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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
Patterns
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Patterns
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Patterns
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 03/27/2017
20,551 -45.74 -0.2%
8,935 6.33 0.1%
702 -3.50 -0.5%
5,840 11.63 0.2%
2,342 -2.39 -0.1%
YTD
4.0%
-1.2%
6.5%
8.5%
4.6%
Tom's Targets    Overview: 03/14/2017
20,100 or 21,250 by 04/15/2017
8,500 or 9,500 by 04/15/2017
675 or 715 by 04/01/2017
5,950 or 5,650 by 04/15/2017
2,275 or 2,425 by 04/15/2017
Mutt Losers: None YTD
Mutt Winners: None YTD

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.

June 2010 Headlines


Archives


Tuesday 6/29/10. Tutorial Tuesday: The Markets, A Longer View

Picture of the Dow industrials on the monthly scale.

I show a chart of the Dow industrials on the monthly scale. When the bear market ended in 2002, it did so by forming a head-and-shoulders bottom chart pattern. I show that circled on the chart.

Since history never repeats itself exactly, but it comes close, the recent turn from bear to bull in 2008 to 2009 was similar in appearance to the earlier turn. The right side of the head-and-shoulders in this example was well above the left, so the chart pattern was some type of alien mutant.

Following the reversal pattern in 2003, the market started moving higher at a brisk pace. I show that by the red line. This was the recovery phase and all it did was bring the Dow back up to where it was.

In 2009, the same thing happened -- a straight-line run higher which I also show as a red line.

Finally, price moved sideways, which usually happens when a stock or market makes a swift and long uphill, straight-line run. I show that in green. This sideways movement lasted from 2004 into 2006, about 2.5 years, give or take.

With the markets dropping down in recent weeks, we are entering this consolidation phase where the markets will move sideways. I expect this choppy sideways action to last for about 3 years. Why that long? Because the uphill run was steeper and lasted longer than it did in the past. Thus, it will require an extended recovery time.

If I am right (and that's a big IF), then trend following using chart patterns will not be the way to play the market. Rather, this will be a trading range, suitable to traders and not buy-and-hold investors. Chart patterns can play a role there, of course, but swing trades will come back into vogue instead of position trades.

-- Thomas Bulkowski

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Monday 6/28/10. Market Monday: The Week Ahead

Picture of a flat-headed snake.

Another member of the world family passed away on Saturday. I show a picture of it on the right. Wouldn't it be neat if this was, in fact, a pencil snake?

I found what appears to be a "flat-headed snake" on my grass. Since he was stiff, my dog probably didn't kill him (fortunately). I couldn't find any cause of his death except for sunstroke, perhaps, since he was lying in the hot sun. That's doubtful, too, but who knows? I was thinking that maybe a bird picked him up but except for a "broken" tail, there was no trauma markings on his body.

It's not the first time I've discovered these snakes on my back lawn. When they do turn up, they are usually dead. Once, in the evening, I found one making its way back home. Way cool!

They nest in my compost pile, so earlier this year I decided to abandon taking soil from there. The last time I did so, I inadvertently killed two of them. Just as the discovery of this one's death, the death of those two brought sadness.

My Prediction

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

I show the S&P 500 index (^GSPC) on the daily scale. The markets have been heading lower in a straight-line run. I think investors and traders alike are expecting the markets to find support and turn soon.

That's what I expect, too.

The index is slightly below the 62% retrace of the recent move up (which I show as a horizontal blue line), so it should find support here. The support and resistance chart (not shown) exhibits a decent amount of support at 1065, so I expect the index to stall or even turn in a day or two.

My computer program says that the S&P closes up 61.3% of the time on Monday's and even better on Thursday's, so that's what I show. Friday, with the multitude of economic reports coming out will probably be a weak day, which is also in-line with my computer model. In short, I look for the markets to turn higher this week.

A Brief Look Back

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 8.23 points.
Tuesday: Down 148.89 points. Existing home sales were down, much lower than expected.
Wednesday: Up 4.92 points. New home sales also dropped.
Thursday: Down 145.64 points. Durable orders dropped, but less than expected. Initial jobless claims were better than expected.
Friday: Down 8.99 points. GDP dropped more than expected.

