一个笨蛋的股指交易记录-------地狱级炒手

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An Oddity in the Airlines Today
September 8th, 2008 by Corey Rosenbloom

If you don’t trade airline shares today, you may have missed this interesting intraday development that occurred around lunch time.
The Chicago Sun Times reports the story “United Airlines Shares Plunge on False Bankruptcy Report.”
Apparently, the Florida Sun Sentinel website posted an article dated 6 years ago and simply (erroneously) changed the date to the present, which reported that UA was declaring bankruptcy.  An investigation has been launched to determine if there was intentional wrong-doing.  The story referred to the company’s 2002 bankruptcy (UA exited bankruptcy in 2006).
According to the Chicago Sun Times article:
“UAL shares dropped to 1 cent from $12.45 when the rumor first surfaced. The shares dropped suddenly just before 10 a.m. The Nasdaq stock market halted trading until United could address the rumors. After trading resumed about 11:30 a.m., the shares jumped $11.50.”
Let’s see what happened on the chart:

United Airlines (UAUA) Daily Chart:

The action likely executed any stop-loss orders placed properly beneath the 20 or 50 period daily EMA from traders trying to capture a reversal up in these stocks.  Although most of the time, such long bars (candle wicks) are deemed “erroneous” or ‘false tick’ or something of the sort, this time it is a real bar and will permeate the chart of this and other airline companies for a time to come.
I did want to highlight a couple of chart points prior to today’s surprise and mistaken action.
Notice that as price continued to make new price lows into July, the momentum oscillator actually made higher lows, indicating a developing (and multi-swing) positive momentum divergence prior to the price reversal to the upside - this is a good example of this concept.
Also, shares of other airline stocks show similar (but not as extreme) price patterns in sympathy with United Airlines.
View the daily (and intraday) stock charts of Delta Airlines (DAL), Northwest Airlines (NWA), Southwest Airlines (LUV), Continental (CAL), Jet Blue Airways (JBLU) and others.  Jet Blue’s intraday chart is particularly interesting.
This is an example of how news (true or false) can destroy any perfect price pattern or trade set-up you find on the charts and reminds us why it can be better to diversify money into multiple trade set-ups instead of trying to hit a homerun on a single stock set-up intraday - you never know when this will happen.
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Charting Freddie FRE and Fannie FNM Perhaps for the Last Time
September 8th, 2008 by Corey Rosenbloom

With virtually all news focused on Fannie Mae (FNM) and Freddie Mac (FRE) and their government take-over, let’s look at their charts while they still exist to learn any trading lessons from these companies.
Freddie Mac (FRE) Daily:

The take-away from this chart is that it’s generally unwise to bet against a prevailing or primary trend.  Although there were massive retracement (and two 100% rallies), ultimately price gave back all those gains and more, and in one day price has fallen almost 80%.
Notice that simple technical (chart) sell signals came each time FRE retraced back to its falling 20 day EMA (green line), and notice the ‘dojis of indecision’ that formed at this critical barrier to overcome in a down-trend.  At a minimum, you should exit any long (counter-trend) trade at these zones, but they also can serve as excellent short-sell entries with low-risk stops.
Though you cannot predict government announcements or reports, you can trade high probability, low risk opportunities when they set-up in the basic price structure.
Fannie Mae (FNM) shows a virtually identical price structure, but I added the price from the start of 2008.
Fannie Mae (FNM) Daily:

Identifying a downtrend can be as easy as viewing moving average orientation (that the 20 is consistently beneath the 50 (blue) period EMA) or by comparing price swings (looking for lower lows and lower highs) or as complex as linear regression, autoregression, or other statistical measures.  I find some combination of the “swing high and low” method and the moving average method as being fine for quick trend assessment.
Again, whether or not you can spot ideal trade location set-ups on this chart, what’s important is to grasp the big picture.  A lot of people got excited and purchased shares in these companies (and others that are trending down) and decide to be aggressive buyers when price swings lower.
While this may work for the long-term (studies often show it does, provided the company does not go bankrupt!), short-term, it can be a trying strategy psychologically, and you always run the risk of a company being taken over or bankrupting or ceasing to be listed, particularly when we get beneath $5 per share.
People really do compare it to ‘catching a falling knife’ and if you’re successful at catching it, you can make immense profits… however I find it’s superior mentally and financially (as a trader) to identify the predominant trend and then find low-risk retracement entries in the direction of that prevailing trend, particularly as price retraces to a moving average or Fibonacci number.
Finally, let’s look briefly at Fannie Mae’s (FNM) weekly chart to see how fast and far this stock has fallen.
Fannie Mae (FNM) Weekly:

I’ll let the chart speak mainly for itself.  Notice that even on this timeframe, the 20 week EMA (exponential moving average) provides formidable resistance and sets up entry opportunities.
Study these charts (and print off your own and annotate your understanding of price behavior on them) for further insights, and use these companies as a lesson not to trade aggressively against the predominant price structure (trend) and to understand risk and reward characteristics.
For further fundamental (news) information on these companies, there are many resources to check out today, the easiest way to view many of them would be to use the NewsFlasher Business News and Business Blogs section.
I also wanted to highlight Barry Ritholtz’s “The Big Picture” site which has recently written over 6 articles on Freddie and Fannie (including multiple links as well) that you might find interesting.
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Gap Fade Stats for August
September 6th, 2008 by Corey Rosenbloom

Wow - August was another month with a high percentage of overnight gaps, but let’s see how many of these overnight gaps in the DIA (Dow Jones) were filled intraday.
I define a gap as being an open that is at least $0.20 different than yesterday’s close and use Excel for the statistics.
There were 21 trading days in August, and 17 of these (81%) showed an overnight gap of at least $0.20 in the DIA.
Of these 17 gaps, 8 gaps filled, giving us the first under 50% month this year, with 47.06% of overnight gaps filling intraday.
There were 7 up-gaps, and 4 of these filled (57.14%).
There were 10 down-gaps, and only 4 of these filled (40.00%).
Despite the daily chop, there was not one gap greater than $1.00 (there was a gap of $0.98 on August 5th which did not fill).
The following print-out shows the DIA gap fill statistics for August:

I’m including the “year to date” numbers from January 1st until August 31st 2008 in the DIA (of gaps greater than $0.20):
As you see from the table below, 77% of days have opened with a gap at least $0.20, and 62.50% of these gaps have filled.  The table shows the whole picture so far:

Up gaps have been more likely to fill than down gaps this year, and almost 3 out of 4 up gaps have filled, while 1 out of 2 down gaps have filled.
2008 has been a generous year so far for the gap-fade strategy.  Will it continue?
Check out these prior gap fade statistics months:
January Gap Fade Statistics
February Gap Fade Statistics
March Gap Fade Statistics
April Gap Fade Statistics
May Gap Fade Statistics
June Gap Fade Statistics
July Gap Fade Statistics
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Intraday Action from Friday
September 6th, 2008 by Corey Rosenbloom

Wow, what a day Friday gave us in the markets.  Let’s look inside the price action to see what potentially profitable trade set-ups occurred in the intraday structure of the major stock market indexes.
DIA Dow Jones 5-minute chart:

Price began the day with an opening gap down, given the bearish ‘trend day’ from Thursday, such a move was quite expected.  The intraday price reversal was not as easily anticipated, though given the ‘chop’ of the current environment (up one day, down the next, vice versa) it should not have been an unexpected development - it’s so easy to get overly bearish or bullish and miss emerging information.
Also, although this will go down as a “Gap Fill Day,” odds are quite high that if you attempted a gap-fill today and used any sort of stop-loss strategy, you were stopped out prior to the gap fill, although there was a quick move to fill the gap within the first 30 minutes of trading - unless the gap is greater than 100 Dow points, the highest probability move is to play to fill the gap.  I do recommend using a stop that’s at least half the distance to your target (meaning, if you target a 50 cent gap fill, place your stop 25 cents away from entry).
Moving on, the price trended lower into the 11:00 hour before forming quite a significant ‘triple swing’ positive momentum divergence, which at a minimum indicates the sellers are losing pressure and risks of holding short are increased - divergences often signal an exit to any (in this case) short positions you have intraday.
In fact, that worked as price surged off the new lows on the day to cross above its falling 20 period EMA (a ‘last resort’ short exit) and then found resistance above the 50 period EMA, forming a new price high and new momentum high on the day.  Price fell gently (sloping in a 45 degree angle) to its rising 20 period EMA, setting up the “Impulse Buy” trade or in this case a “Bull Flag” trade (I drew the pattern in the SPY chart below, not in the DIA chart).
Price then found resistance at the “measured move” target of the flag and also at yesterday’s closing price before consolidating, finding support again at the confluence of the 20 and 50 period EMA, and rising into the close of the day with the classic “Three Push” pattern which developed on a loss of upward momentum.  The “Three Push” pattern is a sign of weakness as price makes the final push into the close - using up buying power to form the three tight peaks.  It’s also analogous to a mini complete Elliott Wave pattern (with the three pushes being the impulse waves of a 5-wave pattern).
Though the S&P 500 (SPY) chart below has similar structure as the DIA, I wanted to provide it to show the similarities in intraday action on these indexes.
SPY S&P 500 5-minute chart:

With a hammer forming on the daily chart (by the way, if you want to look inside a hammer candlestick, Friday’s action showed the inner-workings of the pattern), it will be interesting to see the price action on Monday, which is likely to be bullish given the intervention plan of Freddie and Fannie (FRE) and (FNM) which could cause a big price move if investors are reassured.
Do some good homework over this weekend.
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Inside the Recent Bearish Rising Wedge
September 5th, 2008 by Corey Rosenbloom

Technicians should not be surprised with the recent downward price ejection out of the August consolidation pattern, known as a ‘rising wedge.’  Not only did the pattern follow classic definitions and expectations, we were treated with a prior example of the pattern just a few short months ago.  Let’s look at the Dow Jones index and step inside this pattern for a better educational foundation.
Dow Jones Daily Chart:

History repeats itself?  It sure seems likely, and many were aware of the possibility of the rising wedge seen from March to May repeating itself (almost exactly) into today’s environment.  The only major difference was that the current wedge endured two failure tests (failure tests take place after a breakout when price returns to test the lower trendline) instead of the one (red arrow) that occurred last time.
It’s very difficult to enter at the absolute breakout of the pattern, however the highest probability short-sell (or long liquidation) entry occurs at the failure test of the pattern (this is true on most patterns).  In fact, one could also call this a “throwback” rally before final expected capitulation.  Nevertheless, entry takes place as close to the trendline as possible, with a stop being placed on the opposite side of the upper trendline.  The target is often a “measured move” of the height of the pattern.
The initial target is always a test of the swing low, which in the Dow is near 10,800 from the July 15th low.  Odds look greater than ever that price will - at a minimum - test this price for a major battle at that level (the level is 1,200 on the S&P 500).
Notice the negative momentum divergences which set-up as price reached the ejection point (breakout zone) of the pattern - this adds to confirmation and confluence.
Let’s do something a little fun and go inside the bear wedge, sort of like entering the eye of a hurricane or core of a tornado… but safer.
Inside the Bearish Rising Wedge:

I’ve drawn this hourly chart on the Dow Jones index and drawn the trendline according to the “maximum touch” method, meaning you attempt to draw the line so as to maximize its significance in terms of times the trendline has been touched or tested.  You get better insight this way because it makes sense and captures the psychology (thinking process) of those who drew trendlines and experienced what they thought was a true break (such as what happened around August 12th).
This was a breakout as far as the pattern was concerned, but I felt that not enough time (cycle) had elapsed to be a true breakout - patterns need time to form, especially consolidation patterns.  One should also keep in mind that this entire move you’re seeing is an official “Bear Market Rally” or “Counter-Trend Retracement” so you have to keep that as the dominant structure - there was no reason to get excited and to believe a whole new bull market had emerged… or that the bottom was firmly set in place.
That being said, the false breakout took price back to the lower trend channel, back to the upper channel, and then to the breakout price around August 18th.  That level would be an “aggressive” short with a large stop placed above the upper trendline IF you believe that was a true breakout (you really don’t know until it’s been confirmed, but by the time it’s been confirmed, you often sacrifice initial trade location).
I prefer to enter on ‘failure tests’ or ‘throwback rallies’ such as what occurred on August 25th.  However, the flaw in this strategy is that there isn’t always a throwback to enter safely.  Interestingly enough, price came back to test the lower trendline two more times (giving heat to short-sellers and possibly causing them to take a stop-out if their stop was placed too close… ie. inside the channel).
Tuesday, September 2nd’s overnight strong gap likely got buyers excited, but they entered into a retest of a converging trendline and apex of the bearish wedge pattern, which proved to be the absolute top (or ‘perfect’ entry in hindsight).  From here, sellers dominated, the bearish wedge pattern was confirmed, and price has, and continues to plunge to meet its price objective (now around 200 points away).
Whenever you see a clear or distinct pattern, annotoate your charts, print them, and learn as many lessons you can so you can profit the next time the pattern possibly sets up.
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A Quick Look at the Current S&P Weekly Structure
September 5th, 2008 by Corey Rosenbloom

Today’s 3% index rout reaffirmed the predominant and primary downtrend on the major US Equity Indexes, and also confirmed the breakdown of consolidation from a bearish rising wedge as the dominant technical pattern.  Let’s look at the S&P 500 weekly chart to see the structure.
S&P 500 Weekly:

Price peaked in October, 2007 and a primary downtrend was confirmed into 2008 (via a variety of methods, including a moving average bearish cross, lower high & lower low, break beneath all moving averages, etc).  Thus, any rallies in price must be labeled as counter-trend rallies.
The July 15th bottom should have been classified as such, and although you can certainly profit on counter-trend rallies, you must know that the risk is higher (it can be like playing musical chairs) and the odds of success are lower.  At any point in time, the prevailing trend can reassert itself, and the dominant technical structure (trend) will take over.  Such is what happened Thursday.
Price found resistance just above 1,300 at the 32.8% retracement of the May high to July 15 move, which also corresponded with a confluence of the weekly 20 and 200 week moving averages - remember that confluences of support can be very difficult to overcome, and often set-up excellent, low-risk trading opportunities.
Now, the bearish wedge on the indexes (I’ll try to detail that later) has been broken, confirmed, and we have bearish price projections, the first of which is a retest of the July 15th low (around 1,200).  Failure there will take price lower, perhaps even to a ‘measured move’ of the prior bear swing - I’ll discuss that more should the break of the July 15th low occur.
For now, don’t panic - manage your risk - and stay on top of any open positions.  The path of least resistance for the US Equity market appears to be to the downside, keeping in mind that September has a historical significance as a generally ‘bearish’ month.
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Large Scale Ascending Triangle in Copper
September 4th, 2008 by Corey Rosenbloom

A reader asked me yesterday to look at a potential ascending triangle on the 3-year chart of copper and indeed that is the dominant structure of Copper prices and it’s definitely worth a second look.
Let’s take a look at the compressed weekly chart of Copper prices (Symbol $COPPER in StockCharts.com):

Ascending triangles are consolidation patterns, which often have an upside bias in terms of range expansion (breakout) expectations.  They don’t always break out to the upside, but that is the assumption.
At the moment, price is testing the lower rising trendline at around $330, and a doji has formed currently, but there’s a few considerations to analyze before getting ultra bullish or drawing any fast conclusions.
The $380 to $400 range provides the upper trendline for the pattern.  As expected, the momentum oscillator has been winding down to an equilibrium level (swings have been compressing and overlapping) which is consistent with the pattern.  A negative momentum divergence has also set in.
Let’s zoom the camera in on the weekly chart and look closer at some of these developments.

IF (and that may be a large “IF”) the lower trendline fails (the trendline is abundantly clear on this zoomed in scale), then the initial downside target would be the prior swing low at roughly $290.  Also, the 200 day moving average (currently just beneath $280) would likely rise to around the $285 level and would provide initial support should the trendline fail.
Price recently failed a test of resistance via the 50 week EMA, and it appears an EMA bearish cross is eminent.  Reference the end of 2007 for a similar set-up, which resolved to the upside.
The resistance at $400, and the current negative momentum divergence are evident as well on this chart.  There could be a battle to hold on to the $325 level.
Finally, let’s look at the daily chart for a little educational example using Fibonacci and resistance.

Copper has respected its 200 day SMA in terms of support, which has now been broken and confirmed as resistance.
I wanted to call attention to the classic “confluence” trade set-up at $355 in mid-August.  Price rallied up against a confirmed daily downtrend and retraced 38.2% of the July high to August low move, and this Fibonacci level corresponded directly with the 200 day SMA and 50 day EMA, which proved too difficult for buyers to push above.  As such, an extremely high probability, low risk short-sell trade set-up here.
Multiple sources of confluence often set-up excellent trade opportunities with low-risk entries in either direction.
Nevertheless, the current structure has price forming a positive momentum divergence and a potential “double bottom” pattern after a large range bar and gap yesterday.  Recall that the weekly ascending triangle lower trendline comes right at the $325 level, so it will be interesting to see if price finds support here and reverses back to the upside.
Let’s continue to watch these levels for signs of continuation or reversal, and for more potentially good examples of trade set-up and management.
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The Dollar, Fibonacci, and Trading from a Desert Island
September 4th, 2008 by Corey Rosenbloom

What if you had to trade from a desert island, isolated from others and news reports. Could it be done?
Adam Hewison of Market Club released a new educational video today that answers this question in an interesting method, but beyond that, he shows how to use the Market Club software in terms of identifying trends, finding entry signals, and managing positions based on price structure alone, removing subjectivity.
Hewison discusses the US Dollar Index long-term charts to show the structure and how the prevailing trend exists now. Further, he shows insights into using Fibonacci retracements to set profit targets and trade entries.
Entitled “How to make money almost anywhere, even on a desert island,” Hewison writes:
“It is probably every traders dream to trade from their own personal tropical island and make money, but can it be done? Oh yes, and in this short video I show you how it can be achieved. What you will see can be done from any location… so if you are on your own private island or you are still saving up to make that big purchase, this technique can be applied.
The dollar index, which is receiving a lot of publicity lately, is featured in this educational video. This index has made a major push to the upside. The question is, do you know what catalyst pushed this market higher? The other question is how high can the dollar go?
If you think it all happened just by luck, that this index is headed higher, think again. In my video I explain and show you in detail why this index is gaining upward trajectory and give specific price targets on the upside.
Summer is over, and it’s time to get serious about the markets. Watch this video and see how you can get a leg up on the market for the rest of the year.
There is no need to register to watch this video, just enjoy!”
Learn more about the Market Club service and how you might benefit from becoming a member if you have not joined already.
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Prudential Financial PRU Bull Flag Example
September 3rd, 2008 by Corey Rosenbloom

Financial stocks have been showing relative strength as of late during the recent market rally.  I wanted to call attention to Prudential Financial Securities (PRU) to show a classic example of a Bull Flag measured move example worth nothing.
Prudential Financial (PRU) Daily Chart:

Price formed a positive momentum divergence on the July 15th lows as evidenced by the oscillator (which often precedes price reversals) but again we can’t know how powerful a move will occur off divergence signals.  In this case, strong momentum pushed price to new momentum highs but not new price highs for the year.  The price high is closer to $92 per share, which was achieved right at the start of 2008.
Nevertheless, following the large momentum impulse, price retraced to the 38.2% retracement of the July 15th move to find support at the 50 day EMA, setting up the “Impulse Buy” trade or in this case, a “Bull Flag” or measured move.  It was also roughly the 50% retracement of what I’ve considered as the “flag” portion (the move from $62 to $76 per share - a $14 move).
Generally, for the best bull flags, you want to find a confluence of support at a key moving average (usually the 20 period EMA) and also a Fibonacci retracement, usually the 50% retracement.  This will increase your odds of a successful trade, and also allow you to take a potentially larger position as a result of a tighter stop.
Volume declined as the flag potion developed, adding confidence to the pattern resolving as expected.
Entry was taken as price broke above the upper trendline, and the target is an equal or “Measured Move” of the prior impulse (added to the bottom of the trend channel for conservative price projection).
A $14 move off the roughly $70 support projects price to complete the flag (measured move) pattern at roughly $84 per share - keep in mind these prices are rough estimations, and not exact numbers.
It’s important to note and categorize ideal chart patterns so that you’ll be more likely to recognize and act upon them in real time, potentially adding to your trading edge.
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The DELL Decline
September 3rd, 2008 by Corey Rosenbloom

Dell Inc (DELL) missed earnings last week and investors punished the stock by sending shares lower, breaking the daily uptrend and numerous levels of support.  Let’s take a quick look at the charts to see what we can learn from these developments.
Dell Daily:

Prior to the earnings announcement plunge, price had completed a “Three Push” pattern which often occurs prior to a reversal (albeit we can never anticipate the strength of price reversals), and the ‘Three Push’ pattern was complete with a triple swing negative momentum divergence - clearly the risk of ‘long DELL’ was high.
What was shocking was how quickly and violently price broke all recent levels of support (Fibonacci retracements, moving average support from all 3 averages, and the prior July swing low).  This is an unusual pattern, and underscores why earnings plays can be very risky indeed.
At the moment, price appears to be in a daily time frame free-fall, and the new momentum low is significant.  Following a retracement, odds are for lower prices yet to come in this stock.  For possible support, let’s raise the time frame to the weekly chart.
Dell Weekly:

