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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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Chart Patterns: After the Buy
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 11/21/2017
23,591 160.50 0.7%
9,615 92.77 1.0%
758 2.01 0.3%
6,862 71.77 1.1%
2,599 16.89 0.7%
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19.4%
6.3%
14.9%
27.5%
16.1%
Tom's Targets    Overview: 11/14/2017
23,700 or 22,800 by 12/01/2017
9,300 or 9,800 by 12/01/2017
800 or 750 by 12/01/2017
7,000 or 6,500 by 12/01/2017
2,625 or 2,540 by 12/01/2017

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.

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Thursday, 10/30/2008. Bees and Candlestick Tip.

A bee visiting a flower

Instead of day trading my favorite ETF today, I decided to take pictures of the bees visiting my aromatic aster plant. Shown is one from the 88 pictures I snapped. When the leaves of the plant are crushed, it smells somewhat like pepper, but more like the seasonings in spring that waft through the air when the plants blossom. I am sure you have visited such fragrances on walks or bike rides through the woods or tree lined streets. If not, then get outside and smell the roses!

I know. You’re not reading this for the nature lesson, so let’s turn to candlesticks. This tip you will find timely since many stocks are near their lows.

Tip: The best performing candlesticks appear within a third of the yearly low.

The way I measured this is too complicated to describe in detail here (I tried and deleted it, so trust me). To simplify it, I used a database of 4.7 million candle lines and found 103 different candlestick patterns. Then I measured the move from the breakout to the trend end and sorted them into where the breakout was in the yearly price range.

This is one of the discoveries I made and discuss in my book, Encyclopedia of Candlestick Charts. In each candlestick chapter, I sort candle performance into the yearly price range, just to see if a trend develops. Most of the time, candles that showed the highest post breakout move began their life within the lowest third of the yearly price range. Here are the results.

Highest Third:5%
Middle Third: 11%
Lowest Third: 84%

As an example, the bullish belt hold candlestick in a bear market after a downward breakout drops an average of 11.21% for those candlesticks within a third of the yearly low. Belt holds in the middle third drop 9.35% and those with breakouts in the highest third drop 7.76%. The other breakout directions (up/down) and markets (bull/bear) show similar results, but check the candlestick type you are interested in. The decline in this example measures from the breakout to the trend low (often the nearest minor low).

Knowing that candlesticks within a third of the yearly low tend to be more reliable (meaning price trends farther than otherwise, so you are more likely to walk away with a profitable trade) is the kind of information that gives traders like me an edge. And you can buy that edge from Amazon at the link. Just click on the book picture and it will take you there.

-- Thomas Bulkowski

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Wednesday, 10/29/2008. Hummingbirds and the FED.

A moth in Bulkowski's garden

Ann Adams-Smith jokingly said that she missed my flower pictures, so I am including one here today. If you look closely, you can see the "stinger" (at A) that it uses to grab the nectar from the flower. But you are not looking at a hummingbird. How do I know? Because it does not hum when it flaps its wings, and because it comes out at night or in the late evening. The FAA does not allow hummingbirds to fly at night because they don’t have radar.

I have not updated my database yet for today’s market action, but here is my plan for tomorrow. The Federal Reserve will announce their decision about rates, probably around 2:15 pm EST. If they do not lower interest rates, then the market will go down because everyone expects the FED to cut rates. If they do cut rates, then my guess is the market will drop because of today’s (Tuesday’s) large rise (889 points on the Dow) and because the rate cut is already factored in. The market will go nuts just after the announcement comes, but should begin trending thereafter. So, I plan to day trade the market by buying an ETF that shorts the market (probably DXD). If the market rises, then I will trade from the long side, probably using DDM.

My guess is that whichever I chose to trade, it will be the wrong one. Sigh.

-- Thomas Bulkowski

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Tuesday, 10/28/2008. Protect Yourself: ETFs to Buy Now.

Think of exchange traded funds (ETF) as just another stock. You buy and sell them as you would a stock. But the ETF is more like a mutual fund because it can hold many securities to fulfill its investment objective. What I love about ETFs is that some of them are geared toward shorting the market. Thus, when the market goes down, these funds go up. Buying them long is the same as shorting the market. That is great for guys like me that do not like to short individual stocks.

Another difference is leverage. Some ETFs have two for one leverage, meaning that they are twice as volatile as the market. If the market drops 1%, the fund is supposed to move by 2%. Leverage is both good and bad. If the ETF you bought is moving in your favor, you can make a lot of money quickly. If it goes against you, then the drain can be substantial and fast. For that reason, I prefer the 1x leverage instead of 2x, but I have traded both.

If you have a portfolio that you want to protect, consider buying a fund that shorts the general market. If you own 5 technology companies, then there is a ETF that shorts technology. If your holdings go down, the ETF rises. Think of it as a hedge for those issues you want to hold for the long term without worrying about option expiration dates. Unlike mutual funds, there is no minimum hold time (which some funds have) and you can buy and sell them as often as you like intra day. Mutual funds price their funds at day’s end and then they allow you to buy the fund. ETFs have no such restriction.

What are the ETFs that can protect your portfolio now? Here is a list. All of these short the market. You BUY them with the hope that the market will drop. For a complete list of ETFs, go to yahoo!finance and enter Proshares for the ETF in the "Find Funds by Name" text box (or other ETF fund name).

In the following table, UltraShort means twice the leverage of their Short funds. Price is as of the close on October 27. When you visit yahoo!finance and click on the fund’s symbol, a new page displays. Clicking on Profile will tell you details about the fund, such as the leverage and fund objective.

Since the volume on some of these funds can be low, be sure to look at the bid-ask spread before trading. This table is courtesy of yahoo!finance.

