Prepare While You Wait

Educational use only. Never intended as advice. Not a registered investment advisor.


How does a trader prepare for each day's/week's/month's activity. Everyone has their own routine, but many technically-based traders choose a top down approach, starting with an overview of the markets. The SP500 pulled back minimally within its range on light volume.

The NDX looks pretty similar.

Key sectors. The Bank Index broke out from an ascending triangle and has plenty of resistance to work against. The relative strength (chart bottom) hasn't been so great, and every trader has to ask what the risk/reward ratio is for them.

The Broker Dealers sector has been on fire, but momentum has slowed, and there's even a stochastic divergence available (at the top of the chart).

The Semiconductor Index has also strongly outperformed the SP500, and similarly shows some stochastic divergence.

Biotechnology looks suspiciously similar. Same outperformance and stochastic rollover at the top. A 50% pullback of the index would bring it back to around 600. There's nothing magical about 600, but 1) it is a round number and 2) provides a convenient 'decision zone' where traders can decide whether they put up or shut up.

Dynamics.

The pictures tell the story that the market has enjoyed a remarkable run. Gary had a great question today about the Specialist Short Ratio. It is extremely low, near twenty percent, another potentially bullish contributor.

The new high to new low ratio remains very favorable at 281-26. I like to remember the adage 'enter in mild times and exit in wild times'. Often superior traders and the buy side try to buy in when things are quiet, knowing that 'when the ducks quack, you feed them'. Does anybody seriously think that these big upgrades come out of nowhere?

The market has been slowly working off some of the overbought conditions, remembering that it can work them off through either PRICE or TIME.

The 5 day average of the TRIN shows that we are actually a bit more oversold than overbought by this particular monitor. There isn't any holy grail, rather a confluence of evidence on which traders make judgements.

Trading Styles. Ultimately everyone has to decide where their 'edge', their 'sweet spot' comes into play. Frankly, shorting (selling stock first with the hope that it can be bought back more cheaply) has been extremely difficult in this environment. For the relatively few short choices I've made, I've done them with options and even then often hedged them with longs. For example, I bought JNJ October 65 puts for 2 dollars over a week ago, and with JNJ moderately oversold, I bought JNJ stocks at 63.37 today to hedge the puts (@2.55).

As I've written regularly, I like to buy oversold liquid stocks or indexes/ETFs (exchange traded funds), buy or sell volatility breakouts, and buy small cap value stocks that are well below book value and have low price to sales ratios, and low short interest. I have great respect for professional short sellers, and have no interest in competing against them.

Most oversold ETFs

PPH 72.71-71.93

SWH 36.85-36.53

ETF NR7 or ID/NR4 (narrowest range of 7 days or inside day with narrowest range of 4 trading days)

IYR 66.57-66.11

EFA 53.54-53.11

Pullbacks (long or short)

CVS 30.39-30.00 (watch retail RLX or RTH)

MCK 44.73-43.95

MMC 29.49-29.04 (watch insurers)

GDW 66.94-65.48 (also a 90-10 trade- open top 10% of range close bottom 10)

CAT 52.67-51.62 (watch cyclicals)

SRA 16.60-16.44 (biotechs)

HET 78.05-76.52 ('momentum moving average' pullback)

PNC 55.79-55.07 (banks, relatively weak sector)

GS 109.73-108.31 (brokers)

Goldman has had a very strong breakout and pause. Watch the market, the broker-dealers (XBD) and the dynamics.

..........................................

I think Dave Landry said this, "Plan your trades, and trade your plan." With stops, of course. I appreciate the great questions and comments because they help me to learn and to become a better trader.

Sunday Evening Coffee

Educational use only. Never intended as advice. You own your investment decisions.

So, it's about thirteen hours until we approach the beginning of a new trading week adventure and here's the 'stepback' pop as they say in basketball parlance.

1. Amidst a sea of liquidity, we live in at least a cyclical bull market, with many veteran market observers crying foul about valuations, but a lot of buying going on nonetheless.

2. From a technical standpoint, the key averages are both extended and above the 'well-watched' fifty and two-hundred day moving averages.

3. The ICE indicator (my -100 OVERBOUGHT to +100 OVERSOLD) remains pretty deeply entrenched in the overbought space at -54. The market shook off mixed earnings and closed with a higher low and higher high for the week.

4. For point-and-figure advocates (another way to look at the market), the NYSE has 70 percent of its charts with a 'bullish' P&F chart. The Bullish Percent chart had crossed down through the 70 percent mark, and has recrossed it at this point. http://stockcharts.com/def/servlet/SC.pnf?c=$BPNYA,P

5. The most overbought sector (by bullish percentages at least) is the utility sector, with an astonishing 95 percent of stocks with bullish P&F charts. By comparison, the Nasdaq Composite has 53 percent and the NDX 61 percent. The lowest tracked on stockcharts is the Materials at 50 percent, although I'd guess the drug sector would be lower.

6. Six week lows with close higher than the open in the ETF space? TIP and SHY. So, I'll see if I can be SHY and TIP my cap?

7. Six week highs with close lower than the open in the ETFs? IYH, XLV, VHT. Somebody not liking healthcare?

8. Any pullbacks worth watching?

BIVN 7.92-7.39
RJF 30.20-29.75
WFMI 119.32-117.00 (one of those stocks everyone loves, until they don't)
CVS 30.47-30.03
MMC 29.73-29.35 (are they done hating this one?)
NFS 38.84-38.30 (insurance)

Remember the rules of the game:
1) Capital preservation comes first (Risk management)
2) Mechanical trading systems require mechanical execution - i.e. the system is smarter than I am
3) Failing to prepare means preparing to fail (John Wooden)
4) Analysis means staying in tune with market dynamics (e.g. breadth, TICK, and TRIN)
5) It's all about 'you', as in discipline is everything. Investing is about decision-making and we own all of ours.

Next month I hope to be going out to Ojai with my son and the gang from Minyanville for the second annual Minyans in the Mountains retreat. Scott Patterson recently reviewed Minyanville (www.minyanville.com) for the Wall Street Journal, and Scott either missed the point or elected to ignore the Minyanville philosophy of community. Too bad.

ETF Roundup

Educational use only. Never intended as advice. Not a registered investment advisor or likely to ever become one.

I'm a huge believer that ETFs will become even more dominant as a trading tool and equity investment proxy. Their liquidity, variety, use for derivatives and hedging, and inability to be totally trashed by fraud or bought out allow for certain advantages. They can be constructed in many new ways as well, to mimic mutual funds, particularly sector funds, and even technical analysis based products are possible if not likely.

For now, it seems logical to look at them (particularly the highly liquid ones) as their own universe, so that's my goal for today.

I'll start with ETFs trading an average of at least 400,000 shares a day, a reasonable liquidity test. There are 40 of these, with many different foci. I'll look at them from a number of different angles, and see if we have any non-efficient frontiers to fish.

For some reason blogger won't let me include pictures today, so I'll just try links (aesthetically unpleasing)

1. ETFs above their 50 and 200 day averages (winners live above key averages)

34 of 40 included show what I call Marder Long patterns
http://stockcharts.com/def/servlet/SC.web?c=uth,uu[m,a]daclyyay[pc50!c200][vc60][iUp14,3,3!Lj[$spx]]&pref=G this pattern doesn't excite me, with relative strength weakening

2. ETFs crossing below their 50 day average on increased volume

None

3. ETFs at least moderately oversold (proprietary criteria)

http://stockcharts.com/def/servlet/SC.web?c=pph,uu[m,a]daclyyay[pc50!c200][vc60][iUp14,3,3!Lj[$spx]]&pref=G PPH is below the 50 and 200 day averages, with stochastics turning down and poor relative strength in the midst of plenty...you think the Vioxx trial has anything to do with this?

