Dow STILL Trapped!
March 30th, 2007 by Corey Rosenbloom
The Dow rose 5 points today, but that headline eliminates all the price action that occurred today.
As mention yesterday, we are still trapped between the 20 and 50 period moving averages as defined support and resistance on the daily charts.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dow-mar-29.png
The Nasdaq is also trapped:
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/nasdaq-mar-29.png
The S&P 500 sits comfortably on its moving averages (now support zones):
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/sp-mar-29.png
Now, today was an interesting day from a price perspective. Yesterday, I mentioned that moving averages can be used to generate trade ideas on lower time frames. Today was proof positive of that statement.
However, instead of behaving ‘nicely,’ price penetrated the moving averages slightly in both directions before reversing - in essence, a semi-trap occurred today.
The market is clearly trapped between the buyers and sellers, and both sides today fought a convincing battle, yet neither side won. I personally give victory to the bulls, because analysts keep listing so many reasons why our economy is headed towards a recession, housing is collapsing, oil is rising, yet through it all, the bull market - as of yet - has climbed this wall of worry quite nicely, even despite the recent ’suprise’ correction.
We are still in a technical uptrend, especially on the weekly charts, and therefore odds do favor trend continuation until proven wrong. Regardless of the news or how you feel, more money tends to be made in the direction of the trend rather than fighting it.
Until proven wrong, and despite how negative other bloggers or the media get, we are still in a technical confirmed (long) uptrend in the Dow and other major market indices.
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Dow Trapped between Two Moving Averages
March 29th, 2007 by Corey Rosenbloom
Believe in the power of Moving Averages!
While no technical indicator is perfect, or gives totally accurate signals, moving averages can provide reliable zones of support and resistance in trending markets.
Today is a unique day in the Dow Index, in that the market tested both the lower 2o period MA (for support) and the flat 50 period MA for resistance.
 http://blog.afraidtotrade.com/wp-content/uploads/2007/03/indu-mar29.png As technicians, we say “the market is trapped between its moving averages” and imply that a breakout of the “trapped zone” must occur.ÂAt the moment, this signals indecision and no clear direction (at least temporarily).ÂIt is good for the market to pause after rapid mark-ups or mark-downs (recently).
If you don’t use moving averages, or don’t know how to optimize moving averages (which settings work best), then studying how price reacts when it approaches a key moving average can be a very valuable exercise for you.
I live by moving averages for various confirmation or trade entries (or stop placements) and have found the 20 period exponential, 50 period exponential (or simple, depending on preference) and the 200 period (daily) simple work the best.ÂFeel free to add your own comments if you find others to work.ÂMany people use shorter moving averages and also use them as signals of trend strength.
However you use them, always know key areas on chart time frames higher than the one on which you are trading.ÂPost (or interlay) higher time frame moving averages onto lower time frame charts and see how the market trades around these levels.ÂOften, key tests of moving averages in trending environments (view the left side of the chart) serve as entry points into a trend.
Nevertheless, it is odd that the market (Dow Jones Index) tested both moving averages to the penny today, and I wanted to bring this to your attention.
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March 28 5min DIA chart
March 29th, 2007 by Corey Rosenbloom
Today was an active day in the equity markets!ÂThe news of the day was Chairman Bernake’s testimony which rattled investors early this morning.ÂRemember, news is difficult to predict, but the momentum action creates a predictable trade idea with high probabilities of success.ÂToday was no different.ÂWe had a test of the most recent swing-low just after the retracement after the new momentum and price low made early which set up an “Impulse Sell” trade.
Also, note the divergence trades which could have been aggressively entered both on the long and the short side of the market.
Today’s plays were most profitable from a “Momentum Divergence” standpoint.ÂIn other words, even though price looked grim, momentum that underlined the price showed a different story.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dia-mar-28-5m.jpg
 The arrows indicate Impulse Buys or Impulse Sells which both would have achieved the objective (most recent swing high only).ÂI did not annotate the “divergence” plays which would have yielded more profit, actually.ÂRemember, divergence trades are entered when price makes a new low (or tests a recent low) yet momentum (compared to the price swing) makes a higher low.ÂThe trade is entered when you view this divergence and you must keep a tight stop.ÂThe target is just beyond the most recent swing high or low, and the trade is played for a scalp only, not a trend change.
Let it be noted that today’s play is working out from a newly initiated lower swing on the daily charts, and so the bias for the day should have been to the short side.ÂSwing traders should have already entered a short position when the market was recently overextended to the upside and ready for a corrective swing down to begin.
Always analyze higher time frames to determine market structure and swing patterns before entering the day-trading and scalping arena.ÂLet this ‘bias’ guide your trades for the day and manage risk.
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DIA March 27 quick thoughts (and psychology insight)
March 28th, 2007 by Corey Rosenbloom
Today provided a great example of how one day, your system will work and the next day, the system does not. Nevertheless, the insight is that it is crucial to follow your system, rather than take random trades and achieve random results. Compare the 15 minute charts of yesterday and today.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dia-mar-27-15min.jpg
While I trade with more complex information than I simplify here, assume that our system is to take trades in the direction of the market breadth (negative for both days) and (in this case) enter short when price rallies back to the 20 period moving average. Stop is placed beyond the 50 period moving average (or include time stop component). The target is the most recent price swing low.
If this is the case, then four trades occurred (red arrows). The first was stopped out. This could lead to frustration and could cause you to pass on the next opportunity (signal) from your system which occurred the next day (today).
The next two trades were perfect, textbook winners. No rinse, no wash, no gimmics. But what if you passed on these trades, as many of us are so likely to do?
The fourth signal occurred late in the day and maybe you decided to take it because you see the system working now. The outcome of this trade is a scratch, as the trade must be closed prior to the close. The trade could be closed with a slight profit, but the target was not achieved.
Also note that price nicked just above the moving average, and if your stop was too close, you would have been rinsed right before the intended move.
Market Psychology Insight!
We have our own way of determining when to enter a trade and where to place a stop, yet our emotions and past experience influence this greatly. As discretionary traders, we have great leeway about how to make these decisions. If we have a proper, established framework, it can become difficult to execute flawlessly because no system is 100% perfect; all systems will have losses (usually to the tune of 50%, which is pure chance).
What happens when we take a signal and it results in a stop-loss? We are less likely to take the next signal.
What happens when we avoid a signal that turned out to be a winner? We are more likely to take the next signal.
In probability theory, avoiding trades doesn’t make logical sense. This is another example of how our emotions influence how we trade, with the result being sub-par results. If you have a system with an edge, you must commit yourself to taking ALL the trades it offers. Doing so keeps the thinking and emotion to a minimum, while statistics and the odds play out in your favor over time.
(Market Education Hint: Notice the possible momentum divergence developing. Price also seems to be establishing temporary equilibrium.)
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March 26 Brief Analysis
March 26th, 2007 by Corey Rosenbloom
I often try to mark-up the “perfect trade zones” based on my system each evening looking back at the day’s action, and today offered very little in terms of trades I identify and am comfortable taking. Today, I was chopped around as I tried to play the short side because of the strongly negative breadth readings (which improved through the day) and took the afternoon off because of the slowly creeping trend which later became evident after the fact. It is very difficult to scalp or day-trade in a market that starts out negative and creeps higher, especially when your bias (because the market was overextended upwards) is to the downside.
Nevertheless, here are the 15-min and 30-min charts for the DIA (Dow Jones ETF the “Diamonds”):
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dia-mar-26-15m.jpg http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dia-mar-26-30m.jpg
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/mar-26-breadth.jpg
I have added the Breadth (Advances and Decline lines) as a bonus, which shows the root of my frustration trading today. When the breadth is so negative, typically short sales tend to work out with satisfaction. Today, it didn’t.
Notice on the 15 minute chart how the market defied an “Impulse Sell” set-up (indicated by the red arrow). Although the trade gave 20c of satisfaction, the actual target was the most recent swing low which was not achieved. When an Impulse Sell or an Impulse Buy fails (remember these are set-up by New Momentum Lows or Highs), odds then switch strongly in favor of continuation in the direction of the failure.
Often, creeper trends sneak up on traders and catch both sides of the market leaning the wrong way, as was likely the case today. Markets can creep higher because short sellers are forced to cover at higher prices, which attract new buyers, and the cycle repeats. Creeping trends are difficult to predict and much more insidious to trade.
Here is a swing chart of the DIA on the Daily Frame.http://blog.afraidtotrade.com/wp-content/uploads/2007/03/mar-26-swing-chart.jpg
My hat is now off to the bulls (buyers). They have managed to overcome immense technical adversity and now have proven themselves with a bounce off the daily 50 period moving average (to the penny). Although a lot of news is bad (with a possible recession on the horizon, as some economists and analysts predict), the charts and price are king.
Notice the momentum divergence with the two recent swing lows (red bars) and the new momentum high on the oscillator. Also, notice price has now crossed above the key moving averages. The techincal picture is much better than it was early last week, to say the least.
As such, we must respect the courage and strength of the bulls and recognize that - at extended technical price levels AND in the face of a sharp morning drop - the buyers have yet again pushed this market higher.
I still must remind readers that the market is overextended to the upside in the short-time frame (daily chart) and caution is warranted before committing new capital into the market, or getting overly aggressive now with initiating new long positions.
Stay safe out there.
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Chrysler (DCX) New Momentum High and Impulse Buy example
March 26th, 2007 by Corey Rosenbloom
I wanted to point to a recent, clear example of the “Impulse Buy” trade I’ve been referencing. The chart ends March 23:
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dcx-nmh.jpg
A few highlights:
[*]Note the consolidation (base) preceding the move[*]The new momentum high drives price sharply up as news broke (Chrysler may be a take-over candidate)[*]New traders entered after the news broke and probably sold as price (naturally) pulled back[*]Theplaces your entry when price retraces back to the 20 period moving average[*]A “Rinse” (perversion) trade occurred and likely took out stops of those who placed them too close to the average[*]Price quickly rocketed upwards in the intended direction for those who “held on” through the rinse[*]Target #1 is the most recent swing high ($74) which was achieved (a great place to sell half the position)[*]Price is now overextended to the upside, making new upside potential very limitedWhile this particular technical pattern was caused by news and rumor (private equity or an unknown company may be buying portions of Chrysler), the pattern played out as perfectly as an Impulse Buy pattern could unfold (with the exception of the “Rinse” into the area of tight stop-loss placement).
A few lessons:
[*]Establish positions AFTER the retracement following a key breakout and new momentum high (new price highs are likely to follow)[*]Give the position a bit of leeway to avoid rinses and washes beneath your entry[*]News events often serve as the impetus for the Impulse Buy pattern, but cannot be predicted in advance2 Comments | add comment
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Advance Decline Oddity
March 23rd, 2007 by Corey Rosenbloom
When trying to assess daily market internals, it is helpful to follow the Breadth, or the Advance/Decline Lines (number of stocks positive for the day vs. the number of stocks negative for the day).
I plot these lines to create an inverse graph, rather than simply following the breadth number because it helps show the past and the trend of the breadth better for me.ÂWhen the breadth is skewed positive, I only take long trades and vice versa when the breadth is skewed negative.ÂIf the breadth is narrow, I am looking to step aside or trade with small size if I need more practice on a particular strategy.
The breadth line also helps in taking setups from stocks, which can provide much more movement with price patterns and daily bais than the ETFs or even index futures.
Normally, the breadth is skewed in one direction or the other, and may switch once or twice daily.ÂYesterday (Thursday), there was an oddity in the breadth which caused me frustration and a couple of whipsawed trades.
Of course looking in hindsight, the action is clear and the market was rangebound, and the best play would have been to fade extremes, but it is often difficult to anticipate a rangebound market and difficult to make money when your bias is for trend trading tactics.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/indu-mar-22.jpg
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/adv-dec-mar-22.jpg
I am showing the Dow Jones Index and using the standard stochastic settings.ÂFor TradeStation, the Advance line is plotted with $ADV and decline line with $DECL.ÂFor the Nasdaq, the symbols are $ADVQ and $DECLQ respectively.ÂCombine the Breadth with the TRIN for the overall (yet lagging) bias of the day for the market.
The day’s action saw six changes of leadership in the breadth.ÂIndeed, it was a choppy day.ÂOne can imagine that consolidation was necessary after the large increase following the “Fed Decision” rally.
Today (as of 11:00 EST) we have positive breadth (+500) and a tempered bullish bias.ÂWe will soon see if that will be reversed!
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Victory to the Bulls
March 21st, 2007 by Corey Rosenbloom
How did everyone enjoy today’s market action? I am noticing a shockingly similar pattern to trading days where Federal Reserve policy is announced: There is sharp contraction in volatility and immediately following the action, there are usually three sudden pulses (bursts) of trending price movement.
Such days are indeed for the bold and daring, but stops can be maintained very close to the entry and price targets (rewards) - if you are willing to hold through up to three impulses - are astronomical compared to the risk you take. I must admit that I didn’t hold through the full duration of the rapid move following the announcement but I’m not kicking myself either.
I noticed the Advance/Decline line tilting decidedly positive going into noon while the market stayed relatively flat. This was an internal hint that the market bias was biased to the upside, but entering before Fed Decisions is dangerous. Today was one of those “grit your teeth and hope you’re right” days if you chose to play.
With all the fun of the day’s action behind us, today leaves the major indices above critical resistance levels and the entire technical picture is brighter where dark clouds once loomed mightily over the horizon (in the form of converging declining moving averages). We are in a new technical picture and now odds could be favoring a potential upside bias now. This is especially true on the weekly charts.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dia-mar-21.jpg http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dia-weekly-mar-21.jpg
From a “Swing” perspective only, price on the daily chart made a lower low, lower high, found support at the lower low, and then rallied to take out the recent swing high. This sets up a good picture bullishly.
On the daily charts, we found support above the rising 50 period moving average and made a higher swing low. This also is good for the bullish camp.
What looked horrible last week is now looking brighter for the market.
A major negative, however, is that this quick rally occurred on lower relative volume that the most recent (shock) decline. We’ll need to see if the moving averages can hold as potential support before sounding the “all clear” and jumping back aggressively into long positions.ÂIf the market fails below them, then all bullish bets are off the table.
One other cautionary note: Those who own stock who refused to sell during the shock decline in early March may see a second chance to unload their position (some for breakeven now) and might sell into this recent rally. We would need to clear those pockets of supply here before going markedly higher.
I hope you enjoyed the ride down and then back up!
Addendum:
As per Vega’s comment, I wanted to post the Fibonacci grid of the most recent market move and, Vega is right - it is important to temper the bullishness with the following chart which shows that the DIA hit (to the penny) the 68.2% retracement and could indeed head lower based on this fact. What looks exciting this morning could actually be the top of a simple retracement. Do keep an eye on this if you are overly bullish on this most recent move.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dia-fib.jpg
Always consider both sides of the equasion before trading!
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March 19 New Momentum High - Markets (5-min)
March 19th, 2007 by Corey Rosenbloom
I wanted to post a lunchtime chart of the QQQQ’s which had the best 5-minute New Momentum High and “two trade” Impulse Buy set-up I’ve been describing. The DIA and SPY had almost identical impulse buy setups. Remember, after a new momentum high, wait for a pullback (ideally to a key moving average) and play for the target just beyond the most recent swing high. Usually there are three pushes up, but the highest probability comes only for playing the first two upswings following the new momentum high.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/qqqq-mar-19.jpg http://blog.afraidtotrade.com/wp-content/uploads/2007/03/qqqq-mar-19-color.jpg
Remember that these trades are good for “scalps” only, but the pattern can be applied when observed on any timeframe. Don’t get greedy and “overstay your welcome”. Play for the highest probability target and move on. Beware the natural momentum divergence (decreasing momentum on each upswing) that accompanies this pattern. Consolidation (or possible retracement) is more likely than further upside potential (in this chart).
Your stops are placed at least 10 cents from entry.
Charts courtesy TradeStation. 5 minute charts - QQQQ.
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Explanation in the Comment Thread
March 16th, 2007 by Corey Rosenbloom
I wanted to draw attention to a conversation taking place between Jordan and I in the Comments section of the post “March 14th Analysis”
In it, Jordan asks me to clarify points concerning momentum divergences and the “Impulse Buy” pattern which illustrates the “Momentum precedes price” example.
I also wanted to note a new chart of McDonalds (60 minute) in line form and bar form which highlights the Impulse Buy pattern and Momentum divergence.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/mcd-line-graph.jpg http://blog.afraidtotrade.com/wp-content/uploads/2007/03/mcd-color-graph.jpg
Although I trade other patterns, I find this set-up to be most profitable and most comfortable for me to execute consistently.
The simple explanation is that after a downtrend (reverse the terms for uptrend), momentum and selling decline and a base forms (you should expect a longer base to form than in this example). Equilibrium is achieved between buyers and sellers. Eventually, new information enters the arena and throws participants off balance, which creates (in this case) a strong upside momentum thrust.ÂThe problem is that you cannot anticipate this momentum thrust, and divergences are often good only for small targets (and represent countertrend plays).
