trend day can lead to significant profits, especially if you day trade using futures or leverage.
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Technical Analysis hints at Higher Oil Prices
January 2nd, 2008 by Corey Rosenbloom
While nothing is certain in the markets, if we use basic principles of technical analysis, it would appear that oil prices are expected to continue their uptrend higher, and there is no resistance in sight, but there are clear support levels beneath.
First and foremost, trends â
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Markets Start New Year Off Negatively
January 2nd, 2008 by Corey Rosenbloom
While 2007 was an up-year for the US stock market, 2008 is off to a rocky start so far.
We saw the Dow Jones Index fall 100 points on Monday and 220 points today, taking price through a technical barrier and setting the stage for a potential technical breakdown.
Let’s look at the Daily Chart:
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The midpoint of the triangle formation was marked uniquely by the convergence of the three key moving averages.
Price has now broken beneath that key triangle consolidation zone and appears poised initially for a retest of the October and November lows around 12,700. It would honestly surprise me if these levels were not at least tested soon.
Ignore recent volume readings due to the holiday effect. It is therefore not accurate to say that “volume increased as price broke the triangle” because relative volume has been low due to the holiday season. Volume in general is now picking up across the board due to the end of the holiday season.
Admittedly, it appears that the NASDAQ index is showing a superior technical picture on the daily time frame.
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A break below the key 200 period moving average as well as the recent up trendline (which appears to be part of a larger consolidation pattern) would invalidate any bullish hopes.
A break of the triangle sets the stage for at least retest of the November lows at 2550 if not the August lows.
What set the stage for today’s decline? Among other things, Crude Oil prices breached $100 for the first time ever.
Should Crude Oil prices trend higher (as they appear to be doing so), then this would be a negative factor for the broader stock market indexes.
Of course, all this provides excellent inter-market opportunities for savvy traders.
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ETF vs My Mutual Fund
December 31st, 2007 by Corey Rosenbloom
How great did your mutual fund do this year? Mine underperformed.
I try not to look at the performance of my long-term retirement/mutual funds because
[*]I want to trade them[*]I get very angry[*]I wish I were invested elsewhereThe same cycle is true again this year, and this may be the death knell in the coffin for my mutual funds.
I am invested in five diversified funds with different money managers, and four out of the five underperformed the S&P 500 index, some by more than an amount I’m comfortable with.
For about two years now, I’ve favored ETFs over normal, diversified mutual funds, but have not made significant changes in my long-term investment objectives as directed by my financial adviser.
I am a trader, I prefer short-term impulse patterns in the market, and I am most comfortable with the variables that influence short-term price movements in market indexes and selected stocks.
It is for that reason that I trust my longer term investments to those I feel far more qualified than me, including my personal financial advisor and the money/fund managers in which my professional trusts.
However, for the last two years, my largest fund has underperformed the S&P 500, and subsequently has underperformed the SPY, an Index Exchange Traded Fund in which I could be invested and pay about .5 basis points instead of just under 2.0 basis points that I pay now for these professional fund managers to underperform the market.
So when you see the next chart, realize that I had to pay a fund manager (or group of managers) approximately 2 additional percent to underperform an index where I would have been guaranteed market returns for the year:
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The SPY (ETF) appreciated just over 4% this year.
My largest mutual fund (which will mercifully be unnamed) lost just under 8%. When you add the 2% management fee, I lost 10% of my portfolio value that was invested in that fund.
Needless to say, I am extremely unhappy and will very likely will be switching funds upon the next meeting with my advisor. In fact, I may be pulling the money together and placing a part of that in bonds or in the DIA (Dow Jones ETF) or SPY (S&P 500 ETF) so that â
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[ 本帖最后由 hefeiddd 于 2009-3-23 10:04 编辑 ]
Two Week Gap Study
December 22nd, 2007 by Corey Rosenbloom
Since December 13th, we have seen six out of seven days provide us with some type of “Gap Fade” tactic to use. Gap fade tactics are extremely profitable and easy to execute using only one “indicator”: Price.
Let’s look:
http://blog.afraidtotrade.com/wp-content/uploads/122207-1828-twoweekgaps1.png
I have annotated each gap with a blue oval and indicated whether or not (”Y” for fade and “N” for not faded) the gap was filled (or ‘faded’).
Typically, the fill will take place within the first hour of price action, and if the gap has not filled by then, the odds tend to shift to playing “anti-gap” strategies, which actually trade for a larger target in the direction of the gap. Usually these days provide traders with large profits that, when leveraged with confidence, can provide the bulk of the profits for the month.
