S&P500 And Shanghai Index

Just a quick look at the Shanghai index and S&P500. As you can see both markets continue to move higher making new highs for the year.

Why I'll Be Watching The Bank Index Next Week

The stock market has been enjoying a rather sizeable eight week rally which began on March 6th. As long as the S&P continues to move higher there is no reason to fight the current uptrend but there is reason to be cautious.

Above is a chart of the Bank Index (BKX) and in the lower pane is the S&P500. Notice on this last move up in the S&P the bank index did not make a new high. This sets up what is known as a bearish divergence and could cause problems for the stock market.

Notice what happened at the beginning of the year when the S&P made a new high, the bank index did not make a new high and the stock market subsequently took a tumble. Well we are seeing the exact same scenario take place right now. The bank index is diverging from the rest of the market which means we may see stocks sell off.

I consider the bank index to be one of the leading groups for the overall direction of the stock market which adds that much more significance to the divergence we are currently seeing. If the banks begin to roll over next week, it is quite possible we will also see the S&P head south as well. Sell in May and go away? I'm not going anywhere, there may be a short trade knocking at my door!

Stocks Sell Off

If you read my post from last week, you would know that I was questioning the current stock market rally. What bothered me was that the leader of this stock market advance (NASDAQ) was displaying a very significant bearish divergence when compared to the advance decline line as can be seen in the above chart.

Stochastics are in the zone for a sell off and the NASDAQ has also broken its uptrend line. Looks like the market is going to get hit with some selling pressure over the days to come. You can read my original post from last week by clicking this link.

Stock Indices Get Pounded Down Over 4%

It was another ugly day in the market as all the major indices got hit with heavy selling taking the S&P, Dow and NASDAQ down over 4%. The industries that got hit the hardest today were the banks (BKX) down over 11%, Airlines (XAL) down 9,87% and the reits (DJR) down 7.03%.

Money moved into gold today as GLD rallied up over 3% bouncing off its 50 day moving average. Gold stocks (XAU) also did well today enjoying a 5.08% rally.

As the stock market moves lower I'm looking for signs of strength but so far all I see is a raging bear that is growing stronger while the bull is hibernating and no where to to be found.

Stock Indices Close Above Their 50 Day Moving Averages

The stock market was strong today with the Dow, NASDAQ and S&P all closing above their 50 day moving averages. You'll recall the other day I shorted the Q's and I'm using a very tight stop which is right above last week's high. The reason for such a tight protective stop is because this time of year there is a strong seasonal tendency for stocks to rally going into January and I do NOT want to be short if seasonal strength begins to show itself. We'll see if the buying continues tomorrow.

Stocks Tumble

If you've been reading my blog recently you would know that I've been on the sidelines for weeks but finally entered a position today on the short side. Just the other day I posted about how important it is to watch how the market reacts at the 50 day moving averages for the major indices. My strategy was to let the market tell me what to do once the 50 day averages were tested.

As you can see in the above chart the NASDAQ (as well as the S&P and Dow) were not able to penetrate their 50 day moving average and have all headed south. The stochastics are in the overbought zone and have crossed lower which was my signal to get short today. I chose to short the NASDAQ because the NASDAQ is weaker than the Dow and S&P as can be seen in the middle panel which is a ratio line of the NASDAQ vs S&P. You can see how the Q's made a higher high but the ratio line is making a lower high which indicates weakness in the NASDAQ.

The only problem I have with being short right now is that there is a strong seasonal tendency for stocks to rally going into January. Rather than talk myself out of making a trade, I shorted the NASDAQ (QQQQ) and my protective stop is right above last Tuesday's high. We'll see what happens.

Stock Indices Stall At The 50 Day Moving Average

The S&P, NASDAQ and Dow have all tested their 50 day moving averages and it appears that we are seeing some selling come into the stock market at these averages. I'd still like to see some more weakness come into this market before I turn bearish again. What I am basically looking for is a downturn in the stochastics followed by a trendline break on the 60 min chart. On the other hand if the stock market can post 2 closes above the 50 day moving average, that would indicate strength and I would expect to see the market rally a bit more.

Stock Market Investing - Is It For You?

What's wonderful about the stock market is that there are many different approaches and strategies an individual can implement if they wish to participate in the up and down gyrations of stock prices. Some people prefer to trade short-term with a holding time of 1 to 3 days while others are much more comfortable holding stocks for a period of months and even years. If owning stocks for such a long period of time is your style of trading, then you are considered to be an investor.

