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

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Chart Patterns: After the Buy
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Busted
Patterns
Candles Chart
Patterns
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Patterns
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 06/22/2017
21,397 -12.74 -0.1%
9,320 27.23 0.3%
727 -2.42 -0.3%
6,237 2.74 0.0%
2,435 -1.11 0.0%
YTD
8.3%
3.1%
10.3%
15.9%
8.7%
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.

December 2009 Headlines


Archives


Tuesday 12/29/09. What's Common to Stocks That Double?

For the last year, I have been working on my fifth book. Part of it covers fundamental analysis, or picking stocks based on value. I just finished a chapter on stocks that double in price within five years and I thought I'd share the results with you. I used data from 1992 to 2007 on almost 1,000 stocks, but not all stocks covered the entire span. Fundamentals were provided by Value Line.

Here is the list of common elements.

  • Start with small cap stocks, those with market caps (shares outstanding times stock price) less than $1 billion.
  • Stocks priced between $5 and $20 have the highest frequency of doubling.
  • Look for low price to book ratio, below 2.5.
  • Find stocks that are reducing capital spending (cap ex).
  • Price to cash flow below 8 is good, below 2 is better.
  • Focus on stocks that do not pay dividends, but this is a 60/40 thing.
  • Look for companies cutting their long term debt.
  • Increasing net profit helps but it's not that important.
  • A price to earnings ratio below 25 is good, below 20 is better.
  • Keep the price to sales ratio below 1.0.
  • Look for return on equity between 8% and 14% but be flexible.

I picked the items I liked and did a scan for those fundamentals and found 31 stocks. Here's what I looked for: small caps, stocks priced from $1 to 20, price to book value less than 2.5, price to cash flow less than 2.0, PE ratio less than 25 and PSR less than 1.0. Preliminary testing showed the criteria performed well. I would add a test for reduced capital spending since that helped boost performance. I did not scan for that in the following picks, so you will have to do that yourself.

Here are the symbols...

IBKR, BBEP, MADKY, PTRY, SGU, FLY, NRF, DAC, ISLE, ACEAF, KV.A, PNCL, VRS, GOK, SPGZ, KYCN, NEGI, HAST, SNSTA, TMM, WCSTF, PSJEY, FREE, JPST, GFN, GLUX, BHO, SSY, EDAC, CVBK, NWX.J

I am NOT saying that these stocks will double next year or within the next 5. What I am saying is that these stocks share the same traits as those that did double within five years.

-- Thomas Bulkowski

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Monday 12/28/2009. Market Monday: The Week Ahead

A Brief Look Back

Picture of a poppy from my back yard.

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

Monday: Up 85.25 points.
Tuesday: Up 50.79 points. GDP came in lower than expected, but existing home sales were better.
Wednesday: Up 1.51 points. Personal spending and income both were below expectations and new home sales were soft as well. Crude inventories dropped.
Thursday: Up 53.66 points. Initial and continuing jobless claims were better than expected. Soft auto sales hurt durable good order numbers.
Friday: Holiday or other weird event!

For the week...

The Dow industrials were up 191.21 points or 1.9%.
The Nasdaq composite was up 74 points or 3.3%.
The S&P 500 index was up 24.01 points or 2.2%.

Economic Reports

The following information is derived from yahoo!finance and times are local to the east coast. The "Dow Moved" column is the close-to-close price change of the Dow industrials on the release day from the prior trading day, the last time the report came out.

ReportTimeA-F
Rating
Dow
Moved
Description
Consumer confidence10:00 TB--17Surveys 5,000 households for trends.
Chicago purchasing managers index9:45 WB+35Monitors regional manufacturing activity.
Crude inventories10:30 W?+2My guess: Measures oil inventory.
Initial jobless claims8:30 ThC++54Counts people filing for state unemployment benefits.

The markets will be closed on Friday in celebration of hangovers.

Options Expiration

No options expire this week.

CPI: Chart Pattern Indicator

As of 12/24/2009, the CPI had:

5 bearish patterns,
56 bullish patterns,
575 patterns waiting for breakout.
The CPI signal is 91.8%, which is bullish (>= 65%).

