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Weekly Market Newsletter, June 7th, 2010

2010-06-07T22:37:22.246-04:00

The Week Ahead: The jobs report failed to inspire confidence in stocks as all but 20,000 jobs created were temporary census workers. The report was a catalyst for the Dow Industrials to fall below 10,000 on increasing volume. Nervous markets will be watching the Consumer Credit report on Monday, Wholesale Trade numbers and the Fed Beige Book data on Wednesday. By Thursday, expect the International Trade numbers as well as the Jobless Claims for the past week. Friday's Retail Sales, Business Inventories, and Consumer Sentiment releases will rap up a busy and likely volatile week.

Stocks to Watch: Industrial and Material stocks faired the worst do to ties with the global economy. Heavier than normal volume was associated with Caterpillar (CAT), Boeing (BA), and General Electric (GE). Others include Textron (TXT), Jacobs Engineering (JEC), and trucking company Ryder Systems (R ). Worries about less global demand for steel impacted US Steel (X ), AK Steel (AK), and Cliffs Natural Resources (CLF). Concerns about European debt problems can be seen through ETF stocks of Europe such as the I-shares for Italy (EWI), Spain (EWP), and Belgium (EWK) whose debt is greater than Spain and Portugal relative to the size of its economy.

Special Note: During the the market peak in 2007 and subsequent low in 2009, many analysts cited US companies market presence in countries overseas as a saving grace for continued earnings growth despite a weak domestic economy. The burgeoning debt crisis is proving to have no boundaries as seen by a growing list of European countries including the recent threat of default by Hungary. How long can earnings be sustained as economies around the world endure budget cuts and contraction of the very debt that helped sustain their growth?

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Weekly Market Newsletter June 1, 2010

2010-06-01T09:12:57.610-04:00

The Week Ahead: Markets head into June concerned about higher oil prices do to the Gulf oil spill, the weakest consumer spending report in seven months, and Spain's credit rating being cut by Fitch. Further insight will be provided by three reports on Tuesday: Auto Sales, the ISM Manufacturing Index, and Construction Spending. In addition to this watch Thursday's Jobless Claims, Productivity and Costs, Factory Orders, and the ISM Non-Manufacturing Index. Lastly, Friday's Employment Report may have the most impact on stocks and bonds.

Stocks to Watch: Stocks related to the oil spill disaster in the Gulf continue to weaken as Halliburton (HAL), Baker Hughes (BHI), Diamond Offshore Drilling (DO), and FMC Technology (FTI) headed lower. Nabors Industries (NBR) bucked the trend as it is mostly a land driller and its stock headed higher. The growing possibility of a weakening European economy had Dow Chemical (DOW) down as 2/3 of the company's sales come from overseas. Blue Coat Systems (BCSI), a network security management firm, lost 1/4 of its value on a ratings cut over concerns about its European business.

Special Note: Volatility in May was the worst in over a year for the Dow Industrials. The biggest losing sectors were Energy down 11.8%, Industrials down 9.8%, and Materials down 9.7%. The rate of change in the core CPI figures which excludes food and energy fell to the lowest level since 1966. In addition to this, the now privately computed M3 money supply numbers show the broadest aggregate measure to have declined by almost 10% on an annualized basis. Perhaps deflation is the real threat going forward in all asset related markets.

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Bearish Measured Move Pattern

2010-05-27T09:00:16.703-04:00

Bearish measured move or measured move down is a three phased continuation chart pattern. The pattern starts as reversal of an existing uptrend but is considered as continuation pattern as the pattern is only confirmed after the second phase. The 3 phases of bearish measured move are reversal decline phase, consolidation/retracement phase and continuation decline phase.

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The requirements of bearish measured move pattern include,

• The pattern should begin at the top/end of a strong uptrend.
• The reversal decline phase starts near a high. The downward price decline should be pretty orderly; usually breaking a major support and forming a price channel. This phase lasts from a few weeks to many months. If the price is greatly curved, then the validity of the pattern is challenged.
• The consolidation/retracement phase follows the first phase. If it is a price retracement, it can be up to 67% of the first phase. Consolidation patterns such as rectangle chart pattern and descending triangle or retracement patterns such as rising wedge, bearish flag and bearish pennant formations should occur at the end of this phase.
• The continuation decline phase should (almost) match the slope of the first phase.
• Volume confirmation is no so important. Generally, the volume should increase at the beginning of both decline phases and should decrease at the end of the retracement phase.

