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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 09/20/2017
22,413 41.79 0.2%
9,654 147.29 1.5%
732 -5.08 -0.7%
6,456 -5.28 -0.1%
2,508 1.59 0.1%
YTD
13.4%
6.8%
10.9%
19.9%
12.0%
Tom's Targets    Overview: 09/14/2017
22,450 or 21,500 by 10/01/2017
9,750 or 9,200 by 10/01/2017
775 or 730 by 10/01/2017
6,650 or 6,200 by 10/01/2017
2,600 or 2,425 by 10/01/2017

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Tuesday, 3/31/2009. Tutorial Tuesday: A Look at Energy

The chart pattern indicator turned bearish, saying that Friday was a great time to sell. Wish it had told us on Friday instead of after the close of trading on Monday. The signal means it is time to tell Scotty in engineering to put up the shields.

I changed the direction of my targets from up to down in recognition of the indicator swing and lowered the targets. For many of the indexes, I see a 50% to 62% Fibonacci retrace of the move off the March lows. In one case, I see a head-and-shoulders forming.

# # #

A view of DJ US Oil equipment and services (IEZ) etf on the daily chart.

The chart to the right shows an exchange traded fund that appears similar to many oil related stocks. According to yahoo!finance, the ETF "seeks results that correspond generally to the price and yield performance of the Dow Jones U.S. Select Oil Equipment & Services index. The fund generally invests at least 90% of assets in securities of the Underlying index and depositary receipts representing securities of the Underlying index."

Last week, I noticed the strong downtrend in the oil stocks and then they bottomed out, forming a flat base. I like flat bases. A flat base occurs when price moves horizontally. You can call it a rectangle bottom chart pattern, but a flat base does not have the requirements that a rectangle does. In other words, as long as price moves sideways, whether or not following a trendline, that is fine with me. Rectangles need horizontal tops and bottom with plenty of touches. Flat bases do not.

Flat bases often act as springboards to large price moves. Whether or not that will happen this time is easy. It will. The question is when? Before I get to that, let’s look at the picture (upper right chart).

IEZ started moving down in July 2008 (only a portion of the chart is shown) and it hit bottom in December 2008. Since then, the price has wobbled up and down, recently moving to the upper end of the channel on a climb in the price of oil. I use the USO exchange traded fund as the proxy for the price of oil (lower right chart). Notice on the USO chart that the price bottomed well after the stock: February (for USO) versus December (for IEZ) but that USO lifted off in February but IEZ took off in March.

According to Yahoo!Finance, USO seeks "to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil."

United States Oil (USO) on the daily chart

Both charts appear on the linear scale, and not the log scale. That is important. Flat bases are easier to see on the linear scale because of the price compression when you are dealing with large price moves.

Returning to USO, the turn seems like a rounding bottom chart pattern. It is not unusual to see price jump upward midway through the turn, just as oil has done (but the jump is often more violent). After the spike is over, price retreats back down, often to just above the launch price. That is what I see happening and I show it with a blue line.

The turn could also resemble a head-and-shoulders bottom chart pattern. If I am right, it means that the price of oil will be soft in the coming weeks but should begin to turn upward. If that happens, then the oil related stocks would rise also. Right now, there is not a good case to be made for that happening. With people still driving less, the country is awash in oil. OPEC is having difficulty with their wrenches in turning off the spigot of supply. But the chart does suggest a bottom is forming.

Thus, although I see the price of oil coming down, I still like the oil related stocks. I have limit orders on three of them, but well below where they are trading at now. If the orders fill, then I will hold them for several years, expecting a climb in the price of energy and a corresponding move up in the price of the drillers. Short term bearish on oil but long term bullish. We only have so much oil remaining in the ground, and the price spikes last year is only a prelude to what is to come. I do not see a move to such highs anytime soon, but you never know.

Anyway, that is my thinking on the energy stocks. They represent great value plays because the price to earnings, price to sales, and so on are at or near their five year lows. From a fundamental perspective with a long term hold in mind, they are good buys. But I have been wrong before...

