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Friday, February 29, 2008
Wednesday, February 27, 2008
I noticed on StockBee that Pradeep has given his all clear for the market. I completely agree and, even thought the S&P 500 still looks flat, the internals of the market continue to get stronger.
For more explanation about the plot below, check out this link.
Posted by Paul Stiles at 2/27/2008 09:04:00 PM
While the market was falling apart I picked up some shares of CSCO as it completed a perfected TD Sequential countdown. The entry point was very close to the stop-loss so I didn't worry too much. (That is what is so cool about the TD Sequential and Combo, they have well defined risk) The trade didn't work out and I was stopped out for a small loss.
The other day I pointed out that CSCO finished another TD Sequential just as an analyst upgraded the stock. After the post pop sell-off occured I couldn't help but pick up some July CSCO in-the-money calls for 3.50. Thanks to better market conditions, I'm sitting on some big gains right now with those calls being priced at 4.80. The really cool thing is that I expect to see CSCO price to reach 27.50, which would mean a call price of around 5.80. Tags: LongTags: Options
Posted by Paul Stiles at 2/27/2008 08:39:00 PM
Tuesday, February 26, 2008
Monday, February 25, 2008
Blocks 3.0 offers the zig-zag swing indicator but doesn't allow you to look into the code. I was interested in this because I'm trying to reproduce Jan Arp's Trender.
What I did was to translate a piece of EasyCode into VB.net from "New Trading System and Methods".
First thing to do is to create a new code block. Then, insert the Kswing code (found at the bottom of the page).
Posted by Paul Stiles at 2/25/2008 09:23:00 PM
Saturday, February 23, 2008
Posted by Paul Stiles at 2/23/2008 02:32:00 PM
Friday, February 22, 2008
It is always hard to time trades based on sentiment, but since I'm bullish (at least for the next few months), I thought I might back up my position with a look at the AAII sentiment survey. The red plot is the 10 week adjacent average for the AAII bull-bear spread, plotted along with the weekly close of the S&P 500. I think it is pretty amazing that the difference between the bulls and bears (with the bears outnumbering the bulls) is greater than the lows of 2002 and 2003. They say that sentiment indicators do not work unless they are reading extreme levels. If this isn't extreme, I don't know what is.
Posted by Paul Stiles at 2/22/2008 11:07:00 PM
The DeMark indicators are fairly complex and can seem a little like "black magic" sometimes. No matter what you might think of their usefulness or their predictive behavior, I'm beginning to wonder if some analysts use them to time their upgrades or downgrades.
Take Cisco (CSCO) as an example. Yesterday, CSCO completed a perfected TD Sequential countdown and was immediately followed by an upgrade from Citigroup.
Citigroup analyst Paul Mansky upgraded the San Jose, Calif., networking-equipment maker to buy from hold, calling Cisco attractive for long-term investors based on its valuation.
I have not made any attempt to document this behavior, but I'm certainly going make more of an effort in the future. What I would really like to do is to go back and look at the historical upgrades for a group of stocks and see how they correlate with the TD Sequential and TD Combo indicators. Unfortunately, I do not have the time or resources to attempt such a study. Too bad, if it is true, it could be a significant trading edge.
Thursday, February 21, 2008
Wednesday, February 20, 2008
With another good day for gold stocks, I'll continue my recap of how I timed some of my recent buys.
I have owned Great Basin Gold (GBN) since early 2007. It wasn't a large position but one that I liked fundamentally and technically. With gold rising ever higher, I was always on the lookout for another opportunity to add to my shares of GBN.
The chart below is a weekly that has two trends defined by a blue and green line. I have also plotted the Fibonacci retracement levels of each trend. You can see that there is very good agreement between the 0.382 retracement of the blue trend and a 0.618 retracement of the green trend. This overlap is referred to as "confluence" and often serves a support. I was looking for this and picked up some GBN at the 2.50 mark. As you can see, I took a little heat for about a week but overall, the timing of the buy was pretty successful.