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

Other

Earnings season is over.

Mutual funds will begin dividend distributions and rebalancing their portfolios for the approaching year end (starts in late November).

I found 4 pipe bottoms last week, which is mildly bullish. Large numbers of pipe bottoms often signal the start of a short to intermediate-term move up before price curls back down, forming an unconfirmed double bottom. I think of it as the signal for the first bottom of a potential double bottom.

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

This WeekLast Week
1. Coal1. Coal
2. Internet2. Internet
3. Chemical (Specialty)3. Air Transport:
4. Apparel4. Apparel
5. Semiconductor Cap Equip.5. Insurance (Life):
48. Securities Brokerage48. Electric Utility (Ea
49. Trucking/Transp. Leasing49. Petroleum (Integrated):
50. Electric Utility (East)50. Trucking/Transp. Leasing
51. Alternate Energy51. Alternate Energy
52. Short ETFs52. Short ETFs

My Prediction

Picture of the Nasdaq (^IXIC) on the daily scale.

I am pleased to see that the Nasdaq's partial decline broke out upward from the broadening top chart pattern, just as the pattern predicted. I show that on the chart, which is displayed using the daily scale.

At A, price gapped higher in a breakaway gap. A breakaway gap is a gap in price that leaves a congestion area. I was hoping to see a matching gap posing as an exhaustion gap, book ending the rise, but that hasn't happened yet.

When you combine the expectation of an exhaustion gap with the white marubozu candle, which is a continuation candle 56% of the time, it suggests price will continue moving up. For how long? My guess is two days. I show the white marubozu at B in the inset, by the way. The white marubozu is a candle without shadows. That means the opening price is at the low and the closing price is at the high. The various prices might be off a bit but it looks like a hairless rectangle on the chart.

After Tuesday, things get dicey. Price could drop on the crude oil report or the employment report the next day could take it lower. Or I could be wrong about all of this...

If you intend to celebrate the New Year, please drive sober.

-- Thomas Bulkowski

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Tuesday 12/22/09. Adam and Eve Patterns

Picture of Lexmark (LXK) on the daily scale.

For those of you not familiar with Adam and Eve, let me give you a tutorial. Double tops and double bottoms come in four varieties: Adam & Adam, Adam & Eve, Eve & Eve, and Eve & Adam. Each peak or valley is either wide or narrow. Wide ones are called Eve and narrow ones are called Adam.

But what is wide and what is narrow?

Answering that can be confusing for both novices and experts alike. Sometimes a chart pattern can be difficult to assess. However, I've created some identification rules.

Let's discuss Eve bottoms and I show one in the chart of Lexmark (LXK) on the daily scale. Eve is wide, rounding appearing. If it has downward spikes, they are numerous and often short. Notice how the top of the Eve bottom is very wide. I denote that with a green line between points B and C.

Compare the width of BC with AB. Notice that the Eve bottom is much wider at its top than is the Adam top. That is one of the key ways of telling an Adam bottom or top from an Eve.

Adam peaks or valleys are narrow and remain slender as you move up (bottoms) or down (tops) the pattern. Often Adam will be composed of one long spike. Recall that Eve can have spikes, too, but they will be numerous and often short. Adam will have one or two and be quite long. This Adam bottom shows such a long spike.

The chart shows, of course, an Adam & Eve double bottom. Imagine the same picture flipped upside down. The Adam and Eve peaks would retain the same characteristics.

To make identification easier, ask yourself if the two peaks or valleys look the same or different. If they are the same, then you are dealing with Adam & Adam or Eve & Eve. If one is wide and the other is narrow, then it is either Adam & Eve or Eve & Adam.

Now that you can identify the various combinations of Adam and Eve, so what? My book, Encyclopedia of Chart Patterns, Second Edition (pictured) discusses the details of Adam and Eve tops and bottoms. The various combinations behave differently so that if you can identify them correctly, you can use that information to your advantage.

Eve & Eve double bottoms, for example, tend to be star performers. Tests show that the average rise beats the other three combinations of Adam and Eve. Another example: Adam & Adam double tops have the lowest failure rate of the four combinations of Adam and Eve double tops.

