Subscribe to RSS feeds Bulkowski Blog via RSS

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

Support this site! Clicking the links (below) takes you to Amazon.com. If you buy ANYTHING, they pay for the referral.

Picture of Bumper.
Kindle
Paperback
Nook
Picture of the head's law.
Kindle
Paperback
Nook
Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
Encyclopedia of Chart Patterns 2nd Edition book.
Bulkowski's Blog: ThePatternSite.com
Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 12/11/2017
24,386 56.87 0.2%
10,371 -31.68 -0.3%
763 4.90 0.6%
6,875 35.00 0.5%
2,660 8.49 0.3%
YTD
23.4%
14.7%
15.6%
27.7%
18.8%
Tom's Targets    Overview: 11/30/2017
24,600 or 23,500 by 12/15/2017
9,900 or 10,500 by 12/15/2017
800 or 750 by 12/15/2017
7,100 or 6,700 by 12/15/2017
2,725 or 2,575 by 12/15/2017

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

May 2010 Headlines


Archives


Thursday 5/27/10. Position Sizing. What I Use!

YearAverage AmountDuration (years)Comments
1983$2,00012Bull market begins in August 1982
1995$6,0005Market trend increases
2000$10,0004Bear market begins in March 2000
2004$15,0002Bull market begins in October 2002
2006$20,0002Bear market begins in October 2007
2008$10,0001 
2009$5,0001+Bull market begins in March 2009

When I started looking at the markets, position sizing never occurred to me, at least not the fancy mechanisms available to traders and investors today. I started by buying $2,000 worth of a security, because that was all I could afford. I added more positions as my capital grew. The table shows the growth using this scheme.

In 2006, I was spending $20,000 per position as a minimum. I say minimum because I would take $20,000, divide it by price, and then round up the number of shares. Sometimes I would take multiple positions in a stock, such as an electric utility, but spread the buy order over time. I did this since I could often get a better return by parking my money in a utility yielding 5% to 8% instead of what money market funds were offering.

There are more advanced position sizing algorithms than the one I'm going to discuss in a moment, but often they are oriented toward portfolio managers. If you like math, then read Ralph Vince's book, The Handbook of Portfolio Mathematics. Don't forget to bring the popcorn.

I tested three types of position sizing algorithms: constant position size (same number of shares per trade -- the worst performer), fixed dollar amount (what I used to use-- the middle performer), and volatility based (best performing and what I use now).

Here's the formula for a volatility based position size.

Position size = (Portfolio value x Risk)/Volatility
  • Portfolio value is the total amount of your trading capital, such as $25,000 or $100,000.
  • Risk is often set at 2%, because you want to lose no more than 2% of your trading capital per position.
  • Volatility is the spread between the daily high and low, averaged over time. Some may prefer to use the average true range over the last month.

For example, let's use 3M as a stock I want to buy. I looked at my average loss and divided that by my portfolio value and found that I risked an average of 0.33% per trade. Notice that's well below the 2% that some traders use. Anyway, assume I have a $500,000 portfolio. I computed the volatility of the stock by counting the difference between the high price and low price, each day for the last 21 trading days (about a calendar month), and found it to be $2.72. Again, you could use the average true range, if you prefer.

Plugging the numbers into the formula gives: Position size = 500,000 x 0.0033/2.72, or about 600 shares for the stock. Since the stock is trading at about $80 a share, that means it would cost 80 x 600 or $48,000. I could own 10 similar stocks to chew up the full half million dollar portfolio. That's decent diversification. If I want to own more positions, I'll cut the portfolio size that I use, say, in half. That would suggest I buy 300 shares but I could own 20 stocks.

-- Thomas Bulkowski

Top


Tuesday 5/25/10. Tutorial Tuesday: What is Hold Time Loss?

Picture of a bee geting stuck in a flower.

Hold time loss is a new concept that I've researched. It's similar to draw down, but it involves the stock dropping below the buy price for a profitable trade. Why is that important? Because setting an initial stop too close will take you out of your most profitable trades.

