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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Chart Patterns: After the Buy
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 11/21/2017
23,591 160.50 0.7%
9,615 92.77 1.0%
758 2.01 0.3%
6,862 71.77 1.1%
2,599 16.89 0.7%
YTD
19.4%
6.3%
14.9%
27.5%
16.1%
Tom's Targets    Overview: 11/14/2017
23,700 or 22,800 by 12/01/2017
9,300 or 9,800 by 12/01/2017
800 or 750 by 12/01/2017
7,000 or 6,500 by 12/01/2017
2,625 or 2,540 by 12/01/2017

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

April 2010 Headlines


Archives


Thursday 4/29/10. Can Stops Hurt Trading Performance?

First off, I finished the 800 page book and submitted my report to the publisher. I'd tell you about it, but the authors might try to hunt me down.

I received a call yesterday (Wednesday) from Gabriel Wisdom, asking if I'd appear on his radio show two hours later. If you click on the link (then Archive/Podcasts), you can listen to the show. I'm on during the second half. It's probably my best interview, not because of my insightful answers, but because I wasn't all that nervous, and I didn't lose my voice! Yippee! The person that sounds like a woman, is me.

For the last 2 weeks or so, I've been playing around with scaling in and stop loss orders. I am using a test discussed by Howard Bandy in his Active Trader magazine article titled, "Scaling in as an entry technique," from the October 2009 issue. The figure below is a corrected one from the original post. It shows the average profit or loss per trade.

Picture of stop results

The chart shows my results for the test using stops. I'll build a web page discussing how I conducted the test and will stuff it into the research section of this site, but until then, let's just talk about the results.

The chart shows the profits or losses from trading a simple system. Along the bottom scale is the percentage for a trailing stop loss. It increases from 1% in one percentage point increments up to 60% and then jumps to 100%, which means buy-and-hold. Along the vertical axis is the average amount of money made or lost per trade.

If you just buy and hold onto the stock over the test period, you gain just under $15 per trade, on average. That corresponds to setting a stop 100% below the current price, and I show that on the chart at the right-most column.

Look what happens when you use a trailing stop! If you place a trailing stop closer than 36% below the current high price, you'll lose money. The closer the stop is to the current high, the more money you lose (from 35% to 8%, anyway).

Why? Because the stop takes you out of the most profitable trades. If you use a stop at all, regardless of the size of the stop, and you trade enough, you'll do worse than if you just buy and hold the position.

This is not a new finding. I discovered this when I tested volatility stops and others found this behavior long before I did.

What am I not telling you? First, using a stop will cut the draw down. Drawdown is the largest amount of money you stand to lose from an equity peak to trough. Second, stops aren't bad, you just have to know where to place them.

-- Thomas Bulkowski

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Monday 4/26/10. Market Monday: The Week Ahead

Picture of a mushroom

My Prediction

I think the markets will continue their recent uptrend...

For the next week or so, I will be busy reading/critiquing an 800 page book for my publisher. I'm already behind due to the volcano in Iceland (they tried shipping the manuscript from England, and it's still not arrived yet. I'm working on the electronic version. Thus, if it takes more effort than pushing a button for a blog entry, then I won't have time.

A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

Monday: Up 73.39 points.
Tuesday: Up 25.01 points.
Wednesday: Up 7.86 points.
Thursday: Up 9.37 points.
Friday: Up 69.99 points.

For the week...

The Dow industrials were up 185.62 points or 1.7%.
The Nasdaq composite was up 48.89 points or 2.0%.
The S&P 500 index was up 25.15 points or 2.1%.

Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

ReportTimeA-F
Rating
Description
Consumer confidence10:00 TB-Surveys 5,000 households for trends.
Crude inventories10:30 W?My guess: Measures oil inventory.
FOMC Rate decision2:15 W?The Federal Reserves reports on interest rate changes.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Gross domestic product8:30 FBMeasures economic activity; GDP deflator measures inflation.
Chicago purchasing managers index9:45 FBMonitors regional manufacturing activity.

Options Expiration

No options expire this week.

Swing and Position Traders: Chart Pattern Indicator

As of 04/23/2010, the CPI had:

1 bearish patterns,
35 bullish patterns,
160 patterns waiting for breakout.
The CPI signal is 97.2%, which is bullish (>= 65%).