It appears the $18 per share level could be the next eventual target in terms of price support and reversal.  This comes in at the 2008 lows in April, but should price fail there, all bets to the long-side would be off.
I also wanted to use this example to show multiple momentum divergences on the weekly chart, which precedes price reversals and provides structural opportunities for trade management.  Remember, momentum (supply/demand imbalance) precedes price.
2007 showed a negative momentum divergence which preceded the trend/price reversal down.  Mid-2008 showed a ’rounded reversal’ complete with a positive momentum divergence, which leads us to the current negative divergence and sharp price decline.
As an added bonus, price formed two ‘doji’ candles prior to the plunge - in addition to the dojis, we had price at the 61.8% Fibonacci retracement from the 2007 highs to the 2008 lows price swing.  We had significant confluence of technial (chart) factors, in terms of a negative divergence, doji (indecision/reversal candles), and resistance via Fibonacci retracement.  Combined with the “Three Push” pattern and negative divergence on the daily chart, the odds were quite high for a price reversal.
DELL shows how to use multiple time frames and different forms of technical analysis to tilt the odds in your favor in terms of your price structure analysis.
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What a Difference a Day Makes: Gold, Oil, Dollar, NASDAQ
September 2nd, 2008 by Corey Rosenbloom

Wow!  Today’s price action was fascinating from a number of angles.  The US Equity Indexes surged higher at the open, only to give back all gains and more.  Oil, Gold and other commodities plunged sharply today, only to recover slightly by the close.  Bonds rose and yields fell.  Let’s take a quick chart glance at Gold, Crude Oil, the US Dollar Index, and the NASDAQ Index.
I’ll fly through the charts and let them speak for themselves, with minimal annotation.  Let’s get started!
Gold Prices (per ounce):

Gold prices suddenly and violently failed at a test of the falling 20 day EMA. This was an “Impulse Sell” trade as I define it, and also a semi-flag pattern.  Today’s failure was harsh and notable.  Thursday and Friday gave us candle pattern sell signals (shooting star and then semi-doji) at resistance, but the harsh failure today (and range expansion) was likely unforeseen.
Crude Oil Prices (per barrel):

Crude Oil showed a similar failure test of the 20 day EMA as gold.  Notice the two “long upper shadow” days and the evening star-style doji (gravestone doji) at resistance.  I figured oil would find support at the 200 day SMA (red line) and begin to curve higher, so today’s action was quite the shock to me - I didn’t expect such a dramatic failure at this level - it causes me to reasses the technical picture.  Clearly, technical (chart) damage has been done to the price structure.  How much damage is yet to be seen.
The US Dollar Index:

It’s hard to deny the strength of the US Dollar via the rally price has mounted against other currences since July.  The strength of the Dollar is likely the culprit driving all these shifting inter-market relationships, so be sure to keep a very, very keen eye to developments on this chart.  The Dollar trades inverse to most commodities - especially crude oil - and has implications far beyond the commodity markets.
By the way, today’s breakout from consolidation takes price above the 20 month EMA - a significant breakout (take a look at your monthly Dollar Index charts).
The NASDAQ Index:

I chose to show the NASDAQ index because of the massive range in today’s action.  We call this an “Outside Bar” or “outside day” in terms of the market gapping above the high of yesterday and then falling all day to close beneath the low of yesterday’s (Friday’s) bar.  That’s a significant development showing range expansion and indecision in the marketplace, as well as a pick-up in volatility.  Notice volume rose today as well.
I also chose to show this because the 200 day SMA proved as intraday resistance and the 50 day SMA (blue) served as support - it’s sometimes remarkable how two moving averages can be successfully tested in one day.  We consider the market “trapped” at the current moment between support and resistance - and an inability to say conclusively which direction price will break.
Before concluding, let’s take a look at the nine AMEX Sectors to see if there were any clues or bright spots in today’s action.

Two observations stand out in this chart.
First, downtrodden Financials and Consumer Discretionary/Retail (as well as Staples) showed strength today, which is a rather bullish sign underneath the market’s hood.
Second, Energy was the most battered sector today, losing 5.5%!  That is remarkable and its reality must be heeded.  These are the exact ‘best case’ scenarios for the bulls - financial/retail recovery while inflationary pressures/energy prices fall.
A lot happened today - annotate your charts, save/file your observations, and get ready for more action ahead!
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Clean Gap Fill Example on Goldman Sachs GS
September 2nd, 2008 by Corey Rosenbloom

I wanted to highlight a quick, intraday example of a classic (or ideal) gap fade play that occurred on Goldman Sachs (GS) this morning.  As a bonus, I’ll show the S&P 500 (SPY) chart intraday and the interesting reaction move that occurred today.
Goldman Sachs (GS) Intraday:

The morning (and week) began with a large volatility gap up, and it’s usually best to try (trade) for at least a 50% retracement of a stock gap, but the odds for success (100% fill) trail off as the gap size increases.
Nevertheless, Goldman Sachs rose for the first 10 minutes and then collapsed $4.00 to fill its intraday gap (trade at the price of Friday’s close).  Often, with a gap fill complete, the next strategy is to try to trade IN the direction of the impulse (gap) and capture a portion of the (in this case) upside move.
I wanted to emphasize the hammer (buy signal) that occurred as price re-visited the prior close.
Goldman only gave a 62% retracement (stopping exactly at the Fibonacci line) of the gap before rolling back over, and now (as of this writing but not seen on the above chart) has retraced back to Friday’s close once again.
An interesting series of patterns have occurred so far on the S&P 500 (and Dow and NASDAQ for that matter) Index.  Keep in mind these are intraday charts and are not complete yet.
S&P 500 (SPY) Gap Fill:

The market has made two “Measured Move” plays already, and the most recent bear flag (measured move) has been remarkably violent (achieving its target very, very quickly).
Today’s action will be recorded as an official gap fill, though the gap was a relatively large gap.
I’ll be compiling the statistics for August’s gap fade strategy soon, so be sure to stay tuned for that.
Fascinating action so far - September could be wild!
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Looking at the August S&P 500 Action
September 2nd, 2008 by Corey Rosenbloom

With August now behind us, let’s look at what happened during that month in terms of the S&P 500 Index.  Hint:  A lot of up and down that left us relatively unchanged.
Let’s look at the Daily Chart of the S&P 500 Index:

It looked initially that we broke out solidly above moving average support and from an ascending triangle around August 11th, only to have that pattern ‘busted’ and then decide that a potential wedge was forming, and that a breakout down out of that wedge around August 18th happened, but that pattern too was ‘busted’ and so August was a month of great confusion and indecision according to the price charts.
Swing traders likely had great difficulty, as true signals were generated and then quickly eroded into losses on both sides of the market - the edge fell to the intraday trader, and even they were chopped up sometimes mercilessly through intraday buy and sell signals which themselves were quickly faded/busted.
One must understand that August’s (and July’s) rising price action was classified as a counter-trend retracement against the prevailing daily (and weekly) index down-trends, and as such, trading counter-trend is often far more difficult than trading swings in the direction of the trend (compare the price action of May to July in terms of a primary trend swing down with July to August’s counter-trend retracement swing - it’s a world of difference).
At the moment, we appear to be testing the rising trendline (trendlines, once broken, often switch polarity, in terms of support becoming resistance, which could be happening here), which offers a temporarily bearish assessment, but two previous signals have failed and the market is embroiled in a major power-struggle between buyers and sellers of various time-frames and so short-term patterns are not having the efficacy we would expect - things are more murky than we’d like.
Now, let’s take a look at the hourly chart that focuses in almost exclusively on August’s intraday action, which details the consolidation situation a little better:

All this chart shows is the August price action which confused many, many traders in terms of false break-outs and narrowing price swings.  There weren’t many (if any) momentum divergences on this time-scale, and moreover, we’re just looking at rhythmic swings that potentially gave traders many headaches.
One of the best explanations and insights I’ve found so far regarding the current state of the indexes comes from Trader Mike’s August Recap:  Holes in the Wall in which he details the current state of the main equity indexes and uses the Guppy Multiple Moving Average method to describe some conditions possibly missed by other analysts.
You can also take time to learn more by viewing educational videos from INO.com or other websites - including four free videos.  I strongly, strongly recommend joining the INO.com TV Premium educational video service for $99 for a full year which grants you access to on-demand access to over 500 videos and print-offs from over 150 trading educators.  These are recorded sessions of seminar presentations, which are often one and a half hours in length each.  Take time to check out and subscribe to this resource.
Otherwise, just keep learning and trading small to protect your capital in these choppy markets!
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How to View Sector Performance in StockCharts
September 1st, 2008 by Corey Rosenbloom

There are two main ways I view broad sector performance and compare results to determine where we may be according to the Sector Rotation Model.  Here, I show those two methods.
First, I use the StockCharts.com AMEX Sector Performance page with a few modifications.  It’s located on the StockCharts homepage under the PerfCharts tab on the left.
Clicking on the AMEX Sectors launches a Java window with multiple, illegible lines on the graph.  To get a clearer picture, you’ll need to click on the “Bar” graph option at the bottom left to make the comparison clearer (the tab has a green and red bar on it - see example below).
Right now, the chart looks like this:

The above chart assumes no modifications - what fun is that?!
There’s a little trick that you might miss when you’re looking at this chart.  What you’re actually viewing is RELATIVE performance over the last 65 days (time frame is scaled and adjusted on the bottom right of the chart - right click to adjust).
The reason it’s relative is that you’re comparing performance to the S&P 500 Index (which is ‘zeroed’ and sector performance is shown above or below the performance of the S&P).  That’s great for comparison purposes, and gives good insight into what sectors are outperforming or underperforming the S&P 500 for the given time period (perhaps year to date, monthly or weekly comparison).
Right now, Health Care and Consumer Staples have outperformed all other sectors over the last 3 months.  That’s useful information.
However, what if we want to know ABSOLUTE performance of the sectors?
We’ll need to click the S&P 500 (the red box at the top left) to compare to absolute performance (in other words, what exact percent has the sector moved in the given period we’re examining).  This chart pops up.

I’ve actually changed the time scale in this chart (by right-clicking on the ‘days’ tab) to show “Year-to-Date” performance of all AMEX Sectors.
We see that the Financial sector has underperformed all others (losing 25%), followed by Technology (losing 14%) so far this year.  None of the sectors at this time are positive for the year (which may be surprising to you, given the attention energy stocks have received).
Again, you can change the time scale to reflect weekly performance, or you can scale it back to the October peak and see performance from there.  To do so, left click and hold on the left side of the “days” bar to change the size and scale of the chart.
You can also click in the middle and drag the entire bar to go ‘back in time’ and see what the performance was for the scale you chose - this can be an interesting exercise in seeing how money flows from sector to sector over time, and what that might mean for the broader market and economy.
Play around with this useful and free tool to see what insights you might gather about the current and past sector rotation that has occurred!
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Holiday Links
August 31st, 2008 by Corey Rosenbloom

Let’s take a quick look at some of the stories around the business blogosphere, courtesy Newsflashr’s Business Blog section.
For an official link-fest, the Big Picture offers a “Labor Day Weekend Linkfest.”
CXO’s Trading Calendar (trading day historical percentage change) for September (via Kirk Report’s Quick Links).
From the “Winning Mental Edge” site, “Persistence (in Trading) - Is it Always Good?”
Dr. Steenbarger posts a simple but thoughtful post on a potentially profitable system entitled:  “Making the Trend Your Friend: A Remarkably Consistent Trading System”
Chris Perruna notes a “US Dollar Buy Signal”
Adam Warner discusses InTrade prediction markets (building on Paul Kedrosky’s assertion that “Prediction Markets … Suck“) in his post “Prediction or Reflection?”
The Stock Chartist asks, “Bottom or Consolidation Channel? What’s Your View?”
Hopefully these will get you started for a market holiday Monday!
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Recent US Dollar Index Action Chart
August 30th, 2008 by Corey Rosenbloom

With the US Dollar Strengthening, officially reversing the trend back to the upside, and consolidating above support, let’s look at the daily and weekly chart to see what’s happened and what might be in store.
US Dollar Index Daily Chart:

The dollar bottomed at the same time that the US Stock Market bottomed (July 15th), yet the dollar has surged with massive relative strength over the equity indexes, which rallied comfortably and then now are ‘chopping’ around the daily charts.
I cannot underscore how powerful and meaningful this recent momentum impulse was and what it means for the US Dollar Index.  This is one of the strongest upward surges in the index in years (both on the daily and weekly chart) and the assumption is that it is powerfully bullish for the Dollar.  New momentum highs often precede new price highs.
The trend of the Dollar Index is now positively confirmed as “up” (after making a higher low, higher high, and then taking out that high) and then breaking solidly above moving average resistance.
In terms of the moving averages, the 20, 50, and 200 day moving averages are officially in the “most bullish orientation possible” in terms of the 20 being above the 50, with both above the 200.  One cannot ignore this development - these moving averages now serve as expected price support.
Also, I have drawn in small blue Fibonacci retracement levels off the July 15th low to the August $77.50 high.  The retracement support levels are the following:
38.2%:  $75.25
50.0%:  $74.50
61.8%:  $73.75
That being said, let’s look at the structure on the weekly chart.
US Dollar Index Weekly Chart:

A positively confirmed trend reversal (up) has also occurred on the weekly chart, which is a dramatic development many assumed to be impossible.  The blue hash marks represent a higher high, higher low, and the confirmation (break above) that level.  Also, price has broken above the 20 period EMA (which is a significant development) and now above the 50 week EMA (also a critical development).
We can now expect these averages to provide potential (initial) support.  The 20 week EMA rests at $73.30 and the 50 week EMA rests at $75.40.
We could be due for a clean retracement of the recent powerful impulse (price doesn’t go up forever) which is why I’ve called attention to the potential support levels.  But for now, with a fresh trend change officially in place, we have to shift our interpretation and focus to the bullish side unless proven otherwise.
The downtrend has ended and now we’re into a new environment - be sure to pay attention to all the intermarket relationships and economic realities that will come from this new development.
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Looking at the August S&P 500 Action
September 2nd, 2008 by Corey Rosenbloom

With August now behind us, let’s look at what happened during that month in terms of the S&P 500 Index.  Hint:  A lot of up and down that left us relatively unchanged.
Let’s look at the Daily Chart of the S&P 500 Index:

It looked initially that we broke out solidly above moving average support and from an ascending triangle around August 11th, only to have that pattern ‘busted’ and then decide that a potential wedge was forming, and that a breakout down out of that wedge around August 18th happened, but that pattern too was ‘busted’ and so August was a month of great confusion and indecision according to the price charts.
Swing traders likely had great difficulty, as true signals were generated and then quickly eroded into losses on both sides of the market - the edge fell to the intraday trader, and even they were chopped up sometimes mercilessly through intraday buy and sell signals which themselves were quickly faded/busted.
One must understand that August’s (and July’s) rising price action was classified as a counter-trend retracement against the prevailing daily (and weekly) index down-trends, and as such, trading counter-trend is often far more difficult than trading swings in the direction of the trend (compare the price action of May to July in terms of a primary trend swing down with July to August’s counter-trend retracement swing - it’s a world of difference).
At the moment, we appear to be testing the rising trendline (trendlines, once broken, often switch polarity, in terms of support becoming resistance, which could be happening here), which offers a temporarily bearish assessment, but two previous signals have failed and the market is embroiled in a major power-struggle between buyers and sellers of various time-frames and so short-term patterns are not having the efficacy we would expect - things are more murky than we’d like.
Now, let’s take a look at the hourly chart that focuses in almost exclusively on August’s intraday action, which details the consolidation situation a little better:

All this chart shows is the August price action which confused many, many traders in terms of false break-outs and narrowing price swings.  There weren’t many (if any) momentum divergences on this time-scale, and moreover, we’re just looking at rhythmic swings that potentially gave traders many headaches.
One


How to View Sector Performance in StockCharts
September 1st, 2008 by Corey Rosenbloom

There are two main ways I view broad sector performance and compare results to determine where we may be according to the Sector Rotation Model.  Here, I show those two methods.
on the left.
Clicking on the AMEX Sectors launches a Java window with multiple, illegible lines on the graph.  To get a clearer picture, you’ll need to click on the “Bar” graph option at the bottom left to make the comparison clearer (the tab has a green and red bar on it - see example below).
Right now, the chart looks like this:

The above chart assumes no modifications - what fun is that?!
There’s a little trick that you might miss when you’re looking at this chart.  What you’re actually viewing is RELATIVE performance over the last 65 days (time frame is scaled and adjusted on the bottom right of the chart - right click to adjust).
The reason it’s relative is that you’re comparing performance to the S&P 500 Index (which is ‘zeroed’ and sector performance is shown above or below the performance of the S&P).  That’s great for comparison purposes, and gives good insight into what sectors are outperforming or underperforming the S&P 500 for the given time period (perhaps year to date, monthly or weekly comparison).
Right now, Health Care and Consumer Staples have outperformed all other sectors over the last 3 months.  That’s useful information.
However, what if we want to know ABSOLUTE performance of the sectors?
We’ll need to click the S&P 500 (the red box at the top left) to compare to absolute performance (in other words, what exact percent has the sector moved in the given period we’re examining).  This chart pops up.

I’ve actually changed the time scale in this chart (by right-clicking on the ‘days’ tab) to show “Year-to-Date” performance of all AMEX Sectors.
We see that the Financial sector has underperformed all others (losing 25%), followed by Technology (losing 14%) so far this year.  None of the sectors at this time are positive for the year (which may be surprising to you, given the attention energy stocks have received).
Again, you can change the time scale to reflect weekly performance, or you can scale it back to the October peak and see performance from there.  To do so, left click and hold on the left side of the “days” bar to change the size and scale of the chart.
You can also click in the middle and drag the entire bar to go ‘back in time’ and see what the performance was for the scale you chose - this can be an interesting exercise in seeing how money flows from sector to sector over time, and what that might mean for the broader market and economy.
Play around with this useful and free tool to see what insights you might gather about the current and past sector rotation that has occurred!
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Holiday Links
August 31st, 2008 by


Recent US Dollar Index Action Chart
August 30th, 2008 by Corey Rosenbloom

With the US Dollar Strengthening, officially reversing the trend back to the upside, and consolidating above support, let’s look at the daily and weekly chart to see what’s happened and what might be in store.
US Dollar Index Daily Chart:

The dollar bottomed at the same time that the US Stock Market bottomed (July 15th), yet the dollar has surged with massive relative strength over the equity indexes, which rallied comfortably and then now are ‘chopping’ around the daily charts.
I cannot underscore how powerful and meaningful this recent momentum impulse was and what it means for the US Dollar Index.  This is one of the strongest upward surges in the index in years (both on the daily and weekly chart) and the assumption is that it is powerfully bullish for the Dollar.  New momentum highs often precede new price highs.
The trend of the Dollar Index is now positively confirmed as “up” (after making a higher low, higher high, and then taking out that high) and then breaking solidly above moving average resistance.
In terms of the moving averages, the 20, 50, and 200 day moving averages are officially in the “most bullish orientation possible” in terms of the 20 being above the 50, with both above the 200.  One cannot ignore this development - these moving averages now serve as expected price support.
Also, I have drawn in small blue Fibonacci retracement levels off the July 15th low to the August $77.50 high.  The retracement support levels are the following:
38.2%:  $75.25
50.0%:  $74.50
61.8%:  $73.75
That being said, let’s look at the structure on the weekly chart.
US Dollar Index Weekly Chart:

A positively confirmed trend reversal (up) has also occurred on the weekly chart, which is a dramatic development many assumed to be impossible.  The blue hash marks represent a higher high, higher low, and the confirmation (break above) that level.  Also, price has broken above the 20 period EMA (which is a significant development) and now above the 50 week EMA (also a critical development).
We can now expect these averages to provide potential (initial) support.  The 20 week EMA rests at $73.30 and the 50 week EMA rests at $75.40.
We could be due for a clean retracement of the recent powerful impulse (price doesn’t go up forever) which is why I’ve called attention to the potential support levels.  But for now, with a fresh trend change officially in place, we have to shift our interpretation and focus to the bullish side unless proven otherwise.
The downtrend has ended and now we’re into a new environment - be sure to pay attention to all the intermarket relationships and economic realities that will come from this new development.
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How to Achieve a 96% Win Rate
August 29th, 2008 by Corey Rosenbloom

Would you like a simple, easy to implement trading strategy that has recently returned a 96% win rate, and it doesn’t require indicators at all - in fact, it doesn’t even require watching the market intraday or watching any news reports.  Sounds too good to be true?  Of course, but recent research and a simple strategy test by Rob Hanna of Quantifiable Edges has found such a system.  What is it?
Hanna’s post “A Short System for Handling Chop” details a two-part entry system that has returned this impressive result from a trading system tested with TradeStation that has the following strategy:
1.  The S&P 500 closes higher two days in a row
2.  And the S&P 500 is beneath its 200 day SMA
Then Sell Short on close.
The exit criteria are the following:
1) If the S&P 500 closes under the entry price of the trade, cover on close OR
2) Cover on the close four days later if there’s no profit (time stop/exit).
Hanna coded and tested this strategy from June 1st 2007 to present.
Check out his entire post for the full results and charts, but Hanna found the following:
“There have been 26 trades, 25 (96%) of which were profitable. The average trade made about 0.75%.”
Rob also took away the “closing beneath the 200 day SMA” component and found the following:
“If you relax the entry criteria and don’t require the S&P to close below the 200ma, then there will be 43 trades – 41 (95%) of which were profitable.”
Does this all sound too good to be true?  Well the data speak volumes during the current environment, but realistically, is this a profitable system now or forever?  In other words, can you start trading this system tomorrow?  Rob writes:
“Although the performance has been stellar over the last 15 months, this is not a great system. In fact, if you run performance back to 1960, it’s not even a winning system.”
Also, “Lastly, this environment will certainly change. While the above system may not be a great “trading” system, it does appear to be a very useful “tracking” system.”
Read Rob’s conclusion and insights into what the system means.
To add some confirmation with current action, the S&P showed strength yesterday… but now (as of this writing), almost all those gains from yesterday’s session have been erased, and we experienced a down gap this morning - thus the profitable ‘trade’ would have been to enter short at yesterday’s close.  I cynically had a conversation with a trader yesterday saying just that (prior to reading Rob’s research).  I noted “with the strength of today, I bet tomorrow will be a big down day.”  That’s just the current environment we’re in.
Either you get frustrated, stand aside, or try to profit from it.  Rob’s right - these conditions won’t last forever, but for now, let’s try to understand what’s going on and how (and whether) to participate profitably.
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Freddie Mac FRE Doubles in a Week
August 28th, 2008 by Corey Rosenbloom

Who would have thought it - Freddie Mac (FRE), which has been battered by almost endless selling, has actually doubled in value since the end of last week.  Let’s take a closer look at this remarkable accomplishment that may have shocked a lot of market participants.
Let’s look at a logarithmic scale of Freddie Mac’s Daily Chart:

I don’t normally use log charts because it distorts higher prices in exchange for clarity at lower prices - and allows us to compare moves in terms of percentages, rather than prices.
The last four trading sessions resulted in a doubling of value for Freddie Mac - a clear example and evidence bottom fishers will use for playing low-value stocks and how amazing gains can be made quickly.  While true, the corresponding risk is so much higher and odds are so much decreased for multiple stocks at similar prices to complete such an accomplishment.  Freddie Mac (FRE) and Fannie Mae (FNM) might be grand exceptions to the general rule “what is cheap tends to get cheaper.”
That being said, we cannot ignore the significance or remarkable accomplishment buyers have been able to push in this stock.  It’s also a testament that “You shouldn’t get short just because news is bad” or the like.  Making money is not as easy as “Watch TV, Make Money.”  Odds are you would have gotten short possibly with a long position and then been sadly awakened with massive losses.
Freddie now rests just beneath its key 20 day EMA, and has formed a semi-doji, which could be a possible reversal signal (a more risk-adjusted potential short-sell entry with risk management… a stop just above the EMA).
I just wanted to point this stock out as an interesting example of fascinating short-term action.
Now, let’s look at the 30 minute chart to see how this structure developed and what trading opportunities might have arisen.