Draw down is the largest drop in equity while you hold a trade. That often means it's how much you could have made if you sold when price peaked. Hold time loss is how deep into the red (loss) the trade goes before turning profitable.

If you place a stop loss order 10% below the buy price and you get stopped out that's bad news, but it pales to the angst you suffer if the stock goes on to rise by 10 times your buy price.

To figure the hold time loss, I looked at all of my profitable trades and computed how far into loss territory the stock dropped while I held it. The following table shows a frequency distribution of the results with loss size on the vertical axis and hold time on the horizontal. The one-month interval is the only one with plenty of samples. That's due to the way my computer counted the trades (first in, first out).

Loss30 days6 Months*1 Year*
5%57%20%7%
10%86%42%29%
15%93%54%36%
20%98%66%43%
25%98%76%57%

For example, of those profitable trades held less than a month, 57% of them had losses of 5% or less, and 86% of them had losses of 10% or less. This makes sense because price often doesn't move very far in a short time.

On the other end of the table, 7% of the stocks with hold times greater than 6 months but less than a year had losses of 5%.

The table shows that the closer to buy and hold, the more I'm willing to tolerate a substantial loss. The average hold time loss for all trades is 15% with a median (mid range) of 7%. That tells me an initial stop placed between 7% and 15% below the purchase price will allow the stock some wiggle room before it takes off...or drops to 0.

If you're having trouble with placing the initial stop (large losses or frequently being stopped out), then try computing the hold time loss for your trades. It might say you're placing the stop too close, too far away, or just right for the markets you trade and the anticipated holding times.

You can find more details about hold time loss here.

-- Thomas Bulkowski

Top


Monday 5/24/10. Market Monday: The Week Ahead

My Prediction

Picture of the Dow utilities on the weekly scale.

I show the Dow utility average since it's the only one that exhibits any features worth visiting this week. What I find intriguing about the index is how symmetrical it looks. I'm referring to the horizontal price movement reflected on each side of the highest peak. It looks like a head-and-shoulders top chart pattern, even though the shoulder peaks don't like up as well as they could.

To draw the picture, I just flipped the left side of the figure and pasted it to the right of the green line. I really don't expect the markets to "crash" like that shown, but it's a possibility.

The index has closed below the neckline, suggesting more of a down move coming. My best guess is the index will hit B, which reflects across the chart to A. A stock often returns to to the price where a strong up-move began. The up-move starts at A with two long white candles. That could mean that price will drop to that level, and if things get really bad, they could drop to C, where there is a flat shelf that should lend support and stop the downtrend.

A Brief Look Back

Picture of a lizard

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: Up 5.67 points.
Tuesday: Down 114.88 points. Building permits were down but housing starts were up, PPI dropped.
Wednesday: Down 66.58 points. CPI dropped
Thursday: Down 376.36 points. Initial jobless claims climbed and leading indicators dropped.
Friday: Up 125.38 points.

For the week...

The Dow industrials were down 426.77 points or 4.0%.
The Nasdaq composite was down 117.81 points or 5.0%.
The S&P 500 index was down 47.99 points or 4.2%.

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
Existing home sales10:00 MCCounts sales of used homes.
Consumer confidence10:00 TB-Surveys 5,000 households for trends.
Durable goods orders8:30 WBMeasures orders, shipments of goods with lifespans >3 years.
New home sales10:00 WC+Shows sales of single-family homes.
Crude inventories10:30 W?My guess: Measures oil inventory.
Gross domestic product8:30 ThBMeasures economic activity; GDP deflator measures inflation.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Personal income & consumption8:30 FC+Measures sources of income to predict future demand.
Chicago purchasing managers index9:45 FBMonitors regional manufacturing activity.

Options Expiration

No options expire this week.

Swing and Position Traders: Chart Pattern Indicator

As of 05/21/2010, the CPI had:

7 bearish patterns,
1 bullish patterns,
117 patterns waiting for breakout.
The CPI signal is 12.5%, which is bearish (<= 35%).

