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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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Busted
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 10/20/2017
23,329 165.59 0.7%
9,972 85.59 0.9%
749 1.35 0.2%
6,629 23.98 0.4%
2,575 13.11 0.5%
YTD
18.0%
10.3%
13.6%
23.1%
15.0%
Tom's Targets    Overview: 10/16/2017
23,700 or 22,700 by 11/01/2017
10,300 or 9,700 by 11/01/2017
775 or 725 by 11/01/2017
6,700 or 6,500 by 11/01/2017
2,625 or 2,525 by 11/01/2017

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July 2009 Headlines


Archives


Thursday 7/30/09. NFG: The Target Trade

When to sell is one of the problem areas for novice traders and experienced pros alike. One thing can make it quite simple: An exit strategy.

Here is a trade I made in National Fuel Gas (NFG), pictured on the daily scale.

When prices began a tear upward in early March, I started looking around for things to buy. I looked at the oil stocks and how cheap they appeared. On the linear scale (log scale is shown), the price pattern of National Fuel Gas showed a flat base, irregular looking, but price moved horizontally in a trading range since last November (not shown).

After doing research on the company, I liked the protection of a nearly 4% dividend with 60% of revenues coming from the utility side of the business. Fundamental ratios were tempting, making it a decent value play, too. Four insiders bought and 2 sold since May 2008, but in small amounts.

A chart of National Fuel and Gas (NFG) on the daily scale.

When the stock broke out of an ascending triangle, I bought and received a fill at 32.90. A volatility stop at 30.27 would protect my backside. The upside target was 47, according to my trading notebook. However, I adjusted that target lower to 38-41, based on overhead resistance dating back to valleys in March and August 2007.

The stock threw back and dropped below my buy price within weeks of purchase, reaching a low of 30.56, which was still above the volatility stop. Then it began moving up starting at A

At B, it formed an Adam & Adam double top, which looks weird in the picture because the second peak is not as high as the first, but price didn't drop much below the confirmation price (the valley immediately to the left of C).

Then price began rising again, following in the footsteps of the general market. At D I started thinking of selling. Why? Because price had reached my 38-41 target. A check of the numbers showed a measured move up chart pattern had completed, too.

Where is it? It begins at A (30.56) and rises in the first leg to B (37.61) for a height of 7.05. The corrective phase took price down to C at 33.77 and the second leg took price up to D, at 40.87, for a second leg height of 7.10.

The first leg had a height of 7.05 and the second topped out at 7.10, just as theory predicted.

Let's turn to the candle patterns now, which you can find in my Encyclopedia of Candlestick Charts book pictured on the right.

I show the two candles at D, the day before I sold, in the inset on the chart. The first candle line has a tall upper shadow and no lower one. It is not a belt hold because price trends upward leading to the candle and not downward. It is an opening white marubozu candle perched atop 8 new price lines. Both candles (marubozu and new price lines) are continuation candles, according to my tests. The second candle pictured in the inset is a closing white marubozu which is also a continuation candle, but just 55% of the time. In other words, it acts randomly. Notice that it did not make a higher high.

Here are the reasons for the sale.

  • The candles were overlapping and seemed to be struggling to go higher;
  • The stock completed a measured move up chart pattern;
  • The stock had reached overhead resistance;
  • Quarterly earnings were coming and likely to be soft; and
  • The stock had hit my 38-41 target.

I placed a sell order to be executed at the market open but then checked the quotes 10 to 15 minutes before the open. The bid was at something like 36 and change and the ask was 44+. I did not want my order to execute at 36, so I day traded the exit. That means I watched my profits drop minute by minute as the stock moved lower until I felt the downtrend was set. I sold and received a fill at 40.54 for a net gain of 22.6%.

Does this mean the upside is over for NFG? I have no idea. Price could continue rising and that would be fine with me because I no longer own it. I am shopping for new opportunities.

-- Thomas Bulkowski

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Tuesday 7/28/09. Tutorial Tuesday: 8-10 New Price Lines

As you may know, the Dow industrials have been on a tear lately. They formed a head-and-shoulders top chart pattern that broke out downward and then busted. By that, I mean the decline was less than 10% before price moved up and closed above the top of the head. During that process, it formed a rare candlestick pattern called 8 new price lines.