4. ETFs most extended from 200 day average (high and low)

BBH, OIH, XLE, and EWW are all at least 18% above their 200 day averages, with BBH (25%) and OIH (22%) up in the stratosphere. Can they go higher? Sure. I just hate being the last one to the party.

http://stockcharts.com/def/servlet/SC.web?c=bbh,uu[m,a]daclyyay[pc50!c200][vc60][iUp14,3,3!Lj[$spx]]&pref=G BBH gapped up on the Amgen earnings and has the potential to be a breakaway or an exhaustion gap. One of my 'experimental' indicators, although overbought shows only about half the 'extension' on the BBH as in May 2003 and no divergence with price yet, so we'll see. It's looking parabolic, but as my son is fond of telling me, "there are no reliable indicators for a topping process."

BBH also shows an ADX(10) of 40 on weekly charts, so it's been on a rocketship ride.

Only HHH (-2%), EWJ, and XLB have negative 200 day disparity.

5. ETFs with possible volatility breakout (narrowest day of 7)

EEM, IYR, and GLD all have volatility expansion 'energy' as measured by the narrowest range of the past 7 days. Does Chinese revaluation have meaning for rate sensitive stories? We're going to find out soon.

http://stockcharts.com/def/servlet/SC.web?c=EEM,uu[m,a]daclyyay[pc50!c200][vc60][iUl10!Lj[$spx]]&pref=G Narrow range bar on Friday could have meaning

6. ETFs with clearly defined support and resistance (trading not trending)

http://stockcharts.com/def/servlet/SC.web?c=RKH,uu[m,a]daclyyay[pc50!c200][vc60][iUl14!Lj[$spx]]&pref=G RKH has an ADX(14) of 18 and resistance about 139 with support around 137. How the financials behave may be crucial this week.

7. ETFs with most dramatic price change in 20 days

BBH (14%), IBB (13%), EWW (9%) all have made sizable short-term moves. Does that mean pullback? Not necessarily, but I'm not willing to chase these.

8. ETFs with narrow-range bar or doji (indecision) candle

Nothing specifically worth mentioning.

9. ETFs with Landry type pullback long or similar pullback characteristics

http://stockcharts.com/def/servlet/SC.web?c=XLK,uu[l,a]daclyyay[dd][pc50!c200][vc60][iUl14!Lj[$spx]]&pref=G XLK has a breakout and is consolidating (first pullback?). Naysayers will point out the double-top possibility. Agreed on both.

10.ETFs miscellaneous that I find intriguing

If they abandon the high flyers, where might they go?

http://stockcharts.com/def/servlet/SC.web?c=GLD,uu[l,a]daclyyay[dd][pc10!c30][vc60][iUb14!Lj[$spx]]&pref=G

Yet Another Classmate in the News

Yet another classmate (Harvard '77) making me look weak and ineffectual. We have the ultrarich (Bill Gates, Steve Ballmer), the ultraloud and very rich (James Cramer), the quietly very rich (Brian Rogers), and now (ta da) John Glover Roberts. Apologies to all those famous or rich who've I've omitted through ignorance or indifference...

Looking through the Freshman Book, I'm struck by Cramer's full head of hair and Roberts' obligatory long mane. He looks pretty familiar through the prism of history, and I have a number next to his name, indicating at least at one time I knew him.

For what it's worth, since "brevity is the soul of wit," he doesn't appear in the 25th year report, so indeed he is a man of few words.

SP500 (weekly) another view, with a channel easily imagined, and the MACD (bottom) very favorable as well. Everything says not to stand in the way of the freight train. For example, the weekly action shows are higher high, higher low, and close greater than the open. Is that something we want to fight? Even if it's 'wrong'? Global terrorism increased dramatically, yet the risk premium unchanged? Who are the leaders? What is the catalyst to propel markets higher? Are market tops generally led by events or by processes? If the market's going to keep rising, I guess some of the areas to watch will be the yield on the Ten Year (if it starts falling, then does that forecast reallocation?), the TLT (if the sucking sound means TLT rises, also worrisome), the housing index (many see this as vulnerable - see Barrons'), and of course volatility.  

Always click the chart to enlarge: SP500 (monthly) with Fibonacci grid overlying. Isn't that interesting. Right up to the .618 retracement. Chartwise, food for thought.  

Back in the Hotseat

Educational use only. Never intended as advice. Not a registered investment advisor.

Welcome back, with some good rest behind me, as well as some good reading including Dan Shaughnessy's Seeing Red about Red Auerbach, Jane Leavy's Sandy Koufax, and Nassim Taleb's Fooled by Randomness. The first two chronicle excellence in the sports world, while Fooled asks a rhetorical question about how much luck has to do with it.

Auerbach, the cigar-smoking godfather of the Celtics, rose from being an obscure high school coach to be equated with excellence as coach and general manager of the Boston Celtics. He infuriated opponents with his psychological ploys, 'victory cigars', and run of eight straight NBA Championships. I learned a lot about Auerbach and the Celtics that I didn't know, including 1) Auerbach got thrown out of an Old-Timers game for arguing with officials, 2) Auerbach's victory record in seventh games of playoff series was 12-0, 3) Bill Russell scored 30 points and had 40 rebounds in a Championship seventh game, and 4) Len Bias PASSED an unauthorized drug test only days before he died of a cocaine overdose.

Koufax, the legendary lefty, is withdrawn by comparison, to about everyone. Born Sanford Braun, his name changed when his mother remarried Irving Koufax, and Sandy went to college with the goal of becoming an NBA star. When he tried out (as a walk-on) for baseball, two catchers quit, rather than catch his overpowering stuff. He pitched four games in college before being signed and added to the Dodgers major league roster, to the detriment of Tommy Lasorda, who was sent down.

Koufax won 25 games three times, led the NL in ERA five years running, had 4 no-hitters, including one of seventeen perfect games. In his perfect game, he struck out the last six batters. He walked away from baseball at his peak, going 27-9 in 1966 for the Dodgers, as his elbow could no longer take the punishment.

The SP500 continued on a roll, as the bubble rebuilds, courtesy of the enormous liquidity the Federal Reserve has injected into the system.










The Nasdaq100 (NDX) has done even better, although it too faces a challenge from resistance. The NDX has outperformed the SPX on the 'price relative' scale (bottom) on this weekly chart.








Market Dynamics
Any regular readers know that I'm a believer in 'mean reversion' and 'trend resumption', although books like Fooled by Randomness give me a healthy respect for outliers.

Looking at some 'overbought' criteria first, I see that 79% of the Worden TC2000 stocks are above their 40 day average. 61 percent of SPX stocks are about their ten day average, and 4% of the SPX stocks are oversold by stochastics while 45% are overbought by stochastics.


Looking at the Mamis-Meisler 10 and 30 day averages of the NYSE advance-decline line, we can see a 'permanently overbought' condition on both. It's all good, irrespective of external factors. Liquidity, liquidity, and more liquidity chasing stocks.


Volatility remains at historic lows. Some will argue the inherent bullishness of that case. It's hard to even see the 66 stocks on the SPX below the 50 and 200 day averages. Only 15 SPX stocks are at least 5% below their 50 day averages; conversely 187 SPX members are at least 5% above their 50 day averages.

1419 stocks are 'Landry Long' while 72 are Landry short. The Landry Long stocks must be over 30 dollars a share, over their 50 day average, and the 10 day SMA is above the 20 day EMA that is also greater than the 30 day EMA.

My proprietary 'short scan' index is at an all-time low at 59. In other words, the database says it doesn't get any better than this. The contrarian in me worries about the universality of favorable numbers. Of course, Investors' Intelligence says that there are only 53% bulls and 23% bears.