Notice also that GBN bounced off another confluence point defined by the 0.236 retracement of the the blue trend and a 0.382 retracement of the green trend. (I didn't buy any more)
More on confluence
Tuesday, February 19, 2008
I am a CANSLIM investor above all else. But since there are very few market leaders to buy out there I think it is useful to dabble in some other trading methods.
This recent market weakness has highlighted a potentially powerful divergence between the price of gold and the performance of many gold stocks. Here are some of my recent gold buys and the reason why I bought them. Most of these methods were heavily influenced by Tom O'Brien.
First up is Gold Fields (GFI), which was a simple buy-at-support play. Sure the company was hammered by the energy problems of South Africa, but the price held at previous support and offered a low-risk entry. I have a price target of 18 and, depending on volume, I will either sell half the position and let the rest ride or just sell it all.
Next up is Anooraq Resources (ANO). This is an excellent example of a stock coming back and testing the breakout. I owned ANO from 1.00 to 2.10 and was anxious to get back in. I almost bought at around 4.00, but thanks to some advice from Tom O'Brien, I waited for that test. Well I got the test in late January on lower volume and jumped in at $3.37. Nice day today.
I want to also talk about Great Basin Gold (GBN) but due to my obsession with all of the election coverage, I'll talk about it tomorrow.
Posted by Paul Stiles at 2/19/2008 07:19:00 PM
Monday, February 18, 2008
The Blocks program is extremely versatile and quite easy to use. The newest version (Blocks 3.0), while still a little unstable, is even easier to use. Here is how you can create DeMark's TDST lines with the program.
To create the TDST line corresponding to a TD Sequential Buy Setup, the first thing you need to do is to create a "value pointer". Right click on it and then left click on the "block diagram". Next, create the block diagram shown below, using the custom block you will create.
To create the custom block, right-click on any blank spot on the above block diagram window and then left-click on the "create code block". Choose the "bar and Int to line" block. Next, insert the code (given below) into the space that says '************ Your Code Here ***************
To create the red TDST line, repeat the above steps but using the following block diagram and code. You can change the Integer input to go back in time. For example, if you want the TDST line that occured before the most recent TDST line, just enter 2 into the integer variable. The higher the number, the further back you go.
I put the code at the end of the blog page. It was written in VB.
Posted by Paul Stiles at 2/18/2008 08:39:00 PM
Wednesday, February 13, 2008
One of the things I really like about the Worden Brothers' data is that they contain sector indexes. There are main group sectors and sub-sectors within them. All of the sectors can be plotted together to get an idea of which sectors are leading. You can also put together a "market monitor" type breadth indicator to get a feel for the entire market. Below I have plotted market monitor for the Hemscott Industry Groups along with the NYSE.
Blocks also lets you take a look at an individual sector or ETF. Below I have plotted the market monitor breadth for the XLF and SPDR Semiconductor ETF.
Posted by Paul Stiles at 2/13/2008 10:49:00 AM
Monday, February 11, 2008
Here is a swing trade that I put on today. I picked up Gold Fields (GFI) in the morning for 13.32.
Here is a break out that I nearly bought last month. The break out failed and came back down to the lower level of the base. Friday, CHDX broke out again. This time it held and even followed through today. This type of action bodes well for the market.
Saturday, February 09, 2008
It seems that my previous post prompted a link from from Stockbee, as I have seen a sharp spike in my visits. I do not have a paid Stockbee membership so I can't follow the link back from where it originated. I can only hope that it wasn't pointing people to see a post of "what not to do". I have great respect for what Pradeep does and I hope that I wasn't stepping on his toes. It is one thing to present an indicator, it is quite another thing to use that indicator to make money in the market. Pradeep knows how to use his tools and that is why people pay him money for his advice. With that said, I want to respond to a comment asking about the previous post.
The indicator I presented is really quite simple. All one needs to do is calculate the percent change of the closing price from a high or low of a given period. One then counts how many stocks in a given index are above or below a given threshold. The final indicator is constructed by subtracting the percentage of stocks below the threshold from the percentage of stocks above the threshold. What's cool about the indicator is that stocks in a consolidation do not contribute.