When your son or daughter asks about Adam and Eve, you now have a wonderful bedtime story to tell them.

-- Thomas Bulkowski

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Monday 12/21/2009. Market Monday: The Week Ahead

A Brief Look Back

Picture of a red flower.

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

Monday: Up 29.55 points.
Tuesday: Down 49.05 points. The producer price index climbed, perhaps a sign of inflation. Both capacity utilization and industrial production rose.
Wednesday: Down 10.88 points. Building permits and consumer price index both climbed, but housing starts held steady. Crude inventories dropped. The FED left interest rates unchanged.
Thursday: Down 132.86 points. Initial and continuing jobless claims both moved higher (more unemployed).
Friday: Up 20.63 points. RIMM and ORCL posted good earnings, boosting the market, but a strong dollar limited gains.

For the week...

The Dow industrials were down 142.61 points or 1.4%.
The Nasdaq composite was up 21.38 points or 1.0%.
The S&P 500 index was down 3.94 points or 0.4%.

Economic Reports

The following information is derived from yahoo!finance and times are local to the east coast. The "Dow Moved" column is the close-to-close price change of the Dow industrials on the release day from the prior trading day, the last time the report came out.

ReportTimeA-F
Rating
Dow
Moved
Description
Gross domestic product8:30 TB-17Measures economic activity; GDP deflator measures inflation.
Existing home sales10:00 MC+133Counts sales of used homes.
Personal income & consumption8:30 WC++31Measures sources of income to predict future demand.
Personal consumption expenditures8:30 WC++31Covers durables, non-durables, and services.
New home sales10:00 WC++31Shows sales of single-family homes.
Crude inventories10:30 W?-11My guess: Measures oil inventory.
Initial jobless claims8:30 ThC+-133Counts people filing for state unemployment benefits.
Durable goods orders8:30 ThB+31Measures orders, shipments of goods with lifespans >3 years.

Due to the Christmas holiday, there will be no trading on Friday and markets will close early on Thursday.

Options Expiration

No options expire this week. However a new SPL series is added on Thursday. I have no idea what that means, but it sounds important.

CPI: Chart Pattern Indicator

As of 12/18/2009, the CPI had:

24 bearish patterns,
24 bullish patterns,
320 patterns waiting for breakout.
The CPI signal is 50.0%, which is neutral (between 35% and 65%).

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

Other

Earnings season is over.

Mutual funds will begin dividend distributions and rebalancing their portfolios for the approaching year end (starts in late November).

I found 5 pipe bottoms last week, which is mildly bullish Large numbers of pipe bottoms often signal the start of a short to intermediate-term move up before price curls back down, forming an unconfirmed double bottom. I think of it as the signal for the first bottom of a potential double bottom.

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

This WeekLast Week
1. Coal1. Internet
2. Internet2. Air transport
3. Air Transport3. Apparel
4. Apparel4. Medical Supplies
5. Insurance (Life)5. Long ETFs
48. Electric Utility (East)48. Trucking/Transportation Leasing
49. Petroleum (Integrated)49. Oilfield Svcs/Equipment
50. Trucking/Transp. Leasing50. Petroleum (Integrated)
51. Alternate Energy51. Alternate Energy
52. Short ETFs52. Short ETFs

My Prediction

Picture of the Dow industrials (^DJI) on the daily scale.

Monday is the first day of winter! Yippee! Let's all go to the beach.

I am predicting a mild Monday since no economic reports come out and no important earnings announcements. Tuesday has GDP coming out that could move the market but it's not expected to.

New home sales numbers come out on Wednesday and I expect a market reaction to that. The news could send the market down through the bottom of the rectangle top chart pattern. I show that on the chart by two parallel red lines.

Finally, I don't think the dip will be a lasting one. Thursday is only a half day of trading but with low volume, few players can move the markets around.

-- Thomas Bulkowski

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Thursday 12/17/09. Bulkowski as Secret Santa

This year has been good for me, both in my investing/trading activities and in revenue generated by the website. In November, for example, I had over 29,000 unique visitors come to the site and poke around -- the highest ever. However, less than 1% of you clicked on an ad (which is fine), and just a handful visited Amazon.com through the site and bought something there. Both ad clicks and Amazon.com referrals help pay for the cost of running this website.