-- Thomas Bulkowski

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Monday, 3/30/2009. Mental Monday: Stress and Trading Success

This posting is now located here.

-- Thomas Bulkowski

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Thursday, 3/26/2009. Dow Head-and-Shoulders?

The Dow industrials on the daily chart

I show a chart of the Dow industrials on the daily scale to the left of the green line. To the right of the line is a guess as to how I think the Dow will climb.

I base the projection on what is called a mirror, a reflection of price movement across the vertical line. It has been surprisingly accurate in the past.

If you had asked me how price would progress up to today, I would have said that I expected a double bottom. In fact, that is what I wrote in some of Tom’s Targets, at the top of this page (click on a link at page top for a description of the target). I did not think that price would climb far before economic events would conspire to send the Dow lower. That hasn’t happened yet but it still could. Thus, we could see a double bottom form. However, I think that unlikely.

A better guess is to believe that the climb from the bottom has been far enough that only a partial retrace is in store. So, I expect price to hit overhead resistance and stall, essentially moving horizontally for several months, perhaps having a bad few days in late summer. That would make the pattern appear as a head-and-shoulders bottom, which I show.

There are lots of surprises ahead. One financial consultant warns that the commercial real estate sector will run into trouble. Those empty strip malls that used to contain barely-thriving shops are going into foreclosure because of a lack of tenants. And that will pull the financial sector down all over again. Maybe that is what causes the plunge in June or July, if you can believe the chart. Having the Dow coast lower during the summer is probably a good guess, too.

What the chart shows is that the bear market has reached bottom. I just hope it is the lowest bottom...

# # #

I hosed down my plants to help remove the spider mites from my arborvitae. After they dried and the wind died down, I mixed alcohol, ivory soap and olive oil with water into a delicious concoction. I used the recipe a few years ago, but found it didn’t work. Maybe I will have better luck this time. I think the bugs get drunk on the alcohol, take a bath in the soap, and the olive oil covers them with a shiny new coat.

-- Thomas Bulkowski

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Tuesday, 3/24/2009. Tutorial Tuesday: The Search for SAR

I was hoping to combine some chores and work 5 days a week on my website instead of 6, so I told you last week that I was releasing updates to the chart pattern indicator on Thursday instead of Friday. Sigh. I am moving it back to Friday since I have to update the site for quote info at that time anyway.

I put on my strongest reading glasses and took my magnifying glass outside and examined my arborvitae plant. Yes, it’s infested with spider mites. Since the winter was so warm, bugs are having a field day on my plants. In fact, the mites and their webs are so thick, it makes the green plants look white. The only thing that really kills them the mites is kelthane, which I believe was removed from the market years ago. I still have some left and plan to nuke them as soon as the weather settles down (it’s too windy).

# # #

Picture of support and resistance in the Dow industrials

Sorry for the blurry image on the right, but I wanted to keep the size to a reasonable level. Do not adjust your set, as they say.

Let’s talk about SAR, support and resistance. Starting with the top half of the bar chart.

  • Point 1 is supposed to point to 8,000, which would be round number SAR. Often, people do not buy or sell at odd numbers, such as 8.93. Rather, they use the round number 9.00. Traders know better and use the oddball numbers (especially when placing stops). If people set their trades on the round number, it tends to act as a support or resistance area when those orders execute. Price may stall or even reverse there. When I pick a target for the market averages, it will often be a round number because investors place lots of emphasis on them.
  • 2. Valleys or bottoms are often places of support or resistance. Why? If price drops back to that price level, people will often buy. They reason that they missed the buying opportunity at the low the first time so they are not going to miss it again. That buying places a floor on price. And that is how double bottoms form.
  • 3. For the same reason that bottoms show SAR, so do peaks or tops. I show a cluster of them on the chart, circled. Here, those that missed selling when they had the chance do so when price returns to the price level of a prior peak. When a bunch of sell orders appear, the upward move stops or reverses there.
  • 4. A trendline acts as a SAR line. Why do prices form a trend? I have no idea. Some may speculate that it is a slight imbalance of buy or sell orders. Clearly that is true but why does price hit a trendline and reverse? Good question. This could be a self-fulfilling prophecy, where traders expect a reversal at a trendline and their selling or buying makes it so.
  • 5. A horizontal consolidation region (HCR) is a name I coined for price structures that tend to share bottoms or tops or both. They are areas that have a lot of price overlap from day to day. Sometimes, as in this case, they may slope downward some, but a stock enters the price level of these areas in the future and gets stuck -- not always, mind you, but enough to make trading interesting.
  • 6. The bottom half of the chart is of the same Dow only I overlayed the SAR lines from Patternz. The SAR button on the chart form will draw green lines of support and red lines of overhead resistance setup by valleys and peaks, and the program highlights round numbers by a dashed line. Controls found after clicking the Setup button allow you to increase or decrease the number of lines displayed. I like to see lots of lines because a cluster of them tells you how much SAR price has to push through. This chart suggests that the Dow is right underneath a thick layer of overhead resistance setup by prior valleys. Whether or not it is strong enough to repel price, only time will tell. Unless, of course, the earth gets hit my a massive asteroid. That would be exciting.

