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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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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 06/21/2017
21,410 -57.11 -0.3%
9,293 -11.21 -0.1%
730 -4.82 -0.7%
6,234 45.92 0.7%
2,436 -1.42 -0.1%
YTD
8.3%
2.8%
10.7%
15.8%
8.8%
Tom's Targets    Overview: 06/15/2017
21,600 or 21,000 by 07/01/2017
9,100 or 9,600 by 07/01/2017
720 or 745 by 07/01/2017
6,300 or 6,000 by 07/01/2017
2,525 or 2,390 by 07/01/2017

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May 2011 Headlines


Archives


Tuesday 5/31/11. Market Monday on Tuesday: The Week Ahead

My Prediction

Picture of the Dow industrials on the daily scale.

I show a picture of the Dow industrials on the daily scale.

To the right of the green line is what might happen in the future. I'm not saying the markets will play out like this, but they could. When I have made these types of predictions in the past, some of them have turned out to be quite accurate.

To make the chart, all I did was copy the image, flip it horizontally and paste it back onto the chart.

If the Dow follows this pattern, it will form a head-and-shoulders top. The left shoulder (LS), Head, and right shoulder (RS) are marked on the chart.

Perhaps the only scary thing about this chart is the straight-line run down from the right shoulder to A. Why that would happen in the middle of summer is unknown. Perhaps it could be due to the difficulties the European governments are facing with their debt crisis.

Do I think this is how the Dow will play out? No. I still expect the market to move up from here, but I will admit that it's been more nervous than usual. All of this is just a guess, of course.

Top

A Brief Look Back

Picture of a flower from my garden.

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 130.78 points.
Tuesday: Down 25.05 points.
Wednesday: Up 38.45 points.
Thursday: Up 8.1 points.
Friday: Up 38.82 points.

For the Week...

The Dow industrials were down 70.46 points or 0.6%.
The Nasdaq composite was down 6.46 points or 0.2%.
The S&P 500 index was down 2.17 points or 0.2%.

Year to Date...

Dow Industrials
     3.4% down from the high of 12,876.00 on 05/02/2011.
     7.7% up from the low of 11,555.48 on 03/16/2011.
Nasdaq
     3.1% down from the high of 2,887.75 on 05/02/2011.
     7.4% up from the low of 2,603.50 on 03/16/2011.
S&P 500
     2.9% down from the high of 1,370.58 on 05/02/2011.
     6.6% up from the low of 1,249.05 on 03/16/2011.

Top

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
Chicago purchasing managers index9:45 TBMonitors regional manufacturing activity.
Consumer confidence10:00 TB-Surveys 5,000 households for trends.
Construction spending10:00 WDCovers residential/non-residential/public spending on new construction.
Auto & truck sales3:00? WC-Monthly sales of domestically produced vehicles.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Productivity & costs8:30 ThD+Cost of producing a unit of output.
Factory orders10:00 ThD+Durable/non-durable goods orders w/factory inventories.
Crude inventories11:00? Th?My guess: Measures oil inventory.
4 Employment reports8:30 ThANonfarm payrolls, unemployment rate, avg workweek, hourly earnings.

Options Expiration

No options expire this week.

Top

Swing and Position Traders: Chart Pattern Indicator

As of 05/27/2011, the CPI had:

5 bearish patterns,
24 bullish patterns,
452 patterns waiting for breakout.
The CPI signal is 82.8%, which is bullish (>= 65%).

The chart pattern indicator is bullish 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.

Swing Traders: Pivot Points

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

IndexS2S1PivotR1R2
Dow Industrials (^DJI): Daily  12,355  12,398  12,441  12,484  12,527 
Weekly  12,219  12,330  12,421  12,532  12,623 
Monthly  11,976  12,209  12,542  12,775  13,109 
S&P 500 (^GSPC): Daily  1,322  1,326  1,330  1,335  1,339 
Weekly  1,303  1,317  1,326  1,340  1,349 
Monthly  1,279  1,305  1,338  1,364  1,397 
Nasdaq (^IXIC): Daily  2,783  2,790  2,795  2,803  2,808 
Weekly  2,718  2,757  2,779  2,819  2,841 
Monthly  2,660  2,729  2,808  2,876  2,956 
  • Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
  • S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
  • If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
  • In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
  • A move outside of daily R1 or S1 usually does not mean a breakout.
  • The odds suggest that the entire week's price action will remain between weekly R2 and S2.
  • Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
  • Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
  • Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

Top

Consecutive Price Trends

Index Consecutive
Closes So Far 
% Comments 
 Dow industrials (^DJI) 4 weeks down 4.4%  Expect a reversal soon.
 1 month down 19.0%  Expect a reversal soon.
 S & P 500 (^GSPC) 4 weeks down 5.7%  Expect a reversal soon.
 1 month down 20.0%  Expect a reversal soon.
 Nasdaq composite (^IXIC) 2 weeks down 21.0%  Expect a reversal soon.
 1 month down 25.9%  The trend may continue.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

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.

Top

Earnings, Chart Patterns & Industries

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

 Found Chart Pattern Name
24Pipe top
20Head-and-shoulders top
18Triangle, symmetrical
12Double Top, Eve and Eve
12Triangle, ascending
9Double Top, Eve and Adam
8Rising wedge
8Target price
7Channel
6Rectangle bottom

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

 

 

 

 

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. Medical Supplies2. Medical Supplies
3. Petroleum (Integrated)3. Building Materials
4. Precision Instrument4. Semiconductor Cap Equip.
5. Toiletries/Cosmetics5. Precision Instrument
48. Insurance (Prop/Casualty)48. Insurance (Prop/Casualty)
49. Cement and Aggregates49. Investment Co. (Foreign)
50. Internet50. Cement and Aggregates
51. Securities Brokerage51. Securities Brokerage
52. Alternate Energy52. Alternate Energy
53. Short ETFs53. Short ETFs

-- Thomas Bulkowski

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Thursday 5/26/11. Getting Started in Trading

Picture of a flower from my garden.