With bearish measured move pattern, traders can go short at the confirmation of breakout of consolidation/retracement phase. Traders should use appropriate price target suiting the continuation pattern at the end of the consolidation phase.

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Bullish Measured Move Chart Pattern

2010-05-26T08:57:04.593-04:00

Bullish measured move or measured move up is a continuation chart pattern which starts as a reversal pattern. This is a three phased formation which forms over several months. The 3 phases of bullish measured move are reversal advance phase, consolidation/correction phase and continuation advance phase.

(image)
The requirements of a bullish measured chart pattern include,

• The pattern should form at the end of a strong downtrend.
• The reversal advance phase starts near an established low and lasts for a few weeks to many months. The upward price increase should be orderly; usually forming a price channel. If this uptrend is greatly curved, then the validity of the pattern is greatly challenged.
• The consolidation/correction phase occurs after an extended uptrend. The correction can be up to 63% of the reversal advance. Consolidation patterns such as rectangle chart pattern and ascending triangle or correction patterns such as falling wedge or sloping flag formations should occur at the end of this phase.
• The continuation advance phase usually matches the slope of the first phase.
• The volume should increase at the beginning of both advance phases and should decrease at the end of the consolidation phase.

With bullish measured move, traders can go long at the confirmation of breakout of consolidation/correction phase. Traders should use appropriate price target suiting the continuation pattern at the end of the consolidation phase.

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Weekly Market Newsletter, May 24th, 2010

2010-05-24T22:05:36.863-04:00

The Week Ahead: Financial regulatory reform is seen contributing to market volatility as the final bill is hoped to be completed by July 4 and includes an overhaul on derivatives. Triple digit moves for the DOW could become the norm as evidenced again on Friday's reversal up day. Watch Existing Home sales numbers on Monday and the Consumer Confidence report on Tuesday. Durable Goods Orders and New Home Sales figures are released Wednesday. The GDP report on Thursday will be closely watched while Friday ends the week with Personal Income & Outlays and a consumer sentiment report.

Stocks to Watch: The Cme Group (CME) and Intercontinental Exchange (ICE) are two entities that are seen as probable winners benefiting from the Financial Reform package regarding derivatives if differences between the House and Senate get worked out by July. Technology stocks like Dell Computer (DELL) fell nearly 7%, but Marvell Technology (MRVL) rose over 8% on a big quarterly jump in revenues. Ann Taylor Stores (ANN), having tripled in the past year, showed margin growth last quarter with less discounting.

Special Note: Foreign equity indexes have been leading the charge to the downside versus the perceived lower risk U.S. markets. With key levels beginning to breakdown on the major indexes such as the 200 day moving average the " flash crash" low made earlier this month, and the 10,365 area on the DOW mentioned here last week investors may want to adopt a more defensive posture near term until the volatility calms down. This may mean selling into rallies or buying puts against long positions for protection.

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Trading Rectangle Chart Pattern

2010-05-18T08:16:32.890-04:00

Rectangle pattern is a trend-continuation chart pattern indicating the continuation of an existing trend after a period of consolidation. It is an easy-to-recognize chart pattern with (almost) equal highs and lows. Rectangle chart pattern resembles symmetrical triangle formation, another trend-continuation pattern.

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The requirements of rectangle chart pattern include,

• There should be prior trend existing in the market. The trend shouldn’t be too mature; strong and extended prior trends provide lesser chances of trend continuation.
• To qualify as a rectangle pattern, there should be two relatively equal reaction highs and lows. The parallel line connecting reaction highs forms the upper resistance line and the line connecting reaction lows forms the lower support line.
• The breakout is confirmed when the price breaks out of the upper or lower line in the direction of the trend. For bullish breakouts the broken resistance level turns into potential support level, and vice versa.
• The volume is not so important with the pattern; but the breakout should be noticeable with increase in volume.
• The duration of the pattern can range from a few weeks to many months. Generally long-duration patterns are more reliable than short ones. If the pattern takes less than 3 weeks to develop, it is considered as a flag pattern.