There are other types of SAR, such as that setup by moving averages and indicators, but I will leave them to your imagination.

-- Thomas Bulkowski

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Monday, 3/23/2009. Mental Monday: Trading Hesitation

This posting is now located here.

-- Thomas Bulkowski

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Thursday, 3/19/2009. 8 New Price Lines in Intel!

8 new price lines in Intel (INTC), on the daily chart

For those of you interested in the chart pattern indicator, I will be releasing the weekly update to it on Thursday’s instead of Friday’s, and that goes for the other related files. That means I only have to work 5 days instead of 6 updating this website. You will still receive the same quantity of information, only it will appear a day earlier.

The semiconductor and semiconductor equipment industries have been moving up in relative strength this last week or two. Plus, the technology laden Nasdaq is outperforming the other indexes, and that suggests technology stocks are in vogue.

Thus, I added Intel to my shopping list of companies to buy when the time is right. Yesterday I noticed an 8 new price lines candlestick. According to my Encyclopedia of Candlestick Charts, pictured on the left, the pattern is supposed to act as a bearish reversal, but does it? In a bear market, the reversal rate is 50%. Random, in other words. If it did act as a reversal all of the time, then there would be no 10, 12 and 13 new price lines candlesticks.

I show the candlestick beginning with point 1 and ending at point 8 in the above chart of Intel (or Letni spelled backwards). Each candle in the pattern sports a high that is above the prior high. Hence the name, 8 new price lines. The last day of the pattern ended yesterday and today (Wednesday, as I write this), price continued moving up. I thought the red trendline would pose resistance, but the stock has pierced that. I have no doubt that price will throwback to the trendline and perhaps lower, so I will wait. I am in no rush to lose money on this stock, but for a long-term hold, it has a chance to do well.

Since the candlestick pattern is so tall the measure rule that I created for most candlesticks and outlined in my Encyclopedia book will not work. Instead, I use the height of the candle pattern from start to end and divide it by 6 for upward breakouts. Add the new height to the top of the pattern’s end to get a target. That method works 74% of the time in a bear market.

Eyeballing the chart says that the candlestick height is 3 points, and divided by 6 is 0.50. Thus, the new target would be 15.50. The stock missed hitting the target by 9 cents today.

-- Thomas Bulkowski

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Tuesday, 3/17/2009. Tutorial Tuesday: Trendline Measure Rule

Up trendline measure rule

Trendlines offer clues as to how far price is going to rise (down sloping trendlines) or tumble (up-sloping ones). Let’s take the case of an up-sloping trendline to gauge how far price is likely to drop.

The figure to the right shows an up-sloping trendline with price breaking out downward at point B.

From the breakout, find the prior minor low trendline touch. I show it as point A. Measure the widest distance between those two points (re, A and B), measured vertically. In this case, that’s the distance from C to D. Multiply that distance by 63% because that’s how often this method works when a full height is used, and project the result downward from the breakout price (B) – the point where price pierces the trendline.