Below, I use Terra Nitrogen (TNH) as an example. The first chart shows the 30 day Donchian channels (30 day highs and lows) and also shows the percent above the low and percent off of the high. In the previous post, I used a threshold of 15% in order to determine if the stock should be counted or not. If TNH was included in our hypothetical index, it would contribute to both the up count and the down. Since the final result of the indicator takes the difference between the up and down counts, TNH would cancel out and not contribute to either direction of the indicator.
The next two charts use longer time frames and greater thresholds. The 50 day high/low uses a 25% threshold. For the 80 day high/low I used the 40% threshold. Both time frames had TNH contributing to the up count, but not to the down count. Therefore, TNH would help contribute to the health of any index it was included in.
All I did in the previous post was to repeat these calculations for every stock in the Russell 1000 and the Nasdaq 100. Blocks 2.0 and Blocks 3.0 uses a very simple interface that makes such calculations very easy.
Posted by Paul Stiles at 2/09/2008 10:15:00 PM
Friday, February 08, 2008
I am constantly searching for new ways to help me visualize the health of the market. I recently posted about my Combo MACD indicator and found it helpful in identifying points of price exhaustion.
Today I'm going to present an indicator that is inspired by the "Market Monitor" methods of Pradeep Bonde at stockbee.blogspot.com. I don't know exactly how Pradeep uses his method. All I know is that it is based on counting the number of stocks that are a certain percentage above or below the recent low or high.
The indicator I show below was calculated by finding the percentage of stocks that are 15% above their lowest level in the last thirty days and then subtract that value from the percentage of stocks 15% below their highest level in the last thirty days. The result is a measure of the strength of that index. A high number means that there are more stocks going up than going down and vice versa for a low number. I also show the same indicator using using higher percentage moves over longer time periods and also using the weekly bars instead of the daily.
The first chart is that of the Russell 1000. I always like to focus on the triple bottom that ended the great bear market of 2000-2002. Look how the strength of the market increased with each successive low and also notice how powerful the move up was after the third bottom. What I find interesting about today's market is that we are very near the extreme levels of 2002 and we have yet to see a large counter-trend bounce. We are also testing the recent lows without an increase in the negative readings of the indicator.
The chart and market strength indicator of the Nasdaq 100 is given below. Notice how we hit even greater extremes that rival those of the 2002 lows. Is this the end of a bear market or just the beginning? I'm not sure but either way, I'm playing for a bounce in the short term.
Posted by Paul Stiles at 2/08/2008 02:33:00 PM
Posted by Paul Stiles at 2/08/2008 12:22:00 AM
Wednesday, February 06, 2008
Here is a Bloomberg Headline: U.S. Stocks Retreat After Crude Oil Prices Drop, Macy's Cuts Its Forecast
I know the writers need to say something, but I kind of get tired of this. Why does oil have to take the blame everytime the market goes down? Stocks decline on higher oil? Stocks decline on lower oil?
For once I'd like to see the following headline.
US Stocks Retreat for No Good Reason.
Posted by Paul Stiles at 2/06/2008 07:44:00 PM
Tuesday, February 05, 2008
One of the reasons why I put together the Combo MACD indicator was so I could compare individual stocks and to quickly judge the strength of each. It also allows me gauge the overall strength of the market by calculating how many stocks are weak or strong.
Below I show the S&P 500 and Nasdaq 100 and their corresponding Combo MACD, which I'm not too interested in. What I show at the bottom are the percentages of stocks in those indexes that are either above the value of 2, which I consider strong (green), and the percentage of stocks that are below 0, which I consider weak (red). What I find interesting is that we seem to be an extreme level of weakness right now. As you can see, we are at levels not seen since the market lows of 2002.
While I see no individual stocks to buy right now, I am picking up some ETFs on this weakness.
Posted by Paul Stiles at 2/05/2008 10:44:00 PM
Monday, February 04, 2008
Posted by Paul Stiles at 2/04/2008 02:29:00 PM
Thursday, January 31, 2008
Nice endorsement from the most respected living Fed Chairman. A man who fought and won the battle over inflation in the 70's.