A Look at the Database
The maximally oversold screen for ETFs comes up dry. The moderately oversold list shows the PPH (Vioxx aggravation?) and the BHH, at this point a penny stock.

Maximally oversold OEX stocks are not as rare as hen's teeth. In addition to the COX-2 space (Merck and Pfizer), Avon, Citigroup, SBC, Radioshack, and Cigna have all been beaten down lately.

Volatility expansion possibilities (e.g NR7 narrowest range of 7 days or ID/NR4 stocks inside day and narrowest range of 4 days)

IBM 84.63-83.86
NXTL 32.74-32.40
JNJ 64.40-64.00 (net short via options)

MDY 130.81-129.81
IYR 66.19-65.67
EEM 76.23-75.93

Pullbacks (long)

TSN 18.90-18.67
SNPS 18.28-17.50
CME 311.00-301.04
CYPB 13.88-13.30
NUAN 4.90-4.82
FDS 37.21-36.38

Pullbacks (short)

BCR 66.99-65.89

It's really difficult to find anything short because of not only the overall market strength, but also the general group strength. 213 of 239 Worden industry groups are positive over the past 20 days. Only 11 are off as much as 2%. The worst performing groups are hospitals, generic drugs, specialty eateries, and medical practitioners.

As the Terminator quipped, "I'll be back."

Time for a rest.

I'm going to take a little break from posting, although I may sneak in a comment here and there.

Some really terrific (professional) commentary is around - just check the side bar for some of the best- Bill Cara, Stephen Vita at the Alchemy of Trading, Trader Mike, Jack Rothstein at http://www.wealthcast.com/blog/ and many more.

Good trading.

Best,

Ron

S(px)tatus Report

Educational use only. Never intended as advice.

Preparation is essential.
Execution is important.
Discipline is everything.

Price: 1227.92

ADX(14) 18 (trending market ideally > 30)
ADX(10) 23

Oscillators:
RSI 14 (weekly) 62
RSI 14 (daily) 66

Stoc 14 (daily) 92
Stoc 14 (weekly) 85

Moving averages
MA 200 1175
MA 50 1199
MA 20 1209

Support levels

1220
1209
1200

Volatility Bands

SPX one SD 5.82
1.5 SD 8.72
two SD 11.64

http://stockcharts.com/def/servlet/SC.web?c=$SPX,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lj[$ndx]]&pref=G (note relative underperformance to NASDAQ100)

Key Dynamics:

Lowry % of stocks above the ten day average 76% (high)
Stochastics oversold: 4% (very low)
Worden T2108 percent of stocks above 40 day average: 78% (high)

Good trading. The hardest part of trading is not seeing but believing what we see.

Mandelbrot Wisdom

Educational use only, never intended as advice.

Mandelbrot's Misbehavior of Markets provided even more convincing evidence for some of my beliefs, and raised concerns about others.

1. Anyone here can't really believe in the Efficient Market Hypothesis (EMH), right? Jim O'Shaughnessy's first edition of What Works on Wall Street convinced me enough that I put a 2/3rd, 1/3rd stake of part of my retirement into his funds. Good decision or not? Better on the growth than the value side, but since its inception, both have been pretty good.

http://www.hennessyfunds.com/funds/performance.htm

http://finance.yahoo.com/q/bc?s=HFCGX&t=my&l=on&z=m&q=c&c=%5EGSPC,%5EIXIC

http://finance.yahoo.com/q/bc?t=my&s=HFCVX&l=on&z=m&q=l&c=&c=%5EGSPC&c=%5EIXIC

In addition to O'Shaughnessy's (and later Hennessy's) funds, you have traders like George Soros, investors like Warren Buffett, mutual fund managers like Bill Miller, and hedge fund managers like Mark Boucher (The Hedge Fund Edge) who consistently outperform the market. Larry Connors and my son Conor (How Markets Really Work) also provide mathematically demonstrable proof of advantaged investment situations.

2. Mandelbrot makes a very convincing argument not only against the EMH, but also discusses kurtosis (skew) in markets, showing convincingly that not only are markets not Gaussian distributions, but that price often moves beyond 2 or even 3 standard deviations in a day, sometimes over 20 standard deviations, an event of almost infinite improbability.

3. He also provides convincing data concerning at least partial dependence on previous prices.

4. The consequence of the non-Euclidean nature of markets is the greater risk than appreciable in complex systems (like markets). Mandelbrot shows some convincing evidence relating price action to non-linear flow seen in wind tunnels.

5. His ability to reproduce price charts by varying certain mathematical characteristics of price is quite impressive. He also shows how price can be mapped by day-to-day volatility and confirms what traders know about volatility clusters.

Although he doesn't claim to be able to make us money, he does hope that his work can help us not to lose as much...

Thoughts from the Front Line

Educational use only. Never intended as advice. Not a registered financial advisor...

I'm plowing through Misbehavior of Markets a remarkable study of markets within the context of Benoit Mandelbrot's understanding of nature through fractal analysis. Mandelbrot shares his mathematical constructs concerning finance and has some thought-provoking commentary on risk. Reading this book won't necessarily enrich you financially, but his style and substance are most agreeable. His artificial price constructs have elements that remind me of Soros' Alchemy of Finance and also of Prechter's Elliott Wave Principle.

The book also helped me develop some quick and dirty models that I'll be curious in following to see whether they might predict intermediate-term price action.

Although I'm not going to divulge the methodology, I will report the results for everyone to snicker at, and I certainly am not going to trade the models for now. But here goes.

First model: short-term projection including historical price dependence (using ETFs)

Most overbought (includes raw score rounded)

BBH 50
SMH 42
IBB 37
EWW 34
ILF 33

Most oversold

BHH -32
GLD -7
TIP -7
IEF -2
XLB -2

Second Model: Long Term Choices

SNPS
UIS
SUNW
LU (disclosure long LU)
VZ

Time wounds all heels.

Best,

Ron

Approaching the Break

Educational use only. Never intended as advice.

It's a good time for an examination of methods and results. Periodically new readers ask where to begin. I think the most important factors in investing success are:

1) willingness to admit being wrong and exit
2) having a statistically validated edge
3) proper preparation
4) ongoing analysis of what the market is doing
5) trying to understand the nature of risk

It makes no sense to go out and just start investing, anymore than selecting to face Roger Clemens expecting to get a hit without having played baseball.

In preparation for a little trading hiatus, I've selected a few books to read or reread

The Road to Serfdom
Misbehavior of Markets
Bull's Eye Investing
Fooled by Randomness
What Works on Wall Street (Edition 3)

Strategies:

Buying oversold ETFs or OEX 100 stocks, preferably stocks over 30 dollars a share, over 200,000 shares a day; I use a variety of proprietary criteria, although even using simple stochastics has at least theoretical merit

http://stockcharts.com/def/servlet/SC.web?c=tlt,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lk14]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=hca,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lk14]&pref=G

Volatility breakouts (these can be from extended bases or narrowest range of 7 day patterns) - these can break in EITHER DIRECTION

http://stockcharts.com/def/servlet/SC.web?c=efa,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lk14]&pref=G long EFA calls, short EFA

http://stockcharts.com/def/servlet/SC.web?c=ijr,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lk14]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=fdx,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lk14]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=ba,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lk14]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=dow,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lk14]&pref=G

Pullbacks (ideally following a market pullback/correction) I think Dave Landry's methods, discussed in Dave Landry on Swing Trading are really terrific

(see FDX above - I wouldn't look at FDX as a primary short - versus NR7) because of the duration of the pullback, that could represent a trend change)

http://stockcharts.com/def/servlet/SC.web?c=kci,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lk14]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=dbd,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lk14]&pref=G gap resistance

Small cap value stocks because the stocks I choose are very poorly followed and easily susceptible to manipulation, I don't enumerate the quantitative process going into their selection

Hedging:

Maximal returns simply aren't possible if one hedges. However, such is the price of risk-return decisions. I buy longer dated out-of-the-money puts and put spreads on indexes that I consider weaker (currently the SPX) DEC 06 and DEC 07 puts.