Stock market investing over the long-term is not as easy as it may seem. I remember years ago you could just buy stocks and hold them for many many months and they would continue to appreciate in value but in today's market that approach will not make you money. The characteristics of stocks have changed due to many factors which means we must change as well if our goal is to make money.

There are many stock market participants who prefer to day trade because they don't feel comfortable taking a position overnight due to the risk of a gap the next morning. By closing out all positions at the end of the day, a trader can eliminate their overnight risk exposure. This sounds great but be aware that day trading is very demanding because it requires a trader to be in front of their computer throughout the day. Commissions also play a factor so if you do decide to day trade, be sure you are paying low commissions. Even though I've day traded for many years, this style of trading was not for me and I found it to be quite challenging.

OK, so if stock market investing over the long-term is no longer a profitable strategy and day trading is too demanding, what's a trader to do? Well for me personally I like to swing trade which basically means I am holding stocks for 2 to 5days on average. This style of trading is what I am comfortable with and fits my personality. What I like about swing trading is that I am able to find a few good setups every month and yet not have to be glued to my computer screen on a daily basis. Swing trading is also slower paced than day trading which means I have more time to plan my trades as well as scan for new opportunities.

As traders we are all different and what may be good for one person may not necessarily be good for another. Stock market investing that is geared towards the buy and hold strategy will not serve a trader well in the current trading environment. Whether a person chooses to day trade or swing trade is of course up to the individual. The important thing to keep in mind is to find a method that gives you an edge and be consistent in the application of your chosen methodology and I'm sure you will find success.

Stock Market - Continues To Be A Guessing Game

Last week stocks made new lows for the year but we are now seeing some of those fresh shorts get squeezed as the indices head for a test of their 50 day moving average. I continue to remain on the sidelines because in my opinion the market right now is a guessing game where the odds are against us so why trade?

Stocks Head Lower

The stock market was down again today negating the potential 1-2-3 formation that I posted about the other day. I continue to have no position in this market and I will continue to wait patiently for some kind of setup to present itself where the risk/reward is favorable.

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.

Stock Market- Which Way Will It Go?

Stocks were down again today with the Dow Jones Industrials down almost 5%. It's a little difficult to determine which way the stock market is going to go from here especially ahead of the unemployment number which will be released tomorrow morning.

If you recall the price action from last week we saw all the major indices form weekly bullish engulfments on good volume but now we are seeing a pullback within last week's rally. I think a move back above this week's high will trigger a new leg up for stocks however a move below the trendline (see above chart) will most likely take the market back down to test the recent lows. Basically I'm using the trendline and this week's high as pivotal areas for me to enter the market. Until then, I'm staying of the market and will wait for a clearer picture to develop.

Stock Market Continues To Make Lower Highs

As you know I am bearish on the stock market and if you look at the above chart you will see why I am looking for shorting opportunities. You'll notice in the above chart of the S&P500 that the market continues to make lower highs which indicates to me that the bears are in control. If the bears are in control of this market then we should only be looking to play from the short side until proven otherwise.

What I find interesting about the above chart is that the market rallies for one or two days and then heads back down again. Having said that, I think we'll start to see stocks move lower either tomorrow or the day after. Sellers seem to come into this market after 2 day rallies and we've seen this pattern take place repeatedly since September. I'm bearish and will continue to play from the short side.

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!

Get Ready For A Test Of The 2002 Stock Market Low!

Stocks sold off again today with the Dow Jones Industrials down 679 points making a 5year low. If you look at the above monthly chart of the S&P500, you'll notice that this month's range is the largest MONTHLY range in at least 10 years and we are only 9 days into the month! That gives you an idea of how fast this market is moving.

One thing I've noticed about markets over the years is that they tend to test significant levels of support and resistance. For example the 2002 to 2007 bull market ended on a test of the march 2000 high. If you look at where we are now you will notice that the S&P is about 125 handles away from the 2002 low. In my opinion I think we will see those lows from 2002 tested especially since I am bearish due to the 4-year cycle in the stock market which forecasts lower prices going into 2010!

The Selling Continues In The Stock Market

The stock market got hit again today with another wave of selling as money continues to leave in a big way. The Dow was down over 500 points but it was the NASDAQ that got hit the hardest down over 6%.

