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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
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
Encyclopedia of Chart Patterns 2nd Edition book.
Bulkowski's Blog: ThePatternSite.com
Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 06/21/2017
21,410 -57.11 -0.3%
9,293 -11.21 -0.1%
730 -4.82 -0.7%
6,234 45.92 0.7%
2,436 -1.42 -0.1%
YTD
8.3%
2.8%
10.7%
15.8%
8.8%
Tom's Targets    Overview: 06/15/2017
21,600 or 21,000 by 07/01/2017
9,100 or 9,600 by 07/01/2017
720 or 745 by 07/01/2017
6,300 or 6,000 by 07/01/2017
2,525 or 2,390 by 07/01/2017

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.

August 2010 Headlines


Archives


Tuesday 8/31/10. Tutorial Tuesday: 2 Question Quiz, Part 4 of 5

I actually had a hummingbird visit my feeder today. I saw him flapping his wings two days ago, so I put in fresh nectar and hung the thing where the ants wouldn't get it, at least for a while. (If needed, I'll put petroleum jelly on the chain suspending the feeder, but that's a last resort...and that's a tip from another Tom via email, not me.)

Anyway, I wondered what would happen if I replace some of the nectar with alcohol... Would the hummer chase cars? Maybe try to mate with the Hummer parked across the street?

$ $ $

Picture of a flower from my garden.

Here's the next to last installment of the trading quiz.

True or False: Chart patterns have low failure rates.

The answer depends on what is meant by low, doesn't it? A Eve & Eve double bottom has an 4% break-even failure rate. That means just 4% of chart pattern fail to rise at least 5% after the breakout. So, on the surface, the statement is true. However, 15% of Eve & Eve double bottoms fail to rise at least 10%; 26% can't reach gains of 15%. Half of all EEDBs can't make 30%. The failure rate rises by leaps and bounds once you plug in more realistic numbers for profit opportunity.

For example, if you look at your old trades and find that you need to make at least 15% to cover your costs and make up for losses that you keep small, how often will an ascending triangle fail to make at least 15%? Answer: 32% of the time. A third of ascending triangles fail to show post breakout gains of just 15%! Wow.

True or False: Breakout day gaps suggest better performance from a chart pattern.

This one is easy. A breakout gap occurs on the day when price closes beyond a trendline boundary or above/below the chart pattern's top/bottom. Price forms a gap, a hole where today's low is above yesterday's high (for bullish gaps).

The answer is true. For example, using symmetrical triangles as the benchmark, I found that chart patterns with gaps showed price rising 35% in a bull market after an upward breakout compared to those without gaps climbing an average of 31% before a trend change. Gaps are good.

If you're bored, then turn on the TV to the NBC Nightly News and count how many times Brian Williams uses the phrase, "As always" each broadcast. If it's above zero, then yes, it's annoying.

-- Thomas Bulkowski

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Monday 8/30/10. Market Monday: The Week Ahead

I spent all day Saturday replacing some wood trim around two windows and below my security camera outside. Too bad the existing paint I used didn't match what's on the rest of the house. Sigh. I didn't feel like repainting the entire house to get it to match.

It always amazes me how long doing this type of home repair takes. A lot of it is priming and painting and waiting for it to dry. But I consider it exercise and an adventure in something new. I measure twice and cut as many times as it takes to get things right.

In this case, I cut everything right the first time. Then I labeled each piece (with a pencil) so I wouldn't try to fit the right piece at the wrong location. After priming and painting, the labels disappeared. Oops! No wonder it took so long to install...

My Prediction

Picture of the GLD on the daily scale.

Shown is a picture of GLD, a gold based ETF now called SPDR Gold Shares, if you can believe yahoo. According to the profile, they store actual gold somewhere, probably in someone's basement, which backs the securities traded.

I last discussed the fund in early July. I suggested that when price reached the apex of the triangle (point C), it would form a minor low. I got the turn right (the date) but not the direction, as the chart shows. Price formed a minor high. Read the study to figure out how you can make amazingly wrong predictions, too!

Here's another prediction. Gld is going down. Why? Because price at A has approached the level of B, a pattern called the 2B Rule, or just 2B. When price reaches the level or a prior high and begins to go sideways, it often (but not always) reverses and heads lower. Price doesn't have to stop right at the price level of the old high, either. Sometimes it over- or undershoots. That's ok, but the 2B is a good place to take profits. Price could continue to pause at slightly above level for several days, so don't expect an actual turn today.

$ $ $

I flipped Tom's Targets at the top of this page from down to up, based on a feeling that the markets have found support and should move up. Friday has 4 important employment reports coming out, so it could be a volatile session. The consecutive price trend suggests we are due for a week that closes higher.

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A Brief Look Back

Picture of a Dragonfly from my garden.

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: Down 39.21 points.
Tuesday: Down 133.96 points. Existing home sales were well below what the market expected.
Wednesday: Up 19.61 points. New home sales were down and durable goods orders were below expectations.
Thursday: Down 74.25 points. Initial jobless claims improved (fewer than expected).
Friday: Up 164.84 points. GDP improved

For the Week...

The Dow industrials were down 62.97 points or 0.6%.
The Nasdaq composite was down 26.13 points or 1.2%.
The S&P 500 index was down 7.1 points or 0.7%.

Year to Date...

Dow Industrials
     9.8% down from the high of 11,258.01 on 04/26/2010.
     5.6% up from the low of 9,614.32 on 07/02/2010.
Nasdaq
     15.1% down from the high of 2,535.28 on 04/26/2010.
     4.5% up from the low of 2,061.14 on 07/01/2010.
S&P 500
     12.7% down from the high of 1,219.80 on 04/26/2010.
     5.3% up from the low of 1,010.91 on 07/01/2010.

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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
Personal income & consumption8:30 MC+Measures sources of income to predict future demand.
Personal consumption expenditures8:30 MC+Covers durables, non-durables, and services.
Chicago purchasing managers index9:45 TBMonitors regional manufacturing activity.
Consumer confidence10:00 TB-Surveys 5,000 households for trends.
FOMC Minutes2:00 T?Minutes of the prior Federal Reserve meeting.
Construction spending10:00 WDCovers residential/non-residential/public spending on new construction.
Auto & truck sales2:00 WC-Monthly sales of domestically produced vehicles.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Productivity & costs8:30 ThD+Cost of producing a unit of output.
Factory orders10:00 ThD+Durable/non-durable goods orders w/factory inventories.
4 Employment reports8:30 FANonfarm payrolls, unemployment rate, avg workweek, hourly earnings.