First, we had a lengthy (multiple) swing positive divergence (which was also evident on the daily chart as I had mentioned in a previous post).  When you have a positive divergence on the daily chart and then have a positive divergence also on a smaller timeframe, odds are the signals will ‘converge’ and can result in a powerful move or positive price reversal.  At any rate, it can offer a significant potential for profit and provide edge.
Although you could have tried to call the exact bottom (not usually a profitable exercise), the highest probability play (trade) came where I’ve drawn the two green arrows.  Price has formed a lengthy divergence, broken above both key 20 and 50 period EMAs, formed a new momentum high, retraced this move, and found support and formed a doji at the confluence of the 20 and 50 period EMA (test).  That would be your highest probability, lowest risk entry.
We now have multiple (three) swing negative momentum divergence as price reaches potential resistance on the daily chart.  It might not be a good idea here to get aggressively long, given the stock has doubled in less than a week.  That would clearly be considered ‘chasing’ which is a practice most investors discourage.
See if you can learn additional lessons from this stock regarding price structure and high probability trades.
Consider joining the Market Club for additional analysis, screens, commentary, and trading signals.
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Ideal Trades and Lessons from Wednesday’s Session
August 28th, 2008 by Corey Rosenbloom

Wednesday offered some interesting trade set-ups and opportunities that I wanted to describe from an educational standpoint, as the day showed a clear example of a bull flag measured move and momentum divergence… I also discuss Fibonacci retracements for added depth of understanding.
With that said, let’s look at the DIA (Dow Jones ETF) 5 minute intraday chart:

The day started with a relatively normal opening session, which then gave way to a large momentum move up that created a new momentum high and new price high - meaning we were looking to buy the first pullback against that momentum move (it’s often very difficult to anticipate initial moves but often far easier to play the ‘ripples’ or subsequent expected moves that come from price/momentum impulses).
So as price retraced into noon in a steady pattern, pulling back to the key rising 20 period EMA, the “Impulse Buy” or retracement trade set-up, which could also be considered a potential bull flag (not drawn) or “Measured Move” pattern, where we enter at the break of the retracement (or test of the moving average support) and then play for an equal (measured) move of the initial impulse (placing a stop beneath the 50 period EMA).  This play worked out perfectly.
As price made a new high, the momentum oscillator failed to confirm, and actually made a lower high, which set-up a ‘divergence’ trade which preceded the day’s trend reversal and actually marked the high on the day - it surprises me how many intraday price highs (or lows) are formed with a clear momentum divergence (lack of sustained ‘power’ or conviction).
So the divergence trade allowed us to enter counter-trend short to play for a small target but anticipate a possible reversal and to expect potentially that moving averages might fail to provide support.
As we see, initially the 20 period EMA did act as support but failed, while price supported at the next zone - the 50 period EMA, only to bounce weakly and then fail there too with a new momentum low on the day.
Let me step back a moment and discuss Fibonacci Retracements 101 - both of today’s momentum moves retraced back to the key 38.2% retracement level before supporting and traveling higher.  The second move actually pulled back deeper to the 50% retracement before rolling over.
Focus on the green highlighed area on the chart to see the retracement support.
DIA Fibonacci Retracement Focus:

Fibonacci retracement grids are drawn from a swing low to a swing high, and are best done on impulse or continuous moves (such as was the case for two examples yesterday).
The Blue grid retraces the $113.90 to $114.90 price impulse while the red grid retraces the $114.50 to $115.60 price impulse.
When you see multiple forces of possible support (called ‘confluences’), then often these set-up powerful, low-risk trades.  Combined with moving average and trendline support, Fibonacci retracement levels (38.2%, 50.0%, and 61.8%) can also clue you in to possible price inflection (reversal) points to establish a low-risk (tight stop) entry.
Wednesday’s action provided classic patterns and set-ups that often repeat themselves, providing potential edge for those who understand these principles, and integrate them into personal experience and a trading strategy.  I always recommend annotating charts to clarify patterns and reinforce them through visual repetition.
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A Quick Look at AAPL and GOOG Daily Charts
August 27th, 2008 by Corey Rosenbloom

Apple Inc (AAPL) and Google (GOOG) are telling a different story on their respective daily charts - AAPL sits at support on a potential buy signal while GOOG has fallen beneath resistance on a potential sell signal nearing possible support.  Let’s take a quick look to see if we can make any sense of this.
Apple Inc (AAPL) Daily:

After falling from highs near $192 per share since May, Apple has mounted an impressive recovery so far in August.  Price made a new momentum high (though not as high as the previous May peak, which isn’t a big concern) and is now retracing a portion of that move.
Price is forming a possible bull flag into moving average support, which can set up a powerful buy signal to target a potential ‘measured move’ up should the support at roughly $170 per share hold.
Also, if you take a small Fibonacci retracement grid of the $152 low to the $180 high (most recent August swing) then the 38.2% retracement comes in almost exactly at $170 per share - sometimes it’s eerie how many forms of analysis converge at a similar price point.  The 20 week EMA is also $168.65, which is not shown on the chart.
Notice that Apple is experiencing the same volume decline trend the broader indexes are showing - it’s perhaps a seasonal component of vacation or lack of deep partcipation.
While Apple is showing strong potential support at $170 with the potential bull flag pattern forming, Google has absolutely gone the opposite direction!  Let’s look at its daily chart.
Google (GOOG) Daily:

While these stocks often trade similarly, Google has experienced weakness recently and has found resistance about the $510 per share level (which was prior support, and corresponds with the 50 day EMA).
Price has inflected downwards from this level and is now beneath all key moving averages, but it’s important to note that a potential support zone simply from the previous gap (due to earnings) comes in around $455 per share.  The next weekly MA support is the 200 week SMA at roughly $220 per share.
Google has experienced low relative volume throughout August.
It will be interesting to see how Apple defends key support beneath it and if it holds, so we’re at an inflection point with that stock so let’s continue to watch these developments and how they might affect the NASDAQ index as a whole.
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A Quick View of the NASDAQ
August 26th, 2008 by Corey Rosenbloom

With the mention of the Russell 2000 and NASDAQ forming similar patterns, let’s take a quick look at the actual NASDAQ index to let it speak for itself.
NASDAQ Daily Chart:

The Index formed a negative momentum divergence going into resistance in May, which led to the June and July downswing (primary downtrend swing), which leads us to the current structure, which potentially could be the breakdown of a tight rising channel and termination of the recent up counter-swing.
Price is now trapped between the falling 200 day moving average (which is a significant development itself) and the rising 20 and 50 day EMA.  Actually, price closed with a doji today just below those levels.  The market hangs on a precipice, and it would not take much to tip it for a move to the downside.
The story is the same in terms of volume - volume has clearly not confirmed the recent rally, and has declined virtually every day since late July.  If price is going to inflect higher, it is likely to do so here, but the odds are possibly weakening for further upwards price action.
Let’s move to a quick glance at the weekly chart.
NASDAQ Weekly Chart:

The weekly downtrend is not as pronounced as in the S&P 500 and Dow Jones, namely because price on the most recent downswing formed a higher low (but has now possibly formed a lower high).  This structure leads us to believe we could be forming a larger consolidation pattern - perhaps a triangle of sorts. Nevertheless, the market appears to be coming into balance after swinging wildly into 2008.
The 2,450 area is critical for bulls to defend, but it looks unlikely they’ll be able to do so unless the current structure shifts in their favor.
Typically, the 200 week moving average provides support - and it has - but it has provided sloppy support, rather than clean patterns (breaking through both on a close and intra-week basis).
Major components Apple Inc (AAPL) sits at daily support via the 20 and 50 day EMAs;
Google (GOOG) appears to be inflecting down off a failure test up at resistance;
Research in Motion (RIMM) is similar to Apple, in terms of daily moving average support;
and finally the Semiconductor Index ($SOX) looks very similar to the above NASDAQ chart, in terms of sitting at a turning point.
Let’s continue to watch this situation closely, which could tip either way, but the odds may be stacked slightly in favor of potential additional downside.
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Top 10 Percentages Above and Below Moving Average
August 26th, 2008 by Corey Rosenbloom

It’s time to look at the top and bottom 10 stocks in the S&P 500 Index in terms of percentage above or below its 20 day simple moving average, which attempts to measure stock strength and weakness, and introduce possible trading opportunities.
What we’re looking at is the percentage that price is extended above the 20 day simple moving average.  If a stock is trading at $55.00 and the 20 day SMA calculates as $50.00 per share, then the stock is $5.00 extended above its SMA, or 10% above its average.  The reverse would be true in terms of percent extended beneath its MA.
One can use this list either to continue to play strength (as strength begats strength), to identify relative strength stocks (or weakness), or to attempt to set up ‘fade’ or retracement trades (meaning, you believe the stock is too overextended based on your analysis and desire to look for an entry to play the stock back to its daily MA).
That being said, let’s run the data and view the list!  (Data as of close, Aug. 26)
Top 10 Stocks Extended Above its 20 day SMA:

In a semi-shift again, we see Oil and Gas Operations (Energy Sector) dominating the Top 10 strong stocks, with strong relative strength retail stocks Target (TGT) and Limited Brands (LTD) shining through.  It might be wise to look deeper into these two stocks if you believe the consumer discretionary sector has bottomed.  With that thought in mind, let’s glance at the weak stocks extended beneath its daily SMA.
Bottom 10 Stocks Extended Beneath its 20 day SMA:

It’s maybe no surprise that Fannie Mae (FNM) and Freddie Mac (FRE) are the weakest stocks, being most extended beneath their 20 day SMA.  The Financial Sector once again is under pressure.  Beyond those, Regional Banks comprised a large part of the bottom 20 list (not shown).  The remainder were mostly Consumer Discretionary/Retail - it’s a reminder to watch out in this sector, as stocks remain weak despite the July rally.
Be careful out there, no matter which strategy you choose.
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Would You Trade This Stock?
August 26th, 2008 by Corey Rosenbloom

Let’s talk about volatility and intraday range.  Generally, it’s best to select swing or day trading candidates that have stable patterns, clean ranges, respect for support and resistance (and moving averages), stability, and the like.  What happens when you look back on a stock’s chart and see wildness and confusion?  It might be best not to trade it.
Let’s look at Charles Schwab Corp (SCHW) for an example of a potentially great company with an erratic stock price pattern.  The daily chart is shown below:

Let me reinterate that I’m not discussing the fundamentals or the company itself negatively - I’m only referring to the seemingly random or erratic patterns the stock makes as to a potential reason to shy away from erratic charts and gravitate towards more stable charts.
Focus on the size of the wicks of the candles, or the intraday highs and lows that are sometimes greatly different than the opens and closes.  Also, notice large volatility moves (large daily ranges) that are quickly retraced the next day, and also notice the extreme “chop” or daily price-bar overlap.  There’s so much up and down that it could make you dizzy!
There are very few up days that follow up days.  Rather, (which is characteristic of the current market environment), down days follow up days and vice versa until we have a relatively trendless, confusing market without clear price patterns - or if you can find price patterns, price runs through them intraday before reversing.
Let’s pull back the timeframe to see if the weekly chart confirms this ‘choppy’ pattern.

While the price action gains additional clarity the further you pull back the timeframe, we still see long wicks (intra-week ranges) and erratic behavior.  Interestingly enough, the dramatically choppy period on the daily chart from July to August actually was almost five ‘up’ weekly closes on this scale (all of which supported intra-week on the rising 20 week EMA).
Summary and Thoughts:
When you’re scanning for stocks and find perhaps a condition that would trigger a second look or perhaps a buy (or sell), it’s important not to take the signal blindly, or on its own merits, but to look at the recent behavior of price to see if you can find relative stability in swings or intraday ranges - and if not, look elsewhere.  Many other stocks are likely showing cleaner, more understandable patterns.
What if you just can’t resist trading such a volatile stock?
You’ll absolutely need to raise your stop (decrease if long or increase if short), which often leads to a smaller position size.  You absolutely need to take the volatility conditions into account when planning these decisions anyway.
If you view a moving average as support, you’ll need to place your stop-loss further beneath that average than you normally would if you can see the stock has a history of breaching these levels and then reversing.
There’s literally thousands of stocks to trade - why trade something that shows erratic behavior consistently?  While this won’t guarantee success, it could decrease frustration and lead to potentially easier trading decisions.
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Was Anything Up on Monday?
August 25th, 2008 by Corey Rosenbloom

Monday brought a thrashing in the US Stock Market, but the selling was not contained there. Gold took a hit, oil prices rose very slightly, and bond prices rose on the day, reflecting a possible ‘flight to quality.’  Let’s take a look at some of the sector action on Monday to see if we can figure out what happened and why.
Below is the Sector performance as reported by StockCharts.com:

Today was the same ole’ story, in terms of the Financial Sector (XLF, down 3.5%) and Consumer Discretionary (XLY, including retail, which declined almost 3% today) leading the charge to the downside as investors pulled money out of these shaky sectors, which had been mounting a respectable recovery since the July bottom.
Some financial stocks (small banks particularly) had rebounded as much as 100% (doubling in price) in roughly a month, yet others have rebounded sharply and now retraced a large percentage of those gains.
This action represents a good lesson in what lead yesterday can lag today, or what looked strong yesterday can return to underperform today.  Also, it can be a lesson in the relative danger in ‘bottom fishing’ or ‘knife catching’ possibly.
Nevertheless, the broader indexes still remain divided, in terms of the S&P 500 and Dow Jones having broken down beneath a rising wedge (or rising trend channel), while the Russell 2000 and NASDAQ continue to show strong possible support beneath price.  One of these scenarios is false and will break, and the pressure now is on the NASDAQ and Russell Indexes, as support (via daily and weekly moving averages) is directly being tested.
Still, even traditionally defensive sectors and stocks were taken down today (such as Health Care and Consumer Staples - both down 1.6% today).  These are traditionally the havens money managers gravitate towards when they want to remain defensive (but must be fully long/invested).
Let’s continue to keep a close watch on the market, in terms of possible renewed strength, or continuing weakness, as this week could indeed be a transformative one.
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hefeiddd

A Quick Look at Volume Clues on the Dow Jones
August 25th, 2008 by Corey Rosenbloom

We’re picking up on a relatively bearish volume pattern in the Dow Jones and S&P Indexes.  On downswings in the context of the larger downtrend, we are seeing increased volume to the downside and light volume when price mounts counter-rallies (up-swings).  Let’s look at these patterns and see what they might mean.
A little background before viewing the charts.
Classic technical analysis uses volume to confirm price strength, or hint at developing weakness.  The easiest way to interpret volume is the following:
Rising Prices, Rising Volume (trend) = Bullish (confirmation)
Rising Prices, Falling Volume = Bearish (non-confirmation)
Falling Prices, Rising Volume = Bearish (confirmation)
Falling Prices, Falling Volume = Bullish (non-confirmation)
According to James Dalton (of recommended Market Profile books [url=http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2FMind-over-Markets-Generated-Information%2Fdp%2F0934380538%3Fie%3DUTF8%26s%3Dbooks%26qid%3D1219686352%26sr%3D8-2&tag=afrtotra-20&linkCode=ur2&camp=1789&creative=9325]Mind over Markets[/url] and highly acclaimed [url=http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2FMarkets-Profile-Profiting-Auction-Process%2Fdp%2F0470039094%3Fie%3DUTF8%26s%3Dbooks%26qid%3D1219686352%26sr%3D8-1&tag=afrtotra-20&linkCode=ur2&camp=1789&creative=9325]Markets in Profile[/url]), “Price advertises opportunity, time regulates opportunity, and volume measures the success or failure of the auction process.”  These books are amazing in terms of how to quantify or conceptualize price/auction structure and derive trading opportunities from value.
With that in mind, let’s look at the Dow’s Daily and Weekly charts (with a bit of bonus material beyond the volume).
Dow Jones Daily:

One can clearly see the non-confirmation of higher prices on the daily Dow, meaning that as prices have mounted a counter-swing rally up, volume has declined (in a trend-style fashion) almost every single day.  In fact, the highest volume reading of the last two months was made at the lower end of the price range, and the lowest volume is being recorded now.  This is extremely similar to what occurred during the prior counter-rally into May, which also terminated on low relative volume (as we’ll see).
Buyers and funds are not confirming these higher index prices with increased participation, meaning that it feasibly would be easy to imagine a downturn in the market due to lack of interest at these higher prices, such that price would have to auction lower to find value.
As a bonus, note that price is at resistance via the 50 day EMA and the trendline drawn from the July 15th bottom.  Price is currently failing a test of these levels.
On to the weekly chart.
Dow Jones Weekly:

We are able to see the volume illustrations clearer on this time frame.  Notice that on virtually every down-draft in the market recently, volume picked up, as lower prices were attracting more participation (selling led to more selling), and whenever the market mounted a counter-swing up (keep in mind the swing and impulse labeling, as the market is now in a confirmed downtrend), volume was flat or trailed off to lower levels, as higher prices were not confirmed.  Further selling occurred after these counter-rallies, which was preceded by non-confirmations in volume.
Price is also experiencing a failure test of the 20 month EMA and 200 week (roughly 4 year) SMA.
This volume observation is not going unnoticed by the larger traders and funds, I assume.  Continue to watch the current market closely for signs of strength or weakness, as well as further non-confirmations.
4 Comments | add comment


Divergences in DUG (Oil & Gas ETF)
August 24th, 2008 by Corey Rosenbloom

Let’s take a moment to look at a fund you may not have been aware of, but that has formed two nice daily divergences which have since resolved that can serve as an educational example.
The fund is DUG, the UltraShort (2 times leverage) Oil and Gas ProShares fund (which moves inverse to Dow Jones Index oil/gas companies), and let’s take a look at its daily chart:

Let’s compare crude oil prices to the DUG (which actually is tied to companies, rather than crude oil prices specifically).  The thinking is that stocks (oil services/providers, etc) can sometimes lead their respective commodity prices.  We’ll also look at crude oil prices shortly.
As Crude Oil prices (chart below) formed a short-term top pattern (complete with negative momentum divergences), DUG also formed a semi-rounded reversal pattern before continuing higher.  What I wanted to point out from an educational standpoint is the lengthy positive momentum divergence that had been building since May, which gave us further clues that downside price action (or upside in Crude Oil prices) was likely about to reverse, and give an opportunity in the opposite direction.
Most of the time, divergences precede short-term trend reversals, and this provides a classic example of the concept.  You could have entered long (DUG) at the break of the 50 day EMA, or when price came back to retrace the support confluence via the crossover of the 20 and 50 day EMA (which was likely the highest probability entry).
Two mini-bull flags formed quickly after this point and almost instantly achieved their target before a lengthy negative momentum divergence began to form in DUG (positive divergence in Crude Oil prices per barrel).  DUG found resistance at the $40.00 per share level, while crude oil itself found support near $110.00 per barrel at the 200 day rising moving average.
Let’s take a look at crude oil’s daily chart:

I had been calling out the positive momentum divergence in previous posts, as well as describing how the 200 day SMA could provide support and a short-term end to the downside swing.  This happened quickly (complete with doji candles), as price began to surge higher, but an interested and unexpected development occurred Friday, which sent crude oil prices down over 5% in a single day (which was ultra-bullish for the broader US Stock Market - not surprisingly).
In fact, Friday’s action just about formed a “Bearish Engulfing” candle pattern, which would have more validity if it occurred at a possible market top, rather than a possible bottom (or support).
Should crude oil violate $110, the ’rounded reversal’ and divergence play would be invalidated, so this will be important to watch.  A break beneath $110 would also reaffirm the strong short-term downtrend (which has already taken prices down 20%) in place.
Always watch what momentum (strength) is doing and monitor trades in real time for signs of continued strength (or weakness) for a better handle on price action as it develops.
6 Comments | add comment



Follow the Electoral College Presidential Projections
August 23rd, 2008 by Corey Rosenbloom

Various sites have popped up which track daily polls and update in real time the current and projected winner of the US Election via the Electoral College vote, and I wanted to share some of those sites with you if you’re interested in keeping up with who’s ahead or behind, and learning more.
Whether Americans choose Barack Obama or John McCain as President in the upcoming November election, both prospective administrations will likely affect the economy and thus the stock market differently. While a discussion of how each administration would affect the economy is far beyond the scope of this site, I do keep up with the current trends and news on the political scene, and find it quite interesting in terms of the state-by-state updated polls.
If you want to keep up with the current count, or want to project your own Electoral College count (it takes 270 votes to win the Presidency), some of the following sites may be of great interest to you.
Each day, I view the latest updates on Electoral-Vote.com, which provides daily commentary and also tracks the Senate and House polls as well.
Also, if you want less commentary and want a more statistical or mathematical approach, be sure to visit Election-Projection.net. This site allows you to run multiple simulations based on probability inputs on each state for a more accurate result, which generates aggregate figures of probable outcomes and presents them in percentage and distributions.  “FiveThirtyEight.com” lists similar multiple simulations and data, but provides frequent daily updates and links to breaking news stories.
What’s the current projection?  The map below is courtsey Pollster.com, which uses various colors (shades) to show candidate strength, and also utilizes yellow to indicate “toss-up” states which current polls show could go either way.