The gaps that tend NOT to fill are usually a result of a strong momentum/price impulse that cannot be counteracted. Usually, large trend moves begin when one side of the market is so “Squeezed” that they have to ‘bail’ on their positions, and their bailing creates frenzied activity on the winning side.
In the case of December 21st, we can assume initially that the gap occurred (partially) as a result of overleveraged shorts unwinding their positions by covering, and higher prices (and news reports) caused buyers to enter the market (perhaps mid-day or earlier) and force their hand by driving prices higher.
Either way, history has shown that it is best to fade small gaps and trade in the direction of large gaps. This depends on your definition, but a nice filter is 100 Dow points, or perhaps 3% in a given stock (as defined as “large”).
Trading is an “odds game” (probabilities) and the “Gap Fade” techniques utilized are based on nothing more than odds.
Regardless, learning and utilizing this strategy can add profits to your months, and are among the simplest and clearest strategies to use of all. I’ve found that any indicator degrades performance and execution, and it’s best to throw them out on these types of trades and just monitor pure price action as it reacts.
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Anti-Gap Fade Tactics
December 22nd, 2007 by Corey Rosenbloom
We have been discussing various gap-fade tactics, and Thursday I mentioned that it’s best not to fade a gap in the Dow Jones index greater than 100 points and the market must have heard us talking about it! I didn’t know the Market read my blog!
In all seriousness, there is no technique that works 100% of the time, but for me the “Gap-Fade” tactic has been working extremely well over the last few weeks and months.
The premise is the following:
Fade any gap that occurs that is less than 100 Dow points. Play initially for the gap close.
When the gap is closed, play (trade) in the direction of the gap with a target of the gap open.
If the first trade is stopped out (depending on your risk tolerance) then flip your position and trade in the opposite direction for a ‘trend trade’ with an unspecified larger target.
Another caveat is that if a gap occurs that is greater than 100 Dow points, trade pullbacks in the direction of the gap for a larger target, and establish a ‘trend’ or core position early on and watch for breaks of key moving averages.
Let’s see what this action looked like on Friday’s intraday DIA chart:
http://blog.afraidtotrade.com/wp-content/uploads/122207-1819-antigapfade1.png
This is the “Gap and Run” style trade where the market is just too strong to fade (sell-off) an initial momentum and price impulse. You want to get your trade on early and hold for a large (unspecified) target and sell when price clearly breaks a key moving average (be it the 20 or 50, depending on your risk tolerance).
This core trade would have allowed entry around $133.60 or so with exit either at the close or when price broke the 20 convincingly (which actually didn’t happen even at the close).
This trade would have been worth just under $1.00 and could have been leveraged by similar patterns in other stocks (with higher volatility) or the futures market (as I do).
Whatever the reason, be it “short covering” or not, the gap pattern was the same.
Not only is it best NOT to fade gaps that are greater than 100 Dow points (or $1.00 on the DIA), but it’s best to trade in the direction of those gaps when they occur.
If 70% to 80% of gaps fill immediately, then it’s best to analyze the minority percentage that do not when they occur to see if there are exploitable edges or strategies that take advantage of this relatively rare condition.
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Dollar Index Finally Shatters Resistance
December 21st, 2007 by Corey Rosenbloom
We’ve been waiting for this anxiously for months! The US Dollar Index is showing initial signs of strength, and has broken convincingly above resistance on the daily charts.
http://blog.afraidtotrade.com/wp-content/uploads/122207-0515-dollarindex1.png
Generally, a stronger dollar (or currency) is psychologically beneficial to the people of the nation, is not always best for all economic parts.
For example, companies that rely primarily on exports actually are benefitted by a weaker currency relative to other currencies, meaning that their profit margin is higher.
If this trend continues upward in the dollar, we can expect to see these stocks (which have amassed large gains) begin to top out and perhaps even decline.
For those who trade FOREX, realize that the downward trend in the dollar (relative to other currencies) may be ending, and you should adjust your strategies appropriately.
While the Daily Chart may show signs of hope, the weekly chart needs a few more weeks to do so.
http://blog.afraidtotrade.com/wp-content/uploads/122207-0515-dollarindex2.png
We may have experienced an ‘exhaustion swing’ down which could lead yet to higher prices.
While the daily chart has broken resistance, the weekly chart sits squarely AT resistance (from the falling 20 period moving average). This area could serve as resistance just as it has done nicely on the previous tests.
Keep in mind that the orientation of the moving averages on both the daily and weekly charts is in the most bearish combination possible (20 beneath the 50 which is beneath the 200). There’s no reason yet for unbridled optimism that the dollar will reverse at this point.
We’d need closes above the key moving averages and a shift in the averages’ orientation to get wildly bullish.
Until then, know that “the tides may be turning.”