The chart pattern indicator is bullish with 2 of 3 full triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

Buy-and-Hold: 12-Month SMA

This indicator warns of an index moving into or out of a bear market. It's based on a 12-month simple moving average of monthly closing prices, so it only changes monthly. See 12-Month Moving Average for more details.
Dow Industrials: bullish.
Nasdaq Composite: bullish.
S&P 500 Index: bullish.
Dow Transports: bullish.
Dow Utilities: bullish.

Other

Earnings season is either underway or should be starting soon. The sessions could be more volatile.

The following industries, of 52 that I follow, were the best (1) and worst (52) performing.

This WeekLast Week
1. Shoe1. Shoe
2. Furn/Home Furnishings2. Toiletries/Cosmetics
3. Retail Building Supply3. Semiconductor
4. Retail (Special Lines)4. Furn/Home Furnishings
5. Air Transport5. Retail Building Supply
48. Electric Utility (East)48. Oilfield Svcs/Equipment
49. Petroleum (Integrated)49. Cement and Aggregates
50. Securities Brokerage50. Securities Brokerage
51. Alternate Energy51. Alternate Energy
52. Short ETFs52. Short ETFs

-- Thomas Bulkowski

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Thursday 4/22/10. Weinstein Stops

The ideal stop location

At least one of you wrote an email recently about setting stops. Here's a method that Stan Weinstein recommends in his book, Stan Weinstein's Secrets For Profiting in Bull and Bear Markets.

The chart on the right shows ideal conditions for his method. The red line is a 30-week (150-day) simple moving average and the black line represents price. Assume you own the stock depicted. Price rises to a new high at A in inset 1 and then drops to B. When price rises toward the high at C, place a stop at B. The B price is shown by the small horizontal green line to the left of B. It's below the moving average and it represents the stop price location. The small vertical green line shows the minor low at which the stop should be positioned under.

Trail the stop upward as price rises following these rules:

  • Keep the stop below the lower of the 30-week simple moving average or the minor low, and
  • Place the stop only when price approaches the value of the prior high (when price approaches C, which is near the value of the prior high, A, then place a stop at B).

Inset 2 shows another variation. This time, price drops below the moving average at E. You want to place a stop below the minor low (at E) only as price climbs up to F. He also recommends placing the stop below whole dollar amounts, like 10, 11, 12 and half dollars: 0.50. (I place stops below any number ending in 0). Thus, if the stop you're about to place is at 11.03, place it at 10.93 (below 11.00). Those that buy the stock will set a buy price of 11.00. That buying could stop a drop in the stock, so to avoid getting the stop hit, place it below support.

Points F and C don't have to be peaks, like that shown in the figure. They are just prices that are near the old high of D and A, respectively. When price rises to the value of the old high, then and only then do you move the stop to the new price (always raising it, never lowering it). Keep the stop below the minor low and below the 30-week simple moving average.

Ideal example of the four stages for price movement

Those of you familiar with Stan's book will know what I mean by stages.

The figure to the right shows how price develops over time. The figure is from a research study on his method I conducted. Anyway, when price enters stage 3, you'll want to tighten the stop. That's what inset 3 shows in the first figure. When price goes horizontal in stage 3 and you see the moving average flatten out or trend lower, then tighten up the stop. Why? Because the distance from the stock and the moving average directly below the minor low can be a large percentage decline. That "give back" will hurt while you wait for price to reach the stop. Instead, when it looks as if price is going to drop out of stage 3 and move into stage 4, then tighten up the stop.

I've found that the flattening of the moving average comes a bit too late to be of much use, but if you see the moving average trending lower and you haven't sold by then, then do so.

A chart of Teradyne showing stop locations

Here's an example. Full disclosure: I currently own the stock and bought it as shown on the figure. The figure is a weekly chart showing the moving average in black as a thin line.

I bought the stock as it broke out of congestion. Weinstein recommends placing the initial stop 8%, 10% or whatever below the purchase price. He's not a big fan of percentages because each chart should dictate where to place the stop, according to him. I show the initial stop placement as a red dot positioned slightly below a prior minor low (the week before I bought).