I look to enter a position following this momentum thrust (and the retracement against it) when price nears a key moving average. I then play for the most recent swing high. I repeat the pattern once price corrects back to the moving average and play again for the newly formed swing high. Stops are placed a short distance below the moving average which allows me to enter with a tight stop (but not too tight).
Another point to note (which I have not illustrated on the chart) is that the new momentum low on the left side of the chart corrects up to the moving average (when the bars turn green) and you would be wise to play this new momentum low short for an equal swing or at least a retest of the most recent swing low.ÂEntry would be around $44.25 and the exit target would be $43.ÂRisk would be about 25 cents at $44.50 (slightly above the declining 20 period moving average).
I plan to explore this idea in a further post. For the meantime, feel free to jump in and participate with us in this discussion - or at least scan it briefly.
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March 15 Educational 15 minute chart
March 15th, 2007 by Corey Rosenbloom
Today was a consolidation day, and one with very choppy action that whipsawed many traders, myself included. It was difficult to find direction today, and I suppose the story will be similar tomorrow as it is Options Expiration Friday. It is actually a “Quadruple Witching” Expiration Day, so my recommendation is to take the day off and enjoy a nice, three day weekend after all this wild market action recently.ÂAndy Swan suggests the same, yet goes a step further to predict a possible bearish mauling (strong market decline) next week.ÂI don’t know if I would go that far.
I wanted to post a quick chart of the DIA 15 minute chart over the last few days and note some educational momentum divergences forming in the creeping action we have experienced.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dia-15-min-mar-15.jpg
The most striking point to me - again - is the volume spikes on March 14th during the afternoon. The Big Picture hints that this might constitute a “Key Reversal Day”. I admit it is worth a thought. It is certainly comforting for the bulls to see possible capitulatory selling action here.
Notice the two divergences (black lines on the bottom pane 3/10 MACD indicator). Keep in mind that momentum readings are voided in a range bound environment which we have at the moment. Momentum is winding down to a market equilibrium point, and a directional bias will soon be established.
Take time to do some research and be careful should you decide to scalp or trade on Friday. Odds favor consolidation and choppy market action due to the uncertainty of the “big boys” unwinding futures contracts and options adjustments as necessary. This will take precedence unless some major news or fundamental action occurs. Have a great long weekend.
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Quick Daily Commentary: March 14
March 14th, 2007 by Corey Rosenbloom
Wow! What a day! The Dow fell 150 points and then rallied 200 points almost without looking back! Oh what a day to be a day trader! Today was nauseating for swing traders, though. Today also pierced both bulls and bears!
I’ve been very cautious in this market but decided to be aggressively short yesterday and today. My main time to trade is the morning, and I typically do not hold overnight positions. Anyway, I wanted to post an analysis of the 5-minute chart of the DIA (ETF for the Dow Jones). There were some key things to watch today - I will admit the strength in buying surprised me, but price action is king - not our predictions.
Also, today’s action highlights two key points I have made so far: one on momentum divergences and one on a new momentum high - setting up the “Impulse Buy” pattern.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dia-mar-14-07.jpgYour first play would have been short, which was developed from a bias from the daily chart patterns. The moving average (20 period) acts as entry points for retracement trades in the direction of the established trend (down). However, view 10:30 to 11:00 for the momentum divergence AND a selling climax (trends end in euphoria or capitulation). When you have a capitulatory move AND a momentum divergence, exit your position, and considering entering a new, aggressive position (if you are brave). Ideally you want to wait and let the market tip its hand first. Notice the significant amount of volume for the “lunchtime doldrums”.
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Daily Market Analysis - Mar 13, 2007
March 13th, 2007 by Corey Rosenbloom
I am trying to keep this site educational in nature, and not inject too much analysis into the blog, but it has been requested that I provide a little more updates on market action. As a disclaimer, please keep in mind I do not offer trading advice - all charts are posted for educational purposes to highlight strategies and areas of possible price movement.
That said, I pray that today’s market action did not shock or surprise you. I hope you did well today shorting the market, or at least had removed most of your long positions prior to today’s action and weren’t tricked by our “ghost rally” on low volume.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dow-mar-13-2007.jpg
I am attaching my Swing Chart to accompany the Candle Chart. Please refer back to my post “Anticipating a New Swing Lower“for a bit more analysis and charts from last year to supplement the market action.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dow-mar-13-swing-chart.jpg
For reference:
[*]Green Line: 20 Period Exponential MA[*]Blue Line: 50 Period EMA[*]Red Line: 200 period Simple MA[*]MACD 3/10 Oscillator (bottom pane)It is still not safe to invest in the markets (the S&P 500 and Nasdaq are showing similar patterns - I am most familiar with the Dow for analysis).
The momentum is still strongly with the bears and the sellers, and the rally attempt by the bulls on anemic volume was quickly vanquished. The only “magnet” for price on the chart is the rising 200 period moving average which should not only act as support, but will end the “Equal Swing” down which typically occurs after a large standard deviation swing.
Individual charts are showing busted support levels, and before that, they were showing momentum divergences (some for a lengthy period), and leading stocks are rolling over into lower territory.
I have heard some say “we are in a new downtrend.” We are not. We are VERY close to the trend confirmation zone, or the “Sweet Spot” in the Data. It is possible that a “Sweet Spot” trend entry may occur should price take out the most recently formed lower low at Dow 12,030. We would definately entertain the thought of a new downtrend birth should the Dow take out 12,000. Downtrends are much more risky to play than uptrends, and it is generally unwise to establish long-term position trades short an equity index.
Realize that - after the most recent “rally,” - the highest probability trade would have been to enter short after a counter-swing rally (which occurred today) and play for the most recent swing-low for a small target, which formed at Dow 12,030. We achieved most of that high-probability position today. There is a difference between playing for a large target and a small target.
This helps illustrate why playing the market short is so difficult: Fear is a much stronger motivator than greed and prices will fall (and achieve short profit targets) much earlier than their greed counterparts (which gradually grind prices higher). A price swing that may have taken days to unfold in an up-market is achieved almost instantly (within a day) in down market. It has been said “Price takes the escalator up and the elevator down.”
There is danger for shorts if you enter now. Bulls might attempt to test the most recent swing low by entering new long positions. Odds are against them, but they may try to make one last stand at this recent “possible” support area. Realize that the path lower will not be clean and efficient, as people find a hard time believing prices are headed lower and are attempting to find value at these areas. Unfortunately, those attempting to find value here will most likely be more fuel to the fire of continued price declines.
Regardless of how you trade, utilize caution ahead still. Odds favor success at shorting, and the most likely outcome is a continuation of the new swing low we are experiencing currently.
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Momentum Precedes Price #2: Momentum Divergences
March 11th, 2007 by Corey Rosenbloom
Momentum can also be a leading indicator when divergences between price and momentum arise and can lead to some profitable, high probability trades.
Please understand that the set-ups I am about to discuss are countertrend tactics, and as such, you must employ a hard stop in the event that the trend reasserts itself and you are on the wrong side. Contrast this tactic with the principle: “Trends have a higher probability of continuation than reversal.”
When you play for a momentum divergence trade, you are always playing for a small target and playing for a possible shift in buying/selling pressure. You can find various other sites that describe the concept of divergences with various indicators, and before attempting any such trade, I suggest researching further on this potentially profitable topic.
Some of the most popular indicators for uncovering price divergences include the MACD, stochastic, RSI, Ultimate Oscillator, momentum, rate of change, price oscillator, etc. You have to discover which indicator works best for you. Indicators are used as ‘training wheels’ until you can develop an intuitive sense of determining where the buying and selling pressure (momentum of the move) are diverging with the price action. This process takes time, yet indicators can help highlight these conditions. There is no perfect indicator to do this. I am using a fast MACD oscillator in my chart examples. I also play divergences in the RSI oscillator.
In this sense, momentum precedes price in that a slowing of momentum indicates that a possible change in price is yet to come. Do not get caught in the trap of searching for momentum divergences all over the chart. Examine them at the (possible) end of mature trends for greater probability. Again, we are not seeking the end of a trend move (reversal), but just a retest and a small target. In fact, we are playing for a simple retracement swing against the direction of the prevailing trend. This illustration may help:
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/divergence-illustration.JPG
The top pane always shows price. In this case, we are in a mature uptrend and price is continuing higher. A situation develops where the buyers are becoming less aggressive in their momentum (force of buying pressure) and momentum is declining while price is not.
Of importance to note (and the reason behind the divergence in the oscillator) is also price based. Note the steep rise of the previous swing up (creating heightened oscillator/indicator readings) and then the more gradual rise of the second swing up (creating a lower peak in the mathematical oscillator). This sets up the divergence while the reason for it is declining momentum.
If momentum precedes price, then in this case, a decline in momentum forecasts a decline in price as the most probable swing play. If buyers are less aggressive to raise their offers, then it won’t take much effort for price to fall and those who own the stock will begin to sell.
Here are some charts which highlight momentum divergences:
-
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/ebay-diverg-2006.jpg
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/ebay-diverg-oct-2006-60min.jpg
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/goog-div-15m-chart.jpg
Divergences are difficult to quantify for a mechanical system, so this is one area discretionary traders may have an edge over programmers.
Chart #1: EBAY Daily (end of 2006). With momentum (buying pressure) decreasing, a countertrend divergence trade sets up to test the most recent swing low. Target achieved.
Chart #2: EBAY 60 min chart (October 2006). Buying pressure (momentum) is declining and we can play for a small target with a tight stop.
Chart #3: GOOG 15 min chart (March 2-6, 2007). After declining for a few days, a four-point touch divergence develops in the oscillator and a flatline base forms (this is where experience over oscillators triumphs - the decline in selling momentum is best picked up by the oscillator, yet the basing area is easy to spot on the chart). Even though price continued above our target, the divergence play is only good for a small target. Note the new momentum high and reaction against it on this 15 minute chart.
I did want to highlight another point through the use of various time-frames. Divergences and momentum concepts are valid across all timeframes.
There are a few caveats to be aware when identifying momentum divergence plays:
[*]Momentum divergences are invalidated (and nonexistent) in rangebound, consolidating markets[*]Only look for momentum divergences in the context of a mature trend (however short the time-frame)[*]Momentum divergences work best after a “three-impulse” pattern in a trend[*]Momentum divergences can be used in conjunction with Bollinger Bands or Keltner Channels (for increased probability)[*]Momentum divergences are to be played for a SMALL target (price correction) and NOT for a reversal in trend direction[*]The best divergences resemble “double-top” or “double-bottom” chart patterns[*]Keep a tight stop in the market close to entry in the event that the strong trend reasserts itself and causes great losses.[*]Exit divergence trades which do not resolve within 15 bars (create a time stop parameter)Trading momentum divergences is a complex strategy and should only be attempted after repeated exposure and internalization of the price behavior that sets up the pattern.
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Momentum Precedes Price Chart Examples
March 11th, 2007 by Corey Rosenbloom
I wanted to include a post that highlighted examples of the market principle: “Momentum Precedes Price”. It has been suggested that this principle be restated “Increases in momentum imply price will continue in the same direction of the momentum.”
I do not refer to the indicator “momentum” in this sense, but rather pure price action. A better word might be “impulse” which implies temporary, yet significant imbalance between supply and demand. Price moves in waves and when one wave is significant in scope, it is expected that the imbalance will continue to play out in the direction of the original disturbance of balance.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/impulse-illustration.JPG
Nelson Elliot (of Elliot Wave Theory fame) coined the term “impulse” to describe marked increases in momentum and noted that following an impulse wave, there tends to be (at least) three pushes up in the trend direction (with two corrective waves). While I am not an Elliot Wave theorist, the idea behind his concept is applicable.
In the first few examples, the trade I’ve found that works best is the following:
After identifying a new momentum high AND a new price high (confirmation), look to ENTER the market on the first REACTION against the price high and play for a small target: the most recent price swing high (or just beyond). Your stop is placed a tight distance below entry, which usually corresponds with a moving average or prior swing low.
This drawing may help clearly see the pattern I am trying to convey. I call this the “Impulse Buy“.
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http://blog.afraidtotrade.com/wp-content/uploads/2007/03/cat-2003.jpg Caterpillar. Weekly chart.
Point 1: Following a short consolidation period, we see a quick thrust of price upwards, creating our initial “impulse” condition. Our bottom panel indicator prints a higher high along with price. We look to enter the trade on the first reaction against this initial impulse. Your entry depends on your risk tolerance: aggressively would have entered at the moving average ($23 - green bars) while conservatively would have waited for price to turn-up (the yellow bars - also $23). Price “shook out” below the moving average in this case.
Stop placement is also dependent upon risk tolerance. Overly conservative may have placed stop just below moving average (and would have been stopped out) while overly aggressive would have placed stop below most recent swing low at $18.
If we look simply at price bars, notice the large expansive bars that occur upwards - range expansion also indicates an ‘impulse’ or momentum move may be underway.
The target is the most recent swing high (or just beyond) which formed just below $26.
Chart point #2 indicates our target which has been achieved. After a new price and momentum high, new price highs are likely yet to come.
Here are some other examples, but fewer comments. The play is the same. Identify impulse (range expansion or new momentum high), wait for pullback, play for the most recent swing high. Exit.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dia-2005.jpghttp://blog.afraidtotrade.com/wp-content/uploads/2007/03/goog-2006.jpg http://blog.afraidtotrade.com/wp-content/uploads/2007/03/ctsh-2004.jpg
Some observations: The charts are purposely simplified to highlight the impulse and momentum conditions, and it would be wise to look at larger charts to see these moves and add volume analysis.
Commentary:
A) DIA Weekly Jan 2005: Impulse and two-bar range expansion out of consolidation. Entry: $104. Target: $108.
B) GOOG Daily Sept 2006: Gaps helped serve as initial impulse, along with momentum readings, consolidation, and then retest (and beyond) recent swing high
C) CTSH Daily Aug 2004: Gap and two-bar expansion (along with momentum reading) serve as initial trigger. Target of recent swing high achieved.
The idea behind these patterns is that an initial impulse move will result in a corrective reaction against this move (to shake out the weak hands), yet price will reassert itself (temporarily) in the direction of the impulse and retest (or exceed) the most recent high.
For me, I have found more success in these patterns when I play simply for the retest only. If you get greedy and expect a new swing higher, you may be disappointed. It is best to enter your position, enter a hard stop, and enter a hard profit target. This keeps emotions at bay at trade entry, trade development, and trade exit.
The type of trade discussed here is a cross between a “trend retracement entry” and a “retest” entry, so be aware of the distinction and how they overlap.
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Recent Dow Momentum Divergence Resolved
March 5th, 2007 by Corey Rosenbloom
Did the most recent stock market decline come as a surprise to you?
My guess is yes, and to be honest, its violence and rapidness came as a surprise to me - but I had been sensing things just weren’t right with the market for some time. Unfortunately, this intuition kept me sidelines and missing out on profits to be realized to the long-side as I kept anticipating a market correction (never to the magnitude we’ve just experienced, and not so quickly) but I did want to point out the reason for my skepticism (other than my natural skepticism).
I follow momentum indicators and typically try to play short gains when I (think) I spot a momentum divergence forming. I actually tried playing some of the recent index divergences to the short side, only to be stopped out and frustrated when the market would reverse. I kept focusing on the intraday frames recently as the market kept rallying then countertrending/correcting then rallying, all in a creeping, oozing trend. Also note the trend-trading tactics which could have been employed as the market retraced frequently back to the rising 20 period moving average (these served as new entry points).
I did want to point out something interesting I just noticed with the recent action. First, let me point out the gross momentum divergence that was appearing in almost any oscillator indicator you use. I am using StockChart’s graph and showing RSI (at the top) and MACD (bottom). Note the divergent direction of the indicators with the (creeping) upwards price action.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/dow-momentum-divergence2.jpgPlease pardon all the lines I’ve annotated, as I’m sure you can see the building divergences yourself, but I wanted to highlight the swing highs in price and their relation with the two momentum indicators.
Imagine the momentum divergences as a coiled spring. The longer they go unresolved, the sharper (harder) the resolution (release of pressure) will be when pressure is released. Typical divergences resolve after a simple two point occurrence (between two swing highs) yet this continued longer than I anticipated.
I had been out of the market for longer term trades since the beginning of this year in anticipation of the release of the three-point divergence I observed, which carried over for an additional two months before the final resolution recently. My family and friends kept yelling at me for “missing opportunities and leaving money on the table!” I couldn’t properly explain that something was wrong with the market - it was a gut thing. The market wasn’t “swinging” (retracing/correcting) as it should be. Typical swings and volitility were contracting too much for my comfort. Typically, expansion occurs after volatility contraction, and we just experienced that in a big way (as fear/panic drive stock prices lower faster than greed drives them higher).
What was shocking to me - and will lead me to examine more market data - is that the price corrected the divergence exactly (and now beyond) where the divergence initially began - in this case around 12,100 on on the Dow (late October, 2006). This piques my interest and I will begin examining whether divergence targets test out to resolve back to the initial point of divergence. I hope to have this analysis in the next few weeks.