Options Expiration

No options expire this week.

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Swing and Position Traders: Chart Pattern Indicator

On 08/27/2010, the chart pattern indicator (CPI) had:

1 bearish patterns,
30 bullish patterns,
208 patterns waiting for breakout.
The CPI signal is 96.8%, which is bullish (>= 65%).

The chart pattern indicator is bullish 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.

Swing Traders: Pivot Points

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

IndexS2S1PivotR1R2
Dow Industrials (^DJI): Daily  9,859  10,005  10,082  10,228  10,306 
Weekly  9,763  9,957  10,131  10,325  10,499 
Monthly  9,486  9,818  10,269  10,602  11,052 
S&P 500 (^GSPC): Daily  1,031  1,048  1,057  1,073  1,082 
Weekly  1,020  1,042  1,062  1,084  1,104 
Monthly  988  1,026  1,078  1,116  1,167 
Nasdaq (^IXIC): Daily  2,080  2,117  2,136  2,173  2,192 
Weekly  2,050  2,102  2,151  2,203  2,252 
Monthly  1,977  2,065  2,187  2,276  2,398 
  • Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
  • S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
  • If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
  • In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
  • A move outside of daily R1 or S1 usually does not mean a breakout.
  • The odds suggest that the entire week's price action will remain between weekly R2 and S2.
  • Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
  • Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
  • Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

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Consecutive Price Trends

Index Consecutive
Closes So Far 
% Comments 
 Dow industrials (^DJI) 3 weeks down 16.2%  Expect a reversal soon.
 1 month down 20.5%  Expect a reversal soon.
 S & P 500 (^GSPC) 3 weeks down 13.1%  Expect a reversal soon.
 1 month down 21.4%  Expect a reversal soon.
 Nasdaq composite (^IXIC) 1 week down 35.8%  The trend may continue.
 1 month down 26.3%  The trend may continue.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

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.

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Earnings, Chart Patterns & Industries

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

 Found Chart Pattern Name
41Head-and-shoulders top
28Triangle, symmetrical
21Pipe top
13Double Top, Adam and Eve
10Triangle, ascending
9Triangle, descending
8Broadening bottom
8Head-and-shoulders bottom
7Triple top
7Rising wedge

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

 

 

 

 

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

This WeekLast Week
1. Computers and Peripherals1. Air Transport
2. Electric Utility (West)2. Shoe
3. Chemical (Diversified)3. Computers and Peripherals
4. Electric Utility (Central)4. Packaging and Container
5. Packaging and Container5. Electric Utility (West)
48. Semiconductor48. Semiconductor
49. Oilfield Svcs/Equipment49. Petroleum (Producing)
50. Natural Gas (Diversified)50. Natural Gas (Diversified)
51. Coal51. Oilfield Svcs/Equipment
52. Homebuilding52. Homebuilding

-- Thomas Bulkowski

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Thursday 8/26/10. Chart Pattern Trading Quiz, Part 3

True or False: Short (less than 3 months) price trends leading to the start of a chart pattern means below average performance.

I discovered the answer to this when I did research for my book, Trading Classic Chart Patterns (conveniently pictured on the right and available at the concession stand by clicking on the picture).

I determined where the trend started by the same method as I use to find the ultimate high or low, that is, a 20% trend change. I found that short-term price trends suggest, but do not guarantee, a more powerful move. So, the answer to the quiz is false. A short term price trend leads to above average performance.

True or False: Support and resistance gets weaker over time.

Picture of a flower

This is an easy one. Of course support and resistance gets weaker over time according to the experts that haven't test it. Every time I tested this I found that time is not an important factor in how powerful support or resistance is. In other words, it does not grow weaker over time, despite what everyone believes. If you think I'm kidding, test it yourself.

Here's a brief review. I found a bunch of horizontal consolidation regions (HCRs) and measured how often price stopped within them after a breakout. I found that if the HCR is close enough to the chart pattern, price will fly through the HCR. However, the stopping power increases for HCRs up to a month away and then oscillates up and down in stopping power for at least 1.5 years. In other words, a HCR 1.5 years old is just as powerful at stopping price as one that formed a month ago. The correct answer is false.

True or False: On a price basis (not time), support and resistance gets weaker the farther away it is from the current price.

I measured the vertical distance (price) from a chart pattern to the HCR for both upward and downward breakouts. The stopping power of HCRs increased in strength for HCRs up to 15% away (upward breakouts) and then decreased after that. The same can be said for downward breakouts except that they weaken after 20% away. Thus, the answer is true, support and resistance tends to weaken the further away it is from the top or bottom of a chart pattern.

The answers to all of these questions (and others) can be found by carefully reading my Trading Classic Chart Patterns book.

Bonus question. True or False: The above picture is of a candle.

It's a picture of a flower from my back yard, but it sure looks like a candle. Either way, it looks fake, but it's real. The answer is false. If you think I'm kidding, take a match and try and light it. All you'll get is a melted computer screen.

-- Thomas Bulkowski

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Tuesday 8/24/10. Chart Pattern Trading Quiz, Part 2

I looked at the thermometer today and it said 110 degrees (in the shade). Fortunately, that was outside. In my living room, it was a cool 99.6. However, I keep my office below 90 for my computers. For a treat, I give my dog ice cubes.

$ $ $

Take this quiz to test your knowledge of chart patterns and trading.

True of False: Above average volume on the day of a chart pattern breakout means better performance.

Let's use Eve & Eve double bottoms as a test case. In my book, Encyclopedia of Chart Patterns, second edition, pictured, I looked at 412 Eve & Eve double bottoms in a bull market. Those with heavy breakout volume showed average gains before a trend change (a drop of at least 20%), of 40%. Breakouts with light volume averaged 39%. Yawn.

While it's generally true that above average breakout volume means better performance, it also depends on the situation. In a bear market, for example, the results reverse: double bottoms with heavy breakout day volume showed declines of 24%. Those with light volume dropped an average of 27%.

Here's what I wrote in my study of studies.

For both breakout directions, heavy breakout volume is very important to chart pattern performance after the breakout. Heavy breakout day volume means above the 30-day volume average (one month of calendar days, not trading days) up to but not including the breakout day.
  • Upward breakouts
  • Heavy: 71%
    Light: 29%
  • Downward breakouts
  • Heavy: 68%
    Light: 32%

Picture of a flower

True or False: Tall chart patterns outperform short ones.