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Intraday Trades for Thursday
December 20th, 2007 by Corey Rosenbloom
Here is a sampling of the idealized swing trades that could have been taken for the index action (DIA) for Thursday, December 20, 2007. It was another “U-Turn Buy” day!
http://blog.afraidtotrade.com/wp-content/uploads/122107-0415-intradaytra1.png
As always, the FIRST play (trade) of the day when the index (Dow Jones in this case) experiences a gap of less than 100 points is to FADE the gap, or trade against the gap with the initial target being yesterday’s close.
As you can see, this trade worked perfectly again today. This pattern is working extremely well in the current environment, as we seem to be having many reasonable index gaps that fill.
The second trade is to play in the direction of the initial gap (impulse), which actually was not as successful. In fact, the trade (trying to play/target the intraday highs) fell far short and resulted in a stop.
A nice bear flag (not highlighted) set-up which achieved its target quite rapidly. I missed this one totally. Someone said it best recently, “Bear flags are best seen in hindsight!”
As price began to drift slower downwards, a lengthy momentum divergence developed, where quick divergence ’scalps’ were able to meet their target provided you had quick reflexes.
The prolonged momentum divergence set-up the potential for a ‘larger target’ or at least afternoon breakout, which occurred as price broke above key resistance at the 20 and then 50 period moving averages. I drew an arrow to highlight this.
This was also a “Trend Confirmation Zone” or “Sweet Spot” trade which could have been entered for a larger target on the day.
There were a couple of ‘up-swings’ which could have resulted in profits, but the highest probably trades. There was also the classic “Three Pulse” or “three push” pattern which accompanied the break (and confirmation of new intraday uptrend).
Study your favorite stocks and see what trades set-up according to your perception of market action today!
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Goldman Sachs Intraday Bear Flag
December 18th, 2007 by Corey Rosenbloom
As you may know, one of my most favorite chart patterns to trade recently is the bull/bear flag. Goldman Sachs (GS) presented one of the most beautiful and clear bear flags possible recently.
http://blog.afraidtotrade.com/wp-content/uploads/121907-0535-goldmansach11.png
For a review, a bear flag occurs when there is a large momentum (price) move in one direction and then there is a shallow retracement (rise) against the initial impulse which occurs in a ‘channel’ on lower volume.
The best bear flags retrace back to the 20 period moving average, and it’s best to confirm them with a new momentum low in the bottom pane oscillator (both of which formed in this example).
While you can never predict the initial momentum impulse, you can trade its ‘ripples’ or after-effects, especially if there is a nice flag pattern that occurs after it.
With the principle “momentum precedes price,” we can expect an equal impulse in the same direction with similar or even equal magnitude as the first. The target is thus a “measured move” of the initial impulse.
As you can see above, Goldman Sachs (GS) printed this pattern exactly.
A nice Positive Momentum Divergence (in the oscillator) developed, signaling that you could have played for a win on the longside following the bear flag.
Nevertheless, when you see picture-perfect patterns, it’s best to print them and study them in your own way.
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Intraday Trades of the Day
December 18th, 2007 by Corey Rosenbloom
While today’s action provided a lot of opportunity for nimble scalpers and day traders, there were some key ‘classic’ patterns that unfolded today that I wanted to view closer here.
http://blog.afraidtotrade.com/wp-content/uploads/121907-0515-intradaytra1.png
[*]When there’s a gap in the Dow that’s less than 100 points, the first play is always to FADE that gap and play for yesterday’s close. Today, that worked perfectly.[*]The ‘plunge’ mid-day wasn’t anticipated, but wasn’t all that unexpected, given the downtrend in price.[*]A nice divergence set-up and a perfect Bull Flag occurred around 2:00. The target was achieved perfectly and coincided with the 200 period MA.[*]An “impulse buy” trade then set-up (not labeled) which also exceeded its target.[*]A divergence occurred which achieved its target (again, not labeled).I did want to focus a bit more on the Bull Flag.
Notice how the initial impulse (which set-up a new momentum high in the oscillator) was faded back to:
[*]Yesterday’s close (a strong support/resistance level)[*]The CONFLUENCE of the 20 and 50 period moving averages (a “super-support”) zone.This, along with the initial gap fade, was one of the highest probably trades that occurred (set-up) today.
You can never predict initial momentum (or price) impulses, but you CAN anticipate patterns that form as a result of them (such as the bull flag target above or ‘impulse buy’ trades which play for the previous price high).
Use today’s index action as a guide for the future, and always edit daily charts that highlight ideal trades you would have taken (or did take) based on your system and interpretation of price action.