In the meantime, play it safe out there, enjoy the recent bout of volatility we are experiencing, and show courage in the face of this newly awakened market.
(Note: The same momentum divergences can be observed on the S&P 500 and the NASDAQ).
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Short Scalp Trade Today - QQQQ: Momentum Divergence
March 5th, 2007 by Corey Rosenbloom
I am not in the habit of posting trades I have taken, but I will be posting trades that highlight general principles, or high probability trades (whether they worked or didn’t work for me). I will be posting more about my style, which is between scalping and day-trading for small profits and taking only high-probability, tested set-ups that fit my style and (conservative) risk tolerance.
I did want to highlight a momentum divergence set-up (scalp) I took today in the QQQQ’s. First of all, I suspected the market action to be weak today and was surprised by the gap-fade up in the morning (well, surprised isn’t the operative word - the first play following a gap is to fade the gap back to the open price and then the second play is to play the direction of the gap after it has been closed). The market overshot its gap close and I was looking to short the market today and was having difficulty finding a set-up to do so. I decided to enter a small “probe” position when I saw what I suspected to be a “double top” combined with a possible momentum divergence (will be discussing in a later post) AND pivot level resistance (R1). I decided there would be a very strong probability of lower prices. Attached is the chart moved back to the entry time:
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/qqqq-mar-5.jpg
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Logic: Momentum Divergence, Stochastic Sell, Resistance at R1 Pivot
Entry: Short as close to $42.70 as possible (filled at $42.65).
Stop: Above most recent swing high and resistance at $42.75 to $42.80 (depending on how risk-tolerant you are).
Target: Most recent swing low at $43.40 (this is the highest probability small target)
(Chart facts: March 5th, 10:30 central, 5 minute chart, TradeStation).
Remember the highest probability arises from playing the market one swing at a time.
Risk/Reward: 5 cents or 10 cents risk to 30 cents reward (either 1:6 or 1:3, depending on risk tolerance).
The second chart reveals the closing of the trade.
The divergence occurs with the momentum oscillator at the bottom of the chart. As price swings up to retest the most current swing high ($42.70), the oscillator clearly makes a lower high, signaling “Loss of momentum.”
Remember, Momentum Precedes Price. You could have entered this trade on this axiom alone, yet the confirmation zones strengthen your probabilities and your confidence going in to the trade.
Trading is about putting the odds in your favor and playing for small, frequent gains. Even though this may not be an ‘exciting’ set-up, it puts the edge in your favor through multiple points of confirmation.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/qqqq-mar-5-end.jpg.
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We acheived our target of the most recent swing low at $42.40.
Trade closed for $0.30 profit (actually, 24 cents for me I covered and was filled at my profit target limit at $42.41). That “scalp” lasted about 40 minutes.
This highlights mainly how I trade. I apply support/resistance parameters, swing highs and lows, and momentum divergences that provide clear profit and stop-loss targets. I play for small targets and manage my risk carefully (actually, probably too carefully).
I might make two or three high probability “day trades” (I consider them scalps) per day and usually trade either futures (for a bit more leverage) or the index ETFs themselves (DIA, QQQQ, or SPY). I follow the TICK, TRIN, and Breadth, but they usually support my decision-making, rather than trigger trades.
For the sake of trivia, the QQQQ ran a little lower than my target, set up a nice momentum buy divergence, then played out the buy divergence to the upside as expected before rolling over to close at $42.16. I saw the divergence but decided to pass because of the overall weakness of the last few days.
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The “Sweet Spot” in the Data: Trend Beginnings and Playing for Large Targets
March 4th, 2007 by Corey Rosenbloom
Would you like to know the true, statistically tested spot of a new trend in development? Is this the secret to riches?!
No, there is no secret, unfortunately, but with this objective model of quantifying trend birth, you’ll be more “in the know” than those who miss this key “Sweet Spot” in the market structure.
We know that trends have higher odds for continuation than reversal, and that it takes considerable power and money to shift a trend, but is it possible to spot the EXACT price that a trend changes? Studies have identified a sweet spot where odds are highest for a confirmed trend change, stops (if incorrect) are closest to the zone, AND profit potential is substantially higher than your risk target. This truly is a rare find but it can lead to high profits, if you are patient enough to identify these spots and hold your position with leverage (or higher than normal) position size.
While this may be intuitive to some, it was a major revelation for me. We know that uptrends are characterized by Higher Highs and Higher Lows on a swing chart (don’t try to be exact, just look for recent swing highs and lows). Downtrends are the opposite (in trend structure). Here are a few questions regarding trends:
[*]If price makes a higher high after a sustained downtrend, is this the signal for a new uptrend? Answer = NO.[*]If price makes a higher high AND a higher low following a sustained downtrend, is this the signal for a new uptrend? Answer = NOT YET. (Reason = price may continue to roll lower and invalidate the recent higher high and lure you in to buy when really the price is still rolling over in a confirmed downtrend)[*]If price makes a higher high, then makes a higher low, THEN takes out the most recent higher high, is this a new uptrend? Answer = YES!Not only is this the statistical trend beginning confirmation zone, but it is a zone for you to establish and hold a core position and utilize swing trading tactics (retracement entries) with confidence following this point. It answers the question: “When do I play for a Small or a Large Target?” Finding these areas provide one of the only locations to play for a large target (this is true across any timeframe, for that matter - targets are relative to time-frames).
I am providing a Weekly chart example of Boeing in 2003 as it changed its trend with a technical confirmation pattern (Chart from TradeStation).
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/sweetspottrend.jpg
Of note, the “Trend Confirmation Point” came just above $36 when price took out the new higher high. Two strategies arise here:
1. Enter at the market at the trend confirmation zone and hold until a price extreme occurs OR price takes out the most recent (new) swing low. The stop would be placed just above $30 - the most recent (higher) swing low.
2. Wait for the market to PULLBACK following this point and then enter with a very tight stop.
Waiting for the pullback is almost always the best strategy as your risk is so low. Price pulled back to $34, which happened to occur as the 20 period and 50 period Moving Averages provided a strong support floor for the trade. It is times like this that you place a larger than average position on and hold for a large target.
Not only are the odds stacked so strongly in your favor, but your risk (stop-loss) is so close to entry that the trade becomes almost irresistible. A conservative stop would be $33.50 while an aggressive (proper, in this case) stop would be $31 (below recent swing low).
Please realize that these “Sweet Spots in the Data” occur on 5-minute charts, 30 minute charts, daily, and weekly charts. You simple identify confirmed turning points in the market.
A question always is: “Why not buy at $26, or the absolute low?” The simple answer is that you cannot do this consistently over various time frames and through hundreds of trades. The risk is too high and odds are strongly stacked against you based on core trend structure. Yes, you will surrender potential profits by waiting for confirmation, but at the point of confirmation, odds are so strong for a successful trade that it creates a strongly positive edge which can be played out over hundreds of trades and new trend confirmation zones.
Never try to be perfect; only try to make money. Making money is done by putting the odds (edge) in your favor consistently and knowing when to get out when simple probability goes against you.
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The Four Core Types of Trades
March 4th, 2007 by Corey Rosenbloom
Although we all employ different trading strategies across different time frames using different vehicles (stocks, options, futures, etc), there really are a limited number of pure trades we can take and it is helpful to know the major types and when we are employing them in our trading arsenal.
The four major types I propose are the following:
[*]Breakout/Breakdown[*]Retracements[*]Reversals[*]Rangebound FadesThis simple chart I created helps illustrate these basic concepts:
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/fourtradetypes.jpgWhen experiencing extended range consolidation, it is best to begin considering playing for a Breakout in hopes of a new, sustained breakout move. Recall that other traders will be attempting to “fade” the breakout and if price continues, they will be forced to cover. Stops are placed conservatively just below the breakout zone or aggressively below the area of most recent consolidation.
Retracements often have the highest probability of success when properly identified (trending environment). Core trading strategies (buy and hold until a top or price exaustion is formed) can be utilized as well as swing trading strategies which seek to capture the “sweet spots” in the data which generally are the distance from a retracement to a key moving average is confirmed up to the most recent swing high. Stops are placed conservatively below the support zone (moving average - yet these are frequently “gunned”) or aggressively below the most recent swing low.
Although Reversals have the lowest probability of success, when they truly occur, they can produce some of the largest profits if you capture near the true reversal zone. Realize that calling tops or bottoms is a losing game if you do not press your edge when the trade goes in your favor because your win ratio will be so low. It is generally not a good idea to fade a dominant trend even if you suspect a trend change due to a price climax. When fighting a trend, you must keep tight stops.
Finally, Rangebound or Fade-Trades occur when you have identified a rangebound, consolidating market. You are looking for channels and key support and resistance lines to provide you profit targets and close stop-loss zones. This tends to be profitable until a breakout occurs, in which you could endure large losses if you trade without stops. Realize that price expansion follows consolidation.
Typically, traders find it ideal to identify one set of trades or trade set-ups and play those whenever they recognize them, rather than trying to interpret compex signals and varying personal trading style or strategies on perceptions of possible market behavior. In other words, it might be best to identify which types of trades you are most comfortable executing given your psychological and risk tolerance and sticking to those strategies unless major market action intervenes.
Keep in mind that these trade types are applicable to technical analysis and short-term trading, but even fundamental analysts can benefit from learning basic market structure, especially trend analysis and volatility analysis. An ideal trade has a fundamental reason for buying which is supported by a low-risk entry provided by basic technical analysis and trend structure.
Nevertheless, in your own trading, identify which set-ups you take most often and see if they fit into any of these above patterns. Learning where you fit in the “Grand Game of Trading” can lift your confidence and give you that psychological edge needed over the competition who doesn’t study market structure.
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How do my Emotions Affect Trade Targets?
March 3rd, 2007 by Corey Rosenbloom
Have you ever sat down for you nightly analysis and wondered how far a potential trade might go?
Although the market is the final arbitor of how much profit a potential trade can make, we can adjust our thinking and emotions to capture either more or less of that potential profit.
Once you enter a trade, especially if it is related to a reversal or pull-back entry into an established trend, odds are highest for success at the entry point, provided we analyzed the market probabilities correctly. As the trade continues to work in our favor, odds of further continuation (without reversal) decline as the trade moves further in our favor. In dollar terms, a trade entered long at a support zone might have a 75% chance of success, but as the trade moves up $3 or $4 away from that zone (and nearing possible resistance), odds decline to 25% or 10% of further continuation.
So when is the optimal time to exit a profitable trade? Emotions - surprise - help determine the outcome more than probability if we are discretionary traders. At the correct entry point, fear may take over and cause us to do one of the following actions:
[*]Enter the trade too late (by waiting for confirmation of our intended reversal/shift in supply/demand)[*]Pass on the trade (after waiting for confirmation and the ‘proper entry’ is further away now… but there’s still upwards potential)[*]Enter the trade properly, but stop out prematurelyOn the flipside, Greed may cause us to do the following:
[*]Enter the trade too early (anticipating a signal)[*]Hold on to the trade too long to the downside (when we enter and move our stop downward because “It has to work out!”)[*]Hold on to the trade too long to the upside (because it has “just a little more left!”)Remember that your analysis is clearest BEFORE you enter the trade and cloudiest (by emotion) when you are IN the trade. Typically, your first instinct will be correct, especially if you have been trading for a while and have gathered sufficient experience.
I have found from my trading that I suffered from “Zone Exposure” that stemmed from perfectionism, the need to be right, and fear of loss.
http://blog.afraidtotrade.com/wp-content/uploads/2007/03/executionzone.jpg
In this example (CTSH, April 2006 - Daily Chart: TradeStation), let me oversimplify analysis to the following:
[*]Stock in uptrend[*]Buy at pullbacks to the 50 period moving average[*]Target is slightly above most recent swing high[*]Stop is just below 50p MAYour “perfect entry” is about $56.50.
Assume you find this ‘perfect pullback entry” on your nightly analysis and decide to buy in the morning. The stock gapped up to $58! Are you greedy and do your rush in to buy? Or are you hesitant and fearful, and pass on the trade entirely? What is the correct answer?
A signal, once valid, stays valid until it is invalidated either by the “stop” or the “profit” target (Hint: This is true on higher time-frame analysis). In other words, yes, you missed your perfect entry but odds are higher for more upside continuation than to the downside and you should STILL enter the trade (perhaps with fewer shares, though).
By the way, exit would have been around $62 or $63, depending on your initial parameter (how far above the most recent swing high you desire). Greed could have kept you in all the way to $64… and back down lower. Discretionary trading tests out best when you play for a small, fixed target and not an arbitrary large target. Emotions cloud these targets both at entry (fear keeps you out) AND at exit (greed keeps you in).
We Took a Hit, Captain
February 27th, 2007 by Corey Rosenbloom
There’s no avoiding it - the market got clobbered this morning before the opening session and has not managed to recover as we just breached the noon hour. Although the instinctive move might have been to “fade the gap”, realize that this gap was largely fundamentally driven with a possible contagion effect and struck with the indices on technical sell signals. The technical picture was shattered this morning with that gap and the market (both Dow and Nasdaq) has violated their rising 20p and 50p Moving Averages on a significant candlebar. The caution I warned about yesterday was warranted as the long, uninterrupted uptrend is now called into question, although it is still not invalidated (that will come with a lower low, lower high, and a strike-out below the new lower low). Caution is now strongly warranted as we see how severe the “Asian Contagion” from China, strength in the housing sales and consumer data (which may lead to higher probabilities of an increased interest rate hike) along with Greenspan’s recent warning of “a higher than anticipated probability of a recession”. Clearly, it is now time to raise your stops, take at least partial profits from any remaining position trades, and be very cautious with new buy swing set-ups. My guess is that we will be seeing a plethora of shorts begin to set-up if we make a lower low and then retrace upwards from that low. Please be careful out there and mind your risk management parameters you have set in place.
On a surprising note, I have rarely seen Breadth levels so divergent (as of Noon, EST)
Advancing Issues: 487
Declining Issues: 2,770
Another internal is shockingly high:
The TRIN reads just over 4.50
Also, in the last two sessions, the $VIX has risen from around 10.0 to 13.40. Quite the “fear” spike.
In the meantime, look at these ‘blood in the water’ charts.
http://blog.afraidtotrade.com/wp-content/uploads/2007/02/feb27nas.png
http://blog.afraidtotrade.com/wp-content/uploads/2007/02/feb27dow.png
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Begin to Overcome your Fears!
February 25th, 2007 by Corey Rosenbloom
I am excited about being a part of this new endeavor to help newer and novice traders - as well as some professionals - overcome fears, hesitations, and anxieties concerning trading. I hope this will be a long and rewarding journey for all of us as we seek to increase confidence, awareness, and profitability in the world of market speculation.Here is a sample chart I have for us:http://blog.afraidtotrade.com/wp-content/uploads/2007/02/feb24.pngAlthough odds favor a retest of support here at the 20 period moving average (as well as the RSI reading of 50 - midpoint), it doesn’t take much to see that the MACD is diverging with price action and should be a ‘flashing light’ for us. Remember that odds favor continuation after a trend is established so it would be countertrend to enter a new short position at this level, but one also has to wonder how much further can the Dow (above) continue without even a slightly meaningful correction. As TraderMike pointed out, the Nasdaq market is ripe for a correction (probably at least back to the moving average) and so with conflicting signals, caution is warranted right now.
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Greetings!
February 24th, 2007 by Corey Rosenbloom
I created this blog to serve as a link to active investors, traders, and market enthusiasts of all types in an effort to connect us together and move forward in our attempt to succeed at this challenging game of investing!I will be creating a complementary website, complete with message boards and chat functions, to connect us together.
As I am beginning my endeavor and am new to the blog and website world, please bookmark this site and keep checking back for updates, comments, and more information.
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Begin to Overcome your Fears!
February 25th, 2007 by Corey Rosenbloom
I am excited about being a part of this new endeavor to help newer and novice traders - as well as some professionals - overcome fears, hesitations, and anxieties concerning trading. I hope this will be a long and rewarding journey for all of us as we seek to increase confidence, awareness, and profitability in the world of market speculation.Here is a sample chart I have for us:http://blog.afraidtotrade.com/wp-content/uploads/2007/02/feb24.pngAlthough odds favor a retest of support here at the 20 period moving average (as well as the RSI reading of 50 - midpoint), it doesn’t take much to see that the MACD is diverging with price action and should be a ‘flashing light’ for us. Remember that odds favor continuation after a trend is established so it would be countertrend to enter a new short position at this level, but one also has to wonder how much further can the Dow (above) continue without even a slightly meaningful correction. As TraderMike pointed out, the Nasdaq market is ripe for a correction (probably at least back to the moving average) and so with conflicting signals, caution is warranted right now.
No Comments | add comment
Greetings!
February 24th, 2007 by Corey Rosenbloom
I created this blog to serve as a link to active investors, traders, and market enthusiasts of all types in an effort to connect us together and move forward in our attempt to succeed at this challenging game of investing!I will be creating a complementary website, complete with message boards and chat functions, to connect us together.