I computed the height of each pattern from highest high to lowest low and divided the result by the breakout price to standardize the numbers across all stocks.

In a study of various types of chart patterns, I found that tall ones outperform short ones 86% of the time. That's a bit misleading since it's a count the various types of patterns (double bottoms, double tops, head-and-shoulders tops) versus a count of each tall pattern that beats a short one. Nevertheless, I found that tall patterns do better than short ones, so the correct answer is true. The following show the numbers (from study of studies).

  • Upward breakouts
  • Tall: 86%
    Short: 14%
  • Downward breakouts
  • Tall: 97%
    Short: 3%

True of False: Wide patterns outperform narrow ones.

If you answered either true or false, you'd be correct, but it depends on the breakout direction. Again, in a study of the various chart pattern types, I found that patterns with upward breakouts showed that wide pattern outperformed 56% of the time. Downward breakout had narrow ones winning 69% of the time.

-- Thomas Bulkowski

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Monday 8/23/10. Market Monday: The Week Ahead

Question: Why did my weight rise by 10 pounds in 30 seconds? Answer: Because I bought a new scale. The old mechanical one read 15 pounds when I placed a 25 pound dumbbell on it. The new electronic one shows 24.8 pounds.

My Prediction

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

I show a chart of the S&P 500 index (^GSPC) on the daily scale. Taking shape is a head-and-shoulders top chart pattern, and a fine looking one at that, thank you very much!

Price forms a left shoulder (LS), head, and right shoulder (RS) with a neckline connecting the two armpits. I'm not sure if price has closed below the up-sloping blue neckline yet, but if so, then that confirms the chart pattern as a valid reversal pattern.

Since a reversal pattern needs something to reverse, I expect the index to return to near the July low as denoted by the horizontal blue line. That could be a quick move down, or not.

The index has been down for 2 weeks now. Just 20.7% of the time has the index closed lower for 3 weeks in a row.

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A Brief Look Back

Picture of a flower from my garden.

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: Down 1.14 points.
Tuesday: Up 103.84 points. Housing starts were higher but below expectations. Building permits were down. Core PPI rose.
Wednesday: Up 9.69 points.
Thursday: Down 144.33 points. Initial jobless claims climbed and leading indicators dropped.
Friday: Down 57.59 points.

For the Week...

The Dow industrials were down 89.53 points or 0.9%.
The Nasdaq composite was up 6.28 points or 0.3%.
The S&P 500 index was down 7.56 points or 0.7%.

Year to Date...

Dow Industrials
     9.3% down from the high of 11,258.01 on 04/26/2010.
     6.2% up from the low of 9,614.32 on 07/02/2010.
Nasdaq
     14.0% down from the high of 2,535.28 on 04/26/2010.
     5.8% up from the low of 2,061.14 on 07/01/2010.
S&P 500
     12.1% down from the high of 1,219.80 on 04/26/2010.
     6.0% up from the low of 1,010.91 on 07/01/2010.

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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
Existing home sales10:00 TCCounts sales of used homes.
Durable goods orders8:30 WBMeasures orders, shipments of goods with lifespans >3 years.
New home sales10:00 WC+Shows sales of single-family homes.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Gross domestic product8:30 FBMeasures economic activity; GDP deflator measures inflation.

Options Expiration

No options expire this week.

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Swing and Position Traders: Chart Pattern Indicator

As of 08/20/2010, the CPI had:

40 bearish patterns,
1 bullish patterns,
307 patterns waiting for breakout.
The CPI signal is 2.4%, which is bearish (<= 35%).

The chart pattern indicator is bearish 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.

Swing Traders: Pivot Points

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

IndexS2S1PivotR1R2
Dow Industrials (^DJI): Daily  10,087  10,150  10,211  10,274  10,334 
Weekly  9,947  10,080  10,280  10,414  10,614 
Monthly  9,602  9,908  10,314  10,620  11,026 
S&P 500 (^GSPC): Daily  1,059  1,065  1,070  1,077  1,082 
Weekly  1,042  1,057  1,079  1,093  1,115 
Monthly  1,014  1,043  1,086  1,115  1,158 
Nasdaq (^IXIC): Daily  2,151  2,165  2,174  2,188  2,197 
Weekly  2,115  2,147  2,188  2,221  2,261 
Monthly  2,061  2,120  2,215  2,274  2,369 
  • Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
  • S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
  • If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
  • In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
  • A move outside of daily R1 or S1 usually does not mean a breakout.
  • The odds suggest that the entire week's price action will remain between weekly R2 and S2.
  • Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
  • Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
  • Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

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Consecutive Price Trends

Index Consecutive
Closes So Far 
% Comments 
 Dow industrials (^DJI) 2 weeks down 20.0%  Expect a reversal soon.
 1 month down 20.5%  Expect a reversal soon.
 S & P 500 (^GSPC) 2 weeks down 20.7%  Expect a reversal soon.
 1 month down 21.4%  Expect a reversal soon.
 Nasdaq composite (^IXIC) 1 week up 38.7%  The trend may continue.
 1 month down 26.3%  The trend may continue.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

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.

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Earnings, Chart Patterns & Industries

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

 Found Chart Pattern Name
28Triangle, symmetrical
18Head-and-shoulders top
15Double Top, Adam and Eve
11Pipe top
9Triangle, ascending
9Head-and-shoulders bottom
8Rising wedge
8Pipe bottom
6Triangle, descending
6Rectangle top

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

 

 

 

 

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

This WeekLast Week
1. Air Transport1. Air Transport
2. Shoe2. Shoe
3. Computers and Peripherals3. Electric Utility (West)
4. Packaging and Container4. Packaging and Container
5. Electric Utility (West)5. Computers and Peripherals
48. Semiconductor48. Semiconductor
49. Petroleum (Producing)49. Petroleum (Producing)
50. Natural Gas (Diversified)50. Oilfield Svcs/Equipment
51. Oilfield Svcs/Equipment51. Short ETFs
52. Homebuilding52. Homebuilding

-- Thomas Bulkowski

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Saturday 8/21/10. Solar News!

Picture of solar collectors on my neighbors roof.

My neighbor installed solar collectors on his roof about a month ago, as the photo shows, but he added a twist.

To keep them generating electricity at night, he shines two floodlights on them.

-- Thomas Bulkowski

 

 

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Thursday 8/19/10. Chart Pattern Trading Quiz, Part 1

Picture of my dog.

Here is part 1 of a multi-part trading quiz. Test your knowledge of trading by answering true or false to the following questions.