For example, if the high at C is 10 and directly below that at point D, the trendline is at 8, the difference is 2. Multiply this by 63% to get 1.26. Suppose the breakout at point B is at 9. That would give a price target of 7.74 (9 – 1.26). If the projected decline is less than 0, ignore the result.

Down trendline measure rule

For down-sloping trendlines, use the measure rule to predict how far price will rise after an upward breakout (a price pierce) from the trendline. The figure to the left shows a down-sloping trendline with price breaking out upward at point B. From the breakout, find the prior minor high trendline touch. I show it as point A. Measure the widest distance between those two points, measured vertically. In this case, that’s the distance from C to D. Multiply that distance by 80% because that’s how often this method works when a full height is used, and project the result upward from the breakout price – the point where price pierces the trendline.

For example, if the low at C is 10 and directly above that at point D, the trendline is at 12, the difference is 2. Multiply this by 80% to get 1.60. Suppose the breakout at point B is at 11. That would give a price target of 12.60 (11 + 1.60).

If you use the full height of the CD move in either case, the success rate is 63% and 80%, respectively. Multiplying the CD height by 63% or 80% boosts the success rate into the 90% or above region. The above links provide more information on trendlines. My Trading Classic Chart Patterns book takes an in depth look at trendlines.

-- Thomas Bulkowski

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Monday, 3/16/2009. Mental Monday: Trading Visually for Increased Profit

My computer kept rebooting on Saturday and I spent all day trying to fix it. Turns out the problem went away when I removed the temporary files. That's right. Here is what the Dell technician told me to do (for Windows XP Home Edition). Click Start then Run and type in the following:

  • prefetch (then click OK)
  • temp (then click OK)
  • %temp% (then click OK)
For example, I typed prefetch into the dialog box and then clicked OK. That opened a folder and I deleted everything in that folder. Then I continued onto temp and %temp% (yes, include the percentage signs).

Also, there is a new scam going around. Perhaps you have received a phone call that begins, "You car warranty has expired," or something to that effect. Hang up and contact the Federal Trade Commission (http://www.ftc.gov/) and log the illegal phone call.

# # #

This posting is now located here.

-- Thomas Bulkowski

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Thursday, 3/12/2009. Bottom Fishing: Preliminary Picks.

ADDENDUM!In the new light of morning, before the market has opened today (Thursday), Hot Topic doesn’t look so hot. Overhead resistance setup by a down-sloping trendline on the weekly scale beginning in January 2004 suggests price will reach 10 and reverse. That also matches a congestion region in Sept 2006 to July 2007. Combined with round number (10) and the appearance that sequentially higher same store sales are powering the stock upward by less and less, it appears that this stock is tired. Thus, I expect this stock to hit 10 in a quick move up but it may not go much higher from there. Downside would be a stop place below the right-angled broadening formation at 8.13. The upside is a gain from Wednesday’s close of 13% and downside of 8% and that is if you can buy in at 8.85, which is very doubtful. Posted Thursday at 9:20 EST.

# # #

I spent part of yesterday and much of today (Wednesday) searching for stocks to buy. I found a pile and I list them below. This is a preliminary list, one that I will slim down considerably in the coming days.

I started by looking at my portfolio of 566 stock charts on the monthly scales, searching for upward sloping trends on the price charts. I wanted to see a strong run up from the 2002 bear market low until late in 2008. Since nearly every stock has stumbled in this bear market, I knew that even the strongest stocks have been taking down a notch or two. Thus, a recent drop is expected, but I still wanted to see strength preceding the decline. Nearly every stock in the list shows this behavior, but there are exceptions.

I excluded what I call price mountains. Newport Corporation (NEWP) (or General Electric (GE), for that matter) shows a good example. On the monthly scale, there is a huge price peak in 2000 and the stock has been sinking or going nowhere (horizontally) ever since. Research says that it takes years to recover from these types of blow-off moves. I chose stocks that may have price mountains but the run-up is more gradual, showing continued strength over years. My hope is that once the bear market is over, these stocks will resume the up-trend. Thus, buying low in the coming months and then holding for a few years could result in handsome rewards.