For the week...

The Dow industrials were down 306.83 points or 2.9%.
The Nasdaq composite was down 86.32 points or 3.7%.
The S&P 500 index was down 40.75 points or 3.6%.

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.
Consumer confidence10:00 TB-Surveys 5,000 households for trends.
Chicago purchasing managers index9:45 WBMonitors regional manufacturing activity.
Crude inventories10:30 W?My guess: Measures oil inventory.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Construction spending10:00 ThDCovers residential/non-residential/public spending on new construction.
Auto & truck sales2:00 ThC-Monthly sales of domestically produced vehicles.
4 Employment reports8:30 FANonfarm payrolls, unemployment rate, avg workweek, hourly earnings.
Factory orders10:00 FD+Durable/non-durable goods orders w/factory inventories.

Options Expiration

No options expire this week.

Swing and Position Traders: Chart Pattern Indicator

As of 06/25/2010, the CPI had:

17 bearish patterns,
12 bullish patterns,
233 patterns waiting for breakout.
The CPI signal is 41.4%, which is neutral (between 35% and 65%).

The chart pattern indicator is bearish 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.

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: bearish.

Other

Earnings season is over.

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

This WeekLast Week
1. Shoe1. Shoe
2. Furn/Home Furnishings2. Computers and Peripherals
3. Computers and Peripherals3. Furn/Home Furnishings
4. Insurance (Life)4. Retail Building Supply
5. Retail Building Supply5. Insurance (Life)
48. Securities Brokerage48. Internet
49. Coal49. Securities Brokerage
50. Internet50. Oilfield Svcs/Equipment
51. Oilfield Svcs/Equipment51. Short ETFs
52. Alternate Energy52. Alternate Energy

-- Thomas Bulkowski

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Thursday 6/24/10. My Trade: High and Tight Flag in ANN!

Chart of Ann Taylor on the daily scale

The chart on the daily scale shows the buy side of a trade I made in Ann Taylor (ANN).

On July 25, 2009 I made a comment in my trading log about waiting to buy the stock. Why? Because earnings were due to come out on August 17. So, that's what I did. I waited.

On July 30, the company announced that they would cut more jobs, but see a modest profit in Q2. That sounded promising, because I don't work for the company and didn't have to worry about losing my job.

On August 5, Jefferies initiated coverage with a hold and on the 19th, UBS upgraded the stock.

Actual earnings arrived on August 21, which is also the same day as I bought. Turning to the chart, you can see a high and tight flag begins on July 14 at a low price of 6.87 (point A). By August 7, the stock had climbed to a high of 13.55 (point B) for a gain of 97%, above the 90% threshold I set for high and tight flags.

Chart of Ann Taylor on the daily scale

In a high and tight flag, the stock must double (or nearly so) in 2 months or less. Then the stock moves sideways in a congestion region called the flag. The flag can be a loose collection of prices (worst) or a nice tight sideways movement (best). The "flag" often doesn't look like a traditional flag at all. Most of the time, the price movement is irregular, not resembling a flag or pennant. The Ann flag does follow a down-sloping trend as in many flags, but it's not as tight as I've seen in other congestion regions.

After the near doubling in price in about 3 weeks, the stock moved sideways in the flag portion of the high and tight flag. I bought as price left the consolidation region.

The next chart shows the sale. Arguably, it doesn't matter at what price you buy the stock. What matters is the price at which you sell.

Looking back at the historical price trend of Ann Taylor, I found that it trends downward in May 6 out of 9 times since 2001. Coupled with the saying, "trade till May and then go away," and believing that the general market was heading into trouble, I decided to sell, which the chart shows.

I bought the stock at 12.36 and sold it at 22.06 for a net gain of 78% in less than 9 months.

-- Thomas Bulkowski

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Tuesday 6/22/10. Tutorial Tuesday: Fighting About Flags

Two flag chart patterns

This just in! I rented out my newly built birdhouse. Unfortunately, it appears a small sparrow has taken up residence instead of the intended finch or wren.