Democratic presidential candidate Barack Obama won the endorsement of former Federal Reserve Chairman Paul Volcker.
``It is only Barack Obama, in his person, in his ideas, in his ability to understand and to articulate both our needs and our hopes that provide the potential for strong and fresh leadership,'' Volcker said in an e-mailed statement today.
Obama, 46, an Illinois senator, is locked in a tight race with New York Senator Hillary Clinton for the Democratic nomination. The two will meet head-to-head in more than 20 state primaries and caucuses on Feb. 5 after yesterday's withdrawal of former North Carolina Senator John Edwards from the race.
``This is a high-profile endorsement that is likely to strengthen Obama's credibility with respect to economic issues,'' said Costas Panagopoulos, director of the elections and campaign management program at Fordham University in New York. ``Given the growing importance of the economy as a top issue for voters, the Volcker endorsement can be very helpful.''
Paul Volcker, Former Fed Chairman, Endorses Obama
Posted by Paul Stiles at 1/31/2008 05:55:00 PM
Every once and a while I come across something so stupid/crazy that I have to do a little research just to prove to myself that my intuition is still sound. Recently, I read something very stupid/crazy while visiting The Big Picture. (Barry Ritholtz pointed out a Bloomberg story about Barton Biggs' new book).
The book, "Wealth, War and Wisdom", tries to argue for the wisdom of crowds. How is this done? Here is a segment of the article.
The ``wisdom'' in the alliterative title refers to the spooky way markets can foreshadow the future. Biggs became fascinated with this phenomenon after discovering by chance that equity markets sensed major turning points in the war.
The British stock market bottomed out in late June 1940 and started rising again before the truly grim days of the Battle of Britain in July to October, when the Germans were splintering London with bombs and preparing to invade the U.K.
The Dow Jones Industrial Average plumbed ``an epic bottom'' in late April and early May of 1942, then began climbing well before the U.S. victory in the Battle of Midway in June turned the tide against the Japanese.
I could not believe such wild claims and suspected that Biggs had made the mistake of using "20/20 hindsight" and a poor understanding of the way markets move to reach totally ridiculous conclusions. Ok, there is my hypothesis. What does history say?
Below I have the weekly chart of the Dow 30 during World War II. Let's follow the time line of events. First you have the invasion of Poland. Due to a treaty, Britain and France respond with a declaration war, but neither want to fight and we enter the "Phony War" period. It looks like the market doesn't believe that a full-scale war will be fought as the Dow just meanders sideways (So much for the wisdom of crowds here). What happens next is the surprise invasion of France, which is promptly followed by a massive sell-off on huge volume.
This is the point where some understanding of how markets move is required. The most important fact is that markets never go up forever and they never go down forever (quote of Tom O'Brien). The reason why is quite simple. There are only a finite amount of shares and a finite amount of money out there. This fact is reflected in the volumes. When volume dries up at tops there is no more money to buy, when it dries up at bottoms, there are no shares to sell. During fast and furious sell-offs the market can quickly exhaust the amount of shares and bottoms are reached in a short period of time.
Ok, back to the chart. Look at the period after the invasion of France. The volume quickly dries up (selling exhaustion), resulting in bounce. So yes the market rose during the Battle of Britain, but this was merely a counter-trend bounce on light volume back up to the 50 period moving average. More selling would come, especially since the world's future looked very bleak.
The next big event was Pearl Harbor, resulting in another huge sell-off as America entered the war. All through the early part of 1942, while America struggled to learn how to fight in Africa and the Pacific, the market continued to fall on ever decreasing volume. Just like the markets always do, it started a counter-trend bounce when things look the darkest, this time just weeks before the decisive Battle of Midway. This was an obvious turning point of the war in the Pacific and gradually the markets began to gain confidence.
