Subscribe to RSS feeds Bulkowski Blog via RSS

Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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

Picture of Bumper.
Kindle
Paperback
Nook
Picture of the head's law.
Kindle
Paperback
Nook
Chart Patterns: After the Buy
Getting Started in Chart Patterns, Second Edition book.
Trading Basics: Evolution of a Trader book.
Fundamental Analysis and Position Trading: Evolution of a Trader book.
Swing and Day Trading: Evolution of a Trader book.
Visual Guide to Chart Patterns book.
Encyclopedia of Chart Patterns 2nd Edition book.
Bulkowski's Blog: ThePatternSite.com
Class Elliott Wave Fundamentals Psychology Quiz Research Setups Software Tutorials More...
Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 09/20/2017
22,413 41.79 0.2%
9,654 147.29 1.5%
732 -5.08 -0.7%
6,456 -5.28 -0.1%
2,508 1.59 0.1%
YTD
13.4%
6.8%
10.9%
19.9%
12.0%
Tom's Targets    Overview: 09/14/2017
22,450 or 21,500 by 10/01/2017
9,750 or 9,200 by 10/01/2017
775 or 730 by 10/01/2017
6,650 or 6,200 by 10/01/2017
2,600 or 2,425 by 10/01/2017

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.

Headlines


Tuesday, 9/30/2008. What is Ahead for the Market?

I lost power for the last 3 hours of the trading day (a power transformer exploded, or so it sounded), so I was unaware of what was taking place. When my brother called, it was like 9-11 all over again, but reversed. I was the one near ground zero and he was the informed source. I did tune in for the opening and was surprised to see the Dow already off a few hundred points instead of shooting upward as I expected.

I feel fortunate to have moved my IRA into cash about 2 weeks ago. As late as it was, that move saved me 8% of my retirement savings.

Based on price relative strength, the top performing industries are:

  1. Retail building supply (6.9%)
  2. Biotechnology (6.0%)
  3. Electric utility (East)(-1.6%)
  4. Toiletries/Cosmetics (-1.8%)
  5. Electric utility (West) (2.4%)

In the last few days, I have noticed that the utility stocks have moved up the list toward one (best) out of the 49 that I rank. The numbers in parentheses are the close-to-close price change over the prior 6 months.

Where is the Dow going tomorrow (Tuesday)? Look for the downtrend to continue in the morning with a brief spike downward followed by a retrace of the 777 point drop today, ending with a higher close. Market instability should last until at least Thursday when congress meets again to discuss a new version of the bailout package.

A black marubozu candle Based on my book, Encyclopedia of Candlestick Charts today’s candle is a black marubozu, pictured to the right. That is a continuation candle 54% of the time (meaning more down move ahead).

Based on the height of the candlestick, there is a 78% probability of the Dow hitting 9,588 in the coming days. I used the full height of the candle, projected downward in a bear market. The candle height is 777.68 and today’s low was at 10,365.45, giving a target of 9,588 or 10,365.45 - 777.68. You can read about the candlestick beginning on page 504 of the book, and the measure rule is on page 507. I find that kind of probability information invaluable, which is one reason why I wrote the book.

-- Thomas Bulkowski

Top

Monday, 9/29/2008. New Mutt Portfolios Released.

As the grid at the top of this page shows, I released two new test portfolios today. Both suck. Both are losing money. "Mutt losers" is based on a discovery I made while testing mutual funds. I found that index funds do better when you select the worst performing and buy those, holding them for a minimum of 9 months. If a worse performing index fund then comes along, you buy that and swap the two, otherwise just hold on, holding your nose, and hoping the fund recovers.

"Mutt winners" takes the opposite approach and tested better. The idea is to buy the top two performing mutual funds, including index funds, and hold them for a minimum of 7 months. After that time, if a better performing fund comes along then you buy that and swap the two, holding the new one for another 7 months.

Both test portfolios have suffered in September, with performance dropping dramatically during the month. As the performance numbers show, the strong performers have held onto more of their value than the worst performers. I think it will be interesting to watch how they rebound. Can the weaklings stage a comeback, bouncing higher than the strong performers? Time will tell, but my testing suggests that the winners will stay on top, slightly ahead of the losers. Selecting weak performing stocks expecting a bigger recovery works, but not as well as selecting the strongest performing stocks and buying those. Of course, that is just a guess because I am applying lessons learned on mutual funds to stocks without actually testing the idea.