Rectangle chart pattern forms as a result of strong competition between bulls and bears. After a strong trend, the prices begin to consolidate as bulls fail to make new highs exceeding the resistance level and bears fail to make new lows below support level. After a period of consolidation, breakout occurs, usually in the direction of the previous trend. Traders can enter trades after the confirmation of breakout; the immediate price target is the vertical height of the rectangle added/subtracted from the breakout point.

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Stock Market Weekly Update, May 17, 2010

2010-05-17T09:15:29.233-04:00

The Week Ahead: Retail sales are up for the seventh month in a row, but with globally linked economies many investors question how the European slow down will impact the U.S. recovery especially exports as the rising value of the Dollar versus the Euro inflates prices. More clues to the U.S. economy via Housing starts and the Producer Price Index are due Tuesday while Wednesday spotlights the Consumer Price Index. The Jobless Claims, Leading Indicators, and the Philadelphia Fed Survey will round out this weeks reports on Thursday.

Stocks to Watch: Financial stocks have led recent weakness in the market as seen by the Select Sector SPDR's Financial ETF (XLF). Credit card companies such as Visa (V) and Mastercard (MA) declined sharply as the Senate moved to regulate debit card fees as part of financial reform, but some analysts see this getting deleted in the final bill. Tivo (TIVO) crashed 41% on a federal appeals court planned rehearing of a patent suit with DISH and Echostar. Hewlett-Packard (HPQ) may have trouble hitting revenue targets as 20% of its business could be hurt by the Euro plunge.

Special Note: Back to back triple digit declines for the Dow Industrials may have investors on edge this week. A look at the Volatility Index (VIX) shows a significant reversal on an intermediate and longer term basis with much higher than normal downside volatility. A technically sensitive area on a DOW chart surrounds 10,365. Recall September 29, 2008 when Congress initially rejected the TARP bailout and the market plunged 777 points. After the TARP approval and market bounce, the DOW fell back through 10,365 and hit an air pocket plunging 3000 points over the next 7 weeks. Correlate this with the recent market plunge and bounce with ties to the recent European bailout package for Greece.

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Triple Top Chart Pattern

2010-05-12T09:22:08.507-04:00

Triple top is a trend reversal chart pattern indicating the reversal of an existing uptrend and the start of a new downtrend. The pattern is relatively rare but considered a very reliable signal for short selling and to close long positions. Triple top pattern usually takes lesser time to form than triple bottom pattern and the typical time range is 3 to 6 months.

(image)
The requirements of triple top chart formation include,

• The pattern should form at the top of a relatively long uptrend or during sideways movement after an uptrend.
• There should be three price highs (tops) of almost equal heights. There should be reasonable time interval between each high.
• The price breakout of support level marks the trend reversal. The breakout point is the lowest low level during the pattern formation.
• The volume should diminish as the pattern forms and the breakout should be noticeable with increase in trading volume.

Triple top pattern is the result of three failed attempts to make a new high. As bulls continuously fail to break the resistance, the bears start to capitalize on that. The breaking of support level indicates the start of a new downtrend; and this support then turn into a resistance. The immediate price target is derived by subtracting the vertical height from the breakout point to the highs, from the breakout level.

On development, the triple top formation resembles many other patterns like double top pattern and ascending triangle formation. It differs from head and shoulders top pattern in the height of the middle top.

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Bump and Run Reversal Chart Pattern

2010-05-11T08:33:46.122-04:00

Bump and run reversal or BARR is a chart pattern indicating the reversal of an existing trend. The pattern was first identified by Thomas Bulkowski and was originally named Bump and Run Formation (BARF). Bump and run reversal is usually a long-term chart pattern which forms as a result of excessive speculation that drives the price too fast to the extremes and then shows a reversal.

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There are both bullish and bearish versions of bump and run reversal. Bullish BARR pattern forms when excessive speculation drives the price down forming a large downtrend and an over-sold situation. The price rises sharply when more investors start to buy. Similarly bearish BARR pattern forms when excessive speculation drives the price up too fast, forming an over-bought situation. The price starts to fall when investors start to sell.

Bump and run reversal pattern comprises 3 different phases:

1. The lead-in phase is identified by a gradual trend development where the price rises/falls forming a trend. The trendline is moderately steep with average/low trading volume. The lead-in phase takes a month or more to form.
2. The bump phase is identified by sharp increase or decrease in price in the direction of the trend. The new trendline deviates too much (45 to 65 degrees) from the original trendline; and there is also a great increase in trading volume.
3. The run phase is identified when the price falls/rises to cross the original trendline. The breakout confirms trend reversal.