The funny thing is, the volumes, and thus crowds, do not significantly increase until months after the Battle of Midway. So much for the "wisdom of crowds". Moreover, the "epic" bottom can only be defined after several years of perspective, well past the point where the outcome of World War II was in doubt. Just because there was an exhaustion in selling pressure and a counter-trend bounce just weeks before Midway does not mean that the markets predicted the war's outcome.
It almost seems silly to point all of this stuff out because it is so obvious. It looks like Biggs was fooled by randomness.
One last thing, Biggs says that the markets "then began climbing well before the U.S. victory in the Battle of Midway in June turned the tide against the Japanese. " I really don't think one month or 20 trading days can be considered "well before" an event, especially when Biggs is defining it as a multi-year bottom. What a joke.
Posted by Paul Stiles at 1/31/2008 04:02:00 PM
Here is my current thesis. The selling is done and the bad news is already baked into the market. It will take some time for the leaders to emerge, but buying index funds and market ETFs is a good strategy right now. Be ready, because when those new leaders emerge some serious money will be made.
Here is a great quote from Tom O'Brien during his conversation with Ken Shrieve of Investors Business Daily.
"Its Armageddon everywhere, but we'll see if the market cares about Armageddon at these lows."
Posted by Paul Stiles at 1/31/2008 10:09:00 AM
Wednesday, January 30, 2008
Monday, January 28, 2008
"The bullhorns are out!"
These are the words of Tom O'Brien, a man who has been bearish since March 2007. What was funny is that the day before he flipped bullish he sounded about as grim as I have ever heard.
Tom is not only looking for a Dow 15,000, but he also predicts that Ben Bernanke will trade in his helicopter for a fleet of B-52's to drop cash.
Posted by Paul Stiles at 1/28/2008 09:23:00 PM
Sunday, January 27, 2008
I have been watching the meteoric rise of bond prices and have been looking for a spot to get in on the short side. The 20 year bond ETF, TLT, has finished a TD Sequential sell signal and recent price action has indicated that we are at some serious resistance. That resistance is much clearer in the long term chart below.
I would honor a stop loss if the price closes above 97.05.
By now you have probably seen this guy. He was long 10 Russell 2K contracts into the MLK weekend. Here is a pretty funny remix of his own video post. I guess he sold for a 31K loss just minutes before the Fed emergency rate cut. 31K isn't all that much, but it was obviously too much for him.
Here is his blog. http://highprobability.blogspot.com/
The dude in the video is getting tired of all of the attention and it reminded me of this REM vid.
Posted by Paul Stiles at 1/27/2008 03:09:00 PM
Congratulations Barack Obama and South Carolina. I was absolutely convinced that, while disgusting and shameful, the Clinton's tactics would prevail. Such negativity just always seems to work (especially in South Carolina) and this time it backfired. Thank God.
Who would have thought that the state that instigated the Civil War would be the state that restored my faith in American democracy.
The bottom line: I now consider myself a former Bill Clinton fan and will either vote for the Republican candidate or not vote at all if Hillary Clinton wins. Lets hope it doesn't come to that.
If you happen to be undecided about which candidate to vote for on February 5th, just take a look at the breakdown of Obama's and Clinton's constituency. I don't know about you but, if you take out the gender difference, I wouldn't want to be grouped together with Hillary Clinton's voters.
The contest from now on, Layman said, will be "a battle between distinct and fairly evenly-matched constituencies....with Obama doing better among blacks, men, younger voters, better-educated people, and independents (in open primary states), and Clinton doing better among whites, women, older voters, lower income and less-well-educated voters, and staunch Democrats." The results he said, are likely to "be just as confused on the night of Feb. 5 as they are right now."
No wonder why Bill's efforts to pin Obama's as "the black candidate" failed. All of the ignorant bigots were already voting for Hillary.
Source: This Now Becomes A Real Delegate Fight
Posted by Paul Stiles at 1/27/2008 12:52:00 AM
Thursday, January 24, 2008
Two days up does not make a new bull market. We need to watch for an IBD style follow-through day and watch for breakouts from sound bases. This market needs to prove itself so don't get too comfortable.
