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August 2009 Headlines
Thursday 8/27/09. Best and Worst Performing Industries.
Have you noticed that good news is not moving the market upward like it used to just a few weeks ago? That is a signal of a potential top, so take care making new commitments here.
# # #
I started to think about dead-cat bounces and inverted dead-cat bounces. I did some research on them back in 2007, but I wanted to update
the page for the latest bear (2007-2009) and bull market, which I have done. I am going to expand the tables to include the inverted dead-cat bounce
From the low in early March 2009, which ended the bear market in the S&P 500 index, I looked at price declines and rises of at least 15% in 572 stocks in 47 industries. The following
table shows a portion of what I found.
|Industry||Inv DCB Rank||DCB Rank||Industry||Inv DCB Rank||DCB Rank|
|Aerospace/Defense||1 Fewest||1 Fewest||Toiletries/Cosmetics||38||37|
|Electric Utility (Central)||1||1||Coal||39||21|
|Electric Utility (West)||1||1||Chemical (Specialty)||40||33|
|Natural Gas (Diversified)||1||1||Insurance (Prop/Casualty)||41||41|
|Electric Utility (East)||5||1||Building Materials||42||40|
|Petroleum (Integrated)||6||15||Furn/Home Furnishings||43||46|
|Household Products||7||1||Alternate Energy||44||39|
|Natural Gas (Distributor)||8||10||Insurance (Diversified)||45||44|
|Chemical (Diversified)||9||7||Insurance (Life)||46||45|
|Food Processing||10||9||Homebuilding||47 Most||47 Most|
Inverted dead-cat bounces are good animals. The table shows the rank of stocks that moved higher by 15% from prior close to current high in one session. For example, those stocks in the
homebuilding industry (bottom right) had lots of times when price soared by 15%. They rank 47 (most numerous). Opposite this is the dead-cat bounce rank. Dead-cat bounces are bad animals.
They occur when price
drops by at least 15% in one session, measured from prior close to current low. The rank for the homebuilding industry is 47 and that means it contains the most instances in which industry
stocks have dropped at least 15% since the bear market ended.
Notice how the industries that move up the most are also the ones that tend to drop quickly (that is, the rank numbers are similar, but they mean the opposite).
The table is split into two halves. The left ten are from the top of the 47 industry list table and the right 10 are from the bottom of the table. Not all 47 industries
are shown, just the top and bottom 10.
If you want to make big money, start with the homebuilding industry. If you want to lose your shirt, then start with the homebuilding industry. In short, the higher the risk,
the higher the reward. The smaller the risk the smaller the reward.
-- Thomas Bulkowski
Tuesday 8/25/09. Tutorial Tuesday: Picking Stocks to Buy.
I have written on these pages that it's not important when you buy a stock. What's important is when you sell. Hold too long and you'll lose your shirt. Sell too soon and you may miss
the move you have been waiting for.
You may have seen it written in magazines or books that traders and investors spend too much of their time searching for stocks to buy and not
enough time on those to sell. That's true. It's probably also true that you spend more fussing about the features in a new dishwasher, or refrigerator but you'll spend thousands or
tens of thousands just by looking at squiggles on a chart for fifteen minutes.
Having written all of that, I am not going to focus on when to sell. Rather, I want to discuss picking stocks to buy. In the last few days, I have received two emails from
people asking just that question. "Send me some shopping tips." This is my answer to that request.
As you know, my shopping list appears on the website at the link (and also by clicking on the menu button at the top of this page, the location is circled in
red in the screen shot below). I show additions to the list, but not when they disappear. By reviewing my additions,
you can get some ideas about what I think is an industry or a stock worth looking at. Often, the stocks you see listed I throw away because something has caused me to cough up fur balls.
The coal industry is a recent example.
If you look at the coal stocks, you will see flat bases (use the linear scale and not the log price scale). When price breaks above that region, it's time to go shopping! Or is it?
I put a few coal stocks on the list and then pulled them off then months later I added them and then pulled them off yet again. The reason I pulled them off the list recently is due to changing
fundamentals. Technically they look great but the fundamental side is too weak to tempt me. Anyway, my stock picks is one place to look for ideas.