Over the past several months, a number of people have asked questions and referred to high and tight flags when they really meant regular flags. What's the difference?

Let's talk about a flag first. I show two variations of a flag, but there are others. Price moves in a straight-line run leading to the flag. If you don't have this straight-line run, then you don't have anything for the flag to tie itself to. In other words, a flag must have a flagpole. Without the flagpole, you just have a congestion area.

A surprising number of people forget about the flagpole. The straighter and longer the flagpole, the better, I think, because it denotes strong upward momentum. Short flagpoles or ones that show price moving up, but also sideways, means the move after the breakout will likely be weak, too. I discovered that the velocity leading to the start of a chart pattern repeats after the breakout, regardless of the breakout direction. That doesn't always happen, but you can use it as a gauge of how long a trade might take.

The "flag" portion of the flag is where price moves between two parallel trendlines. If the trendlines converge then you're looking at a pennant instead of a flag.

Flags are short, from a few days to three weeks. The 3 week maximum is arbitrary but many regard longer chart patterns as rectangles. I consider short duration flags without proper flagpoles as rectangles.

The "flag" portion of the flag can slope in any direction, but you'll see it most often like that pictured -- sloping against the prevailing price trend. Volume trends downward in the flag but don't discard a flag pattern because of unusual volume.

Those are the rules for flags. What I see many using is to draw two trendlines over an irregular shaped congestion area and call it a flag. It's not a flag, just a congestion area. Flags have parallel or nearly parallel trendlines not an irregular shaped border. And they must have a flagpole. Remember that.

A flag in FLIR

Here's a picture of a flag in Flir Systems (FLIR), but if the flagpole were long enough (such that price doubled from the start of the flagpole to the top of the pole), it would also qualify as a high and tight flag.

Anyway, price begins the flagpole at A, rises to B in a wonderful straight-line run. Then price consolidates -- moves sideways -- creating the flag. In this example, price breaks out downward at C before beginning a new upward trend.

If you pay attention to the measure rule, the traditional approach is to measure the height of the flagpole (B-A) and add the height to the bottom of the flag (just above C) to give you a target price. Looking at the figure, I get 29-22.50 for a flagpole height of 6.50. Add 6.50 to 27 gives a target of 33.50, which the stock either hits or comes awfully close to.

A high and tight flag is often not a flag at all. The chart pattern begins when price doubles in less than 2 months. Then price consolidates, usually forming an irregular shape as a flag portion of the pattern. Volume recedes most often in the flag portion of the chart pattern.

Unless I think of something else to write about on Thursday, I'll discuss a high and tight flag trade I made in Ann Taylor. Stay tuned.

-- Thomas Bulkowski

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Monday 6/21/10. Market Monday: The Week Ahead

My Prediction

Picture of the Dow transports on the daily scale.

I show the Dow transports on the daily scale.

Many of you familiar with chart patterns will recognize a broadening bottom. Price drops into the pattern from above and then cycles up and down, forming higher peaks and lower valleys. Fifty-three percent of broadening bottoms breakout upward, so that's about random.

My guess is that things will be quiet until the Federal Reserve meeting on Wednesday. I don't think they will do anything, so I expect the markets to continue rising, probably easing higher.

I also expect a partial decline. That's when price touches the top trendline and then drops but does not touch nor come that close to the bottom trendline before staging an upward breakout. This drop should not be too low before price moves toward the top trendline. However, I could be wrong since the transports have been rising for a long time now (about 2 weeks). Thus, they could retrace between 38% and 62% of the prior move up from the June low. That's certainly possible.

A Brief Look Back

Picture of flowers.

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 20.18 points.
Tuesday: Up 213.88 points. Export and import prices dropped.
Wednesday: Up 4.69 points. Permits, housing starts, and PPI all dropped, too. Core PPI, capacity utilization and industrial production climbed.
Thursday: Up 24.71 points. Initial jobless claims climbed, CPI dropped and leading indicators eased lower.
Friday: Up 16.47 points.