The chart pattern indicator is bearish with 1 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: bullish.

Other

Earnings season is either underway or should be starting soon. The sessions could be more volatile.

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

This WeekLast Week
1. Furn/Home Furnishings1. Furn/Home Furnishings
2. Shoe2. Shoe
3. Retail Building Supply3. Retail Building Supply
4. Retail (Special Lines)4. Insurance (Life)
5. Air Transport5. Air Transport
48. Investment Co. (Foreign)48. Oilfield Svcs/Equipment
49. Oilfield Svcs/Equipment49. Investment Co. (Foreign)
50. Securities Brokerage50. Alternate Energy
51. Coal51. Securities Brokerage
52. Alternate Energy52. Short ETFs

-- Thomas Bulkowski

Top


Thursday 5/20/10. Cup-With-Handle in GLD!

Picture of GLD on the daily chart.

Shown is a cup with handle pattern in the exchange traded fund, GLD. The fund tries to reflect the performance of gold. "The Trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets," according to yahoo!finance, but they may have changed their method since the quote is an old one.

When searching for cup with handle patterns, novice chart pattern traders omit the rise leading to the start of the cup. I don't show much of it here but guidelines say the rise must be at least 30%. The cup is a rounded shape between 7 and 65 weeks long (the median is 155 days) and price drops anywhere from 12% to 50%. Handles appear on the right as a consolidation region and last a median of 23 days. Cups with shorter handles tend to perform slightly better: 37% versus 32% average rise.

Cups with a higher right lip perform less well than do those with a higher left lip but the difference is small: 34% versus 35%, respectively. The cup pictures has a higher right lip.

The day price closes above the top of the cup is the breakout. If the breakout occurs on light volume performance tends to improve: 37% to 34%. All of the statistics measure from the breakout to the ultimate high, which is the highest high before price drops by at least 20% or drops below the bottom of the cup.

If GLD behaves like other cups, then expect price to move sideways for a period and then climb. However, it's been my experience that price climbs 10% to 15% and that's it. The show's over. That's why I don't follow cup with handle patterns. Out of 23 chart patterns in a bull market they rank 13th, where 1 represents the best performance. Cups are mid list performers in other words.

-- Thomas Bulkowski

Top


Tuesday 5/18/10. Does Dollar Cost Averaging Work?

Picture of a fly.

Mary won over a quarter million dollars in a state lottery. After taxes, she had just $12,000 left. How should she invest it, as a lump sum (putting it to work all at once in the stock market) or buying $1,000 of stock each month for a year? The latter route is called dollar cost averaging. The idea being that you buy more shares when the market is down and fewer if it rises. That way, you don't have to worry about buying at the top and seeing your investment sink.

To find out if dollar cost averaging works better than buy and hold, I used the S&P 500 index from January 1950 to May 2010 and programmed my computer to buy $12,000 worth of the index at the start of each month and hold it for a year, selling it at the end of the period, using closing prices in each transaction. Commissions, fees, taxes, slippage, and interest earned on idle money were not factored in. Each tests was a series of overlapping holding periods, meaning I would buy in February 1950 and sell in January 1951, then buy another $12,000 in March 1950 and hold it until February 1951, and so on. Profits were not reinvested. Those series of tests represented buy and hold.

For dollar cost averaging, I bought $1,000 of the index each month and held it until the end of the period in a series of overlapping holding periods just like in buy and hold. The only difference between the two is the first test invests the entire $12,000 at the start of the period. In the second test, $1,000 is spent each month until the money is gone. Both holding periods span a year.

How did the two do? Buy and hold made $705,147 and dollar cost averaging made $371,445.

-- Thomas Bulkowski

Top


Monday 5/17/10. Market Monday: The Week Ahead

My Prediction

Picture of the NYSE Composite on the daily scale.

This tip comes from Dipika who emailed me asking about the pattern in the NYSE composite. I show the chart of it on the right, courtesy of bigcharts.com since I don't follow this index. Represented is a right-angled and ascending broadening formation with a partial rise.