Although markets can do anything, I find voices of reason in long-time market observers like Jeremy Grantham, John Hussman, John Mauldin, and others who question current valuations when compared to historical norms.

All the above (technical) choices are driven off principles of 'mean reversion' or trend resumption. I monitor intermediate to short-term overbought-oversold statistics in trying to develop higher probability decisions. For example, better relative strength stocks during market pullbacks could be opportunities, or stocks that have intermediate term weakness, shorter-term strength when markets are overbought. Justin Mamis' When to Sell is a reference that appeals to me.

From a 'dynamics' standpoint, the market remains very heavily overbought...

http://stockcharts.com/def/servlet/SC.web?c=$NYAD,uu[h,a]daclyyay[dd][pb10!b30][vc60][i]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=$TRIN,uu[m,a]daclyyay[da][pb5][vc60][i]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=$SPX,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lk14]&pref=G

Best,

Ron

Speculative over Old Reliable?

Educational use only. Never advice.

At the halfway point today, the SPECs (CME, EBAY, YHOO, TGT, housing) index is up about .2% and the RELIABLES (GE, MSFT, WMT, C, SMH) are down about 0.75%. All of which goes to prove nothing.

Overall the SPX has traded in a less than 4 point range and the NDX in about a 10 point range. Breadth is mildly negative, so we'll have to see if Mr. Snapper can bring about a rally to end the week and send the crowd home happy.

Double Top?

Educational use only. Never intended as advice.

Brief comments because the 'it's all good' comments stand. In fact, it's too good, with a reversal day today for the SP500, which rallied, ran into resistance, and ended up closing above the open and in the bottom half of the range. A higher high, higher low, and higher close have to be scored bullish, but the SPY weakened going into the close, while the NDX held.

ICE pick is now at -58 and some interpret the ability to continue to rise as pure liquidity seeking assets. Is there any risk appreciation?

http://www.fooledbyrandomness.com/prediction.pdf For those with nearly infinite time and definitely infinite curiosity, an examination of the arrogance of our species in predicting future events...

QQQQ (Cubes) - I'd rather be here than SPYders, with better relative strength...NEVER ADVICE 

DIA - weaker relative strength, the 'unloved' index NOT ADVICE 

Click Chart to Enlarge: Selected volatility bands for July 14, 2005 

This Illusion or Disillusion?

Educational use only. Never intended as advice.

Everyone has to draw in their own lines to connect the dots, using the facts as they see fit. Likewise, we need to determine what our risk parameters are, as well as the facts. Technical analysis is pretty good on facts; you either believe them or you don't.

http://www.bloomberg.com/markets/rates/index.html Bloomberg has rates (fact) and the yield curve. Somewhat flat (opinion). Draw your own confusion.

http://stockcharts.com/def/servlet/SC.web?c=$NYAD,uu[h,a]daclyyay[dc][pb10!b30][vc60][i]&pref=G breadth is pretty extended

http://www.bullandbearwise.com/CRBChart.asp No inflation, so 'they' say. CRB up 50 percent in three years.

http://stockcharts.com/def/servlet/SC.web?c=$VIX,uu[w,a]daclyyay[df][pb10!d20,2][vc60][iUp14,3,3!Ll10]&pref=G VIX, complacency anyone?

http://customer1.barchart.com/custom/vsn/4528.htm copper; demand must be pretty good...

http://customer1.barchart.com/custom/vsn/2772.htm cotton; maybe not so good for the textile industry?

http://customer1.barchart.com/custom/vsn/0288.htm lumber, double bottom, or an inverse cup-and-handle? Guess those frisky commodity traders will find out soon.

http://customer1.barchart.com/custom/vsn/1039.htm the dollar pulls back to support

http://stockcharts.com/def/servlet/SC.web?c=$TRIN,uu[h,a]daclyyay[db][pb5][vc60][i]&pref=G 5 day TRIN...overbought

http://stockcharts.com/gallery/?$BPNYA pretty far downfield, as the football analogy goes, from point-and-figure land

http://stockcharts.com/gallery/?$BPUTIL almost 94 percent of Utilities have bullish point-and-figure charts. Anybody left to buy? Nothing showing a 'process top' I guess.

http://stockcharts.com/candleglance/?RKH,$XBD,$HGX,UTH,BBH,SMH,TTH,GLD,EFA,EWJBJ[$SPX] any of these charts look extended to you?

Fun Facts:

27 of 30 Dow stocks are over their ten day average.

83 percent of SP500 stocks are above their ten day moving average

3 percent of SPX stocks are oversold by 14 day stochastics, 52 percent are overbought

From a weekly standpoint on the SPX, fast stochastics are at 86 percent

80 percent of Worden TC2000 stocks are above their 40 day moving average

The 5 day average of TC2000 stocks at least two channels above their 40 day average is the highest since November of 2004

177 of 186 ETFs are above their 10 day average

XLE, ILF, and BBH are at least 18 percent over their 200 day average

No ETFs meet my criteria for being significantly oversold

Only 90 'short ideas' even show up in my screen with adequate price and volume, 45 day high less than 110 day high and the close below the 50 and 200 day averages. "It's all good." Everything works, until it doesn't.

UTH (Utility Holders) Utilities tend to lead equities. If so, that's a good sign for equities (NOT ADVICE).  

OIH (Oil Service Holders) same format. Notice how the extension from the 200 day average is less for OIH than earlier in the year.  

Always Click Chart to Enlarge BBH (Biotech Holders) - Top = price, middle is relative strength (green) to SP500, and MACD (red)...bottom is volume and in red the disparity between price and the 200 day moving average. Not as high as in 2003, but high...of course, it can always go higher...NEVER ADVICE 

A Separate Piece

Educational use only. Never intended as advice.

"There are old pilots and there are bold pilots, but there are no old bold pilots." - anon (? Chuck Yeager)

Believe it or not, I get questions from readers, and they're always good ones, because every question deserves an answer.

Eric asks: "How is the ICE tool doing?" Actually, although I don't calculate it every day (almost every day), the question is quite timely. It's pretty apparent that the market is frothy both sentiment wise and price wise. I'd be surprised to see the Investors' Intelligence percent bearish over 20 percent.

Tonight's ICE reading is a FROSTY -56 on the -100 to +100 scale. That's the lowest (most collectively overbought) reading I've had since developing this indicator. This also correlates with the Worden TC2000 chart I showed recently with the percentage of stocks over their 40 day average at 82% and the Lowry's indicator, the percentage of stocks over the 10 day average at a mind-numbing 84%.

Philippe asks "what are Haggerty 'volatility bands'?"http://www.investorsobserver.com/contributor38_A.asp The bands are calculated price objectives based on single day volatility and at-the-money near-term options prices that project standard deviations of price.

Weekly fast stochastics are at about 85% and tick behavior has shown what I can only decribe as "manipulated" or "statistically deviant" behavior. Do I believe in conspiracies? Santayana remarked "Skepticism is the chastity of the intellect, and it is shameful to surrender it too soon or to the first comer."

So, now that everyone's on the bandwagon, be prepared for whatever comes next. The market may be invincible, but KRyptonite's in the House.

NASDAQ Composite (note: the broader 'techs') Also headed to resistance on weekly charts, with better relative strength (green line) and similar improving MACD. In other words, better action than in the SP500.  