Many of the stocks on the longer time scales show that they weathered the 2000 to 2002 bear market in good shape and that their upward trend resumed. I removed from consideration those that moved horizontally for too long (several years). I want only the strongest players and not those that consolidate for too long.

A company like FedEx (FDX) is an exception. When this economy recovers, this company will likely know it first. The number of packages delivered will begin to climb and with it profits, so even though it went flat from mid 1999 to mid 2001, I still want to watch it and maybe pick up a few shares.

I also like stocks that have plunged well below the price they traded in the 1990s. These will be the ones that move up by 50% in a year. They are bounce plays, 38% Fibonacci retrace plays like Ashland (ASH) and Hawaiian Electric (HE).

A company like Hot Topic (HOTT) is one I want to single out. If I buy anything, it may be this one. The chart on the monthly scale shows it peaked in January 2004, so it is a price mountain with a twist. Look at the trend since 2008. It has been uphill. That’s right. In this bear market a stock is climbing! That intrigued me. I looked at a half-dozen research reports and all said the same thing: buy. S&P claims that the fair value is only $7.10 a share (it closed today at 8.85), but they still call it a strong buy, their highest rating (report dated March 10). The stock posted earnings after today’s close that were better than expected and the stock already moved up in after-hours trading.

Looking at the company website, I am troubled by them hiring Michael Crooke as president of the Hot Topic Division in June 2008 and then him leaving a month later. That makes me nervous, as if he found the books were cooked and decided to quit. He was a Navy Seal, so it’s not like he couldn’t take the pain. Maria Comfort (chief merchandising officer) left three weeks after that. Hmmm.

The stock is showing a right-angled broadening formation, so this stock could rise to the top trendline, maybe 10% in a week. But that is just a guess.

Comparable store sales were up 4.3% in December 2008, 6% in January and 10.8% in February. They have slowed the store opening blitz and will close or relocate non-performing stores. They remind me of Michaels Stores (it went private) and I was able to retire at 36 on that one stock. So, yes, I am excited but I also know that the road to riches will be a bumpy one for this stock and many others on the list. That is why the below list will shorten as I tear apart each company. You might consider creating your own buy list and having it ready for the market bottom. It is coming.

I do not own any of the stocks as I post this note on Wednesday night. That could change soon, though...

-- Thomas Bulkowski

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Tuesday, 3/10/2009. Tutorial Tuesday: Bottom Fishing with Stan Weinstein

ADDENDUM! I released a new version of Patternz because of a bug I found in the chart pattern indicator. The most recent day would always have a 0 count (showing on the chart as a neutral 50). The latest version corrects this and has a small addition to the instruction manual regarding the breakout method. Both changes were prompted by Jerry Somer. Thanks, Jerry! And I haven’t forgotten about a request to add moving averages to the program...

# # #

If you purchase anything from Amazon.com, then please do so through this website. Just click on one of the pictures of my books (upper left of page) and that will take you to Amazon automatically with a code passed to them. If you were to buy a book, car, Lear jet, or other gift, they will pay a small referral fee at no cost to you. That fee helps support this website.

I do not charge a subscription fee to access over 400 pages of information on ThePatternSite.com, nor do I charge for the Patternz program. Google runs ads and the revenue derived when you click on them also helps defray the costs of running this website. If you see something in an ad that interests you, then click on it and explore what they offer. It may help your trading.

# # #

The book, Stan Weinstein's Secrets for Profiting in Bull and Bear Markets, published in 1988, is remarkable because it proves his method without numbers but uses pictures instead. I tested his idea on my actual trades and found that the method works. Here is a quick tutorial.

Ideal example of the four stages for price movement

According to Weinstein, price follows four stages.

Stage 1

Price moves sideways, sometimes rising above the 30-week moving average and sometimes not. The moving average flattens out, following price horizontally. Price is choppy but usually moves sideways. Volume may rise as people cash out of the stock after waiting for it to move up.

Stage 2

Stage 2 is the uphill run. Price breaks out of the trading range of stage 1 on impressive volume, which helps power the stock upward, leaving the moving average trailing behind. In the early portion of stage 2, price may throwback at least once to the top of the trading range marked during stage 1. The moving average turns up. Weinstein says that stage 2 is the ideal time to buy.