The broadening pattern breaks out downward 66% of the time, so that is a huge clue as to what will happen next (meaning the index will likely make its way lower until closing below about 6,600. Since we are dealing with probabilities, there is no guarantee that the decline will happen and it could take some time before the drop occurs, too.

The partial rise, which is highlighted in the figure, breaks out downward 74% of the time in a bull market. Having those types of statistics on your side while trading gives you an edge. You can buy that edge for the price of my Encyclopedia of Chart Patterns, 2nd Edition book, which is pictured on the left. That's a commercial plug, but I went shopping for an emergency use only (no contract) cell phone this weekend and got pissed at the phone companies for what they charge and how it's setup to cost you money.

It all began some months ago when the phone company raised my land line rates by 40% and boosted the cost of my internet connection, too. Over the last 3 months, I made just 2 calls lasting about 3 minutes total. Why are they charging me to NOT use their $%^* lines? Then the government doubles my phone bill by adding a page worth of taxes. I'm not exactly poor, but you can see that dollars are on my mind. There's an old joke that goes, "We don't care. We don't have to. We're the phone company!" I think that sums up my feelings about the phone company.

Anyway, if a country in Europe does default on its debt, then look for the indexes to head toward 0. The plunge will be a swift one but when it's over, put every buck you have into stocks of your choice. The rebound from that will be delicious. In other words, have some cash set aside.

A Brief Look Back

Picture of a dragonfly

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: Up 404.71 points.
Tuesday: Down 36.88 points. Wholesale inventories dropped more than the market expected.
Wednesday: Up 148.65 points. Treasury budged deficit increased.
Thursday: Down 113.96 points. Initial jobless claims climbed a bit.
Friday: Down 162.79 points. Retails sales climbed, capacity utilization dropped, but business inventories and industrial production held steady.

For the week...

The Dow industrials were up 239.73 points or 2.3%.
The Nasdaq composite was up 81.21 points or 3.6%.
The S&P 500 index was up 24.8 points or 2.2%.

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
Building permits8:30 TB-Measures building permits for new construction.
Producer price index8:30 TB-Measures wholesale goods cost. An indication of future inflation.
Housing starts8:30 TB-Number of homes beginning construction.
Consumer price index8:30 WB+Inflation report. Measures cost of goods and services.
Crude inventories10:30 W?My guess: Measures oil inventory.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
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).

Swing and Position Traders: Chart Pattern Indicator

As of 05/14/2010, the CPI had:

22 bearish patterns,
2 bullish patterns,
616 patterns waiting for breakout.
The CPI signal is 8.3%, which is bearish (<= 35%).

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: bullish.

Other

Earnings season is either underway or should be starting soon. The sessions could be more volatile.

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

This WeekLast Week
1. Furn/Home Furnishings1. Furn/Home Furnishings
2. Shoe2. Shoe
3. Retail Building Supply3. Retail Building Supply
4. Insurance (Life)4. Air Transport
5. Air Transport5. Insurance (Life)
48. Oilfield Svcs/Equipment48. Investment Co. (Foreign)
49. Investment Co. (Foreign)49. Oilfield Svcs/Equipment
50. Alternate Energy50. Securities Brokerage
51. Securities Brokerage51. Alternate Energy
52. Short ETFs52. Short ETFs

-- Thomas Bulkowski

Top


Thursday 5/13/10. Pullback in S and P or Trend Change?

S and P 500 index on the daily scale

The chart shows the S&P 500 index on the daily scale. A small head-and-shoulders top chart pattern has formed as price peaked. The shoulders are not as pronounced as I like to see (and that means I look for a minor high, one that separates itself from the upward price trend), but they'll do.

When I see a swift downturn like we've seen in the last week and the rapid pace of the recovery, I am cautious.

The first thought that comes to mind is that this is just a pullback to the neckline of the head-and-shoulders top. The pattern at the top need not be a head-and-shoulders nor a defined chart pattern at all. Just the V-shaped recovery should make you cautious.