For the week...

The Dow industrials were up 239.57 points or 2.3%.
The Nasdaq composite was up 66.2 points or 3.0%.
The S&P 500 index was up 25.91 points or 2.4%.

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.
New home sales10:00 WC+Shows sales of single-family homes.
Crude inventories10:30 W?My guess: Measures oil inventory.
FOMC Rate decision2:15 W?The Federal Reserves reports on interest rate changes.
Durable goods orders8:30 ThBMeasures orders, shipments of goods with lifespans >3 years.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Gross domestic product8:30 FBMeasures economic activity; GDP deflator measures inflation.
Consumer confidence9:55 FB-Surveys 5,000 households for trends.

Options Expiration

No options expire this week.

Swing and Position Traders: Chart Pattern Indicator

As of 06/18/2010, the CPI had:

7 bearish patterns,
53 bullish patterns,
638 patterns waiting for breakout.
The CPI signal is 88.3%, which is bullish (>= 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.

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: bearish.

Other

Earnings season is over.

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. Furn/Home Furnishings
3. Furn/Home Furnishings3. Retail Building Supply
4. Retail Building Supply4. Computers and Peripherals
5. Insurance (Life)5. Retail (Special Lines)
48. Internet48. Short ETFs
49. Securities Brokerage49. Internet
50. Oilfield Svcs/Equipment50. Securities Brokerage
51. Short ETFs51. Oilfield Svcs/Equipment
52. Alternate Energy52. Alternate Energy

-- Thomas Bulkowski

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Thursday 6/17/10. One Last Trading Setup

Picture of a house cat on a roof

This past weekend, my electronic thermostat that I bought about 20 years ago showed EE as the temperature. Using a paper clip to reset the device erased the display. So, I cycled power and numbers appeared which didn't change (time, for example). Another reset and the screen went blank again.

Fortunately, I saved my 20-year old thermostat that came with the house and remembered where I put it. It's now installed and working just fine, thank you very much.

Yesterday, my dishwasher stopped working mid-cycle. Many of you millionaires would have called a repair man, but not me. I turned off the power, tore it apart, and 1.5 hours later, put it back together, including putting away my tools. Then I started it up and it stopped right where it did the last time.

Sigh.

I put it out of my mind until late last evening. I figured out that the timer relay must be the problem -- two contacts that, due to a manufacturing defect, don't align properly. I sanded the contacts, bent the top one down, and put the machine back together again. I didn't store my tools like last time, but I was confident I had it fixed.

I worked.

# # #

Noam Lenz asked that I run a trading simulation where I buy stock in a rectangle bottom and sell either at 5% profit or 3 days later. It ranks best for performance. If you'd like more information about the rectangle bottom trading setups, then click here. I released a new page discussing them. In rectangle tops, the Lenz variation ranks third.

Here's a new trading setup based on rectangle tops, which I finished testing today and will release a new page as soon as it's ready.

Rectangle top chart pattern

The image on the left is of an ideal rectangle top chart pattern. It's a top because price enters the pattern from the bottom, but it can exit the pattern in any direction.

When price exceeds the rectangle top by at penny (that is, set a buy stop a penny above the highest high in the chart pattern), buy the stock providing it is also above the 21-trading day simple moving average. Sell it 3 days later. Tests show it makes an average of 3.1% in 75% of the trades and sports a win/loss ratio of 7.13. Hold time averages 5 days which helps keep the average loss to $51 but the average win to $360 on a $10,000 investment. That's not bad for a week's work.

-- Thomas Bulkowski


Tuesday 6/15/10. Tutorial Tuesday: Another Trading Setup

Picture of a bachelor button flower

I completed testing on rectangle bottom chart patterns and found some good setups, one of which I'll share with you here.

A rectangle bottom chart pattern is a horizontal congestion area. Two horizontal or near-horizontal trendlines border the pattern, one along the top and another along the bottom. Price touches each trendline several times, filling the area with price movement. In a rectangle bottom, price enters the chart pattern from the top but it can exit the pattern in any direction. Most often, though, the breakout is downward 55% of the time.