An unconfirmed chart pattern is just squiggles on the page [true or false]?

Confirmation often occurs when price closes beyond the chart pattern's boundary. For example, in a double bottom, a close above the peak between the two bottoms means the chart pattern becomes a valid, significant chart pattern. A study I conducted of nearly 1,000 twin bottom patterns showed that 64% of them had price failing to confirm the pattern (closing above the middle peak). Thus, it's true that if a chart pattern is not confirmed, it is just squiggles on the page. It has little significance.

Performance suffers after a throwback [true or false]?

A throwback occurs within 30-days after the breakout from a chart pattern. You often see it as a looping price movement that returns price close to or at the breakout price. Often, a throwback happens in about 3 days after price rises 6% to 8%, with price completing the journey back to the breakout price in about 10 days. Once a throwback occurs, 86% of the time, price resumes the upward price trend. A throwback applies only to upward breakouts. A study I conducted using double bottoms found that those chart patterns with throwbacks showed average gains of 35%. Those without throwbacks climbed 45%, on average. Thus, it's true that if a throwback occurs, it hurts performance.

Performance suffers after a pullback [true or false]?

Don't be fooled into thinking that I'm asking the same question twice. This one applies to pullbacks, not throwbacks. A pullback occurs after a downward breakout from a chart pattern. Price drops for an average of 3 days, sinking 4% to 10% before pulling back to the breakout price. It completes the journey in about 10 days and 87% of the time price moves lower thereafter. Does performance suffer after a pullback? Yes, it's true. Just like throwbacks, pullbacks seem to rob downward momentum, hurting the decline. I measured this in downward breakouts from chart patterns and found it to be true. The performance results are not as startling as with throwbacks, but there is a clear performance degradation. I found that 97% of chart pattern variations have worse performance after a pullback than those without pullbacks.

How did you do? If you got all of them right, then run next door and tell your neighbor. And be sure to give them this tip: Don't eat yellow snow. That's not so much of a problem in the summer as it is in the winter.

-- Thomas Bulkowski

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Tuesday 8/17/10. Tutorial Tuesday: This Just in, Pattern Styles!

I wondered if some chart patterns were better suited to swing trades than position trades. Swing traders attempt to buy at or near a minor low and ride price upward to a minor high, where the trade ends. The reverse is also true, when the swing goes from minor high to low. The duration of the swing is often short, measured in weeks or a few months.

Position traders try to catch the longer-term price trend. The long-term trend includes many minor low and high swings (or the reverse, high to low) and the trade usually lasts at least 3 months, but can extend to over a year. Although the hold time can be long, it's not buy-and-hold, where an investors holds onto the stock for years, often through bull and bear markets.

I expected to see the usual players at the top of the list, but the results surprised me. Chart patterns that I hadn't considered viable trading candidates (such as three rising valleys, scallops, long islands, and diamonds) topped the list. Those that I trade often were buried lower in the list.

The following is the top five patterns for upward breakouts in a bull market. For the complete list, refer to the study which shows downward breakouts, and explains how I figured all of this out.

FormationAverage
Rise (%)
Days to
Ultimate High
Avg Rise
Rank
Hold Time
Rank
SumTrade
Style
Flags, High and Tight6939134Swing
Three Rising Valleys4112571320Position
Scallops, Ascending and Inverted4313752025Position
Diamond Bottoms36119171128Position
Islands, Long316726430Position

-- Thomas Bulkowski

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Monday 8/16/10. Market Monday: The Week Ahead

My Prediction

Picture of the Dow utilities on the daily scale.

The Dow Utility index shows an interesting pattern over the last several months. The head-and-shoulders bottom chart pattern (shown in red with LS=left shoulder, RS=right shoulder) is supposed to act as a reversal of the downward price trend. But price didn't decline much going into the left shoulder, so there wasn't much to reverse. The climb to point A ended quickly.

Along the way up from the right shoulder, price pierced the neckline, confirming the head-and-shoulders bottom as a valid chart pattern. Then price threw back as it does in 53% of all chart patterns (but the rates vary from chart pattern to pattern). Now it appears that price has again touched the neckline. Is that a sign of weakness?

I think so. In a typical, well-behaved throwback, price touches the breakout price and then resumes the uptrend. That didn't happen here. Price has congested just after the breakout. If price drops below the congestion area, then it's likely to drop to one of the retrace lines I show in green. Those mark the retrace of the move up from the right shoulder low to point A.

I believe a decline is more likely than an upward breakout from the consolation area. Thus, look for another week of downward price movement. If I'm wrong then price should soar out of the congestion region and that would be the time to be bullish. Just keep in mind that September is the worst performing month of the year. The Dow industrials close higher in September just 39.5% of the time since 1928.

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A Brief Look Back

Picture of a flower from my garden.

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 45.19 points.
Tuesday: Down 54.5 points. Productivity and wholesale inventories both dropped more than expected. The FED takes no action but makes noise.
Wednesday: Down 265.42 points. Trade deficit increased.
Thursday: Down 58.88 points. Initial jobless claims increased.
Friday: Down 16.8 points. CPI was higher than expected and retail sales dropped.

For the Week...

The Dow industrials were down 350.41 points or 3.3%.
The Nasdaq composite was down 114.99 points or 5.0%.
The S&P 500 index was down 42.39 points or 3.8%.

Year to Date...

Dow Industrials
     8.5% down from the high of 11,258.01 on 04/26/2010.
     7.2% up from the low of 9,614.32 on 07/02/2010.
Nasdaq
     14.3% down from the high of 2,535.28 on 04/26/2010.
     5.5% up from the low of 2,061.14 on 07/01/2010.
S&P 500
     11.5% down from the high of 1,219.80 on 04/26/2010.
     6.8% up from the low of 1,010.91 on 07/01/2010.

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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
Housing starts8:30 TB-Number of homes beginning construction.
Building permits8:30 TB-Measures building permits for new construction.
Producer price index8:30 TB-Measures wholesale goods cost. An indication of future inflation.
Industrial production9:15 TB-Production of utilities, mines, and manufacturers.
Capacity utilization9:15 TB-Gauges economic activity, hints of inflation.
Crude inventories10:30 W?My guess: Measures oil inventory.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Leading indicators10:00 ThD-Summary of already known reports.

Options Expiration

The following is courtesy of the Options Industry Council.

OptionDate
VIX, RVX expireWednesday
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).