The key feature about the 8 new price lines candle is that it has 8 consecutively higher highs. It is supposed to be a reversal candle, but my tests show that it acts as a bullish continuation 53% of the time. You can read the full chapter on the candlestick pattern in my book, Encyclopedia of Candlestick Charts.

If the candle acted as a bearish reversal like theory predicts, there would be no 10 new price lines, nor 12 new price lines or even 13 new price lines. All of those are names of similar candlestick patterns.

How likely is it that 8 new price lines changes into 10 or 12 new price lines? Answer: 21%. 12 new price lines turns into 13 new price lines 49% of the time. To put 13 new price lines into perspective, I found just 95 of them in over 4.7 million candle lines searched. This makes sense because each day has to post a higher high. That is difficult to do even for the strongest price trends.

The Dow hit 10 new price lines before a lower high happened two days ago. What comes next?

A chart of ADTRAN (ADTN) on the daily scale.

To answer that question, I show a similar situation in ADTRAN (ATDN) on the daily chart. It shows a head-and-shoulders top, formed by the left shoulder (LS), head, and right shoulder (RS). The neckline joins the two armpits. When price closes below the neckline, it signals a valid head-and-shoulder top and a downward breakout.

As with the Dow, price did not drop very far before turning up. Almost immediately, price began forming higher highs, starting at A. Notice that was near the start of March, when the entire market burst into bullish activity.

When price reached 8NPL, a black candle was the last in the series of 8 to make a new high. That ended the 8 new price lines candlestick.

Then look what happened.

Price move sideways for a week or two as if resting before another attack on the summit. Then at B price left base camp for the rarefied atmosphere of the summit, at C.

Will the Dow industrials do the same thing? One thing is for sure: I have NO idea.

-- Thomas Bulkowski

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Thursday 7/16/09. Market Review

I got my car back from the doctor after forking over $481, half of that for the part and half for labor. The reason I couldn't start my car is because the "ignition control module and crank sensor assembly" were bad.

Here's a tip for those of you stranded with a car problem. The towing companies pay a referral fee to the repair shop. The shop I took mine to passes the $20 savings on to their customers (me). However, when the towing driver picked up my car, he asked that I pay the $75 towing fee up front, which I did (becuase I didn't know any better and he was taking advantage of me). When I found out at the car shop about the rebate, it was already too late. The towing company would not pay the referral fee, so it cost me $20.

If this happens again, I will ask that the towing cost be added to the auto repair bill and then ask if the shop will pass on all or some of the savings to me. And I got the wrecker phone number from the repair shop. She said they were the cheapest around. Can you imagine paying $75 to go less than a mile? Wow. And they are supposed to be the least expensive wreckers in town. Ouch.

I am considering doubling my subscritpion fee I charge all of you to access my website. (Before you write to complain, it's a joke because the fee I charge is $0. You can quadruple it and it would still be $0. I went to college to learn that kind of crap).

# # #

Matt asked in an email today if chart pattern success rates change from bull to bear market. By that, he means if an ascending triangle with an upward breakout is successful in a bull market, does a descending triangle with a downward breakout in a bear market become the place to be?

My first reply was to say I had no idea and testing that sort of thing is difficult. Then I thought about my book, Encyclopedia of Chart Patterns, Second Edition (pictured on the right) and knew it had an answer.

Here is what the book reports, by market condition (bull or bear), triangle type (ascending or descending), breakout direction (up or down), and the average rise or decline (before a trend change). Please do not assume that the average rise of an ascending triangle in a bull market is 35%. That is for hundreds of perfectly traded patterns. Your trade could do much better or worse than that.

 
Bull market, asc tri, up bkout: 35%
Bull market, asc tri, dn bkout: -19%
Bear market, asc tri, up bkout: 30%
Bear market, asc tri, dn bkout: -24%
Bull market, desc tri, up bkout: 47%
Bull market, desc tri, dn bkout: -16%
Bear market, desc tri, up bkout: 27%
Bear market, desc tri, dn bkout: -25%
 

What I expect to see is that upward breakouts do best in a bull market and downward breakouts do best in a bear market. Those are trading with the trend. If you look at all chart patterns, trading with the trend works best but it's not clear from this example.