What many have found appealing about this pattern, is that it can be a springboard to big gains. Unfortunately, testing shows that it's just a mid-list performer, ranking 11th out of 23 patterns.

Of the 23 tests I administered on about 260 rectangle bottoms, I found that the best performing is to wait for the buy price to be above the 200-day simple moving average. The buy price is set a penny above the top trendline, meaning a buy stop works well to get you into the trade properly.

Hold the stock for three additional days and sell it at the open the next day.

During the 4 day hold time, the setup wins 68% of the time, making 2.5% on an investment of $10,000, including $20 round trip commissions. The average win is $304 and the average loss is $58, for a ratio of 5.25 to 1. The maximum drawdown was 26% with a hold time loss of 8% in 161 trades. The hold time loss is how far below the purchase price the stock dropped. That's different than drawdown, which is the largest peak to valley drop in the stock.

I will release a page describing the complete results of all tests soon.

-- Thomas Bulkowski

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Monday 6/14/10. Market Monday: The Week Ahead

My Prediction

Picture of the Dow industrials on the daily scale.

I show the Dow industrials on the daily scale. Circled in blue is a congestion area that appears similar to the region shown near B. Notice how price bursts out of the February region. It powered higher then threwback to the red line near the start of March before moving higher. That could happen this time, but with Europe having problems controlling debt, it makes a sustained upward move unlikely although still possible.

I drew three Fibonacci retrace lines in green, corresponding to the retrace of the move down from A to B.

In the short term, it appears the upward move is lacking steam, denoted by the height of the last few candles. Thus, I expect a short drop followed by a resumption of the move up. Wednesday, with all of the economic reports coming out (rated B- for importance), that could be the swing day or one with a tall price range.

By week's end, I expect to see the Dow hit the 38% retrace line and in coming weeks plow its way to 50% and then struggle as it nears 62%.

If I'm wrong, then the index could continue to be mired in the congestion region. If Europe burps, we could fall out of the region entirely. One financial consultant I spoke with said that will happen, but not until August. That's odd, given that August tends to be an up month, but that's what she's heard from others.

A Brief Look Back

Picture of a flower.

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 115.48 points. Consumer credit climbed more than expected.
Tuesday: Up 123.49 points.
Wednesday: Down 40.73 points. Wholesale inventories dropped.
Thursday: Up 273.28 points. Initial jobless claims grew, treasury budget dropped, and trade balance was flat.
Friday: Up 38.54 points. Retail sales dropped and so did business inventories.

For the week...

The Dow industrials were up 279.1 points or 2.8%.
The Nasdaq composite was up 24.43 points or 1.1%.
The S&P 500 index was up 26.72 points or 2.5%.

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
International trade8:30 TC+Import/export prices, trade balance. US economy vs others.
Housing starts8:30 WB-Number of homes beginning construction.
Building permits8:30 WB-Measures building permits for new construction.
Producer price index8:30 WB-Measures wholesale goods cost. An indication of future inflation.
Capacity utilization9:15 WB-Gauges economic activity, hints of inflation.
Industrial production9:15 WB-Production of utilities, mines, and manufacturers.
Crude inventories10:30 W?My guess: Measures oil inventory.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Consumer price index8:30 ThB+Inflation report. Measures cost of goods and services.
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). Friday is quadruple witching.

Swing and Position Traders: Chart Pattern Indicator

As of 06/11/2010, the CPI had:

0 bearish patterns,
27 bullish patterns,
407 patterns waiting for breakout.
The CPI signal is 100.0%, 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.

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: bearish.

Other

Earnings season is over.

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

This WeekLast Week
1. Shoe1. Shoe
2. Furn/Home Furnishings2. Furn/Home Furnishings
3. Retail Building Supply3. Computers and Peripherals
4. Computers and Peripherals4. Retail Building Supply
5. Retail (Special Lines)5. Retail (Special Lines)
48. Short ETFs48. Internet
49. Internet49. Coal
50. Securities Brokerage50. Investment Co. (Foreign)
51. Oilfield Svcs/Equipment51. Oilfield Svcs/Equipment
52. Alternate Energy52. Alternate Energy

-- Thomas Bulkowski

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Thursday 6/10/10. Ascending Triangle Trading Setup

Shown is aflower picture

It's late Wednesday evening and I'm disappointed with the results of research on trading ascending triangles. I tried two dozen different tests to get the pattern to perform as a swing or position trade and it's been miserable.