The tornadoes that were buzzing around the area in which I live missed my house, and the only damage I suffered yesterday (Tuesday) was from golf ball-sized hail stones trying to poke holes in my shingles. Fortunately, the "stones" didn't last long and didn't come down as congested as they have in the past. That hasn't stopped the roofing contractors from ringing my phone every hour or so.

I spent most of the time between standing outside watching the clouds bubble and roll (if you remember the movie, "Close Encountered of the Third Kind" then you'll know what I'm talking about) and running back inside to listen to the TV. I happened to be watching the clouds to the South when a tornado formed a mile away to the north. Oops.

$ $ $

I received an email asking, "When should I quit my job and trade full time?"

My answer is this: When you make as much or more money trading than you do at your day job, then consider trading for a living.

You can trade part time using setups that have a conditional order to enter the trade, and to exit -- use a stop loss order or a target order. If you have those three components, then you don't need to follow the markets full time. You evaluate the markets before and as they open, and then place your order(s). Near the close, you check on how you did. If any setup triggered and the trade remains opened, close it out regardless of whether or not you show a profit.

Here are additional suggestions. Keep your day job...

  • If you don't have those types of mechanical trading setups;
  • If you can't follow your setups without deviating;
  • If you can't pull the trigger by exiting any setup before the close. A day trade is a day trade. No exceptions;
  • If you don't have enough money to live on (cover all expenses, including vacations, and luxuries like food) for months (6 months to a year is a good start but 2 years is better. If you have to find a job after burning through your trading capital, then it could take a long time before you're employed again). This does not include your trading capital.
  • If you intend to use your entire trading capital for day trading. Diversify. Only a portion of your trading capital should be used for day trading (say, 25%). Use the rest to split into other types of trading or investing, like swing or position trading and have money in long term plays (buy and hold, bonds, money market funds, and so on).

-- Thomas Bulkowski

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Tuesday 5/24/11. Snakes On A Plain!

Picture of a flower from my garden.

Let me tell you what I've been doing these past two weekends. The picture on the right is a portion of my front yard.

A few decades ago, I planted a hedge that runs along my driveway to my neighbors driveway, following the road, in a large U-shaped configuration. Does that make me a hedge fund manager?

I also planted shrubs (the individual green boxed shaped ones) along my sidewalk like that shown in the photo.

A few weeks ago, I came up with the idea of building a smaller hedge along the sidewalk, to mirror the larger one along the border of my property. Thus, I yanked out the house bricks (A) that I buried vertically years ago and planted additional shrubs to fill up the space. That took a weekend.

After I finished pulling out the bricks, I started putting them away in my garage. I ran out of space. What was I going to do with a bunch of bricks? Then I had an idea.

I have a compost pile that is busting its border. The leaves tend to leave the area (Maybe that's why they call them leaves?).

Anyway, I decide to brick the area in. As I was pulling out the bricks in my garage, I found a bunch of white eggs there. "Snake eggs," I thought. All of them had holes in them, suggesting that whatever was inside the eggs had hatched. And they were small, too. About double the size of a green pea.

I thought it odd that they would be there. Then I looked down and saw a tail slowly withdraw into the brick area. Gulp! I thought, "coral snake." Those are poisonous. The tail had black and brown rings and I didn't see much of it before it withdrew.

Picture of a flower from my garden.

A coral snake has lots of colorful bands, not just black and brown. Upon reflection, I think it was a lizard.

In the back yard, I was working on the far wall, B. Point B is the highest circle on the picture (in case it's hard to read). Just below that circle is C. To the right of it is a hole in the fence at ground level. The wood eroded away over the years, and I didn't mind since the water funnels through there and floods my neighbor. Yes, I'm a generous soul and share my water with them whenever it rains.

Anyway, I decided to take a break. I went inside for 15 minutes or so and came back. When I was about 20 feet away, I froze. There, at A, was a snake the size of a Buick! (4 feet long). I hate to say this but my first inclination was to kill it. That doesn't bode well for when E.T. (extra-terrestrial) comes to visit. However, the shovel was at C and the snake was between us.

When I moved, he slithered through the hole to the right of C and disappeared into my neighbor's property.

Picture of a flower from my garden.

This snake had a flat, black head and black neck with a black and dark brown body, spiced with orange dash marks scattered along his body. The picture shown here is a smaller one and the colors aren't the same, but after looking through about 150 pics, it's the closest I could find.

According to the website, this is a Texas rat snake. And yes, they can climb. They showed a picture of one poking its head out of a bird house.

I blocked the and the other holes in my fence and completed work on my project. Along the way, I unearthed a few flat snakes. Those are like foot long worms, really, about the diameter of a pencil. They eat bugs, not people. The rat snake was probably about the diameter of a child's wrist. I don't mind the flat snakes, but this rat snake surprised me, since I live in a subdivision.

My flowerbed has become a snake pit. And that's what I did this weekend!

-- Thomas Bulkowski

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Monday 5/23/11. Market Monday: The Week Ahead

My Prediction

Picture of the Dow industrials on the daily scale.

For those of use that didn't make it up to heaven during yesterday's rapture, let's talk about the market in the coming days and weeks.

I show a picture of the Dow industrials on the daily scale. Outlined in red is a bull flag, and that's no bull. That's what many call it, anyway. A flag is a pattern lasting less than 3 weeks with a flagpole (a straight-line run up to the flag) followed by the flag itself. If you don't have a flagpole, then you don't have a flag.

The flag is a congestion area bounded on the top and bottom by two parallel (or nearly so) lines. The slope of the lines can be in any direction, including sideways. Most of the time, you'll see it slant opposite the direction of the trend. In this case, the trend is upward and the flag slopes downward.

Obviously, this flag exceeds the 3 week limit. Perhaps it's better called a channel.

Breakout from a bull flag is upward 54% of the time. That's about random.

