Is The NASDAQ Trying To Put In A Bottom?

Trading has been very choppy over the past few weeks as the market decides which way it will go next. Trying to trade the stock market right now can be extremely frustrating and costly as it's very easy to find yourself on the wrong side of this market which is why I am on the sidelines right now.

Even though I don't have a position in the market that doesn't mean I'm not doing my homework and putting together a game plan. Here is my opinion as to what I am looking for and what I see taking place in the NASDAQ.

Above is a daily chart of the NASDAQ 100 (NDX). You'll notice that there is a 1-2-3 formation that is beginning to develop which could mean the market is trying to put in a bottom. The 1-2-3 formation will be confirmed ONLY if point 2 is taken out. That means prices must rally ABOVE point 2 for this formation to be confirmed.

In the chart below we have a weekly chart of the NASDAQ which gives us a longer term view of the market. As I pointed out last week, many of the stock indices formed weekly bullish engulfment patterns which happens to be one of my favorite patterns to trade especially when COMBINED with other indicators.

So now we have a weekly bullish engulfment pattern COMBINED with a daily bullish 1-2-3 formation. In my opinion we are beginning to see the pieces of the puzzle come together which "suggests" that the NASDAQ might be in the process of putting in a bottom.

Does this mean we all should run out Monday morning and buy stocks on the open? Of course not! What it does mean is that I will not touch this market on the long side until I see the NASDAQ move above point 2 which is where I'd consider going long. Until then I will wait patiently for the next trade. Once again this is just my opinion I am sharing as to what I am anticipation and how I will react if things unfold the way I see it. As always, we'll see what happens.

Safe Investing - Does It Exist?

Making money in the market is the goal of every trader and investor but is there such a thing as safe investing? Is it possible to speculate with very little risk involved? The answer to that question has to do with the amount of risk a person is willing to expose their money to.

If safe investing is what you desire, you may want to consider a money market account which is guaranteed by the government to retain its value. The downside to such an investment is that there will not be any large gains like you may have experienced in the stock market. For some people money market accounts are the safe investment they are looking for even though the returns are rather small compared to other forms of investing.

Another way of safely investing your money is putting your funds into Certificates of Deposit which will guarantee an interest rate return on your money and is also backed by the government. Just like money market accounts, CDs have low risk and the returns will be low as well. If safe investing is what you are after, then CDs and money market accounts might be just right for you.

On the flip side of safe investing would be to speculate in the futures markets which is extremely risky due to the enormous amount of leverage that is available. The returns on futures trading can be substantial but at the same time so is the risk. Futures trading involves markets such as grains, currencies, precious metals, stock indices and interest rates. I personally prefer to trade these markets using ETFs because it allows me to speculate in various markets around the globe with less leverage which means less risk.

The most popular form of investing is the stock market which can produce spectacular returns but is this considered safe investing? I guess the answer depends on who you ask. There are some methods of trading stocks that have very low risk such as "The Dogs Of The Dow" which is a popular strategy that makes money over time but once again there is risk even though it may be low. Some investors love to play penny stocks with the hopes of multiplying their money rapidly. The problem with this method is that it can be hit or miss. Either you hit a home run or you strike out. If safe investing is what you are looking for, then be sure to stay away from speculating in penny stocks!

In my opinion the best way to safely invest your money in the stock market is to diversify effectively and to always use proper money management. When I say diversify, I don't mean run out and buy GOOG and BIDU which are two stocks that have a high correlation with each other. Diversification in my opinion means placing your money in stocks or investments which move somewhat independently to the overall stock market. Once again, ETFS are a great way to diversify and participate in various markets such as stock indices, gold, oil, grains, currencies etc.

The last thing I'd like to say about safe investing is to always use some form of money management which in my opinion is critical to your success as an investor or speculator. If you are not managing your money correctly I can guarantee at some point you will blow out your account with a massive draw down which will be devastating to your ego, wealth and confidence. I highly recommend educating yourself on various ways to apply money management principles to your trading. I know it's boring but nothing can be more important than learning how to manage your funds and how much risk to place on the very next trade.