Descending triangles breakout downward most often, but notice that when they breakout upward, they beat the average rise of ascending triangles (47% versus 35%). In a bull market, the same can be said for ascending triangles. When they break out in an unusual direction (downward), price tends to drop more than in a descending triangle, 19% versus 16%. I will leave the rest of the analysis up to you, but that is the type of analysis made easy by my books. That, in part, is why my books are so popular: They give you a trading edge.

# # #

Yesterday, I raised the price targets for all of the indexes. As you can see from the grid at the top of this page (Tom's Targets), I am still expecting the indexes to drop, just not as far as before. If you look at the chart of the S&P 500 or the Dow industrials, you will see that they are struggling to move higher. They are running into overhead resistance that I mentioned a week ago. I expect price to drop in the coming days, but the markets could surprise me. This might be the corrective phase of a measured move up chart pattern. If that pattern shows a breakout to a second leg up, then yes, Scott, you can take your well-deserved victory lap.

By way of explanation, Scott suggested a few weeks ago that it was a gutsy call of mine to suggest the market would drop going into earnings season. He's been right, so far, but the game isn't over yet. Did you ever hear Captain Kirk say, "Very funny Scotty! Now beam down my clothes."

-- Thomas Bulkowski

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Tuesday 7/21/09. Tutorial Tuesday: Candle Tips

During research on candlesticks for my most recent book, Encyclopedia of Candlestick Charts, pictured on the left, I made many interesting discoveries that I disclose in the book. In a moment, I will discuss two of them.

Before I get to them, let me issue a warning to those of you possessing illegal copies of my books and those posting them onto the Internet.

First, if you see any book (or any other item for that matter) priced well below its usual selling price, then suspect an illegal copy. It may say Rolex on the outside, but if the sweep second hand doesn't make smooth arcs as it turns, and it sells not for $5,000 but $50, you can be sure it's not genuine. The same applies to books.

Today I received an email with a link to a website selling my Encyclopedia of Candlestick Charts book for $6, well below the Amazon.com price of about $94. You can almost guarantee that it's an illegal copy of the electronic version of the book.

Second, my publisher is beginning to prosecute those that break the law by selling and distributing these illegal copies. They are getting aggressive in tracking down those that post copies to the Internet whether they charge money for them or not. Why risk your net worth and your job by violating a copyright? Buy only from sources you trust, and don't upload any illegal file to the Internet. It's not worth it.

# # #

A chart of Griffon Corp (GFF) on the daily scale.

  1. Trade bullish candles in a primary uptrend.

    This may sound obvious and it is, but try to prove it. I did. Bullish candles perform much better in a primary uptrend than otherwise.

    Displayed is a daily chart of Griffon Corp (GFF) on the right, and it shows an example of what I mean.

    Price after the March low started a nice upward trend. It was an intermediate-term trend (3-6 months long). Then price retraced a portion of that climb by dropping down in an Elliott wave type ABC correction. I show the three legs of that down move labeled in red.

    At the bottom of the ABC correction, a morning doji star appears, highlighted by the inset so you can see it. It is not pretty, meaning it is far from text book. It appears at the end of a downward price trend and the candle acts as a bullish reversal 76% of the time (ranking 8th out of 103 candle patterns). I found those numbers by testing, and I dedicate a full chapter to the candlestick in my book.

    Anyway, when price breaks out upward from the morning doji star, it rejoins the primary uptrend. It's like taking a dip in the river and swimming with the current instead of against it.

    In a bull market, when the underlying price trend is upward, you want to trade bullish candles.

  2. Trade bearish candles in a primary downtrend.

    As you might imagine, bearish candles work best if the primary trend is downward. In a manner similar to that described above, except inverted, you want the current to pull your stock in the direction of the industry and the general market. The best trades are when all three (stock, industry, and market) are tending in the same direction, either all moving up (bull market) or all moving down (bear market).

    If you are unsure what the price trend is (short-, intermediate-, or long- term), then flip to the weekly scale. Draw a trendline beneath the bottoms and along the tops. Those may help you decide what the primary (basic or underlying) trend really is. Your trades should follow that trend.