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Swing and Position Traders: Chart Pattern Indicator

As of 08/13/2010, the CPI had:

53 bearish patterns,
0 bullish patterns,
245 patterns waiting for breakout.
The CPI signal is 0.0%, which is bearish (<= 35%).

The chart pattern indicator is bearish 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.

Swing Traders: Pivot Points

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

IndexS2S1PivotR1R2
Dow Industrials (^DJI): Daily  10,245  10,274  10,315  10,344  10,384 
Weekly  9,979  10,141  10,431  10,592  10,882 
Monthly  9,631  9,967  10,344  10,679  11,056 
S&P 500 (^GSPC): Daily  1,074  1,077  1,082  1,084  1,089 
Weekly  1,043  1,061  1,095  1,113  1,148 
Monthly  1,016  1,048  1,088  1,120  1,161 
Nasdaq (^IXIC): Daily  2,162  2,168  2,179  2,185  2,196 
Weekly  2,069  2,121  2,215  2,268  2,362 
Monthly  2,065  2,119  2,214  2,269  2,364 
  • Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
  • S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
  • If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
  • In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
  • A move outside of daily R1 or S1 usually does not mean a breakout.
  • The odds suggest that the entire week's price action will remain between weekly R2 and S2.
  • Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
  • Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
  • Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

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Consecutive Price Trends

Index Consecutive
Closes So Far 
% Comments 
 Dow industrials (^DJI) 1 week down 32.3%  The trend may continue.
 1 month down 20.5%  Expect a reversal soon.
 S & P 500 (^GSPC) 1 week down 32.3%  The trend may continue.
 1 month down 21.4%  Expect a reversal soon.
 Nasdaq composite (^IXIC) 1 week down 35.9%  The trend may continue.
 1 month down 26.3%  The trend may continue.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

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.

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Earnings, Chart Patterns & Industries

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

 Found Chart Pattern Name
85Head-and-shoulders bottom
39Triangle, symmetrical
28Big W
21Double Bottom, Eve and Adam
15Double Top, Adam and Eve
15Double Bottom, Adam and Adam
15Triangle, ascending
14Pipe bottom
14Double Bottom, Eve and Eve
14Triple bottom

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

 

 

 

 

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

This WeekLast Week
1. Air Transport1. Shoe
2. Shoe2. Chemical (Specialty)
3. Electric Utility (West)3. Air Transport
4. Packaging and Container4. Computers and Peripherals
5. Computers and Peripherals5. Machinery
48. Semiconductor48. Petroleum (Producing)
49. Petroleum (Producing)49. Oilfield Svcs/Equipment
50. Oilfield Svcs/Equipment50. Natural Gas (Diversified)
51. Short ETFs51. Homebuilding
52. Homebuilding52. Short ETFs

-- Thomas Bulkowski

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Picture of a mushroom.

Saturday 8/14/10. Where Do Red Ants Come From?

I made two major discoveries this weekend. First, I figured out where all of my hummingbird nectar was going. I thought that the heat was evaporating it, but no! Ants were stealing it.

The second discovery concerns red ants. I figured out where they come from. After eating my red hummingbird nectar, the black ants turned red! 

Here's a tip if you're interested in buying a hummingbird feeder. Check the box carefully. If it doesn't say that hummingbirds are included, then you'll have to buy those separately. I didn't buy any hummingbirds and have had the feeder up for over a month now with just one hummer visiting. It's parked across the street.

-- Thomas Bulkowski

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Thursday 8/12/10. Tutorial Thursday, Part 2: Six Selling Rules Every Trader Should Know

Picture of a flower from my garden.

The following are six more rules for selling. Remember, you heard it hear first.

  1. If price hits its target, sell. This is often best for swing or day traders that have a shorter-term view of the markets. But even for position traders, those that can hold for months or even years until the trend changes, it's useful.

    A utility stock I own, for example, likes to rise to 50-52 and then drop. Each time it hits that range, I sell some then buy it back in the low 40s. Easy money!

  2. Sell when price plunges through support. If price reaches a support area and bounces up, then you're fine. However if it closes below support then get worried. It will likely continue lower, so it's best to sell immediately. In fact, place a stop a penny or two below the lowest price in the support zone to make execution automatic.
  3. Sell on a bearish chart pattern breakout. This one is related to the prior one. If I see a symmetrical triangle chart pattern that breaks out downward, for example, then that's a bearish signal. It's time to exit. My Vivus trade is a recent example. I sold a day after a bearish breakout from the symmetrical triangle, missing a 55% plunge in the stock.
  4. Sell if others in the industry are weak. If other stocks in the same industry are struggling, then that is a signal that all is not well. Several years ago, I owned Home Depot. When Lowes reported weaker than expected earnings a few days before Home Depot's announcement, I knew that Home Depot was going to get hit, too. It did, twice, when Lowes reported and again when Home Depot reported.
  5. Sell on weak fundamentals. Fundamentals are not a timely indicator, since they can lag recent events by months, but if you see earnings declining from quarter to quarter or sales struggling, then take the hint. It could be time to sell.
  6. Sell on technical indicators. If your indicators are saying sell, why are you holding on? Don't forget divergence, too. And failure swings. And don't forget to check anything else that you forgot to check.

The butterfly pictured above is 6 inches from wing tip to wing tip. I kept my dog inside the house just in case the butterfly tried to carry her away. Didn't that happen to Toto in the Wizard of Oz?

-- Thomas Bulkowski

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Tuesday 8/10/10. Tutorial Tuesday: 6 Selling Rules Every Trader Should Know, Part 1

Picture of a flower from my garden.

Here are six trading rules that every trader and investor should know. I'll give you another six on Thursday.

  1. Use stops. Using a stop loss order makes trading for a living easy. There's little stress involved because the sell decision has already been made after you file the stop price level with your broker. If you raise the stop as price rises, you keep more of your profit or narrow a loss. Without a stop in place, you'll keep wondering if now is the time to sell? Or "I should have sold yesterday when it was 3 points higher!" You'll not have regrets like that if you use a stop.
  2. Sell the unexpected! If a stock does the unexpected, then sell. If you expect an upward breakout from a stock and it breaks out downward instead, then dump it and fast. If a downward price trend doesn't reverse as you predicted, then sell. If earnings were supposed to be good and they are not, chances are the market will confirm that by punishing the stock. The sooner you realize that the market is telling you to get out, the better.
  3. If the price trend changes, sell. Use the 1-2-3 trend change method to determine when to sell. Testing shows it adds value (meaning it correctly predicts a trend change, just not all of the time). The method can help you detect a significant trend change in time to save your skin.
  4. If you get a sell signal, then follow it. How many times have you received a sell signal from an indicator or trading system and ignored it? Examine your trades and ask yourself if you had followed your trading rules would you be more profitable?
  5. Sell on an adverse breakout. If you have a tidy profit in a stock and it forms a reversal pattern (such as a double top) which confirms, then sell the stock. Don't let an adverse breakout from a chart pattern erase too much of your gain. Don't let a small loss grow into a huge one by continuing to hold a losing position.
  6. Sell on divergence! This is not an automatic sell since price can diverge from an indicator for weeks or even months. But if price makes a higher peak and the indicator does not, then the indicator is showing weakness. Find out why. Divergence doesn't always work, either, so confirm the stock's weakness with other indicators.