SP500 (Weekly) Where are we? The S&P500 is at the top of the trading range, overbought by stochastics (not shown), and overbought short-term, headed into expiration. The MACD (bottom) is about to cross (possibly) the zero line.  

No surprises

Educational use only. Never intended as advice.

After three solid days of rally, a modest pullback (teletubbies love to call this profit-taking) is hardly unexpected.

Forget the news, it's about the price.

The only 'areas' up over a percent that I'm following are the TRIN, VXO, and OIH. Conversely, even red-hot biotech is only off less than a percent.

Yesterday Todd Harrison at www.minyanville.com called it "the bovine smirks and reaches for another rubber glove for the ursine", an amazing visual. Ouch...of course, you have to be part of the Minyanville community to feel the pain...

Market Mania in Pictures: almost 82% of stocks are trading over their 40 day moving average...Worden Brothers TC2000 is an outstanding source of end-of-day data; I highly recommend it.

Seven Come Eleven

Educational use only. Never intended as advice. Not a registered investment advisor. Not trying to sell you anything.

Keywords: stock market, investment, technical analysis, trading setups, volatility trading

The market 'obeyed' last week's end-of-day, end-of-week strength postulate, with the SP500 rising on decreased volume (third consecutive gain) and the NDX rising for the third consecutive day on increased volume (accumulation). For those who occasionally frequent this site, they know it is about price not about why. The more I can accept the prices and forget the whys, the more likely I am to survive and possibly prosper in 'the loser's game'.

With three solid upcloses in a row, I'm a lot less enthusiastic about getting long, but it's worth the preparation for all eventualities.

The SOX is up 6 percent in 5 days, too much too fast as they say, and won't be an area for me to chase. The Dow Jones US biotech index is also up almost 6 percent in 5 days, so ditto. Coming off a bottom, the HHH (Internet Holders are up about 4 percent in 5 days, much to my chagrin as I pretty much fubar'ed my HHH trade.

On the downside, there hasn't been much downside, as only the OIH of ALL the ETFs is down over 1% in the past trading week. Really. It's all good.

On the bright side, BNSO payed off for me today as the little-followed company reported stellar earnings. http://stockcharts.com/def/servlet/SC.web?c=bnso,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lj[$vxo]]&pref=G It had a weak close after a large gap opening.

Staples (SPLS) http://stockcharts.com/def/servlet/SC.web?c=SPLS,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lj[$vxo]]&pref=G also looked good for me on continuation after a pullback.

Unfortunately, investigational short trading looked weak, as I got stopped out of a 90-10 short-trade on a possible HET reversal. http://stockcharts.com/def/servlet/SC.web?c=HET,uu[m,a]daclyyay[da][pc50!d20,2][vc60][iUp14,3,3!Lj[$vxo]]&pref=G My error? Entering too soon in the day, one of the themes I have to reverse.

On to the show.

Maximally and Moderately oversold ETFs (proprietary)
NONE, as in nada, nil, zip

ETF NR7 (narrowest range of 7, volatility based trading)
RKH, TTH, and PPH are all qualifiers, but none are my 'favorites' because the daily range was a bit wide, and the close very close to the high. I don't know if this is good or bad, but it makes the stop (other end of the range) less tenable for me.

OEX Oversold
HCA 54.95-54.95

Arresting Development: pause that refreshes, non-momentum winner
BA 65.49-64.78 early entry, close stop

Pullback Space
EEFT 28.87-28.55 (long EEFT)
OMI 19.40-19.03 (shipping)

Rallying to Resistance (assess market and sector action, dynamics)
FDX 84.50-83.43
GDT 67.55-66.85

Greenspan's Bosom Buddies in Bases
PNC 55.18-54.74
BUD 46.08-45.60
LH 50.50-49.81

The good news is that there are a lot of setups and bases forming. The bad news is that the overbought cycle has really expanded. Time to post as the electrical circuits seem threatened by heat or lightning...or the Abreu power surge at Comerica.

Liar Liar

Educational use only. Never intended as advice.

Last week was unmistakeably bullish, no matter how much 'bull' it took to get there.

Market overview:

The future of investing is the exchange traded fund (ETF) space, particularly the more liquid ETFs. Currently there are 40 ETFs trading at least 400,000 shares a day.

Of these stocks, 30 of 40 are above the 50 and 200 day averages, one benchmark for assessing bullishness.

Another quick check for bullishness is the percentage of Landry Long stocks (over 30, SMA10 > EMA20 > EMA30) versus the number of Landry Short stocks, currently at 1090 to 62, clearly bullish.

Not surprisingly, there were 4 ETFs making 6 week highs with closes below the open versus only 61 making six week lows with closes above the open of the week (including the Cubes QQQQ, SPY, DIA, and EFA).

I'm not a breakout trader, but for those who are, there are several ETF liquid breakouts, including BBH, IBB, IWM, and IWN and XLF and IYR are threatening to do so. Breakout traders get in first, and also reversed first, should sentiment change.

OIH has made a minipullback (closing below the 5 period SMA).

On the cautious side, 14 of40 'active' ETFs made 90-10 moves Friday, closing in the top 10% of the range while opening in the bottom 10%, including QQQQ, EEM, UTH, IWM, MDY, and DIA.

EWW makes a narrow range bar after an uptrend (high 28.10-low 27.88).

Most oversold ETFs:

GLD 42.40-42.12

Pullbacks to Watch:

EEFT 29.00-28.63
TOPT 15.96-15.67

Sentiment watching:

Schwartz end of week, end of day finish: positive

Stocks above 40 day average 79% (high)

Investors Intelligence, bull and bear, 54 and 21 (close to extreme)

VXO/SPX http://stockcharts.com/def/servlet/SC.web?c=$SPX,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Lj[$vxo]]&pref=G (high)

Percent oversold by stochastics: NDX 15%, SPX 9%

Lowry's % of stocks over the 10 day average: SPX 80% (high)

No matter how bearish one wants to be on fundamentals, valuation (see numerous previous columns discussing Grantham, Hussman, et al), the market remains technically strong, with the crowd rejecting risk in the face on increasing global terrorism and geopolitical instability.

http://www.cnn.com/2005/US/07/05/terror.site/index.html?section=cnn_latest

I'll err on the side of caution with this recent frothiness. Good luck to all.

Questions, not answers

"An eye for an eye and pretty soon, the whole world is blind."

A brief aside, with no solution proposed. The terrorist attacks in London (we can substitute 'fill in the blank') just provides the latest salvo in the international CULTURE OF QUID PRO QUO. A attacks B, so B retaliates, provoking A to respond, causing B to escalate and so on.

Both A and B have 'good' reasons for their actions, however destructive, protecting their interests.

Good for bombmakers, good for bomb detection companies, good for intelligence agencies, and good for electronics manufacturers, and very bad for all the victims and their loved ones. Too bad we can't put a 'v-chip' in people.

Manipulation Station

Educational use only. Never advice.

We are asked to believe that a major international terrorist action has no impact on risk premium. I also note that TICK behavior yesterday was abnormal, in the sense that my monitors showed the highest buying pressure in over a month. As Robot might say in Lost in Space, "that does not compute."

Systemic risk and risk taking are building together, amidst valuation and liquidity.

The first priority in investing is conservation of capital.

Can't Fight the Tape

Educational use only. Never intended as advice.

The domestic markets started down, but rallied sharply off bottoms to close mildly higher. The way I analyze TICKs, the market had more buying power than at any period during the past two weeks, which smacks of manipulation. Is the 'Plunge Control Team' still lurking? I suspect that was at work, although it is peculiar with the heavy put selling reported by Minyanville's options experts, that there wasn't more hedging at work.