Revenue exceeded the website's expenses this year, and I had a bit left over. So, I decided to give it away. But how?

Giving away money has always been a problem, and I have thought about how to do it for years without a good solution. A few months ago, I figured it out. I would become a Secret Santa. You may have heard about them. They are often rich people that visit thrift shops or homeless shelters and hand people $100 bills. My idea was different.

Picture of a tiger lilly.

I am a private person. I don't like it when people make a fuss over something I've done. When I worked for Tandy Corporation, for example, I told them not to buy a cake and celebrate my 10 year anniversary on the job. At the 5 year mark, they bought a cake and made a spectacle. You stand there like a dope, smiling, shaking the hands of people that want nothing to do with you. They are only after the cake. I hated every minute of it.

So, handing someone a hundred bucks was a non-starter. And, I didn't know how to recognize someone in need anyway. I would probably select Warren Buffet and try to hand him $100.

And before you send me emails requesting cash, recognize that your car costs more than mine (I drive a 1988 Grand Am). Your house is larger than mine. When my neighbor lights a cigarette, I close my window to keep out the smoke. In other words, I'm not rich, so don't even think about asking for money. I'm serious.

Here's my idea. I bought blank business cards from Office Depot. On each card I printed, "Merry Christmas 2009! -- Secret Santa."

Then I went to the library. I pulled books off the shelves and inserted not only the business card but money -- one bill per book.

That's my idea. Go to the library and stuff a greeting card along with cash into your favorite library books. Not only will it put a smile on someone's face, it will help promote reading and libraries. As an added bonus, you don't have to deal with people. It's all anonymous without the fuss. And that's what I really like.

While I was there, I visited the Friends of the Library section where they sell used books and video tapes. I found two videos and several books that I wanted so I dug into my pockets for cash and came up empty. Go figure.

-- Thomas Bulkowski

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Tuesday 12/15/09. Tutorial Tuesday: The Top 5 Candles

Here are the top five candle patterns, ranked by overall performance. That means they have outperformed in bull and bear markets as measured by the move 1, 3, 5, and 10 days after the candle pattern ends.

Image of a bearish three line strike candlestick
1. (best) Three line strike, bearish
84% bullish reversal
Image of a bullish three line strike candlestick
2. Three line strike, bullish
65% bearish reversal
Image of a three black crows candle
3. Three black crows

78% bearish reversal

Image of an evening star candle
4. Evening star

72% bearish reversal

Image of a upside Tasuki gap candle
5. Upside Tasuki gap
57% bullish continuation

Below are the top five candles that perform best as reversals. That means price enters and exits the candlestick on the same side, reversing the price trend. Their reversal rate has nothing to do with their performance over the coming days.

Image of a three stars in the south candle
1 (best). Three stars in the south
86% reverse
Image of a bearish three line strike candlestick
2. Three line strike, bearish
84% reverse
Image of a three white soldiers
3. Three white soldiers
82% reverse
Image of a identical three crows candle
4. Identical three crows
79% reverse
Image of a bearish engulfing candle
5. Engulfing, bearish

79% reverse

The following are the top performing candlesticks that act as continuation patterns. That means price enter and exits the candlestick in the same direction -- both up or both down. Again, the continuation rate has nothing to do with the performance in the coming days.

Image of a mat hold candlestick
1 (best). Mat hold

78% continue

Image of a deliberation candle
2. Deliberation

77% continue

Image of a concealing baby swallow candlestick
3. Concealing baby swallow
75% continue
Image of a rising 3 methods candlestick
4. Rising 3 methods

74% continue

Image of a bullish separating lines candle
5. Separating lines, bullish
72% continue

If you would like more information on these candlesticks, click on the associated link or you can read the full story in my book, "Encyclopedia of candlestick charts."