Since the performance of these two is poor, I am going to spend more time and test mutual funds using Wilder’s relative strength index. Perhaps I can replace these losers with a new setup that works better.

For the skinny behind the portfolios, winners, losers, and mutual funds tests, click the associated link.

-- Thomas Bulkowski

Top

Thursday, 9/25/2008. 3 Trading Mistakes and How to Fix Them.

  1. Not using stops. You know this had to come first, and it is probably the most important. It may surprise you to learn that if you do not use stops, you can make more money than if you do use them. I have proven this in my system testing for the test portfolios on the website. During development, whenever I included a stop, performance deteriorated. That’s also why those two portfolios do not use stops, and that is also why they are showing gains this year when the market is down almost 20% since January.

    Having said that, let me also say that I do not use stops on my long term holdings. I am willing to let them fluctuate further because I intend to hold them for years. They are the stocks in which I expect to double or triple my money or collect juicy dividends while waiting for them to appreciate. But in my shorter-term trades, you can be sure that I use stops.

    It sounds like a contradiction, but it’s not. If a long term holding drops too far and I fear for survival of the company (or other factors), then I will sell it. But for shorter-term trades, every trade has a target price and a stop price. That way, I can limit losses when the market goes against me. Even for long term holdings, you can say that I use a stop, it’s just that the stop is a very wide one and it’s held in my head.

    I became consistently profitable when I started using stops in my trading. It allowed me to limit losses but also to capture gains. I use a trailing stop, raising it as price rises. That way, even if price returns to the purchase price, I will have made money because I was stopped out at a higher price.

    If making money is important to you, then use a stop on every trade. The worst thing you can do is not use a stop and see a large gain turn into a loss or watch a loss grow from 5% to 20% then 30% and so on.

  2. Ignoring sell signals. Imagine that you are in a trade and get a sell signal. "Price will continue rising, so I am going to ignore the signal and hold on," you say. You are right because the next day and in coming days, the stock moves higher. Congratulations! You have just taught yourself that when you get a sell signal, you can do better by ignoring it. That is how bad trading habits form. Unless you have a poor trading system, ignoring a sell signal will eventually catch up to you and you will take a huge loss. If you are not obeying the trading signals that you receive, then either you do not understand your trading system or you are not following it anyway. You lack confidence in it.

    Take the time to understand your trading system, and test it until you are comfortable obeying the signals that it gives.

  3. Learn from mistakes. If you don’t learn from your mistakes, you are doomed to make them again (so the saying goes). Even if you do learn from your mistakes, you will probably make them again anyway. That is the nature of emotional trading. We are not perfect. After over 25 years of trading and investing in the stock market, I continue to make variations on the same mistakes.

    At year end, I review my trades for the year. I look at what went right and what failed. I look for common threads among the trades that highlight bad habits forming. I will use the trading spreadsheet to determine whether I am early or late getting into and out of trades.

    Clearly, waiting a year to review a thousand day trades will take too long. If you trade frequently, then your review should be more frequent, too. You cannot learn from your mistakes if you don’t know what you’re doing wrong. Reviewing your trades can help you identify the problem areas.

So that is the list of three trading mistakes and how to fix them. Use stops on every trade, obey your trading signals, and learn from your mistakes. If you obey these three suggestions, you will become a better trader.

-- Thomas Bulkowski

Top

Wednesday, 9/24/2008. 7 Ways to Protect Your Assets

If you are invested in the stock market, whether through individual stock ownership or through a 401K or other retirement vehicle, you will want to protect those assets. How do you do that? Here are some ways.