-- Thomas Bulkowski

SymbolFund NamePrice
DDGShort Oil & Gas ProShares118.00
DOGShort Dow 30 ProShares88.55
EFZShort MSCI EAFE ProShares131.97
EUMShort MSCI Emerging Mrkts ProShares140.92
MYYShort MidCap 400 ProShares97.40
PSQShort QQQ ProShares85.84
RWMShort Russell 2000 ProShares108.75
SBBShort S&P SmallCap 600 ProShares103.54
SHShort S&P 500 ProShares96.20
SMNUltraShort Basic Materials ProShares109.91
SZKUltraShort Consumer Goods ProShares116.00
SCCUltraShort Consumer Services ProShares180.00
DXDUltraShort Dow 30 ProShares96.67
SKFUltraShort Financials ProShares177.99
RXDUltraShort Health Care ProShares112.00
SIJUltraShort Industrials ProShares147.65
TBTUltraShort Lehman 20+ Treasury ProShares59.30
PSTUltraShort Lehman 7-10 Yr Treasury ProShares66.20
EFUUltraShort MSCI EAFE ProShares212.96
EEVUltraShort MSCI Emerging Mrkts ProShares194.00
EWVUltraShort MSCI Japan Proshares 148.00
MZZUltraShort MidCap 400 ProShares130.87
DUGUltraShort Oil & Gas ProShares56.80
QIDUltraShort QQQ ProShares87.80
SRSUltraShort Real Estate ProShares199.42
SDKUltraShort Russell MidCap Growth ProShares185.40
SJLUltraShort Russell MidCap Value ProShares195.00
SFKUltraShort Russell 1000 Growth ProShares152.99
SJFUltraShort Russell 1000 Value ProShares153.40
SKKUltraShort Russell 2000 Growth ProShares158.55
TWMUltraShort Russell 2000 ProShares143.00
SJHUltraShort Russell 2000 Value ProShares153.98
SDSUltraShort S&P 500 ProShares114.31
SSGUltraShort Semiconductor ProShares155.34
SDDUltraShort Small Cap 600 ProShares139.66
REWUltraShort Technology ProShares129.43
TLLUltraShort Telecommunications ProShares136.08
SDPUltraShort Utilities ProShares99.81
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Monday, 10/27/2008. Story of the Mistaken Bull.

The question from Fred Sears was an innocent one: Why am I down to 13% cash when the chart pattern indicator (CPI) is bearish? You can always find the indicator reading near the top of this page and clicking on the associated link there shows the weekly chart (it’s a daily chart that I post weekly on Friday evenings). For a spreadsheet of the CPI readings, go to the home page and click on "CPI detail (.xls)" near the bottom, middle of the page. It last signaled a bearish turn on September 22 and a lasting bull signal has not yet appeared.

If you look at the CPI chart, the readings are as close to 0 as you can get (1.4% as of 10/23 where below 50% is bearish). That means bearish signals vastly outnumber the bullish ones (2 bullish patterns to 139 bearish ones). It suggests, but does not guarantee, that the market is still bearish. Of course we can get a bullish turn any time now, and the CPI would eventually reflect that.

I justified my reckless buying by saying that the CPI is a lagging indicator. It will signal today that you should have bought up to 7 days ago. And it can change its mind on any signal for up to 7 days. That’s why I recommend not to believe the signal for up to a week and why the CPI is best used as a weekly -- not daily -- indicator. Do not try to use it to time your entry and exits on the daily chart.

As I watched the indicator build its signal a week or two ago, I noticed that the chart was showing a bullish signal until it finished processing the last few stocks. Thus, it looked to me like the CPI wanted to turn bullish but the final counts turned it bearish. The CPI hinted that a bullish turn was coming.

I saw some good value in a few stocks and decided to buy them. I wish I hadn’t. I bought small positions in three oil service stocks and will probably sell all three Monday or shortly thereafter (I expect a bullish bounce Monday, so I will sell on strength). With the price of oil coming down, I tried to time the bottom and was wrong.

I added DUG to my portfolio, an ETF that shorts the energy market. That means it rises as energy stocks fall. I may buy some of that, too. Thus, I can be low in cash and yet bearish on the market because what I own is full of ETFs that short the market.

To sum it up, Fred, the real reason I am down to 13% in cash is because I made a mistake. Oops.

-- Thomas Bulkowski

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Thursday, 10/23/2008. The Top 10 Best Performing Industries

I am beginning the roll out of over 100 new pages of information on candlesticks. My first page is here if you care to take a look. Each page will briefly cover information from my Encyclopedia of Candlestick Charts book and include important statistical results and identification guidelines. I would like to present more, but legal issues (oddly, violating my own copyright) prevents me from doing so.

The following is a list of the top 10 best performing industries as measured by the stocks I follow using today’s close with a close 6 months ago.

  1. Domestic investment companies: up 44.5%
  2. Biotechnology: -4.1%
  3. Medical supplies: -17.8%
  4. Drug: -18.0
  5. Food processing: -18.8%
  6. Household products: -19.4%
  7. Electric utility (west): -20.4%
  8. Trucking/transport leasing: -20.7%
  9. Electric utility (east): -22.8%
  10. Retail building supply: -23.3%

Domestic investment companies are up 44% because these are the ETFs that short the market (that is where I put them because it was the only category that made sense). Others, such as biotechnology, medical supplies, and drugs, many would consider to be defensive issues. If you have diabetes and need to take an insulin shot or risk death, then you take the shot and look to cut costs elsewhere.

I am pleased to see my utility stocks holding their own, meaning two of the three are in the list. I like utilities because of the dividends they pay but even they are taking a beating. If that insulin shot costs big bucks then you leave the lights off as long as possible and that hurts the electric utility.