    In the case of bearish candlesticks, only trade them in a downward price trend. A wonderful and profitable way of doing that is to wait for them to appear as a reversal candlestick in an upward retrace of the downward price trend. I show the bullish variety of that description in the chart (meaning it shows a downward retrace in a upward price trend).

-- Thomas Bulkowski

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Thursday 7/16/09. Market Up Move Nearing End!

Several people have emailed me asking about the direction of the Dow industrials. I reported last week that I thought the Dow had formed a head-and-shoulders top chart pattern, and it has. The breakout from this pattern was downward. My comments about a pullback ("you should not be surprised if the Dow pulls back to the neckline or higher") were correct, meaning that a pullback has also occurred. What I find surprising is how far the Dow has climbed. Again, it is not unheard of for price to climb above the right shoulder peak but it is unusual.

How unusual, you ask? I checked my database of chart patterns to find out. Of those head-and-shoulders tops with pullbacks, 79% climbed above the right armpit low. Just 1% climbed above the right shoulder high and only 1 pattern climbed above the head out of 814 patterns qualified for the test.

Since busted patterns need not have pullbacks, how many patterns broke out downward and dropped less than 10%, then returned to soar above the head? Answer: 62%. That number being so high surprised me. Almost 700 patterns were involved in this test, so it was not a small sample. A better test that mimics what we see in the indexes is a drop of less than 5% after the breakout. How many times does price return to rise above the head? Answer: 54%. That's about random, so it's not much help is it?

Since I covered the Dow last week, I'll use the S&P 500 index this week. Both the Dow and S&P show head-and-shoulder tops and the below chart is similar.

This is an unusual chart not only for its size but for the many horizontal lines. It is a chart showing support and resistance. Green lines are from valleys and red lines are from peaks. By the way, the Patternz program will draw these lines for you (chart form, SAR button) but you may have to play with the setup (Setup button).

A chart of the S and P 500 on the daily scale showing support and resistance lines.

Look at the right side of the chart. Point A shows heavy support underneath the index, right were the pullback began. Had I looked at this chart, I would have been stronger in my warning about a possible pullback.

Point B shows overhead resistance at the head, setup mostly by peaks in the head itself but some from November and January. The thicker the line or the more clustered the lines, the more support or resistance may appear in the future.

What does this tell me? My guess is that the index will probably rise up to the level of the head and then turn back. Price may move horizontally after that and, if the gloom and doom seers are right, it will tumble in the fall (September-October).

However, price could continue climbing. If that happens, then what? Look at area C, highlighted by the tall blue line. The area between 1,000 to 1,200 shows little overhead resistance. If the index can reach 1,000 (there's a thick line near 989 on the chart), then my guess it will be clear sailing from there.

-- Thomas Bulkowski

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Tuesday 7/14/09. Tutorial Tuesday: One Trading Secret You Must Know!

For the chart pattern indicator signals, I tried combining the diamonds () with the arrows () and after I had finished drawing all 12 variations, I realized the two represented different signals. They cannot be combined. However, you will see half an arrow () when the chart pattern indicator signal is new (within 7 days of a change). After a week, the signal becomes reliable and switches to a solid color throughout. To better explain all of this, click on the diamonds () near the top of this page, under Test Portfolios and CPI.

Please note: I was able to merge the diamonds with the arrows... and the diamonds have disappeared.

# # #

I also split Trading Help/Other into "Trading Class" and Tutorials both on the Home page and in the box above. Some have emailed me asking how to make the best use of the ThePatternSite.com to learn how to trade. The "Trading Class" page will help with that, and the tutorials provides another outlet for articles that don't fit anywhere else.

# # #

One Secret...

And if I tell you, it won't be a secret anymore. But yes, I'll spill the beans in a moment.

After yesterday's post, I realized that the authors of the book missed a very important tip in trading success. Let me share with you a few anecdotes to illustrate my point.

Five Cent Jill

Jill is a trader new to the club. She has been in the investment business as a broker and financial adviser for a number of years, but quit her job to trade full time.