This doesn't mean that it is time relax, however. Keep a look out for new leaders and stay away from broken down former leaders. Take for example the two charts below. Chipotle (CMG) has held up reasonably well and looks to be forming a nice base.
Flotek Industries (FTK) is a different story. I know this company very well as I owned it way back in June 2006 and sold around February 2007 (Yes it was painful watching the run that followed). I had to laugh though when I read that they blamed their recent earnings warning on "bad weather". That is what they said just before that big dip in 2006. It looks like the market will once again punish FTK severely. This is going to take a long time to recover (probably over a year) but I wouldn't be surprised to see it hit 55 again. Flotek went too far and too fast and I think the management started to believe their own hype for a little bit.
Wednesday, January 23, 2008
Posted by Paul Stiles at 1/23/2008 04:07:00 PM
Tuesday, January 22, 2008
I just talked to my Mother. I've been advising her on an exit strategy for her long positions. During the conversation she mentioned that she was surprised by the emergency rate cut today and noted that "wow, things must be really bad".
Like a majority of Americans, the reality of the credit crunch hasn't penetrated into my Mom's everyday life. So it seems that the Fed's cut, while easing Wall Street's fears, has just given Main Street something else to worry about (as if the falling price on their home wasn't enough).
Goodbye American consumer. It was a good run.
Mark Hulbert talks about this unintended consequence in this interview.
Posted by Paul Stiles at 1/22/2008 11:22:00 PM
When TD Sequentials are completed, a break below their stop loss points are usually a very bad sign. One thing that I have observed (and posted about) is that a retest of the breakdown point usually follows, giving one a second chance to get out. The retest can also give one a chance to get short that equity.
One of my favorite things to do in technical analysis is to use several techniques to arrive at the same conclusion. As the charts of MGM show, both a retest of the TD Sequential breakdown and a return to confluence lines up at almost the exact same place. (see previous post on confluence)
If we bounce back up to the 80 price point, use 84 as a stop loss for a short entry.
Looking for a fabulous short? Again, we can use confluence to spot low risk entry levels. Be patient and wait for the XLF to climb back up to 28.80 level and then look for a rejection of price levels. Look how nicely confluence worked back in early December.
If you really want some action, buy the SKF, which is the 200% inverse of the financials.
So I was watching the TV this morning when Helicopter Ben announced the rate cut. First off, considering all of the crash talk out there, I was not surprised. After about 10 minutes of letting it sink in, I realized what an lame move this was. I would have preferred a climactic sell-off and complete wash-out. The Fed could have kept their finger on the trigger and announced a 75 basis point cut if things got out of control.
Oh well, easy for me to say.
All this means is that I will short this market at the lower levels of confluence as we have many more weak hands than we would have had if a full capitulation took place.
Posted by Paul Stiles at 1/22/2008 04:14:00 PM
Monday, January 21, 2008
In every chart we are already into the 1:1 expansion point, which means that the next level will be the 1:1.618 level. The areas are shaded in grey. If we hit those levels on some panic type selling and bounce, that will be a good sign. If we go down to the low end of the shaded areas and stall, we are probably building cause to break below them. That will not be good for anyone (except for any greedy/piggish bears out there).
The Line in the Sand:
S&P 500: 1248.53
DOW 30: 11395.16
Nasdaq 100: 1728.54
IWM (Rus 2000): 60.59
Posted by Paul Stiles at 1/21/2008 09:22:00 PM
Well first of all, if you are not short here, you should by no means get short now. You missed your chance on this leg. The good news is that, if this is a serious bear market, you will have many opportunities to get short again.
One of the best tools that I have found to pinpoint entry levels for short positions is Fibonacci confluence. The method is pretty simple and projects both short entry points and stop loss levels.
The charts below show three separate short entries predicted during the bear market of 2000-2002. Basically, one takes the Fibonacci retracement levels of two separate trends and look for their overlap, or confluence. See how nicely all three retracements stopped when they hit these levels. The uppermost retracement level acts as a stop loss. Some other examples can be found here.
Patience is the key here and don't forget to stay disciplined.