While it's possible that this uptrend will continue as Europe and the world puts the debt crisis behind them (or hides it for several months), the up move can continue. However, there will come a point when the sentiment of "too far too fast" will take over and that's when price will collapse again.

It may come as soon as tomorrow (I'm writing this on Wednesday evening) or days later. My guess is we'll see a small decline, say 40 or 50 points. String enough of those types of declines together, and soon price has made another dip. After that, then we can continue to new highs.

Is this a pullback? My answer is yes, it is. I expect this upward move to stall, perhaps reverse but not see the indexes drop too much unless another shoe drops.

Once the index closes above the April peak, then the uptrend has resumed. Until then, be careful and don't spend too much time counting all that green (as in greenbacks or dollars for you foreigners).

-- Thomas Bulkowski

Top


Tuesday 5/11/10. Tutorial Tuesday: How to Short Stocks

I don't like to short stocks, so I'll let Stan Weinstein do most of the talking. This is based on information from his book, Stan Weinstein's Secrets For Profiting in Bull and Bear Markets, of which I show a picture on the right.

First, let's talk about what not to do.

  • Don't short a stock based on valuation. Just because a stock has a high price to earnings ratio (P/E) is not a good reason for shorting a stock. Other common valuation measures apply, like price to book, price to sales, and well, price to anything. Do not use valuation metrics to determine if the stock is worth shorting.
  • Don't short an expensive stock. Stocks that seem unbelievably pricey can get even more expensive. Check out Berkshire Hathaway (BRK-A), Warren Buffett's playground stock. It closed on 5/7/2010 at $111,500, down $2,000 a share. Just because price has run up a huge amount is not a good enough reason to short a stock. Many traders buy high and sell higher (momentum plays), so don't try to short against them.
  • Avoid the sucker short. These are stocks that have risen much too far in price based on fundamentals that seem made out of rumor only. The stock gets lots of media attention for its quick but large run-up, leaving many to believe the stock just has to drop. It doesn't. If you short the stock, the upward rise will kill you just before the stock finally tumbles. Avoid the pain by not playing the sucker short in the first place.
  • Don't short a stock above the rising 30-week (150-day) moving average. The rising simple moving average means upward momentum is still on the side of the bulls.
  • Never short a thinly traded stock. A good rule of thumb is that your position should be no more than 1% of the average daily volume. If a stock trades 100,000 shares daily, on average, shorting more than 1,000 shares could be a mistake. I'd avoid a stock with fewer than 500,000 shares trading daily.
  • Check the short interest. If the stock has a huge short interest, the exit is going to be blocked by traders trying to cover when someone in the theater yells "Buy!" Divide the short interest by the average daily volume to see how many days the stock has to trade to equal the number of shares sold short. In 1988, when the book was published, Weinstein said that a common ratio was 3 or 4 (short shares) to 1 (meaning 3 or 4 days of average trading to cover all the shorts). Get nervous about anything above that.
  • Avoid shorting stocks in a strong industry. You want the market, industry, and stock to all show weakness. If any of the three are strong, you increase your chances of picking a loser.
  • Ideal example of the four stages for price movement

  • Don't short a stock in stage 2. I show where in the price mountain a stage 2 stock belongs in the figure to the right.
  • Never short a stock without a protective stop. Doing so is a good way to wipe out your account.

If the above list is what you should not do, how do you short a stock?