Almost every time that I heard from her, it was the same refrain: "All I have to do is net 5 cents or a dime." When multiplied by 1,000 shares per trade, that small amount turns into $13,000 to $26,000 a year, trading once each day and winning. She often places up to 6 trades per day, potentially making $78,000 to $156,000 per year, all by netting just a nickel to a dime per trade.

Of course trading is never that easy. Commissions and other trading fees add to the profit required as do losing trades. Yet earning a nickel or dime per trade sounds so easy, yet she could not do it on a consistent basis. Why?

Large Loss Larry

Before I answer that, let's turn to another trader whom I'll call Larry. He is an experienced trader with over a decade terrorizing the markets. But if you were to look at his portfolio, you would be shocked at all the red ink. Positions are down by 25%, 40% and even some by 50%. To balance that is just one well-performing stock, up 50% and another up 20%.

"Those losses are too large to sell," he told me recently. It's like he was pretending to be AIG or Citigroup. How did those losses get to be so large? By dropping one penny or one dollar at a time.

Bankrupt Bill

Yet another trader, Bill, looks at the stack of bills on his dining room table and wonders where he is going to get the money to pay them. Each day he trades adds more to the loss column. Everything he tries ends in failure. His trading capital is dwindling despite taking multiple cash infusions from his wife. He tried to double down, buy twice as much as the stock dropped only to be forced to sell at the bottom. Within days, price began a long, straight-line run up, but he was too broke to participate in the rally. He could only watch from the sidelines until his wife cashed her next check.

All three of these traders have one thing in common. Can you guess what it is? The answer is the one secret all traders must know.

I have told this secret to several traders over the years and not one, not one has believed me and put it to good use. Why? I guess they just weren't ready for it. Will you be the same? Can you handle it?

What's the secret? It's this: Forget about the money!

I know, you were expecting something revolutionary, something so unique that it would make you millions. Guess what? You just heard it. Here's what I mean, so pay attention.

If you ignore how much money you are making or losing on a trade and just focus on execution, the money will take care of itself. It's that simple.

Five Cent Jill

Let's review each trader, starting with Jill. All she wants to do is make 5 cents or a dime. If she would concentrate on executing her trades according to plan instead of settling for just a few pennies, she would do much better.

Now, when she makes a nickel or a dime, she gets so nervous about losing it that she sells her position too soon.

When she buys the next time, she sits paralyzed when it goes bad because she keeps thinking that as soon as the stock rises by a nickel, she'll exit for a profit. Instead, she settles for a loss.

Forget about the money and concentrate on execution. Does she have a stop loss order in place (or a mental stop for a day trader)? Does she search for overhead resistance and exit when price levels out there? If she were to just focus on the trade instead of worrying about the money, she would do fine. But she doesn't believe me and keeps losing money.

A chart of the Dow industrials on the daily scale.

This is a picture of a worm I caught eating one of my plants. The creature is about the length and thickness of your middle finger. Huge, in other words!

Large Loss Larry

Larry is the trader with huge losses that were too large to sell. I told him, "It doesn't matter at what price you paid for the stock. What matters is when you sell." If you sell above the buy price, you will make money. If you have a stop in place, then that would limit losses to well below 25%. Yes, a dead-cat bounce can take you down over 70% in one trading session, but his losses did not occur that way. They occurred by inaction, the stocks dropped a little each day while he was off counting the pennies on his winners.

All Larry has to do is monitor his trades. Look for support and resistance in the stock, and when it looks as if the market is going to drop or the industry is showing signs of weakness, then sell. Do not get married to a position. Do not fall in love with a stock.

If Larry ignores the size of his losses and just looks at what price is doing on the chart, he would not have piled up such massive losses. Does he listen? No. How about you? Are you still with me?

Bankrupt Bill

Bill is up to his eyeballs in bills, and I'm not talking children, here (little Bills). He is so worried about paying his debt that he cannot execute his trading plan. His desperate attempts to double down end in disaster. Increasing leverage in his state of mind has compounded his problem. Again, if he only focused on his trading and forgot about the money, he would do much better.