As I am beginning my endeavor and am new to the blog and website world, please bookmark this site and keep checking back for updates, comments, and more information.
No Comments | add comment
« Previous Page
Begin to Overcome your Fears!
February 25th, 2007 by Corey Rosenbloom
I am excited about being a part of this new endeavor to help newer and novice traders - as well as some professionals - overcome fears, hesitations, and anxieties concerning trading. I hope this will be a long and rewarding journey for all of us as we seek to increase confidence, awareness, and profitability in the world of market speculation.Here is a sample chart I have for us:http://blog.afraidtotrade.com/wp-content/uploads/2007/02/feb24.pngAlthough odds favor a retest of support here at the 20 period moving average (as well as the RSI reading of 50 - midpoint), it doesn’t take much to see that the MACD is diverging with price action and should be a ‘flashing light’ for us. Remember that odds favor continuation after a trend is established so it would be countertrend to enter a new short position at this level, but one also has to wonder how much further can the Dow (above)
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About Me
February 24th, 2007 by Corey Rosenbloom
http://blog.afraidtotrade.com/wp-content/uploads/chicagosmaller.pngLet’s overcome fear and engage in one of the most challenging, exciting, and rewarding activities out there!
My name is Corey Rosenbloom, trader, educator, analyst, and I am excited to share with you my experiences studying and trading the markets and to hear from you regarding your experiences, challenges, and frustrations, and successes. My goal is to create a community dedicated to reaching out to those who have been burned by the market or are anxious about risking their money to make money in the stock, options, or futures markets. Together, we can share strategies and learn how to overcome crippling fears that keep us from achieving our highest potential.
I have been investing for the last 10 years but discovered the addictive world of trading during the wicked bear market of 2001-2002 and began actively trading the market short-term mid-2003.
After some bad trades following some early large successes (due to overconfidence and over-leverage), fear gripped me to the core and I spent the next three years oscillating between love and hate for the trading world and committed to learning as much as I could before committing more money to the active trading of the markets. I fought a constant battle with perfectionism and fear, and wanted to reach out to others beginning their trading careers who may be struggling as I did with “fear of the order entry screen.”
I deeply enjoy education, research, and analysis and would love to help you to improve your edge so that you can increase your confidence in yourself and your abilities. Trading without a solid education, as well as a personalized method of quantifying abstract market data, can cost you not only hard-earned money, but your confidence and your dreams of success. I would love to connect with others who are progressing through their lifetime learning cycles in the market and unite us through a community that fosters a supportive environment of networking.
Through this blog, I am hoping to keep in touch with all of you whom I met at various Trader’s Expos and conferences and meet others in the trading community. Most importantly, I want all of you to connect with each other. I will be writing market analysis and commentary, providing links to fresh articles and information, collecting volumes of resources that will help you advance your trading, and writing my own insights to share with you.
Please share your personal stories with me and get to know mine as well - I will be happy to post success stories and personal achievements as I receive them from you. Remember, together, we can stand and achieve our dreams; divided, we will fall victim to the wiles and traps of the darker side of the market.
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Educational Experience: The University of Alabama in Huntsville
Master’s Degree: Political Science/Public Affairs
Research Area: Cognitive/Perceptual Influences on Voting Behavior; Use of Emotion in Political Campaigns; The Economic Cycle and Presidential Preference
Bachelor’s Degree (with highest honors): Dual Degree: Psychology and Political Science
Research area: Cognitive Psychology. Topics: False Memories, Perception, Emotional Interference
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Professional Organizations:
Affiliate Member: Market Technician’s Association (MTA)
Chartered Market Technician Candidate (All three exams passed):
Level I - passed (November 2007)
Level II - passed (May 2008)
Level III - passed (December 2008)
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Stock Market Experience/Conferences:
Trader’s Expo: Las Vegas 2005
Trader’s Expo: New York 2006
Trader’s Expo: Ft. Lauderdale, FL 2006
Trader’s Expo: Las Vegas 2006
Trader’s Expo: Las Vegas 2007
Paid Seminars Attended:
[*]Become a Technical Purist: Eliminate Doubts about How to Enter, Where to Place Stops, How to Manage a Trade, and Whether to Play for a Small or Large Target (Linda Bradford Raschke)[*]Tax Considerations and Starting a Hedge Fund (Robert Green - Tradertax.com)[*]Discover the DaVinci Code Behind Stock Market Behavior - (Chris Schumacher and Bo Yoder)[*]How to Profit from ETFs by Using the Business Cycle and Intermarket Relationships (Martin Pring)Key traders/educators/mentors I’ve met and attended seminars (and for whom I hold highest respect):
Linda Bradford Raschke (True Market Wizard & one of the best traders of today. Her knowledge and connections are amazing)
Bo Yoder (”fader trader” turned position trader/edge consultant. Stunningly intelligent.)
Toni Hansen (Mild-mannered, power-packed trader. Offers excellent education, chatroom, and daily commentary)
Lawrence McMillian (Possibly one of the greatest Options Traders of our time)
Toni Turner: (Introduced me to the Market Cycles - Author, Excellent Educator)
Price Headley: (Wonderful resource -options trader, trend master, market strategist/analyst)
Tom Sosnoff and Don Kaufman:(Founder and educator at “Think or Swim” options brokerage. Entertaining fellows with a wealth of info)
Martin Pring: (Most respected Technical Analyst of our time - also teaches intermarket relationships and the market cycle)
John Carter: (Respected trader/educator - very popular now. Author of Mastering the Trade)
Adrienne Toghraie: (Trader’s Coach, Motivator, “seller” of discipline - “Overcome Sabotages in your Trading”)
Dr. Doug Hirschhorn: (The “Trading Doctor”. Author of “The Trading Athlete”. Dynamic in person.)
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I’d love to tell you about any of these and discuss the various books/articles I’ve read as well. Reach out! I want to hear some of your experiences and victories in the market. Contact me at corey AT afraidtotrade DOT com.
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http://www.thedisciplinedinvestor.com/blog/wp-content/uploads/2008/05/corey-rosenbloom1.jpgI am available for private mentoring opportunities, seminars, and consulting. Contact me for personalized information.
I currently assist newer and experienced traders in developing risk management strategies, edge development, strategy construction, and basic market trading education across multiple timeframes.
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Toni Hansen's Online Trading Blog
About Mehttp://www.tradingfrommainstreet.com/images/Tonismall.jpg Name: Toni Hansen Location: Sarasota, FL, United States View my complete profile
Links[*]Trading From Main Street[*]ToniHansen.com[*]Toni's Trading Course[*]Toni's Online Bookstore[*]High Profits in High Heels[*]ChrisNYork's Blog[*]Brandon Fredrickson's Blog[*]Articles by Chris TerryPrevious Posts[*]Simple Moving Averages[*]Market Corrects After Multi-Day Rally[*]Toni Hansen's Feb. Bookstore Specials[*]Adding Tick Charts to Your Market Analysis - GG[*]Market Rally Returns on Improved Outlook from IBM[*]Trading Style[*]Flags vs. Avalanches[*]Question on Trading News[*]Market Pushes Higher on Positive Data[*]Market Soars on News for Bond InsurersArchives[*]June 2007[*]July 2007[*]August 2007[*]September 2007[*]October 2007[*]November 2007[*]December 2007[*]January 2008[*]February 2008[*]Current Postshttp://buttons.blogger.com/bloggerbutton1.gif
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Sunday, June 17, 20071-2-3 Continuation Pattern
Hey Gang,
Just a reminder: I'm am going to be out of town visiting family back up north over the next two weeks. I'll be sending out a few of these while away to give you something to learn from while I'm gone. I will be starting the regular market action column again on July 1st. Have a wonderful time while I'm away and I look forward to getting back in the markets when I return!
All my best,
Toni
1-2-3 Continuation Buy Pattern
http://tradingfrommainstreet.com/images/FocusLetter/123cont.gif
Description: This pattern refers to a three bar pattern where a narrow range bar following an initial momentum bar creates a build-up in momentum, leading to a continuation pattern in the direction of the first bar when the second one breaks higher on the third bar.
Criteria:
1. Wide range bar breaking out of support.
2. Narrow range bar near/at the highs of the previous wide range bar. Often this narrow range bar is also an inside range bar.
Entry: Switch to a smaller time frame and take a breakout from the base on Bar #2, using the entry criteria for a breakout, or use above the highs of the narrow range bar of Bar #2.
Stop: Under the lows of the base or last major pivot low on the smaller time frame, under the lows of the narrow range bar, or under the lows of the third bar at the time of the setup.
Target: Bar #1 = Lows of Bar #2 to highs of Bar #3. Watch for resistance levels overhead such as previous congestion zones or whole number resistance.
Ideal 5 Tech Tools Traits:
Pace: Above average momentum on the first bar, but not wider than an average wide range bar. In other words, if the largest bars tend to be $2, then one that is significantly larger than that will be less likely to form as strong of a follow-through on a 1-2-3 continuation pattern as compared to normal. The pace within the second bar should end up being more gradual overall on the counter-trend moves, such as the pullbacks from highs after an upside move on the first bar.
Volume: Lighter than average volume on Bar #2, followed by increasing volume as the highs of Bar #2 are broken.
Correction Periods: Higher probability of success if the setup triggers on Bar #3 as it is coming out of a correction period.
Support/Resistance:
* This pattern tends to be the strongest when it is coming off a larger time frame support level. A base on Bar #2 that pulls into a moving average support level as it sets up, particularly the 20 period sma, will increase the odds of success.
* Often the highs of Bar #1 and Bar #2 will be at a resistance level such as whole number price resistance. If a significant resistance level is just above the highs of those bars, then it will add risk, since the security will more often stall at that point.
* Watch for prior highs such as the highs of the third wave of selling on ATVI shown below in Figure 2, for resistance to assist with targets.
Trend Placement/Trend Development: Look for a setup near the beginning of a new trend, such as after three waves of selling, as was the case in the daily setup on ATVI shown in the example which follows. This pattern is also strong when it takes place on a larger time frame breakout.
1-2-3 Continuation Buy Example
Example #1: Activision Inc. (ATVI) 1-2-3 Continuation Buy Setup
http://tradingfrommainstreet.com/images/FocusLetter/123cont_atvi.gif
© 2007 Chart provided by Townsend Analytics Ltd.
Pros on Daily 1-2-3 Continuation in ATVI:
1. The momentum heading into the base on the 15th was stronger than average to the upside.
3. The base on the 15th had two pullbacks within the range before it broke higher. This is typical of a correction.
3. The volume on the 15th was much lighter than the previous session and then increased as the range broke.
4. ATVI broke higher into the very end of the day on the 15th and morning of the 16th. This is a typical correction zone intraday and is a great time for bases on the 30-60 minute charts to break.
5. The base on the 15th lasted right into the 30 minute 20 sma support, which was followed immediately by the breakout.
6. ATVI had three waves of selling on the daily charts ahead of the continuation pattern. This trend development is typically followed by a larger correction.
7. ATVI had hit strong daily support at previous lows, making a bounce highly probable.
8. There was a lot of room from the time of the breakout until the next major resistance from the highs of the third wave of selling on the daily time frame would hit. This left quite a bit of potential for the setup.
Cons on Daily 1-2-3 Continuation in ATVI:
1. ATVI did not form a base along the highs of the range on the 15th before breaking, but rather moved from the lows of the range over noon and through the highs in the afternoon.
2. The volume did not increase much on the breakout on 2/16 as compared to the prior day’s base.
3. After the initial wave of buying on the 16th, it pulled back more sharply before its second wave of buying as compared to the mid-day correction on the 14th, which slowed the overall momentum and kept it from hitting an exact equal move as easily when coming into the target zone.
1-2-3 Continuation Short Pattern
Description: The criteria for a 1-2-3 Cont. Buy Setup can also be reversed for a short. Simply change “support” to “resistance” and “buy” to “sell” and vice versa to give the short criteria.
1-2-3 Continuation Short Example: Shaw Group Inc. (SGR)
http://tradingfrommainstreet.com/images/FocusLetter/123cont_sgr.gif
© 2007 Chart provided by Townsend Analytics Ltd.
Pros on Weekly 1-2-3 Continuation in SGR
1. SGR triggered a daily Avalanche breakdown with the first bar of the 1-2-3 Cont. Short Setup. This created room for larger downside follow-through by virtue of its placement in the larger trend.
2. The second bar formed in the lower half of the first with no increase in upside momentum as it came off the support from January’s lows.
3. Within the second bar on the weekly time frame, SGR formed a strong consolidation and broke lower on the third test of lows within that consolidation and heading into bar 3 on the weekly time frame.
4. Volume declined as SGR consolidated in the second bar of the continuation pattern.
5. No immediate support to stall the continuation move.
6. The momentum at the beginning of bar 3 was as strong as heading into bar 2, allowing for SGR to hit an equal move target on the weekly time frame.
Cons on Weekly 1-2-3 Continuation in SGR:
1. No easily discernable base along the lower end of the daily base to allow for a tighter stop.
2. The base on the daily time frame did not quite hit the 20 day sma resistance and might have attempted to test that resistance better before breaking lower.
3. The volume did not show much increase once bar 2 broke to provide volume confirmation of a stronger selloff developing
posted by Toni Hansen @ 7:46 PM 1 Comments http://www.blogger.com/img/icon18_email.gifhttp://www.blogger.com/img/icon18_edit_allbkg.gif
Wednesday, June 13, 2007Wednesday's Market Action
Trading Slows Ahead of the Fed's Beige Book
Good morning! Market participants were looking for just about anything to grasp onto in Wednesday's session to produce some movement intraday. Unfortunately, until 14:00 ET they lacked anything to sway them one way or the other as we sit and await an increase in news from the next upcoming warnings and earnings season. We've seen a lot of smaller names and thinner stocks topping the market gainers and losers lists lately and its led to a reduction in intraday opportunities in stocks and has led to my favoring EMini trading in recent sessions. This is a nice benefit of having access to both marketplaces and not getting tied down to just one or the other. You can go where the most money is. When news is romped, the momentum players in the equities market can offer the best risk versus reward, but when things are slow on the news front, it's the indices themselves that I find most attractive.
A key difference in trading equities versus futures is that in the equities market I tend to scan for specific criteria, focusing on certain combinations to give me setups, but in the futures market you have to have a larger arsenal and even greater patience since there is no scanning to do in between trades. Instead you just have to wait out the current move and then have the patience to await the next trigger, even though it may take a bit of time to get one that lines up on multiple time frames since those have the highest odds for success. In a way though, you can be a bit more lazy since you don't have to worry about scanning and flipping through charts to find the next big mover. Instead you can just sit and keep half an eye on things as they develop as long as you don't get wrapped up in the minute by minute action and loose track of the bigger picture.
http://tradingfrommainstreet.com/images/FocusLetter/20070614nas.gif
This being said though, I did had a more difficult time on Wednesday locating setups in the indices as well as the stocks. The market had gapped higher out of the open, which, given the overall market range, was on the bullish side. The market had opened directly under resistance, however, with the 15 minute 20 simple moving average directly overhead. This forced the indices into a trading range for the first 45 minutes of the day. As they did so the volume declined before breaking higher out of the range with the 10:15 ET reversal period. A rapid, albeit brief, rally followed which took the indices into price resistance from the previous session, but it lasted for less than 15 minutes before slowly turning over and giving way to an excessive amount of choppy trading throughout the remainder of the morning and into the first half of the afternoon.
http://tradingfrommainstreet.com/images/FocusLetter/20070614sp.gif
After reversing off highs, the indices slowly worked their way lower until finally finding support when the Nasdaq gap closed at about 13:00 ET. At this point the 1 minute setups that had ruled the day finally lined up with the 15 minute charts to favor an upside move into the afternoon, however, the 14:00 Beige Book loomed on the horizon and continued to hold down most stocks. The indices themselves began to give an indication for their preference just before the release. The Nasdaq formed a 5 minute 2B pattern while the YM had perhaps the strongest pattern with a Phoenix between 13:17 and a trigger at 13:33 ET. This provided a great scalp with the clearest pattern of the afternoon up to that point. A second strong setup formed with a base from 13:39-13:57 ET. The setup then took off when the Fed release hit, moving quickly higher to break free from the congestion in play in the market up until that point on the day.
It was about this time that a number of individual stocks finally found a foothold, although most of the setups were rather sloppy and I still had a difficult time locating what I felt would end up being decent positions ahead of time. Even when I found stocks I liked, they didn't have clear-cut setups for the most part and required a good deal of faith and willingness to place some larger stops than usual to avoid a higher risk of getting flushed out due to the choppier trading.
http://tradingfrommainstreet.com/images/FocusLetter/20070614dow.gif
Despite the risks from the type of trend move in play in the afternoon, the market still trended higher into the close. The Dow Jones Industrial Average ($DJI) had nearly a 200 point gain, adding 187.34 at the closing bell. Out of the Dow 30, 29 closed with solid gains, many rallying more than 2%, such as AA, BA, C, CAT, DD, GM, and INTC. The S&P 500 ($SPX) gained 22.67 points, while the Nasdaq Composite ($COMPX) rose 32.54 points on the day. The strongest sectors included real-estate investment trusts ($DJR), utilities ($UTY), and oil stocks ($XOI). Even though the momentum increased on the upside on Wednesday, the market can still go either way on Thursday since we're stuck in a daily trading range and we still likely to see more of the thinner stocks in the top momentum lists again.