-- Thomas Bulkowski

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Monday 8/9/10. Market Monday: The Week Ahead

Picture of a flower from my garden.

Numerology! Cool: 8/9/10.

What a wonderful but tiring weekend. Saturday I spent most of it working on 1) changing the oil in my car (easy), 2) flushing the radiator (hard because I couldn't unloosen the drain plug, which looks like a plastic wing-nut, so I had to create my own wrench and hoped the radiator wouldn't leak when I finished, 3) changed the oil in my lawnmower (easy) and cleaned the air filter (messy because it's supposed to be laced with oil), and 4) drained my hot water heater.

You should flush your hot water heater yearly to remove the sediment and other gunk (looks like cottage cheese) that builds up. Think I'm kidding? Read the owner's manual. Be sure to turn off the power before you start and open the pressure release valve at the top of the tank to help drain it. My heater is 24 years old, and it's like brand new (I removed the heating elements a few years ago and they looked new).

One secret to longevity is to install a hot water timer on the thing. Why are you heating your water all night long? For less than $50, you can put an end to that. Mine comes not only with a timer, but with a switch as well. I don't use the timer, but just switch it on for 5 minutes each day after a bike ride in the summer. For laundry, I may leave it on 30 minutes to heat the water. But not using items is how you get things to last.

$ $ $

I added Consecutive Price Trends to the links below. The analysis helps determine when the indexes are ready to change direction.

My Prediction

Picture of the nasdaq composite on the daily scale.

I show the Nasdaq composite on the daily scale. If we put Elliott wave to the test, the current trend is a motive wave upward, composed of three up waves (1, 3, and 5) and two counter-trend waves (2, and 4). The numbers show the end of the waves.

Some of the rules are:

  1. Wave 2 never moves beyond the start of wave 1. (Ok)
  2. Wave 3 is never the shortest wave. (OK)
  3. Wave 4 never overlaps wave 1. (Uh oh)

Well, two out of three isn't bad (wave 4 overlaps wave 1), but who's counting? We are, of course, because that's what Elliott wave is all about.

Let's assume it's a valid motive wave. After the motive wave ends, an ABC correction begins. That would take the index down, as I show, but it could extend lower (or not), of course.

If price decides to climb instead, it will hit overhead resistance as shown by the green lines. Those should not be thought of as distinct lines but areas of resistance that the index will have to plow through to move higher.

The markets are tolerating bad news just fine, suggesting a bullish outlook. The chart pattern indicator is neutral and that often happens before a trend change. The consecutive price trend shows the Dow closing higher for the third week and it's unlikely to make it 4 in a row. Thus, look for this week to close lower -- no guarantee, of course -- but that's my guess.

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A Brief Look Back

Picture of a flower from my garden.

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 208.44 points. Construction spending climbed.
Tuesday: Down 38 points. Personal income was slightly below expectations. Factory orders were worse.
Wednesday: Up 44.05 points.
Thursday: Down 5.45 points. Initial jobless claims climbed more than expected.
Friday: Down 21.42 points. Consumer credit dropped. The unemployment rate held steady despite expectations of a rise.

For the Week...

The Dow industrials were up 187.62 points or 1.8%.
The Nasdaq composite was up 33.77 points or 1.5%.
The S&P 500 index was up 20.04 points or 1.8%.

Year to Date...

Dow Industrials
     5.4% down from the high of 11,258.01 on 04/26/2010.
     10.8% up from the low of 9,614.32 on 07/02/2010.
Nasdaq
     9.7% down from the high of 2,535.28 on 04/26/2010.
     11.0% up from the low of 2,061.14 on 07/01/2010.
S&P 500
     8.0% down from the high of 1,219.80 on 04/26/2010.
     11.0% up from the low of 1,010.91 on 07/01/2010.

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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
Productivity & costs8:30 TD+Cost of producing a unit of output.
Wholesale inventories10:00 TD-Wholesale sales and inventory statistics.
Trade balance8:30 WC+Signals balance of exports & imports.
Treasury budget2:00 WDTracks budget deficit. Important in April (tax filing).
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
International trade8:30 ThC+Import/export prices, trade balance. US economy vs others.
Consumer price index8:30 FB+Inflation report. Measures cost of goods and services.
Retail sales8:30 FA-Reports total retail sales (not services). Are people spending?
Business inventories10:00 FC-Reports manufacturing, wholesale, retail inventories.

Options Expiration

No options expire this week.

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Swing and Position Traders: Chart Pattern Indicator

As of 08/06/2010, the CPI had:

18 bearish patterns,
24 bullish patterns,
496 patterns waiting for breakout.
The CPI signal is 57.1%, which is neutral (between 35% and 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.

Swing Traders: Pivot Points

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

IndexS2S1PivotR1R2
Dow Industrials (^DJI): Daily  10,459  10,556  10,613  10,710  10,766 
Weekly  10,374  10,514  10,608  10,748  10,843 
Monthly  9,235  9,944  10,324  11,033  11,412 
S&P 500 (^GSPC): Daily  1,101  1,112  1,117  1,127  1,133 
Weekly  1,098  1,110  1,119  1,131  1,141 
Monthly  976  1,049  1,089  1,162  1,202 
Nasdaq (^IXIC): Daily  2,241  2,265  2,278  2,302  2,315 
Weekly  2,231  2,260  2,282  2,311  2,334 
Monthly  1,995  2,142  2,225  2,371  2,454 
  • Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
  • S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
  • If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
  • In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
  • A move outside of daily R1 or S1 usually does not mean a breakout.
  • The odds suggest that the entire week's price action will remain between weekly R2 and S2.
  • Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
  • Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
  • Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

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Consecutive Price Trends

Index Consecutive
Closes So Far 
% Comments 
 Dow industrials (^DJI) 3 weeks up 19.9%  Expect a reversal soon.
 2 months up 36.7%  The trend may continue.
 S & P 500 (^GSPC) 1 week up 38.7%  The trend may continue.
 2 months up 39.3%  The trend may continue.
 Nasdaq composite (^IXIC) 1 week up 38.9%  The trend may continue.
 2 months up 41.9%  Expect a random direction.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

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.