Years ago, I thought ascending triangles were all the rage, but soon discovered that they poop out soon after the breakout. As a chart pattern trading vehicle, they suck. However I chose them to test first because they are easy to program. The have a flat top which makes the selecting of the buy price simple.

I split my data into two pieces, not along a time line, but along the number of patterns found. I tested in-sample patterns and found results for my two-dozen tests. When I tested it on out-of-sample data, the results flipped. The worst performing test shot to near the top performing and the top performing was now the worst. So I took the best and worst performing and threw everything I had at it, doubling the number of chart patterns not used in either the in-sample or out-of-samples tests. The results were in-line with the out-of-sample tests.

In other words, my confidence is low that this setup will work in the future and the results probably don't merit you trying to trade it anyway. Reference the picture of an ideal ascending triangle (right). Here is the best-performing setup.

Shown is an ascending triangle chart pattern

  1. Find an ascending triangle like that shown.
  2. Place a buy stop a penny above the top, horizontal trendline.
  3. Sell at the closing price 3 days after entry (enter on trading day 1, exit on day 4). No stop is used.

On a $10,000 investment per trade using 1,030 trades since mid 1991 to mid 2010, using $20 round trip commission ($10 each way, but no allowance for slippage), my tests reveal that...

  • The average profit per trade is: $202.31 or 2.0%.
  • It wins 65% of the time.
  • The average win is $295.92 and the average loss is $93.61 for a 3.16 ratio of wins to losses.
  • The max drawdown is 16%.
  • The hold time loss (max drop below the buy price) is 18%.
  • The average hold time is 5 days.

Making an average of 2% in a week isn't bad. If you annualize that, you'll get 104%, but it assumes you can find ascending triangles often enough for the winners to overcome the losers.

-- Thomas Bulkowski

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Tuesday 6/8/10. Tutorial Tuesday: Should You Average Down?

Picture of a lizard and grasshopper.

When I was a hardware design engineer, I blamed everything on software. When I became a software engineer, I blamed everything on documentation. Now that I'm a writer, I found someone new to blame: the web hosting service!

When I connected to the internet this morning, I discovered that my website had crashed. Maybe crashed is too strong of a word. If you used Internet Explorer as your browser, some of the content was missing (mostly the buttons and related info at the top of this page). If you used Firefox, then you couldn't even access the website. It kept asking if you wanted to save some type of file.

Anyway, the hosting service told me where to go and after playing with two lines in an obscure file, I stumbled across the right combination and the site is working again. Now that it's fixed, the web host admits that they upgraded their server and that's what caused the problem. Oops.

I'd like to thank Olaf Weicker for his help in solving this problem.

# # #

I was hoping to discuss a new trading setup, but I'm not finished testing due to today's distractions. Instead, I'll discuss something from my latest, unpublished, book that I've been working on for 1.5 years now. And I'm on chapter 2 (it's a long chapter).

Averaging Down

Averaging down is buying more of a holding at a lower price. Sometimes it makes sense to do that and sometimes not. Here's how you can tell the difference.

Trading StyleShould You Average Down?
Buy-and-holdYes, but do so carefully in a bull market. Check your holding to make sure the fundamentals are still sound and the technicals are appealing. Fibonacci retracements work well in these circumstances. Measure the prior rise from swing low to high and average down at the 62% retrace of that swing move. If it's a bear market, then wait. Otherwise it's like catching a falling knife. You can get quite bloody in the process. Why take a chance? Wait for the markets to turn up.
Position traderYes, but you have to hold long enough for the stock to recover and only in a bull market. Make sure the industry is also rising and any problems with the company are due to short-term factors (like a bad quarter with rosy projections for the next quarter).
Swing traderProbably not. If you're too early, expecting a turn and the stock is continuing to drop, then average down if market and industry are rising and do so only once. If you want to average down a second time, sell the loser instead. Remember, you're supposed to be a pro. Admit your mistake, take the loss, and move on.
Day traderNo. As a day trader, you have to exit by day's end and there is no guarantee that the stock will rebound by the close. Never let a day trade turn into a multi-day holding. One trader I know lost half his account that way.