Imagine how stressed he is. Now imagine how less stressed he would be if he just focused on price rising and falling, ebbing and flowing like the tide. If he only traded what he saw on the screen instead of making large bets to earn enough money to pay the mortgage, he would be in a better state of mind. He would be trading better.

Money Honey Tom

Let me give you an example from my own experience, and how I stumbled onto this secret. Several years ago, I had a problem with earning too much money. It sounds stupid, but as soon as I earned about $2,000 in a trade, I would sell it. I cut my winners short.

Once I learned to stop reviewing my earnings statement each night after trading, I did much better. If I didn't see my profit and loss statement, I wouldn't get excited about making 2 grand and sell. I could focus on technique and let profits ride. That made a huge difference.

So that's the secret that every trade must know. And now you know.

Focus on trading better instead of the money and all the world's riches can be yours. Well, maybe not. But if you come close, please share!

-- Thomas Bulkowski

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Monday 7/13/09. Mental Monday: 11 Trading Barriers. What Are They?

Ian suggested in a email that I color the chart pattern indicator graphs with different colors to highlight when the signal turns from tentative to reliable. I explained that it's a good idea but it would take too much time the way I have the website set up. After another read of his email, he may have meant changing the color of the up or down arrows that appear near the top right of this page. I will implement that and you should see it during the next signal change.

Starting with Tuesday's post, you will be able to click on the CPI date and get the number of patterns that are bullish, bearish, and still waiting for breakout along with the CPI percentage. Clicking on the diamonds pops up a window explaining what the graphics mean. I think I will simplify the indicator and just reduce it to three arrows instead of an arrow and three diamonds. Thanks for the idea, Ian!

# # #

This posting is now located here.

-- Thomas Bulkowski

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Thursday 7/9/09. Down With the Dow?

Before I get to today's discussion of what the Dow will do next, I have a few announcements.

I'd like to thank Keith Newcomb and all the others that order books through ThePatternSite.com. To do so, just click on a picture of one of my books and it will redirect you to Amazon.com automatically. When you purchase anything, like a book, kindle thingy, diapers, or whatever, I receive a small referral fee from them. That helps defray the cost of running this website. This referral fee does not increase your cost in any manner. It's just a rebate program that Amazon has.

Steve Lewis found a bug in my "Patterns for the weekend" links. They were broken, but it's now fixed. You will see a new listing on Thursday evening when I post it.

Scott wrote in an email that the bearish head-and-shoulders top pattern in the Dow could be a bear trap since it has appeared just as earnings season is about to get underway. He could be right and I hope he is. Why? Because I still have lots of stocks in my portfolio and would like to see them climb out of the red or turn even more black (meaning smaller losses or higher profits).

A bear trap occurs after a downward breakout when price turns and begins climbing, trapping the bears in their short positions for a loss.

I became alarmed yesterday about the head-and-shoulders top, so I sold off 5 stocks and another one today. These stocks were meant as long term holdings as I described in Tuesday's blog, but they all looked as if holding them would incur significant losses. They had broken below a well-define support layer.

My thinking is I can always buy them back when they bottom. I say that but I almost never buy them back. If the Dow drops in September or October, they could become compelling buys again.

A chart of the Dow industrials on the daily scale.

Returning to the Dow industrials, which I show in the chart on the daily scale, a head-and-shoulders top appears. The left shoulder is LS, the head is as marked, and the right shoulder is RS. This pattern changed from a multiple bump movement into a valid head-and-shoulders top when price closed below the neckline at E.

If you want to call this chart pattern a complex head-and-shoulders top because of the two extra shoulders at A and B, that's fine. The neckline is the trendline connecting the armpits, and I show that as C.

What does all this mean? The appearance of almost any chart pattern says the markets are undecided about a direction. Yes, this chart pattern is bearish, but what I mean is price has moved sideways -- consolidated -- for two months (from May through June). During that time, the head-and-shoulders top has formed. Since the pattern is bearish, it says the market is anticipating weaker than expected earnings this quarter. If Scott is right and companies beat expectations, their stocks could soar. Alcoa, for example, reported better than expected earnings after the market close today and price jumped 4% in after hours trading.

Certainly some companies will beat the consensus and some won't. I will leave it up to you to pick the winners and avoid the losers.