The map looks wild, but the two shades of blue represent Democrat Barack Obama, while different shades of red represent Republican John McCain.  The election will likely be decided by these yellow “swing-states,” which will likely flip back and forth until November as new polls come out and the campaigns take new and potentially interesting twists and turns.

The easiest way to view all these sites at once is to view “Three Blue Dude’s” Election Projection Database, which lists over 65 blogs and websites that run the gambit from partisan sites, independent sites, and professional news sites (such as CNN’s projection, which looks almost identical to Pollster’s map above).

If I had to inject my opinion now, I would say the main swing states that will determine the election will be Ohio (20 electoral votes, Virginia (13 votes) and Colorado (9 votes).  It’s likely that whichever candidate wins two of these three states (or even sweeps them all) will win the election.

However, so much can change before November, which is of course also true with the markets, and the Political Conventions taking place over the next two weeks could alter the map above.  Then, the candidates will engage in three debates, which could shift trends as well.

If you have further interest, check out some of the sites mentioned above, and especially the Projection Database for links to a plethora of sites with far more information on this topic.

Oh, and just for fun, as of Saturday, August 23rd, The Projection Database reports that 57 linked web or blog sites with frequently updated electoral vote projections have Democrat Barack Obama winning in November, 8 sites list Republican John McCain as the winner, and 2 sites list an exact 269 vote tie.

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Viewing the Current S&P and Russell 2000
August 22nd, 2008 by Corey Rosenbloom

Wow - this week gave us some fascinating action on the US Stock Market indexes.  Let’s look quickly at the state of the S&P (daily and monthly chart) and then take a peek at what I saw and commented yesterday on the Russell, which came to pass today.
First, the S&P 500 Daily Chart:

First, let’s look at the overwhelming potential for resistance at the 1,292 price area (exactly at the close of today’s action).  What’s providing potential overhead resistance that needs to be overcome?
The 50 day EMA is at 1,290.91
The 38.2% Fibonacci retracement of the current move down is at 1,292.84.
The rising trendline (of the channel or ascending triangle) terminates currently at roughly 1,290.
These are all variables known to provide critical support and resistance, and should be considered and monitored.
Notice the way I have drawn the ascending trendline (channel) on the chart.  Valid trendlines must have at least three ‘touches’ (known as “tests”), and it is important to draw a trendline that connects as many points as possible.  Also, connecting trendline closes is more valid than connecting intraday points (according to Martin Pring and other classic technicians).
That being said, we had a confirmed breakdown of the trendline both on the daily S&P 500 and Dow Jones index, and are currently re-testing this trendline from underneath.  If another trendline needs to be drawn, it will be done when more price data arrives, but we must make our analysis and decisions on what we have at the moment, and this appears to be the best fit line for our accomodations.  As such, the line could be another variable to provide resistance.
However, if price were to break through all these zones of resistance, it would be a remarkable feat worth mentioning, and the next line of resistance would be 1,320.  Why this level?  I’m glad you asked.
S&P 500 Monthly Chart:

Moving to the longer time frame chart, we see that price is in a confirmed monthly downtrend (lower lows and lower highs) and is trading beneath the key 20 and 50 month EMA (though these have not crossed over yet).  The 50 month EMA is priced at 1,315, which is also near the 1,320 price zone on the daily chart 50% Fibonacci retracement.  These would likely serve as upside targets should price trade higher early next week.  The 50 month EMA has already provided resistance just last week.
It’s worth noting that the 38.2% Fibonacci retracement off the monthly chart is at 1,268, which has provided closing (and intra-month) support in 2008 (price has failed to close beneath this critical level).  The July bottom took the S&P almost to the 50% monthly Fib. retracement at 1,172.
Note also that price has made two new momentum lows not seen since 2002, for what it’s worth.
Yesterday evening, I noticed a fascinating confluence of support on the Russell 2000 Index, and noted that in the post “Interesting Development on the Russell 2000.” I’m pleased to note that these confluence of support levels held and the Russell, along with the Dow, S&P, and NASDAQ traded quite higher today.  I mentioned this was interesting because of the likely breakdown of support on the Dow and S&P and noted that these two developments can’t (necessarily) co-exist peacefully.  Check out yesterday’s post and let’s look at the current state of the Russell 2000.
Russell 2000 Daily Chart:

On the Russell, it apperas for the moment that the 720 level will provide significant support.
What’s odd based on my take on the market?
The S&P 500 and Dow Jones Index appear to be breaking down out of a channel or possibly bearish wedge pattern, and both have significant resistance (via moving averages and Fibonacci retracements) on multiple time frames.
The NASDAQ and Russell 2000 have significant support beneath them.  I don’t show the NASDAQ here, but it’s pattern and structure is highly similar to that of the Russell.
What gives?  I’m not magic enough to answer that question, but I can point out that this is a strange development, with strong technical positioning on two indexes, and weak technical positioning on the other two.  Generally, all four indexes show similar structure, and it’s not very often that we get such massive divergence (conflicting signals) as I’m seeing now.
If you’re seeing something I’m totally missing, please let me know.  Otherwise, we’ll wait and see how this “conundrum” resolves itself, and not get too aggressive either way until the ‘coast is clear’.
Check out the good ole’ Market Club service and Market Club Blog for additional trading signals, commentary, scans, and analysis.  Alternatively, you can check out four educational videos for free from INO Education.
Fascinating times!  Please be safe out there.
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hefeiddd

A Quick Look at Volume Clues on the Dow Jones
August 25th, 2008 by Corey Rosenbloom

We’re picking up on a relatively bearish volume pattern in the Dow Jones and S&P Indexes.  On downswings in the context of the larger downtrend, we are seeing increased volume to the downside and light volume when price mounts counter-rallies (up-swings).  Let’s look at these patterns and see what they might mean.
A little background before viewing the charts.
Classic technical analysis uses volume to confirm price strength, or hint at developing weakness.  The easiest way to interpret volume is the following:
Rising Prices, Rising Volume (trend) = Bullish (confirmation)
Rising Prices, Falling Volume = Bearish (non-confirmation)
Falling Prices, Rising Volume = Bearish (confirmation)
Falling Prices, Falling Volume = Bullish (non-confirmation)
Price advertises opportunity, time regulates opportunity, and volume measures the success or failure of the auction process.”  These books are amazing in terms of how to quantify or conceptualize price/auction structure and derive trading opportunities from value.
With that in mind, let’s look at the Dow’s Daily and Weekly charts (with a bit of bonus material beyond the volume).
Dow Jones Daily:

One can clearly see the non-confirmation of higher prices on the daily Dow, meaning that as prices have mounted a counter-swing rally up, volume has declined (in a trend-style fashion) almost every single day.  In fact, the highest volume reading of the last two months was made at the lower end of the price range, and the lowest volume is being recorded now.  This is extremely similar to what occurred during the prior counter-rally into May, which also terminated on low relative volume (as we’ll see).
Buyers and funds are not confirming these higher index prices with increased participation, meaning that it feasibly would be easy to imagine a downturn in the market due to lack of interest at these higher prices, such that price would have to auction lower to find value.
As a bonus, note that price is at resistance via the 50 day EMA and the trendline drawn from the July 15th bottom.  Price is currently failing a test of these levels.
On to the weekly chart.
Dow Jones Weekly:

We are able to see the volume illustrations clearer on this time frame.  Notice that on virtually every down-draft in the market recently, volume picked up, as lower prices were attracting more participation (selling led to more selling), and whenever the market mounted a counter-swing up (keep in mind the swing and impulse labeling, as the market is now in a confirmed downtrend), volume was flat or trailed off to lower levels, as higher prices were not confirmed.  Further selling occurred after these counter-rallies, which was preceded by non-confirmations in volume.
Price is also experiencing a failure test of the 20 month EMA and 200 week (roughly 4 year) SMA.
This volume observation is not going unnoticed by the larger traders and funds, I assume.  Continue to watch the current market closely for signs of strength or weakness, as well as further non-confirmations.
4 Comments | add comment


Divergences in DUG (Oil & Gas ETF)
August 24th, 2008 by Corey Rosenbloom

Let’s take a moment to look at a fund you may not have been aware of, but that has formed two nice daily divergences which have since resolved that can serve as an educational example.
The fund is DUG, the UltraShort (2 times leverage) Oil and Gas ProShares fund (which moves inverse to Dow Jones Index oil/gas companies), and let’s take a look at its daily chart:

Let’s compare crude oil prices to the DUG (which actually is tied to companies, rather than crude oil prices specifically).  The thinking is that stocks (oil services/providers, etc) can sometimes lead their respective commodity prices.  We’ll also look at crude oil prices shortly.
As Crude Oil prices (chart below) formed a short-term top pattern (complete with negative momentum divergences), DUG also formed a semi-rounded reversal pattern before continuing higher.  What I wanted to point out from an educational standpoint is the lengthy positive momentum divergence that had been building since May, which gave us further clues that downside price action (or upside in Crude Oil prices) was likely about to reverse, and give an opportunity in the opposite direction.
Most of the time, divergences precede short-term trend reversals, and this provides a classic example of the concept.  You could have entered long (DUG) at the break of the 50 day EMA, or when price came back to retrace the support confluence via the crossover of the 20 and 50 day EMA (which was likely the highest probability entry).
Two mini-bull flags formed quickly after this point and almost instantly achieved their target before a lengthy negative momentum divergence began to form in DUG (positive divergence in Crude Oil prices per barrel).  DUG found resistance at the $40.00 per share level, while crude oil itself found support near $110.00 per barrel at the 200 day rising moving average.
Let’s take a look at crude oil’s daily chart:

I had been calling out the positive momentum divergence in previous posts, as well as describing how the 200 day SMA could provide support and a short-term end to the downside swing.  This happened quickly (complete with doji candles), as price began to surge higher, but an interested and unexpected development occurred Friday, which sent crude oil prices down over 5% in a single day (which was ultra-bullish for the broader US Stock Market - not surprisingly).
In fact, Friday’s action just about formed a “Bearish Engulfing” candle pattern, which would have more validity if it occurred at a possible market top, rather than a possible bottom (or support).
Should crude oil violate $110, the ’rounded reversal’ and divergence play would be invalidated, so this will be important to watch.  A break beneath $110 would also reaffirm the strong short-term downtrend (which has already taken prices down 20%) in place.
Always watch what momentum (strength) is doing and monitor trades in real time for signs of continued strength (or weakness) for a better handle on price action as it develops.
6 Comments | add comment



Follow the Electoral College Presidential Projections
August 23rd, 2008 by Corey Rosenbloom

Various sites have popped up which track daily polls and update in real time the current and projected winner of the US Election via the Electoral College vote, and I wanted to share some of those sites with you if you’re interested in keeping up with who’s ahead or behind, and learning more.
Whether Americans choose Barack Obama or John McCain as President in the upcoming November election, both prospective administrations will likely affect the economy and thus the stock market differently. While a discussion of how each administration would affect the economy is far beyond the scope of this site, I do keep up with the current trends and news on the political scene, and find it quite interesting in terms of the state-by-state updated polls.
If you want to keep up with the current count, or want to project your own Electoral College count (it takes 270 votes to win the Presidency), some of the following sites may be of uses various colors (shades) to show candidate strength, and also utilizes yellow to indicate “toss-up” states which current polls show could go either way.

The map looks wild, but the two shades of blue represent Democrat Barack Obama, while different shades of red represent Republican John McCain.  The election will likely be decided by these yellow “swing-states,” which will likely flip back and forth until November as new polls come out and the campaigns take new and potentially interesting twists and turns.

looks almost identical to Pollster’s map above).

If I had to inject my opinion now, I would say the main swing states that will determine the election will be Ohio (20 electoral votes, Virginia (13 votes) and Colorado (9 votes).  It’s likely that whichever candidate wins two of these three states (or even sweeps them all) will win the election.

However, so much can change before November, which is of course also true with the markets, and the Political Conventions taking place over the next two weeks could alter the map above.  Then, the candidates will engage in three debates, which could shift trends as well.

If you have further interest, check out some of the sites mentioned above, and especially the Projection Database for links to a plethora of sites with far more information on this topic.

Oh, and just for fun, as of Saturday, August 23rd, The Projection Database reports that 57 linked web or blog sites with frequently updated electoral vote projections have Democrat Barack Obama winning in November, 8 sites list Republican John McCain as the winner, and 2 sites list an exact 269 vote tie.

1 Comment | add comment



Viewing the Current S&P and Russell 2000
August 22nd, 2008 by Corey Rosenbloom

Wow - this week gave us some fascinating action on the US Stock Market indexes.  Let’s look quickly at the state of the S&P (daily and monthly chart) and then take a peek at what I saw and commented yesterday on the Russell, which came to pass today.
First, the S&P 500 Daily Chart:

First, let’s look at the overwhelming potential for resistance at the 1,292 price area (exactly at the close of today’s action).  What’s providing potential overhead resistance that needs to be overcome?
The 50 day EMA is at 1,290.91
The 38.2% Fibonacci retracement of the current move down is at 1,292.84.
The rising trendline (of the channel or ascending triangle) terminates currently at roughly 1,290.
These are all variables known to provide critical support and resistance, and should be considered and monitored.
Notice the way I have drawn the ascending trendline (channel) on the chart.  Valid trendlines must have at least three ‘touches’ (known as “tests”), and it is important to draw a trendline that connects as many points as possible.  Also, connecting trendline closes is more valid than connecting intraday points (according to Martin Pring and other classic technicians).
That being said, we had a confirmed breakdown of the trendline both on the daily S&P 500 and Dow Jones index, and are currently re-testing this trendline from underneath.  If another trendline needs to be drawn, it will be done when more price data arrives, but we must make our analysis and decisions on what we have at the moment, and this appears to be the best fit line for our accomodations.  As such, the line could be another variable to provide resistance.
However, if price were to break through all these zones of resistance, it would be a remarkable feat worth mentioning, and the next line of resistance would be 1,320.  Why this level?  I’m glad you asked.
S&P 500 Monthly Chart:

Moving to the longer time frame chart, we see that price is in a confirmed monthly downtrend (lower lows and lower highs) and is trading beneath the key 20 and 50 month EMA (though these have not crossed over yet).  The 50 month EMA is priced at 1,315, which is also near the 1,320 price zone on the daily chart 50% Fibonacci retracement.  These would likely serve as upside targets should price trade higher early next week.  The 50 month EMA has already provided resistance just last week.
It’s worth noting that the 38.2% Fibonacci retracement off the monthly chart is at 1,268, which has provided closing (and intra-month) support in 2008 (price has failed to close beneath this critical level).  The July bottom took the S&P almost to the 50% monthly Fib. retracement at 1,172.
Note also that  pleased to note that these confluence of support levels held and the Russell, along with the Dow, S&P, and NASDAQ traded quite higher today.  I mentioned this was interesting because of the likely breakdown of support on the Dow and S&P and noted that these two developments can’t (necessarily) co-exist peacefully.  Check out yesterday’s post and let’s look at the current state of the Russell 2000.
Russell 2000 Daily Chart:

On the Russell, it apperas for the moment that the 720 level will provide significant support.
What’s odd based on my take on the market?
The S&P 500 and Dow Jones Index appear to be breaking down out of a channel or possibly bearish wedge pattern, and both have significant resistance (via moving averages and Fibonacci retracements) on multiple time frames.
The NASDAQ and Russell 2000 have significant support beneath them.  I don’t show the NASDAQ here, but it’s pattern and structure is highly similar to that of the Russell.
What gives?  I’m not magic enough to answer that question, but I can point out that this is a strange development, with strong technical positioning on two indexes, and weak technical positioning on the other two.  Generally, all four indexes show similar structure, and it’s not very often that we get such massive divergence (conflicting signals) as I’m seeing now.
If you’re seeing something I’m totally missing, please let me know.  Otherwise, we’ll wait and see how this “conundrum” resolves itself, and not get too aggressive



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Johnson and Johnson JNJ Reaches New Highs
August 22nd, 2008 by Corey Rosenbloom

Consumer staples (defensive sector) stock Johnson and Johnson has performed rather well in the current uncertain economic environment, as funds and investors have rotated into perceived stable sectors as of late.  Let’s see the result of this flow and if there’s a potential trading opportunity now in this stock.
Johnson and Johnson (JNJ) daily:

Price actually bottomed prior to the stock market bottom (think Freddie & Fannie) on July 15th (JNJ actually ‘bottomed’ in June) and has rallied over 11% from these levels.   JNJ Relative Strength chart (not shown) to the S&P 500 actually bottomed in mid-May before skyrocketing higher (to create a relative strength chart in StockCharts.com, enter JNJ:$SPX - this divides JNJ by the S&P 500 to view the ratio).
From early July, price has staged an impressive upwards surge that has led to two new momentum highs - impulse precedes impulse.  I’ve noted a bull-flag which formed in late July and has since achieved its price target (I did not draw the legs of the measured move pattern).  Price could be forming a new bear flag pattern, and could be breaking above the flag at the moment.
Notice that volume trailed off during the current ‘downswing’ or retracement back to the 20 period EMA - this behavior is what we would expect for a ‘flag’ or impulse pattern.
Nevertheless, whether the flag completes or not (to the upside), one could enter a place a stop beneath the 20 period EMA for a decent reward to risk ratio.  Perform your own analysis to see if you find additional insights into this stock.
Johnson and Johnson (JNJ) weekly:

We see from the weekly chart that price has broken upwards out of a potential ascending triangle, or perhaps just a plain horizontal resistance line at $68 per share.
The weekly moving averages are in the ‘most bullish orientation possible,’ which is a sign of longer-term strength and bullish optimism.
Momentum has formed a new high via the recent price swing from $64 to $72.
While price certainly could come back and test the break-out level, the overall trend is up and the bullish case is in tact for this beacon of hope in uncertain times.
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Interesting Development on the Russell 2000
August 21st, 2008 by Corey Rosenbloom

Something interesting is potentially about to happen on the Russell 2000 Small Cap index, and something quite impressive has already just happened.  Can you guess what occurred?
First, let me start by saying that the Russell came just points shy last week of eeking out a new high for 2008, but was successful in reaching a new 7-month high by a little over one index point.  Given the environment and rampant (news) bearishness prevalent out there, that is a remarkable accomplishment indeed.
That being said, there’s the potential for a strange confluence of support to occur at the 720 Index level from a variety of sources.
Let’s look at the Daily and Weekly charts, and then discuss some of these potential levels:

First, we have to classify the Russell 2000 as being currently in a technical uptrend, according to the daily chart structure, as price has made a higher high (June), higher low (July) and now made a higher high (August), confirming the trend reversal up (which, again, seems odd in the context of ‘recession’ and the like).
Second, we note a confluence of support via the 200 day SMA (at 720.59) and the 50 day EMA (at 718.62).  The 20 day EMA is just above price at 727.92 - notice the doji ‘buy signal’ at support which is being threatened by today’s downward action.
Finally, although I have not drawn it on the chart, the 38.2% Fibonacci retracement from the July bottom to 764 swing high sits exactly at 719.76 (close enough to call it 720).  It’s not often that such events cluster at the same level, and when it does, it could pay to take note.
Let’s pull back to the weekly chart for more possible confluences of possible support:

Eerily enough, the 20 week exponential moving average rests at 717.94 (718) and the 200 week simple moving average rests at 719.02.  There is also a potential Gann fan that can be drawn projected down (1 point per box) from the July price high that rests just beneath 720 as well (not shown).
Whether or not the 720 level holds is of course yet to be seen, but one might be wise not to ignore this possible confluence of support that could hold.  What’s interesting (at least to me) is that the S&P 500 and the Dow appear to be breaking downwards out of a possible wedge or channel formation on the daily chart, so it’s a little odd to get such a strong potential buy signal on the Russell at the same time.  One of these patterns is likely to fail, and I’m not ready to make my prediction yet.
Let’s continue to watch this index closely for possible early clues of strength or weakness, and try to play the subsequent move that occurs off or through this interesting inflection point.
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Why is Trading in the Current Environment So Hard?
August 21st, 2008 by Corey Rosenbloom

