Written by and copyright © 2005-2018 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions.
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The following are my comments on market action, updated each trading day as time allows. You should not interpret anything I say as advocating
buying or selling any security. See the privacy statement and disclaimer for more information.
1/31/08: Dow Pipe Bottom
Within the last few days, I have noticed an inordinate number of pipe bottoms and other bullish patterns signaling a buy. This often occurs at market bottoms.
In the past,
it has not been the time to buy because price moves up, rounds over, and continues the decline. Still, with the FED lowering interest rates twice and congress trying to return
our tax dollars to almost anyone whether or not they paid them in the first place, it could stimulate the economy. If it does, then housing issues (which have already moved up) and related
securities (trucking, cement makers, chemical companies, and so on) are the place to be. In the past few days, I have purchased a few stocks with this in mind. I did cut the position size to one-quarter of
my normal amount because I expect the market to resume the downtrend. But the issues were cheap enough that, if they don’t go bankrupt first, will increase by a factor of ten in two or three years.
Shown on the right is an example of a pipe bottom on the daily scale in the Dow Jones Industrial Average. Two parallel lines spike downward followed by price moving up. It is a bullish
signal and an obvious one if people know what to look for. Usually, the best performing pipes occur on the weekly scale, but the signals are sometimes just as effective on the dailies.
-- Thomas Bulkowski
My Georgia Gulf Trade
Now that the trade is over, I can tell you about it. Georgia Gulf (GGC) is a company that I traded many times over the years, but forgot about it until discovering it at point
A on the accompanying chart. I first marveled at the large drop in the stock (it was at 20 in August 2007) and my next thought was, "You’ve got to be kidding!" I knew the company was worth more than $3.12
a share (the low at A). I started to do my research but the next day, the stock took off and closed 25% higher, so I lost interest. I won’t chase a stock upward.
Anyway, I dug
into the fundamentals and found that the company has a book value of about $11 a share so if it went bankrupt, there might be a few pennies left for guys like me. I considered it a steal because
I think it could trade at $20 in 2 to 3 years. So, I watched the stock move up and then drop back down. I didn’t pay too much attention to it but wish I had. Another low surfaced but
I didn’t see it (point B).
On January 28, the stock closed above a down-sloping trendline so I bought a 1/4 position in the stock the next day, receiving a fill at $5.80, shown as point D. The stock had, by this time,
made a double bottom (points A and B), confirmed when price closed above C. I was hesitant to buy the stock because there seemed to be overhead resistance at 6 (several candles stop at or near
that value) and I thought the stock would tumble. It didn’t, so I pounced.
I sold the stock today (point E) at 7.67 for a 3 day gain of 32%. Why did I sell? The market was up strongly today, 207 points on the Dow, and I feel that tomorrow it will retrace some of
those gains. More importantly, I know that the company has an earnings announcement coming out soon (February 15), and I didn’t want to give back my profits if it comes in worse than expected. If the
stock drops, you'll find me buying more, but I’ll try to resist until after the announcement. After all, if they say that loan covenants are getting closer to being breached, then that
won’t be good for the stock. I still think it’s worth holding until it reaches 20, but it could still go to 0, so buyer beware.
-- Thomas Bulkowski
1/25/08: Weekly Wrap
- On Monday, the United States markets were closed for the Martin Luther King Jr. holiday, but overseas markets were free to tumble and tumble they did.
- Before Tuesday’s open, overseas markets dropped again, prompting the Federal Reserve to cut interest rates by three-quarters of a percentage point, the largest decrease since
October 1984. Many expect the FED to cut rates again at their next meeting (2 days long) ending January 30. The Dow dropped 465 points early in the session but ended the day
- On Wednesday, the Dow climbed nearly 300 points after having been down by about 300, a stunning reversal and the largest 1-day turnaround in more than 5 years,
according to one report.