Commodity Channel Index: negative http://stockcharts.com/def/servlet/SC.web?c=$SPX,uu[m,a]daclyyay[pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G

Most oversold ETFs

EFA 52.10-51.24 (short ETF, long ETF calls)
PPH 72.11-71.59

ETF narrow range of 7 (NR7)

None

OEX volatility selection (inside day, narrow range 4)

None

Momentum moving average long

DNEX 44.12-43.43
ORCT 27.65-26.14
STM 15.87-15.58

Possible Turtle Soups - Long (20 day low failed failure swings)

ACN 23.61-22.20
CGX 41.40-40.45

Possible Turtle Soup Failure of Long breakout - short

PAYX 33.83-32.90

Possible shorts rallying to resistance

DBD 47.53-47.04
WAT 38.28-37.80
IVW 56.87-56.19
AVY 53.27-52.00

Chart for the Day:

http://stockcharts.com/def/servlet/SC.web?c=ICTS,uu[m,a]daclyyay[dc][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G Sometimes investments just work out. Recently ICTS showed up on a screen of microcap value stocks that I use. I was lucky enough to buy at 2.02; the London tragedy gave the stock a catalyst today. There doesn't seem to have been any 'warning' volume activity.

HON (Honeywell) another big cap beaten and left for dead, at support.  

CLICK to ENLARGE: HHGP - "The bigger the base, the higher in space." I hope so. LONG HHGP today. NOT ADVICE.  

Always CLICK CHART to ENLARGE: VZ (Verizon) - VZ makes a 20 period low and closes above support. Can it hold support? The possible gain to circa 35 is about 58 cents with the risk (the low) about ten cents. A possible trade in the making (NEVER ADVICE).  

Love Bill O'Neil? Here's the SP500 with 5 distribution days (decreased price, increased volume) in the past nine sessions, but only getting the market back to support. Is this THE top? Darned if I know, but somehow I'm not feeling it, despite the fact that systemic risk increases daily.

TOL - another 90-10 pattern, with a low range close, and quite near to the 20 day moving average (green). This will be one of the bellwether stocks for me to watch tomorrow.  

CLICK CHART to ENLARGE. UTH - more recent trendline is intact, with a solid selloff day, but light volume today. This a 90-10 pattern, with open in the top 10% of the daily range and close in the bottom 10%.  

Stockcharts.com has great charts. Here's a 5 day TRIN showing a pretty oversold condition. This isn't something I feel good about getting short in front of. Maybe we're moving into an 'up day, down day' pattern. Find out tomorrow, right? 

CLICK CHART to ENLARGE - Missed opportunity on MON...Monsanto makes a new high (for at least 5 periods) and comes back in below the previous high of 7 days earlier. Failure swing subsequently. Sometimes tests of previous highs and lows can make for good entries. Of course, finding them real time is a bit more challenging! 

CLICK CHART to ENLARGE. ICOS with the so-called Momentum Moving average pattern. It was above the 20 day moving average and five day average yesterday, and came back today. Sometimes traders can catch a trend early by looking for these 'obscure' pullbacks. Watching the Drugs sector would be a must for this kind of trade.  

Always CLICK CHART to enlarge: IBM, an NR7 setup of an OEX stock. The high was 74.97 and the low 74.16. There were no ETF Narrow range of 7 day setups tonight. We'll see.  

Game Planning

Educational use only. Never intended as advice. Not a registered investment advisor. Not by a long shot.

Different ideas flourish in different environments and at different times. My son, Conor, explained how Doyle Brunson recently won yet another World Series of Poker championship bracelet (record tying 10th). The 73 year-old Brunson explained, "it's hard to substitute for experience."

The market held up relatively well under the impact of yet another (the 9th) increase in the Federal Funds rate. The bulls point to the stability of the bond market (even under the cloud of the auto makers), the strength of the economy, and the potential for moderating oil prices. Bears counter with the duration of the cyclical bull, the rising interest rates, flattening yield curves, and valuation issues.

Clifford Asness wrote about this at aqrcapital. http://http://www.aqrcapital.com/index.php?xpose=content.display_research&display_research=1

Looking around. http://stockcharts.com/candleglance/?RKH,$XBD,$HGX,UTH,BBH,SMH,TTH,GLD,EFA,EWJBJ[$SPX] A Stockcharts.com 'panoramic' view shows that a number of areas(excepting the SMH, RKH, Gold, and Japan) have done a little better than the SP500 recently. Brokers and the Utilities have significantly outperformed, and other areas, while outperforming (e.g. Biotech, Housing, and Telecomm) still reside in trading ranges.

Volatility http://stockcharts.com/def/servlet/SC.web?c=$VXO,uu[s,a]daclyyay[pb10!c200][vc60][iUp14,3,3!Ll10]&pref=G remains in the nether regions of perpetual sunshine.

Developing strategies. Were I (or anybody else) blessed with the Holy Grail of trading strategy, would I reveal it to the world? Mama, slap me upside the head if I did. What all of us can accept though, is that we recognize that not all strategies are created equal for all times. Short-based strategies have largely NOT been in play for awhile. What has worked (at times) are pullbacks AND trading range strategies that technicians argue nullify the 'efficient markets hypothesis'.

I'm just not a breakout trader, although that certainly can work, especially when animal spirits rule. I will take volatility expansion trades from certain patterns, although I wouldn't call that breakout trading. For illustrative purposes (never recommendations), I'll post some links to the kinds of charts I find intriguing.

Volatility expansion trades

ETF Narrow range of 7 days

http://stockcharts.com/def/servlet/SC.web?c=SMH,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=dia,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G

ETF Inside day, Narrowest range of 4 days

http://stockcharts.com/def/servlet/SC.web?c=iyt,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G

Mean reversion trades, liquid, oversold stocks

Maximally oversold

http://stockcharts.com/def/servlet/SC.web?c=hhh,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G (long July calls)

Moderately oversold ETFS or OEX stocks

http://stockcharts.com/def/servlet/SC.web?c=dd,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=Dis,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G


Narrow range bar as setup

http://stockcharts.com/def/servlet/SC.web?c=arbx,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=lng,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G

90-10 (open top 10% of range, close bottom 10% of range)

http://stockcharts.com/def/servlet/SC.web?c=pcp,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G

Pullbacks during trends (long)

3 to 5 day pullbacks

http://stockcharts.com/def/servlet/SC.web?c=wtw,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=goog,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=ener,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=gs,uu[l,a]daclyyay[db][pc50!d20,2][vc60][iUp14,3,3!Ld20]&pref=G

Heck, there are many other types of excellent trading opportunities that arise daily (opening range gaps, like 'trapdoors' to fade upon reversal for one), NYSE Tick/SPX price divergences (require more screen time), Slim Jims (http://daytrading.about.com/library/weekly/aa032700b.htm), volatility bands (http://www.hamfon.com/daytrade/vband.htm, http://www.investorsobserver.com/contributor38_A.asp) and so forth, but I don't have unlimited screen time, and you probably don't either.

All of the strategies require attention to underlying market dynamics (breadth, intraday TICK and TRIN trends, etc) and constant attention to broad market action.

I also follow microcaps that have deep value characteristics (low price-to-book, price-to-sales), with strong balance sheets, and insider participation as another way to diversify.

XLB (Basic materials spyder)...in an economy with strong, ongoing demand for basic materials, wouldn't basic materials stocks be a good measure. Has a suspicious look like a head-and-shoulders top, but it has already taken quite a beating. Worth watching.  

HGX (Housing Index) Have the Homies (homebuilders) put in a top? I like to call tops 'process tops' because often they are processes rather than events. Okay, it looks a little 'spiky' and there is MACD price divergence, but relative strength is still pretty good against the SP500 (green line, lower panel). Not a chart that I'd be shorting, and Toll Brothers (TOL) may be the bellwether (bell) to watch. Hehe. 