Before crossing the original trendline, the price bounces back many times to form a double top or double bottom. Traders can enter the trade when the breakout is confirmed.

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Stock Market Weekly Update, April 19, 2010

2010-05-10T10:37:49.189-04:00

The Week Ahead: The largest employment increase of the economic recovery was not the focus of markets as the sudden 1000 point intra-day collapse in the Dow Industrials Thursday still had investors reeling at Friday's market open. With the exception of a few order imbalances though, the NYSE had no structural deficiencies. Ben Bernanke will speak on both Monday and Thursday. International trade figures and Treasury Budget numbers will be reported on Wednesday. Jobless Claims are due Thursday while four reports are released Friday: Retail Sales, Industrial Production, Consumer Sentiment, and Business Inventories

Stocks to Watch: Tech stocks were hardest hit in the past week as some of the more widely held like Apple Computer (AAPL), Cisco Systems (CSCO), and Amazon.com (AMZN) are down sharply from their recent highs. Other stocks in the food group like Kraft Foods (KFT) bucked the trend and is still up 10% since January. Despite gold prices testing their all time highs late last week, gold stocks like Newmont Mining (NEM), Freeport Mcmoran (FCX), and Barrick Gold (ABX) all dropped over 2%.

Special Note: Much conjecture is building as to the size of a potential correction for the major indexes. The decennial pattern mentioned here last January 4 may have some warning. For the Dow Industrials the first year of the decade or '0' year going back to 1900 the corrections ranged from 15% in 1950 to 46% in 1930. The average correction was about 25%, but with the advent of derivatives and other leveraged products not to mention the interlinked nature that excessive debts worldwide has had on the financial world and sovereign nations perhaps something closer to the upper end of the the correction range is in store.

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Overtrading - The Signs and Effects

2010-05-07T08:56:53.304-04:00

Overtrading is one of the most dangerous common trading mistakes practiced by traders. They buy and sell more to get more profits, but this often results in big losses and very poor money management. Overtrading can be of two types; the first is trading with more open positions than he can handle (more trades) and second is the risking of most of the capital on a single trade (bad position sizing). Overtrading results in many terrible consequences.

• Capital Loss: Overtrading results in over-exposure to risk and poor risk management which can result in capital loss.
• Poor money management: often the trader opens new positions even when most of his money is still in the market. In other words, he is keener on opening positions than closing them.
• No trading plan: traders can be very engaged in finding new hot opportunities but can be very poor with their position sizes, stop-losses, and price targets. Often, no fundamental or technical analysis is done.
• Behavioral changes: as the number of losing trades increases, traders get angrier, more panicky and frustrated, and search more for opportunities. They usually start to risk more to make up for the losses.

Overtrading can be identified and controlled. The common signs of overtrading include,

• Deviating frequently and too much from the core trading plan/strategy.
• Too much searching for opportunities like subscribing to a number of newsletters, constantly switching news channels, asking others, frequently calling the broker, and so on.
• Trading hurriedly. They feel better when they trade; and so they trade often.
• Over-reacting to price changes and news; getting over-excited or desperate at times.

Related Reading: How to Avoid Overtrading?

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Double Bottom Chart Pattern

2010-05-06T08:54:41.861-04:00

Double bottom is a popular trend reversal chart pattern which indicates the end of an existing downtrend and the start of an intermediate/long-term uptrend. As the name suggests, double bottom pattern is identified when the price forms two troughs of (almost) same lows.

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The requirements of double bottom chart pattern include,

• The pattern should form at the bottom of an extended downtrend.
• There should be two price troughs of almost the same depth which should be separated by a clear price peak. The highest point of this peak is the reaction high or confirmation point.
• There should be enough time interval between two bottoms. The ideal interval is 4 months; but can range from 4 weeks to many months. The longer the pattern takes to form, the higher its significance.
• The volume should decline as the pattern forms, but the bottoms are noticeable with increase in volume.
• The trend reversal is confirmed when the price crosses above the reaction high after forming the second bottom. Volume expands on confirmation and gaps are common.