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Earnings, Chart Patterns & Industries

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

 Found Chart Pattern Name
82Head-and-shoulders bottom
39Triangle, symmetrical
28Big W
21Double Bottom, Eve and Adam
15Double Bottom, Adam and Adam
15Pipe bottom
14Double Bottom, Eve and Eve
12Triple bottom
11Triangle, ascending
9Double Bottom, Adam and Eve

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

 

 

 

 

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

This WeekLast Week
1. Shoe1. Shoe
2. Chemical (Specialty)2. Computers and Peripherals
3. Air Transport3. Air Transport
4. Computers and Peripherals4. Trucking/Transp. Leasing
5. Machinery5. Machinery
48. Petroleum (Producing)48. Natural Gas (Diversified)
49. Oilfield Svcs/Equipment49. Homebuilding
50. Natural Gas (Diversified)50. Coal
51. Homebuilding51. Oilfield Svcs/Equipment
52. Short ETFs52. Short ETFs

-- Thomas Bulkowski

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Thursday 8/5/10. 4 Trading Tips

Pic of a moth

During the past week, two traders have emailed me questions about trading problems. Both are new to the trading game and both can't make consistent money over the longer term (for 2 years they've been trying). I don't know the cause of their problems, but I did offer advice. Here's four tips that may help.

  1. Forget the money, honey! A day trader I know complains that "All I need to do is make 10 cents per trade" and is finding it difficult to net even that much. Every phone call and email is the same. "Just 10 cents per trade. On 1,000 shares, that's $100 a day times 262 trading days in a year and that's $26,000 a year. Twenty cents a day will net me $52,000 annually" and so on.

    Do you know what kind of psychological pressure chanting that mantra puts you under? Do you find yourself holding onto a trade too long because it was at 8 cents profit and you wanted 10? Instead of holding an 8 cent winner, the trade turned into 15 cent loser. Do you exit a trade just as soon as it hits a dime? You can imagine more permutations, but the fact remains, it doesn't matter at what price you bought the stock. What matter is at what price you sell.

    To put that another way, forget about the money. Concentrate on execution. So many traders, seasoned ones and novices alike, focus on the money instead of executing properly. If you execute your trades according to your trading plan then the profits will come.

  2. Learn from mistakes. There's an old joke that goes, "learn from your mistakes so you can recognize them when you make them again." If you can't figure out what you are doing wrong, then you're in serious trouble. Sometimes the market Gods are just not in your favor. Sometimes your trading style doesn't match market conditions. Maybe your favorite setup has stopped working. Whatever the reason, find it and then fix it.
  3. Switch to a longer timeframe. Not everyone can make it as a day trader. It can take years of practice before you become consistently profitable. You can say that about many jobs where a skill is involved -- it takes time to become an expert -- and trading is just a job. Even for swing or position traders, perhaps the solution is to switch to a longer timeframe. Changing from intraday to swing trading, where you could hold a position for days or weeks might solve your problem. At least you can get some trading experience before you again tackle a quicker trading style.
  4. The same can be said for trading options, which I think is just another way to use leverage. With options, you need to get right not only your timing down, but the direction and extent of the move. Switch to stock trading for a few years (or more) to get the experience needed to trade options properly. Then maybe you'll have a chance to make consistent money.

    When I started day trading, I was using the 1-minute scale. Switching to the 5-minute scale felt as if I could break for lunch, take a nap, and still have 3 minutes to go before the next candle. My stress level dropped considerably just by moving to a longer interval. Try moving to a longer scale and see if the profits increase.

  5. The trend is your friend. How many times have you heard that? It's true (I proved it when I wrote my Encyclopedia of Chart Patterns and Encyclopedia of Candlestick Charts books). Patterns and candles with breakouts in line with the market trend outperformed those going against the trend.
  6. CPI location

    How do you trade with the trend? Check the chart pattern indicator -- CPI for short -- at the top of this page. The graphic shows what to look for. If the arrows are green then that's bullish. Red is bearish. Solid arrows are better than half-shaded, and the more arrows the stronger the signal.

    Following the CPI will keep you on the right side of the trend until the trend changes. When that happens, the indicator will often flip from bullish to bearish for three days or so before settling down on a new direction. This occurs when the market makes a large price move. That move will cause many Nr7s to breakout in a new direction, flipping the existing signal. If the trend continues, that's not a problem. But if the trend moves sideways or goes in the opposite direction, that's when you could get fake signals. The arrows are an attempt to fix the problem. The more arrows, the stronger and more reliable the signal.

    I'm NOT suggesting you trade the indicator signals, just that you are going long when the arrows are green and shorting (or in cash) when they are red. In short, trade with the trend.

-- Thomas Bulkowski

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Tuesday 8/3/10. Trading Tuesday: VVUS

Picture of Vivus (VVUS) on the daily scale.

The chart shows a trade I made in Vivus (VVUS), on the daily scale.

On Sept 9, 2009 the company "Announces positive results from two phase 3 studies; obese patients on Qnexa achieve average weight loss up to 14.7%" according to google. As the chart shows, the stock responded by gapped higher from 6.91 to 11.80, or 71%, at B.

Two days later, the CEO sold 200,000 shares. Smart move. The two blue As are an Adam & Adam double top chart pattern, suggesting the stock would drop, which it did.

At C, the company announced that they would sell 9 million shares. The stock dropped 5% after hours. Two days later, they set the price at 10.50 and completed the offering on the 23rd..

As the steady decline shows, anyone participating in the offering got hosed.

Price bottomed at 7.07, almost closing the gap at B. Five days later, I bought the stock and received a fill at 7.80. My notes for the trade say, "11/11/09: I believe this has retraced all it's going to so now is the time to buy. The stock has hit support setup by the bottom of the large gap and a prior peak in late July."

It took a while for the stock to move higher, but that was the general direction. Since I didn't expect to sell anytime soon, I ignored the stock until June 15.

My trading notebook has the following entry on the sale. "Downward breakout from a symmetrical triangle with possible negative potential on FDA approval due to heart side effects. ONE analyst speculates that the FDA will turn down the drug due to insufficient evidence that it does NOT hurt the heart. Got a great fill considering it opened at 10.56."