ALWAYS CLICK CHART TO ENLARGE - CRB (Commodity Research Bureau Index) You had to know this chart was next...price divergence on the MACD weekly chart, falling relative strength, you know the drill. Had to guess this would be a consequence of Dollar Daze.  

DXY (Dollar Index) Don't know much about geography...but know a little bit of Fibonacci. This weekly chart shows the beating the dollar had taken at the hands of the liquidity policies of the Federal Reserve. It should be interesting to see if it will continue its gradual push to get back to the 95ish area. Stronger dollar, weaker commodity prices? DEFINITELY NOT ADVICE.  

RUT (Russell 2000) with multiple moving averages (SMA 5 and 10, and EMA 20, 30, and 150) Bottom panel with MACD (recent divergence) and very strong relative strength compared to the SP500.  

ALWAYS CLICK ON CHART TO ENLARGE: Educational Use Only. Never intended as advice. Not a registered investment advisor...just a passionate, no obsessed, participant. At the top of the chart is the NYSE short-term trading index with a five day moving average. At the bottom is the SP500. Notice that in late April, mid May, and now that the 5 day average of the TRIN is at highs. This has TENDED to correspond with market lows, not highs. Heck, nothing is certain, but I'm not short concerning short-term outlook on the market. NOT ADVICE and you can't trade at 9PM Eastern time anyway... 

Great www.stockcharts.com chart. I know that the markets closed poorly. I know that there is a lot of fretting. I know that most of you think Greenspan is a mealy-mouth political hack. But a TRIN close near 2 and a 5 day TRIN approaching the high of mid May shouldn't be entirely ignored as a possible sentiment extreme. Price action determines what is what.  

Chart of trader action after the Federal Reserve announced a 25 basis point increase in rates? Not exactly, but it makes about as much sense. this is a picture of a Jackson Pollack "drip painting". You had to be there... 

ITRI (Itron) Meters. Meting out punishment or profits? Narrow range bars give well-defined risk limits (the other end of the bar).  

HDI (Harley Davidson) Born to be wild? Pullback to breakout land, second chance or Failure City?  

FDG (Fording Canadian Coal) This is one of those 'trap' setups, with a pullback with a gap down. Do you believe the gap will be filled? How can you know? This is a hard stock to borrow, and always feels like it's manipulated (ooh the dirty word), but you never know.  

WBS (Webster) kind of thinly traded, but another stock that has been channelling, DOWN. Do the banks like a flat yield curve.  

DST (DST Systems) this would be a possible reversal trade, after a sharp rally coming off a bottom). NOT ADVICE.  

NIKE (High priced NR7 setup) - sometimes explosive pullbacks, sometimes explosive continuation. Traders can live with either. NEVER ADVICE.  

BBH (Biotech Holders) The BBH is an NR7 (narrowest range of 7 days) setup that could explode in either direction (really). Toby Crabel wrote about NR7s in 'Day Trading with Short-Term Price Patterns' and Connors and Raschke amplified in 'Street Smarts'. One of my favorite patterns, but generally not a good one to 'cheat'. NEVER ADVICE.  

HHH (Internet Holders) Beaten to death oversold nine ways to Sunday, but not showing a lot of reversal power. NOT ADVICE 

Standing in Place

Educational use only. Never advice.

Minimal change in the markets today, setting up for possible increased volatility.

Narrowest range of 7 days:
QQQQ 37.26-36.97
IWM 64.06-63.63
MDY 125.83-123.31

Higher priced stocks with NR7s and narrow range bar: a possible volatility expansion list:
LTR 77.96-77.49
IWO 65.25-64.89

Most oversold ETF:
HHH 55.50-54.30
EWY 32.40-32.10

20 day lows with prior low at least 4 days earlier:
KLAC 45.44-43.81

90-10s with open top 10% and close bottom 10% of the range:
PGR 99.78-97.89
BBH 169.75-167.95

Pullbacks:
Almost nothing on the screens, means sit on the hands.

Overbought or oversold? 5 day TRIN says more overbought than oversold
http://stockcharts.com/def/servlet/SC.web?c=$TRIN,uu[m,a]daclyyay[db][pb5][vc60][i]&pref=G

Why Technical Analysis?

Educational use only. Never intended as advice.

A visitor declared this site unintelligible. That got me to thinking, a rarity. That also prompted an earlier 'chart basics' print.

Why use technical analysis (TA) anyway? Fundamental analysis gives you everything you could want to know about a company, market capitalization, industry, capital structure (equity versus debt), debt, earnings trajectory and growth, valuation ratios, and much more. You can then compare company A with company B based on size, industry, or any other variable. The problem is, does that tell you what the market thinks about the company now?

A chart doesn't tell you anything about the capital structure, key ratios, debt, or earnings of a company. It gives you the sum opinion of all market participants, and tells you whether the price is going up or down, volatile or not, and allows you to compare it with another similar or diverse company in the blink of an eye. In Jack Schwagers's Market Wizards series Ed Seykota, one of his wizards says something to the effect that if you can't tell from across the room how the company is doing, why would you want to choose it.

AND that is what traders and investors do. We make choices. Many or few, and very often wrong. But charts give us a framework to choose, choosing to buy new highs, or pullbacks, or support, or a volatility breakout. They also tell us how the market views 'news', whether it is truly news or already baked into the price.

Price also gives us validation of 'sell side' recommendations. Let's say I'm LARGE BROKERAGE HOUSE and I want to move inventory, stock XYZ, maybe because I know something or maybe I just want out. I then give a glowing recommendation, maybe an earnings projection or business upgrade, and a higher target price. Meanwhile, a couple of hours later, the stock is down, because I'm bailing and you're taking on water. That is how the game is played.

SP500 Weekly with a possible longer-term topping process. So far a lower high, toppish stochastics and RSI waiting to declare itself.  

OIH (Oil Services Holders) a so-called 90-10 trade (opens in the top 10% of the range and closes in the bottom 10%), where the stock must trade below today's low, then entry is at the low with the stop below the low of the trade day. The goal with these types of trades is getting a reversal and a tight stop.  

CLICK CHART TO ENLARGE HHH (Internet Holders) The HHH chart (high 55.78, low 55.05) encapsulates two potential trading strategies. First, the HHH is strongly oversold using proprietary criteria. Second, the HHH is an inside day (range inside the previous day's high and low) and the narrowest range of the past four trading sessions. This predicts price volatility explosion but not direction. NEVER ADVICE 

Chart Primer

CLICK CHART TO ENLARGE - Chart Primer - I've put up a chart of the Semiconductor Holders, a vehicle traders/investors can use to invest in the computer semiconductor chip industry. PRICE is in green, with the small bars on the left of each vertical line indicating the OPENING, the small bars to the right th CLOSE, and the difference between the TOP and the BOTTOM the range.

The wavy colored lines are moving averages, the average price over a certain time. Yellow is 5 day simple, White is 10 day simple, Green is 20 day exponential (increases attention to recent price), Magenta is 30 day exponential, Orange 50 day exponential, Blue is 150 day exponential.

In the middle panel are RELATIVE STRENGTH (yellow) and 10 day average of relative strength, comparing price to the SP500, and the MACD (Moving averages convergence divergence) something called an 'OSCILLATOR' that may help traders in a variety of ways.

The bottom panel shows VOLUME, green bars showing up days and red bars down days. Some people believe that volume precedes important moves while others are less convinced. ACCUMULATION occurs when a day has increased price and volume (ideally more accumulation means more volume and a close near the top of the RANGE. DISTRIBUTION means selling with increased volume.