Double bottom chart pattern is a clear indication of the weakening of an existing downtrend. Price begin to fall from overbought levels at the first bottom but the existing market sentiment or some other news drives the price to drop to second bottom. But prices don't fall much from first bottom level and tend to rise from there after successfully testing this support level. Traders should go long only after confirmation of trend reversal.

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Chaikin's Volatility Indicator

2010-05-05T09:13:50.202-04:00

Chaikin's volatility indicator measures the market volatility based on the trading range between high and low prices for a given period. The indicator was developed by Marc Chaikin and hence the name. Chaikin's volatility indicator values are derived by calculating the exponential moving average (EMA) of the difference between high and low for a period and then calculating the percentage change in moving average over a period.


When HL Avg is the high-low range for a given day and N denotes the same value ‘n’ periods ago. Usually both the EMA period and ROC period (n) are 10 days, but traders can use custom values to increase or decrease sensitivity.

In general, high values of Chaikin's volatility indicator indicate increased market volatility and low values indicate low volatility. There are two basic methods to interpret Chaikin's graphs.

• Assume that market tops are accompanied by increased volatility and market bottoms are accompanied by decreased volatility.
• Assume that increase in indicator over a shorter time period indicates near-future market bottom and decrease in indicator over a longer period indicates near-future market top.

Unlike Average True Range (ATR) indicator, Chaikin's volatility does not take trading gaps into account. The indicator offers better results when used together with other indicators like moving averages and price envelops.

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Different Ways to Trade Forex Currencies

2010-05-04T09:05:12.353-04:00

Global Forex market offers great flexibility to traders and suits different trading styles. Here are 4 different ways to trade Forex currencies.

1. Currency carry trades: Forex carry trading is a popular Forex trading strategy which aims at profiting from the difference in interest rate between two currencies like NZD/JPY. The trader buys high-interest rate currency spending low-interest rate currency and maximizes any profit chance by using high leverage and high position size.
2. Political trades: political factors like elections, political stability/instability, agreements/disagreements between countries, all these can trigger price changes to the related currencies. There are many Forex traders who search for these types of opportunities and position themselves according to the news.
3. Economic trades: world economies are closely related to one another. Many traders use economic disparities as a profitable opportunity. For example, traders can buy currencies of countries with strong fundamentals like better unemployment rate, GDP growth, and retail sales rate, spending those of countries with not-so-good fundamentals. One other example is profiting from the ever-changing oil and gas prices.
4. Volatility trades: There are many currency pairs like GBP/JPY which are fairly volatile to offer some pretty good intra/inter-day trading opportunities. In order to profit from these opportunities, traders should be thorough in their decision making and technical analysis.

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Stock Market Weekly Update, April 19, 2010

2010-05-03T09:46:42.552-04:00

The Week Ahead: The service sector highlighted the first quarter GDP report which came in at 3.2% the third increase in a row. Auto sales, Personal Income and Spending, Construction Spending, and the ISM Manufacturing Index will all be reported on Monday. Factory Orders and Pending Home Sales numbers are due Tuesday. The ISM Non-Manufacturing Index will track service sector activity on Wednesday. Productivity and Jobless claims will be released Thursday. The Employment numbers for April will round out the week.

Stocks to Watch: Goldman Sachs (GS) continued its slide falling 15% in April as a criminal fraud investigation was added to the recent civil lawsuits hitting the company. Transocean Ltd. (RIG) has now lost 20% of its value since the oil rig it owned sank in the Gulf of Mexico. British Petroleum (BP) has fallen 13% since the Gulf accident. Coinstar (CSTR) which operates DVD kiosks hit a new all time high after tripling it bottom line for Q1 from a year ago. Finally, McAfee (MFE) fell 12% after reporting a 30% drop in Q1 profits and a weak outlook for Q2.

Special Note: The month of April in stocks was led by consumer focused stocks which rose 6% on average. Healthcare related companies showed the worst performance down 3.9%. Volatility is once again on the increase based on the VIX index. The burgeoning debt problems by sovereign entities such as Greece, Portugal, Spain, and Iceland appear to be at the forefront of another financial crises similar to 2008 when faulty sub-prime loans led to the demise of Lehman and Bear Stearns. The interconnected nature of sovereign debt has even larger implications for financial markets.