The green line in the figure is a support area. Thus, I think that this flag will breakout upward. Too many people are worried that the economy will double dip into a recession and that the market will suffer. They could be right, but the market will tend to confound the masses. Thus, I'm thinking that the market will move up going into mid June. Earnings season is winding down and most of the bad or good news is out. I think the markets will coast upward.

If I'm wrong, then look for the index to bounce off the top trendline (but it's close enough now that it could just continue tumbling) and drop again until it finds support at 12,200. If and when that happens, I'll re-evaluate.

Top

A Brief Look Back

Picture of a flower from my garden.

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 47.38 points.
Tuesday: Down 68.79 points.
Wednesday: Up 80.6 points.
Thursday: Up 45.14 points.
Friday: Down 93.28 points.

For the Week...

The Dow industrials were down 83.71 points or 0.7%.
The Nasdaq composite was down 25.15 points or 0.9%.
The S&P 500 index was down 4.5 points or 0.3%.

Year to Date...

Dow Industrials
     2.8% down from the high of 12,876.00 on 05/02/2011.
     8.3% up from the low of 11,555.48 on 03/16/2011.
Nasdaq
     2.9% down from the high of 2,887.75 on 05/02/2011.
     7.7% up from the low of 2,603.50 on 03/16/2011.
S&P 500
     2.7% down from the high of 1,370.58 on 05/02/2011.
     6.7% up from the low of 1,249.05 on 03/16/2011.

Top

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
New home sales10:00 TC+Shows sales of single-family homes.
Durable goods orders8:30 WBMeasures orders, shipments of goods with lifespans >3 years.
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.
Michigan sentiment9:55 FB-Consumer sentiment: Measures strength of consumer spending.

Options Expiration

No options expire this week.

Top

Swing and Position Traders: Chart Pattern Indicator

As of 05/20/2011, the CPI had:

42 bearish patterns,
6 bullish patterns,
445 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.

Swing Traders: Pivot Points

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

IndexS2S1PivotR1R2
Dow Industrials (^DJI): Daily  12,415  12,464  12,534  12,583  12,653 
Weekly  12,247  12,380  12,511  12,644  12,775 
Monthly  11,712  12,112  12,494  12,894  13,276 
S&P 500 (^GSPC): Daily  1,324  1,329  1,335  1,340  1,347 
Weekly  1,306  1,319  1,332  1,346  1,359 
Monthly  1,257  1,295  1,333  1,371  1,409 
Nasdaq (^IXIC): Daily  2,782  2,793  2,807  2,818  2,832 
Weekly  2,728  2,766  2,797  2,835  2,866 
Monthly  2,618  2,711  2,799  2,892  2,980 
  • Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
  • S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
  • If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
  • In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
  • A move outside of daily R1 or S1 usually does not mean a breakout.
  • The odds suggest that the entire week's price action will remain between weekly R2 and S2.
  • Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
  • Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
  • Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

Top

Consecutive Price Trends

Index Consecutive
Closes So Far 
% Comments 
 Dow industrials (^DJI) 3 weeks down 15.5%  Expect a reversal soon.
 1 month down 19.0%  Expect a reversal soon.
 S & P 500 (^GSPC) 3 weeks down 11.6%  Expect a reversal soon.
 1 month down 20.0%  Expect a reversal soon.
 Nasdaq composite (^IXIC) 1 week down 33.6%  The trend may continue.
 1 month down 25.9%  The trend may continue.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

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.

Top

Earnings, Chart Patterns & Industries

Earnings season is coming to an end.

 Found Chart Pattern Name
25Pipe top
23Head-and-shoulders top
20Triangle, symmetrical
18Triangle, ascending
15Double Top, Eve and Eve
13Double Top, Adam and Adam
10Double Top, Eve and Adam
8Target price
7Dead-cat bounce
7Rising wedge

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

 

 

 

 

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. Medical Supplies2. Semiconductor Cap Equip.
3. Building Materials3. Apparel
4. Semiconductor Cap Equip.4. Medical Supplies
5. Precision Instrument5. Building Materials
48. Insurance (Prop/Casualty)48. Cement and Aggregates
49. Investment Co. (Foreign)49. Homebuilding
50. Cement and Aggregates50. Securities Brokerage
51. Securities Brokerage51. Insurance (Prop/Casualty)
52. Alternate Energy52. Alternate Energy
53. Short ETFs53. Short ETFs

-- Thomas Bulkowski

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Thursday 5/19/11. What Happened to Solar?

The chart of the FuelCell Energy (FCEL) on the monthly scale

I show a chart of FuelCell Energy (FCEL) on the monthly scale. I classify this stock as part of my alternative energy industry, namely solar. When I investigated the industry in 2009, the company hadn't made any money since 1999 but had almost no debt. They make fuel cell power plants for electric power generation.

The chart shows an alarming trend that is shared by other solar based stocks in the industry. In other words, this stock moved from 1.34 in 1999 and peaked at 54.37 just over a year later. Part of that rise appears as the move from B to C. Since that time, it's been mostly downhill.

The other solar stocks, those that went public within the past several years, show a spike in 2008 and then the same downhill run. This stock shows that it went nowhere for 5 years, from 2003 to 2008. It formed a descending triangle which I highlight by the red trendlines. The breakout from this chart pattern is downward 64% of the time and that is what happened in the recent bear market. A pullback occurred at A, although I usually require pullbacks to return to the breakout price within 30 calendar days. Since I'm on the monthly scale, who's counting?

This chart appears on the log scale. If you show it on the linear scale, you'd see a price mountain. That looks like a Hershey's kiss. It takes years to make a new high after a price mountain and that's what this chart shows.

Will the stocks in the industry bottom soon, and is it a buying opportunity? My guess is no. With the price of oil probably heading lower, the stock's price will suffer. There seems to be a flood of solar manufacturers in the world. Even so, the cost of buying and installing a solar panel can't justify the expense unless you live in Europe where their subsidies are higher than in the US. I'm still scratching my head over why my neighbor installed panels on his roof. He's a teacher, so maybe he's trying to set an example.