  • Short Stage 4 stocks. When a stock is in stage 3, price moves horizontally. A trendline drawn beneath the minor lows will outline support. The 30-week simple moving average will be climbing up to meet the stock. When price closes below the horizontal (or nearly so) trendline such that it's clear support has been pierced then consider shorting the stock. If a pullback occurs, then you can initiate a short position once the pullback to support completes and it's obvious that the stock is again heading lower.
  • Short in a bear or weak market. If the market is rising like oil gushing from a ruptured oil line in the Gulf of Mexico, avoid shorting stocks unless the situation is compelling. If the market is trending downward (bear market) or stocks are especially weak, then that's the time to short.
  • Short weak sectors. You can use relative strength to compare industries. Since stocks in hot industries can continue moving up, look for industries that are especially weak and select stocks from those.
  • Relative strength should be trending lower. The stock compared to the market index should be trending lower, meaning the relative strength of the stock should show weakness.
  • The stock should be below the 30-week moving average, and other stocks in the same industry should also be weak (below their 30-week moving averages).
  • Look for a significant run up. If there is little to reverse, then don't take the short ("the bigger the top, the bigger the drop"). The ideal stock should have an extended uphill run that is now in the process of reversing.
  • Look for underlying support. If support is nearby then this stock is not an ideal short candidate. Look for stocks which show sparse underlying support as they make their way to the top.
  • If a head-and-shoulders top or other reversal pattern appears, that's good. Look for bearish chart patterns to bolster your confidence about picking a winner.

-- Thomas Bulkowski

Top


Monday 5/10/10. Market Monday: The Week Ahead

My Prediction

I spent most of Saturday working in my yard. Despite the windy day, I decided to use my hedge trimmer on some shrubs. Let's just say they'll grow back...

 

Picture of the Dow industrials on the monthly scale.

Let me say right up front that I have no idea what will happen this week. My guess is the averages will rise, perhaps substantially, but they could crater just as easily. It all depends on what happens or doesn't happen in Europe.

The pic shows the Dow industrials on the monthly scale . It's one scenario that could play out over the coming years. I like it because it looks symmetrical.

My first instinct was to say that A was the top around which everything reflected. Thus, valley C is a weird reflection of B, so E would be reflected as a new bottom on the right of the chart, which I show.

What I believe to be true is that after the Dow makes a strong move up, it tends to consolidate for a period of time, often years. See the sharp rise from E to F followed by 2 years of choppy, sideways movement. Move G to H precedes another 2 year horizontal move. Thus, I expect the C to D move will be followed by 2 years of sideways action. In other words, the easy money was made already. From here on, it gets much tougher. Trend following that worked so well during the last year will stop working now and probably stay broken for 2 years.

Notice the symmetry in the time scale. Peak A to valley C is about 1 year and so is the move from valley C to peak D. Will the next move take 5 years to play out and what will cause the Dow to plummet starting in 2013?

I show choppy price movement to the right of D because of the Europe thing which will likely take years to iron out. The market is going to be roiled by what happens over there and perhaps here, too.

Picture of the Dow industrials on the monthly scale.

Here's a more rosy scenario. I took the rise from 2004 to 2007 and copied it to the right of the green line. The coming months will still be choppy and likely move sideways for 2 years. After that, the markets turn upward and head toward the price level of the 2007 peak.

If the countries around the world tame their debt and social program spending, then the markets have a chance of looking like this.

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: Up 143.22 points. Personal income climbed along with construction spending
Tuesday: Down 225.06 points. Factory orders were flat.
Wednesday: Down 58.65 points. Crude rose, especially in the Gulf of Mexico.
Thursday: Down 347.8 points. Initial jobless claims were down but higher than expected. Productivity dropped.
Friday: Down 139.89 points. Unemployment rate climbed but so did nonfarm payrolls.

For the week...

The Dow industrials were down 628.18 points or 5.7%.
The Nasdaq composite was down 195.55 points or 7.9%.
The S&P 500 index was down 75.8 points or 6.4%.

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
Wholesale inventories10:00 TD-Wholesale sales and inventory statistics.
Trade balance8:30 WC+Signals balance of exports & imports.
Crude inventories10:30 W?My guess: Measures oil inventory.
Treasury budget2:00 WDTracks budget deficit. Important in April (tax filing).
International trade8:30 ThC+Import/export prices, trade balance. US economy vs others.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Retail sales8:30 FA-Reports total retail sales (not services). Are people spending?
Capacity utilization9:15 FB-Gauges economic activity, hints of inflation.
Industrial production9:15 FB-Production of utilities, mines, and manufacturers.
Business inventories10:00 FC-Reports manufacturing, wholesale, retail inventories.

