Thursday, August 15, 2013

Stochastics - 2 Ways To Make It More Reliable

The stochastics indicator is a popular oscillator that many technicians like to use when trading the markets but like with most indicators they have a poor track record. If used correctly, the stochastics indicator can actually be profitable by simply focusing on trading with the trend and trading at support and resistance.

Above we have a 60 min chart of QCOM with the stochastics oscillator in the lower panel using the standard default setting of 14 bars. The first thing I like to do when analyzing a chart is to determine the trend. Trading in the direction of the trend  puts the odds tremendously in your favor as the moves tend to be much larger in price and time than counter trend trades. There are many ways to determine the trend but I like to keep things simple and just look at the swing points and ask the question, is the market making higher highs and higher lows or lower highs and lower lows?  If the swings are moving higher then the trend is up and I will look to take buy signals only using the stochastics indicator.

The next piece of information that I look for is where is the support and resistance. If the trend is up as it is in the above chart example, I will look to buy when the stochastics are oversold and price is also testing a support area. Taking buy signals in the oscillator that also coincides with a support level can increase the likelihood of that buy signal working.

There are two forms of support that I look for on a chart. One is a test of a previous swing low and the other is when the market breaks out above resistance and now comes back to test that resistance area which should now act as support. Both examples of support can be seen in the above chart.

So there you have it, two simple ways to increase your odds of capturing a profitable trade using the stochastics indicator. Trade with the trend and trade when the stochastics are overbought/oversold and support/resistance is also being tested.

Russell2000 - Keeping it simple

As you can tell from my  uncluttered charts I like to keep things simple which I do believe is one of the keys in analyzing and trading any market successfully. Above is  2 hour chart of the Russell2000 index and as you can see there is a head and shoulders pattern which has formed over the last 3 weeks. My plan was to short this market on a move below the neckline but with today's gap down the risk was too high. I waited for a rally which never came as today's open was the high of the day.  Hey, that's trading!  The downside target for this head and shoulders pattern is about 1021 which means we should expect a little bit more selling in the next few days.

Monday, August 12, 2013

Gold Stocks - Seasonal And Technicals Suggest Higher Prices

Above is a daily chart of the gold stocks index symbol XAU and as you can see we have a head and shoulders bottoming formation taking place. Today we saw the XAU index trade above the neckline confirming the bullish pattern.

On a seasonal basis we usually see gold and gold stocks make their greatest gains during the months of August and September . When you combine a bullish seasonal with a bullish technical chart pattern such as we have now, I think the odds favor higher prices in the weeks to come in my opinion. As always. we'll see what happens!

Thursday, March 21, 2013

Time To Buy Gold

Above is a daily chart of gold (GLD) over the past 20 months and as you can see this market appears to be bouncing off of major support (green line). In the lower panel is the Gold/S&P ratio which has just broken its 4 month down trendline suggesting that money is now moving into gold and out of stocks.
You'll notice red vertical lines on the chart which are exactly the same distance apart. As you can see there seems to be a major change of sentiment that takes place in gold every 4 1/2 months. The reason I consider this significant is because gold appears to be reacting to this time cycle once again making a turning point precisely on schedule.
The next chart is a 4 year weekly chart of gold futures with the net position of the commercials which is the red line in the lower panel. The commercials are holding their largest long position in years which in my opinion is bullish. The last time the commercials held such a net long position was back in June of last year which triggered a nice 3 month rally. I think we are going to see a similar rally so this is definetly a market to keep an eye on. As always, lets see what happens!

Wednesday, February 20, 2013

NASDAQ - Trade Setup

If you read my previous post you would know that I see a short trade setting up in the NASDAQ.  I'd like to continue commenting on other bearish technical factors that are beginning to setup.

In the above weekly chart of the NASDAQ (QLD) you'll notice a "potential" head and shoulders top  that is beginning to take shape. This pattern is far from being confirmed but I wanted to post my observations now rather than after the fact which  would be useless.

There is also a very accurate cycle of 24 week highs which seems to be dominating the price action over the past 2 years. Approximately every 24 weeks (give or take a week) the NASDAQ has put in a significant top. We are 22 weeks from the previous high which is slightly early but close enough to get my attention.

Over the years I've seen similar setups such as this and the endiings have usually not been good for the bulls. The most recent example is the Yen.

Above is a weekly chart of the Yen. Notice the accurate cycle of tops ( down arrows) as well as the head and shoulders top formation.  Look familiar? By the way, the Yen has reached its measured objective.
As always anything can happen and it is quite possible the market may rally from here. I'd be kidding myself if I said the market has to go down. The purpose of this post is to simply show a trade that I see setting up...a road map if you will of what might take place as the pieces of the puzzle come together.  In my opinion I see the NASDAQ as being extremely vulnerable to a downside correction. As always, we'll see what happens.


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