  1. 401k. Many times funds are invested in the company’s stock but sometimes retirement plans give you the option of investing in other securities, such as mutual funds. While you may believe that your company will be the next Google, it can also become the next Enron. It pays to diversify. Talk to the department in your company that handles your retirement funds and see what investment options you have.
  2. Covered calls. If you expect a stock you own to move little or drop some, then perhaps a covered call is the way to go. It gives the buyer the right to purchase your stock at a set price. If the stock is below the strike price at expiration, the option expires worthless and you get to keep the premium you charged for that right. Conservative investors use covered calls to boost their investment returns. Before you write (sell) a call, be sure that you won’t mind selling the underlying stock should the price of the stock rise. Think of the tax implications (short term versus long term holdings). Not all stocks are optionable.
  3. Put options. If you own a stock and want to protect it in case its price declines, consider buying a put. A put gives you the right to sell the stock at a certain price for a limited time. I have discussed these in the past. Use puts instead of calls when you fear your stock could drop substantially. An investment consultant I spoke with suggests taking 10% of the stock’s price and subtracting that from the current price to get the strike price with an expiration date 2 months out. The downside of puts is that they can expire worthless and cost money to buy in the first place. Think of them as a limited time insurance policy.
  4. Short ETFs. I have mentioned these many times in my blog and have traded them when I thought the market was going to drop. If you cannot write an option on a utility stock you own, for example, then there is a short ETF that covers utilities: UltraShort Utilities ProShares (SDP). Go to yahoo!finance, Investing tab then ETFs, View ETFs by fund family, then select ProShares trust for the fund family. Up will pop 64 funds to choose from. I would avoid the low volume ones unless you have a special need. If you see the word "Ultra" in the title, that usually means the fund is twice as volatile (leveraged) as the underlying securities. So, you can make or lose a lot twice as fast as normal. For that reason, trade these with care.
  5. Cash. This is one of my favorites. Rarely am I completely invested in the stock market. With my buy-and-hold stocks (usually utility stocks), I keep them and usually ride out the downturn because I may hold them for years, collecting the dividends. With my other stocks (position trades or swing trades), I just sell them as they hit their profit targets or get stopped out. Then I remain in cash. Being a chart pattern trader, bullish patterns disappear in a falling market, so that helps me avoid buying as price drops.
  6. Money market funds. This is where you park your cash when it is not invested. As the holders of the Reserve fund found out, money market funds can break the buck. To help avoid that, check to see if the fund has a parent company. Often the parent will pump cash into the fund so it maintains $1 a share. The Reserve fund has no such parent, so breaking the buck was a lot easier. But now that the government is offering protection to money market funds, this should be less of an issue.
  7. CDs. This is another method of parking your cash and I would not mention it except that if you own a CD, make sure it is under $100,000 in value. If considering buying a CD over that amount, then I suggest you spread it around to as many banks as necessary so that each CD is fully insured by the FDIC. And also verify that your bank is FDIC insured and your broker is covered by SIPC and has insurance for all of your holdings.

-- Thomas Bulkowski

Top

Tuesday, 9/23/2008. Is it Time for Gold?

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

The above chart is of streetTRACKS Gold Shares (GLD -- an exchange traded fund) on the daily scale and I swiped it from the August 11 blog entry. It shows my guess as to how gold would perform and the discussion talked about gold finding support at the apex of the symmetrical triangle (point C on the chart).

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

In the chart to the right, GLD on the weekly scale, I show GLD reaching that support area and turning. With the turmoil in the financial markets, gold has been seen as a safe haven, so traders and investors have flocked to it, pushing it up while the dollar has weakened. Based on something I read in a book, the two are the inverse of each other. When gold rises, the dollar falls and vice versa. The relationship may not be exact but that is the way it has behaved for years, according to the chart I saw.

Anyway, I thought GLD would stop climbing near the base of the head-and-shoulders bottom. That could still be the case but I don’t think so. Congress will take their time discussing and then passing the $700 billion bailout (expect it to happen this weekend or so). That means gold should continue moving higher as the dollar weakens. Uncertainty after that will likely keep the dollar under pressure and gold rising.

I see GLD climbing until it reaches the red trendline connecting the two highest peaks on the chart. Then it should pause trying to push through but push through it will. It might climb to the value of the old high, about 100, and then stall again or even reverse.

-- Thomas Bulkowski

Top

Monday, 9/22/2008. Alternative Energy Burns Down

Chart of Evergreen Solar (ESLR) on the daily scale.

Before I get to the Evergreen Solar charts, let me tell you what I did this weekend. Home Depot said that my dwarf arborvitae would grow to stand 3 to 5 feet tall. When I cut it down on Friday, it was 15 feet high. I dug the stump out and figured that I could line the perimeter of the crater with brick pavers left over from other gardening changes.

On Saturday, The UPS man delivered copies of the German edition of my second book, Trading Classic Chart Patterns. It does not look like the figure, but it is the same book. My publisher sold licenses to translate my books into Orthodox Chinese, Simplified Chinese, German, Russian, and French. The translation for the French book was finished in June or July, so it should be out soon (it may be available already). I haven’t heard about the Russian and Simplified Chinese. Just because the publisher sold the license is no guarantee that the book will be translated. Anyway, receiving the books was a nice surprise.