How is this information useful? The top performing industries tend to continue outperforming, something I learned from the research I conducted on industry relative strength (for the test portfolio, see above). Companies on the bottom of the industry relative strength list tend to continue doing poorly. Thus, you can use this sector list to help you focus on companies that will continue to do well in the future.

-- Thomas Bulkowski

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Wednesday, 10/22/2008. Pricing: How to Buy Stocks.

The chart of Johnson and Johnson on the daily scale

Back in mid August, I reviewed a potential buy in Johnson and Johnson stock based on an upward breakout from a monthly symmetrical triangle (a symmetrical triangle on the monthly scale that a trading setup suggests as a buying opportunity). But I did not buy the stock. Why not?

The chart shows Johnson and Johnson (JNJ) stock on the daily scale. The two blue lines represent a portion of the symmetrical triangle that appears clearly on the weekly scale. Price broke out upward from the triangle and then I wrote about it in my blog. That was August 12, near the time the stock peaked. Price moved sideways and formed two higher peaks before beginning its downward trek.

My blog entry says that I wanted to wait for price to drop back into the price of the congestion region that I show circled in green. Meanwhile, as time passed, I thought of buying the stock occasionally but did not like the way it was acting. It was moving sideways, so I held off.

As the market declined, it took the stock lower. On October 9, I placed a market order to buy the stock the next day at the open. If I felt it was a good value at 71, it was a steal at 58 (that type of reasoning can really hurt you in a dead-cat bounce situation, but I digress). I received a fill at 55.12 and I think I traded the entry instead of letting a market order have all of the fun. As the chart shows, the stock has climbed since then.

The point I am making here is that I wait for the perfect setup to occur before I buy. Patience. I selected a stock, did my research to qualify it for purchase, and then waited for the right opportunity.

"That is wonderful story, Tom, but how do I buy stocks from here?"

There are several ways. FULL DISCLOSURE: I still own Johnson and Johnson. I am not suggesting you buy this stock. I am using it as an example of how I bought in and how I could use recent price action to add to my holdings. I may or may not do that. As I write this, I have NO plans to buy the stock again, but if it drops below the 50% retrace, I just might.

On the day I bought, the stock bottomed at 52.06 (point B). Recently, the stock hit a minor high of 67.48 (point A). Using those two points, we can apply a Fibonacci retrace to pick buying prices. The difference between A and B is 67.48 - 52.06 or 15.42. Multiplying this by 38%, gives 5.86. Subtract this from the high at A gets the first possible buy price of 61.62. Calculating a 50% retrace of the BA rise in the same manner gives a target of 59.77 and a 62% retrace gives 57.92. I show the three retrace targets on the chart.

Since I believe the market is still weak and likely to fall, I would choose one of the three prices as my target. I often use the 62% retrace because price frequently turns there, but the other two are also reliable (but less so) if you think the stock/market is about to rebound and will be unlikely to reach the 62% level.

You can place a limit order to buy the stock and then sit back and watch. If conditions change, then you can always cancel your order. If the stock has not dropped to the 62% value of 57.92 but, say, hits 58, then buy. Fibonacci retracements are guides, not absolutes. If price comes close, then don’t worry about the pennies.

Take a look at your favorite stock. Find the yearly high and low and then apply the Fibonacci retrace values to the move from the low to the high (pretend it came in that order but it probably reached a high price before the low). If you buy near the 62% retrace of the high-low range and sell when it approaches the value of the old high, you can clean up. Of course, there is no guarantee that your stock will climb that far. It could continue lower. Use appropriate money management to protect your investment (use a stop, in other words, or a protective put option). It may take years for your stock to recover if the high-low range is wide, so have the patience to wait.

Using this technique, you can do your research on the stocks, set buy prices and then wait for them to hit. That way you have thought about the situation proactively. You are letting price come to you instead of chasing after it. And if price never hits your buy order, do not worry. Search for other buying opportunities and try again.

Having completed the research on JNJ and other stocks, when the market hit its low on October 10, I was waiting with a fist full of dollars and a number of candidates. I was prepared. You can do the same.

-- Thomas Bulkowski

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Tuesday, 10/21/2008. Is It Too Late To Buy?

In my stock portfolio, I am down to 13% cash. I was lucky to buy 3 stocks at the market bottom on October 10 then added another stock a day later then four more after that. And yet I feel as if I am not in the market at all, as if the huge gain since the Oct low has passed me by.

Just 3 trading days ago (Thursday, October 16, it is now Monday Oct 20), I posted a note about 6 stocks that I liked. Here is a portion of the table, updated with Monday’s closing prices.

StockSymbol10/1610/20%
Equitable ResourcesEQT$22.94$29.5428.8%
Shaw GroupSGR$15.78$18.8919.7%
Questar STR$22.11$31.3741.9%
HoneywellHON$29.00$29.722.5%
OneokOKE$26.24$31.2519.1%
Northrop GrummanNOC$42.30$46.8110.7%

I thought of buying the natural gas companies but decided that they were a mistake. Oil and natural has been coming down in price for quite some time now, so I decided not to buy them. Oneok is up 19%, Equitable Resources is up 29%, and Questar is up a massive 42% in just 3 trading days. Honeywell is a dog so I am removing it from the list. It warned of weak results going forward, so there are better stocks to buy than one predicting failure.

I was tempted to buy Questar because the upside is still a toasty 34% away (target is 42) but not after rising 42%. I can wait. With such a large Dow gain on Monday (413 points, or 4.7%), we may give back part of that on Tuesday, so I might be able to buy back in at a lower price in the coming days and weeks. I am not holding my breath. I will buy two stocks on Tuesday if things head lower, one is an undervalued utility stock and the other is an oil services provider that reported better than expected earnings.