New readers are encouraged to investigate TECHNICAL ANALYSIS sites on the market. There are many good places to start.

CHH (Choice Hotels) Gap up with steady pullback to 30 day moving average. Volume is pretty light for active traders to mess with this one.  

AVB (Avalon Bay) Potential pullback setup. NOT ADVICE.  

RKH (Regional Bank Holders) Does Alan Greenspan give a rat's patootie about you or me? Are you kidding? But HE LOVES HIS BANKING BUDDIES. RKH has pulled back, and has positive relative strength AND a possible MACD cross. Not something I'd want to be short.  

BBH (Biotech Holders) one of MANY ETF narrow range trade possibilities. It's easy to visualize this one exploding in either direction (long directional butterfly options) 

SMH (Semiconductor Holders) Markets are funny things. You can read anything into a chart and come up with an explanation for it. The SMH has pulled back toward Fibonacci 3/8ths support AND made a 20 day low. Although some traders will act on 20 day lows to initiate trades SHORT, others will look for a failure of that test of the previous low. This can setup a trade with nearby stop by going long above the previous 20 day low with the stop below the current day low (NOT ADVICE).  

AMX (American Movil) Good example of a brief pullback amidst a trend. Long AMX.  

TNX (Yield on the ten-year note) A very important chart showing so called "Gatekeeper" pattern, with a long decline, a rally, and then a .786 retracement of the rally. "Flight to quality" often means bond buying with decreased bond yields. Should the crowd decide to move to equities (not advice), I'd expect to see some action with INCREASING ten-year rates. Of course, I could be wrong. No position. 

Always click chart to enlarge SPX (SP500) pullback today on small range (6 points) to .382 Fibonacci support...relatively narrow range day with lower high and lower low.  

NDX (Nasdaq100) Pullback with light volume, rather than a full-fledged breakdown. 50% retracement nearby.  

Construction or Destruction?

Educational use only. Never intended as advice.

There are two sides to the coin, and as 'bleak' as the action seems, volume is muted, and there has been favorable action in the homebuilders, with negative work on the SMH and HHH.

Thus far, it's been S's over N's.

Oversold, although not wildly so.

CLICK CHART TO ENLARGE - Sometimes the FTSE is the 'canary in the coal mine.' Still chirping. NEVER ADVICE...positioned in SYNTHETIC STRADDLES IN EFA. 

Third and Long

Educational use only. Never intended as advice. Not a registered investment advisor.

Keywords: trading, risk management, risk control, technical analysis

As everyone has seen, last week's solidly negative action (from significantly overbought) took the SP500 back to the 50 day moving average, the NDX below, window-dressing period (or not) coming up.

As traders-investors, we have several obligations 1) preservation of capital, 2) exploitation of our edge, 3) risk management, and 4) discipline to adhere to the former three.

We have some basic decisions to make:

1) do we participate at all? Currently the market is oversold short-term and remains overbought longer-term

2) what is our timeframe? I trade intraday, intermediate, and longer-term. I have to fess up that the longer term approach that appeals to me uses microcap stocks with value-oriented choices. http://stockcoach.blogspot.com/ The rationale is simple.

3) do we trade from both the long and the short side? Yes, but until recently, almost nothing was working from the short side.

4) do we use leverage? Variably, via options.

5) what are our strategies? See below.

6) what are our risk control algorithms? The algorithms vary with the methodology, and I don't employ rigid criteria. People talk about fixed dollar stops, stocks based on volatility, stops which vary according to stock price, etc. The deep value stocks (very low price to book, price to sales) generally are hardest to develop stop methodologies (in my opinion), because they've usually already been hammered.

Can we control trading costs and slippage? Every trader/investor has to determine how to achieve this.

Technical analysis based strategies generally fall into a few categories:

1) Breakout from congestion or volatility
2) Trend trading within pullbacks
3) Trading from support or resistance, sometimes using 'mean reversion' techniques (oscillators or other criteria)

There is no substitution for trading 'with the market'. Retail traders (the little guys, us) have some advantages (flexibility, nobody to report to but ourselves)

1) Breakouts from congestion or volatility
I prefer to use multiple methods. NR7s (narrowest range of 7 days) in higher priced stocks or ETFs...better liquidity, smaller overall commissions

http://stockcharts.com/def/servlet/SC.web?c=EFA,uu[h,a]daclyyay[dd][pc50!c20][vc60][iUp14,3,3!Ll14]&pref=G EFA (includes a significant portion with EWJ as well) has been consolidating for a long time. It could go in either direction. I'm already in this one via long calls and short stock via a synthetic straddle, desirous of a large move. EFA is in an NR7 pattern now.

I find it intriguing that only 2 of 100 OEX (SP100) stocks are showing NR7 patterns currently.

http://stockcharts.com/def/servlet/SC.web?c=UTX,uu[h,a]daclyyay[dd][pc50!c20][vc60][iUp14,3,3!Lr14]&pref=G United Technologies has pulled back to its breakout, which could attract buyers.

2) Pullbacks from trends

A number of different 'patterns' exist, with the simplest the three to five day pullback

http://stockcharts.com/def/servlet/SC.web?c=gm,uu[h,a]daclyyay[db][pc50!c20][vc60][iUp14,3,3!Lk4]&pref=G GM (not my cup of tea)

http://stockcharts.com/def/servlet/SC.web?c=frt,uu[h,a]daclyyay[db][pc50!c20][vc60][iUp14,3,3!Ll14]&pref=G FRT (REIT)

http://stockcharts.com/def/servlet/SC.web?c=amx,uu[h,a]daclyyay[db][pc50!c20][vc60][iUp14,3,3!Ll14]&pref=G AMX

http://stockcharts.com/def/servlet/SC.web?c=Ansi,uu[h,a]daclyyay[db][pc50!c20][vc60][iUp14,3,3!Ll14]&pref=G ANSI

http://stockcharts.com/def/servlet/SC.web?c=cat,uu[h,a]daclyyay[db][pc50!c20][vc60][iUp14,3,3!Ll14]&pref=G CAT if cyclicals don't dog it

http://stockcharts.com/def/servlet/SC.web?c=kbh,uu[h,a]daclyyay[db][pc50!c20][vc60][iUp14,3,3!Ll14]&pref=G KBH if HGX strong

3) Support and Resistance/Mean Reversion Price has a habit of attracting buyers at support and sellers at resistance. Bargain hunters want to get in low and others want to be made whole by selling at resistance (where they bought).

http://stockcharts.com/def/servlet/SC.web?c=sscc,uu[h,a]daclyyay[dd][pc50!c20][vc60][iUp14,3,3!Lr14]&pref=G Smurfit-Stone had a smurf-sized rally and has pulled back and could be forming a double bottom.

http://stockcharts.com/def/servlet/SC.web?c=igv,uu[h,a]daclyyay[da][pc50!c20][vc60][iUp14,3,3!Lr14]&pref=G Software Ishares has made the lowest low in the past twenty days.

http://stockcharts.com/def/servlet/SC.web?c=iwb,uu[h,a]daclyyay[da][pc50!c20][vc60][iUp14,3,3!Lr14]&pref=G ditto for IWB

http://stockcharts.com/def/servlet/SC.web?c=XLP,uu[h,a]daclyyay[db][pc50!c20][vc60][iUp14,3,3!Lr14]&pref=G XLP as well

http://stockcharts.com/def/servlet/SC.web?c=mdy,uu[h,a]daclyyay[db][pc50!c20][vc60][iUp14,3,3!Lk4]&pref=G MDY

Short Ideas:

Database short on pullbacks with recent weakness.

So, we'll see what tomorrow brings and enjoy the summer weather.