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Double Top Chart Pattern

2010-04-29T10:42:22.341-04:00

Double top is a popular reversal chart pattern indicating the end of an uptrend and the start of a downtrend. As the name suggests, the pattern is identified when the price forms two peaks of (almost) the same height. Double top formation is also known as 'M - pattern' and is usually easy to find.

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The requirements of double top chart pattern include:

• The pattern should form at the top of an extended uptrend.
• The price should form two peaks of almost identical height; and the peaks should be separated by a distinct trough. The lowest point of this trough is known as reaction low or confirmation point.
• The volume should decline as the pattern forms; but the formations of peaks are associated with increase in trading volume. Usually the first top formation has more volume than the second one.
• The pattern is confirmed when the price crosses below the reaction low after forming second top. Volume tends to expand on this price breakout.

Double top chart pattern is a clear indication of the uptrend weakening. The prices are at overbought levels at the first peak and tend to fall from there. This fall or some other fundamental or news factors trigger the price to move up to form the second peak. But the price does not move much beyond the first peak and will fall from there after testing this resistance level.

Traders should short only after confirmation of trend reversal. The immediate price target is derived by subtracting the vertical distance from the reaction low to the first peak, from the breakout point.

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Stock Market Weekly Update, April 26, 2010

2010-04-27T04:47:05.652-04:00

The Week Ahead: As the tax incentive deadline for home purchases approaches April 30, new home sales rose by 22% in March. A Consumer Confidence report due out Tuesday may show another rise from the March levels. The FOMC meeting on interest rates begins on Tuesday with its decision arriving Wednesday afternoon. Look for the jobless claims number on Thursday. Friday brings multiple reports including the GDP for Q1, the Employment Cost Index, and the University of Michigan's Consumer Sentiment Index.

Stocks to Watch: Schlumberger Ltd. (SLB) earnings for Q1 were lower than a year ago but beat estimates as the stock rose to a 52 week high. Xerox Corp. (XRX) boosted 2010 guidance as its stock rose 8% to a one and half year high. Coal stocks were on the move with higher energy prices. Watch Alpha Natural Resources (ANR), Patriot Coal (PCX), and Peabody Energy (BTU) which received an analyst upgrade. Insurance giant Travelers (TRV) fell 1% on heavy volume as did Microsoft (MSFT) after earnings call.

Special Note: In addition to the overbought readings mentioned last week, the rise in stocks since the February 5 low has been accompanied with lagging upside momentum the whole time and waning NYSE volume on a ten day basis. Furthermore, key company insiders have seen their selling of stock shares rise to a level of over 4 times the rate of which they are buying. Evidence continues to suggest the market is building toward an important top possibly later in the second quarter.

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Concept of Currency Cross Triangulation

2010-04-26T08:50:48.790-04:00

In the global Forex market, the exchange rate of currencies depends on one another. Currency cross triangulation involves using a third currency to find the conversion rate and/or to convert two different currencies. Usually this third currency used is a standard currency like US Dollar or Euro; this interim currency is known as triangulation currency.

Currency cross triangulation is needed by major companies, governments, investors, and exporters to transact currencies; especially if they are transacting two non standard currencies. This triangulation process effectively eliminates the need of buying and selling an interim currency. Here is the example. Before the introduction of currency cross triangulation, for an effective conversion of CHF (Swiss Franc) to GBP (British Pound), a company needed to sell CHF to buy USD (US Dollar) and then sell USD to buy GBP. But now they can just use the USD/CHF and GBP/USD exchange rate to find the exchange rate of GPB/CHF.

As evident from the above example, one can find the price of one currency pair by crossing two standard pairs that involve a third currency; the formula is AAA/BBB * CCC/AAA = CCC/BBB. This is especially important because of the fact that many spot currency cross pairs are not traded against each other in the inter-bank market. Often, there can be some small price disparities in cross triangulation which can give rise to opportunities of triangular forex arbitrage, which usually last for a very short time.

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1-2-3 Reversal Chart Pattern Trading

2010-04-23T08:54:05.052-04:00

1-2-3 chart pattern is a trend reversal chart pattern indicating the reversal of an existing trend. The formation usually occurs at the end of a strong trend. 1-2-3 pattern occurs frequently in trending markets and is considered very reliable. There are bullish and bearish variations for this pattern.