I read of one person that priced an array for his home. It would cost $30,000 for the unit and it would pay for half of his electricity use. With rebates, the cost dropped to about $12,000. Even at that rate, I figured it would take 30 years to pay for itself. I'd be dead before it paid off its bill.

I don't view this industry as attractive at all. But I could be wrong. The industry is trying hard to boost efficiency of their solar cells and are making advances in the field. That's the promise, but it hasn't arrived yet.

-- Thomas Bulkowski

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Monday, 8/18/2008. My Favorite Chart Pattern.

The chart of the QLogic (QLGC) on the daily scale My favorite chart pattern is a descending triangle which I show between the two red lines on the chart to the right. Price should bounce from line to line, making plenty of crossings and touch each red trendline at least twice. Price breaks out downward 64% of the time, based on a survey of 1,166 triangles in 500 stocks from mid 1991 to mid 1996 (bull market) and 500 from 2000 to 2003 (bear market), but not all stocks covered both ranges.

Many of you familiar with this blog will know that I don’t short stocks. Why then trade a chart pattern that breaks out downward? I don’t trade those either. My preferred setup is as the chart shows. First, I look for a downward breakout. The breakout should not take price down too far, say a maximum of 10% (but that’s an arbitrary number), nor last too long (no more than a few weeks, but that is arbitrary also).

After the downward breakout (which occurs when price closes below the bottom trendline), I look for price to pullback and bust through the top trendline. I show that as step 2. Price must close above the top trendline, not just pierce it. That’s why I show the upward breakout a few days after the first pierce. After the upward breakout, price tends to stage a good run upward, as this example in QLogic (QLGC, daily scale) shows.

The only book of mine that takes an in-depth look at busted chart patterns is Getting Started in Chart Patterns, shown in the picture. The title is really a misnomer because it covers advanced topics as well as serving as an introduction to chart patterns. An entire chapter dedicated to busted chart patterns begins on page 215. I review 18 different types of busted patterns and provide a few performance statistics for each along the way.

One last note about the chart. The vertical green line connects the apex of the triangle with the sky. When price meets the line, expect the trend to change. It may form a brief minor high or it may take a few days for the trend to change, but that is the way to bet. In this example, the stock turns at A.

-- Thomas Bulkowski

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Monday 5/16/11. Market Monday: The Week Ahead

My Prediction

Picture of the Dow utilities on the daily scale.

I show a picture of the Dow utility index from the start of this year, on the daily scale.

Will this index be the star performer this year? Time will tell, of course. A look at the top of the page shows that the utility index is in the middle of the performance rank when compared to the other indices. And I've been lightening up on my utility holdings since I expect more strict regulations for carbon emissions to come. That will make utilities spend more to control carbon dioxide. More spending means less profit.

While the other indices appears mired in a congestion area or looking as if they are about to crash, the utility index appears to be doing well. It's on a straight-line run up. Friday's close was a down one and that could continue but my guess is the index will climb higher. Now if we could only get the other indices to climb as well...

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A Brief Look Back

Picture of a flower from my garden.

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 45.94 points.
Tuesday: Up 75.68 points.
Wednesday: Down 130.33 points.
Thursday: Up 65.89 points.
Friday: Down 100.17 points.

For the Week...

The Dow industrials were down 42.99 points or 0.3%.
The Nasdaq composite was up 0.91 points or 0.0%.
The S&P 500 index was down 2.43 points or 0.2%.

Year to Date...

Dow Industrials
     2.2% down from the high of 12,876.00 on 05/02/2011.
     9.0% up from the low of 11,555.48 on 03/16/2011.
Nasdaq
     2.1% down from the high of 2,887.75 on 05/02/2011.
     8.6% up from the low of 2,603.50 on 03/16/2011.
S&P 500
     2.4% down from the high of 1,370.58 on 05/02/2011.
     7.1% up from the low of 1,249.05 on 03/16/2011.

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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
Housing starts8:30 TB-Number of homes beginning construction.
Building permits8:30 TB-Measures building permits for new construction.
Industrial production9:15 TB-Production of utilities, mines, and manufacturers.
Capacity utilization9:15 TB-Gauges economic activity, hints of inflation.
Crude inventories10:30 W?My guess: Measures oil inventory.
FOMC Minutes2:00 W?Minutes of the prior Federal Reserve meeting.
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Existing home sales10:00 ThCCounts sales of used homes.
Leading indicators10:00 ThD-Summary of already known reports.

Options Expiration

The following is courtesy of the Options Industry Council.

OptionDate
VIX expiresWednesday
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).

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Swing and Position Traders: Chart Pattern Indicator

As of 05/13/2011, the CPI had:

34 bearish patterns,
4 bullish patterns,
313 patterns waiting for breakout.
The CPI signal is 10.5%, 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.

Swing Traders: Pivot Points

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

IndexS2S1PivotR1R2
Dow Industrials (^DJI): Daily  12,447  12,521  12,618  12,692  12,789 
Weekly  12,394  12,495  12,638  12,739  12,882 
Monthly  11,740  12,168  12,522  12,950  13,304 
S&P 500 (^GSPC): Daily  1,323  1,331  1,341  1,348  1,358 
Weekly  1,316  1,327  1,343  1,354  1,370 
Monthly  1,258  1,298  1,334  1,374  1,410 
Nasdaq (^IXIC): Daily  2,805  2,817  2,839  2,851  2,873 
Weekly  2,786  2,807  2,841  2,862  2,896 
Monthly  2,626  2,727  2,808  2,909  2,989 
  • Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
  • S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
  • If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
  • In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
  • A move outside of daily R1 or S1 usually does not mean a breakout.
  • The odds suggest that the entire week's price action will remain between weekly R2 and S2.
  • Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
  • Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
  • Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

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Consecutive Price Trends

Index Consecutive
Closes So Far 
% Comments 
 Dow industrials (^DJI) 2 weeks down 18.9%  Expect a reversal soon.
 1 month down 19.0%  Expect a reversal soon.
 S & P 500 (^GSPC) 2 weeks down 19.4%  Expect a reversal soon.
 1 month down 20.0%  Expect a reversal soon.
 Nasdaq composite (^IXIC) 1 week up 40.3%  Expect a random direction.
 1 month down 25.9%  The trend may continue.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

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.