© 2007 Toni Hansen
© 2007 All charts brought to you by Real Tick III by Townsend Analytics, Ltd.
posted by Toni Hansen @ 9:07 PM 0 Comments http://www.blogger.com/img/icon18_email.gifhttp://www.blogger.com/img/icon18_edit_allbkg.gif
Tuesday, June 12, 2007Tuesday's Market Action
Market Displays Uncertainty Despite Heavy Trading
Good morning! Volume was strong in Tuesday's session, but the market was all over the place. When I begin my day the first thing I do in the morning is scan through the premarket gainers and losers. These will tell me what type of momentum potential we have for the session as a whole. Then, shortly after the open, I will scan through all of the top intraday gainers and losers that have the strongest trading out of the open. On the best days these lists will tend to have a plethora of well-known and well-followed names and there will be a number of popular stocks on both sides. On Tuesday this was not the case. Many of the stocks that habitually make these lists were missing and a lot of the names which did show up were more thinly traded stocks, particularly in the Nasdaq.
Due to this lack of momentum in individual stocks, I had a very difficult time finding things to trade. I like to see stocks which have setups on multiple time frames. In other words, I likely won't short a stock which has strength on a larger time frame unless the trend is severely exhausted and vice versa. Most of the stocks I came across at the open that did catch my eye on the daily charts for potential intraday continuation never gave decent setups intraday on Tuesday. Since I prefer not to scalp in stocks unless it at least is going to give me a 50 cent move, I found myself rather bored before long.
Even when I went back after the close and poured through the day's action I found very few things that I wished I had seen during the day and had missed since most of the gainers at that point had either been because of initial upside which ten fell flat for the remainder of the day or else they just climbed steadily throughout the session like ETN. Most of these that did move, however, did so without a great daily chart and without strong intraday continuation setups that would not get you killed if you tried them on every stock you came across. By the end of the day I was so bored I literally fell asleep and completely missed the last two hours of trading which is kind of funny because I am NOT a nap person. At least it's good thing I don't have a boss to answer to! On the plus side though, there was some decent action in the indices as a whole and this allowed me to still manage to finish ahead despite my lack of stock trades.
http://tradingfrommainstreet.com/images/FocusLetter/20070613nas.gif
When the market opened on Tuesday the indices experienced a marked decline since the previous day's close. The opening prices were at support from the previous day's lows in the S&P 500 and the Dow Jones Industrial Average and Friday's morning congestion in the Nasdaq Composite, however, and this forestalled further selling initially. Instead the market bounced for a bit out ofthe open, closing a good chunk of the gap before hitting resistance around 9:45 to 9:50 ET. The rally had taken place on declining volume ever since the open and this made it easier for the indices to turn back around as the morning progressed. By 10:15 the three major indices were coming into new intraday lows and were now having to deal with support levels from Friday on all three, having strongly cleared Monday's lows.
The increase in momentum on the mid-morning sellinggave the indices very little chance to gain strength when they tried tobounce into 10:30 ET. I had caught the YM on this initial attempt tomove off support, but was forced to scalp it for only small gains before the indices moved lower again into 11:00 ET. This was too early for a solid bear flag, which should have at least hit the 5 minute 20sma, and ideally the 15 minute 20 sma given the extent of the selloffinto the earlier lows. The result was a 2B reversal pattern where the indices established a very slightly lower low on this form of a double bottom and it created a change in momentum that then allowed for a stronger reversal into mid-day.
http://tradingfrommainstreet.com/images/FocusLetter/20070613sp.gif
The market climbed steadily throughout the remainder of the morning. It eventually ran into resistance at the 12:00 ET reversal period when the indices hit their 15 minute 20 simple moving averages intraday and the 15 minute 200 simple moving averages on the all-sessions charts (which include the afterhours data). The strong combo of resistance levels and the reversal period led to a correction off the highs going into the early afternoon. Due to the larger intraday resistance, it seemed likely to me that the 5 minute 20 sma support would break on the pullback, but I never saw any conviction coming into the selloff so I just sat it out and waited. Following the 13:00 ET reversal period the market did find a foothold again when the gradual pullback along the 15 minute 20 sma broke through the resistance for a second wave of intraday buying on the 15 minute charts.
As in the morning rally, the momentum in the afternoon on the upside was steady and it led to a nice equal move on the 15 minute charts before also hitting price resistance from the previous session at the 14:00 ET reversal period. Even though the morning reversals trailed the reversal periods by about 5 minutes, the market held the afternoon ones perfectly and the market again began to correct out of 14:00 ET. This is about when I called it a day since I had not expected as strong of a reversal off the highs as we ended up getting. I found nothing in my scanning that caught my attention and figured that the momentum on the buying in the indices would hold off any strong reversal and the market would instead get stuck between the highs and the 15 minute 20 sma support for most of the remainder of the day.
http://tradingfrommainstreet.com/images/FocusLetter/20070613dow.gif
Had I waited just a few minutes to monitor the reaction to the market resistance it would have been obvious that was not going to be the case. The turnaround gained momentum on the downside immediately andreacted little to the 5 minute 20 sma which was the initial support. A series of small bear flags ended up taking the market lower into the close. By the end of the day all three indices had given back all the gains they had recouped since the open and the Dow ($DJI) closed lower by 129.95 points, the S&P 500 ($SPX) fell 16.1 points, and theNasdaq ($COMPX) lost 22.4 points. Since the market was unable to bust through the 10 and 20 day simple moving averages we were keeping an eye on yesterday, it diminishes the odds for a triangle on the daily charts at this time and instead favors a break in the 50 day sma with the next main support at the 100 day sma and early April trading levels if last week's lows can give way within the next couple of sessions.
© 2007 Toni Hansen
© 2007 All charts brought to you by Real Tick III by Townsend Analytics, Ltd.
Monday, July 30, 2007Strong Daily Support Forestalls Further Declines
Good day! The market's momentum took a bit of a turn on Monday, kicking off the new trading week on a somewhat bullish note intraday, even though the daily time frame is still under a lot of strain. The Dow Jones Industrial Average ($DJI) regained 92.84 points, closing at 13,358.5 after 24 of its 30 stocks posted gains. One the largest was General Motors Corp. (GM), which climbed 1.51 points, or +4.9%, ahead of its Tuesday earnings announcement. The S&P 500 ($SPX) rose 14.96 points on Monday and closed at 1,473.90. The Nasdaq Composite ($COMPX) gained 21.04 points and it ended the day at 2,583.3.
A lot of the intraday trading on Monday was actually pretty sloppy. The session began with a great deal of hesitation as the indices moved in for a stronger test of the daily moving average support levels. The S&P 500 pulled back to its 200 day sma in the last two sessions, while the Dow settled at its 100 day sma, and the Nasdaq Composite slid into its 50 day simple moving average.
http://tradingfrommainstreet.com/images/FocusLetter/20070731nas.gif
After the sharp return to lows in Friday afternoon, it took the market awhile to begin to show any real recovery. Extreme momentum moves tend to correction with slower and choppier ones. We experienced this on Monday morning as the indices climbed off the lows beginning around 9:45 ET. All three indices made their way into their 5 and 15 minute 20 sma zones going into 10:30 ET following this early morning pivot. Along the way they chopped back and forth within the trend channel on the 1-5 minute time frame and broke that channel lower with another quick, albeit brief move, into 10:45 ET.
A second drop on the smaller intraday time frames came out of the 11:00 ET reversal period after volume declined as the indices played around with the 5 minute 20 simple moving averages. This time it wasn't quite as much of a move as the first though. When the third move within this small 1-5 minute trend came at about 11:30 ET it barely breached the previous low, creating a bit of a trap and reversal pattern that took the market higher on stronger momentum into noon.
http://tradingfrommainstreet.com/images/FocusLetter/20070731sp.gif
On the 15 minute time frame the change in momentum on this second decline into the daily support intraday is very noticeable. Nearly every bar on the 15 minute charts overlaps most of the price action from the previous bar. The volume decline also indicates that the selling pressure has dried up. After popping to the upper end of this congestion, the indices then hugged the 5 minute 20 sma into 12:30 ET. This was again on declining volume and it triggered the perfect buying opportunity for index traders, as well as setups in a number of stocks which had undergone similar price activity throughout the morning. My entry came at 12:25 ET in the NQ (Nasdaq EMini) at 1969.50, which was essentially the 5 min channel break along the 20 sma.
The first wave of buying following the intraday reversal on Monday was the largest one. It took the indices back into the intraday highs much more quickly than they had fallen from them. That price resistance then led to a two-wave pullback into the 5 minute 20 sma, which had been resistance, but was now support. Light volume on the decline again favored the bulls and the market turned back around for a second wave of upside on the 5 minute charts going into 14:00 ET. This reversal period hit at about the time as the 5 minute 200 sma zone in the S&Ps and Nasdaq to create a second correction in this new trend going into 14:30 ET.
That second rally in the indices did not quite have the extension of the first and, as in the morning's decline into 11:15 ET, this meant that a third upside move would likely break the previous highs of the trend by an even lesser amount than the last. The S&Ps and Dow still did pretty well, even though there was a bit more overlap in prices on the 5 minute charts, but the indices hugged the 5 minute 20 sma support longer before pulling up off it and broke free to a lesser degree than the previous two moves.
This third move not only completely another trend set, but also took the indices back into the strong price resistance from the zone of Friday afternoon's highs and the 5 minute 200 sma in the Dow intraday. The response was a rounding off at highs on the 1-5 minute charts and a pullback into the final hour of trading whereby the 5 minute 20 sma support gave way.
http://tradingfrommainstreet.com/images/FocusLetter/20070731dow.gif
Some of the largest winners on the day on Monday included FPL Group, Inc. (FPL), which rose 5.2% after posting second-quarter earnings growth, NewMarket Corp. (NEU), which also rallied on earnings, and First Solar Inc. (FSLR), which climbed ahead of Tuesday's earnings. MNST, GRMN, ISRG, GYMB, SPWR, FCX, IR, MA, TEX, UA, and SPW also moved strongly higher.
The top decliners on the day included the likes of Dow Jones & Co. (DJ) on news relating to the sale of shares to News Corp. (NWS), Jarden Corp. (JAH), which dropped following earnings, NovaStar Financial (NFI) after the announcement of a 1-4 reverse split, RadioShack Corp. (RSH) following earnings, and ValueClick Inc. (VCLK), which released weaker-than-expected earnings. AAPL, AMZN, BIIB, SAFM and NTRI also lost more ground on Monday.
As the week progresses, I believe that we will continue to see the market react to the recent support, but the bulls are going to be wary. There is a general mindset to buy pullbacks in order to add to positions, but while that worked well in February, many of the market leaders are a great deal more extended now and are showing signs of larger corrections on the monthly time frames and not simply on the daily charts. The zone of the previous highs will serve as significant resistance. As such, I am not currently favoring many new position trades or investments as longs right now and have been continuing to focus primarily on intraday activity with just a few overnight holds.
To learn how to recognize these patterns intraday in real time and identify the building blocks of these market moves, check out my new CD course at http://www.swingtrader.net! A sample video displaying my methodology can be viewed by CLICKING HERE.
posted by Toni Hansen @ 10:56 PM 0 Comments http://www.blogger.com/img/icon18_email.gifhttp://www.blogger.com/img/icon18_edit_allbkg.gif
Monday, July 30, 2007Strong Daily Support Forestalls Further Declines
Good day! The market's momentum took a bit of a turn on Monday, kicking off the new trading week on a somewhat bullish note intraday, even though the daily time frame is still under a lot of strain. The Dow Jones Industrial Average ($DJI) regained 92.84 points, closing at 13,358.5 after 24 of its 30 stocks posted gains. One the largest was General Motors Corp. (GM), which climbed 1.51 points, or +4.9%, ahead of its Tuesday earnings announcement. The S&P 500 ($SPX) rose 14.96 points on Monday and closed at 1,473.90. The Nasdaq Composite ($COMPX) gained 21.04 points and it ended the day at 2,583.3.
A lot of the intraday trading on Monday was actually pretty sloppy. The session began with a great deal of hesitation as the indices moved in for a stronger test of the daily moving average support levels. The S&P 500 pulled back to its 200 day sma in the last two sessions, while the Dow settled at its 100 day sma, and the Nasdaq Composite slid into its 50 day simple moving average.
http://tradingfrommainstreet.com/images/FocusLetter/20070731nas.gif
After the sharp return to lows in Friday afternoon, it took the market awhile to begin to show any real recovery. Extreme momentum moves tend to correction with slower and choppier ones. We experienced this on Monday morning as the indices climbed off the lows beginning around 9:45 ET. All three indices made their way into their 5 and 15 minute 20 sma zones going into 10:30 ET following this early morning pivot. Along the way they chopped back and forth within the trend channel on the 1-5 minute time frame and broke that channel lower with another quick, albeit brief move, into 10:45 ET.
A second drop on the smaller intraday time frames came out of the 11:00 ET reversal period after volume declined as the indices played around with the 5 minute 20 simple moving averages. This time it wasn't quite as much of a move as the first though. When the third move within this small 1-5 minute trend came at about 11:30 ET it barely breached the previous low, creating a bit of a trap and reversal pattern that took the market higher on stronger momentum into noon.
http://tradingfrommainstreet.com/images/FocusLetter/20070731sp.gif
On the 15 minute time frame the change in momentum on this second decline into the daily support intraday is very noticeable. Nearly every bar on the 15 minute charts overlaps most of the price action from the previous bar. The volume decline also indicates that the selling pressure has dried up. After popping to the upper end of this congestion, the indices then hugged the 5 minute 20 sma into 12:30 ET. This was again on declining volume and it triggered the perfect buying opportunity for index traders, as well as setups in a number of stocks which had undergone similar price activity throughout the morning. My entry came at 12:25 ET in the NQ (Nasdaq EMini) at 1969.50, which was essentially the 5 min channel break along the 20 sma.
The first wave of buying following the intraday reversal on Monday was the largest one. It took the indices back into the intraday highs much more quickly than they had fallen from them. That price resistance then led to a two-wave pullback into the 5 minute 20 sma, which had been resistance, but was now support. Light volume on the decline again favored the bulls and the market turned back around for a second wave of upside on the 5 minute charts going into 14:00 ET. This reversal period hit at about the time as the 5 minute 200 sma zone in the S&Ps and Nasdaq to create a second correction in this new trend going into 14:30 ET.
That second rally in the indices did not quite have the extension of the first and, as in the morning's decline into 11:15 ET, this meant that a third upside move would likely break the previous highs of the trend by an even lesser amount than the last. The S&Ps and Dow still did pretty well, even though there was a bit more overlap in prices on the 5 minute charts, but the indices hugged the 5 minute 20 sma support longer before pulling up off it and broke free to a lesser degree than the previous two moves.
This third move not only completely another trend set, but also took the indices back into the strong price resistance from the zone of Friday afternoon's highs and the 5 minute 200 sma in the Dow intraday. The response was a rounding off at highs on the 1-5 minute charts and a pullback into the final hour of trading whereby the 5 minute 20 sma support gave way.
http://tradingfrommainstreet.com/images/FocusLetter/20070731dow.gif
Some of the largest winners on the day on Monday included FPL Group, Inc. (FPL), which rose 5.2% after posting second-quarter earnings growth, NewMarket Corp. (NEU), which also rallied on earnings, and First Solar Inc. (FSLR), which climbed ahead of Tuesday's earnings. MNST, GRMN, ISRG, GYMB, SPWR, FCX, IR, MA, TEX, UA, and SPW also moved strongly higher.
The top decliners on the day included the likes of Dow Jones & Co. (DJ) on news relating to the sale of shares to News Corp. (NWS), Jarden Corp. (JAH), which dropped following earnings, NovaStar Financial (NFI) after the announcement of a 1-4 reverse split, RadioShack Corp. (RSH) following earnings, and ValueClick Inc. (VCLK), which released weaker-than-expected earnings. AAPL, AMZN, BIIB, SAFM and NTRI also lost more ground on Monday.
As the week progresses, I believe that we will continue to see the market react to the recent support, but the bulls are going to be wary. There is a general mindset to buy pullbacks in order to add to positions, but while that worked well in February, many of the market leaders are a great deal more extended now and are showing signs of larger corrections on the monthly time frames and not simply on the daily charts. The zone of the previous highs will serve as significant resistance. As such, I am not currently favoring many new position trades or investments as longs right now and have been continuing to focus primarily on intraday activity with just a few overnight holds.