Price climbed to a new high at B, dropped to D and when it approached the high at C, (that is, as price approached the old high at B), move the stop to below the minor low and below the 30-week moving average -- point D in this case.

I show other stop locations as price climbed. Each short horizontal line designates the stop price. All are below the moving average and they are quite a bit away from the stock, at least on a percentage basis. That's by design. You want to give the stock room to maneuver. Notice that in the last dot on the right, the stop is placed below the minor low, since the low is below the moving average. The stock has not entered stage 3 yet, so I continue to hold. I've doubled my money so far.

-- Thomas Bulkowski

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Tuesday 4/20/10. Tutorial Tuesday: Hikkake? What's That?

The ideal hikkake candlestick The ideal hikkake candlestick, with confirmation

Dan Chesler (CMT, CTA) discovered the hikkake candlestick, shown in the left figure, and popularized it in two magazine articles. Recently, he alerted me to the pattern, and I decided to take a look.

The bullish hikkake resembles a three inside down candle pattern but without the constraints. The bullish hikkake doesn't require a rising price trend nor is candle color important as they both are in the three inside down candlestick. Look for an inside day (lower high and higher low compared to the prior day) followed by a lower high and lower low. Candle color is not important for identification.

In theory, the hikkake is supposed to be a bullish candlestick, but it can act either as a reversal or continuation of an existing price trend. That's what I found, too. My numbers say the confirmed pattern is a continuation 52% of the time, with upward breakouts more than twice as likely to occur as downward ones (13,584 vs 6,416 samples). That shouldn't be a surprise because price is probably closer to the top of the confirmed candle than the bottom.

The bullish hikkake ranks 16th out of 104 candle types, where 1 has the highest frequency.

The best average move 10 days after price closed above the top of the highest high or below the lowest low in the 3-bar candlestick was 4.97% in a bear market after an upward breakout. That's short of the 6% or so that I like to see. That performance ranks 23rd where 1 is best out of 104 candles.

The figure on the right shows Dan's recommended configuration. Wait for price to confirm the candle pattern by rising above the top of the inside day, shown in the picture with a horizontal blue line, but it has to confirm the candle within 3 days.

Limited testing shows that if the very short term trend is downward leading to the confirmed hikkake candle, then performance improves.

The following table shows the performance as measured from the top or bottom of the 3-bar candle to the end of the trend.

Market, Breakout DirectionRising TrendFalling Trend
Bull market, upward breakout5.91%6.47%
Bear market, upward breakout6.75%8.58%
Bull market, down breakout4.60%4.37%
Bear market, down breakout7.24%8.67%

In all cases except for downward breakouts in a bull market, price trending down into the start of the hikkake results in improved performance. Also notice how well the pattern does in a bear market, regardless of the breakout direction.

For trading, you can place a buy stop a penny above the top of the inside day once the 3-bars appear. That will get you in at a good price. Once in the trade, a stop placed below the bottom of the hikkake would work well.

For more information on the hikkake, click on the link.

-- Thomas Bulkowski

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Monday 4/19/10. Market Monday: The Week Ahead

My Prediction

Picture of the S&P 500 on the daily scale.

I decided to move my prediction to the top of the page so y'all can find it easily. The other information is still there, below.

The chart shows the S&P 500 index on the weekly scale so I could show you the trendlines I've been looking at. The bottom trendline connects to two valleys and slopes upward. If you were to extend this to the left, it would slice right through the index, so it's not the ideal way to draw a trendline. I like to connect all valleys and this only connects the last two major turns.

Along the top is another trendline connecting a few peaks. Notice how it touches the current price. Friday was a big down day but it only dropped price back to where it was two days prior. Not a big worry, as far as I'm concerned.

The two up-sloping and converging trendlines have the shape of a rising wedge chart pattern, although I like to see more trendline touches than I show. Also notice how price has trended higher in a tight trading range since A. That worries me. It could mean that we are in for a higher volatility move. That's just a guess, but with earnings season beginning, things could get interesting.

My prediction for the coming weeks is shown in blue. The index may drop a bit, but I expect earnings to come in better than expected and that will power the indexes to higher ground. If I'm wrong, then look for the index to drop to the bottom trendline. If things become really bad, like Europe declaring bankruptcy, then the index will drop out of the rising wedge and try for 867, the price near the first trendline touch.