-- Thomas Bulkowski

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Monday 12/14/09. Market Monday: The Week Ahead

A Brief Look Back

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

Monday: Up 1 point. Consumer credit was down less than expected, but it didn't effect the market.
Tuesday: Down 104 points. Moody's warned that the US needed to cut its budget deficit to maintain its credit rating.
Wednesday: Up 51 points. Wholesale inventories climbed more than expected, but crude inventories dropped.
Thursday: Up 69. Initial jobless claims were more than expected, continuing claims dropped, trade deficit sank less than expected, and the treasury budget dropped less, too.
Friday: Up 66 points. Export climbed but imports held steady. Retail sales were up along with business inventories.

Economic Reports

The following information is derived from yahoo!finance and times are local to the east coast. The "Dow Moved" column is the close-to-close price change of the Dow industrials on the release day from the prior trading day, the last time the report came out.

ReportTimeA-F
Rating
Dow
Moved
Description
Producer price index8:30 TB-+30Measures wholesale goods cost. An indication of future inflation.
Capacity utilization9:15 TB-+30Gauges economic activity, hints of inflation.
Industrial production9:15 TB-+30Production of utilities, mines, and manufacturers.
Building permits8:30 WB--11Measures building permits for new construction.
Housing starts8:30 WB--11Number of homes beginning construction.
Consumer price index8:30 WB+-11Inflation report. Measures cost of goods and services.
Crude inventories10:30 W?+51My guess: Measures oil inventory.
FOMC interest rate2:15 WBig?The FED announces any changes in interest rate policy.
Initial jobless claims8:30 ThC++69Counts people filing for state unemployment benefits.
Leading indicators10:00 ThD--94Summary of already known reports.

The Federal Reserved reports on Wednesday, so that could set the tone for the rest of the week.

Options Expiration

The following is courtesy of yahoo!finance and they stole it from The Options Industry Council.

OptionDate
SPL converts to SPXTuesday
VIX, VXN, 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).

CPI: Chart Pattern Indicator

On Friday, 12/11/2009, the CPI had:

7 bearish patterns,
57 bullish patterns,
420 patterns waiting for breakout.
The CPI signal is 89.1%, which is bullish (>= 65%).

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

Other

Earnings season is over but Best Buy reports earnings on Tuesday, Oracle and RIMM on Thursday.

I found only 4 pipe bottoms last week with no pipe tops appearing. This is mildly bullish. Large numbers of pipes often signal the start of a short to intermediate-term trend change.

The following industries, of 52 that I follow, were the best performing.

  1. Internet (best again this week)
  2. Air transport (new, replacing Shoes)
  3. Apparel (was 3)
  4. Medical Supplies (new, replacing Coal)
  5. Long ETFs (new, replacing Computers and Peripherals)

Here are the worst performing.

  1. Trucking/Transportation Leasing (new, replacing Cement and Aggregates)
  2. Oilfield Svcs/Equipment (new, replacing Homebuilding)
  3. Petroleum (Integrated) (was 50)
  4. Alternate Energy (was 51)
  5. Short ETFs (worst) (was 52)

Notice that the bottom three remain the bottom three. In other words, the dogs remain dogs. Stick to industries that outperform and avoid those that don't show good relative strength.

My Prediction

Picture of the Dow utility (^IXIC) on the daily scale.

The chart shows the Dow utility average on the daily scale. I think the rest of the market will follow this index higher, so I have changed all of my targets going into the new year. See "Tom's Targets" at the top of this page.

The Federal Reserve meets on Tuesday, I think, and reports their decision on Wednesday. I don't think they will do anything except celebrate the coming holidays. Happy Hanukkah, by the way.

For the coming week, I show what I expect will happen by the red lines. This is geared toward the utility index, so I expect the up trend to continue for a few day then begin to pause and retrace a portion of its gains. Options expire this week, so that could add to the volatility on Friday. A check of the Dow industrials for last month showed that the industrials dropped 14 points the last time options expired. So maybe Friday won't be a large-move day after all.

Returning to the chart, I show a broadening pattern called a right-angled and ascending broadening formation, highlighted in blue. The pattern broke out downward and then reversed course. When it closed above the top of the pattern it "busted" it. Busted patterns tend to show strong moves in the direction of the new breakout -- higher, in this case.

-- Thomas Bulkowski

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Thursday 12/10/09. May I take your order?

Picture of an egret.