Stage 3

Stage 3 is the top. Price levels out and begins to move horizontally again. The moving average is climbing but flattens out, eventually catching price. Volume may increase as price churns sideways. Weinstein says traders should take profits in this stage, but investors can hold on by selling half their position. If price moves up, forming another stage 2 advance, then continue to hold. A downward breakout from the trading range should cause a sale.

Stage 4

Stage 4 is the downhill run. Volume is not the key to this stage because it can be heavy or light as price drops. Price breaks out downward from the stage 3 top and may pullback into the trading range. After that, though, price continues down. The moving average usually remains above the stock as price drops.

A review of my trades shows that I averaged 27% on 44 trades purchased in stage 1 and sold in stage 2. I found that the highest win/loss ratios accompanied buys in stage 1 (wins 73.4% of the time) and sales in stage 2 (wins 80.2% of the time). Visit the link for more details on his method and my results.

-- Thomas Bulkowski

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Monday, 3/9/2009. Mental Monday: Action Trading Like a Samurai

This posting is now located here.

-- Thomas Bulkowski

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Thursday, 3/5/2009. Is Down Over? Cycles Give Clue!

A picture of the Nasdaq (^GSPC) on the daily scale.

The chart is a picture of the Nasdaq on the daily scale. I began drawing the vertical lines by using the distance between the two red dots. My program took it from there and completed drawing the vertical lines.

Highlighted by green dots, notice how the Nasdaq turns near the lines. It is not always accurate, as the most recent line shows, but it is close. The line in mid February slices through the price action.

If you estimate when the next line will hit, you get tomorrow (Thursday, since I am writing this on Wednesday evening). According to yahoo!finance, the employment report that comes out this Friday will have a say in price movement. I expect the downtrend to resume on Thursday and pick up steam on Friday. Since my crystal ball is made of plastic, everything looks fuzzy, so your guess is as good as mine.

# # #

I have been enhancing yesterday’s post, What’s Hot Wednesday. I may try adding chart patterns onto each table.

I went shopping for tomato plants today at home depot and they wanted $3.48 for each one! I wanted six, but would have to take out a second mortgage, so I decided not to stimulate the economy. I will check Lowes but they will likely charge the same. I have tried seeds only to have none grow.

And I found the top to my Vaseline jar. My dog had pushed it under a shelf in my office. All is right with my world again.

-- Thomas Bulkowski

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Tuesday, 3/3/2009. Tutorial Tuesday: The Double 7s Setup.

John Myer was gracious enough to configure TC2005 for Patternz, my free pattern recognition software. I felt that his efforts should be rewarded so when he asked me to announce the offering of his technical analysis course, I said no. Then I changed my mind. This is not an endorsement of his product, just an announcement. You can find his demo at http://www.jdmmtrades.com. Select the Web Courses menu button and then the TA101 demo link for more information.

# # #

A picture of downy woodpecker.

I went grocery shopping today and while I was away, I received a phone call. My dog went nuts and tried to eat a box of Kleenex but couldn’t reach them. So, she settled for a jar of Vaseline. When I got home, the jar was downstairs outside the kitchen with the top missing. I took the jar back upstairs to my office and hoped she didn’t make too much of a mess. She tossed a floppy disk on the floor and tipped over a desk clock. That’s all. But where’s the top? She’s not saying, and I can’t find it either. It will probably be in the last place I look. Maybe I should look there first?

Also, for local color, I am including a photo I took of a downy woodpecker. My neighbor has a dead tree in which he grows termites, and the bird has come to visit it. The bird landed on my metal chimney once and it sounded like a gang was spraying my house with gunfire.

# # #

I would like to thank Dr. Tom Helget for help testing the following double 7s strategy.

The January 2009 issue of Technical Analysis of Stocks & Commodities magazine has an article titled, "Three rules, one easy way to trade ETFs," by Larry Connors and David Penn. They call their strategy the double 7s setup and you will discover why in a moment. Here are the three rules for trading exchange traded funds (ETFs).