A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

Monday: Up 8.62 points. Treasury budget dropped more than expected.
Tuesday: Up 13.45 points. Export prices climbed, import prices dropped and the trade balance got worse.
Wednesday: Up 103.69 points. CPI met expectations and retail sales were higher than expected, but business inventories climbed.
Thursday: Up 21.46 points. Initial jobless claims were higher than expected, capacity utilization and industrial production dropped.
Friday: Down 125.91 points. Building permits and housing starts climbed but Dorothy found out she wasn't in Kansas anymore.

For the week...

The Dow industrials were up 21.31 points or 0.2%.
The Nasdaq composite was up 27.21 points or 1.1%.
The S&P 500 index was down 2.24 points or 0.2%.

Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

ReportTimeA-F
Rating
Description
Leading indicators10:00 MD-Summary of already known reports.
Crude inventories10:30 W?My guess: Measures oil inventory.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Producer price index8:30 ThB-Measures wholesale goods cost. An indication of future inflation.
Durable goods orders8:30 FBMeasures orders, shipments of goods with lifespans >3 years.
New home sales10:00 FC+Shows sales of single-family homes.

Options

No options expire this week except for VIX and RVX on Wednesday.

Picture of a worm.

Swing and Position Traders: Chart Pattern Indicator

On 04/16/2010, the chart pattern indicator (CPI) had:

34 bearish patterns,
8 bullish patterns,
195 patterns waiting for breakout.
The CPI signal is 19.0%, which is bearish (<= 35%).

The chart pattern indicator is bearish with 2 of 3 half triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

Buy-and-Hold: 12-Month SMA

This indicator warns of an index moving into or out of a bear market. It's based on a 12-month simple moving average of monthly closing prices, so it only changes monthly. See 12-Month Moving Average for more details.
Dow Industrials: bullish.
Nasdaq Composite: bullish.
S&P 500 Index: bullish.
Dow Transports: bullish.
Dow Utilities: bullish.

Other

Earnings season is either underway or should be starting soon. The sessions could be more volatile.

The following industries, of 52 that I follow, were the best (1) and worst (52) performing.

This WeekLast Week
1. Shoe1. Shoe
2. Toiletries/Cosmetics2. Furn/Home Furnishings
3. Semiconductor3. Semiconductor
4. Furn/Home Furnishings4. Toiletries/Cosmetics
5. Retail Building Supply5. Long ETFs
48. Oilfield Svcs/Equipment48. Electric Utility (East)
49. Cement and Aggregates49. Securities Brokerage
50. Securities Brokerage50. Cement and Aggregates
51. Alternate Energy51. Alternate Energy
52. Short ETFs52. Short ETFs

-- Thomas Bulkowski

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Thursday 4/15/10. Want to Make Money? Hold On!

Picture of my dog

I was going to discuss a trade I made but that can take me up to two hours to write, so I'll leave it for another time. Here's new research I just completed.

To make money, how long should you hold onto a stock? I'll give you the probabilities in a moment, but here's how I did it. I downloaded the daily, weekly, and monthly price data from yahoo finance and then went to work. The data ranges from January 3, 1950 to April 13, 2010. For the computation, I used overlapping periods. For one year, as an example, I determined whether price closed higher from April 1, 2010 to May 1, 2009. Then I used the next month, March 1, 2010 to April 1, 2009, and so on. I summed the number of up closes to the number of samples and found the percentage.

In other words, I counted the number of times price closed higher for each period. The table below shows what I found.


Period
Percentage
Up Closes

Period
Percentage
Up Closes
Daily53%5 Years83%
Weekly56%6 Years86%
Monthly59%7 Years90%
1 Year71%8 Years91%
2 Years79%9 Years92%
3 Years83%10 Years92%
4 Years84%  

For example, if you bought the S&P 500 index and sold it a day later, you would have a 53% chance of making money -- all else being equal. If you hold onto the index for a week, the probability of a gain rises to 56%. Hold for 5 years, and the probability rises to 83%.

If you are having problems making money in this market, then consider holding longer. Or just buy low and sell high.