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Earnings, Chart Patterns & Industries

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

 Found Chart Pattern Name
37Pipe bottom
21Triangle, symmetrical
19Head-and-shoulders top
15Triangle, ascending
11Head-and-shoulders bottom
10Pipe top
9Double Top, Eve and Adam
8Double Top, Eve and Eve
8Double Top, Adam and Adam
8Target price

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

 

 

 

 

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

This WeekLast Week
1. Furn/Home Furnishings1. Coal
2. Semiconductor Cap Equip.2. Furn/Home Furnishings
3. Apparel3. Semiconductor Cap Equip.
4. Medical Supplies4. Building Materials
5. Building Materials5. Petroleum (Integrated)
48. Cement and Aggregates48. Cement and Aggregates
49. Homebuilding49. Insurance (Life)
50. Securities Brokerage50. Investment Co. (Foreign)
51. Insurance (Prop/Casualty)51. Securities Brokerage
52. Alternate Energy52. Alternate Energy
53. Short ETFs53. Short ETFs

-- Thomas Bulkowski

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Thursday 5/12/11. Giro News

Picture of a flower from my garden.

I don't have any ideas on finance today, and with storms in the area, I thought I'd write about bicycling.

I took my bicycle out for my first spin this past Sunday. It was late in the afternoon and I needed to get some exercise. Temperature was 91 degrees and the winds were sustained at 18 mph with gusts up to 28. Those are far from ideal bike riding conditions. The wind alone can push you sideways into a car. Much to my surprise, the winds didn't push me over the road as much as I expected.

The heat was a problem and being my first time out, I wasn't in tip top condition, either. Still, I made a 13 mile run and averaged almost 17 mph. I took a shorter but safer and slower way home, which added to my time.

Bike riding is a dangerous sport, mostly from running into cars that pull out in front of you at intersections, not from being run over from behind (although that's a concern when you serve into traffic to avoid a pothole or stone or whatever).

How dangerous is bicycling? Cyclist Wouter Weylandt died on Monday in the Giro d'Italia race. In stage three of the race, Belgian rider Weylandt was descending a hill at high speed when things went wrong. He crashed. According to news reports, medical help was there within 30 seconds. For 40 minutes, they tried to revive him, but without luck. His head injuries were too severe.

The next day, in a tribute to their fallen comrade, the near-200 riders ran stage four with each of 23 teams taking a 10k shift at the front of the race. The last team to head the race was the one Weylandt belonged to. It was like a six hour funeral procession. Very moving and very deserved for Weylandt.

Stage five, today (Wednesday), the cyclists returned to racing only this time the crashes and mechanical breakdowns were numerous -- the most I've seen in any stage of any race. The overall leader of the race was trying to capture a time bonus in an intermediary sprint and drove right into another rider, causing both to wipe out in spectacular fashion. Another had his tires skid out from under him on a dirt road. He fell and the bike flipped over him and both ended up in a ditch. The most serious crash was of Tom-Jelle Slagter. According to one news report, he was getting a water bottle from a team masseur and fell. No word on how serious his injury was but he was conscious when they took him to the hospital.

Despite the crashes, you see these athletes hop back onto their bikes and pedal off. When I crash, I break some bones (collarbone -- twice, numerous ribs, punctured lung). I expect to crash this season, but with seeing the professionals crash when there is no other car traffic on the road (except for team cars and film crews), it's scary. That's why I'm in no hurry to ride again. But I sure do miss getting my exercise that way.

-- Thomas Bulkowski

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Tuesday 5/10/11. Tutorial Tuesday: How Important is Volume?

Picture of a flower from my garden.

For years now, I have looked at my daily charts with the volume scale turned off. In my blog posts, it's rare that I include volume. Why is that? My feeling is that volume is not important.

In new research I just completed, I looked over 8,000 chart patterns (samples) from July 1991 to May 2011 but included only double and triple tops and bottoms, and rectangles. Those chart patterns have defined breakouts, meaning there's no guessing where a breakout might be since a breakout is either above the top of the pattern or below it. That contrasts to something like a symmetrical triangle or broadening top which have slanting trendlines, a close outside of which denotes a breakout.

Then I compared the breakout day volume to the preceding 31 calendar days. I found that when price broke out of the pattern on above average volume, price climbed 37.6%, on average, before changing trend (dropping by at least 20% or slipping below the bottom of the chart pattern). When breakout volume was below average, the gain was 35.8%. So, a high volume breakout gives the trader a boost of 1.8 percentage points. Downward breakouts show the reverse, 15.1% to 15.7% for above and below average breakouts, respectively.

Measuring the 10% failure rate (which asks how often does price fail to move more than 10% after a breakout?) shows that failures occur more often after a high volume breakout. The differences are significant, 14% versus 5% for upward breakouts on above/below average volume, respectively, and 28% versus 11% for downward breakouts, respectively. In other words, 14% of the chart patterns I looked at with above average breakout volume failed to see price climb more than 10%. Those that had below average breakout volume failed just 5% of the time.

Chart patterns with above average breakout volume are at least twice as likely to fail than are those with below average breakout volume.

Here's another important finding. Price is three times as likely to throwback or pullback after an above average volume breakout. Throwbacks occur 57% of the time after an above average volume breakout versus 18% for those patterns with below average volume, and pullbacks occur 47% versus 17% of the time after above versus below average breakout volume, respectively.

To summarize, after a high volume breakout, the move isn't much better than after a low volume breakout, failures increase (many are taught to avoid a low volume breakout), and the likelihood of a throwback or pullback triples. Throwbacks or pullbacks rob the stock of momentum and performance suffers.