I sold the stock the next day, June 16, and received a fill at 10.71. I made 37% on the trade.

Fortunately, I was lucky enough to sell the stock when I did. A month after I sold, the FDA rejected the weight-loss drug on safety concerns. The exchange halted trading and after hours the stock was down 57%. When it opened again, the stock closed 55% lower, eventually sinking to a low of 4.69 before recovering.

-- Thomas Bulkowski

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Monday 8/2/10. Market Monday: The Week Ahead

I added pivot points to the list of goodies presented each Monday. See below for details.

My Prediction

Picture of the Dow industrials on the daily scale.

I show the Dow industrials on the daily scale.

The index has formed an unconfirmed Adam & Eve double top chart pattern. Adam is at A and Eve is at B. Adam peaks are narrow, often composed of one long spike. Eve is more rounded looking. If it has spikes, they tend to be numerous, perhaps shorter, too. Over the height of the Adam peak, it tends to remain more narrow than does Eve. Eve peaks tend to broaden out.

This chart pattern is unconfirmed, meaning price hasn't closed below the low between the two peaks (C). Thus, it's just squiggles on the price chart. Nevertheless, you can also call this a 2B top. That's when price rises to the level of a prior peak and then reverses. Sometimes the new peak may climb above the prior one by a little or fall short, but when it stalls, it usually means price is going to drop.

The question is, how far?

There is underlying support as I show by the blue horizontal lines. It highlights an area called the corrective phase of a measured move up chart pattern (which stretches from C to B).

According to my book, Encyclopedia of Chart Patterns, 2nd Edition, price stops above the corrective phase 19% of the time, within the phase 35% of the time, and drops below it but above the bottom of the measured move 31% of the time, and drops below the MMU low 15% of the time.

Numbers like these help traders predict price movement and that's why many feel my books are invaluable resources. At nearly 1,000 pages, it can double as firewood in a cold winter (or even toilet paper -- buy several copies just in case). And if you buy anything from Amazon.com, then please do so through my website. Simply click on a picture of a book and it'll take you there, passing a code to Amazon along the way. I get a small referral fee (at no extra charge to you) and that helps support this site. You don't have to buy my book. You can buy anything while there (like a new kindle or a Mercedes) and it will apply. But you have to go through my website each time you visit Amazon for it to count.

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A Brief Look Back

Picture of a flower from my garden.

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 100.81 points. New home sales were better than expected.
Tuesday: Up 12.26 points. Consumer confidence was shaken.
Wednesday: Down 39.81 points. Durable orders weren't so durable.
Thursday: Down 30.72 points. Initial jobless claims were fewer than expected.
Friday: Down 1.22 points. GDP dropped from prior period.

For the Week...

The Dow industrials were up 41.32 points or 0.4%.
The Nasdaq composite was down 14.77 points or 0.7%.
The S&P 500 index was down 1.06 points or 0.1%.

Year to Date...

Dow Industrials
     7.0% down from the high of 11,258.01 on 04/26/2010.
     8.9% up from the low of 9,614.32 on 07/02/2010.
Nasdaq
     11.1% down from the high of 2,535.28 on 04/26/2010.
     9.4% up from the low of 2,061.14 on 07/01/2010.
S&P 500
     9.7% down from the high of 1,219.80 on 04/26/2010.
     9.0% up from the low of 1,010.91 on 07/01/2010.

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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
Construction spending10:00 MDCovers residential/non-residential/public spending on new construction.
Personal income & consumption8:30 TC+Measures sources of income to predict future demand.
Personal consumption expenditures8:30 TC+Covers durables, non-durables, and services.
Factory orders10:00 TD+Durable/non-durable goods orders w/factory inventories.
Auto & truck sales2:00 TC-Monthly sales of domestically produced vehicles.
Crude inventories10:30 W?My guess: Measures oil inventory.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
4 Employment reports8:30 FANonfarm payrolls, unemployment rate, avg workweek, hourly earnings.
Consumer credit3:00 FD-Measures auto, credit card and other debt.

Options Expiration

No options expire this week.

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Swing and Position Traders: Chart Pattern Indicator

As of 07/30/2010, the CPI had:

10 bearish patterns,
12 bullish patterns,
375 patterns waiting for breakout.
The CPI signal is 54.5%, which is neutral (between 35% and 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.

Swing Traders: Pivot Points

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

IndexS2S1PivotR1R2
Dow Industrials (^DJI): Daily  10,281  10,373  10,440  10,533  10,600 
Weekly  10,229  10,347  10,466  10,585  10,704 
Monthly  9,251  9,859  10,222  10,829  11,192 
S&P 500 (^GSPC): Daily  1,080  1,091  1,099  1,109  1,117 
Weekly  1,071  1,086  1,104  1,119  1,136 
Monthly  968  1,035  1,078  1,145  1,188 
Nasdaq (^IXIC): Daily  2,200  2,227  2,246  2,273  2,292 
Weekly  2,171  2,213  2,260  2,302  2,349 
Monthly  1,961  2,108  2,208  2,354  2,454 
  • Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
  • S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
  • If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
  • In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
  • A move outside of daily R1 or S1 usually does not mean a breakout.
  • The odds suggest that the entire week's price action will remain between weekly R2 and S2.
  • Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
  • Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
  • Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

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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.

Earnings, Chart Patterns & Industries

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

Large numbers of bullish or bearish patterns can signal short to intermediate term market trends. The most frequently appearing chart patterns in the stocks, indexes, and long-only ETFs I follow during the last month were:

FoundPattern Name
186Pipe bottom
77Head-and-shoulders bottom
36Triangle, symmetrical
29Big W
19Double Bottom, Eve and Adam
17Double Bottom, Adam and Eve
16Double Bottom, Eve and Eve
15Double Bottom, Adam and Adam
13Triple bottom
10Triangle, ascending

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

This WeekLast Week
1. Shoe1. Shoe
2. Computers and Peripherals2. Computers and Peripherals
3. Air Transport3. Metal Fabricating
4. Trucking/Transp. Leasing4. Trucking/Transp. Leasing
5. Machinery5. Packaging and Container
48. Natural Gas (Diversified)48. Homebuilding
49. Homebuilding49. Short ETFs
50. Coal50. Natural Gas (Diversified)
51. Oilfield Svcs/Equipment51. Coal
52. Short ETFs52. Oilfield Svcs/Equipment

-- Thomas Bulkowski

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