The following discussion details (such as times) may vary from broker to broker and between the various exchanges. Check with your broker before depending on this information.

Bill S. asked if I knew that stop loss orders were triggered on the bid price and not the last sale. Yes, that's the way they work, much to the dismay of traders.

Let's talk about order types. A market order is an order to buy or sell securities at the best price available. Buy orders are filled at the asking price. Sell orders fill at the bid price.

Limit orders specify that you will buy for no more or sell for no less than a chosen price.

Stop orders are instructions to buy above or sell below the current market price. A stop order, when triggered, changes into a market order for execution.

A stop loss order is triggered on the bid price. A buy stop is triggered when the asking price rises to or above the activation price. In both types of stops, the stock does not need to actually trade at your price to trigger your order.

If price gaps around your stop, it could fill well beyond the activation price. This happens from time to time. I remember having a limit order to buy a stock at 20 and the stock gapped open at 18. My order filled at 18, and then dropped from there. Of course, that's better than seeing the order fill at 20 and drop to the same price. .

When the Nasdaq prepares to open trading, they use what's called the opening cross to set a stock's opening price. Orders placed within two minutes of the open cannot be canceled. I discovered this the hard way.

Market on close (MOC) orders are used when you want to buy a stock as close to the final close as you can get. Some brokers offer MOC orders. What's the problem with them? They can be rejected if placed after 3:01 (59 minutes before the close). I've not had that problem, but you must place your order at least 20 minutes before the close. Once you place your MOC order, you may not be able to cancel it after 3:40 (20 minutes before the close). If you would like to cancel the order, your broker will make a best effort to do so.

The price at which MOC order fills on Nasdaq may not be at the best bid or ask price due to the Closing Cross -- the way the exchange prices securities at the close.

Again, check with your broker to determine how they (mis)handle your orders.

-- Thomas Bulkowski

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Tuesday 12/8/09. Tutorial Tuesday: Learn How to Predict Breakout Direction

I was watching The View while exercising, and they said that you can take a scratched DVD, smear toothpaste on it, and it will taste just like new! Actually, it's supposed to make it playable again. They said to rub the toothpaste from the inside out. So the host smeared on a bunch of paste, then circled her fingers from the innermost track on the disc to the outermost. Sigh. What she should have done is move not in circles but in straight lines from the innermost track to the outer rim. That way, if you scratch the disc, the correction software might be able to compensate. If you rub in a circle, you could scratch the disc so a large portion of the information on a track is wiped out.

To make a long story short, I tried the method using Crest toothpaste and it worked! A once unplayable DVD now jerks along at the start but then plays like brand new when it didn't before. I would also suggest that you use toothpaste without any additives that might scratch the CD or DVD (like baking soda toothpaste or even some of the tartar control things). And yes, I tried once to clean the disk with soap and water, but that didn't help.

# # #

Picture of Apple computer (AAPL) on the daily scale.

With some chart patterns, determining the breakout direction is easier than with other chart patterns. Let's take a look at broadening tops.

The chart of Apple Computer (AAPL) shows a broadening top chart pattern. There are a number of identification guidelines that help with identification. They are:

  1. Price should trend up leading to the start of the pattern (if it trends downward, it's a broadening bottom).
  2. The shape of the pattern should resemble a megaphone with the smaller end toward the left, wider to the right.
  3. Price follows two diverging trendlines, one along the peaks and another along the valleys.
  4. Price should touch each trendline at least twice.
  5. Look for partial rises and declines.

The chart shows a partial decline. Once the broadening top has passed the identification guidelines (meaning only begin looking for a partial rise or decline after point 2 in this case, since bottoms 4, 5, and 6 were made earlier) then watch for price to drop from the top trendline but not make it down to the lower trendline. In broadening tops, these partial decline correctly predict an immediate upward breakout 72% of the time.

In this example, the breakout was not immediate as the partial decline predicted, even though it correctly signaled an upward breakout. It took another move down before price recovered and broke out upward.

You can review the links for more information on these pre-breakout features. You will find partial rises and declines helpful in all varieties of broadening patterns as well as rectangles and even triangles.