-- Thomas Bulkowski

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Monday 5/9/11. Market Monday: The Week Ahead

My Prediction

Picture of iShares silver trust (SLV) on the daily scale.

This week, I show the iShares silver trust (SLV) exchange traded fund on the daily scale. Silver has dropped dramatically over the past week, so it's worth a look to see if anything unusual appears.

I don't see anything on this chart that would hint of such a rapid downturn. As price rises, it does so in a stair-step fashion. From the low at A, you can see a pause in March and smaller pauses in late February and late April. Why then did silver take a plunge? We can only speculate as to the cause because I don't see any hints on this chart.

Now that SLV has tumbled, what's next?

I computed the Fibonacci retrace of the move from A to B. The green line shows where the fund has dropped to the 62% retrace level. That 62% area is often a support area. I've bought stocks that have retrace that far and they climbed from there. That doesn't always happen, of course, but I consider it reliable.

The fund is also at a support area which I show as two horizontal red lines marking the top and bottom of the March "step." That area could support SLV.

Of course, the swift drop might see a pause here followed by another plunge that takes it back down to A. That's possible. If another swing down occurs, there's a support area at 28 which is where I would expect to see the fund stop declining.

My guess is that we'll see the fund move sideways here and maybe recover somewhat. I'm more confident of this position by seeing an exhaustion gap appear two days ago. That suggests the downtrend is over, at least for a few days.

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A Brief Look Back

Picture of a flower from my garden.

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 3.18 points.
Tuesday: Up 0.15 points.
Wednesday: Down 83.93 points.
Thursday: Down 139.41 points.
Friday: Up 54.57 points.

For the Week...

The Dow industrials were down 171.8 points or 1.3%.
The Nasdaq composite was down 45.98 points or 1.6%.
The S&P 500 index was down 23.41 points or 1.7%.

Year to Date...

Dow Industrials
     1.8% down from the high of 12,876.00 on 05/02/2011.
     9.4% up from the low of 11,555.48 on 03/16/2011.
Nasdaq
     2.1% down from the high of 2,887.75 on 05/02/2011.
     8.6% up from the low of 2,603.50 on 03/16/2011.
S&P 500
     2.2% down from the high of 1,370.58 on 05/02/2011.
     7.3% up from the low of 1,249.05 on 03/16/2011.

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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.
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).
Initial jobless claims8:30 ThC+Counts people filing for state unemployment benefits.
Producer price index8:30 ThB-Measures wholesale goods cost. An indication of future inflation.
Retail sales8:30 ThA-Reports total retail sales (not services). Are people spending?
Business inventories10:00 ThC-Reports manufacturing, wholesale, retail inventories.
Consumer price index8:30 FB+Inflation report. Measures cost of goods and services.
Michigan sentiment9:55 FB-Consumer sentiment: Measures strength of consumer spending.

Options Expiration

No options expire this week.

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Swing and Position Traders: Chart Pattern Indicator

On 05/06/2011, the chart pattern indicator (CPI) had:

4 bearish patterns,
10 bullish patterns,
160 patterns waiting for breakout.
The CPI signal is 71.4%, which is bullish (>= 65%).

The chart pattern indicator is bullish 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.

Swing Traders: Pivot Points

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

IndexS2S1PivotR1R2
Dow Industrials (^DJI): Daily  12,480  12,559  12,659  12,739  12,839 
Weekly  12,324  12,481  12,679  12,836  13,033 
Monthly  11,754  12,196  12,536  12,979  13,318 
S&P 500 (^GSPC): Daily  1,325  1,332  1,343  1,351  1,362 
Weekly  1,305  1,323  1,347  1,364  1,388 
Monthly  1,259  1,300  1,335  1,376  1,411 
Nasdaq (^IXIC): Daily  2,795  2,811  2,835  2,852  2,876 
Weekly  2,757  2,792  2,840  2,875  2,923 
Monthly  2,626  2,727  2,807  2,908  2,989 
  • Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
  • S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
  • If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
  • In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
  • A move outside of daily R1 or S1 usually does not mean a breakout.
  • The odds suggest that the entire week's price action will remain between weekly R2 and S2.
  • Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
  • Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
  • Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

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Consecutive Price Trends

Index Consecutive
Closes So Far 
% Comments 
 Dow industrials (^DJI) 1 week down 30.0%  The trend may continue.
 1 month down 19.0%  Expect a reversal soon.
 S & P 500 (^GSPC) 1 week down 30.9%  The trend may continue.
 1 month down 20.0%  Expect a reversal soon.
 Nasdaq composite (^IXIC) 1 week down 33.7%  The trend may continue.
 1 month down 25.9%  The trend may continue.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

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.

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Earnings, Chart Patterns & Industries

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

 Found Chart Pattern Name
37Pipe bottom
16Triangle, symmetrical
15Head-and-shoulders top
13Triangle, ascending
11Head-and-shoulders bottom
8Target price
7Double Top, Adam and Adam
7Double Top, Eve and Adam
7Rising wedge
7Double Top, Eve and Eve

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

 

 

 

 

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

This WeekLast Week
1. Coal1. Coal
2. Furn/Home Furnishings2. Petroleum (Integrated)
3. Semiconductor Cap Equip.3. Furn/Home Furnishings
4. Building Materials4. Petroleum (Producing)
5. Petroleum (Integrated)5. Building Materials
48. Cement and Aggregates48. Electric Utility (Central)
49. Insurance (Life)49. Electric Utility (East)
50. Investment Co. (Foreign)50. Electric Utility (West)
51. Securities Brokerage51. Securities Brokerage
52. Alternate Energy52. Alternate Energy
53. Short ETFs53. Short ETFs

-- Thomas Bulkowski

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Thursday 5/5/11. The Swing Rule

Picture of Ferro (FOE) on the daily scale.

Back in mid March, I posted a blog entry about Weinstein's swing rule. I have new results about how often it works.

Briefly, the drop from A to B is the same as the rise from D to C, according to Weinstein. Point D is the same price as A.