Options Expiration

No options expire this week.

Picture of a lizard

Swing and Position Traders: Chart Pattern Indicator

As of 05/07/2010, the CPI had:

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

The chart pattern indicator is bearish 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: bullish.

Other

Earnings season is either underway or should be starting soon. The sessions could be more volatile.

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

This WeekLast Week
1. Furn/Home Furnishings1. Shoe
2. Shoe2. Furn/Home Furnishings
3. Retail Building Supply3. Retail Building Supply
4. Air Transport4. Homebuilding
5. Insurance (Life)5. Air Transport
48. Investment Co. (Foreign)48. Oilfield Svcs/Equipment
49. Oilfield Svcs/Equipment49. Petroleum (Integrated)
50. Securities Brokerage50. Alternate Energy
51. Alternate Energy51. Securities Brokerage
52. Short ETFs52. Short ETFs

-- Thomas Bulkowski

Top


Thursday 5/6/10. Bearish Hikkake Candle

I released an updated chart of the stops figure I discussed in my Thursday 4/29/10. Can Stops Hurt Trading Performance? post. The original figure used an average of an average in the data, resulting in inflated numbers. The correct chart along with a discussion of the research can be found here: Can Stops Hurt?. The numbers changed but not the trend. Be sure to bring along popcorn because it's an exciting read that you won't want to miss.

The ideal hikkake candlestick, with confirmation

Speaking of exciting reads, I introduced a new candle page called the Bearish hikkake candlestick. It's a bearish counterpart to the bullish hikkake that I discussed on April 20.

The figure shows an idealized version of the 3 line pattern. The mixed black and white candles mean they have no designated color and they represent the hikkake candle. The remaining three candle lines on the right are there for confirmation. Once price drops below the bottom of the second candle (the inside day), it confirms that a downward price trend is underway.

My testing of the confirmed candle version suggests it's a stinker in every breakout direction and market except in a bear market after a downward breakout. After 10 days price drops an average of 5.65%, ranking 15th, where 1 is best out of 105 candle patterns. Other than that, you'd do better searching for the more refined versions of the three inside up (ranks 31st) and three inside down (ranks 33rd overall) candle patterns. The bullish hikkake ranks 84th and the bearish version ranks 83rd for overall performance, out of 105 candles where 1 represents the best performance over 1, 3, 5, and 10 days, combined.

-- Thomas Bulkowski

Top


Tuesday 5/4/10. Tutorial Tuesday: Garage Doors, Futures, and Forex

Picture of my garage door.

Pictured is my garage door which used to have wood rot at the joint shown circled in red. I spend all day Sunday and Monday morning fixing it and painting about half the door. The overhang of the inverted T and beveled top is so that water will run off the joint instead of causing more rot.

The last time I had rot at the same location, the neighborhood rug rats put their skateboard through it, and it cost me $250 to replace the entire bottom row. I never thought of patching it. Anyway, it's done and I'm happy it turned out as well as it did.

# # #

On Friday and Saturday, I was bearish but looking at my stocks before the open on Monday, I canceled two of four stock sales but since it was down a bit before the market's close when the Dow was up 150, I decided to sell most of it. I have the suspicion that the market still has more up in it. But we'll have to see how it plays out. Friday could be a big-mover day, probably to the upside.

# # #

The following is based on Carley Garner's column in Technical analysis of stocks & commodities magazine, May 2010 issue, where she compares trading currency futures and foreign exchange (Forex). Since I don't trade either market, don't ask me to explain this stuff...