If you’ve been frustrated by your trading results for any of the quarters this year, or for the year to date performance, you’re not alone.  Many hedge funds, institutions, mutual funds, retail (at home) traders, and almost the whole spectrum experienced underperformance at least at some point since the market turned in October 2007, so let’s look at a reason why that might be happening.
It’s worth mentioning again that Bill Miller, manager of the Legg Mason Value Trust (LMVTX), had one of the (if not the) most phenomenal track records of mutual fund managers of our time, beating the S&P 500 for 15 consecutive years (that clearly not an easy feat).  However, that same fund lost 35% from January to August of 2008 (when the S&P 500 was down 15%), and from the October 2007 peak, the fund has lost 43% while the S&P declined almost 19% - that’s phenomenal underperformance that has led to negative press and money flow from Legg Mason funds.
Other hedge funds, mostly leveraged on the sub-prime or financial sectors, have gone entirely out of business since 2007.
It seems easy to say, “Well, then Commodity Funds or managed futures accounts have outperformed the market thanks to oil’s dominance” but that’s not even the case either.  While T. Boone Pickens is one of the most well-known oil investors did have a commodity and stock/hedge fund that performed extremely well throughout most of 2008, in July alone, that same commodity fund lost 30% (in one month!) and his entire portfolio lost 10% (according to an article via HedgeFund.net).
These are just two examples of major name players who are suffering in this current market condition - think what’s happening to the number of funds and individual traders you don’t hear about.
I wanted to highlight recent research by Rob Hanna at Quantifiable Edges who addresses this question with objective and eye-opening research in his recent post “How to Trade the Choppiest Environment in 50 Years.”
Hanna details various studies that use end of day entries, such that if today’s close is higher than yesterday’s close, buy the market and hold until there is a down day (today’s close is less than yesterday’s close).  You would expect that moves would carry over, such that strength begats strength (in terms of trend and swing trading) and you’d be 100% correct from 1993 until 2000, and then would have suffered losses along with the market through the 2001 - 2003 bear market, however pay very close attention to the right side of Hanna’s equity curve graph - notice how precipitously the strategy fails in the 2007-2008 current environment.
The same is true for all the scenarios he tests (including shorting down days and buying to cover on the first up day, and even combining these into a unified strategy).
Hanna concludes:
“As you can see, buying after strong days and selling after weak ones worked well for 40 years. In 2000 that changed, and the last year and a half is the worst it has ever been with regards to follow through. This would suggest that strategies that may have worked well for forty years or more could be suffering greatly now.”
On the same day, Dr. Steenbarger of TraderFeed addressed this same tendency, yet focused on international markets in his post Short-Term Reversal Patterns Among Global Equity Indexes. Steenbarger concludes:
“Across the globe, short-term trend following has been hazardous for traders’ wealth. Even longer-term traders need to take these reversal patterns into account, if only to size positions and set stops for expected heat.”
Capital preservation may be the #1 new goal in thisenvironment.
(”Derailed” image courtesy and copyright Narrative Photography)
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Hedge Fund Blogger Richard Wilson
August 21st, 2008 by Corey Rosenbloom

I just came across a massive resource blog/website with information pertaining to those interested in many aspects of hedge funds that I wanted to share with you.
Hedge Fund Blogger describes its site as “Hedge Funds - 500+ educational articles on Hedge Fund and Fund of Hedge Fund managers, jobs, strategies and investments,” and I was thoroughly impressed at all the information contained on the site and will clearly spend some time there reading many of the articles.
I recently spoke with Richard via email and asked what were some of the main or most popular features on the site and he replied,
“A few of the most unique resources on the blog include the:

• Free Investment Book on Hedge Funds
• Geographical Hedge Fund Guides
• Investment Book Reviews
• Hedge Fund Employment Guide”

One could also start at the link “52 Most Popular Hedge Fund Articles” to begin your journey to learn what you’ve always wanted to know about hedge funds.  His “Hedge Funds FAQ” page is also a good launchpad resource.
You can also learn about possible job postings and descriptions for those more serious about this type of fund.  In addition, read some of the popular strategies (that aren’t veiled in total secrecy!) used, and what Richard believes will be the top 5 main strategies going forward from here.
In addition, you can find specific geographical information on regulation, employment, practices, listings, and more on his Geographical Hedge Fund Guide.

Wilson provides videos, PowerPoint files (mostly on regulation), white papers, news articles, links to other resources and much more on his site.  Be sure to check it out no matter if you’re just learning what a hedge fund is or are considering working for one or possibly starting your own!
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Johnson and Johnson JNJ Reaches New Highs
August 22nd, 2008 by Corey Rosenbloom

Consumer staples (defensive sector) stock Johnson and Johnson has performed rather well in the current uncertain economic environment, as funds and investors have rotated into perceived stable sectors as of late.  Let’s see the result of this flow and if there’s a potential trading opportunity now in this stock.
Johnson and Johnson (JNJ) daily:

Price actually bottomed prior to the stock market bottom (think Freddie & Fannie) on July 15th (JNJ actually ‘bottomed’ in June) and has rallied over 11% from these levels.   JNJ Relative Strength chart (not shown) to the S&P 500 actually bottomed in mid-May before skyrocketing higher (to create a relative strength chart in StockCharts.com, enter JNJ:$SPX - this divides JNJ by the S&P 500 to view the ratio).
From early July, price has staged an impressive upwards surge that has led to two new momentum highs - impulse precedes impulse.  I’ve noted a bull-flag which formed in late July and has since achieved its price target (I did not draw the legs of the measured move pattern).  Price could be forming a new bear flag pattern, and could be breaking above the flag at the moment.
Notice that volume trailed off during the current ‘downswing’ or retracement back to the 20 period EMA - this behavior is what we would expect for a ‘flag’ or impulse pattern.
Nevertheless, whether the flag completes or not (to the upside), one could enter a place a stop beneath the 20 period EMA for a decent reward to risk ratio.  Perform your own analysis to see if you find additional insights into this stock.
Johnson and Johnson (JNJ) weekly:

We see from the weekly chart that price has broken upwards out of a potential ascending triangle, or perhaps just a plain horizontal resistance line at $68 per share.
The weekly moving averages are in the ‘most bullish orientation possible,’ which is a sign of longer-term strength and bullish optimism.
Momentum has formed a new high via the recent price swing from $64 to $72.
While price certainly could come back and test the break-out level, the overall trend is up and the bullish case is in tact for this beacon of hope in uncertain times.
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Interesting Development on the Russell 2000
August 21st, 2008 by Corey Rosenbloom

Something interesting is potentially about to happen on the Russell 2000 Small Cap index, and something quite impressive has already just happened.  Can you guess what occurred?
First, let me start by saying that the Russell came just points shy last week of eeking out a new high for 2008, but was successful in reaching a new 7-month high by a little over one index point.  Given the environment and rampant (news) bearishness prevalent out there, that is a remarkable accomplishment indeed.
That being said, there’s the potential for a strange confluence of support to occur at the 720 Index level from a variety of sources.
Let’s look at the Daily and Weekly charts, and then discuss some of these potential levels:

First, we have to classify the Russell 2000 as being currently in a technical uptrend, according to the daily chart structure, as price has made a higher high (June), higher low (July) and now made a higher high (August), confirming the trend reversal up (which, again, seems odd in the context of ‘recession’ and the like).
Second, we note a confluence of support via the 200 day SMA (at 720.59) and the 50 day EMA (at 718.62).  The 20 day EMA is just above price at 727.92 - notice the doji ‘buy signal’ at support which is being threatened by today’s downward action.
Finally, although I have not drawn it on the chart, the 38.2% Fibonacci retracement from the July bottom to 764 swing high sits exactly at 719.76 (close enough to call it 720).  It’s not often that such events cluster at the same level, and when it does, it could pay to take note.
Let’s pull back to the weekly chart for more possible confluences of possible support:

Eerily enough, the 20 week exponential moving average rests at 717.94 (718) and the 200 week simple moving average rests at 719.02.  There is also a potential Gann fan that can be drawn projected down (1 point per box) from the July price high that rests just beneath 720 as well (not shown).
Whether or not the 720 level holds is of course yet to be seen, but one might be wise not to ignore this possible confluence of support that could hold.  What’s interesting (at least to me) is that the S&P 500 and the Dow appear to be breaking downwards out of a possible wedge or channel formation on the daily chart, so it’s a little odd to get such a strong potential buy signal on the Russell at the same time.  One of these patterns is likely to fail, and I’m not ready to make my prediction yet.
Let’s continue to watch this index closely for possible early clues of strength or weakness, and try to play the subsequent move that occurs off or through this interesting inflection point.
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Why is Trading in the Current Environment So Hard?
August 21st, 2008 by Corey Rosenbloom

If you’ve been frustrated by your trading results for any of the quarters this year, or for the year to date performance, you’re not alone.  Many hedge funds, institutions, mutual funds, retail (at home) traders, and almost the whole spectrum experienced underperformance at least at some point since the market turned in October 2007, so let’s look at a reason why that might be happening.
It’s worth mentioning again that Bill Miller, manager of the Legg Mason Value Trust (LMVTX), had one of the (if not the) most phenomenal track records of mutual fund managers of our time, beating the S&P 500 for 15 consecutive years (that clearly not an easy feat).  However, that same fund lost 35% from January to August of 2008 (when the S&P 500 was down 15%), and from the October 2007 peak, the fund has lost 43% while the S&P declined almost 19% - that’s phenomenal underperformance that has led to negative press and money flow from Legg Mason funds.
Other hedge funds, mostly leveraged on the sub-prime or financial sectors, have gone entirely out of business since 2007.
It seems easy to say, “Well, then Commodity Funds or managed futures accounts have outperformed the market thanks to oil’s dominance” but that’s not even the case either.  While T. Boone Pickens is one of the most well-known oil investors did have a commodity and stock/hedge fund that performed extremely well throughout most of 2008, in July alone, that same commodity fund lost 30% (in one month!) and his entire portfolio lost 10% (according to an article
Hanna details various studies that use end of day entries, such that if today’s close is higher than yesterday’s close, buy the market and hold until there is a down day (today’s close is less than yesterday’s close).  You would expect that moves would carry over, such that strength begats strength (in terms of trend and swing trading) and you’d be 100% correct from 1993 until 2000, and then would have suffered losses along with the market through the 2001 - 2003 bear market, however pay very close attention to the right side of Hanna’s equity curve graph - notice how precipitously the strategy fails in the 2007-2008 current environment.
The same is true for all the scenarios he tests (including shorting down days and buying to cover on the first up day, and even combining these into a unified strategy).
Hanna concludes:
“As you can see, buying after strong days and selling after weak ones worked well for 40 years. In 2000 that changed, and the last year and a half is the worst it has ever been with regards to follow through. This would suggest that strategies that may have worked well for forty years or more could be suffering greatly now.”
On the same day, Dr. Steenbarger of TraderFeed addressed this same tendency, yet focused on international markets in his post concludes:
“Across the globe, short-term trend following has been hazardous for traders’ wealth. Even longer-term traders need to take these reversal patterns into account, if only to size positions and set stops for expected heat.”
Capital preservation may be the #1 new goal in thisenvironment.
(”Derailed” image courtesy and copyright
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Glancing at the Health Care Sector XLV
August 20th, 2008 by Corey Rosenbloom

There’s been significant money flow shifts in the current environment, both between asset classes (from commodites into the stock market) and also in individual sectors of the broader stock market (from energy to technology and healthcare and others).  Let’s focus briefly on the price action in the Healthcare Sector (XLV) to see how rapidly price movements can shift and occur.
XLV Weekly Chart:

On the longer timeframe chart above, we see a double top pattern complete with a negative momentum divergence pattern throughout 2007, and an intense sell-off through the better part of 2008.  However, the tides have turned and funds seem to be strongly buying companies in this sector, as evidenced by the larger volume, positive momentum divergence, relative strength (vs. the S&P 500), and recent price swing up.
We appear due for a slight correction before the new weekly uptrend continues, but it would seem this could be a safe area, provided you stay on the sector level or diversified across various stocks, rather than concentrated in a handful in an industry (given that biotechnology stocks can be extremely erratic and surge or plunge based on clinical trial results or lawsuits).  Do be aware of recent examples like Elan Corporation (ELN) and Biogen Idec (BIIB) in terms of overnight surprises.
XLV Daily Chart:

The Health Care sector bottomed in June and has rallied almost 13%, which doesn’t sound too impressive, but the price movement has been in a steady 45 degree angle move up.  Right now we’re testing daily support via the 20 day EMA and 200 period SMA - note that we have indeed broken above the 200 day moving average, which many consider to be the ‘line in the sand’ in terms of trend or attractiveness.
Price made a new momentum high on this recent swing up, so we can expect continued strength following what appears to be a retracement move underway currently.
In terms of diversification, I’m including a quick chart courtesy FinViz’s Market Map of the performance of hte Health Care (and Consumer Goods/Staples, which has also experienced large positive money flow as well) of the past month.

From this, we see that Amgen (AMGN) and Merck (MRK) (along with United Health - UNH and others) have performend exceptionally well (increasing close to 10% each in a month), so these stocks may be worth further consideration.

Pay attention to sector rotation and money flow, and what it could be telling us about the broader market (for example, Health Care and Consumer Goods/Staples are traditionally ‘defensive’ sectors that  perform well during economic uncertainty, etc).

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New All-Time Lows For Freddie Mac and Fannie Mae
August 20th, 2008 by Corey Rosenbloom

Mortgage backers Freddie Mac (FRE) and Fannie Mae (FNM) made new lows today, after erasing all gains made from the July ‘Savior Rally” that was widely expected to be the absolute bottom for these stocks.  Let’s look at where we are price-wise and how far these stocks have fallen recently.
First, their daily charts:
Fannie Mae (FNM):

Freddie Mac (FRE):

I’ll discuss these charts together, as their price patterns are extremely similar (only their prices are not).
Price consolidated (flat trend) throughout April until June, when price began a slow ebb to the downside that turned into a vicious snowball effect move washing out investors to the downside until the eventual July 15th bottom when virtually everyone was most pessimistic about these companies (myself included) but then a massive, triple digit percentage surge occurred and almost 400 million shares changed hands in both companies.
Both stocks gained over 100% from their respective bottoms, rewarding those almost instantly who grabbed the falling knife and reassuring us all that these stocks were ok and that the worst was behind us.
All that has changed dramatically now, as both stocks have breached the intraday gap-down low of July 15th and made new lows for the year.  In fact, both stocks have made all-time lows today (Freddie Mac began trading in 1992 at $10 per share while Fannie Mae common stock began also in 1992 at $15 per share. Preferred shares - FNA -began trading May 2008 at $50 per share.)
What’s interesting to note is that the ‘off the bottom’ surge was halted sharply at the 20 period EMA on both stocks (Fannie Mae actually closed slightly above this average before failing its test here to roll back over to make new lows).  In a downtrend, the 20 period EMA often serves as initial expected resistance.
Notice also how volume is significantly lower than the July period, almost as if this bottom is being made in absolute ‘hush-hush silence,’ hoping that no one will pick up on this event.  Generally, new lows being made on reduced volume from previous lows is a bullish non-confirmation, so be sure to keep that in mind before rushing out to get short these stocks at these levels.
Let’s step back and view Freddie Mac’s Weekly chart for clues that could have saved investors such financial pain:
Freddie Mac (FRE) Weekly Structure:

As mentioned above, in a downtrend, the 20 period EMA (regardless of timeframe) can be expected to provide initial (and often significant) overhead resistance.  It’s also the ideal place to enter a short-sell, or to exit a trade you may have held too long emotionally, as it offers favorable risk/reward.  Red arrows mark these zones.
The July ’savior rally’ is a mere dragonfly doji on this chart, but recall that this rally was indeed a 100% up-move (initially fueled by shorts exiting the market in droves thanks in part to new changes in short selling, namely curbing “naked shorting” of 19 stocks including these.
So, looking at these charts and what’s happened now, it’s abundantly clear that the massive surges of July were caused by a significant short-squeeze or short-covering rally by large funds and traders, rather than a rush to buy these supposedly infallible companies.
Will investors pick up these stocks at these levels?  It’s impossible to tell by the charts alone, but we’ll need to keep our attention to these stocks to see what the level of risk-taking appetite is for funds and investors in these difficult economic times.
For more information, Mish’s Global Economic Trend Analysis released an article today entitled “Fannie, Freddie - $223 Billion Debt Rollover Problem” which includes economic data and commentary.
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A Return to Simplicity: Up, Down, Sideways
August 20th, 2008 by Corey Rosenbloom

We tend to overcomplicate trading at times, myself included, but sometimes it’s refreshing to step back and recall the simplest, most basic (almost oversimplified) concept of broader trends and possibilities.
Adam Hewison of Market Club released a new video today entitled “Three for One,” in which he takes trading and investing back to the foundational principle “Markets can do one of three things… go up, go down, or go sideways.”  From this structure, trading strategies of infinitely complex nature can be developed.
Adam walks us through a simple decision matrix and then explains how they constructed their “Trade Triangle Technology” using these principles with additional inputs, and how it’s used to generate profits by identifying basic price structure/behavior across all markets.
In describing the video, Hewison states,
“The most important element in the market is not the news, it is the market action itself. Everything else is secondary. In my new video I explain exactly how we look at the market and how you can benefit from looking at the market the same way.
The simplicity speaks for itself.”
I’m in the middle of doing various backtesting studies and strategy development, and I get caught up in the optimal parameter for an indicator, the optimal stop-loss strategy, the optimal position sizing algorithm and can get carried away in the finer nuances of price action and trading opportunities.
To some extent this is a necessary progression, but it’s important not to forget that price behavior is driven by supply, demand, expectation, etc. but that when all is factored away, price can only go up, down, or sideways, thus it’s important to identify the current environment and then develop strategies to take advantage of low-risk opportunities within the current structure.
Let’s remember the foundation of technical analysis, according to Martin Pring:
“[To] Identify trend changes at an early state and to maintain an investment posture until the weight of the evidence indicates that the trend has reversed.”
(Pring, [url=http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2FTechnical-Analysis-Explained-Successful-Investment%2Fdp%2F0071381937%3Fie%3DUTF8%26s%3Dbooks%26qid%3D1219249692%26sr%3D8-1&tag=afrtotra-20&linkCode=ur2&camp=1789&creative=9325]Technical Analysis Explained[/url], an essential book for those serious about the art of technical analysis).

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Crude Oil Reversal Back Up Underway?
August 19th, 2008 by Corey Rosenbloom

According to a few price calculations and support levels, odds have now shifted to favor a current possible short-term bottom for crude oil prices and a reversal to test higher levels - a technical development that comes at a time that gold has supported at similar levels and the S&P 500 is breaking down out of a daily trend channel.  Let’s focus for now on crude oil.
Crude Oil ($WTIC) Weekly Fibonacci Grid:

Taking the 2007 price low and projecting a Fibonacci retracement of the move to the 2008 highs, the following long-term Fibonacci retracement grid is created, which has the first level of support - the 38.2% retracement at $110.97, or roughly $111.00 per barrel.  The 38% retracement often provides initial support in an uptrend, which price clearly is in (despite a steep correction, on the longer time chart, we cannot deny the uptrend is still in tact).
Quickly - why is price still in an uptrend? Price is now making a higher low with a pullback after making a higher high.  Also, the moving averages remain in the most bullish orientation possible (20 above the 50 above the 200).
In addition to the possible support via Fibonacci, we have the 50 week EMA just below price at $108.89 (roughly $109 per barrel).  It would be quite impressive for price - after making such a large volatility price move down recently - could not find at least moderate support at these levels.
As if these levels were not enough to provide a solid case for a potential bounce, let’s look at additional confluence from the daily chart:

On August 4th, I published a post entitled “Crude Fails Test - Continues its Slide” in which I set a price target of roughly $110 per share, which was the ‘magnet trade’ or next zone of support via the daily chart.  Indeed price has now fallen just short of that $15 target and this current action can be considered a “test” of that level, meaning the 200 day moving average - currently at $110.20 - provides additional confluence for a strong and likely successful test of these price levels before mounting a possible reversal (however long lived) to the upside.
In terms of momentum, there’s also a clear positive momentum divergence forming, which often tends to precede price reversals.
To recap:
38% Weekly Fibonacci Retracement:  $111.00
Weekly 50 period EMA:$109.00
Daily 200 period SMA:  $110.00
All of which provide a confluence of possible support and price reversal at these levels.
Should price fail here, it would be a significant development.
Continue to look at your intermarket relationships, meaning gold also has found possible support (as I posted this weekend in the article “Is there Potential Support for Gold at These Levels?“, and the S&P 500 (and Dow Jones) are possibly breaking beneath a key rising support trend channel (mentioned in today’s post, “Market Gaps Through Support Trendline.”
Keep a close eye on all these developments and critical areas, all of which are happening simultaneously - I’ll be sure to keep you all posted on these situations as they develop.
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Market Gaps Through Support Trendline
August 19th, 2008 by Corey Rosenbloom

With the inflation numbers (double what was expected) and weak housing data, the market took the opportunity to gap downwards through the prevailing rising support trend channel on the daily chart (evident on the Dow and S&P 500).  We’ll need a close beneath the trendline to validate it, but as of noon, it looks like we’ll finally get that close.
Dow Jones DIA ETF Daily Chart:

I’m showing two interpretations of the daily bottom channel trendline (the top channel is not drawn) which is likely seen by all - on one trendline I use intraday closes and on the other, I use closing prices - the recent difference being yesterday’s action broke the trendline using intraday prices (candle wicks) and today’s action broke them both.  It’s possible that price could support, or could be stealing stop-loss (or triggering short-selling) orders and that we’ll need to re-draw the trendline, but for the moment - with a close beneath $114, we will need to classify these two valid trendlines as officially broken.
I’m sort of jumping the gun prematurely and posting intraday, rather than waiting for a close, but we must do our analysis in real time and be ready to chage if market conditions dictate so.   It will be frustrating if this turns out to be a whipsaw, but again, analysis and trading decisions are made in real time.
I mentioned yesterday that a test of the trendline offered an attractive place to ‘get long’ and play for the upper channel, but luckily before we could put on a position at that level, the market gapped lower, invalidating that play (opening and moving into the area where a tight stop-loss would be placed).  It is a great example of how we should do evening analysis, develop a strategy/game plan, and then wait for the market to confirm or disconfirm our analysis.  In this case, the market disconfirmed it, and a trade was not taken.
Let’s take a peek at the intraday action so far to see how this happened and what might be in store.
Dow Jones DIA ETF 5-min Chart:

Yesterday’s ‘trend style’ day action gave way to a late and pronounced positive momentum divergence and end-of-day rally, which seemed to indicate that price - being at support from the daily trend channel - would trade higher into Tuesday’s action and could travel as high as $117 to $118.  The economic news invalidated this pattern/analysis and the trend is strongly confirmed as “down” on the 5-minute timeframe (notice the most bearish orientation possible of the moving averages).
Also, notice the daily trend channel is - as of this writing - just over $1.50 away.  Odds are quite high that we’ll get that close definitively beneath this line, which would make the bullish case much more difficult.
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Monday’s Intraday Trading Tactics
August 18th, 2008 by Corey Rosenbloom

With a semi-trend day behind us and plenty of trading opportunities at hand, let’s look at some of the price structures and idealized trade entries we could have taken now that Monday’s action is complete.
Dow Jones ETF - DIA 5-minute:

First, the day started with a mini-index gap, which was instantly filled for little chance of profit, however this gap was indeed at least $0.20 above yesterday’s close, so it will count as a successful gap fade in the August statistics (compiled at the end of each month).
Price made a new price and momentum low on the day, setting up a potential “Impusle Sell” trade whenever price retraced to the 20 period EMA - or better - a confluence of intraday moving averages.  This confluence occurred as price pulled back in a 45 degree angle around noon, when a classic bear flag style trade developed (or a “Measured Move” as I’m more fond of calling this pattern).
Entry came as price crested to test the 20 or 50 period EMA, and the break beneath any of the dojis (or during the 5-minute doji formation) would have been an excellent short (with patience) with a stop above the key moving averages here.  The trade’s target would have been an equal or “Measured Move” of the prior impulse, or roughly $1.00 (100 Dow points) which was achieved very rapidly after the break of the price consolidation of the flag.
One could have played a retracement back to the 20 period EMA trade, given the three dojis in a row, but such countertrend reversal trades are often very low probability of a big win and offer little more than a scalper’s profit - it’s much better to step aside as price retraces and then look for an area to “get short” which came as price neared the 20 period EMA again and formed a tight doji (red arrow).
Price now formed a momentum divergence, but still it would have been better to step aside (no position) and then wait for a proper short entry again - this time signaled by three dojis in a row (second red arrow).
Price eased its way lower on less downside momentum, and a growing positive momentum divergence developed, which should not have been ignored, and could have been sensed without the use of any indicator (notice price swings narrowing to the downside).
The final ’short’ trade occurred as price retested the 20 period EMA for the last time before swinging back, forming yet another doji (today seemed like the “Day of the Doji” to me) and then broke to the upside, as hinted by the lengthy and pronounced positive momentum divergence.
All and all, it was a rough day for the market, but we sit cautiously on rising trend channel formed on the daily chart.  Unless there’s a significant down move Tuesday, odds slightly favor upside potential, and a good risk to reward trade long, given a tight stop beneath the trend channel, should it hold - either way, you won’t risk much to find out, and the upside (potentially to $117 to $118) is almost too good to pass up if I do say so myself.
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Market Retests Bottom Channel Intraday
August 18th, 2008 by Corey Rosenbloom

As of noon today, the S&P and Dow Jones returned to test their rising daily trend channel (or possible rising wedge formation) and is finding temporary support at these levels currently.  Let’s look quickly and see what might be in store.
DIA Daily Chart:

Could a similar pattern be forming as what formed during March - May?  That pattern resolved sharply to the downside.  While it’s possible the same resolution could occur, I don’t think we’re there just yet and we need a little more time and information to see what the eventual breakout (and there will be a breakout one way or the other) will be.
Right now, the bottom portion of the trend channel comes in around $114.75 (Dow 11,475), which is - at the time of this writing - the intraday low so far.  Price is just a bit beneath the daily 20 period EMA, which registers at $115.10.  Notice also how the moving averages are sharply narrowing, and how price is being semi-contained between these two levels.  As a caveat, note also how price has recently failed to respect the daily 20 as support or resistance until a few sessions ago.
It’s as if traders have a squeeze on the index and both buyers and sellers are finding fair prices at these levels.  Big moves often originate out of low volatility or reduced range conditions, such as we’re having now (again, one need only to look back to May to see the last time price narrowed as such and the resulting trend impulse that occurred).
Let’s take a quick moment also to focus on the S&P 500 daily chart, which looks almost identical to that of the Dow.
S&P 500 Daily (zoomed in):

The pattern is the same - only the numbers have changed.
It’s important to note that the NASDAQ is not forming this pattern (in fact, is showing strong relative strength against the S&P and Dow) and the Russell 2000 is more in line with the NASDAQ.  It’s a battle of two markets (technically, four indexes), and it will be fascinating to see the resolution.
Let’s keep our attention here to see if we can gain additional clues, or if price will give us a definitive break one way or the other.  Until then, remain patient and try not to get frustrated.
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A Closer Look at July’s Gap Fills
August 18th, 2008 by Corey Rosenbloom

July had one of the best months in terms of the gap-fill strategy (fading an opening gap), so let’s look a bit closer to see just how this amazing feat was accomplished.
DIA 60 min chart (click to expand):

What I’m showing is through TradeStation’s 60 minute chart, with blue dotted lines representing yesterday’s close and red horizontal lines representing today’s open.  When the lines are equal (or roughly equal), there is no gap.  However, when the lines are separated, there was an opening gap for that day.
I’ve added blue arrows to show the direction price traveled on its pathway to fill the gap (meaning that at some point during the day after a morning gap, the price equaled yesterday’s close, meaning the gap was erased).  You can see that not all gaps were filled easily.  Price did not always just rocket back to fill the gap - sometimes, price continued in the direction of the gap (which would have taken any well-placed stops) and then filled the gap.
On one interesting day (July 11th), price actually had a late day surge to fill a relatively large gap that most people believed couldn’t be filled.  Price formed an almost identical pattern later on July 15th.
Let’s zoom in a bit to see how some of these gap fades were accomplished:

The July 11 - 15 days as mentioned above:

I’m fascinated by gap fade trades, and tend to do very well playing them, as they are easy to recognize, have a greater than 50% chance of filling (in July, roughly 80% of DIA gaps greater than $0.20 filled), and as long as your stop is 1/2 the distance to your target (away from entry) or some sort of risk-management strategy (some traders refuse to use stops on gap fade trades… something I don’t necessarily recommend), the winning trades will make more than the losing trades.
There’s even an entire blog and website dedicated to the Gap Fade/Fill strategy, entitled “Master the Gap” which I’m looking forward to reading.
Let’s continue to see if this strategy will have edge throughout August and beyond.
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hefeiddd

Head and Shoulders for the Utilities?
August 17th, 2008 by Corey Rosenbloom

Is the Utility SPDR (XLU) on the precipice of a breakdown of a large head and shoulders pattern?  At a minimum, we need to keep a close eye on this index for a potential resolution one way or the other.  Let’s look.
XLU Weekly Chart:

Massive potential head and shoulders patterns such as this magnitude are rare, so when they form, it can be an excellent educational opportunity.  Traditionally - according to classical technical analysis - we would expect to see larger volume on the left shoulder, declining volume (and momentum) as the head forms, and finally the lightest volume as the right shoulder forms:  this is exactly the pattern we see here (notice the dotted declining arrow on volume).
Although I have not labeled the H&S pattern, it should be evident to you, in that the early 2007 swing is the left shoulder, late 2007 upswing (and “Measured Move” pattern - also not labeled) is the head, and finally the right shoulder formed in mid-2008.  Notice the roughly equal symmetry of the pattern, making it possibly too obvious to everyone to resolve as expected (’perfect’ patterns often have a higher failure rate than ‘busted’ patterns).
Nevertheless, if we play the pattern out to completion, we take the height of the head and measure down to the neckline (blue horizontal line) and then project that downwards, should there be a closing break.  The Head to Neckline distance is roughly $7.00 ($43.50 - $36.50), thus a $7.00 subtraction from $36.50 projects price to a possible $29.50 target - if this results in being a true head and shoulders top pattern.
At the moment, price rests cautiously at the neckline (and thrice tested) support line, meaning also that a potential bounce/rally is possible as well (try not to be tied too much to a certain interpretation, and allow yourself to see other possibilities as well, so as not to be blindsided).
Let’s drop down to the daily chart to see if we can glean any clues.
XLU Daily Chart:

We see different momentum divergences preceding each price turn (swing) in the ETF, but we are seeing what I call a “Flatline Divergence” which is a weaker form of divergence than a pure positive or negative one.  The moving averages on the daily chart are in the ‘most bearish orientation possible,’ which does not bode well for the bulls.  The 20 day EMA has served as considerable resistance, thwarting any rally to it since July.
A major test of support is upon us in this key ETF/sector, and it will be important to note the resolution and aggressive traders may try to profit from a breakthrough (down) of these levels, or could alternately play a successful support test.  The key - whatever your choice - is that your stop will be close to entry and your target will be much larger than your stop.
Continue to watch this development as it unfolds, and we may have an answer as early as next week.
(Hat tip to Fresh Salt Water Blog for calling this structure a little earlier).
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Is There Potential Support for Gold at These Levels?
August 16th, 2008 by Corey Rosenbloom

I’ve you’ve been following gold prices lately, you’ve noticed the precipitous plunge from the 1,025 per ounce high made just earlier this year.  Rather than getting ultra bearish at these levels, let’s consider the possibility that a bounce may occur, or at least that gold prices are at critical ‘make or break’ short term price levels.  Let’s use a few new tools to see what could be in store.
Gold Prices Weekly, using two Fibonacci Retracements:

While one could get better results focusing on longer term Fibonacci retracements, let’s look at two possible levels on the weekly chart.
First, if we take the 2006 breakout low (around $560) and then trace that to the $1,025 high (this is the RED grid on the left side of the chart), we note that gold paused first at the 38.2% retracement at $852, before heading higher.  Gold is now testing the 50% Fibonacci retracement from this move, at $797, and actually has broken slightly beneath this level.
If we take the 2007 price breakout low (blue grid on right side of chart), then we see that gold has already failed the 50% retracement and is now testing the 61.8% retracement at $791 per ounce, which is just below where price closed ($792) on the week.
The quick thought is that these levels could hold to give at least a minor (or perhaps major) support level for price - thus a long entry with a close stop might not be a bad idea IF you believe in Fibonacci relationships and the interpretation I have here (I strongly encourage you to do your own analysis for deeper insight).
If anything, it might give you pause to take an aggressive short right here, at least until prices firmly break these potential support levels.
Let’s take a quick look at the Gann Fan analysis chart (TradeStation):

I’m not a Gann expert, so I encourage others to submit comments on of this is correct, but using the $1 as an input on the default TradeStation Gann Fan indicator (taken from the price high), these mathematical lines appear.  Notice how the price has roughly held the relationship temporarily at a test, and appears to be an interesting tool for application.
At current, price is just beneath the 1×2 fan line, which could hold as support (though note that price has just breached beneath this level).  I won’t go too deeply into Gann analysis, only to note the possibility of price confluence with Fibonacci.
Back to Fibonacci, let’s look at the Fibonacci Extension/Projection tool, along with a “Measured Move” that has completed:

First, the Green line represents where I drew the three points necessary to create the Fibonacci extension grid (which resulted in the blue data to the right), which also happened to be a measured move.
Price fell $193 from the high to the May lows before rising $138 to form the July high.  The “measured move” would expect price to again fall $193, which occurred and was slightly exceeded on Friday’s close for a price decline of $207 per ounce (from the July high).  Often, price reverses once a measured move is complete.
Also, price has exceeded the 100% Fibonacci price extension line drawn from these swing high levels.  The 100% projection is at $804, and price is currently trading at $791 per ounce.
Conclusion:
Price is just beneath key potential support levels provided by Fibonacci retracements, Fibonacci extensions, and Gann Fan lines.  Whether price holds here is yet to be seen, but with such potential confluence of price levels about the $800 per ounce level, a bounce (or support) for price is not out of the question.  However, if gold prices trade beneath $790 or $780 convincingly, gold would have failed to support at these levels, and true support levels may be further away, and could come in as low as the $650 to $700 range.
Continue to watch this level very closely in the upcoming week.
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HANS Pops 50% - Short Squeeze?
August 15th, 2008 by Corey Rosenbloom

In one of the most massive short-squeezes/bottom fishing price surges I’ve seen, Hansen Naturals (HANS) - famous for their energy drinks - surged 50% from new 2008 lows, which was preceded by a distinct positive momentum divergence.  Let’s look closer.
HANS Daily:

According to the Motley Fool article, Hansen released news that their Monster Energy drink (16oz) just overtook RedBull (8oz) to become the current market leader in US energy drink sales.  Such news, combined with oversold technicals and - I would guess - a relatively large short float gave the stock all the energy it needed to boost higher and form a new upswing in price.
Let’s keep in mind that the trend is still clearly and confirmed down, and even a 50% rally does not change that fact.  We’ll still need price to retrace part of this move and form a higher low before switching trend.  Also, note that the moving averages are currently in ‘the most bearish orientation possible,’ which does not bode well for the stock. On a bullish note, price is above the 20 and 50 day EMAs.
Notice in mid-June when a similar ‘price pop’ happened that took price above these averages yet bulls failed to consolidate the gains, and the selling pressure continued to press the stock to new 2008 lows, forming two additional swing lows prior to our current surge.
If by chance you may be looking to get long HANS, try to wait for a pullback, instead of getting euphoric and joining after such a large volatility price swing.  Also, let’s take a peek at the higher timeframe structure to see if it adds any clues.
HANS Weekly:

Sure enough, price is currently testing (and perhaps failing) at the 20 week EMA, which is a level that has not been breached (on a closing basis) since the horrific plunge in late 2007.  Notice how the 20 week EMA has contained all price rallies until present.  In fact, any retracement to this average served as an excellent, low-risk shorting opportunity.
This stock teaches us valuable lessons about divergences, trends, moving averages, gaps (from the daily chart), earnings, etc.  Continue to study it for your own insight on trading opportunities and risk management.
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Recent Money Flow Shift Affects Hedge Funds
August 15th, 2008 by Corey Rosenbloom

There’s been a clear shift in money flow (as well as asset classes) that started in June which has cost some prominent hedge funds dearly who were behind the curve.  Those who remained long commodities or energy and short financials (because it was the easy thing to do) were crushed in recent weeks.  Let’s look at a quick article and see the recent money flow shift, and what it might mean for the time being.
First, let’s look at the shift away from the Long Commodities and Short Financials combination, and let’s now look at the Technology and Health Care sectors for current money flow.

This comparison begins in January and takes us to present.  What I’m demonstrating is the massive shift and reversal first away from energy (notice the almost 20% sell-off from June) and strong Financials (green) rebound.  Energy peaked first and Financials bottomed and rallied sharply.  That’s the first take-away from the chart.
Funds or traders/investors who continued to hold the ‘hedge’ trade were crushed because market dynamics changed.  Specifically, T. Boone Picken’s (a famous oil expert investor), commodity fund of his BP Capital lost 35% in July alone (overall, his funds lost 10%), a massive decline for a singular month.  According to a HedgeFund.net article:
“Pickens said a “steep decline” in natural gas and oil had an “adverse impact on our performance” in an investor letter.
The Washington Post called the downturn “embarrassing….”
“Pickens was not the lone casualty of the commodity backlash. The average hedge fund lost 4.35% on the HFN Hedge Fund Aggregate Average in July.”
The blog “Fund My Mutual Fund” has an excellent, brief commentary (including other news links) about this money flow shift, including the following quotes:
“I don’t think one of the best investors/corporate raiders of the past 30+ years suddenly got stupid; the rules have simply changed.”
“I think this showcases yet again how heavily the “long commodities/short financials” trade was weighted by the hordes of institutional money. When all these [investors] decided to jump ship at the same time, we all capsized.”
“The velocity of the moves nowadays are really the only difference - what used to takes months to unwind is now taking days or weeks at most. If you dare sit back and think about the situation over a couple of weeks, you are down 30%. Shoot first, ask questions later.”
This is a critical point, one of which is exacerbated by algorithm/computer trading and instant news access.  Linda Raschke often uses the phrase “Dog-pile in, dog-pile out” to refer to this phenomena of rapid movement and capital shifts in such a short period of time, driven by the expansion of hedge funds.
It’s phenomenal to watch and participate, but the rules have changed from years ago.  Opportunities still abound, but we have to be much quicker and alert, and pay attention to many markets and capital shifts to understand potential opportunities.
We’ll continue to watch these developments and the implications for the broader markets.
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hefeiddd

Head and Shoulders for the Utilities?
August 17th, 2008 by Corey Rosenbloom

Is the Utility SPDR (XLU) on the precipice of a breakdown of a large head and shoulders pattern?  At a minimum, we need to keep a close eye on this index for a potential resolution one way or the other.  Let’s look.
XLU Weekly Chart:

Massive potential head and shoulders patterns such as this magnitude are rare, so when they form, it can be an excellent educational opportunity.  Traditionally - according to classical technical analysis - we would expect to see larger volume on the left shoulder, declining volume (and momentum) as the head forms, and finally the lightest volume as the right shoulder forms:  this is exactly the pattern we see here (notice the dotted declining arrow on volume).
Although I have not labeled the H&S pattern, it should be evident to you, in that the early 2007 swing is the left shoulder, late 2007 upswing (and “Measured Move” pattern - also not labeled) is the head, and finally the right shoulder formed in mid-2008.  Notice the roughly equal symmetry of the pattern, making it possibly too obvious to everyone to resolve as expected (’perfect’ patterns often have a higher failure rate than ‘busted’ patterns).
Nevertheless, if we play the pattern out to completion, we take the height of the head and measure down to the neckline (blue horizontal line) and then project that downwards, should there be a closing break.  The Head to Neckline distance is roughly $7.00 ($43.50 - $36.50), thus a $7.00 subtraction from $36.50 projects price to a possible $29.50 target - if this results in being a true head and shoulders top pattern.
At the moment, price rests cautiously at the neckline (and thrice tested) support line, meaning also that a potential bounce/rally is possible as well (try not to be tied too much to a certain interpretation, and allow yourself to see other possibilities as well, so as not to be blindsided).
Let’s drop down to the daily chart to see if we can glean any clues.
XLU Daily Chart:

We see different momentum divergences preceding each price turn (swing) in the ETF, but we are seeing what I call a “Flatline Divergence” which is a weaker form of divergence than a pure positive or negative one.  The moving averages on the daily chart are in the ‘most bearish orientation possible,’ which does not bode well for the bulls.  The 20 day EMA has served as considerable resistance, thwarting any rally to it since July.
A major test of support is upon us in this key ETF/sector, and it will be important to note the resolution and aggressive traders may try to profit from a breakthrough (down) of these levels, or could alternately play a successful support test.  The key - whatever your choice - is that your stop will be close to entry and your target will be much larger than your stop.
Continue to watch this development as it unfolds, and we may have an answer as early as next week.
(Hat tip to Fresh Salt Water Blog for a little earlier).
1 Comment | add comment


Is There Potential Support for Gold at These Levels?
August 16th, 2008 by Corey Rosenbloom

I’ve you’ve been following gold prices lately, you’ve noticed the precipitous plunge from the 1,025 per ounce high made just earlier this year.  Rather than getting ultra bearish at these levels, let’s consider the possibility that a bounce may occur, or at least that gold prices are at critical ‘make or break’ short term price levels.  Let’s use a few new tools to see what could be in store.
Gold Prices Weekly, using two Fibonacci Retracements:

While one could get better results focusing on longer term Fibonacci retracements, let’s look at two possible levels on the weekly chart.
First, if we take the 2006 breakout low (around $560) and then trace that to the $1,025 high (this is the RED grid on the left side of the chart), we note that gold paused first at the 38.2% retracement at $852, before heading higher.  Gold is now testing the 50% Fibonacci retracement from this move, at $797, and actually has broken slightly beneath this level.
If we take the 2007 price breakout low (blue grid on right side of chart), then we see that gold has already failed the 50% retracement and is now testing the 61.8% retracement at $791 per ounce, which is just below where price closed ($792) on the week.
The quick thought is that these levels could hold to give at least a minor (or perhaps major) support level for price - thus a long entry with a close stop might not be a bad idea IF you believe in Fibonacci relationships and the interpretation I have here (I strongly encourage you to do your own analysis for deeper insight).
If anything, it might give you pause to take an aggressive short right here, at least until prices firmly break these potential support levels.
Let’s take a quick look at the Gann Fan analysis chart (TradeStation):

I’m not a Gann expert, so I encourage others to submit comments on of this is correct, but using the $1 as an input on the default TradeStation Gann Fan indicator (taken from the price high), these mathematical lines appear.  Notice how the price has roughly held the relationship temporarily at a test, and appears to be an interesting tool for application.
At current, price is just beneath the 1×2 fan line, which could hold as support (though note that price has just breached beneath this level).  I won’t go too deeply into Gann analysis, only to note the possibility of price confluence with Fibonacci.
Back to Fibonacci, let’s look at the Fibonacci Extension/Projection tool, along with a “Measured Move” that has completed:

First, the Green line represents where I drew the three points necessary to create the Fibonacci extension grid (which resulted in the blue data to the right), which also happened to be a measured move.
Price fell $193 from the high to the May lows before rising $138 to form the July high.  The “measured move” would expect price to again fall $193, which occurred and was slightly exceeded on Friday’s close for a price decline of $207 per ounce (from the July high).  Often, price reverses once a measured move is complete.
Also, price has exceeded the 100% Fibonacci price extension line drawn from these swing high levels.  The 100% projection is at $804, and price is currently trading at $791 per ounce.
Conclusion:
Price is just beneath key potential support levels provided by Fibonacci retracements, Fibonacci extensions, and Gann Fan lines.  Whether price holds here is yet to be seen, but with such potential confluence of price levels about the $800 per ounce level, a bounce (or support) for price is not out of the question.  However, if gold prices trade beneath $790 or $780 convincingly, gold would have failed to support at these levels, and true support levels may be further away, and could come in as low as the $650 to $700 range.
Continue to watch this level very closely in the upcoming week.
3 Comments | add comment



HANS Pops 50% - Short Squeeze?
August 15th, 2008 by Corey Rosenbloom

In one of the most massive short-squeezes/bottom fishing price surges I’ve seen, Hansen Naturals (HANS) - famous for their energy drinks - surged 50% from new 2008 lows, which was preceded by a distinct positive momentum divergence.  Let’s look closer.
HANS Daily:

According to the  sales.  Such news, combined with oversold technicals and - I would guess - a relatively large short float gave the stock all the energy it needed to boost higher and form a new upswing in price.
Let’s keep in mind that the trend is still clearly and confirmed down, and even a 50% rally does not change that fact.  We’ll still need price to retrace part of this move and form a higher low before switching trend.  Also, note that the moving averages are currently in ‘the most bearish orientation possible,’ which does not bode well for the stock. On a bullish note, price is above the 20 and 50 day EMAs.
Notice in mid-June when a similar ‘price pop’ happened that took price above these averages yet bulls failed to consolidate the gains, and the selling pressure continued to press the stock to new 2008 lows, forming two additional swing lows prior to our current surge.
If by chance you may be looking to get long HANS, try to wait for a pullback, instead of getting euphoric and joining after such a large volatility price swing.  Also, let’s take a peek at the higher timeframe structure to see if it adds any clues.
HANS Weekly:

Sure enough, price is currently testing (and perhaps failing) at the 20 week EMA, which is a level that has not been breached (on a closing basis) since the horrific plunge in late 2007.  Notice how the 20 week EMA has contained all price rallies until present.  In fact, any retracement to this average served as an excellent, low-risk shorting opportunity.
This stock teaches us valuable lessons about divergences, trends, moving averages, gaps (from the daily chart), earnings, etc.  Continue to study it for your own insight on trading opportunities and risk management.
No Comments | add comment



Recent Money Flow Shift Affects Hedge Funds
August 15th, 2008 by Corey Rosenbloom

There’s been a clear shift in money flow (as well as asset classes) that started in June which has cost some prominent hedge funds dearly who were behind the curve.  Those who remained long commodities or energy and short financials (because it was the easy thing to do) were crushed in recent weeks.  Let’s look at a quick article and see the recent money flow shift, and what it might mean for the time being.
First, let’s look at the shift away from the Long Commodities and Short Financials combination, and let’s now look at the Technology and Health Care sectors for current money flow.