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Goldman Sachs Triangle Break Confirmed
December 18th, 2007 by Corey Rosenbloom
Last week, I mentioned the consolidation triangle which was forming in Goldman Sachs (GS), and this week, it appears the downside resolution of that pattern is underway.
http://blog.afraidtotrade.com/wp-content/uploads/121807-1724-goldmansach1.png
[*]Clear triangulation (consolidation) pattern broken to the downside[*]Volume is confirming (rising) this break[*]Momentum (oscillator) also triangulated, and has broken further to the downside (momentum leads price)[*]If Financials lead the stock market (as they typically do), then this is an extremely negative developmentOf potential hope, sometimes break from a triangle consolidation to one side and then ‘fail’ and reverse to break out the other.
However, given the news and economic conditions that are developing, that prospect seems unlikely.
Goldman reported earnings today, and the traders’ reactions to those reports were clearly negative.
With the overall market testing prior lows, this is not a positive sign at all for the broader markets.
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Momentum Slants Negative on the Dow
December 17th, 2007 by Corey Rosenbloom
With inflation concerns picking up, and an economic slowdown virtually a certainty, the US stock market indexes are looking far worse (for the future) than they did at the start of 2007.
Let’s look quickly at the momentum development on the Dow Jones:
http://blog.afraidtotrade.com/wp-content/uploads/121807-0432-momentumsla1.png
Of interest to this chart, note the following regarding the oscillator at the bottom:
[*]Price etched out a New Momentum Low, hinting that new price lows are yet to come[*]Momentum printed a Negative Divergence, meaning that new price highs were made on lower momentum readings, forecasting lower prices[*]“Momentum” is now in a downtrend and a down-channel, another bearish developmentMomentum tends to lead price, and if that premise is true, then one can only surmise that lower prices are ahead for the US Indexes.
While there are 101 ways to interpret the US Stock Market, this is just one of them, and the readings from momentum have clearly turned negative.
The bulls (buyers) are losing momentum while sellers are gaining it, and the supply/demand imbalance is now shifting to the sellers it appears.
Time will tell, but do be careful if this is indeed the case.
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A Divergent Look at the Dow
December 16th, 2007 by Corey Rosenbloom
With 2007 nearing its close, I thought it would be interesting to look at the #1 best performing, and the #30 worst performing stock in the Dow Jones Industrial Average so far:
Can you guess what the #1 stock was? The result may surprise you.
McDonalds (MCD), up from $42 to $62 this year (a 47% increase):
http://blog.afraidtotrade.com/wp-content/uploads/121707-0241-adivergentl1.png
McDonald’s weekly chart spanning 2 years (price has doubled from $30 to $60):
http://blog.afraidtotrade.com/wp-content/uploads/121707-0241-adivergentl2.png
And what, might you ask, was the worst performing Dow Jones stock this year?
It was a financial stock named Citigroup (C), which declined from $54 to $30, a 44% plunge:
http://blog.afraidtotrade.com/wp-content/uploads/121707-0241-adivergentl3.png
Citigroup’s Weekly chart spanning 2 years:
http://blog.afraidtotrade.com/wp-content/uploads/121707-0241-adivergentl4.png
Notice how, on both weekly charts, the key moving averages helped support (or resist) price moves, even if doing so temporarily. That is another discussion, however.
What would have happened had you bought McDonalds and shorted Citigroup as a strange ‘hedge-play?’
http://blog.afraidtotrade.com/wp-content/uploads/121707-0241-adivergentl5.png
Unsurprisingly, your relative position (hedge) would have more than doubled in value.
Hindsight is always wonderful, of course, but it’s always great to know what happened this year so that you can study and see if you can catch next year’s big Dow winner and avoid (or hedge with) next year’s big Dow loser.
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Michael Baker falls off a Cliff
December 16th, 2007 by Corey Rosenbloom
Hopefully the human Michael Baker has not fallen off a cliff, but the stock/company (BKR) has indeed done so recently.
http://blog.afraidtotrade.com/wp-content/uploads/121507-2205-michaelbake1.png
We saw a prior healthy uptrend that took prices into the ’stratosphere’ via the three impulse day move of early September.
As usual, ‘what comes up must come down’ and so we have the reaction to that impulse following a ledge or consolidation pattern.
The break beneath the key moving averages was extremely severe.
Notice the Broadening Formation (which is often a bearish formation) that was created throughout September and into November.
This is a classic example of how ‘dangerous’ broadening formations can be, as they highlight the epic struggle between buyers and sellers that often resolves in the opposite direction in which it was created (up formations resolve downwards).
Never underestimate the potential of a reversal formation and ALWAYS use protective stops if you thought price would be going higher and traded that thought.
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First Solar â