How often does this work?

I cataloged the stair step climbs from the start of the 2000 bear market, March 24, 2000, until May 3, 2011 in over 925 stocks, finding from 24,587 samples (for down swings) to 32,035 up swings. The up swing variety is shown in the figure. The down swing would be a stair-step decline.

I measured how close peak C came to the predicted target. For up swings, the stock was within 5% (plus or minus) of the target 83% of the time. Small swings (a decline less than 10% from A to B) is more accurate than declines more than 10%. Small swings are within 5% of the target 86% of the time.

For downward stair-step patterns, small swings also excel at creating a good price target. It works 88% of the time in a bull market.

Thus, if you want a reliable way to measure how far price is going to rise or drop, calculate the decline from A to B and add it to A for an upward target. For downtrends, you'd do a similar calculation for the decline.

-- Thomas Bulkowski

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Tuesday 5/3/11. Tutorial Tuesday: 12 Tips for Picking Stocks

Picture of a flower from my garden.

My dog survived 8 teeth being pulled by my vet this morning. Cost: $315. The other vet would have charged $750+ for the same procedure. It pays to shop around...And this applies to human surgeries, too. A for-profit hospital will charge you big bucks for a procedure done off-site for small bucks by another company. I priced a procedure years ago and that's what I found.

$ $ $

About the first of each month, I search for stocks to buy, but only if there's enough cash available, of course. I wrote my own program, so features such as the ones I describe below probably won't be available in your program. Here's a dozen items that I look for when shopping for stocks.

  1. Weekly scale. I switch to the weekly scale because it's not a scale that I use often, and it shows things I miss on the daily charts. The scale goes back to September 2001 on my 23" monitor, so I get a good view without having to scroll anything. I just press Enter for the next screen.
  2. Industry. The stocks are sorted by industry, so I also get a feel for which industries are doing well as I page through each stock. A beep sounds to tell me I've moved into a new industry group.
  3. Relative strength. I also have my program setup to color the borders of the chart green or red, depending on how good the industry relative strength is. I want to invest in strong industries, but sometimes bottom fishing in the discard bin can give good value. I usually won't discard a stock just because of a weak industry.
  4. I avoid price mountains. Those are stocks that made a big run up and have been siding lower ever since. Intel is an example. It peaked at 75.81 in August 2000 and has been trending lower. A study of price mountains confirms that it takes years for a stock to make a new all-time high.
  5. Downtrend. Even if the stock does not show a price mountain, I will throw it away if price is sliding down for year or more (or less!). Why take a chance on a stock executing a turn-around when I can find another that's already moving up?
  6. Congestion region. If the stock is moving higher, I want to find a shelf, a platform or congestion area such as the top of an ascending triangle upon which the stock sits. All four (ALL, AVY, CVG, and RTI) of my watch list picks show variations on this theme. Price is (or was, recently) congesting. I will buy as the stock climbs out of that congestion. If it's already made its move, then I'll wait for a throwback.
  7. I like flat bases, so I switch to the linear scale from the log scale on the price axis. That compresses the price movement when the stock makes a large move. It tends to look flat. Breakouts from these flat bases can lead to exciting moves.
  8. Target. I also look for significant overhead resistance to be far away -- like double the current price. If a cloudbank pattern exists, then that's even better. I'm looking to hold the stock for months, perhaps years, to allow price to climb, pushing through nearby resistance. I like to see the path to a double be free of overhead resistance, but that's wishful thinking. Still a clearly defined target that's far above the current price is what I aim for. That way, whenever I'm tempted to sell, I can look at the target and remind myself that we're not there yet. The CHG trade was one that used a target to exit.
  9. Picture of a flower from my garden.

  10. Avoid straight-line runs. On the daily scale, I avoid straight-line runs. I prefer to see price break out of a congestion zone. To buy when price is climbing is to invite the run to end and retrace. That retrace may take price down far enough to cash me out, so I will wait for price to collapse before entering. Allstate (ALL) shows this behavior now. Price gapped higher on earnings but I know that in a week or two, price will throw back to a symmetrical triangle/rectangle and once it starts moving up again, then that's the time to buy.
  11. Research reports. I will read my favorite research reports to find out how the company is doing. This includes a look at the fundamental ratios. Is the company a value play? Does their business have upside growth potential? I threw out Vulcan Materials (VMC) because the Obama infrastructure improvements haven't been exciting enough to push this stock up much, homebuilding is still slow and so is the commercial side. This could be a turn around play, but buying now means I'd be locked in for months with the stock moving up slower than the indices. I tend to throw out too many stocks because of poor fundamentals even though they have a good technical picture.
  12. Insider buying. I like to see insiders buying large amounts of shares and lots of them buying. Having one buy 30k shares is good, but it's not as good as five buying 6k shares each and none selling.
  13. Daily chart. Once I finish the weekly scan and get a pile of stocks to choose from, I narrow that list by looking at the fundamentals. Once that's done, I switch back to the daily scale. There I look for entry points. I'll click on my Buy button which pastes a checklist into my computer. Items such as target price, stop price (it makes a suggestion using a volatility stop), position size (also suggested), scores the pattern, if applicable, the next earnings to make sure I'm not buying within 3 weeks, and so on.

Once I'm in my checklist, that usually means I'll be buying the stock. Often it will take days or even weeks for price to move where I consider it a buy. I don't mind waiting.

That's most of what I look for when shopping for stocks, but I forgot the main one. I only buy stocks that go up. If they don't go up, I don't buy them. Yes, I borrowed that from Will Rogers.

-- Thomas Bulkowski

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Monday 5/2/11. Market Monday: The Week Ahead

My Prediction

Picture of the Dow utilities on the daily scale.

I show a chart of the Dow utility index on the daily scale.

This chart shows two candle patterns that I want to point out. The first begins at A. If the index makes another high, then the candle pattern will qualify as "8 new price lines." A line is a price bar in candle-speak. It means that price has made 8 consecutive higher highs, which it has (including the near tie 2 days after A).