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1-2-3 formation starts from a big price movement in the direction of an existing trend to form a highest-high/lowest-low (point 1), then the price reverses for a correction (point 2), then again turns back to retest the support/resistance (point 3) and finally the price reverses and breaks through to start a new trend. The point 3 should not reach or exceed the point 1 level; if it reaches 1, then the pattern is not considered a valid one.

Bullish 1-2-3 chart pattern or 1-2-3 buy pattern forms at the end of an existing downtrend. The price first falls, then starts reversing, but falls again to form point 3 and then reverses and breaks free to form a new uptrend. Bearish 1 2 3 pattern or 1-2-3 sell pattern forms at the end of an existing uptrend. The price first forms a highest high, then starts falling but rises from point 3 and then reverses and breaks free to form a new downtrend.

1-2-3 chart pattern is easy to trade and supports both short-term and long-term trading. The breakout is confirmed when the price breaks the range created in between point 1 and 2. Traders can enter trades when breakout is confirmed.

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Stock Market Weekly Update, April 19, 2010

2010-04-19T21:53:26.483-04:00

The Week Ahead: The fraud charges leveled against Goldman Sachs by the SEC has added a new level of uncertainty for markets in terms of the next shoe to drop in the financial sector and where this will lead to next. First quarter reports by major companies such as IBM, Citigroup, Apple Computer, Microsoft, Wells Fargo, Boeing, Amazon, and Yahoo will be under a microscope. Noteworthy reports include: Leading Indicators on Monday. The Producer Price Index, Jobless Claims, and Existing Home Sales on Thursday. Durable Goods and New Home Sales on Friday.

Stocks to Watch: Goldman Sachs (GS) shares imploded by 13% on ten times normal volume. General Electric beat estimates for their Q1 earnings, but were still lower than year ago levels. Strength in its investment banking business helped Bank of America (BAC) beat Q1 estimates as the company also set aside less money for bad loans. Google (GOOG) failed to impress investors in its Q1 report as the stock fell to 3 week lows. Boston Scientific (BSX) got the FDA approval it needed to restart sales of its implantable defibrillator devices in the U.S.

Special Note: Some interesting overbought readings were recorded for the stock market not the least of which is the 30 day NYSE TRIN at levels not seen since spring of 2007. Another is the ten day average of the CBOE put/call ratio which at .46 is its lowest level in 10 years. The Volatility Index or VIX reached its lowest close since October 2007 at 16.14. Finally the Daily Sentiment Index hit an extreme at 92% bulls. These measures serve as a reminder of the higher than normal risk one assumes when entering stocks in general near term.

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How to Avoid Overtrading

2010-04-15T07:47:41.830-04:00

Overtrading is a 'must avoid' trading practice, yet it is practiced by a high percentage of traders trading stocks, currency pairs, futures and so on. It is not that much a hard-to-overcome habit; one just needs a sound plan and dedicated implementation. Here are some tips to avoid overtrading:

• Create a trading plan and stick to it. The plan should address what to trade, when to trade and how to trade.
• Create a small list. Rather than trading each and everything, create a small list of fundamentally/technically evaluated stocks and search for opportunities. Keep the list short, and periodically update the list.
• Do some research. Before entering a trade, make sure there is a chance of profitability. Use the most convenient tools/indicators to evaluate each opportunity. In short, never go blind.
• Don't make your money flow too complex. Keep your risk to low levels, ideally below 2% of your capital, and limit the number of your open positions.
• Be patient and consistent. No market can make you rich overnight and no single trade can make you a successful trader. The rule of thumb is 'the predator should be more patient than the prey'.
• Evaluate regularly. Ideally at the end of the day evaluate your trades and decisions. Evaluate how well you implemented the plan or answer why you deviated from the plan.

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Murrey Math Lines Trading

2010-04-14T08:37:59.704-04:00

Murrey math lines (MML) is a relatively new trading indicator showing supports and resistances, and helps in finding trends and trend changes. The indicator was developed by T. Henning Murrey and has some similarity to Fibonacci retracement and pivot points. MML was created based on the observations of Gann studies and is a simple way to implement Gann.