-- Thomas Bulkowski

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Monday 6/7/10. Market Monday: The Week Ahead

My Prediction

If you look below, you'll see that the Dow utility average has signaled a bear market. Some analysts will tell you that the utility average leads the industrial average. I'm not sure that's true, but if it is, then expect the Dow and perhaps other indexes to drop into bear market territory, too.

Picture of the Nasdaq composite on the monthly scale.

Above is a picture of the Nasdaq composite on the monthly scale. It's a representation of a symmetrical triangle with peaks and valleys bordered by two converging trendlines.

Notice how peak A is below the trendline, but at B the trendline touches the index. I think that denotes strength, suggesting an upward breakout. I don't know that for a fact, so don't rely on it...it's just a guess. Based on this and the belief that the economy isn't going to fall into another recession, I show the index climbing after a brief dip just after B.

Retail sales come out on Friday, so the day could be another big mover. I'll leave it up to you to guess the direction of the move.

A Brief Look Back

Picture of a praying mantis and a toad.

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

Tuesday: Down 112.61 points. Construction spending increased dramatically.
Wednesday: Up 225.52 points.
Thursday: Up 5.74 points. Productivity, factory orders, and initial jobless claims dropped.
Friday: Down 323.31 points. Nonfarm payrolls increased but less than market expected.

For the week...

The Dow industrials were down 204.66 points or 2.0%.
The Nasdaq composite was down 37.87 points or 1.7%.
The S&P 500 index was down 24.53 points or 2.3%.

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
Consumer credit3:00 MD-Measures auto, credit card and other debt.
Wholesale inventories10:00 WD-Wholesale sales and inventory statistics.
Crude inventories10:30 W?My guess: Measures oil inventory.
FEDs Beige book2:00 W?Reports on economic conditions.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Trade balance8:30 ThC+Signals balance of exports & imports.
Treasury budget2:00 ThDTracks budget deficit. Important in April (tax filing).
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.

Swing and Position Traders: Chart Pattern Indicator

As of 06/04/2010, the CPI had:

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

The chart pattern indicator is bearish with 1 of 3 half triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

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: bearish.

Other

Earnings season is over.

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

This WeekLast Week
1. Shoe1. Shoe
2. Furn/Home Furnishings2. Furn/Home Furnishings
3. Computers and Peripherals3. Retail Building Supply
4. Retail Building Supply4. Retail (Special Lines)
5. Retail (Special Lines)5. Insurance (Life)
48. Internet48. Securities Brokerage
49. Coal49. Investment Co. (Foreign)
50. Investment Co. (Foreign)50. Short ETFs
51. Oilfield Svcs/Equipment51. Alternate Energy
52. Alternate Energy52. Oilfield Svcs/Equipment

-- Thomas Bulkowski

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Thursday 6/3/10. Death and New Trading Setup

Picture of young sparrows.

The baby bird that I was so proud of saving a few days ago has died. I found him floating in my bird bath. He was too young to fly, so another bird must have considered him a meal and either yanked him out of the birdhouse or found him struggling on the ground.

The picture on the right was from a few days ago. At the time there were four in the nest...now there are three, and two appear in the photo.

This is what I expected because the nesting material in the birdhouse makes the area too confined for four sparrows. The remaining three are having a hard time finding room even though the house is plenty large (it's a two-hole birdhouse but they plugged one hole. I thought that if I added a second hole, I could increase the rent, but no such luck ).

# # #

It's almost time to eat dinner and we have a thunderstorm approaching, so I'm going to make this brief. I released a new trading setup that I plan to use for position trading You can read the details about it here. Over a 20 year test period, it was profitable in all but 4 of those years and that includes the 2000 to 2002 and 2007 to 2009 bear markets.