It's supposed to be a bearish reversal, but if it worked as its supposed to, there would not be 10, 12, and 13 new price lines, each supposedly a bearish candle pattern.

The 8 new price lines is bullish, but only 53% of the time. That's what I call near random.

The inset shows the second candle pattern and it's called a deliberation. Deliberation appears in an upward price trend and it starts with two tall white candles followed by a small body that opens near the second day's close. Each open and close should be higher than the previous open and close, respectively.

The deliberation is bullish 77% of the time, probably because price closes near the top of the candle pattern, so an upward breakout is more likely.

The deliberation appears as the most recent three candles in the chart.

What does all of this say? It suggests that there is more upside to the utility index, but I expect the uptrend to stall soon, perhaps this week. In a week to three weeks, I expect to see the index round over and retrace a portion of the recent move up.

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A Brief Look Back

Picture of a flower from my garden.

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 26.11 points.
Tuesday: Up 115.49 points.
Wednesday: Up 95.59 points.
Thursday: Up 72.35 points.
Friday: Up 47.23 points.

For the Week...

The Dow industrials were up 304.55 points or 2.4%.
The Nasdaq composite was up 53.38 points or 1.9%.
The S&P 500 index was up 26.23 points or 2.0%.

Year to Date...

Dow Industrials
     0.2% down from the high of 12,832.83 on 04/29/2011.
     10.9% up from the low of 11,555.48 on 03/16/2011.
Nasdaq
     0.1% down from the high of 2,876.83 on 04/29/2011.
     10.4% up from the low of 2,603.50 on 03/16/2011.
S&P 500
     0.1% down from the high of 1,364.56 on 04/29/2011.
     9.2% up from the low of 1,249.05 on 03/16/2011.

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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 MDCovers residential/non-residential/public spending on new construction.
Auto & truck sales3:00 MC-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.

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Swing and Position Traders: Chart Pattern Indicator

As of 04/29/2011, the CPI had:

6 bearish patterns,
31 bullish patterns,
285 patterns waiting for breakout.
The CPI signal is 83.8%, which is bullish (>= 65%).

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

Swing Traders: Pivot Points

The following is based on an SFO article in December 2004 by John Seekinger, titled, "Take a two-dimensional approach." He offers these tips.

IndexS2S1PivotR1R2
Dow Industrials (^DJI): Daily  12,716  12,764  12,798  12,845  12,880 
Weekly  12,310  12,560  12,696  12,947  13,083 
Monthly  11,840  12,325  12,579  13,064  13,318 
S&P 500 (^GSPC): Daily  1,356  1,360  1,362  1,366  1,368 
Weekly  1,320  1,342  1,353  1,375  1,386 
Monthly  1,271  1,317  1,341  1,387  1,411 
Nasdaq (^IXIC): Daily  2,857  2,865  2,871  2,879  2,885 
Weekly  2,791  2,832  2,855  2,896  2,918 
Monthly  2,649  2,761  2,819  2,931  2,989 
  • Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
  • S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
  • If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
  • In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
  • A move outside of daily R1 or S1 usually does not mean a breakout.
  • The odds suggest that the entire week's price action will remain between weekly R2 and S2.
  • Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
  • Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
  • Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Pivot point: P = (H + L + C)/3
First resistance level: R1 = (2 * P) - L
First support level: S1 = (2 * P) - H)
Second resistance level: R2 = P + (R1 - S1)
Second support level: S2 = P - (R1 - S1)
H = high price , L=low price, C=closing price

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Consecutive Price Trends

Index Consecutive
Closes So Far 
% Comments 
 Dow industrials (^DJI) 2 weeks up 31.7%  The trend may continue.
 5 months up 8.9%  Expect a reversal soon.
 S & P 500 (^GSPC) 2 weeks up 29.9%  The trend may continue.
 5 months up 18.8%  Expect a reversal soon.
 Nasdaq composite (^IXIC) 2 weeks up 26.0%  The trend may continue.
 1 month up 48.7%  Expect a random direction.

How long can an index close higher (or lower) each day? The adjacent table shows how often consecutive up or down closes occur in the indexes, based on the most recent trend of closes.

Low percentages suggest the market is overdue to turn (think of it as the likelihood that next week or next month will continue the trend, based on historical performance). Values of 50% mean random, so most percentages will be lower.

The analysis uses data going back 10 years for weekly percentages and 25 years for monthly percentages (or the start of data, whichever is more recent). Any unchanged closing price is interpreted as the end of the string of consecutive up or down closes.

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.

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Earnings, Chart Patterns & Industries

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

 Found Chart Pattern Name
25Pipe bottom
16Triangle, symmetrical
12Head-and-shoulders bottom
10Broadening top
10Pipe top
8Triangle, ascending
7Double Bottom, Adam and Adam
5Triangle, descending
3Triple bottom
3Broadening top, right-angled and descending

Large numbers of bullish or bearish chart patterns can signal short- to intermediate-term market trends (many bullish chart patterns can mean an uptrend will continue, for example). However, please realize that the short-term price trend could have changed since the pattern was discovered (this is especially true of pipe tops or bottoms, which are weekly patterns).

The 10 types of most frequently appearing chart patterns in the stocks, indexes, and long-only exchange traded funds I follow during the last month are shown in the adjacent table.

 

 

 

 

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

This WeekLast Week
1. Coal1. Coal
2. Petroleum (Integrated)2. Petroleum (Integrated)
3. Furn/Home Furnishings3. Oilfield Svcs/Equipment
4. Petroleum (Producing)4. Petroleum (Producing)
5. Building Materials5. Building Materials
48. Electric Utility (Central)48. Household Products
49. Electric Utility (East)49. Electric Utility (Central)
50. Electric Utility (West)50. Electric Utility (East)
51. Securities Brokerage51. Electric Utility (West)
52. Alternate Energy52. Alternate Energy
53. Short ETFs53. Short ETFs

-- Thomas Bulkowski

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