Another place is the test portfolios at the top of this page, shown in the screen shot to the right. I show four of them. They are not model portfolios but test portfolios --
personal experiments to see what works and what doesn't. If you are into mutual funds, I show two based on the best and worst performing funds. Testing revealed that selecting funds from
those extremes can lead to outsized profits. However, they trade every 7 to 9 months, so transactions are few so far. Plus, I happened to introduce them just as the bear market in 2008
But look at the Wilder RSI portfolio. As of today, the average gain this year is 64.5%. What's not to like? Listen to some of these picks for this year: DOW up 181%, PMTI up 119.2%, FO up 106.8%,
PTV up 118.9%. Since January, just one stock picked this year remains in the red by just 6% (all of this info is as of 8/25/09). The huge performance numbers posted by this portfolio
reminds me of some of the ads that appear on my website. If you follow enough stocks and recommend them all, yes, you will have a handful of huge winners which you can broadcast to the world.
So what's wrong with this portfolio? Nothing except that it has forgotten when to sell. Only three stocks were sold since inception in January 2008. Yes, they made a handsome gain of
48%, but the draw downs can be downright frightening. Nevertheless, this portfolio seems to be a good place to shop for weak stocks destined to grow stronger. I have shopped from this
On What's Hot Wednesday's I show tables of securities that have gained and lost the most this year. It's based not on the overall market but on stocks I follow. Look at those posting
big gains. Think momentum investing. If the homebuilders are showing up on this list, then you know what industry to begin your search. If coal stocks appear on the biggest losers list,
then you'll know to either avoid buying them or maybe do some bottom fishing. Just remember that those near the yearly low are there for a reason and they can and often do stay down
there for months, even years.
What scares novice traders and investors most is buying a stock that has move up already. Again, think momentum play. Dow is up 181% this year but it first had to make 20% then 30%
then 100% and so on to get where it is. If you climb aboard these rockets, you can ride them until the air is too thin to breathe. Don't bother with a parachute because the air is too
thin for it to work and you'll likely freeze to death before you touch down. Just keep your fingers glued to the ejection handle.
-- Thomas Bulkowski
Thursday 8/20/09. Is Investing Dead?
The bomb that went off in my bedroom last night at 3 AM was not one of nails powered by C-4 or semtex. Rather, it was a mental bomb with parts being created starting back in 2007.
That was when I looked at all of my trades made since I started plying the markets. I longed for gains of 50%, 80% and higher, and I decided to make a change to my trading style.
In 2007, I began to hold stocks for the longer term, searching not for singles but home runs in the form of doubling my money at a minimum. Instead of listening to my trading skills
that warned I should sell a stock and do it now!, I held on and watched the losses grow, confident that if I held long enough, I could reap the rewards I was searching for.
And then 2008 came along with the bear market. Those long-term positions were like trying to swim pulling cinder blocks. Enough was enough and I cut my losses.
Late in the year, I listened to a radio interview from a respected day trader that wrote a book about investing, released in 2008. Then, in
a second interview by the same trader a few months later, the person said that investing was dead, that everyone should become a day trader because that was the way to make money.
I was surprised that he contradicted himself so quickly. He wrote a book that said, "Here's a technique that will make you money by investing for the long term," only now he was
saying, "Just kidding!" and you were all idiots for buying his book.
He was right, though. Day trading during the bear market sure beat buy and hold.
That was in 2008. Fast forward to last week when I read an article that said the same thing. Trading is king. Investing is dead. Reading that made me angry.
I haven't changed my
trading style since 2007. I still want to hold onto a stock for the long term but when gains come in a week, like my CNO double, I sell.
The stocks I pick now all show patterns that I believe will mean large gains -- doubles or triples -- in the coming years. I'm not sure how long it will take to reach those profit levels.
I know (through research) that the first year after a bear market ends is the time to jump in and buy for the longer term. The gains I have racked up so far have been a blessing, but
I feel as if we (the markets) are just getting started. If and when price recoverers to what it was in mid 2008, I will have tripled my money.
The bomb that went off last night and kept me awake for almost 2 hours is because I still believe there is a place for all trading styles: investing, position trading, swing trading, and day
trading. If investing is dead, then the mutual fund industry is in trouble. That's about all the mutt fund drivers do is pick stocks as longer term
investments. Not always, of course.
I will still resort to day trading, swing trading, and position trading (my favorite) as necessary, but I don't believe that investing is dead. Last year it was on life support, but
this year it's running a marathon and it will continue to do so for a long time.
Just ask Warren Buffet if he plans to become a day trader because investing is dead, and see what he says.
-- Thomas Bulkowski
Tuesday 8/18/09. CPI Divergence: More Down Ahead?
For about three weeks now, I have been marking bearish divergence on the chart pattern indicator page, which I update each Friday evening.
Above is from today's run (Monday evening, after the market close).
Divergence occurs when the indicator trends in one direction and price the other or the indicator will make a higher peak or lower valley and price will not.