To answer the question, is it too late to buy? Yes and no. There are still some good bargains out there, but you have to be selective. The good stuff has likely recovered from the low, and who wants to buy a dog like Honeywell, one that hardly has moved? If it is still a bargain, then it may remain a bargain. Stocks like Questar have climbed too fast, so they are likely to suffer profit taking in the future. Perhaps they will become bargains again. Of course, by then my cash will be all gone.

-- Thomas Bulkowski

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Monday, 10/20/2008. Gold Tumbles. Why?

The chart of gold ETF (GLD) on the daily scale

I last wrote about streetTRACKS Gold Shares (GLD -- an exchange traded fund) a month ago and suggested that price would rise. It did -- for a while -- as the updated chart shows. It reached the base of a head-and-shoulders bottom which I show only a part of (head and right shoulder, ending in June). Another head-and-shoulders appeared, starting in September, but this time it was a top and it predicted a downward breakout. GLD never reached my $100 target and did not climb to trendline either (not shown but it was a line connecting the two highest peaks -- July being the second peak).

Given that the world’s financial markets have been in turmoil during the last month, I felt strongly that GLD would climb because gold is supposed to be a safe haven in difficult times. The dollar is probably getting stronger because gold is dropping (they are inversely related).

How far might GLD drop? The three bottoms since August remind me of a head-and-shoulders bottom chart pattern. Coupled with a doji candlestick on Friday (see inset), it suggests price will turn higher here. Flipping open my Encyclopedia of Candlestick Charts book, a long-legged doji candlestick acts as a bullish reversal 50% of the time (random, in other words), so that is no help. The doji, with opening and closing prices near the same value and long shadows speaks of indecision. Since the price trend started with a strong drop, the indecision would mean a change in sentiment -- a reversal. This week will probably determine a new direction.

And I just checked to be sure that the Amazon.com link is intact and discovered that my candlestick book is rated #2 in Books > Reference > Encyclopedias > Business! Those rankings change every few minutes it seems. Coincidentally, my publisher dropped off a new version of my book Getting Started in Chart Patterns, translated by a Korean publisher. A few weeks ago, my book Trading Classic Chart Patterns appeared on my doorstep, this time in German. Both are probably on sale now in their respective markets. They add to translations in Chinese (orthodox and simplified), Russian, and French.

Bought March of the Penguins (used DVD) for $3 and hoped it would live up to its billing. It was a good documentary but not as fulfilling as I hoped. Certainly, Braveheart, which I also bought but for a $1 (used VCR tape), was more to my liking. I am not talking about the gallons of blood spilled but about the underlying love story and hope for his country that William Wallace represented. I will watch it again tonight. Getting lost in a movie is certainly better than worrying about how much blood will gush from my stock portfolio this week.

-- Thomas Bulkowski

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Thursday, 10/16/2008. Six Stock Picks

Flat base price trend

I combed through my database of nearly 600 securities and found over a dozen that passed my first check. The chart shows the price pattern that I was looking for. It begins with the blue line representing price. Over the last 14 months, price has moved along a trend that shows a flat bottom (flat base). This is a support region and once pierced, it becomes the target.

In the last few weeks, price has dropped through the support line and plummeted (the red line shows where price broke down, generally beginning in early September). The decline continues as I write this. Once the decline ends (marked by the green line), then expect a recovery with price returning to the flat base, which will now be overhead resistance. What often happens is price meanders in this resistance area before finally pushing up through it and staging an upward breakout.

I came upon this pattern when searching for double bottoms years ago when I wrote my second book, Trading Classic Chart Patterns. I noticed that double bottoms were like potholes in a road. You had a flat base of horizontal price movement (the road) and then the double bottom represented the pothole. Price dropped down to the double bottom and then soared out of the pothole and continued above the road (through resistance) and kept going.

With a weak economy that many are predicting, It may take a year or two for these stocks to recover to the flat base, but the rise could be brief if the market decides to soar. This is the list I will be picking from to trade in the coming weeks. The price in the table is today’s (Wednesday) closing price. The target is the flat base of overhead resistance. S&P and Ford are ratings from those two groups.

-- Thomas Bulkowski

StockSymbolPriceTarget%S&PFord
Equitable ResourcesEQT$22.94$47.00104.9%BuyHold
Shaw GroupSGR$15.78$30.0090.1%BuyHold
Questar STR$22.11$42.0090.0%BuyBuy
HoneywellHON$29.00$48.0065.5%BuyBuy
OneokOKE$26.24$42.0060.1%Strong buyHold
Northrop GrummanNOC$42.30$65.0053.7%BuyBuy
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Wednesday, 10/15/2008. Riches in Oil Services?

I am writing this on Monday evening, so you are getting two blog entries today. I am in a mood to go shopping...

Having reviewed the electric utility stocks and made timely purchases in those, my wallet and I looked elsewhere. Scanning through my list of stocks that I follow daily, I noticed that the oil services industry posted huge increases on Monday when the Dow soared over 900 points. The large recovery suggests that the stocks were unfairly beaten down. And that tells me there is an investment opportunity in the industry.

Let me say that the industry as a group is ranked 47 out of 49 for relative price strength (the gain over the last 6 months), where 1 is best. The worst ranking industries tend to remain poor performers. Thus, the stocks in the following list are not meant as short term trades. Rather, it may take a few years for price to rise back to what I consider the fair value (target in the table).