Any potential trades will appear on that webpage and it's updated daily.

The setup makes use of finding support at a double bottom and riding price higher to the confirmation point. That's all it takes. Drawdowns can be large but profits can be large as well. The win/loss ratio over various test periods has varied up to almost 9. Of course, there is no guarantee that future results will meet or exceed past performance. If you decide to use it, then do so with care. Be sure to tailor it to your liking.

-- Thomas Bulkowski

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Tuesday 6/1/10. Market Monday on Tuesday: The Week Ahead

My Prediction

Picture of the Dow industrials on the weekly scale.

I show the Dow industrials on the weekly scale and what could happen in the future. The vertical green line is where reality ends and the future begins.

The index on the right of the line may be a reflection of what happens on the left. Sometimes, it's good to think of future price behavior this way, just so you can be prepared. Sometimes, the guessing turns true.

News on the US economy remains good, but Europe is still causing ripples in the markets. I think that over time, traders will become immune to what happens over there, or at least less panicked about any bad news. That may allow the Dow and US markets to drift higher. I'm not saying it's going to be a smooth ride, but going into summer, we could see higher markets.

Picture of a birdhouse.

If this projection is wrong, then look for the Dow to find support at the recent lows, say, 9800. If it pushes through support, then the drop could continue to 9,400 to 9,500 or so.

If you are really bearish, then a 38% retrace of the move up from the March 2009 low would be 9,439, 50% would put the Dow at 8,864, and 62% would be 8,289.

# # #

On Friday evening, I rescued a baby sparrow that had fallen from my birdhouse (not shown). I scooped up him (or her, I didn't check) and stuffed him back into the house. My guess is his three siblings kicked him out. But the event made me feel both wonderful and gave me the idea of building a birdhouse. That's what I did for 3 hours on Saturday.

I show two pictures of the completed project. The top one is with the front door closed. The bottom one shows that the front swings down for easy cleaning and also how the birds enter the house. At the back, upper story is a U-shaped cutout. That's how they get inside. This house is made for wrens and finches, both small and nimble birds.

I'll bet my taxes go up next year. That reminds me. I have to hang a "For Rent" sign on the front.

A Brief Look Back

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 126.82 points. Existing home sales were better than expected.
Tuesday: Down 22.82 points. Consumer confidence climbed.
Wednesday: Down 69.3 points. Durable orders were strong and new home sales were robust.
Thursday: Up 284.54 points. GDP dropped slightly but initial jobless claims dropped over prior period.
Friday: Down 122.36 points. Chicago PMI came in lower than expected.

For the week...

The Dow industrials were down 56.76 points or 0.6%.
The Nasdaq composite was up 28 points or 1.3%.
The S&P 500 index was up 1.72 points or 0.2%.

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 TDCovers residential/non-residential/public spending on new construction.
Crude inventories10:30 W?My guess: Measures oil inventory.
Auto & truck sales2:00 WC-Monthly sales of domestically produced vehicles.
Productivity & costs8:30 ThD+Cost of producing a unit of output.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
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.

Swing and Position Traders: Chart Pattern Indicator

As of 05/28/2010, the CPI had:

1 bearish patterns,
3 bullish patterns,
662 patterns waiting for breakout.
The CPI signal is 75.0%, 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.

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.

Other

Earnings season is over.

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

This WeekLast Week
1. Shoe1. Furn/Home Furnishings
2. Furn/Home Furnishings2. Shoe
3. Retail Building Supply3. Retail Building Supply
4. Retail (Special Lines)4. Retail (Special Lines)
5. Insurance (Life)5. Air Transport
48. Securities Brokerage48. Investment Co. (Foreign)
49. Investment Co. (Foreign)49. Oilfield Svcs/Equipment
50. Short ETFs50. Securities Brokerage
51. Alternate Energy51. Coal
52. Oilfield Svcs/Equipment52. Alternate Energy

-- Thomas Bulkowski

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