Here, the CPI has been rounding down for over a month even as price made new highs. The thinking with divergence is that price will eventually follow the indicator. That may be what
we are seeing in the markets today, with the 186 point drop in the Dow industrials.
With the CPI reading at 3 arrows down (),
the indicator suggests that this is a serious turning point. Since the arrows are not solid ones, but half shaded, the signal won't be reliable for a few more days yet.
In other words, a strong rebound tomorrow could change the signal to bullish (probably back to the bullish turn back in July).
As a result of this analysis, I have adjusted my targets for the indexes lower, joining the Nasdaq which I already flagged as moving down. Mostly, I am looking for a
38% to 62% retrace of the move up from the July low, depending on the index. You can click on Tom's Targets above to get the full scoop.
-- Thomas Bulkowski
Thursday 8/13/09. What Now Dow?
The chart above is a reduced map of the Dow industrials on the weekly scale, reduced so it will fit on your screen. That makes it a bit fuzzy, but a little fuzz never hurt anyone.
I show a head-and-shoulders bottom with the left shoulder (LS), head, and right shoulder
(RS) clearly marked. Ignore the spike down at A. It only detracts from the presentation, but you could consider
it the left shoulder of a weird looking head-and-shoulders bottom. The chart pattern suggests price will rise and it has, so far.
The measure rule is used to predict a price target. In this example, I used the full height but you might consider multiplying the height by 74%
because that is how often
the full measure works. Reducing it to 74% means the target will be closer and price will reach it more than 90% of the time.
Anyway, let me explain the measure rule. Begin with the head low and measure vertically to the neckline, which appears as a green line
on the chart.
I show the height with a vertical blue line ending at B. That is the full height of this pattern.
Take that height and project it upward from the price at which the index pierces the neckline. I show that at C, ending at a target of 11,388.
I highlighted overhead resistance setup by a red trendline and more circled at D. Since D is close to the target, that
is where I would expect the Dow to have trouble moving higher. It might stall or even reverse there.
Since this is a weekly chart, anything can happen especially with September coming and many on the planet expecting the markets to have trouble, some even predicting it
will form a double bottom (sink back to the March lows. At this point, I don't expect that to happen, but I've been wrong before. I do not have a time estimate for this to occur.
It will likely take months, certainly not weeks.
-- Thomas Bulkowski
Tuesday 8/11/09. Tutorial Tuesday: Busted Patterns. What Are They?
I show a chart of American Superconductor on the daily scale.
Pictured is an Adam & Adam double top. One of these days, I'll explain
the differences between the variations of double tops, but for now, that's not important. What is important is that a double top is just squiggles on a screen until price closes
below the low posted between the two peaks. I show that as point B. When that happens, called confirmation, it turns the squiggles into a valid
double top. And that means price is going down.
Or does it?
In this example, price does drop but not far. In fact, it moves horizontally for about a week and then begins rising. When price closes above the top of the chart
pattern at A, it busts the double top. And that often means price is going to make a strong move up, which we see happening now.
In this example, the stock gapped higher after the release of quarterly earnings. Don't get too excited about this stock because it could round over in a another week or so.
Why? See the event pattern cleverly called good earnings surprise.
This chart is an example of a busted double top. I define a busted pattern as one that breaks out in the expected direction, moves no more than 10% in that direction before
reversing. Then, price shoots out the other side of the pattern. When that occurs, it busts the pattern, often setting up for a strong move. The 10% number is arbitrary. You can
use anything you wish, but for testing purposes, I limited the original breakout move to 10% with no time limit.
The breakout can be either up or down, but downward breakouts that bust are the ones to trade. Why? Because price has unlimited room to move to the upside, so you can
make an infinite amount of money. After an upward breakout, when price busts the pattern downward, you can only lose 100% of your money and no more. Thus, the downside is limited in
You won't find busted patterns on my website, so don't bother looking for them. They are just one topic I haven't gotten around to writing about yet. I have
researched them, but not exhaustively. My paperback book,
Getting Started in Chart Patterns,
pictured on the right, devotes a chapter to busted chart patterns (beginning on page 215, in case you have a copy laying around). I include a few performance statistics, but what you'll
find is that the performance is slightly better than the move posted by non-busted chart patterns.
Let me retract that statement because the comparison isn't fair. Why? Because an Adam & Adam double top has an average drop of 19% in a bull market. If you wait for
the trend to change and then buy the stock, price rises by an average of 54% (this is the so-called "Change after the trend ends" number list in my Encyclopedia of chart
patterns book). However, if you trade a busted double top, the average rise is a tasty 74%. Thus, the comparison between 74% and 19% isn't fair.