ItemFuturesForex
Transaction costsHas commission and fees (CME and NFA). Spreads are often 1 tick ($12.50 per contract), determined by market forces.Commission free but they nail you on the bid-ask spread. This is often the more expensive of the two with Forex brokerages structured as dealing desks charging 3 to 5 pips in the spread ("strategically wider than market pricing").
Liquidity Supposed to have a massive amount of liquidity, but if you're trading against a dealing desk instead of the actual interbank market, the market can be illiquid.
Margin More liberal margin policy with up to 100:1 leverage, but rule proposals could change that.
Options"Options on futures trade in an open outcry pit side by side to the electronic options, and this enables traders to execute multiple-leg spread orders that are not possible in the spot Forex options.""Can trade both US and European-style options and other various exotic derivatives, ...but bid-ask spreads can be a large disadvantage."
Small Lots"CME group introduced e-micro currency futures to compete with micro Forex products" back in early 2009. Micro futures are a tenth the size of original contracts ($1.25 versus $12.50 per tick). Cash settled but often on unfavorable terms.Can trade micro lots.
Rebates Some brokers offer rebates, but spread charges could be higher and service overpriced.

-- Thomas Bulkowski

Top


Monday 5/3/10. Market Monday: The Week Ahead

My Prediction

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

I started selling some of my positions, well, one anyway. I trimmed a utility holding. Monday, I'll sell four more positions -- stocks I owned that have doubled in price and that look to drop significantly. In other words, the market is making me nervous even though I remain bullish.

Why?

Take a look at the chart. The top red line shows a floor underneath price. If the Dow closes below that support, then I believe the market will drop to the second and longer red line, to 10,750. It might find support there or continue lower.

Of course, the market could rise instead. That's what happened the last time, circled in green. Price moved almost horizontally for a time before continuing the up move.

What has changed? I still think that the economy is improving and investors should be rejoicing. In fact, they have been by powering the Dow higher. But the Dow needs a rest. Bad news, like the financial problems in Greece, tend to shake the markets and send the indexes tumbling. Good news doesn't lift the markets as much. That tells me the market is tired. It might not go lower, but it doesn't seem to want to go higher. I'm being cautious and am selling some of my positions before the price can drop and hit my stops.

On Friday, four economic reports come out, and the market tends to watch those reports closely.

From your emails, I understand that you like my pictures. I posted one for Linda, below.

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: Up 0.75 points.
Tuesday: Down 213.04 points. Consumer confidence came in higher than expected.
Wednesday: Up 53.28 points. FOMC meeting didn't make any moves.
Thursday: Up 122.05 points. Initial jobless claims were worse than expected but less than the prior period.
Friday: Down 158.71 points. GDP was down and well below the prior period.

For the week...

The Dow industrials were down 195.67 points or 1.7%.
The Nasdaq composite was down 68.96 points or 2.7%.
The S&P 500 index was down 30.6 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
Personal income & consumption8:30 MC+Measures sources of income to predict future demand.
Construction spending10:00 MDCovers residential/non-residential/public spending on new construction.
Auto & truck sales2:00 M?T?C-Monthly sales of domestically produced vehicles.
Factory orders10:00 TD+Durable/non-durable goods orders w/factory inventories.
Crude inventories10:30 W?My guess: Measures oil inventory.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Productivity & costs8:30 ThD+Cost of producing a unit of output.
4 Employment reports8:30 FANonfarm payrolls, unemployment rate, avg workweek, hourly earnings.
Consumer credit3:00 FD-Measures auto, credit card and other debt.

Options Expiration

No options expire this week.

Picture of a lizard.

Swing and Position Traders: Chart Pattern Indicator

As of 04/30/2010, the CPI had:

52 bearish patterns,
8 bullish patterns,
201 patterns waiting for breakout.
The CPI signal is 13.3%, which is bearish (<= 35%).

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: bullish.

Other

Earnings season is either underway or should be starting soon. The sessions could be more volatile.

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. Retail Building Supply
4. Homebuilding4. Retail (Special Lines)
5. Air Transport5. Air Transport
48. Oilfield Svcs/Equipment48. Electric Utility (East)
49. Petroleum (Integrated)49. Petroleum (Integrated)
50. Alternate Energy50. Securities Brokerage
51. Securities Brokerage51. Alternate Energy
52. Short ETFs52. Short ETFs

-- Thomas Bulkowski

Top

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. Use the best: Linux for servers, Mac for graphics, and Windows for Solitaire.