- The close Thursday was over 100 points higher in the Dow, but I expected the market to close down. Since it didn’t, some say that it is a
sign of strength. "Sucker’s rally" comes to my mind.
- On Friday, the Dow dropped another 171 but ended the week higher.
- This week, rogue trader Jerome Kerviel cost Societe Generale $7 billion on trades worth more than $73 billion. According to one report, the trading capital involved
was worth more than the annual gross domestic product of Libya or Qatar. Another report said he was short last year in the rising market, but decided to switch to the long side
just before the markets turned down. Oops.
On the daily scale, the Dow looks as if it is about to tumble again. Examining the individual issues in the Dow, I see several that are coming up against overhead
resistance setup by down-sloping trendlines. DuPont (DD) is a good example. Others such as General Electric (GE), United Technologies (UTX), and American International
Group (AIG) are within a day or two of hitting a trendline setup by overhead resistance. I would be cautious about making any long commitments here.
On the weekly scale, the most recent candle looks like a hammer. My research says that hammers act as bullish reversals 60% of the time.
-- Thomas Bulkowski
1/18/08: Dow Head-and-Shoulders, Drop then Reverse
1/18/2008: This was a brutal week for guys like me that like to stay long. The Dow dropped 507 points
this week and is down 1,165 points since the start of the year,
or a toasty 8.8%. If you look at the weekly chart pictured above, you will see that today’s bottom is an important milestone because it ties the valley last March
(point A). It’s
not an exact match because the low back then was 11,939, below today’s close of 12,099, but it’s close enough for government work, as they say.
If the Dow continues
moving lower, then I see the next support zone as the peak on May 8, 2006 at 11,670 (point B), but more likely would be a decline to about 11,000. That’s a round number
(support), and it dovetails quite nicely with the flat top from 11/21/2005 to 2/6/2006 (circled in green but it extends back to the peak at C).
It is also close to the launch price where the straight-line move up
began on 7/17/2006 (point D). The launch price has a low of 10,683, so we could drop back there.
Notice the head-and-shoulders top (LS=left shoulder, H=head, RS=right shoulder). It is not a very pretty one because of it’s lack of perfect symmetry,
but it does stick out nonetheless. The measure rule, which is used to find a price target,
for the head-and-shoulders top measures from the head (14,198) to the neckline (shown as a green line) directly below the head (about 12,614 at the red dot) for a height of
1,584 points. From the breakout where the neckline crosses price, about 12,794, subtract the height to get a target of 11,210. For a more conservative target, multiply the height
by how often the measure rule works, 55%, and then do the subtraction from the breakout for a new target of 11,922.
That’s about 170 points above where we are now, and that almost matches the low at point A.
The way I am going to play this is to expect a sucker’s rally. I expect price to drop a bit more to the bottom near point A and then we will see
a bounce up, forming a complex head-and-shoulders top, one with two left shoulders and two right ones.
The new right shoulder should approximate the peak at E, at about 12,800. After that,
I see a decline back toward the launch price near D but not quite making it down that far. Rarely does price actually reach the launch price. All of this is
a wild guess on my part and I mean that. I am frequently wrong on this, but it will be interesting to see what actually happens.
If you expect the market to recover, then you can participate by buying an ETF, such as the QQQQ (PowerShares QQQ -- Nasdaq 100) or other ETF.
If you want to short the indices without going short, then buy an exchange traded fund such as
DXD (UltraShort Dow30 ProShares), DOG (Short Dow30 ProShares) or one of the other ETFs, such as SH and SDS (short the S&P 500), PSQ and QID that short the Nasdaq 100.
In all cases, you buy the shares (long) and the ETF shorts the index. In the last 3 days, I made one trade in each of the QIDs (500 shares) and DXDs (400 shares) for a near $2,000 gain.
You can also buy put options on your favorite security to protect your downside or use ETFs on sectors, such as real estate.
Please note that I am NOT recommending that you trade any of these. I am just listing your options.
-- Thomas Bulkowski