-- Thomas Bulkowski

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Monday 12/7/09. Market Monday: The Week Ahead

A Brief Look Back

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

Monday: Up 35 points. Powered by easing fears of a Dubai default and good news from the Chicago purchasing managers index.
Tuesday: Up 127 points. Construction spending was higher than expected.
Wednesday: Down 19 points. The reading on crude inventories doubled.
Thursday: Down 87. Initial jobless claims were fewer than expected but productivity fell.
Friday: Up 23 points. A better than expected employment report sent the markets bouncing. Factory orders took a big jump.

Economic Reports

The following information is derived from yahoo!finance and times are local to the east coast. The "Dow Moved" column is the close-to-close price change of the Dow industrials on the release day from the prior trading day, the last time the report came out.

ReportTimeA-F
Rating
Dow
Moved
Description
Consumer credit2:00 MD-+17Measures auto, credit card and other debt.
Wholesale inventories10:00 WD-+17Wholesale sales and inventory statistics.
Crude inventories10:30 W?-19My guess: Measures oil inventory.
Initial jobless claims8:30 ThC+-87Counts people filing for state unemployment benefits.
Trade balance8:30 ThC+-14Signals balance of exports & imports.
Treasury budget2:00 ThD-94Tracks budget deficit. Important in April (tax filing).
International trade8:30 FC++73Import/export prices, trade balance. US economy vs others.
Retail sales8:30 FA-+136Reports total retail sales (not services). Are people spending?
Business inventories10:00 FC-+136Reports manufacturing, wholesale, retail inventories.

Options Expiration

No options expiration activity this week.

CPI: Chart Pattern Indicator

On 12/04/2009, the chart pattern indicator (CPI) had:

On Friday, 12/4/2009, the CPI had:

16 bearish patterns,
36 bullish patterns,
163 patterns waiting for breakout.
The CPI signal is 69.2%, which is bullish (>= 65%).

The chart pattern indicator shows one of three half triangles (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal. Bearish divergence appears between the market and the indicator, but it's been that way since September. Bearish divergence suggests the market will turn down.

Picture of a flower from my garden.

Other

Earnings season is over.

There were no pipe tops or bottoms found last week. Large numbers of pipes often signal the start of a short to intermediate-term trend change.

The following industries, of 52 that I follow, were the best performing.

  1. Internet (best again this week)
  2. Air Transport (new this week)
  3. Medical Supplies (was 4, replacing shoes)
  4. Apparel (was 2 last week)
  5. Furniture/Home furnishings (new, replacing Metals and Mining)

Here are the worst performing industries. Notice that the worst performing remain the worst performing.

  1. Cement and Aggregates (was 48)
  2. Trucking/Transp. Leasing (was 50)
  3. Petroleum (Integrated) (was 49)
  4. Alternate Energy (was 51)
  5. Short ETFs (worst) (was 52)

My Prediction

Picture of the Dow industrials (^DJI) on the daily scale.

Based on the above economic reports, this should be a quiet week except for Friday. On Monday and Tuesday, I don't see the markets moving much since we all know that the consumer is in debt up to their eyeballs (Monday), and no reports come out on Tuesday.

On Wednesday, crude inventories will probably show an increase (bad) but wholesale inventories may drop, leaving a small net gain in the market. I see a continued move higher on Thursday, suspecting a drop in initial jobless claims (lots of seasonal employment) but Friday we could get whacked when retail sales come in worse than expected.

In other words, I see the markets continuing to move horizontally, trying to decide which way to go.

If the market does stage a downward breakout, then it could drop to 10,000 (near the bottom of an up-sloping channel, shown in magenta) or even 9,700 (site of the most recent launch upward in November, point A).

An upward breakout would soon bump up against the top of the channel, but the Dow could push through that. Perhaps a very rosy retail sales report on Friday might be the catalyst.

-- Thomas Bulkowski

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Thursday 12/3/09. The Markets: A Longer View.

Picture the Dow Industrials on the monthly scale.

Each month, I give my dog a bath. After the bath, she shivers because it's cold inside and her fur is wet. Yet when I eat lunch, she sits there waiting for me to give her an ice cube, like I do in the summer (I eat soup). She thinks it's food.