StockSymbolPriceBounceTargetRecovery
BJ ServicesBJS$12.5731.6%$20 - $2459% - 91%
Dril-QuipDRQ$30.8416.1%$40 - $4530% - 46%
Ensco InternationalESV$41.2023.8%$50 - $5321% - 29%
Global IndustriesGLBL$4.6917%$871%
Matrix ServiceMTRX$10.9416%$16 - $1846% - 65%
Nabors IndustriesNBR$16.0314.5%$25 - $2756% - 68%
National Oilwell VarcoNOV$29.1424.4%$5072%
Noble CorpNE$32.0427.4%$42 - $4731% - 47%
Patterson-UTI EnergyPTEN$14.0820.1%$19 - $2135% - 49%
Pioneer DrillingPDC$8.5426.5%$1241%
Rowan CompaniesRDC$20.8125.1%$30 - $3544% - 68%
Smith InternationalSII$42.0323.3%$54 - $6028% - 43%

Notes:

Price is based on Monday’s close (10/13/2008).
Bounce is the close to close rise in price that occurred from Friday to Monday. I shaded red bounces below 20%
Target is based on overhead resistance shown on the daily chart starting from 7/17/2007.
Recover measures the rise from the Monday’s close to the target. Recoveries above 60% appear green.

Based on the chart only, BJ services shows that it was very undervalued and has good recovery potential. The low price of Global Industries suggests it could be having difficulty surviving. My choices for further research are BJ Services, National Oilwell Varco, and Rowan. As of this post, I do not own any of the stocks listed.

-- Thomas Bulkowski

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Tuesday, 10/14/2008. 6 Ways to Determine Market Direction

Yahoo!finance home page

Before the market opens, how can you tell the direction the markets are going to take? Here are some tips.

  1. Go to yahoo!finance and look at the home page. I show a portion of it. This is a screen shot. If you visit the site after the open, the futures numbers may not be there.

    Circled in red are the Dow futures. If the values shown on the website are negative, then expect a lower open. Positive values usually mean a higher open. The larger the values, the larger the move. I consider a large move as plus or minus 20.

    The futures indicator is like all other indicators: It is not perfect, but I have found it to be reliable. After the first 5 or 10 minutes, then anything can happen, but the indicator usually gets the opening direction right and it suggests the strength behind the move.

  2. Black marubozu candlesticks
  3. Before the market opens, look at the prior price trend and the last candlestick. If you see a black marubozu or a closing black marubozu, then expect price to open lower. Why? Because price is already tumbling at a good clip, so downward momentum will tend to push price lower, at least for a while. The black candles should be tall ones and appear in a downtrend with the best trend being a straight-line one where price near the bottom of one candle becomes the top of the next (or they gap lower). Also look for candles with very small or no lower shadow. The appearance of a lower shadow means some hesitation in the downward move. Check the intra day chart and look for nearby support. If some appears, then the market may turn quickly.
  4. Candlesticks with long lower shadows
  5. Tall black candles with long lower shadows, like the one pictured on the left, suggest that price bounced off support. Look at the prior day’s price trend and the direction the market was moving before the close. If price bounced off the low in the last hour and was moving up, then expect the up move to continue. If price hits the low earlier in the day and was moving down near the session end, then expect the downtrend to continue. In that case, you may find that a bullish reversal occurs soon after the open.
  6. If the candle is a tall one, then expect a partial retrace of the candle. Think of this move as a Fibonacci retrace as it applies to the prior candle. Expect price to bounce between 38% and 62% of the prior candle height. Several of the intra day setups make use of this retrace behavior, so be sure and read those.
  7. Once the session begins, keep an eye on the clock. Why? Because price often reverses 15 to 20 minutes into a trading session. Today (Monday), price reversed about 10 minutes in. If you are looking to buy (long) when price has been moving up since the opening and it is 15 minutes into the session, then that is almost suicide. Wait for price to reverse and go short. Same with a strong downtrend at the open. Expect a reverse 15 to 20 minutes into the session and then buy long.
  8. Finally, years ago I noticed that when price was higher an hour into the session, it often signaled a higher close. I haven’t checked whether or not this is still true and to what extent, but maybe it still applies and you can find it useful.

# # #

Addendum to my original post: Now that the Dow has closed 936+ points higher, what will happen at Tuesday’s open? Check the futures market in the morning, but expect a partial retrace of the large gain. The Dow could coast higher, forming a higher high, but my guess is profit taking will force it to close lower. Bigcharts shows a slight downward tilt for 4 minutes after the close, suggesting the profit taking already started. If you missed buying your favorite utility stock (which posted the best gains of the indices, thank you very much...see yesterday’s post), maybe you can buy in at a lower price tomorrow (Tuesday). Fortunately, I bought several stocks on Friday and one today. Does today’s gain mark the bottom? Perhaps...until the next large insurance company or bank goes bankrupt.

-- Thomas Bulkowski

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Monday, 10/13/2008. A Close Look at Electric Utilities

FULL DISCLOSURE: I own CHG, GXP, and PNW.

The core of my long term holdings are utility stocks which are suffering right along with other stocks. What I find reassuring is that I can make money on the dividend even as the stock falls. If I buy the stock at a good price and collect the dividend while waiting for the price to recover, I can make a bundle when it rises to trade at its yearly high. And if I hold the stock long enough, the dividend is taxed at a rate lower than ordinary income.

Many utility stocks are inexpensive and the yield on them are huge (when compared to other investment choices) because they have been whacked in the last few weeks. There is still the potential for more down moves ahead in the market, but if you wait to buy with a few names that you have been watching, that is much better than just buying a stock without knowing how it behaves.

I am not recommending that you buy any of the stocks listed, but you can start researching them.

When selecting utility stocks, safety of the dividend is paramount. That means finances should be strong. The company should be earning enough to cover the cost of the dividend and still have room for contingencies and normal operating expenses. Value Line (VL) does a good job of researching companies, so that is the service I prefer when selecting utilities. You can find Value Line in the larger libraries. On the upper left of each VL page you will find a safety rank, where 1 is best out of 5. Avoid stocks rated below 3. Read the research to see if they think the dividend is safe.