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Murrey math lines comprise 9 equidistant lines which run parallel to one another. MM lines from the bottom are at the levels 0/8, 1/8, 2/8, 3/8, 4/8, 5/8, 6/8, 7/8 and 8/8. 0/8 is the oversold line and 8/8 the overbought line; these are the hardest lines to cross and around 75% of the time, the crossing triggers price reversal. The range between 3/8 and 5/8 is the normal trading range and price tends to consolidate at these levels before falling (3/8 line) or rising (5/8) beyond this trading range.

Like Fibonacci retracements, when the price is between two lines, the upper line is considered as resistance and lower line is considered as support. When the price rises above 5/8 and touches 6/8, it has a tendency to reverse to retest the 5/8 level before heading high. The same is also applicable to downtrends; the price tends to reverse to retest the 3/8 level before heading down.

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Investing in Precious Metal ETFs

2010-04-13T08:54:11.695-04:00

In recent years, exchange traded funds tracking precious metals like gold, silver, platinum and palladium has become extremely popular among investors. Actually it was mutually beneficial; the growth of precious metals made ETFs more popular and the popularity of ETFs made precious metals more precious. There are many reasons behind this success.

• Precious metal ETFs provide a great opportunity to individuals who don't have enough money and desire to buy the physical metal commodity but want to benefit from their price growth.
• There is a growing acceptance of precious metal investments as good hedging tools against inflation, weak dollar and economic recession. The fact that precious metal prices are increasing steadily over the years has enhanced this belief.
• Precious metal ETFs tracking physical commodities, future contracts, metal stocks, and more offer opportunities for all kinds of investors.
• Moreover, some investors find themselves much more comfortable investing in these ETFs rather than investing in stocks, bonds, and currencies, which can be a little more complex and time consuming.

Although considered good hedging instruments, investing in precious gold ETFs can be risky. The fact that most precious metals have grown exponentially to a possible market correction and higher tax treatment can make them less favorable to investors.

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TRIX Momentum Technical Indicator

2010-04-09T08:50:43.013-04:00

TRIX or Triple exponential momentum technical indicator is a moving average based technical indicator used to smooth out price changes to find trends and trend changes. The indicator was developed by Jack Hoton. TRIX works like an oscillator indicator moving above and below the zero level. TRIX is the comparison of two triple smoothed exponential moving averages for a certain time period.

TRIX is plotted just like any other oscillator indicator; signals are generated when the oscillator crosses the zero line. Buy signals are generated when TRIX crosses above the zero line and sell signals are generated when TRIX crosses below the zero line. Many traders also use another exponential moving average for the same period as a signal line for finding divergences. Bullish divergence is identified when TRIX crosses above the signal line while below zero and bearish divergence is identified when TRIX crosses below the signal line while above zero.

TRIX is a very useful technical indicator as it offers very good smoothing which reduces false signals; besides, it is a leading and not a lagging indicator. Traders can adjust time periods to suit their trading style; usually active traders use a 9-day period and investors use a 30-day period. The signals generated by TRIX are generally pretty accurate and are very good to enter a trade. But traders should use other indicators or divergences to exit trades as waiting for the indicator to cross the zero line can eat up a large part of the profit.

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Donchian Channel Trend Indicator

2010-04-07T08:29:54.327-04:00

Donchian channel trend indicator is a popular technical analysis indicator used to find trends and trend changes. This is a channel indicator which gives better insights when the market is trendy. The indicator was developed by Richard Donchian, hence the name.

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In Donchian channel indicator, the channel is created in between the upper and lower bands. The upper band is the moving average of highest high prices and the lower band is the moving average of lowest low prices for a certain period. Typical period is 20 days or 4 weeks, but this can be adjusted to make the indicator more or less sensitive. The middle band is optional; it is the average of two bands and is often used for identifying trend changes.

Trading with Donchian channel indicator is easy. The idea is to enter a trade when there is a trend breakout and capitalize on it as long as that trend continues. Traders can go long, or cover their open short positions, when the price crosses the upper channel. Similarly traders can go short, or close their long positions, when the price crosses the lower channel.

Unlike other channel indicators like Bollinger bands, Donchian channel is a simple indicator to plot and follow as it is the simple moving average of only two values - the highest high and lowest low - for a period. Donchian channel often offers the same result as the Aroon indicator, but in different format. Aroon indicator records 100% when the price breaks the Donchian channel.

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