To learn how to recognize these patterns intraday in real time and identify the building blocks of these
posted by Toni Hansen @ 10:56 PM 0 Comments http://www.blogger.com/img/icon18_email.gifhttp://www.blogger.com/img/icon18_edit_allbkg.gif
LFC: Two-Wave Pullback & Breakaway Gap
For those of you in Denver who came to see my presentation there two weeks ago, the following setup should look extremely familiar since I spent about an hour on it. :)
It consists of a two-wave pullback and the continuation pattern which followed.
http://www.tradingfrommainstreet.com/images/trades/trade20070730LFC.gif
posted by Toni Hansen @ 4:09 PM 0 Comments http://www.blogger.com/img/icon18_email.gifhttp://www.blogger.com/img/icon18_edit_allbkg.gif
StockTickr Interview with Toni
StockTickr: Tell us a little about yourself, Toni and how you got to where you are today.
Toni: Well, to start with, my name is Toni Hansen. I live in Sarasota, Florida and I got here via a U-Haul… Ok, that probably isn’t what you meant though! Well, first things first… I’m a full time trader who happens to also teach market analysis to other traders. I’ve been trading for nearly 10 years now, before which time I had worked for the Office of the State Archaeologist in Iowa and had originally intended on a career in that field. I became side-tracked though when introduced to online trading and investing.
After having become uninspired by my broker’s rather sub-par results on my investment account, I had decided to take things into my own hands. I originally began by holding stocks up to a few days or weeks at a time, playing mainly daily setups, but have long since expanded into daytrading and now also trade the EMini futures contracts in addition to trading stocks on multiple time frames.
Shortly after I began trading full time and had quit working in the field of archaeology, I began keeping a free website at http://www.swingtrader.net where another trader and I would post our evening scan results and various musing about the market and the educational tidbits we picked up along the way.
Before long, one of the major market education sites on the web at that time approached us, stating how a number of their members were frequenting our site and they wondered if we would be interested in writing a swingtrading newsletter for them. Since we were already essentially doing this and it seemed like a good way to bring in extra income that would help offset the emotional hurdles of relying purely on our own trading for our living expenses, we agreed. Due to its popularity, we were soon invited to host a chatroom for the site, which was a nice way to socialize with other traders as well as create the necessity to be able to explain each and every action we took in the market.
Eventually we parted ways with that site and went on our own. Over time I found that running a for fee room was incredibly draining and was showing a negative effect on my trading since I was often missing my setups and constantly distracted by keeping the room active all day. So, I’ve now moved on and am focusing more on creating educational material which dispenses the same knowledge as I have taught over the years in the real time setting and work more on a one-on-one basis with individual clients.
I am often asked why it is that I bother to teach if I can trade. Well, the main thing is that had I not agreed to do that site early on, I probably still would not be trading today. Teaching forced me to be able to explain each and every thing I was looking at and why it was important. Even today, by working with individual traders, I learn a great deal and am constantly improving because I am forced to look at the reasons behind my clients’ decisions and to explain to them where they are on track versus where they need to modify their system and what they should be focusing on based upon their own personality and style. By working within their mindset I’m then able to identify nuances in their own trading and styles that I can use to my advantage. It forces me to put into words things which I had taken for granted, but had never really given much thought to before. The result is that it reinforces my ideas and builds confidence in my system. I strongly recommend all traders work with newer traders when possible.
StockTickr: Most traders have a horror story about losing their shirt when they first started trading. What’s yours?
Toni: You know, I guess I must be rather unusual in this regard, since I’ve often been asked this question, but really cannot think of anything that really had that type of affect. Perhaps it is because I am incredibly conservative and have never really put myself into a place that would create the circumstances for such devastation. I’ve certainly had stocks that have gapped a great deal against me overnight, but I managed to keep my shirt.
I guess the worst horror stories, in terms of what has affected me the most in my trading, come more from mistakes in orders. On Friday for instance, I had updated one of my platforms and did not realize that my setting for offsetting an open position had been lost. The result was that since I had closed partials in a position, when I closed the rest of the trade I actually ended up with contracts the other direction, which would have not been bad since I had nailed the high by a tick. The problem was all I saw was that I was now short and had assumed I had simply messed up the order, so when I went and closed that right I then ended up long again! Note how I had said I had nailed the highs by a tick… Well… I am used to reacting very quickly in terms of placing orders and simply didn’t realize that my order had not functioned as it had in the past by only closing what I had open. So, since I didn’t have my P/L up, I didn’t realize that I was now long even as the market was plummeting! Yikes! When I take a loss because I stopped out on something, it does not faze me. This is because I know my odds and the pros and cons heading into a trade, but when something just sidelines me like that I find it harder to get past and it can affect my trading for at least several days, if not longer, since it creates hesitation, which is bad when you are daytrading or scalping!
StockTickr: What single lesson did you learn along the way that has helped you the most in your trading?
Toni: Double check your account and order settings every time you make changes to your trading platform!
Ok, this is probably not the largest lesson though. I would say that lesson would be to accept up front that whenever a new trader is successful right away, it tends to be a fluke. In reality it takes years to really be comfortable with the market and to trust in it to behave in an expected manner and then have the confidence to trade based upon that trust and without an emotional attachment.
StockTickr: Do you see record keeping as a critical part of trading success and how can traders improve upon their trading journals?
Toni: Most definitely, but most traders go about it all wrong! Keeping a spreadsheet of your trades is rather silly in my humble opinion. If you go and look at a spreadsheet of your trades a week or a month later can you remember what the trade looked like and why you took it? Probably not! Instead I feel very strongly that it is important to keep a journal which actually shows a chart of the trades you took and has your entry and exit clearly marked ON THE CHART.
StockTickr: What 3 books do you recommend traders read?
Toni: I’ve honestly never read a trading book from start to finish that really impacted how I trade. In fact, I’ve rarely read a trading book from start to finish period. This is not to say that there are not brilliant traders out there that have written books whom I respect, but I still tend to read history and fiction in my free time.
StockTickr: What is the most common, but easily correctable mistake you see traders make?
Toni: Trading large size without having a grasp of what the best style of trading is which suits their personality. If you can’t make money consistently risking $20, how on earth can you honestly expect to risking $200 a trade?
StockTickr: How do you think the market has changed over the last several years? How have you adapted?
Toni: I don’t believe that market has changed much over the last several years. The patterns and market type that we are seeing now in the indices on the daily, weekly, and even monthly time frames are the same trends and development patterns that are seen over and over on the smaller intraday time frames. The only difference is the scale. While I have learned more about the markets over the years, the basics have not changed at all and my system is just an expansion of the one I used when I first began trading.
One thing that has changed is the technological and industry-related aspects of trading. For instance, it used to cost me $50 in and out, no matter how many shares I was trading, just in commissions alone. After 6 months of trading, the account I shared with my partner was down 20%, but when we broke it down, we discovered that the entire loss was on commissions alone! It is now much easier to reason with new traders to start small, since they can literally pay only a dollar for anything up to 100 shares to take a trade. A disadvantage of beginning to trade in the FOREX or futures market is that you are still subject to much more substantial risk per trade and cannot really control that risk as well per trade.
StockTickr: Do you recommend backtesting and if not, how do traders instill belief in their system?
Toni: The only backtesting I do is reviewing my trading journal to compare current market conditions to those I have seen in the past. I don’t think it’s possible to create an accurate, automated system for backtesting.
StockTickr: What advice can you offer traders who are just starting out?
Toni: Be reasonable. Don’t expect to open a $5,000 account, for instance, and assume that you are going to be able to immediately earn your living trading. Even with initial success, consistency is another matter completely, and it takes time to understand the nuances of market development, even when you do have a mentor assisting you in cutting that learning curve.
Additionally, don’t shell out to buy those $10,000 educational packages you see on tv. Most of the information they peddle can be picked up for free by just scanning the internet! Take time to actually research any mentor or educational site you plan on using and don’t pay them a dime until you have decided that they really do know what they are talking about.
Finally, don’t take for granted the emotional aspects of trading. Those whom I see have the most difficult time are traders who have quit their full-time job, have young children at home, and a spouse that works full time, whom, even though they may have been supportive to begin with, is quickly beginning to think that playing around on the computer all day is not a real job. The pressure to succeed, and to do so quickly, can be overwhelming. This is not to say it’s impossible, but a supportive spouse and a less-hectic lifestyle are huge advantages.
StockTickr: Thanks for taking the time for this, Toni.
Toni: You're welcome!
posted by Toni Hansen @ 3:55 PM 0 Comments
Monday, July 30, 2007Strong Daily Support Forestalls Further Declines
Good day! The market's momentum took a bit of a turn on Monday, kicking off the new trading week on a somewhat bullish note intraday, even though the daily time frame is still under a lot of strain. The Dow Jones Industrial Average ($DJI) regained 92.84 points, closing at 13,358.5 after 24 of its 30 stocks posted gains. One the largest was General Motors Corp. (GM), which climbed 1.51 points, or +4.9%, ahead of its Tuesday earnings announcement. The S&P 500 ($SPX) rose 14.96 points on Monday and closed at 1,473.90. The Nasdaq Composite ($COMPX) gained 21.04 points and it ended the day at 2,583.3.
A lot of the intraday trading on Monday was actually pretty sloppy. The session began with a great deal of hesitation as the indices moved in for a stronger test of the daily moving average support levels. The S&P 500 pulled back to its 200 day sma in the last two sessions, while the Dow settled at its 100 day sma, and the Nasdaq Composite slid into its 50 day simple moving average.
http://tradingfrommainstreet.com/images/FocusLetter/20070731nas.gif
After the sharp return to lows in Friday afternoon, it took the market awhile to begin to show any real recovery. Extreme momentum moves tend to correction with slower and choppier ones. We experienced this on Monday morning as the indices climbed off the lows beginning around 9:45 ET. All three indices made their way into their 5 and 15 minute 20 sma zones going into 10:30 ET following this early morning pivot. Along the way they chopped back and forth within the trend channel on the 1-5 minute time frame and broke that channel lower with another quick, albeit brief move, into 10:45 ET.
A second drop on the smaller intraday time frames came out of the 11:00 ET reversal period after volume declined as the indices played around with the 5 minute 20 simple moving averages. This time it wasn't quite as much of a move as the first though. When the third move within this small 1-5 minute trend came at about 11:30 ET it barely breached the previous low, creating a bit of a trap and reversal pattern that took the market higher on stronger momentum into noon.
http://tradingfrommainstreet.com/images/FocusLetter/20070731sp.gif
On the 15 minute time frame the change in momentum on this second decline into the daily support intraday is very noticeable. Nearly every bar on the 15 minute charts overlaps most of the price action from the previous bar. The volume decline also indicates that the selling pressure has dried up. After popping to the upper end of this congestion, the indices then hugged the 5 minute 20 sma into 12:30 ET. This was again on declining volume and it triggered the perfect buying opportunity for index traders, as well as setups in a number of stocks which had undergone similar price activity throughout the morning. My entry came at 12:25 ET in the NQ (Nasdaq EMini) at 1969.50, which was essentially the 5 min channel break along the 20 sma.
The first wave of buying following the intraday reversal on Monday was the largest one. It took the indices back into the intraday highs much more quickly than they had fallen from them. That price resistance then led to a two-wave pullback into the 5 minute 20 sma, which had been resistance, but was now support. Light volume on the decline again favored the bulls and the market turned back around for a second wave of upside on the 5 minute charts going into 14:00 ET. This reversal period hit at about the time as the 5 minute 200 sma zone in the S&Ps and Nasdaq to create a second correction in this new trend going into 14:30 ET.
That second rally in the indices did not quite have the extension of the first and, as in the morning's decline into 11:15 ET, this meant that a third upside move would likely break the previous highs of the trend by an even lesser amount than the last. The S&Ps and Dow still did pretty well, even though there was a bit more overlap in prices on the 5 minute charts, but the indices hugged the 5 minute 20 sma support longer before pulling up off it and broke free to a lesser degree than the previous two moves.
This third move not only completely another trend set, but also took the indices back into the strong price resistance from the zone of Friday afternoon's highs and the 5 minute 200 sma in the Dow intraday. The response was a rounding off at highs on the 1-5 minute charts and a pullback into the final hour of trading whereby the 5 minute 20 sma support gave way.
http://tradingfrommainstreet.com/images/FocusLetter/20070731dow.gif
Some of the largest winners on the day on Monday included FPL Group, Inc. (FPL), which rose 5.2% after posting second-quarter earnings growth, NewMarket Corp. (NEU), which also rallied on earnings, and First Solar Inc. (FSLR), which climbed ahead of Tuesday's earnings. MNST, GRMN, ISRG, GYMB, SPWR, FCX, IR, MA, TEX, UA, and SPW also moved strongly higher.
The top decliners on the day included the likes of Dow Jones & Co. (DJ) on news relating to the sale of shares to News Corp. (NWS), Jarden Corp. (JAH), which dropped following earnings, NovaStar Financial (NFI) after the announcement of a 1-4 reverse split, RadioShack Corp. (RSH) following earnings, and ValueClick Inc. (VCLK), which released weaker-than-expected earnings. AAPL, AMZN, BIIB, SAFM and NTRI also lost more ground on Monday.
As the week progresses, I believe that we will continue to see the market react to the recent support, but the bulls are going to be wary. There is a general mindset to buy pullbacks in order to add to positions, but while that worked well in February, many of the market leaders are a great deal more extended now and are showing signs of larger corrections on the monthly time frames and not simply on the daily charts. The zone of the
LFC: Two-Wave Pullback & Breakaway Gap
For those of you in Denver who came to see my presentation there two weeks ago, the following setup should look extremely familiar since I spent about an hour on it. :)
It consists of a two-wave pullback and the continuation pattern which followed.
http://www.tradingfrommainstreet.com/images/trades/trade20070730LFC.gif
StockTickr Interview with Toni
StockTickr: Tell us a little about yourself, Toni and how you got to where you are today.
Toni: Well, to start with, my name is Toni Hansen. I live in Sarasota, Florida and I got here via a U-Haul… Ok, that probably isn’t what you meant though! Well, first things first… I’m a full time trader who happens to also teach market analysis to other traders. I’ve been trading for nearly 10 years now, before which time I had worked for the Office of the State Archaeologist in Iowa and had originally intended on a career in that field. I became side-tracked though when introduced to online trading and investing.
After having become uninspired by my broker’s rather sub-par results on my investment account, I had decided to take things into my own hands. I originally began by holding stocks up to a few days or weeks at a time, playing mainly daily setups, but have long since expanded into daytrading and now also trade the EMini futures contracts in addition to trading stocks on multiple time frames.
Shortly after I began trading full time and had quit working in the field of archaeology, I began keeping a free website at http://www.swingtrader.net where another trader and I would post our evening scan results and various musing about the market and the educational tidbits we picked up along the way.
Before long, one of the major market education sites on the web at that time approached us, stating how a number of their members were frequenting our site and they wondered if we would be interested in writing a swingtrading newsletter for them. Since we were already essentially doing this and it seemed like a good way to bring in extra income that would help offset the emotional hurdles of relying purely on our own trading for our living expenses, we agreed. Due to its popularity, we were soon invited to host a chatroom for the site, which was a nice way to socialize with other traders as well as create the necessity to be able to explain each and every action we took in the market.
Eventually we parted ways with that site and went on our own. Over time I found that running a for fee room was incredibly draining and was showing a negative effect on my trading since I was often missing my setups and constantly distracted by keeping the room active all day. So, I’ve now moved on and am focusing more on creating educational material which dispenses the same knowledge as I have taught over the years in the real time setting and work more on a one-on-one basis with individual clients.
I am often asked why it is that I bother to teach if I can trade. Well, the main thing is that had I not agreed to do that site early on, I probably still would not be trading today. Teaching forced me to be able to explain each and every thing I was looking at and why it was important. Even today, by working with individual traders, I learn a great deal and am constantly improving because I am forced to look at the reasons behind my clients’ decisions and to explain to them where they are on track versus where they need to modify their system and what they should be focusing on based upon their own personality and style. By working within their mindset I’m then able to identify nuances in their own trading and styles that I can use to my advantage. It forces me to put into words things which I had taken for granted, but had never really given much thought to before. The result is that it reinforces my ideas and builds confidence in my system. I strongly recommend all traders work with newer traders when possible.
StockTickr: Most traders have a horror story about losing their shirt when they first started trading. What’s yours?
Toni: You know, I guess I must be rather unusual in this regard, since I’ve often been asked this question, but really cannot think of anything that really had that type of affect. Perhaps it is because I am incredibly conservative and have never really put myself into a place that would create the circumstances for such devastation. I’ve certainly had stocks that have gapped a great deal against me overnight, but I managed to keep my shirt.
I guess the worst horror stories, in terms of what has affected me the most in my trading, come more from mistakes in orders. On Friday for instance, I had updated one of my platforms and did not realize that my setting for offsetting an open position had been lost. The result was that since I had closed partials in a position, when I closed the rest of the trade I actually ended up with contracts the other direction, which would have not been bad since I had nailed the high by a tick. The problem was all I saw was that I was now short and had assumed I had simply messed up the order, so when I went and closed that right I then ended up long again! Note how I had said I had nailed the highs by a tick… Well… I am used to reacting very quickly in terms of placing orders and simply didn’t realize that my order had not functioned as it had in the past by only closing what I had open. So, since I didn’t have my P/L up, I didn’t realize that I was now long even as the market was plummeting! Yikes! When I take a loss because I stopped out on something, it does not faze me. This is because I know my odds and the pros and cons heading into a trade, but when something just sidelines me like that I find it harder to get past and it can affect my trading for at least several days, if not longer, since it creates hesitation, which is bad when you are daytrading or scalping!