When I do the analysis, I look at the yield first then the safety rank. Beyond that, you can scan the fundamental numbers. Compare the earnings per share with the dividends declared per share. You want earnings to be higher than the dividend amount (a payout ratio below 100%). The generating mix of nuclear, coal, natural gas, oil, and hydro will become increasingly important in the future. The government and population wants to reduce greenhouse emissions, so that favors nuclear and hydro over the others. Of course, if natural gas and oil spike, the cost of generating electricity will rise and the utility may have difficulty passing on those costs to customers. If the economy goes into recession, electricity demand will also decrease (remember, the utility sells electricity to businesses, not just residences). Utility stocks are not a safe-haven in a poor economy, but since they pay a dividend, that helps support price and they often fair better than other stocks.

Also important but harder to gauge is how the utility gets along with the government. If the state keeps reducing the cost increases that the utility asks for, (a poor regulatory environment) then that is bad. VL often highlights those issues.

VL separates electric utility stocks into three regions: eastern, central and western. If you buy more than one utility stock, try to pick them from different regions so you get diversity. It may be harmful to your wallet or purse to have all of your utility stocks from regions susceptible to hurricanes, for example. Here is a list of stocks from the eastern region that I follow.

CompanySymbolYieldPricePayoutGenerating/Fuel Sources
Central Vermont Public ServiceCV4.1%$22.2050%Nuke: 48%; hydro: 39%; Other: 13%
CH Energy*CHG5.8%$37.3993%Purchased: 99%; hydro: 1%
Con EdisonED6.2%$37.6146%Unknown
Dominion ResourcesD4.7%$33.6726%Coal: 35%; Nuke: 29%; gas: 6%; oil: 2%; purchased: 28%
Duke EnergyDUK6.4%$14.4370%Coal: 61%; Nuke: 34%; Purchased: 5%
Exelon CorpEXC4.2%$47.3850%Nuke: 74%; other: 6%; purchased: 20%
First EnergyFE4.8%$45.4555%Coal: 44%; Nuke: 26%; purchased: 30%
FPL GroupFPL4.8%$37.0859%Oil: 8%; Gas: 52%; Nuke: 19%; coal: 6%; Purchased power 15%
NStarNST5.1%$27.5064%Unknown
Progress EnergyPGN6.9%$35.4276%Gas/oil/coal: 58%; Nuke: 28%; purchased: 14%
Public Service Enterprise GroupPEG5.1%$24.9964%Unknown
Southern CompanySO5.2%$32.2674%Coal: 67%; Nuke: 13%; oil/gas: 15%; hydro: 1%
Teco EnergyTE6.5%$12.3048%Coal: 50%; gas: 34%; Oil: 1%; purchased: 15%
UIL HoldingsUIL5.6%$31.0693%Unknown

The following electric utilities are based primarily in the central US.

CompanySymbolYieldPricePayoutGenerating/Fuel Sources
AmerenAEE9.2%$27.5476%Coal: 84%; Nuke: 12%; other: 4%
American Electric PowerAEP5.9%$28.0044%Unknown
Centerpoint EnergyCNP8.0%$9.0859%Unknown
ClecoCNL4.4%$20.3941%Coal: 28%; gas: 14%; purchased: 58%
DPL Inc.DPL5.1%$21.5555%Coal: 75%; Other: 25%
DTE Energy CompanyDTE7.0%$30.4250%Coal: 70%; Nuke: 14%; oil/gas: 2%; purchased: 14%
Empire DistrictEDE7.3%$17.44119%Coal: 35%; Gas/oil: 24%; hydro: 1%; purchased: 40%
Great Plains Energy*GXP9.6%$17.2194%Coal: 67%; Nuke: 22%; other: 4%; purchased: 7%
MGE EnergyMGEE4.7%$31.0763%Coal: 51%; purchased: 40%; gas: 9%
NisourceNI8.0%$11.55N/A<= Has negative earnings. Coal: 78%; purchased: 22%
OGE EnergyOGE6.4%$21.6055%Coal: 51%; gas: 29%; wind: 2%; purchased: 18%

The below table shows electric utilities from the western US.

CompanySymbolYieldPricePayoutGenerating/Fuel Sources
Black HillsBKH5.9%$23.8167%Coal: 56%; gas: 3%; purchased: 41%
Edison InternationalEIX4.0%$30.2433%Nuke: 25%; coal: 8%; hydro: 12%; purchased: 55%
Hawaiian ElectricHE5.2%$23.99104%Oil: 61%; purchased: 39%
IDACORPIDA5.0%$24.0969%Thermo 54%; hydro: 46%
Integrys EnergyTEG6.5%$41.0571%Unknown
PG & EPCG5.2%$29.7057%Nuke: 36%; hydro: 62%; fossil fuels: 2%
Pinnacle West Capital*PNW7.3%$28.9462%Nuke: 22%; coal: 37%; gas/other: 18%; purchased: 23%
Portland General ElectricPOR4.8%$20.2955%Unknown
Puget EnergyPSD4.3%$23.1169%Coal: 20%; oil/gas: %%; hydro: 5%; wind: 4%; purchased: 66%
XCel EnergyXEL5.7%$16.7364%Unknown

Notes:

Price is based on Friday’s close (10/10/2008).
* These are the stocks I own.
Items in red I consider bad (payout ratios above 90%)
Yields above 6% are highlighted in green (good), but check the fundamentals to determine if the dividend is safe.
NA means earnings were negative, so the payout ratio cannot be calculated.
Unknown means the information is unavailable.
Sources: yahoo!finance and Value Line
Payout is dividend/earnings per share, expressed as a percentage.
Yield is dividend/price per share, expressed as a percentage.
I could have made a mistake in the calculations, so check my math.