  1. The ETF is above the 200-day moving average.
  2. The ETF closes at a 7-day low. Buy on the close.
  3. Exit when the ETF closes at a 7-day high.

When they say "7-day" they mean "7-price bars." In other words, they are using trading days and not calendar days. Rule 1 is easy. They use a 200-day simple moving average. Rule 2 can be confusing. I interpret it as today’s close is below the lowest low price of the prior 6 days. It might mean that today’s close is the lowest close of the 7 days. Rule three is similar to rule 2 in that today’s close must be above the highest high of the prior 6 days. Perhaps my interpretation of their rules is incorrect because my results are nothing to brag about.

What first strikes me about this setup is that it requires you to tune into the market and trade on the same day that you receive a signal. Thus, you have to hope that the close remains above or below the price of the 6 prior bars when your order executes at the close. This is not a big deal, but I want to test if getting a signal on day 1 and placing the trading order on day 2 at the market open improves results. I haven’t done that yet.

According to the article, they ran this setup against various securities from January 1995 through April 2008. The following table shows my results and theirs.

My resultsTheir Results
SymbolPercent
Profitable
PointsProfit per
Trade
SymbolPercent
Profitable
PointsProfit per
Trade
NDX77.9%2,179$25.34NDX79.84%2,822?
^GSPC81.0%1,174$13.98SPX~80%1,133?
FXI76.2%1,004$47.81FXI73%??
EWZ81.4%31.67$0.74EWZ>80%??
All ETFs74.1%39,610$25.37????

Nowhere in the article was it disclosed how much profit per trade they made. I included commissions of $20 round trip (buy=$10, sell=$10) on 100 shares, but made no allowance for slippage or other fees. Where a question mark appears in the table, the results were either not tested or not disclosed.

In the letters to the editor of the March 2009 issue, Kirk Dolan said that his test showed that the percentage profitable trades for the NDX was 77.7% with a gain of 2001.5 points and 11.1% annual average return using 252 trading days per year. Neither of us can figure out where their 2,822 points came from and I can’t figure out where Dolan gets 112 trades from. I counted only 86. Perhaps the lowest/highest close is the correct interpretation. I tried that and still got lousy results.

I asked Dr. Tom Helget to run the same securities. For the SPX, he also used ^GSPC, which is the yahoo!finance version of the S&P 500 index. He had 84 trades, the same as mine. His win/loss ratio was 79.76% with an average profit of 1.32%. The maximum trade draw down was 11.5% with a profit factor of 4.38.

Tom also tested the system against 522 ETFs and found that the win/loss ratio was 59.1%, average profit per trade was -0.39% (a loss), with a max trade draw down of 77.95%. The profit factor was 1.29, recovery factor was 1.25, payoff ratio was 0.89. His test ran from October 19, 1988 to February 25, 2009. Not all ETFs covered the entire period.

In the letter to the editor, Dolan suggested the following rules to boost profits.

  1. "Set a buy-stop 0.1 above the close of the 7-day low, and keep moving the buy-stop down above each day’s close until you are bought in. This often gets you in at lower prices when the price keeps going down after hitting the 7-day low."
  2. "Set a sell-stop 0.1 below the close of the 7-day high, and keep moving it below the close each day until you are sold out."
  3. "One important exception on point 2 above. After the seven-day high (day 1), if the next three days’ highs finish above day 1’s close, loosen the sell-stop to just under the 7-day low channel. The optimum sell-stop was 5% of the 7-day channel width below the 7-day low, but as long as you keep it under the channel low, it will work. This allows you to catch the long runups.

His tests on the NDX shows a average annual return of 28.79% with 70.5% profitable. I implemented step 1 and found that it worked better with a penny above the close and not a dime, as in his setup. I did not have a chance to implement step 2, and step 3 puzzles me (the channel width stuff is confusing and he probably means height, but it’s still confusing).

The system has a high win rate, but profits are small. Annualizing the trading profit can show a deceptively high return when you have no expectation of making that kind of return.

The moral of this story is simple. Don’t believe everything you read.

-- Thomas Bulkowski

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