StockTickr: What single lesson did you learn along the way that has helped you the most in your trading?
Toni: Double check your account and order settings every time you make changes to your trading platform!
Ok, this is probably not the largest lesson though. I would say that lesson would be to accept up front that whenever a new trader is successful right away, it tends to be a fluke. In reality it takes years to really be comfortable with the market and to trust in it to behave in an expected manner and then have the confidence to trade based upon that trust and without an emotional attachment.
StockTickr: Do you see record keeping as a critical part of trading success and how can traders improve upon their trading journals?
Toni: Most definitely, but most traders go about it all wrong! Keeping a spreadsheet of your trades is rather silly in my humble opinion. If you go and look at a spreadsheet of your trades a week or a month later can you remember what the trade looked like and why you took it? Probably not! Instead I feel very strongly that it is important to keep a journal which actually shows a chart of the trades you took and has your entry and exit clearly marked ON THE CHART.
StockTickr: What 3 books do you recommend traders read?
Toni: I’ve honestly never read a trading book from start to finish that really impacted how I trade. In fact, I’ve rarely read a trading book from start to finish period. This is not to say that there are not brilliant traders out there that have written books whom I respect, but I still tend to read history and fiction in my free time.
StockTickr: What is the most common, but easily correctable mistake you see traders make?
Toni: Trading large size without having a grasp of what the best style of trading is which suits their personality. If you can’t make money consistently risking $20, how on earth can you honestly expect to risking $200 a trade?
StockTickr: How do you think the market has changed over the last several years? How have you adapted?
Toni: I don’t believe that market has changed much over the last several years. The patterns and market type that we are seeing now in the indices on the daily, weekly, and even monthly time frames are the same trends and development patterns that are seen over and over on the smaller intraday time frames. The only difference is the scale. While I have learned more about the markets over the years, the basics have not changed at all and my system is just an expansion of the one I used when I first began trading.
One thing that has changed is the technological and industry-related aspects of trading. For instance, it used to cost me $50 in and out, no matter how many shares I was trading, just in commissions alone. After 6 months of trading, the account I shared with my partner was down 20%, but when we broke it down, we discovered that the entire loss was on commissions alone! It is now much easier to reason with new traders to start small, since they can literally pay only a dollar for anything up to 100 shares to take a trade. A disadvantage of beginning to trade in the FOREX or futures market is that you are still subject to much more substantial risk per trade and cannot really control that risk as well per trade.
StockTickr: Do you recommend backtesting and if not, how do traders instill belief in their system?
Toni: The only backtesting I do is reviewing my trading journal to compare current market conditions to those I have seen in the past. I don’t think it’s possible to create an accurate, automated system for backtesting.
StockTickr: What advice can you offer traders who are just starting out?
Toni: Be reasonable. Don’t expect to open a $5,000 account, for instance, and assume that you are going to be able to immediately earn your living trading. Even with initial success, consistency is another matter completely, and it takes time to understand the nuances of market development, even when you do have a mentor assisting you in cutting that learning curve.
Additionally, don’t shell out to buy those $10,000 educational packages you see on tv. Most of the information they peddle can be picked up for free by just scanning the internet! Take time to actually research any mentor or educational site you plan on using and don’t pay them a dime until you have decided that they really do know what they are talking about.
Finally, don’t take for granted the emotional aspects of trading. Those whom I see have the most difficult time are traders who have quit their full-time job, have young children at home, and a spouse that works full time, whom, even though they may have been supportive to begin with, is quickly beginning to think that playing around on the computer all day is not a real job. The pressure to succeed, and to do so quickly, can be overwhelming. This is not to say it’s impossible, but a supportive spouse and a less-hectic lifestyle are huge advantages.
StockTickr:
Monday, July 30, 2007off the new trading week on a somewhat bullish note intraday, even though the daily time frame is still under a lot of strain. The Dow Jones Industrial Average ($DJI) regained 92.84 points, closing at 13,358.5 after 24 of its 30 stocks posted gains. One the largest was General Motors Corp. (GM), which climbed 1.51 points, or +4.9%, ahead of its Tuesday earnings announcement. The S&P 500 ($SPX) rose 14.96 points on Monday and closed at 1,473.90. The Nasdaq Composite ($COMPX) gained 21.04 points and it ended the day at 2,583.3.
A lot of the intraday trading on Monday was actually pretty sloppy. The session began with a great deal of hesitation as the indices moved in for a stronger test of the daily moving average support levels. The S&P 500 pulled back to its 200 day sma in the last two sessions, while the Dow settled at its 100 day sma, and the Nasdaq Composite slid into its 50 day simple moving average.
http://tradingfrommainstreet.com/images/FocusLetter/20070731nas.gif
After the sharp return to lows in Friday afternoon, it took the market awhile to begin to show any real recovery. Extreme momentum moves tend to correction with slower and choppier ones. We experienced this on Monday morning as the indices climbed off the lows beginning around 9:45 ET. All three indices made their way into their 5 and 15 minute 20 sma zones going into 10:30 ET following this early morning pivot. Along the way they chopped back and forth within the trend channel on the 1-5 minute time frame and broke that channel lower with another quick, albeit brief move, into 10:45 ET.
A second drop on the smaller intraday time frames came out of the 11:00 ET reversal period after volume declined as the indices played around with the 5 minute 20 simple moving averages. This time it wasn't quite as much of a move as the first though. When the third move within this small 1-5 minute trend came at about 11:30 ET it barely breached the previous low, creating a bit of a trap and reversal pattern that took the market higher on stronger momentum into noon.
http://tradingfrommainstreet.com/images/FocusLetter/20070731sp.gif
On the 15 minute time frame the change in momentum on this second decline into the daily support intraday is very noticeable. Nearly every bar on the 15 minute charts overlaps most of the price action from the previous bar. The volume decline also indicates that the selling pressure has dried up. After popping to the upper end of this congestion, the indices then hugged the 5 minute 20 sma into 12:30 ET. This was again on declining volume and it triggered the perfect buying opportunity for index traders, as well as setups in a number of stocks which had undergone similar price activity throughout the morning. My entry came at 12:25 ET in the NQ (Nasdaq EMini) at 1969.50, which was essentially the 5 min channel break along the 20 sma.
The first wave of buying following the intraday reversal on Monday was the largest one. It took the indices back into the intraday highs much more quickly than they had fallen from them. That price resistance then led to a two-wave pullback into the 5 minute 20 sma, which had been resistance, but was now support. Light volume on the decline again favored the bulls and the market turned back around for a second wave of upside on the 5 minute charts going into 14:00 ET. This reversal period hit at about the time as the 5 minute 200 sma zone in the S&Ps and Nasdaq to create a second correction in this new trend going into 14:30 ET.
That second rally in the indices did not quite have the extension of the first and, as in the morning's decline into 11:15 ET, this meant that a third upside move would likely break the previous highs of the trend by an even lesser amount than the last. The S&Ps and Dow still did pretty well, even though there was a bit more overlap in prices on the 5 minute charts, but the indices hugged the 5 minute 20 sma support longer before pulling up off it and broke free to a lesser degree than the previous two moves.
This third move not only completely another trend set, but also took the indices back into the strong price resistance from the zone of Friday afternoon's highs and the 5 minute 200 sma in the Dow intraday. The response was a rounding off at highs on the 1-5 minute charts and a pullback into the final hour of trading whereby the 5 minute 20 sma support gave way.
http://tradingfrommainstreet.com/images/FocusLetter/20070731dow.gif
Some of the largest winners on the day on Monday included FPL Group, Inc. (FPL), which rose 5.2% after posting second-quarter earnings growth, NewMarket Corp. (NEU), which also rallied on earnings, and First Solar Inc. (FSLR), which climbed ahead of Tuesday's earnings. MNST, GRMN, ISRG, GYMB, SPWR, FCX, IR, MA, TEX, UA, and SPW also moved strongly higher.
The top decliners on the day included the likes of Dow Jones & Co. (DJ) on news relating to the sale of shares to News Corp. (NWS), Jarden Corp. (JAH), which dropped
For those of you in Denver who came to see my presentation there two weeks ago, the following setup should look extremely familiar since I spent about an hour on it. :)
It consists of a two-wave pullback and the continuation pattern which followed.
http://www.tradingfrommainstreet.com/images/trades/trade20070730LFC.gif
StockTickr: Tell us a little about yourself, Toni and how you got to where you are today.
Toni: Well, to start with, my name is Toni Hansen. I live in Sarasota, Florida and I got here via a U-Haul… Ok, that probably isn’t what you meant though! Well, first things first… I’m a full time trader who happens to also teach market analysis to other traders. I’ve been trading for nearly 10 years now, before which time I had worked for the Office of the State Archaeologist in Iowa and had originally intended on a career in that field. I became side-tracked though when introduced to online trading and investing.
Saturday, July 28, 2007Dow Experiences Worst Week of Trading Since 2003
Good day! I hope you are faring well! It was a pretty wicked week of trading for the market, plummeting in a manner that we have not seen for a number of years. Given that this decline came on the heels of very hesitant buying into huge price resistance from the 14,000 level in the Dow Jones Industrial Average ($DJI) and the 2000 highs in the S&P 500 ($COMPX), the odds are very high that we are now going to experience a much larger correction on this monthly time frame while the market corrects from the bull market of the past five years. This has led me to initiate trailing stops on many of my longer term position trades. A number of them took me out of at least partials in this past week.
On Friday alone, the Dow lost another 208.10 points (-1.5%) and closed at 13,265.47. By the end of the week the cumulative selloff amounted to a 4.2% decline. The S&P 500 lost 5% last week. On Friday it fell 23.71 points (-1.6%). The Nasdaq Composite fell in between, sliding 4.6% with 37.10 points lost on Friday (-1.4%). Some of the hardest hit stocks on Friday included Six Flag (SIX), which had broken down in June from a multi-year base at lows and has been experiencing accelerated selling in recent weeks, GoodYear Tire & Rubber Co. (GT), which had rounded off at multi-year highs in the last several months and rolled over sharply in the second half of last week, and QLogic Corp. (QLGC), which gapped sharply out of a 6+ year trading range on lower-than-expected earnings.
Some of the other most extreme losers were Merck & Co. (MRK) (-3.6%), Exxon Mobil Corp. (XOM) (-3%), American Express (AXP) (-2.8%), DR Horton (DHI) (-3.2%), and Blackstone Groups LP (BX) (-5.4). Those hard-hit by earnings include ITT Corp. (ITT) (-4.6%), Ingersoll-Rand Co. (IR) (-5%), and Chevron Corp. (CVX) (-2.6%).
Despite the underlying weakness, a few top names still made gains. Most of these did so after selling off into strong daily support on Thursday and bounced off those support levels on Friday. CME Group Inc. (CME), Quicksilver Resources Inc. (KWK), and Ceridian Corp. (CEN) were several examples. Also on the move were Stericycle Inc. (SRCL), and Dynamic Materials Corp. (BOOM). SRCL was running on earnings news after announcing on Thursday after the close. It gained 13.82% on Friday. BOOM also took off following earnings and gained 12.85%. Interestingly, most the gains in both of these stocks took place during the trading day as market participants were drawn to these rare beacons of strength on the day.
http://tradingfrommainstreet.com/images/FocusLetter/20070730nas.gif
From a technical standpoint, the market was primarily stuck in a trading range on Friday. The indices had regained quite a chunk of the losses from the large intraday decline on Thursday in the final hour of trading. Even though they pulled back a bit for the first 15 minutes of the day on Friday, they continued back into Thursday's afternoon highs around 10:15 ET. They broke those highs by a hair, creating a 2T reversal pattern at this major morning correction period. It corresponded to the 5 minute 200 simple moving average in the Nasdaq.
Since the upside momentum into 10:15 ET was average to above average, it meant that the earlier intraday lows would be support. The momentum increased into this support when the 10:45 ET reversal period hit, but it lacked the volume from the previous day. This suggested that overall a larger trading range would hold, but the momentum and 2T on the 5 minute charts held the buyers in off this initial support and a second wave of selling followed out of the 11:15 ET reversal period. This second decline continued into noon, at which point the bears became more hesitant. The indices finally flushed back into the previous 15 minute lows from Thursday at 12:30 ET.
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The comparable momentum on the morning's 15 minute decline as that from Thursday afternoon's rally established the previous lows as significant intraday support, much as the comparable pace on the 5 minute decline created support at 10:15 ET. Essentially, the same pattern that formed on the 5 minute charts ended up repeating on the 15 minute time frame. Just as the market congested with slight upside on declining volume on the 5 minute charts from about 10:45-11:15 ET, the indices moved slowly higher from 12:30 ET into nearly 15:00 ET on a slowdown in volume.
This afternoon upside was choppy with a great deal of overlap on the 15 minute time frame as the market retraced a bit over half the morning's decline to the 62% fibonacci level in both the Nasdaq and Dow. Even though I don't use Fibonacci levels intraday in my own charting, I've found them to be highly accurate in the indices as a confirmation tool for support and resistance levels. Often major moves in the market will begin and end at these zones.
http://tradingfrommainstreet.com/images/FocusLetter/20070730dow.gif
In the final hour of trading on Friday the market again experienced a sharp selloff. Notice that on the 15 minute time frame this came after two waves of upside, which is typical for correction moves in a larger trend as opposed to reversal moves. I did manage to catch the short initially, but unfortunately I took off a bit early on Friday and missed the largest chunk of the move which took place in the final 30 minutes of trading. This only occurred once the trend channel from the move out of 12:30 ET broke lower following congestion at the 5 minute 20 sma support into 14:30 ET.
I am expecting volatility in the market to remain high in this coming week or two of trading, but with a lot more back and forth action on the 15-60 minute charts since the indices are going to need to show some reactionary moves off daily exhaustion. This type of market does not tend to recover easily, so even if the market does pull back up a bit, the action would likely be similar to the 5 and 15 minute charts from the afternoon on Friday. Take a look at the drop in late February for example. Since this is the second such move of the year, it will tend to have an even more difficult time than before.
Thursday, July 26, 2007Wall Street Experiences its Worst Session of 2007
Good day! So, that train I was talking about earlier this week? Well, it turns out that the vehicle stalled on the tracks was a full tankard truck of explosive materials and it created a bit of a chain reaction... Yikes! The indices gapped down sharply again on Thursday, continuing to display underlying weakness. As on Tuesday, the Nasdaq made a strong effort to close that gap and managed to do so within the first 45 minutes of trading, while the S&P 500 and Dow Jones Industrial Average remained weaker, holding their 5 and 15 minute 20 simple moving averages as resistance.
The continued selling in the market didn't begin right away. Instead the intraday momentum needed to turn over a bit more. It did so between 10:30 and 11:00 ET by hugging the lower intraday trend channel and moving only slightly higher on declining volume. When the 11:00 ET correction period hit the bottom dropped out. Volume increased sharply as the market fell quickly to new intraday lows.
http://tradingfrommainstreet.com/images/FocusLetter/20070727nas.gif
The market found exhaustion and support around 10:30 ET and rounded off a bit in order to form two small waves of upside on the 1 minute time frame heading back into the 5 minute 20 sma. As you may recall from previous my ramblings, correction moves often take the form two waves, whereas larger trend moves are more likely to take three. The second wave of buying hit highs at the 12:00 ET reversal period and the market again turned lower.
The second selloff was similar to the first and stalled just after 12:30 ET. It also experienced a similar correction, pulling up twice on the 1 minute and again into the 5 minute 20 sma resistance before rolling over a final time around 13:15 ET for a third wave of downside into the early afternoon. The volume at this time was dramatically higher than average and even though the market exhausted at about 14:30 ET, it put in a slightly lower low at about 14:50 ET to create a small 2B setup on the 2-5 minute charts.
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This third wave of selling on the 5 and 15 minute charts took the market smack into that 50 day sma we were targeting on the daily charts. The S&P 500 had already surpassed our 100 day sma target within its mid-day decline when it stalled at it, yet still broke through. The Nasdaq support, however, was hitting at the same time as the zone of the previous daily lows in the Dow and this combination of the daily support with the intraday trend exhaustion was enough to have me finally feeling that the worst of the selling at least was over intraday.
http://tradingfrommainstreet.com/images/FocusLetter/20070727dow.gif
At one point during the day the Dow Jones Industrial Average ($DJI) was down nearly 450 points, but by the closing bell it had bounced back a decent amount compared to the larger decline and ended up losing 311.50 points (-2.3%) to close at 13,472.57. Alcoa Inc. (AA) alone fell 7.1%, while Exxon Mobil Corp. (XOM) lost 4.9%. Citicorp. Inc. (C) also fell a bit harder than the overall index to lose 2.8% on the session.