Pictured on the chart is the Dow industrials on the monthly scale. It's not a scale that I use often, but it can provide clues to the longer term trend.

My eye is drawn to the rise starting at A. Why there? Because it begins a straight-line move up, just like the recent move from C to D.

Look at the slope of the AB move compared to the CD climb. They are similar, aren't they?

Notice how price flat lines like a dead animal, from B to G. The two green vertical lines show the span of that flat period lasted about 2 years. Price dipped in between, retracing a portion of its gains before climbing to G. After that, the move continued higher to E.

Now look at F, which highlights the price movement circled in red. Notice how the B to G move stopped at this level, about 11,000.

What this tells me is that overhead resistance will stop the Dow's upward move soon. We will trend lower going into spring and probably into summer while the commercial real estate market problems because apparent as the next crisis. That will take time to fix and we could mirror the 2-year move from B to G. After that, the Dow will climb to the price level of the old high at E.

To put it another way, we have had a long (in price terms, not time) move up and the market should consolidate its gains (pause with a sideways to down move) for a while. That sideways move could last 2 years.

For those of you that are wildly optimistic, the Dow could just continue moving higher in a straight-line run up to E, forming an unconfirmed double top. The idea behind such a move is a regression to the mean. The market will recover to what it was like before the financial crisis started (to E, in other words). I don't know of anyone that expects that to happen. In fact, many are expecting a retrace to drop the market. As the chart shows, I do expect the Dow to fall, just not that far (meaning a slight dip as the B to G region shows).

And I was really hoping that the bull market would last a bit longer, and I could afford to feed my dog something other than ice cubes.

-- Thomas Bulkowski

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Tuesday 12/1/09. Tutorial Tuesday: What Happens After Stock Offerings?

Thanks to all of you that buy gifts at Amazon.com and use this website as a portal to do so. If you click on a picture of one of my books, you are taken to Amazon. I receive a referral fee when you purchase anything while there. That referral fee helps support this free website and it does not increase your cost in any way. Each time you shop at Amazon, please do so through this website by clicking on a book image. Thanks!

# # #

I released a new version of Patternz due to the bug I mentioned in yesterday's blog, that of 0 count totals for the chart pattern indicator. Holiday celebrating tripped it up.

# # #

For the last month or so, I have been building a database of event patterns for common stock offerings. I started crunching the numbers a few days ago and I have some results to report.

Picture of the Airtran (AAI) on the daily scale.

Let's take a look at Airtran (AAI) on the daily chart, shown.

On October 6, the company announced a public offering of 9 million shares of stock. The next day, the stock gapped open lower on the news and the company priced the stock at 5.08 per share.

The stock followed the usual pattern for such events by forming a U or J shaped bowl, bottoming at A and recovering to B. In this case, the stock tumbled then attempted a pullback in early November. Pullbacks occur 61% of the time after a downward breakout, by the way.

I was hoping this event pattern would be tradeable for a quick 10% gain in two or three weeks. The thinking was to set a buy price a penny or two above the high each day until you buy the stock. If you used a 2 cent above the high buy stop, that would have gotten you in at 5.17, the day after it bottomed at A. Then you wait for price to rebound back to the close at C. For that to work, the rise at B needs to be higher.

How often does it work? Answer: 58% of the time. Yuck. If you buy in a penny above the lower high (a buy stop a penny above the lowest high each day until you buy in), and sell at the highest high before the trend changes, you can make 20.7%. That represents 153 perfect trades, but it gives you an idea of how much money you could make.

If you place a stop a penny below the low at A, use a buy stop a penny above the high, and exit when price reaches the close at C, you will be stopped out enough to lose 0.7%. If you wait for upward breakouts, meaning using a stop order a penny above the announcement day's high, (upward and downward breakouts appear as blue lines on the chart), then you can make 1%. Place a stop a penny below the low, and exit when price reaches C.

How long does it take for price to recover back to C? The average is 29 days but the median is just 9 days. The difference is that a few stocks took a very long time to recover. Several stocks are too recent to have recovered yet, so the performance of this event pattern will improve as final results come in.

I hope to release more details on this even pattern soon.

-- Thomas Bulkowski

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