-- Thomas Bulkowski

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Tuesday 4/13/10. Tutorial Tuesday: Relative Strength -- The Other Kind

There are several types of relative strength. First, there's Wilder's relative strength index (RSI), which is a popular indicator. Then, there are studies I conducted on relative strength of industries, where I compare the price performance of several industries to one another, and stocks, whereby a trader or investor selects the strongest performing stocks to buy. I recently completed research that compares the performance of a stock with the Standard & Poor's 500 index.

I used the closing price of a stock divided by the S&P index then I applied a 22-trading day (about a calendar month) simple moving average to smooth the relative strength line.

For the study, I looked at the slope of the line at three locations: the day before the start of the chart pattern, the day before the breakout, and a month after the breakout. I used 1,094 stocks with data stretching back as far as July 1991 and found 15,763 chart patterns. Not all stocks covered the entire period.

Here's what I found...

  • Select stocks with upward breakouts and falling relative strength before the chart pattern begins but rising on exit from the chart pattern.
  • A reversal in relative strength from rising to falling, or falling to rising, leads to the largest average decline after a downward chart pattern breakout.
  • After an upward breakout from a chart pattern, rising relative strength means good gains. Falling relative strength is bad news.
  • For downward breakouts, falling relative strength means larger losses.
  • The direction of relative strength is random after a breakout compared to before the chart pattern.

I emphasize the last bullet item. Don't expect relative strength to continue in the same direction after the breakout as it was before. If relative strength is rising leading to a chart pattern, there is a 49% chance that it will continue rising after the breakout. That's random.

If you want more details, then read the complete study.

-- Thomas Bulkowski

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Monday 4/12/10. Market Monday: The Week Ahead

Picture of a flower from my garden

A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

Monday: Up 46.48 points.
Tuesday: Down 3.56 points.
Wednesday: Down 72.47 points. Consumer credit dropped substantially more than market expected.
Thursday: Up 29.55 points. Initial jobless claims were up more than expected.
Friday: Up 70.28 points. Wholesale inventories climbed.

For the week...

The Dow industrials were up 70.28 points or 0.6%.
The Nasdaq composite was up 51.47 points or 2.1%.
The S&P 500 index was up 16.27 points or 1.4%.

Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

ReportTimeA-F
Rating
Description
Treasury budget2:00 MDTracks budget deficit. Important in April (tax filing).
International trade8:30 TC+Import/export prices, trade balance. US economy vs others.
Trade balance8:30 TC+Signals balance of exports & imports.
Consumer price index8:30 WB+Inflation report. Measures cost of goods and services.
Retail sales8:30 WA-Reports total retail sales (not services). Are people spending?
Business inventories10:00 WC-Reports manufacturing, wholesale, retail inventories.
Crude inventories10:30 W?My guess: Measures oil inventory.
FEDs Beige book2:00 W?Reports on economic conditions.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Capacity utilization9:15 ThB-Gauges economic activity, hints of inflation.
Industrial production9:15 ThB-Production of utilities, mines, and manufacturers.
Building permits8:30 FB-Measures building permits for new construction.
Housing starts8:30 FB-Number of homes beginning construction.

Options Expiration

The following is courtesy of The Options Industry Council.

OptionDate
A.M. settled index options cease trading.Thursday
Expiring equity, P.M. settled index options and treasury/interest rate options classes cease trading. Expiring cash-settled currency options cease trading at 12:00 P.M. EST.Friday
Equity, index, cash-settled currency and treasury/interest rate options expireSaturday

Many options expire this week, so traders will be looking to close out their positions ahead of that, and that suggests increased volatility (large daily price swings).

Swing and Position Trades: Chart Pattern Indicator

As of 04/09/2010, the CPI had:

2 bearish patterns,
31 bullish patterns,
341 patterns waiting for breakout.
The CPI signal is 93.9%, which is bullish (>= 65%).

The chart pattern indicator is bullish with 2 of 3 full triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

Buy-and-Hold: 12-Month SMA

This indicator warns of an index moving into or out of a bear market. It's based on a 12-month simple moving average of monthly closing prices, so it only changes monthly. See 12-Month Moving Average for more details.
Dow Industrials: bullish.
Nasdaq Composite: bullish.
S&P 500 Index: bullish.
Dow Transports: bullish.
Dow Utilities: bullish.

Other

Earnings season should be starting soon. The sessions could be more volatile.