This comparison begins in January and takes us to present.  What I’m demonstrating is the massive shift and reversal first away from energy (notice the almost 20% sell-off from June) and strong Financials (green) rebound.  Energy peaked first and Financials bottomed and rallied sharply.  That’s the first take-away from the chart.
Funds or traders/investors who continued to hold the ‘hedge’ trade were crushed because market dynamics changed.  Specifically, T. Boone Picken’s (a famous oil expert other news links) about this money flow shift, including the following quotes:
“I don’t think one of the best investors/corporate raiders of the past 30+ years suddenly got stupid; the rules have simply changed.”
“I think this showcases yet again how heavily the “long commodities/short financials” trade was weighted by the hordes of institutional money. When all these [investors] decided to jump ship at the same time, we all capsized.”
“The velocity of the moves nowadays are really the only difference - what used to takes months to unwind is now taking days or weeks at most. If you dare sit back and think about the situation over a couple of weeks, you are down 30%. Shoot first, ask questions later.”
This is a critical point, one of which is exacerbated by algorithm/computer trading and instant news access.  Linda Raschke often uses the phrase “Dog-pile in, dog-pile out” to refer to this phenomena of rapid movement and capital shifts in such a short period of time, driven by the expansion of hedge funds.
It’s phenomenal to watch and participate, but the rules have changed from years ago.  Opportunities still abound, but we have to be much quicker and alert, and pay attention to many markets and capital shifts to understand potential opportunities.
We’ll continue to watch these developments and the implications for the broader markets.
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hefeiddd

Quick Intraday Market Look
August 14th, 2008 by Corey Rosenbloom

Let’s take a look at the possible trading opportunities that presented themselves in the SPY (S&P 500 ETF) intraday chart today with the interesting price action.
SPY 5-minute chart:

You would have thought the bears would have mauled the stock market indexes when you woke up to read the headline “Inflation jumps the most in 14 years and is twice what was expected!” and yes, there was a gap down, but that gap was quickly faded and the market scarcely looked back from the start.  Why?  The reasons are beyond me, but I try to find potential low-risk opportunities as they present themselves throughout the day.
The first opportunity came with the overnight gap to initiate a possible gap fade trade, which actually worked with minimum interruption until price closed the gap and traded at yesterday’s close.  Instead of inflecting back down in the direction of the gap, price surged to new highs on the day and gave us a large opening range (30 minutes and 60 minutes) on high volume.
Price may have resembled a trend day to you at this point, but remember that trend days often begin with a gap that does not fill and then continues to one extreme throughout the day.  In this case, as price made a new momentum high, you should have been looking to buy the first pullback to the rising 20 period EMA, which occurred before noon and the next swing high actually formed on reduced momentum (notice the negative momentum divergence).
The actual high of the day (as happens many times) was formed on a negative momentum divergence (classic example), after which price tested the rising 50 period EMA (forming a clean entry long via the doji), but ultimately followthrough was minimal and price retested the 50 period EMA before failing, setting up a “Magnet Trade” to test the rising 200 period SMA (this was a classic example of a clean and smooth roll-over of a trend).
Price found support at this level before rallying weakly into the close.
The goal is to find low-risk trades and to play for small targets, rather than to capture every last penny.
Print and annotate your own charts for the stocks and markets you trade for improved pattern and opportunity recognition.
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The British Pound Plunge
August 14th, 2008 by Corey Rosenbloom

With the rapid strengthening of the US Dollar Index, that means that many other currences that comprise the index have been plunging in value.  Let’s take a special look at the British Dollar and how spectacular that movement was.
British Pound (Currency iShares) FXB:

I chose to use the iShares chart rather than the British Pound Index ($XBP) so we could discuss volume implications.  Notice how volume was extremely low during the formation of this ‘line’ or rectangle formation, and then increased as a mini-symmetrical triangle completed before price plunged sharply to the downside.  This is a case where it might have been safe to assume that a triangle (or possibly larger rectangle) formation would have broken to the upside, but instead the pattern resolved sharply and suddenly to the downside with little warning as to how severe the move would be.
This development (unexpected break of a pattern and then a sudden surge against long positions) provides a clear example Dr. Steenbarger’s recent post “Mindful and Mindless Trading” where he discusses seeing a chart pattern and then jumping into the market based on that pattern without looking at the broader themes or reasons as to why a market might move (other than a solitary chart pattern), and also what happens when you do so and a market moves violently against you.
The new (and highly informative) Fresh Salt Water blog (written by a friend and regular reader) discusses the possible reasons behind this sudden move in the post “The GBP Slide” and I wanted to pull in a background quote:
“The UK made a decision some time back to not enter the Euro and for parts of this decade that decision looked to be paying off as it was held up as a shining example of a economic powerhouse in Europe. However, things are starting to go a bit wrong lately. The economy is slowing, UK consumers are mired in debt, the housing bubble which is now starting to burst rivals and on some measurements is actually worse than the US situation and inflation is rife. On the last point, recent inflation figures put the Retail Price Index at 5% - higher than the Bank interest rates. This is the first time since the early eighties that has happened. In addition, it’s unlikely the BOE [Bank of England] is in a position to rise rates to combat inflation (which would also strengthen the pound) due to the impact this would have on borrowers and the wider economy.”
Let’s also look at a larger timeframe structure to see what we could have learned from the weekly chart:
British Pound Weekly:

Here we see an upwardly sloping classic Head and Shoulders Pattern (that is more evident in the 3/10 Momentum Oscillator), the break of which would have signaled either a short entry or at least a long liquidation.  Price came back to test the neckline in March 2008 and then moved into a consolidation pattern (triangle) before breaking sharply lower on record volume.
Recall the bullish surge on the charts of the US Dollar Index (shown in my previous post “The Remarkable Strengthening of the US Dollar”) - there has to be a casualty of the dollar surge and those casualties are the currencies that make up the Dollar Index.
You can see similar bearish charts on the Euro ($XEU), Yen ($XJY, although not as severe a plunge as Europe), Canadian Dollar ($CDW), Sweedish Krona (FXS), and Swiss Franc ($XSF).
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Apple’s (AAPL) Remarkable Recovery
August 13th, 2008 by Corey Rosenbloom

If you recently got disgusted and vowed never to look at a chart of Apple inc (AAPL) again, you missed a major move and locked yourself out of a valuable lesson.  Let’s take a look at what’s happened since Apple’s ‘disgusting’ price action after their earnings report and where we stand now.
Apple Daily (AAPL):

After Apple’s late July earnings debacle (amazing earnings but reduced guidance), price continued its downtrend and added even more pain to investors who hoped the earnings day would be the price bottom - as for now, it was indeed the bottom, but traders had to be very aggressive and nimble to enter at those prices.
Interestingly enough, Adam Hewison (Market Club) posted a video that day which provided a great educational lesson that taught when it was ‘ok to trade against the trend” and vowed that Apple at those low prices (around $150 per share) was a time that it was not only safe to do so, but encouraged.  It’s a fascinating video entitled “Apple Rebound” which was released on July 22nd - Adam also discusses how to use Market Club technology to find opportunities like that and the video provides hands-on application of their software (consider joining Market Club if you have not done so - it continues to be an outstanding and extremely affordable service).
That being said, Apple officially broke a downward sloping trendline last week and price has surged higher without looking back - indeed investors are repricing what they thought about the earnings report and the future of the company going into the ‘back to school’ and upcoming holiday sales (hey, Christmas isn’t that far away!).
At the moment, we’re retesting July highs and if we can clearly exceed $180 per share, it would add tremendous fuel to the bullish fire.  Also, note that Apple has been up yesterday and today - two days when the broader market traded lower (which shows us relative strength - as of this writing, the NASDAQ has turned positive on the day).
Why might the $155 per share level been the bottom of the daily downtrend (so far)?  Let’s peek at the weekly structure.
Apple Weekly:

I had posted earlier about this development, in that Apple was testing the rising 50 week moving average and could find significant support at that level.  Indeed that happened, and with the exception of the appearance of the sudden intraday gap down (long lower shadow in mid-July), price never closed beneath this level, meaning a low-risk entry could have been taken at this zone with a stop around the $150 per share level.  As you see, this trade is currently profitable and appears to have some ‘room to run’ higher.
With strength in Apple, this could be a boost to the NASDAQ index and could absolutely be bullish (or at least stabalizing) news for the market.
Let’s continue to watch this amazing and resilient stock together.
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Index Triangle Pattern Becomes More Uncertain
August 13th, 2008 by Corey Rosenbloom

What a difference two days makes!  As of Monday, almost all eyes were focused on a potential breakout from an ascending triangle formation on the major US stock market indexes, and now that pattern is invalidated, and one of two new possibilities exist - one benign and one ominous.  Let’s look.
S&P 500 Daily Chart:

As I wrote briefly in a previous entry, the Indexes were forming a possible ascending triangle break.  That analysis appears now to be invalidated by price failure to follow-through, and now price returns to a confirmed ascending channel structure.
Let’s hope (for the bulls) that the pattern resolves itself into a rising trend channel pattern, which means prices will likely steadily (though choppily) head higher, and could break to the upside, or could continue in the channel for a few weeks.
However, we must now raise the possibility of an ominous specter - that the price is forming a “Bearish Rising Wedge” pattern (examples from StockCharts.com; examples from Thomas Bulkowski’s site), in which the recent rally is a ’sucker rally’ and price will break sharply to the downside, similar to a bear-flag continuation pattern.  We can’t confirm this yet, but we do need to be aware of its possibility.
The ascending triangle theory (on the chart) gives us a bullish projection on all indexes - should the pattern switch to a downside break and completion of the rising wedge, we would have a sharp and deep downside projection - but let’s talk about that if it happens.  Let’s switch our outlook from short-term bullish to ‘wait and see’ neutral (in terms of waiting for this pattern to complete).
Notice that I’ve drawn two trendlines - the darker line represents intraday prices and the narrow line represents closing prices only.  There’s little difference in these trendlines, and they both bring us to similar conclusions.
Let’s look at something additional with the Dow Jones Index.
Dow Jones Daily Chart:

We’d need to stay above 11,450 to keep the rising lower trendline in tact and valid.  It is clear, however, that price is consolidating as it rise, forming an eventual apex (swings are clearly narrowing).
I want to call your attention to the clear and present negative volume divergence, which is setting up as prices move higher - this is a strong non-confirmation of the recent rally, and tilts the odds a little more in favor of the possible “rising wedge” formation.
Remember, we do our analysis on the basis of what we see at the moment, and all analysis (from fundamental to technical to quantatative) is subject to change when new information - confirming or disconfirming - enters the system.
For further information, sign-up for the Market Club blog service (free - just requires your email address), which gives you daily updates to conditions of various markets from multiple guest authors (myself included!) and perspectives.
The outlook is a little more uncertain than it was on Monday - keep your eyes focused on these developments.
(Update:  I just saw that the Art of Trading blog called this potential wedge setup back on August 7th)
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Gold Breaks Major Weekly Support
August 12th, 2008 by Corey Rosenbloom

On Monday, gold prices convincingly violated a key potential support zone, and now it appears that the path of least resistance is to the downside.  Let’s look at the weekly chart:

Price violated the rising 50 day moving average, which was an initial downside target that has now been achieved.
Price has formed a lower high and is now in the process of forming a lower low, which is just a whisper away from an official re-classification of the weekly trend from up to down, which would be a significant shift.  Gold prices are nearing the 20% peak to decline threshold to classify a nominal Bear Market (crude oil prices have already done so), and should this happen, many market commentators (TV news) will likely pick up on it quickly, if they have not done so already.
With the violation of the rising 50 period moving average, a potential (possible) target eventually becomes the rising 200 week moving average, which will continue rising to meet price should we continue lower on the chart.  A key test of this level could be coming up, but it may not happen this month or next month - unless buyers or geopolitical issues can drive prices higher, we do expect an eventual test to occur, which would be most interesting.
Gold (and oil) is suffering greatly with the renewed strength of the US Dollar Index - should this trend continue (recall that the US Dollar Index is officially classified as being in an uptrend on the daily chart, but not the weekly chart yet), then we could expect lower prices ahead in gold and oil - both of which would likely boost the US (and even global) equity markets.
Let’s keep our eyes fixed on these developments!  Consider using the services of the increasingly popular Market Club membership, for trading signals, detailed advice, scans, and more!
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Did You Know the Russell is close to New 2008 Highs?
August 12th, 2008 by Corey Rosenbloom

In something that may have escaped your attention, the Russell 2000 Index is mere points from making a new price high for 2008 - which may be a little hard to believe until you actually see it… so let’s look!
Russell 2000 Weekly:

The chart I have was taken from data from Monday’s close, but notice that as of that point, the Russell was less than 10 points away from surpassing its recent highs to make a new price high for 2008, which may seem extraordinarily shocking, given the amount of bad news that seems to plague the market (subprime, housing crisis, Freddie Mac, recession, etc).
The Russell is made up mostly of small-cap stocks, which actually have been doing well this year, despite the weakness in the Dow and S&P.  This is perhaps an encouraging sign for the bulls, but it’s a development that needs to be monitored closely.
I thought I would point this potential development out, as it stands as a bit of good news in a sea of bearishness.
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Charting the Weekly Dow Jones
August 12th, 2008 by Corey Rosenbloom

While the Daily Dow Jones is short-term bullish, let’s step back and look at the larger structure for potential targets and zones of possible resistance.
Dow Jones Weekly:

We have a little leg-up in viewing Monday’s action on the chart, so the final candle is far from a complete weekly close, so keep that in mind.
Taking the Fibonacci retracement grid from the 2007 highs to the July 2008 lows, we see the 38.2% retracement target is at 12,115, while the 50% retracement target is 12,512.  Also, the 20 period EMA is just overhead, which could provide slight resistance at 11,950.  I’m not sure bulls will have much trouble overcoming this line at least initially.
Keep your eye on the 12,350 zone, which corresponds with the flattening 50 period EMA and is just beneath the 50% Fibonacci retracement - it would be difficult for bulls to advance beyond this level, and if they do so convincingly, it would be significant.
We see a new momentum low on the 3/10 MACD Oscillator (parameters 3, 10, 16), which often forewarns of potential continuation (in this case to the downside), and it is important to note that the overall trend is still clearly and officially confirmed as down (note the progression of lower lows and lower highs, as well as the ‘most bearish orientation’ for the moving averages possible).
Right now in the price structure, we are experiencing a ‘counterswing’ up, and will be classified as such unless price were to overtake the 13,000 level.  Bulls do not have excessive justification yet to be bullish long-term.  We take the price action and try to anticipate the next swing, which is currently up, but the larger trend is unchanged, which is evident on longer time frame charts.
Let’s continue to watch the situation as it develops and always monitor price for signs of continued strength, or potential developing weakness.
(Hat tip to Steve W. from the comment section on requesting a view of the weekly chart - his view, which also incorporates Fibonacci - can be viewed at his “State of the Dow” article).
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The Potash Plunge - Targets Achieved
August 11th, 2008 by Corey Rosenbloom

Potash Corp (POT) is in the midst of a downside price plunge, which was in part forecast by the breaking of moving average support and a subsequent target of a downside test of the 200 day moving average.  At current, Potash has tested and failed to hold the critical support line.  What does this mean?
On August 4th, I pointed out in my post “Potash Breaks to the Downside - Targets Established” that odds were quite high that we would at least test the $170 per share level on the daily chart (which was the target of the descending triangle) and just above the 200 day moving average.  Also, I set a target of $160 based on the weekly chart (via the rising 50 day moving average).  We have achieved both of those targets and beyond.  Let’s look at how it happened and what could be in store.
Potash Daily:

When a stock in a solid uptrend finally violates its 20 day moving average, the next target is the 50 day average.  If this line is violated, and price then finds resistance at this level, the next logical play is to the downside with a test of the 200 day average.  This scenario played out in textbook fashion in the stock, and we even got a price bounce as price tested the 200 day average (buyers may have found value there).
Sellers met the buyers at this critical technical test, and now sellers have convincingly pushed price through all major areas of support on the daily chart, and we can officially confirm a downtrend on Potash’s daily chart.
Before you run out and get short Potash now, something curious is happening on the weekly chart….
Potash Weekly:

Even though the daily chart is quite bearish, we see the potential for significant support via the rising (now flat) 50 week EMA at $160 per share.  Long-term bulls (buyers) could find value at this area, and could try to pick up a large quantity of shares here, so bears should be careful, however if sellers manage to ‘maul’ the buyers beneath $160 per share convincingly this week, all bets are off for this once amazing and wonderful oasis to the bulls.
This case is an interesting and clear example of how trends take time to reverse, and often give plenty of warning (like a large barge changing course slowly) of the potential new direction - complete with targets and technical ‘tests’ to achieve.
Annotate Potash your own way and learn valuable lessons from this popular stock that is now perhaps out of favor with many who arrived to the ‘party’ late.
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Bonddad: It’s a Recession that Won’t End Soon
August 11th, 2008 by Corey Rosenbloom

Hat tip to Hale Stewart of the Bonddad Blog for his article published on the Huffington Post entitled “Yes, it is a Recession [and] No, it Won’t End Soon,” which discusses several points about the economy worth considering.
I strongly recommend reading the full article (at either of its locations), but I did want to highlight your attention to a few major points:
“In other words, using one statistic to describe a system as complex as the US economy is pointless. What we’re really looking for is a fairly widespread decline in activity that lasts a fairly long time.”
Meaning, the classic (or popular) definition of a recession is two consecutive quarters of negative GDP growth, which clearly has not occurred.  Hale provides you two definitions from the National Bureau of Economic Research which deepen and expand the classic definition to include more specifics.
Hale then breaks the four components followed by the NBER, which include the following:
1.  Personal Income (less government payments such as the economic stimulus checks)
2.  Employment
3.  Industrial Production
4.  Volume of Sales in different sectors
He then provides detailed charts from various sources that underscore the points and show the current trends (weakening across all measures) and provides a bit of a summary for you to draw your own conclusions.
Take time to make yourself aware of the data and what it might mean for the broader economy now and in the near future.
(Bonus:  You may also view the contributions Mr. Stewart has made to the Huffington Post, all of which touch on broader economic themes and political considerations at the “Hale Stewart Bio” link here).
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Looking at the Dow and its Components
August 10th, 2008 by Corey Rosenbloom

It’s time to look at the broader picture of the Dow Jones Index, and then look at its 30 stocks to see which ones are overextended both above and below its 20 day simple moving average.
Dow Jones Daily:

The Dow (and S&P and NASDAQ) has gently broken above three forms of resistance:
The upper channel of an ascending triangle pattern,
The flattening 50 day EMA,
and the 38.2% Fibonacci retracement of the May to July downswing
While this is a significant and important development, it would be nice to see follow-through on Monday, meaning we get a ‘clean’ or ‘definitive’ close above these levels (all of which correspond with the 11,700 price level).
Momentum has been clearly building (positively diverging, in fact) and is now clearly uptrending.
The only ‘caveat’ in this bullish scenario is that volume has declined through this rally (officially classified as a “counterswing Up”).  This is not surprising, given the surge in volume to the downside which possibly market the end of a capitulation move (where many longs surrendered at once).
Odds are quite favorable now that a short-term up-swing is underway, which could take price at least to 11,975 (50 % Fibonacci retracement) or to 12,250 (61.8% Fibonacci retracement) or even as far as the falling 200 day moving average (the highest target) at around 12,400.  We will have to monitor price action continually for signs of developing strength or weakness.
For a little bit of fun - and for potential trading candidates - let’s look at how far each of the 30 Dow Stocks are extended above or below their 20 day moving average:

Retailer Home Depot (HD) is the most overextended Dow stock, which represents recent strength in consumer discretionary.  Financial stock Bank of America (BAC) is not far behind Home Depot, as the most recent rally has taken these two sectors considerably higher, much to the broader market’s delight.