Before you roll your eyes in disbelief, let me say that all of the numbers just mentioned were from perfect trades. You buy in at the breakout price and sell the
day price makes the ultimate high or ultimate low, which are the highest high or lowest low before a trend change. And you do that not just once, but dozens of times. Your
chances of replicating that performance is zero. Use the numbers like I have here, for comparison shopping only.
Anyway, look for busted patterns not just from double tops, but head-and-shoulders, broadening patterns, triangles, and so on. And if you should come across a busted
symmetrical triangle, be sure to say "Hello," and then run the other way. Symmetricals have a tendency to double bust (breakout, reverse and reverse again).
-- Thomas Bulkowski
Thursday 8/6/09. Broadening Top in XLB
I paged through my list of exchange traded funds and came across this one: XLB. According to yahoo!finance,
The fund invests at least 95% of assets in companies of the materials sector, as classified by the S&P Composite Stock Index. The fund's sector includes companies from the following industries: chemicals, construction materials, containers and packaging, materials and mining and paper and forest products.
I see a broadening top chart pattern, outlined by red trendines. The two lines diverge (widen) over time, giving the broadening
pattern its name.
I see an interesting feature in this broadening top. What is it?
Need a hint? Look at point A.
There you will find a partial rise. A partial rise occurs when the chart pattern
is fully established (meaning price touches each trendline at least twice, with wider swings each time and crosses the pattern from side to side, coloring the white space)
and price attempts to rise up to the top trendline but fails. An immediate downward breakout usually follows. I show the breakout price as
a green line. When price closed below the line at B, the pattern broke out downward.
Within a week, price started moving up again in a robust run to the top of the chart pattern.
Since the run up to the top of the pattern has been long and it's almost a straight-line run, my guess is price will bounce off the top trendline and head down. Thus,
if you were a swing trader, this is a hint of a possible trend change. Price could push through overhead resistance and continue higher, but the probabilities suggest otherwise.
When you factor in economic news coming out on Friday, namely the unemployment report, the markets could tumble, sucking down this fund. If the news is good, then that could be
the impetus the fund needs to push through overhead resistance and bust the broadening top with an upward breakout.
-- Thomas Bulkowski
Tuesday 8/4/09. Tutorial Tuesday: Relative Strength Index
Let me be clear. There is only one indicator that I use every day on every stock. Can you guess what it is? It's not the commodity channel index because I only use that
on stocks I own. It's not Bollinger bands for the same reason. It's not even the Wilder relative strength index, the subject of this posting.
Price has never failed me, never given a bad signal. I don't like the direction it takes sometimes, but that's just the nature of this business.
Let's talk about the relative strength index, or RSI. I show my version of it on the daily chart of the Dow transports (^DJT) using 70/30 as the lines between over bought (shaded red) and
over sold (shaded green) with a 14-day lookback on the buy and sell lines. Since both the buy and sell lines use the same lookback, only one line appears. If the lookbacks were different, you would
see a second line -- one would be used to time the entry and another for the exit.
This chart is probably unlike other charts you
are used to seeing. That's because it's part of software I wrote. And no, you can't have the program. I'd spend a week telling each of you how to work it, and I don't have that kind of
The chart may look a bit fuzzy and that's because I had to reduce the size of it a bit. Think of the fuzziness as a bonus. No extra charge.
The top half of the chart shows the Dow and the bottom half shows the RSI. The vertical green and red bars are the indicator buy and sell signals overlayed on the price chart.
On the left you see the transports making a lower low during October 2008 while the indicator makes higher bottoms. This is a sign of bullish divergence. Price will often, but
not always, follow the indicator trend (upward in this case). You can see that price moved up to point A.
Incidentally, in a downtrend, look for divergence along the bottoms. In an uptrend, use the peaks.
If you are a follower of my chart pattern indicator, you will see bearish divergence on the chart. It's the third chart down and I have it labeled,
if you visit the link, that is.
Returning to this chart, failure swings mark reliable short term turning points. They are W and M shaped patterns that you can find on many
indicators for your viewing pleasure.
I show two of them circled on the chart. The W is bullish and the M is bearish. Price rises in March and it changes from moving up to trending horizontally in May (or down for a week or so).
The price change after a failure swing is often of short-term duration, not major turning points like that shown here.
Finally, there are the vertical buy and sell signals. You can see how premature the green ones were back in October. But they were quite timely in late February and into March.
Recently, sell signals have appeared because the RSI has moved into overbought territory. If the indicator drops, it could also be a bearish failure swing. That would mean a dip is coming
in the transports.
-- Thomas Bulkowski