The following industries, of 52 that I follow, were the best (1) and worst (52) performing.

This WeekLast Week
1. Shoe1. Shoe
2. Furn/Home Furnishings2. Coal
3. Semiconductor3. Furn/Home Furnishings
4. Toiletries/Cosmetics4. Toiletries/Cosmetics
5. Long ETFs5. Chemical (Specialty)
48. Electric Utility (East)48. Electric Utility (East)
49. Securities Brokerage49. Securities Brokerage
50. Cement and Aggregates50. Cement and Aggregates
51. Alternate Energy51. Alternate Energy
52. Short ETFs52. Short ETFs

My Prediction

Picture of the S and P 500 index on the daily scale.

I flipped my price targets for the indexes from bearish to bullish with the breakout to new highs of the indexes. I'm waiting for the Dow to show a definite move up before I adjust the target. See Tom's Targets near the top of this page for more details.

The chart shows the S&P 500 index on the daily scale. Like other indexes, it has broken out to new highs, suggesting more "up" to come.

If you view valleys A and B as an Eve & Adam double bottom, then when price closes above C, it confirms the chart pattern as a valid one. You can then use the measure rule to determine how far price is likely to move.

Bottom A is at 1029.38 and the high at C is at 1150.45, giving the pattern a height of 121.07. Adding that to C gives a target of 1271.52. It closed on Friday at 1194.37, so it has a few points to go to hit the target. Looking up the probability of the pattern reaching the target in my Encyclopedia of Chart Patterns, Second Edition, it says that price reaches the target 72% of the time. You can multiply the height (121.07) by 72% to get a closer target if you wish. That gives a target of 1237.62.

If you look on the longer scale than the one shown in the chart, you will be hard pressed to consider this a "bottom" since price rises leading into the pattern. Nevertheless, the measure rule does give some indication that price has a 72% probability of reaching 1271 and something north of 90% probability of reaching 1237. Information and calculations such as these are why many traders and investors find my books valuable.

This week, retail sales come out on Wednesday with B- rated reports released on Thursday and Friday. Thus, the last three trading days could be wild, especially since options expire. I don't know which way the reports will bend, so I am showing a choppy movement this week in the S&P.

-- Thomas Bulkowski

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Thursday 4/8/10. Time to Buy GoLD?

On my doorstep today, I found a box of books. Inside was the German translation of my Encyclopedia of Candlestick Charts, the US version of which appears on the left. If there is one thing true about Germans, it's this: They sure know how to sell books. I don't earn much money from them since the meager royalty rate is split into two and shared equally with the US publisher, but every penny helps.

This also gives me a shameless opportunity to plug my website operations. When you click on a picture of a book, it takes you to Amazon.com. If you then buy anything there, I collect a referral fee. Also, thanks to the 1% of you that click on an ad. If you see an ad that interests you, click on it and explore their products. When you click on an ad, I receive a referral fee, too. Both book and ad sales help defray the cost of running this website. Each December, I donate a portion of sales to charity when I play Secret Santa.

# # #

Daily chart of GLD, a gold etf.

I show a chart of the SPDR gold shares, GLD. According to yahoo finance,

The investment seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.

The chart shows a complex head-and-shoulders bottom chart pattern, with left shoulders marked as LS and right shoulders as RS. Those chart patterns breakout upward and confirm as a valid pattern when price closes above the neckline. That is a line connecting the two armpits and I show it as a slanting red line. As the chart shows, price gapped higher, confirming the chart pattern today (Wednesday).

The target is my guess where price might encounter overhead resistance. I am reminded of a Big W chart pattern, with its tall sides. In my view the reversal pattern of a Big W can be any chart pattern, including a complex head-and-shoulders bottom.

-- Thomas Bulkowski

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Tuesday 4/6/10. Tutorial Tuesday: Does April Close Higher?

Bar graph showing up totals for the S and P 500.

The above chart was taken from a new page in the Research section that I released a few days ago. It shows a bar chart in which I counted the number of times the S&P closed higher during each month since 1950.

For example, during that period, January showed price closing the month higher than where it closed the prior month 60% of the time. In April, it's even better at 68.3% of the time.

Based on this chart and this chart alone, the index suggests that after April, the price action get dicey. The up count totals drop for several months, until June, before recovering somewhat going into the worst month of the year: September. After that, investors and institutions tend to buy and each month sees more up closes going into the new year.