If you look at the above weekly chart of the Q's you'll notice that the market is gaining downward momentum over the last few weeks. The NASDAQ is approaching a minor support level from 2004 but it's going to take some work for this market to turn around. As of now I have no position in the stock market but am patiently waiting for a nice rally to short into.

What Is The 4-Year Cycle In The Stock Market Telling Us?

I haven't heard much lately about the 4 year cycle in the stock market so I'd like to post my opinions about this well known and very accurate cycle.

For those of you who are not familiar with the 4 year cycle I suggest you get your hands on a long-term chart of the Dow Jones Industrials and observe the significant lows or buying opportunities that have taken place over the past 100 years. You'll notice that approximately every 4 years there is some kind of a low that takes place in the stock market and it's been very accurate over a long period of time.

In the above chart I show the S&P going back to about 1981. Notice how every 4 years the stock market makes a low which is followed by a rally. The first low on this chart took place in 1982... 4 years later in 1986 we have another cyclical low where the market had an explosive rally just prior to the 1987 crash. The next low in the cycle takes us to 1990 where we saw another buying opportunity. The same thing happened again in 1994, 1998, 2002 and 2006.

Based on this cycle, the next projected low for the stock market is due in 2010! This means stocks should trend lower going into the fall of 2010. I know it's an ugly forecast and many will disagree with me, but from a cyclical viewpoint I have to be looking for stocks to move lower to sideways over the next 2 years.

Does this mean I will only play the market from the short side for the next 2 years? Of course not! There will be opportunities on both sides of the market depending on which sectors you are trading. The point I'm trying to bring out with the above chart is that the majority of stocks in my opinion will be under selling pressure until the 2010 cyclical low is established. Until then, I'd favor selling short into rallies.

Stock Market Continues To Slide

The stock market was down again today as investors unloaded stocks after the government reported a seven year high in jobless claims.

You'll notice in the above chart that the S&P500 is making new lows but on lighter volume than two weeks ago. I find it also interesting that the S&P is at the bottom of a very significant one year channel.

I think if you're short this market, you might want to tighten up your trailing stops to lock in some profits because it wouldn't surprise me to see a sharp bounce in the days to come. For those of you who are thinking of buying the market, I wouldn't do it! There's too much risk and there are a lot better trades out there than picking bottoms in a falling stock market.

Something Worth Reading

Brett over at TraderFeed has just written a wonderful post on hindsight bias and regret in trading. Definitely worth reading.

What Are Symmetrical Triangles

One of my favorite chart patterns to trade is the symmetrical triangle sometimes referred to as a coil. What I like about this particular pattern is that the moves out of such a formation are usually fast and furious! A symmetrical triangle is a converging pattern which usually takes place during a time of indecision and is thought to be a continuation pattern within a trend.

In order to identify a symmetrical triangle a market must have at least 4 points so that an upper and lower trendline can be drawn. These two trendlines will converge forming the triangle. Basically the pattern will have descending highs and ascending lows and will look like this.



Notice in the above chart how the two trendlines converge forming the very distinctive symmetrical triangle formation. Also notice in this particular example that there are 6 points that make up the pattern however at the very least only 4 points are required to qualify this formation as a symmetrical triangle.

You'll notice prior to the formation of the symmetrical triangle that the trend was up which means we should only be looking to take an upside breakout from the pattern. Some traders prefer to trade both sides of the triangle breakout but in my experience I've found counter trend breakouts to be unreliable. I'd rather keep the odds on my side by only trading in the direction of the trend which means in the above example we should only be looking to take an upside breakout.

One other helpful tip when trading the symmetrical triangle pattern is to only take breakouts that form prior to the apex of the triangle. The most reliable breakouts tend to take place two thirds of the way into the pattern and not at the apex. Breakouts that occur near the apex tend to be unreliable.

Entry should be when price moves outside of the symmetrical triangle. An upside target would be the widest part of the triangle added to the breakout point.

To make things easier I will post several charts which will give you a very clear understanding as to what a symmetrical triangle is and how to trade it.











For some of you who may be thinking that this is all hindsight, I'd like you to view an actual post I made on this blog last May regarding the symmetrical triangle in the mortgage financial stocks (MFX). Below is a chart of what took place AFTER I made my post. To see the original post before the move happened you can simply click here.




I think you get the idea now as to what a symmetrical triangle looks like and how to trade it. This formation will appear on all time frames and on any freely traded market in the world. Like anything else in trading, nothing works 100% of the time. By using money management and trading this pattern, I think a trader can do quite well in the market.