Let me also add that you should not be surprised if the Dow pulls back to the neckline or higher. The chances are that price will resume the downtrend already underway should a pullback appear.

There is nearby underlying support (at 8,100, with today's close at 8,178), giving credence to the pullback theory in the next few days. However, when support is closer than about 5% from the breakout price, a stock tends to just push right through it without stopping. I'm not sure if that applies to the market indexes, but that's what I found by researching pullbacks in stocks.

Below 8,100, I see support at 7,900 formed by prior valley's. A longer term view, like I discussed on Tuesday, suggests the Dow could drop to 7,500 in October. That would mirror the down-spike in late November, both in price and time.

-- Thomas Bulkowski

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Tuesday 7/7/09. A Longer View of the Markets

A chart of the Dow utilities on the monthly scale.

After finishing my work on ThePatternSite.com's look, I have turned my attention to adding a few articles to the stable of 450. If you are a subscriber using RSS feeds, you will find the links to the new articles there. If not, then the What's new page shows the changes. And if your RSS file doesn't report any changes, please note that I add a blog entry each trading day, and sometimes more often than that (such as this weekend).

# # #

Moogle asked in an email that I write about investing for the longer term, for those holding IRAs, 401ks, and such. That is what I will focus on today.

I show a chart of the Dow utility average on the monthly scale to get a longer term view. I chose the utilities because it shows a clearer picture of the past price action.

The last bear market started in March 2000 and ended in October 2002, as measured by the changes in the S&P 500 index. The utilities peaked in December 2000 and bottomed in October 2002, forming a head-and-shoulders bottom chart pattern. In other words, when the bear market ended, a reversal pattern appeared. Then what happened?

The utilities moved up in a nice straight-line run to A. Sound familiar? If not, then look at the Dow industrials on the daily scale since the March 2009 low. Price then retraced back to B. After that, the average was a rocket ship soaring higher, reaching a new high at C in a straight-line run that trend followers like me love.

Now turn your attention to points D and E. Is this the beginning of another head-and-shoulders bottom chart pattern? Perhaps. With the worst performing months yet to come (or the best buying opportunities, depending on how you look at it) in September and October, we could form a right shoulder then.

If you were to look at the Dow industrials or the S&P 500 index on the monthly scale, you would see a similar pattern: a reversal after the bear market ended followed by a nice run up then the start of another reversal pattern, perhaps a head-and-shoulders bottom.

First, let me now toss out a tidbit from some unpublished research I have completed. The recovery after a bear market ends occurs in the first year (largest gain) followed by the second year. Let's assume that we will have a head-and-shoulders bottom appear before year end. That right shoulder would be a wonderful buying opportunity. Even if it doesn't occur, look at how much the utility average climbed after point A.

I am fully invested now, knowing full well that I could lose 40% of my investment in the next few months. That is a risk I am willing to take because I expect to hold these stocks for two to three years, selling after they have tripled in price.

Second, I would not depend on your IRA making a substantial contribution to your retirement. It might but it might not. Those charts showing an investment of $2,000 a year over your lifetime turning into millions haven't come true in my case. For example, I bought Scudder Development mutual fund in February 1983 and sold it on December 1987 and made 2% over that entire span. Not 2% a year, just 2% total. And that was during a bull market run. Of course, the crash in October 1987 didn't help, but those types of stumbles are to be expected from time to time. If I had placed my investment into a FDIC insured bank account, I could have made over 5%. But 5% is far short of the 10% to 12% returns that many of those charts predicted. Let me also say that the fund I discussed was the worst performing of my IRA investments, so it may be an extreme example.

I know of one person who emailed me and said how much he enjoyed my Getting Started in Chart Patterns book. Following the advice within those pages, he took his $100,000 IRA money and invested it in metals funds. Within a year the account had hit $1 million. That was in 2007, as I recall.

I believe now is the time to be in the markets for the long term. That is how I have positioned my investments. I have taken small positions in many stocks, diversified over many industries. I may be premature (if the head-and-shoulders bottom comes true, that is), but we are a lot closer to the market bottom than the top.

In other words, don't worry! Be happy.

-- Thomas Bulkowski

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