If you buy in late September and sell in late December, might that work as an investment play based on the chart? No.

A test of $10,000 invested in the S&P 500 index from 1951 to 2009 would value a buy-and-hold portfolio at $545,814.98 versus just $76,089.72 for the abbreviated holding pattern.

The link shows how the many times each index (Dow Industrials, Nasdaq and S&P) closed higher. I still think that September represents a wonderful buying opportunity for a short-term swing or position trade.

-- Thomas Bulkowski

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Monday 4/5/10. Market Monday: The Week Ahead

Picture of a butterfly hanging on a plant.

A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

Monday: Up 45.5 points. Personal income was slightly below expectations.
Tuesday: Up 11.56 points. Consumer confidence climbed.
Wednesday: Down 50.79 points. Factory orders increased.
Thursday: Up 70.44 points. Initial jobless claims were down but so was construction spending.
Friday: Holiday or other weird event! Non-farm payrolls dropped but average hours worked increased a touch.

For the week...

The Dow industrials were up 76.71 points or 0.7%.
The Nasdaq composite was up 7.45 points or 0.3%.
The S&P 500 index was up 11.51 points or 1.0%.

Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

ReportTimeA-F
Rating
Description
FOMC Minutes2:00 T?Minutes of the prior Federal Reserve meeting.
Crude inventories10:30 W?My guess: Measures oil inventory.
Consumer credit3:00 WD-Measures auto, credit card and other debt.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Wholesale inventories10:00 FD-Wholesale sales and inventory statistics.

No options expire this week.

CPI: Chart Pattern Indicator

As of 04/01/2010, the CPI had:

5 bearish patterns,
64 bullish patterns,
413 patterns waiting for breakout.
The CPI signal is 92.8%, which is bullish (>= 65%).

The chart pattern indicator is bullish with 2 of 3 full triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

Other

Earnings season is over but a new one will be starting soon.

The following industries, of 52 that I follow, were the best (1) and worst (52) performing.

This WeekLast Week
1. Shoe1. Shoe
2. Coal2. Toiletries/Cosmetics
3. Furn/Home Furnishings3. Coal
4. Toiletries/Cosmetics4. Furn/Home Furnishings
5. Chemical (Specialty)5. Internet
48. Electric Utility (East)48. Electric Utility (East)
49. Securities Brokerage49. Securities Brokerage
50. Cement and Aggregates50. Cement and Aggregates
51. Alternate Energy51. Alternate Energy
52. Short ETFs52. Short ETFs

My Prediction

Picture of the Nasdaq on the daily scale and RSI chart.

Yes, this is one weird chart. It's a small version of one that fills my screen and my dreams at night.

The top panel shows the Nasdaq Composite (^IXIC) on the daily scale. The vertical red bars are warning signals that the RSI indicator is overbought (above 70). An actual sell signal triggers when the RSI line drops BELOW 70 from above. As you can see, selling when the RSI crosses from below to above the 70 line is often a mistake since it's premature. The index keeps rising. If you wait to sell when it crosses from above to below the 70 line, you may sell at a higher price.

The bottom panel shows the RSI indicator. The red band means the security is overbought (sell) and the green band means it's oversold (buy). Trading the green band is just like the red one but opposite: Buy when the RSI crosses from below to above the 30 line. The buy and sell signals might work for swing or position traders.

I show bearish divergence in the RSI indicator compared to the price chart. Divergence appears as slanting blue lines. Circled in blue is bearish divergence and what happened the last time. I still expect a mild correction in the indexes. Whether or not that will begin this week is anyone's guess. The release of the Federal Reserve minutes on Tuesday might heat up the markets.

Bollinger bands are beginning to narrow. I don't show them on the chart, but you can draw them on BigCharts.com or on the walls of your favorite neighborhood upscale retailer. Narrowing bands means volatility is decreasing. However, periods of low volatility often precede periods of higher volatility. In other words, a big move either up or down is coming. My guess is the move will be downward. When it will occur or why is not clear. Stay tuned. The chart pattern indicator is also showing bearish divergence. That serves as another warning that the market could move down, perhaps soon.

-- Thomas Bulkowski

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