-- Thomas Bulkowski

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Thursday, 10/9/2008. Using Fibonacci for Price Targets

Dow industrial average (^DJI) on the monthly scale

The monthly chart shows the Dow industrial average from the bear market low in October 2002 to the high a year ago. How far will the industrials drop? One way to answer that question is to look for congestion regions, places that might support price. The rounded turn (green line) from 2004 to 2006 is such a place, but the average blew through that on the way down.

Another way to set a target is by using a Fibonacci retrace. I use two prominent turning points, in this case A and B but this technique works on shorter scales, too. From the high, compute how far down price retraces the move from A to B. Often, you will see the stock or index pause or even reverse at the three Fibonacci retrace levels of 38%, 50%, and 62%. I have used the 62% retrace to buy into positions and trade the upturn.

If price cannot hold the 62% level, then I consider all hope lost. In such a situation, I expect the stock or index to return to the launch price (or nearly so). Some will look for price to stall at the 75% retrace level but why stop there? Why not just keep dividing the chart into retrace values until the line stops near one? To me, it sounds a lot like shooting a gun and whatever you hit you call the target. That is why Fibonacci levels are a hit or miss affair. There is no guarantee that price will touch 38% and turn there or hit 50% and turn there. But I have noticed that 62% is the most reliable of the three, so I usually am not interested in trying to trade a stock based on another Fib retrace other than 62%.

Fib retraces are not exact prices. Rather, think of them as areas of support. In this case, the Dow has dropped below the 62% retrace level by too much to call it "close enough for government work." With the world markets in such a mess, I believe that the Dow will drop over the coming months to hit 7,500, the launch price at C. That seems an awfully far drop and I hope I am wrong, but time will tell.

The following table gives the Fibonacci retrace levels for the major indices and where the markets stand now. Fibonacci retrace values are approximate.

Market38%50%62%CurrentComment
Dow industrials11,53210,6909,8479,258.10Below 62% retrace. Expect continued decline.
Dow transports4,1583,7223,2873,902.32Expect bounce off 50% retrace.
Dow utilities406359311367.59Expect bounce off 50% retrace.
Nasdaq composite2,1951,9851,7751,740.33Below 62% retrace. Expect continued decline.
Russell 2000654591527546.57Expect bounce off 62% retrace.
S&P 5001,2691,1721,075984.94Below 62% retrace. Expect continued decline.
Wilshire 500012,64611,60610,5669,926.42Below 62% retrace. Expect continued decline.

-- Thomas Bulkowski

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Wednesday, 10/8/2008. More Down for Transports.

Dow transport average (^DJT) on the weekly scale

I visited my optometrist today and he pronounced my eyeballs worth keeping. I was not having a problem with them. It was just a normal check up. When I returned home and saw the market melting down again, I added to one of my utility stocks. It is yielding 8.25%, meaning it is a great value. Unfortunately, I am now predicting the Dow utility average to continue lower, so it will be an even better value in the coming days and weeks.

The mutual funds I sold just 3 weeks ago are down from 16% to 21%, equal to the decline covered in the first 9 months of the year. That rapid decline suggests the markets are panicking. When the selling stops, I expect a V-shaped recovery but that is just a guess. With the US economy suffering and taking the world down along with it, the stock market could stage a more sedate rally.

The above chart shows the Dow transports on the weekly scale. The two converging red lines form a symmetrical triangle in 2004, part of a larger diamond top. The apex of that triangle (shown as the horizontal green line) should be where the transports drop to, perhaps as soon as tomorrow. The average may find support there but my guess is it will continue lower to touch the red support line. That would be 3,400 and that is my target to be reached by mid November. I set the utility average target at 350, also to be reached by mid November.

-- Thomas Bulkowski

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Tuesday, 10/7/2008. Dow Utilities: More Down?

Dow utility average (^DJU) on the weekly scale

The bailout issue of the last week or two took the markets and I by surprise. I waited for the dust to settle and markets to rebound after passage of the bailout bill, but they didn’t. I was hoping that Monday would begin the long march higher. Instead, the Dow plummeted 800 points and then clawed its way back to half that. Based on the Dow industrials, I expect Tuesday to see it continue lower due to overhead resistance at round number 10,000 and because it appears the Dow was moving lower going into the last few minutes. I am leaving my price targets for the indices alone for now pending a review.

The chart of the utility average shown above makes me pause when trying to predict a new target. The chart shows the average on the weekly scale and price is resting on a support zone (B). The average should move higher tomorrow (Tuesday), but I have been hoping that would be the case for weeks now. Thus, I show possible turning points should the average continue lower.

Point B is at the current low of 377. Below that is line C, drawn in beneath the congestion area of early to mid 2005 at 350. Line D takes us back to November 2005 at about 300. Any of these areas could act as support and see the average bounce off it. Whether that would lead to a lasting upturn is anyone’s guess. Perhaps tomorrow will give a better feel for the direction in the coming weeks. If so, then I will adjust Tom’s targets accordingly.

-- Thomas Bulkowski

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Monday, 10/6/2008. Time to Stop the Losses?

Chicos (CHS) on the daily scale

Imagine that you bought the stock Chicos (CHS), pictured above on the daily scale, at point A. You received a fill at the high of the day, 27.70, but that is fine because this is a momentum play and you know price will move higher. The all-time high for the stock is 49.40, set back on February 2006, and you expect the stock to form a very wide double top at 50.

As you hold the stock, each week it drops a little more, nibbling away the hope of a profit bit by bit.

Price hits 20 and you know it is a support zone (round numbers often are). You have lost, on paper, 28%, which is huge, more than triple your usual loss. What should you do?