General Motors (GM) is most extended to the downside, thanks to poor earnings and deteroriating forecasts and fundamentals.

This week ahead could be good for the bulls if the price indeed does break out of the recent resistance levels.  Place careful stops if not and always monitor developments day to day - all forecasts are subject to change when new developments mandate.

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Significant Strengthening of the US Dollar
August 9th, 2008 by Corey Rosenbloom

If you missed this on Friday, make yourself aware of it now - the US Dollar Index surged significantly on Friday, breaking above key resistance, and possibly altering inter-market dynamics for some time to come.
Let’s see the daily chart:

After building a lengthy and evident positive momentum reading on the bottom-panel indicator, price finally surged higher and has officially completed a trend reversal - the Dollar Index has formed a higher low, higher high, and then taken out the higher high and now broken above all moving average resistance on the daily chart.
Stated with emphasis:  The US Dollar Index is now in a confirmed uptrend on the daily chart!
This has the potential, as mentioned earlier, to change everything for the time-being.
Gold has broken beneath its key support at the 200 day moving average;
Crude Oil is plunging and is set to test its 200 day average $5 per barrel lower
The $CRB Index (shown later) has broken its 200 day moving average
Keep in mind that a stronger dollar can hurt multi-national companies, whose profits are not as inflated when the Dollar currency is weak.
Now to the Weekly Chart:

In addition ot breaking daily moving average resistance, the Dollar Index broke weekly resistance via the falling 50 period EMA - this is a significant development which has not happened since 2006.
Price has not yet made a higher swing high, but if the current strength continues, it will do so, and a change in trend on the weekly chart would be mighty significant for all inter-market relationships - continue to keep your eye on this chart.
Let’s take a quick peek at the broader commodity index (the $CRB) Weekly:

The Index has plunged from its 470 value peak and has just closed beneath the rising 50 week EMA for the first time since 2007 - that is also a significant development.
As was witnessed Friday with the surging stock market indexes, all this is quite bullish for the broader US Equity Market, as it helps ease some of the major worry that inflation will be a significant burden on a weak economy.  If this trend continues (stronger dollar, lower commodities), then we could reasonably expect the US Equity Market to continue higher as well - but this is only one component in the broader economic picture, and one component does not create a new bull (or bear) market.
Continue to watch these interconnected trends very closely, and be prepared to position (or reposition) accordingly if you have not done so already.
Track trading or analysis signals across these and broader commodity (futures), currency, or stock market developments on the custom charts at the Market Club (sign-up here), and follow the daily commentary of Adam Hewison and staff as they track these changes and many more.
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The Thursday Measured Move and Intraday Tactics
August 8th, 2008 by Corey Rosenbloom

Let’s take a quick look at a very interesting pattern that occurred during Thursday’s intraday index trading session and also at some of the opportunities from price structure that set-up during the day.
DIA - Dow Jones ETF (5-minute):

First, the morning began with a large overnight gap of roughly 100 points, putting us in the lower probability that a gap of that nature will be faded, but there was a 61.8% (Fibonacci) retracement of the gap, so even still, there was a partial gap-fade position, the support of which was found at the rising 200 period SMA.
Price then retraced upwards, failing at the confluence of the falling 20 and 50 period EMAs before forming a 45 degree pullback which failed to make new lows on the day and just nipped beneath the 200 period MA.
The pattern I wanted to highlight is the “Measured Move” pattern, or the “A to B equals C to D” relationship which is always an eye-grabber when it happens.  It’s a version of a bull flag, but it is not a definitional bull flag, but is best described as a “measured” or “Equal” move, and the pattern sets up with an initial impulse move, followed by a comfortable 45 degree angle retracement, and entry is triggered at the break of the tight upper trend channel, with a target being an exact “measured move” of the first A to B leg.
Even if you miss the entry, you can still gain clues to price direction and structure once you observe the pattern is completing - many times an intermediate or even actual price high (or low) is printed with a measured move-style pattern.  The move formed a semi-double top, and then price consolidated about the 20 and 50 period moving averages before forming a tight range (consolidation) and then breaking lower slowly at first before the quick retest (red arrow) which retested the break-out zone and formed a solid short-sale entry.
Price then burst out of consolidation to make a new trend move and new significant lows on the day.  Large moves tend to begin out of balance, or consolidation.
So far today (Friday), price has burst to the upside and filled the previous gap, trading as of this writing at $116.40 in a surprise chart move (the day began with a slight gap down).  I’m sure we’ll have some interesting patterns to discuss in today’s action as well!
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July Select Stats - Overnight Holding vs Intraday
August 7th, 2008 by Corey Rosenbloom

I’m adding a new feature to the research side of the blog, which asks the question, “Would it have been more profitable to trade exclusively intraday or to hold overnight exclusively or some mixture?”
Essentially, the question asks ‘what might you be giving up if anything by not holding a trade overnight’?
To run these statistics, I created a simple Excel file that takes daily stock data from Yahoo Finance and then has two formulas:
The “hold overnight only” formula is the following:  Today’s Open minus Yesterday’s Close
The “trade intraday only” formula is the following:  Today’s Close minus Today’s Open
I have hand-selected popular stocks and ran them through these formula to see what the difference would have been.  Let me know if you have suggestions for further analysis.
DIA - Dow Jones ETF… a proxy for the broader market (and my favorite ETF to trade).
DIA Monthly Change: $1.32 (1.17%)
Overnight Only:  $1.61 (1.43%)
Intraday Only:    -$1.33 (-1.17%)
Google (GOOG): Monthly Change:  -$45.83 (-8.82%)
Overnight Only: -$20.08 (-3.86%)
Intraday Only:   -$32.59 (-6.07%)
Apple Inc (AAPL): Monthly Change: -$5.28 (-3.22%)
Overnight Only:  -$7.57 (-5.28%)
Intraday Only:    -$0.92 (-0.53%)
(see explanation below)
Exxon-Mobil (XOM): Monthly Change:  -$7.44 (-8.47%)
Overnight Only:  -$0.95 (-1.08%)
Intraday Only:    -$6.75 (-7.64%)
Though the DIA (Dow Jones) gained a small percentage point for July, had you only bought at the morning and sold at the close - taking no overnight risk - you actually would have lost just over a percentage point.
You would have lost money either way with Google, but you would have actually lost more money had you tried to avoid overnight risk.
With Exxon-Mobil, you would have done much poorer by refusing to take a trade home overnight.
The only of the four stocks I tested that did not show this pattern was Apple (AAPL), which actually would have cost more profits to hold overnight.  Keep in mind that Apple experienced a singular, large $17 overnight gap when it announced earnings guidance on July 22nd.  If we eliminate this whole day from the study (including the $13 intraday rally that took place on the same day), the “overnight numbers” would be a gain of $5.42 by holding overnight only vs a loss of $13.94 by holding intraday only - much more in line with the other stocks).
Perhaps this is encouraging news for the short-sellers, as the edge may be in shorting stocks intraday in this environment and not holding overnight, but these four stocks are far too little to draw any conclusions, as is attempting to draw any conclusions from a single month’s data alone.
I am showing this study as an initial idea in development, which will have me coming back and testing more stocks and longer time periods to see what the results will be when those examinations are complete.
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NewsFlashr Rolls Out New Features
August 7th, 2008 by Corey Rosenbloom

Today, the NewsFlashr website - an all in one news search engine - launched a new tool that allows you to search keywords across all headlines.
Right now on their homepage (www.newsflashr.com), they show the top eight “hot topics” for world, business, politics, entertainment, sports, in a quick, simple tabular format which allows ease of seeing what’s hot in the news circuits right now.  There’s no longer a need to wade through multiple websites to find cutting-edge news stories and then decide what might be important or interesting to read - or what’s being discussed across different forums right now.
If you click on a particular topic (let’s say Business, for example), then the site lists the top keywords across all major financial or online news sites, such as Yahoo, CNN, Fox News, USA Today, Barrons, and others.
At this moment, the most popular terms are the following:
Banks
Toyota
Rates (interest rates)
Wal-Mart
AIG
You can click on specific news stories that catch your eye on these topics.
My favorite usage of the site is the comprehensive, detailed “Feeds View” pages, which spread out each of the major news or blog web sources and list the most recent posts from that source.  To get this resource, you’ll need to click in the upper-right side of the page on the red button “Feeds View.”
From here, it’s as if you’ve spread out the top newspapers or websites in front of you and are viewing the most recent headlines from these sources.  The words “Just In” have now been added to show news stories that were just published - you can also display headlines by time or by Alexa (page-view) rank.
Check out and bookmark the Business Feed section to take a birds-eye view of all the major financial publishers and what they’re providing news-wise right now, which is updated every 15 minutes.   I now have this page as my homepage, so that I can be constantly up-to-date with major news stories.  Feed views also exist for Politics, Sports, World-News, Technology and also blogs that accompany these major news carriers.
In an age where there’s so much information and so little time to digest it all, NewsFlashr provides the essential tool to view dozens of headlines simultaneously, and then decide what’s important to you, and what’s in the public consciousness right now.
(The NewsFlashr Team also run the Instant Bull website, which is a powerful tool for stock-specific resources, information across news sources (such as earnings, analyst estimates, etc), and popular message board posts).
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Gap Fade Stats for July
August 6th, 2008 by Corey Rosenbloom

It’s time to see how many gaps were formed and filled through the month of July!  July recorded the best performance so far for the ‘gap fill’ strategy - let’s look at the numbers.
For these studies, I use the DIA (Dow Jones ETF) and consider a ‘gap’ as being any opening price that is at least 20 cents (20 Dow Points) different than its closing price.  A gap fill is signaled once price does gap and then trades back to at least equal to the prior day’s close.
“Fading a Gap” means shorting a gap-up and buying a gap down, usually as soon as it happens.
For the month of July 2008, 15 out of 21 trading days opened with a gap of at least 20 cents (that’s 71% of days opened with some sort of gap!).
Of these 15 gap opening days, 12 gaps filled, meaning 80% of all gaps in July were filled!
Teasing the numbers a little, we find the following:
8 of 10 (80%) of gap ups were filled.
4 of 5 (80%) of gap downs were filled.
What if we increase our definition of a gap to mean at least $0.50 change (or 50 Dow Points) from prior close to the morning’s open:
8 of 21 days (38%) showed a morning gap of at least 50 cents.
6 of these 8 days’ gaps were filled, for a ‘gap fill’ percentage of 75%.
2 of 3 (66%) of gap ups were filled.
4 of 5 (80%0 of gap downs were filled.
Let’s define a “gap” as being greater than $1.00.
There were 4 trading days that showed an overnight gap greater than $1.00, and 3 of these gaps filled (75%).
These are fascinating statistics for gap-fill traders and for all market participants in general.  For gap-faders, July was about ‘as good as it gets!’
For an individual month’s performance, check out the following monthly posts from Afraid to Trade:
January Gap Fade Statistics
February Gap Fade Statistics
March Gap Fade Statistics
April Gap Fade Statistics
May Gap Fade Statistics
June Gap Fade Statistics
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Critical Test of US Dollar and CRB Index Coming Up
August 6th, 2008 by Corey Rosenbloom

There could be a curious inflection in the current price movement of the Commodity Index ($CRB) and the US Dollar Index ($USD), which could make or break the current trends in place.  Let’s see what I mean.
The US Dollar Index:

The US Dollar Index has experienced a lengthy downtrend, has paused, consolidated, formed higher highs and higher lows, and officially reversed its downtrend to an uptrend on the daily time frame (not yet on the weekly).
The breakout from the triangle consolidation was encouraging, and we are just shy of achieving the target (height of the triangle plus the breakout), which will complete an “A to B equals C to D” relationship (almost like a zig-zag on the chart).  This price projection target is roughly $74, which is almost achieved, but interestingly enough, the target corresponds almost perfectly with the falling 200 day moving average.
One would expect some sort of price correction or retracement at this level (which would be bullish for commodities short-term), but should dollar bulls push price beyond the 200 day SMA, that would be a remarkable and definite shift - one which could officially reverse all prior trends for some time to come.  I strongly recommend you keep an eye on this market for signs of continued strength.
The CRB Index:

The commodity indexes trade almost perfectly inverse the US Dollar Index, such that strength in the dollar is often bearish for commodities, which is what has happened recently with the dollar’s rise.
The CRB Index faces an almost mirror image of the critical test for the US Dollar - this time, the test is to see if commodity buyers/bulls can support the index at the critical $395 level, which corresponds with the 200 day simple moving average - if bears push price through this level, then we could see a significant shift (downwards) in the price of commodities (as many hope).  Breaking through this line would send crude oil and gold (and other commodity) prices even lower.
However, a successful test of this level, which likely has higher odds, could mean a temporary shift back to ‘the way things were’ with short-term higher oil and gold prices.  At a minimum, I do think we’re due for a retracement back up, perhaps to test tthe $420 level which corresponds with the 20 day EMA.  If we don’t get this retest soon, all bets are off and we could see a protracted slide - the protracted slide development would surprise me much more than the gentle retracement.
Adam Hewison’s Market Club team does an excellent job of keeping you informed of these developments, as well as providing annotated charts of all markets with ‘trade triangle’ signals and an educational structure on how to integrate multiple timeframes into analysis and trading decisions.  Please consider joining the Market Club if you have not done so already.  They have clearly earned my respect.
Follow these markets, realize what the broader picture may mean for the US Stock market or the market you are trading, and pay attention to inter-market trends.
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A Quick Look at Tuesday’s Trend Day
August 5th, 2008 by Corey Rosenbloom

The Fed decision and declining oil prices gave us yet another major trend day in the indexes that was more in-line with textbook definitions.  What do I mean?  Let’s look at the charts.
August 5th - DIA 5-minute chart:

Generally, two events precede a trend day:
1.  Range contraction or some sort of narrow candle pattern (such as a doji or a spinning top) the previous day.
2.  A large (relative) opening gap that doesn’t come close to filling
These two events preceded today’s action.  Yesterday’s range formed a type of ’spinning top’ where the close and open were close to each other, despite range expansion above and below these zones.  These - along with doji patterns - indicate that a market may be coming into balance and that range expansion may be ahead.
The morning’s opening gap on such a large day as a “Fed Day” was all the clues you needed to trade as if a trend day was unfolding, and it indeed did.  During a trend day, you should place a core trade immediately upon realizing odds strongly favor a ‘trend day’ move (such that the market will open at the lows and close at the highs - as such, any trade location will be favorable).
You should trail a stop below the rising 50 period EMA (on the 5-minute chart) and then try to play for swings or scalps as price tests the rising 20 period EMA, perhaps on margin if you are experienced in trading these days.
The day’s action was a textbook trend day, with price only ‘nipping’ beneath the 20 period EMA once - when the announcement was released which almost always results in wild, seemingly random price swings in both directions before an eventual direction is established.
Price formed a clean bull flag into the close, and the final retracement to the 20 period EMA set-up this classic and also text-book bull flag which was good for a potential $0.50 (50 points) of profit.
Study today’s action for further insights from confirming indicators such as volume, breadth, TICK, TRIN, etc for a deeper experience of the day’s action and how it relates to possible trade opportunities.
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Risks Run High for Biotech Companies
August 5th, 2008 by Corey Rosenbloom

The broader Biotechnology iShares Index (IBB) has been showing supreme relative strength to the broader stock market, but that doesn’t mean you can buy a random biotech stock and make money - quite the opposite.  Even though the index has held up, here are two companies whose stock prices have absolutely plunged overnight, bringing immense losses to those invested in them.
First, let’s view the Biotech iShares IIndex - IBB:

The chart shows a classic example of a consolidation pattern - lengthy rectange - which has now broken upwards into a ‘realization’ phase which is exhibiting an almost perfect 45 degree angle on increased volume.  Not only has this index shown relative strength by remaining flat while the market plunged throughout May and June, but now the index is making new highs while the market is stagnating.
If you had participated in this iShare ETF recently, you would have been experiencing a smooth, comfortable appreciation in prices.  What would have happened had you tried to be savvy and ramp up gains through buying individual companies?  Let’s look at a couple of recent examples of gross underperformance and surprises through failed drug tests or announcements of new negative side effects.
Biogen Idec Inc (BIIB):

After reaching a high last week above $72, news that two new cases of a rare brain disease were found in Multiple Sclerosis patients taking its treatment Tysabri sent shares plunging instatly, taking away profits from investors who joined the up-trend late.
Company partner Elan Corporation (ELN) shared a similar fate:

Elan lost over 50% of its value recently, as investors fled for the exits upon the news.
Full news story of these newly deemed risky stocks can be found via Forbes in the article “Risks Run High for Biogen, Elan.”
The point I take home is that it is (often) far safer to invest (or swing trade) in an exchange traded fund than it is to speculate or trade in individual stocks, especially in the volatile biotechnology or drug sector, where one whisper or one failed laboratory test can send the fair valuation for a given stock plunging overnight, leaving buyers trapped.
ETFs offer mitigated risks through balanced ‘portfolios’ or indexes of many companies, and while your gains may not be as high, your losses are not expected to be as high either.  Not even intelligent stop-loss placement would have saved you in this situation, though in the iShare index, the two-company plunge represented a relatively small ‘blip.’
Do be careful in individual, speculative stocks, and do consider the possible advantages of swing trading ETFs.
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Crude Oil Fails Test - Continues its Slide
August 4th, 2008 by Corey Rosenbloom

In good news for the broader economy and US Stock Market, crude oil prices failed a critical test of the crossovers of its key 20 and 50 period moving averages, and now could be headed lower for a support test of its rising 200 day moving average.  Let’s see this recent development on the charts:
Crude Oil ($WTIC) Daily:

By “critical test,” I mean that significant overhead resistance has now formed at the $130 level, which now represents the crossunder of the 20 period EMA to the 50 period EMA, which has set up what some call a “hot, wet blanket” trade (the imagery is that the moving averages halt upward movement like a hot, wet blanked would).
A long-legged, spinning-top style candlestick formed at this level, as sellers quickly overtook buyers at this zone - buyers have had little luck since early July in pushing crude oil prices higher.  Perhaps it is concerns over a deeper economic slowdown or increasing supplies or some combination thereof, but the charts appear to be forecasting the potential for lower prices yet to come.
The momentum oscillator registered a new momentum low in mid-July, setting up the “Impuse Sell” trade (when price retraced to the key 20 period EMA), and we could be set for a test of the rising 200 day moving average as a line of defense for the buyers.
Also, on the weekly chart (not shown), prices have now violated (crossed beneath) the key rising 20 week EMA, signalling a bearish turn-around.
Let’s continue to watch this chart for signs of further weakness - and weakness in Crude OIl could translate into a (temporary or longer) boost in the broader equity markets.
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Potash Breaks to Downside - Targets Established
August 4th, 2008 by Corey Rosenbloom

High-flying stock Potash (POT) appears to be in a larger-scale distribution pattern on the daily chart and just potentially broke a descending triangle today.  Let’s look at this chart for potential price targets should these patterns be valid.
Potash Daily:

Based on quick analysis, we have lengthy and persistent negative momentum divergences since April, and momentum is accelerating to the downside now.
The $190 per share level provided solid support in the past, and now that level has been broken to the downside, and there is a descending trendline ahead, which completes a possible ‘descending triangle’ distribution chart pattern.
Classical technical analysis uses price projections from the height of the triangle, which is at $240 down to $190, which would mean a possible downside target would be projected down $50 from the triangle break at $190 to be placed near $140 per share (blue arrow).
I have an initial target near $165 per share, which corresponds with a test of support at the 200 day moving average (currently at $165.69 per share) and the weekly 50 period moving average at $161.89, which is flattening out).
On to the weekly chart.
Potash Weekly:

This chart cleanly shows a ‘non-confirmation’ by volume, as higher prices were met with less enthusiasm and lower volume readings (also there was a negative momentum divergence, which is not shown).  The weekly ‘gravestone doji’ in June at the top of the Bollinger Bands - when combined with a negative divergence from momentum and volume - served as an excellent, high-probability short-sell (or exit for long positions).
With the 20 week EMA violated, a potential target of $160 per share is established as sort of a ‘magnet trade’ or possible ‘impending test’ of the ‘next line of support’ via the 50 week EMA.
These are ‘quick’ targets and you need to apply your own analysis to see if there are other indicators or price points (such as Fibonacci) that may lead further insight to you.  It will be interesting to see if once unstoppable stock Potash does indeed form a larger corrective or reversal pattern, and what that might mean for the broader market.
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