By the end of the day the S&P 500 had also lost 2.3%, or 35.43 points in this case. It ended the day at 1,482. The Nasdaq Composite experienced the greatest reversal into the close, taking back a huge chunk of its intraday losses to close down 48.8 points at 2,599. This was a large improvement over its session lows of 2563.8. Apple Inc. (AAPL) helped out a bit with gains of 6.4% after announcing a 73% profit increase on its Macintosh brand computers.
The volume in the market during this massive decline reached 2.8 billion shares on the NYSE and about 3.5 billion on the Nasdaq.
After a strongly trend week like this into these daily support levels, I am expecting to do more pivot type of trading on Friday while folks ponder just how wise it is to hold their battered positions into the weekend. This will more easily create trading range activity, although volume is likely to remain a bit heavy despite it being a Friday.
posted by Toni Hansen @ 6:05 PM 0 Comments http://www.blogger.com/img/icon18_email.gifhttp://www.blogger.com/img/icon18_edit_allbkg.gif
Trades 3 & 4
Very quickly, here are the other two stock daytrades I had today. Both were short on range breakdowns...
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http://www.tradingfrommainstreet.com/images/trades/trades20070726b.gif
posted by Toni Hansen @ 12:03 PM 0 Comments http://www.blogger.com/img/icon18_email.gifhttp://www.blogger.com/img/icon18_edit_allbkg.gif
Trades from today's daily watch list:
Trades from today's daily watch list:
OMTR and CMI long....
http://www.tradingfrommainstreet.com/images/trades/trades20070726.gif
http://www.tradingfrommainstreet.com/images/trades/trades20070726.gif
posted by Toni Hansen @ 7:32 AM 0 Comments http://www.blogger.com/img/icon18_email.gifhttp://www.blogger.com/img/icon18_edit_allbkg.gif
Good Daily Charts for Upside Cont. Intraday
The following stocks have favorable daily charts for cont. upside intraday today.
WFR, CMI, BG, OI, BDC, NOC, HSC, GVA, AAPL. SYMC, BIDU, CELG, VDSI, OMTR, CCMP, SCRX, FSTR
posted by Toni Hansen @ 6:53 AM 0 Comments http://www.blogger.com/img/icon18_email.gifhttp://www.blogger.com/img/icon18_edit_allbkg.gif
Wednesday, July 25, 2007Volatile Day in the Markets Leaves Mild Recuperation
Good day! It was quite a crazy session on Wednesday after Tuesday's massive selloff left investors and traders alike wondering just which door to run to. The indices did manage to recover some of Tuesday's losses as we expected, but it was not at all easy, and the S&P 500 and Dow Jones Ind. Average even managed to establish lower intraday lows. This took place after the indices moved higher in the premarket and opened into the 15 minute 200 simple moving average zone intraday, as well as price resistance from Tuesday's morning lows. With an extreme gap now in play, the odds were strong that the gap would attempt to fill. Some initial hesitation for the first 30 minutes of the session led to a better test of the 15 minute 20 sma zone, but volume declined on this slight upside move and the market turned around quickly into 10:00 ET on the heels of June's existing home sales data.
Last month the real estate market experienced a sharp drop in the sales of existing homes. The 3.8% decline marks the lowest sales pace in nearly 5 years as more and more home sellers are pulling their listings. Even with this decline, the supply of homes on the market remains at a 15-year high with 8.8 months' worth of sales (or 16 months and a price reduction of 18% if you want to just count how long my completely renovated home in southern Florida has been listed! Ugh!). Countrywide Financial Corp. (CFC), which is the nation's largest mortgage lender, and who reported a 33% drop in quarterly profits on Tuesday, fell another 1.6% on Wednesday.
All in all though, home prices are still out of reach for many would-be home owners, and unfortunately I am in complete agreement with many who feel that this slump is still quite a ways away from the bottom. I would not be at all surprised to still be stuck here for the next year given the massive overdevelopment of new homes in my area and the insane deals these developers are making in a feeble attempt to unload their inventory. New home sales data for June is due out on Thursday. If by chance anyone would love to live in a gorgeous courtyard home in a well-established gated community, 10 minutes from the beach, feel free to give me a call! Preferably sooner than later since hurricane season is about to start! With the addition of two new family members this past year, ages 4 and 8, I REALLY need a larger house!!! Thanks in advance! =)
http://tradingfrommainstreet.com/images/FocusLetter/20070726nas.gif
Ok, ok, since I still haven't quite convinced you, I suppose I better get back to telling you about the rest of the market action on Wednesday...
Once that 10:00 ET selling hit, there was no turning back until the market had made its way back into Tuesday's lows. The major indices didn't even stall enough at 5 minute 20 sma support to form more than a cursory continuation pattern with an inside range bar and then a return of the bulls at 10:15 ET. The momentum increase somewhat as the previous lows approached and finally formed an exhaustion move as the 10:45 ET reversal period hit. This corresponded nicely to the previous day's lows in the Nasdaq Composite, but was a slightly lower low in the Dow and S&Ps. The result was a 2B reversal in those indices and a double bottom in the Nasdaq which eventually took the market back to the 15 minute 20 sma resistance that had held earlier in the session.
http://tradingfrommainstreet.com/images/FocusLetter/20070726sp.gif
After heavy volume throughout the morning, the volume finally died down a bit mid-day. After hitting the 15 minute 20 sma, the momentum within the indices also began to turn back over. The market pulled back off the resistance into noon and then hit the 15 minute 20 sma again around 12:30 ET, but this time at a much more gradual pace than before. This upside into the resistance occurred on the lightest volume of the session so far, which indicated a lack of truly dedicated buyers and after a small pullback into 13:00 ET, the selling increased for a second time on the day going into 13:30 ET.
As in the morning, this low held the previous one in the Nasdaq Composite, but the Dow once again saw a slightly lower low, creating a second 2B low in that index. The slight flush into this low, but on lesser volume than into 10:45 ET, showed us that while the bears were still unsure about buying, they recognized the support and were hesitant to break it. After a brief pause when they contemplated the level, the market popped quickly back to the 5 minute 20 sma resistance zone. This pushed the indices into a sloppy range along that level into the 14:00 ET correction period, at which point the resistance broke and took the indices back into the 15 minute 20 sma for the third time.
Typically a third test of support or resistance is the one most likely to break. The market had not broken the third test of lows because in the Dow each low was slightly lower than the last, hence creating more of a rounded appearance. Each test of lows was also at a more gradual pace than before, leaving less momentum to push through the support. As a result, in this case the third test held. On the upside, however, the resistance became closer and closer each time, so the market had less and less work to do to make it into that level and the slowing downside momentum meant that more steam was available for the bulls. The indices broke through this 15 minute 20 sma resistance when the 15:00 ET correction period hit. This happened after it hugged it for about half an hour beginning just before 14:30 ET with lighter volume throughout that congestion.
The indices rallied sharply out of 15:00 ET and within only a few minutes they were all the way back into the congestion from the opening prices. This stalled the buyers, but the pace was so strong that it was difficult for the market to simply turn back around. Instead, the 5 minute 20 sma support held into the close, even though this close still left the market looking weaker on the 5 minute charts by hugging that 5 minute 20 sma instead of bouncing right back off it.
http://tradingfrommainstreet.com/images/FocusLetter/20070726dow.gif
Although I had a slew of stocks on my watch list which gapped strongly into the open on Wednesday, many of the gaps were too extreme for decent momentum continuation moves and they spent the day stuck in choppy trading. On the upside these included CB, PLT, AMZN, EGLE, and PRAI. Chubb Corp. (CB) gapped on earnings that were up 19% from the previous year, adding 6% by the end of the day. In Plantronic Inc. (PLT) its rally was another earnings move in which it gained 11.3%. Amazon.com (AMZN) made headlines when it reported earnings that more than tripled in the second quarter and sent the stock higher by 24.4% into the closing bell. Eagle Bulk Shipping Inc. (EGLE) rallied 15.4%, all of it with the morning gap, when it announced plans to acquire a fleet of ships from a Greek company. PRA International (PRAI), on the other hand, saw its 7.8% rally resulting from plans to be taken private.
On the downside the extreme gaps which saw little action past the open were SKX, PNRA, NTRI, and JOYG. Sketchers USA Inc. (SKX) shares fell 21.4% after announcing a 27% increase in operating expenses with its earning release. Panera Bread Co. (PNRA) also fell victim to rising costs. In the past year, even though revenue rose 28%, costs increased 33%. Another stock tumbling on earnings news was NutriSystem Inc. (NTRI), which fell 10.8%. Ironically, it actually beat earnings expectations of about 85 cents a share with earnings per share of 96 cents. Joy Global Inc. (JOYG) lost 11.9% when it cuts its fiscal 2007 financial forecast.
In the overall market, the Dow Jones Industrial Average ($DJI) gained 68 points to end the day at 13,785 on Wednesday. It was led by Boeing (BA), which had rallied 3.3% into the open on better-than-expected earnings. The S&P 500 ($SPX) rose 7.05 points, closing at 1,518. The Nasdaq Composite ($COMPX) climbed 8.31 points. It closed at 2,648.
Despite the somewhat higher prices on Wednesday, the Dow and Nasdaq still have room before hitting the larger 50 day simple moving average support. In the S&P 500 the next major support level is the 100 day sma, which is slightly above June's lows. The market still has room to bounce to its 60 minute 20 sma resistance, but the larger daily support remains a magnet for decent potential to hit still at some point this week.
Labels: AMZN, BA, CB, EGLE, EMinis, JOYG, market wrapup, NTRI, PLT, PNRA, PRAI, SKX
posted by Toni Hansen @ 7:39 PM 0 Comments http://www.blogger.com/img/icon18_email.gifhttp://www.blogger.com/img/icon18_edit_allbkg.gif
Importance of Utilizing Time Frames
A very important thing to look at when determining whether or not to take a setup or not is to look at it from several points of view. In the market these are called Time Frames. The ones that are the most pertinent to you will depend on your objective as a trader. For instance, let's say you are a swingtrader. Your primary focus is going to be to look for patterns on the daily charts for buying or shorting opportunities. Once you have a list of stocks that caught your eye, however, it is usually so many that you then need additional means for trimming down that list. One of the ways to do so it to look at those symbols on several other time frames.
For a swingtrader for instance, it is helpful to look at a weekly chart. This will show you where your pattern is at in the larger trend. If you have a bull flag on the daily, but on the weekly you can see that the stock is coming into very strong resistance, such as an equal move from the last weekly breakout, then the odds for success on your swingtrade are going to be lower. This is because, with the weekly so extended, you are nearing the probable end of that swing upwards on the weekly chart and more likely to start to see reversal patterns begin to form. Now let's say you still have a pretty decent list to choose from. Most of your daily charts still had room to move on the weekly as well.
What you want to look at next are the smaller intraday time frames. For a swingtrade, these will be the 15, 30 and 60 minute charts. What you want to watch for are smaller buy patterns on these time frames as well that can lead into a trigger on the daily chart. If you have a bull flag on the daily, look on a 30 minute chart for a base along the highs of the trend channel in the bull flag. As that base breaks, you can use that as your entry trigger, instead of having to wait for the daily breakout, which might not occur until the pace and volume in the market have already picked up and are moving strongly higher. If that is the case at the time of your entry, the odds of you getting in near a short term top are much higher. What this does is make it easier to mess up your trade by getting scared out of the position on a rather significant intraday pullback well past your entry point.
If you are a daytrader only, the weekly charts won't matter as much to you. Even if a stock is at weekly resistance, you can still get a nice upside move intraday. On the other hand, the smaller intraday charts like a 5 minute or even a 2 minute will matter. They will be like the 15-60 minute charts for the swingtrader. You can use these smaller charts to help time your entries.
The same can be done with exits. As a stock is coming into a target level and you want to look to get the most out of it without having to hold through any more pullbacks, you can use the patterns and action on the smaller intraday charts to help you time an exit. This is where the multiple time frames really come into play: as a way to manage and reduce risk, as well as increase your reward potential.
You want to be very careful, however, to pay attention to the time frame you took the pattern on. If you took a daily bull flag, you don't want to use a 15 minute chart halfway to your target for anything other than assistance on trailing stops. Just because you see resistance on a 15 minute chart doesn't mean that the daily rally is over with. More likely, it will just lead to a temporary correction before moving higher again. Too many traders drop down to smaller time frames and start trying to micromanage the trades when they are in play. What this will most often do is just get them out at temporary resistance levels, diminishing their risk:reward potential and keeping them from reaching their targets or objectives.
Labels: multiple time frames
posted by Toni Hansen @ 3:01 PM 0 Comments http://www.blogger.com/img/icon18_email.gifhttp://www.blogger.com/img/icon18_edit_allbkg.gif
Chatroom Guidelines
Hey gang,
Folks have asked to have a list describing the general guidelines to the chatroom that I moderate. As such, I have put together a list and posted it here for easy access.
The login link is as follows: http://www.tradingfrommainstreet.com/roomsetup.html. You can also use http://www.icechat.net/ to access the room for free without the mIRC registration.
The room will remain completely free, but to keep it from getting too crazy and out of control and to be a place where everyone feels welcome and comfortable participating. So, please observe the following...
1) Clean family-style fun only… i.e. no cursing (or mock cursing), excessive/undeserved trouting (deserved trouting still approved)
2) Everyone knows how difficult trading can be at times, so let’s keep all posts positive and encouraging… discussing difficult issues with trading is encouraged, but avoid unconstructive complaining
3) Only post stocks and setups which are similar to those you see posted by Toni (mwah). This way even newbies will be able to catch on easier to the style traded here.
4) If watching a security for a trade, post the symbol ahead of time when possible, as well as buy/short and the general type of trade, i.e. breakout, 2t, etc. There will be times we will post missed setups though in order to expand our familiarity with certain patterns and learn from them.
5) For stocks which fit the criteria of the room’s style of trading, you are welcome to post these in purple to make it easier to follow the setups and pick them out from the rest of the chat dialogue. You can do this by typing for example “/me watching XYZ.” (without the quotations), which will post “watching XYZ.” in purple as an action. I will use similar commands on the setups I am watching as well.
See you there!
Toni
posted by Toni Hansen @ 2:14 PM 0 Comments http://www.blogger.com/img/icon18_email.gifhttp://www.blogger.com/img/icon18_edit_allbkg.gif
Tuesday, July 24, 2007Indecision Gives Way to Massive Selloff
Good day! Tuesday was quite similar to watching a train wreck where you see the stalled vehicle on the crossing, but no one is able to control the outcome. The day started on a sour note for the bulls, giving way to the Nasdaq's rounded highs and bearish bias in that index. The indices slid lower throughout the wee hours of the morning, gaining momentum as the opening bell approached. The NQ, which is the Nasdaq 100 Emini futures contract, opened lower by 14.50 points. The ES (S&P 500 EMini) opened lower by 9.75 points. The YM (mini-sized Dow) lost 86 points by the time it opened. In the indices themselves, The Nasdaq Composite ($COMPX) lost 25.40 points (-0.95%) by 9:45 ET, the S&P 500 ($SPX) had fallen 14.25 points (-0.9%), and the Dow Jones Ind. Average ($DJI) was already down by 121.6 points (-0.87%).
As I've discussed in the past, when the market has an extreme gap, it tends to try to close that gap in the morning and into the early afternoon. The two main exceptions are when there was already another similar gap the day before or when the market is at a major turning point. Due to the large daily resistance with the Dow 14k and all of the extended weekly and monthly charts, it is quite possible that the latter exception was the case on Tuesday. As such, I was not as aggressive on buying the gap right away this time around.
http://tradingfrommainstreet.com/images/FocusLetter/20070725nas.gif
The indices immediately showed greater difficulty in attempting to fill that gap by falling into a trading range for the first hour of the day. This range did develop a bullish bias into 10:30 ET when the market began to hug the upper end of the range on declining volume. This created an upside breakout, but it lacked volume confirmation and the momentum was not sustainable. When the 11:00 ET reversal period hit at about the Nasdaq's 15 minute 200 simple moving average resistance, the indices rounded off at highs and pulled back into noon.
Strong price support hit in the indices when they retested the zone of the morning congestion, but they did not bounce right away. Instead the market slowed, congested a few minutes and rounded off at the support on the 1 minute time frame before pulling higher again. The Nasdaq was displaying the best relative strength by this point by closing a greater percentage of the morning gap and retracing off the highs by a lesser degree. The Dow and S&Ps, on the other hand, had almost returned to the morning lows on this pullback.
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When the market bounced, it was much easier for the Nasdaq to establish new intraday highs, whereas the Dow and S&Ps ran into resistance from its previous highs at 12:30 ET. The Nasdaq strength surpassed the others to the extent that it even managed to completely close the morning gap with a move equal to its first intraday rally, but that price resistance hit right at the same time as the 5 and 15 minute 200 simple moving averages. In the Dow the 5 minute 200 sma and 15 minute 20 sma hit at the same time. and the S&Ps also ran into their own 15 minute 20 sma. All of these levels hitting at once halted this second upside move dead in its tracks.