"If I sell then the stock will bottom, and I will have missed the recovery. If I hang on then the stock will continue lower." That is often how I justify making a bad decision. Let’s parse that statement.

The stock can move in three directions.

  1. Sideways. If it moves horizontally, it means that you just lose time. Price will eventually move higher or lower.
  2. Upward. If it moves higher, you will have dodged a bullet, but that will setup a bad habit such that every time you are faced with a losing position, you may decide to hold on a little longer because it worked the last time you held onto a losing position. That leads to the last choice.
  3. Downward. If price continues downward then you have only postponed your sell decision. Imagine that price is now at C, 10. The loss is a massive 64%. Should you sell or hold on? That is the same question you asked yourself at B. Price can recover after you sell or continue lower. You still have to make a choice. Instead of giving up time and a lot of money, clearly it pays to make the choice sooner.

Perhaps making the sell decision well before the stock drops to B is what separates professional traders and investors from amateurs. But even the pros make mistakes. We "know" that this quarter is going to be a good one, so we hold on and suffer as the stock continues to drop. When the quarterly report comes in and it is better than hoped, the stock drops because the market was expecting even better. So you sell for a loss larger than planned. Amateurs would hold on and ride it even lower.

In the final analysis, which would you rather be? The pro that sells before the stock drops to B or the one that rides it all the way down to C, knowing that it may take years to get back to break even?

-- Thomas Bulkowski

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Thursday, 10/2/2008. What is the Wash Sale Rule?

I think that there is a lot of confusion about the wash sale rule. I am not a tax expert, but I have a book titled, "J.K. Lasser’s Your Income Tax 2008." I would like to share with you some passages from the book regarding wash sales. This does not apply to everyone. As the book says, "The wash-sale rule applies to invetors and traders. It does not apply to dealers."

I mentioned in yesterday’s blog that selling a security for a loss and then buying it back within 30 days means the loss would be barred. If you plan to sell a security for a loss next week, for example, but you still like the stock, you cannot buy twice as much now and then sell half next week. The loss deduction would be barred. The 30 day window extends from 30 days before you take the loss to 30 days after the sale, a 61 day window.

According to the book, "If you sell at a loss and your spouse buys substantially identical stock within this period [the 61 day window], the loss is also barred."

The book also gives examples of how the tax loss is actually deferred. Here is what they write, edited for space.

"1. You bought stock for $10,000 in 1993. On June 21, 2007, you sold the stock for $8,000, incurring a $2,000 loss. A week later, you buy the same number of shares in the same company for $9,000. Your loss of $2,000 on the sale is disallowed because of the wash-sale rule. The basis of the new lot becomes $11,000. The basis of the old shares ($10,000) is increased by $1,000, which is the excess of the buy price of the new shares ($9,000) over the selling price of the old shares ($8,000).

2. Assume the same facts as in example 1, except that you buy the stock for $7,000. The basis of the new lot is $9,000. The basis of the old shares ($10,000) is decreased by $1,000, which is the excess of the selling price of the old shares ($8,000) over the purchase price of the new shares ($7,000)."

Clear as mud, right? Consult a tax attorney. I had a wash sale this year on a day trade I made, so I am interested in seeing how my tax preparation software handles it.

-- Thomas Bulkowski

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Wednesday, 10/1/2008. How to Make Your Life Easier.

I downloaded my quote data again this morning and discovered that yahoo!finance changed the quote information of the Dow industrials. The new candle did not show a black marubozu but an opening black marubozu. The opening black marubozu candlestick is a continuation 53% of the time in a bear market and price reaches the measure rule target 70% of the time.

If the government really wants to help the little guy, I have a few suggestions.

  • Get rid of the wash sale rule. The wash sale rule disallows a loss if within 30 days of a losing trade, you buy the same or substantially the same securities and that includes a put or call option on the securities. The 30 days apply to before and after the sale (61 days total). See J.K. Lasser’s Your Income Tax 2008 book, page 510. My reading of their trading example says that the loss is deferred and not really barred.
  • Quit treating traders as outlaws. Why not allow quick in and out trades that violate the wash sale rule? Why do we need to qualify as professional traders and when we do so, why do the exchange fees for quotes go up?
  • Insure money market funds. Since few funds break the buck, this would be a low cost option to boost the market and soothe investors. Make the insurance permanent.
  • Index FDIC deposit insurance for inflation. Forget temporarily raising the $100,000 level to some other number. Go back to when the government first instituted bank deposit insurance and index it for inflation from that time forward and then make inflation indexing permanent.
  • Get rid of short and long term treatment of capital gains. Treat them all as long term capital gains.
  • Decrease or eliminate the capital gains tax. Ok, so I am dreaming but it sure would be nice not to have to pay taxes on my stock gains. If you can’t do it for everybody, how about eliminating it for those 65 and older? Give our senior citizens a break.
  • Stop treating "Wall Street" like a four letter word. With tens of millions of Americans (I heard 50 million) invested in the stock market either directly or through 401ks and such, Wall Street is really Main Street. Sure, limit CEO compensation when they do wrong and poke some holes in their golden parachutes while you’re at it, but leave Main Street alone.

    To pay for these changes, do the following.

  • Kill the earned income credit. So you probably disagree with this one, but I do not like having to subsidize people for making babies. If you want to become a baby factory, fine, just stop reaching into my wallet at tax time.
  • Kill tax deductible interest on homes. And my guess is you disagree with this one, too, but I should not have to subsidize your Mc Mansion. A guy I know is buying a home just for the tax deduction. Why should my tax dollars go to help him pay for it?

My last suggestion really covers them all. Politicians: Stop spending my money!

-- Thomas Bulkowski

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