The thing to remember about safe investing is that there is no quick way to make your fortune. It takes hard work and dedication to not only learning about the markets but learning about ourselves as well. Find a proven method or approach to investing that you are capable of trading, remember to properly diversify and use money management and I'm sure over time you will find much success!

Stock Market Trading Method

I'd like to share with all of you a method or an approach I've been using to trade the stock market on an intermediate term level. I know there are many people out there claiming to have the holy grail for trading stocks but in my opinion those methods never hold up in real-time trading. What I'd like to do is present a method that is very simple and will keep you on the right side of the stock market around 75% of the time. Let's begin!

The first thing you want to do is identify the trend. Everyone has their own favorite method for determining what the trend is and I'm no exception. I prefer to use simple moving averages based on closing prices. When it comes to trading the stock market, I found success using the 30 and 60 week simple moving averages. If the 30 average is above the 60, the trend is up. If the 30 average crosses below the 60 average the trend s now down. I am not using the averages to trade or time the stock market, I am using them to determine the trend and noting else.

OK, now that we know how to identify the trend we now need to be able to time the stock market for entry. If you've been a reader of this blog, you will know one of my favorite tools for timing into trades is the stochastic oscillator. If the trend is up in the stock market based on the 30 average moving above the 60, I will only look to buy when the stochastics are oversold (below buy line) and have turned back up. If the trend is down I will only look to short when the oscillator is overbought (above sell line) and has turned back down.

So now we have a way of determining the trend in the stock market as well as a way to time into trades. By combining moving averages with the stochastic oscillator, you will increase your odds of finding winning trades.

Over the last 11 years this approach has had 17 trades, 13 were winners and 4 trades would have lost money. This makes the accuracy of profitable trades to be around 76% which is very good. Keep in mind these are not small profitable moves but large winning trades as can be seen on the above chart.

If you were expecting to find the holy grail in this post, then I'm sorry to have disappointed you. On the other hand if you follow this simple system and combine it with money management, I think you will greatly shift the odds in your favor and will find much success trading the stock market.

Oil Stocks

Oil stocks continue to move higher although it was mixed today. Some of the big gainers at the open were SLB and DO.

The February contract for crude oil expired today which means we should all be watching the march contract because that's where all the open interest is. The symbol is CLH07.

If you look above you will see a daily chart of XLE.. Notice recently there appears to be a 3 1/2 month cycle of lows moving though the oil market. It seems like oil stocks have turned the corner confirming the cyclical low.

Keep in mind there is also a seasonal bias this time of year for oil stocks to rally which I commented about yesterday.

I've been bullish on oil stocks for the past 8 days and have been doing quite well buying them for day trades and catching the over night gaps. I've been writing about these stocks every day posting my observations and it seems I've been correct.. At least for now. I think a longer term move is developing and I am positioning myself for it.

In the lower panel is a ratio line of XLE compared to the S&P. If the line is rising that means oil stocks are outperforming the S&P, if the line is falling, oil stocks are under performing the S&P. Notice the ratio line has just started to move higher confirming that money is starting to move back into oil stocks. Let's hope it continues.

Why I Am Bullish On GOLD

If you look at the above 5 year weekly chart of gold, you will see that gold has been in an uptrend since 2001. Notice how the 60 week moving average has provided amazing support for this commodity. Every time gold gets down to the average it finds support and begins a powerful rally. This happend many times as you can see in the above chart.

If you look in the lower panel, you will see an oscillator called CCI... There's no magic to this oscillator but when you combine it with the trend it can help time significant buying opportunities. Notice every time the CCI oscillator gets below the buy line it coincided with a major buy point.

One thing I noticed about the gold and silver market is that it loves triangle formations. The breakouts from such a formation are usually very profitable. Gold is just beginning to breakout of such a formation now.

Ok..so what now...It looks like the ideal place to buy was back in October. Yes that was the ideal time to buy but if you missed it, I think this is a good spot right here. If you look at the lower chart you will see that Gold has just tested it's 50 day moving average which it held and now appears to be moving up. This is the first pullback to the average since it turned up. I think as long as gold holds this 50 average, you can stay long with a trailing stop right below the average. Both the weekly and daily trends are now moving up. I'll be playing gold from the long side on the next dip.