I tried to donate a copy to the local library and they said, "We don’t accept books written in German." I got the same response when trying to donate one of my English versions, too, at another library.

"We don’t take books written in German."
"But it’s in English!"
"Well, we don’t accept those either."
Sigh.

I bought three boards, primed and painted them, and then swapped them for rotten boards on my chimney. The view from 30 feet up is a real treat. At the bottom on two of the boards, I made vertical slits to accept the chimney roof flashing and as luck would have it, I put one cut on the wrong side of the board. That’s the only mistake I made. To pound in some of the nails, not only did I have to climb up the two story house, but climb on top of the 12 foot tall chimney. I was tempted to wave at my teenage neighbors walking up the street but decided that they might think in was stranded up their. They would probably use the opportunity to break in and be eaten by my security/attack dog. Then I’d be sued and left as penniless as a trader formerly working for bankrupt Lehman Brothers. So, no, I didn’t wave.

Today, Sunday, I begin work on installing my pavers. Discussing it here makes it sound like I am turning my lawn into a paved parking lot instead of a Japanese garden retreat. Of course, my back yard is neither of those.

###

Updated chart of Evergreen Solar (ESLR) on the daily scale.

Let’s turn to the daily Evergreen Solar (ESLR) chart shown above. The picture is from the August 27 blog entry, "Cautionary Tale: Alternative Energy." That title really said it all as the updated chart on the right shows.

The vertical red line marks the end of the prior chart and the start of new quote data. Just days after I posted my blog entry, the stock started dropping. Why?

Certainly the dropping price of oil has contributed to the decline in alternative energy stocks. Also, according to an article by Reuters on September 16, Evergreen Solar along with JA Solar Holdings (JASO) and SunPower Corp (SPWR) "slumped on Tuesday on fears Lehman Brothers Holdings bankruptcy could put at risk share loans they had with the bank." The article goes on to say that the companies lent Lehman shares as part of stock issuances. Now that Lehman is bankrupt, the shares may not be returned, forcing the shares to be counted as issued. And that would mean a nearly 20% stockholder dilution for Evergreen (Sunpower: 3.4% and JA Solar 4%) plus a $39.9 million charge it paid to the bank. That news helped push the shares down to a low of 3.30 from a close of 9.31 when I posted my blog entry. On September 17, Citigroup upgraded Evergreen from sell to hold, helping the stock recover.

-- Thomas Bulkowski

Top

Thursday, 9/18/2008. Is This the Bottom?

The Dow Industrials (^DJI) on the monthly scale.

My largest holding, a utility stock, scored a big gain yesterday by climbing almost 4 points (over 8%), so, I was in a bullish mood when I posted my blog entry and suggested that we had found the bottom. Wrong! Today’s price action suggests I was premature.

The monthly chart of the Dow industrials shows three red lines marking a Fibonacci retrace of the prior uptrend from the bear market low in October 2002 to the peak in October 2007. With price piercing the 38% retrace line, it suggests support may come from the 50% line. If I were to contemplate buying this "stock," I would wait until it reached the 62% retrace line, and not 38% or 50%. What persuades me is the congestion zone which I show circled in green. The zone has a bottom at 9660 and a top of 11,000. The Dow closed at 10,609 today, so we are in the thick of things.

Based on the panic that I think the market experienced today, I think we are closer to the bottom than the top. If yesterday was not the turning point then maybe today was. I expect a retrace of today’s 450 point loss. I am not saying that it is a time to buy. Give it a few days for the market to settle down. Market bottoms occur when people panic and sell everything. I did that two days ago when I told my mutual fund company to liquidate my IRA (which they did yesterday, at the close). The funds were invested in the international market and so far had lost a massive 26% to 27% just this year. Today, they closed even lower -- down about 30%. Glad I sold but I fell asleep at the switch because the loss was so great. For some reason, I could never trade mutt funds properly. I am hoping that the research I am doing now on them will help cure that. I am one of the traders that sold everything near the bottom, so it must bottom...soon. Start looking for things to buy.

-- Thomas Bulkowski

Top

Wednesday, 9/17/2008. New Targets for the Indices.

The following quotes are taken from Tom’s Targets, above, and I added a brief explanation for the new target.

Dow Utilities: 460-485

Old target: "As of 8/3, look for the average to break through support, dropping to 425 and then pulling back to the base of the head-and-shoulders top (weekly scale) at 470. All of that may take longer than a month, so I am looking for a September 15 target date."

New target: The average did the reverse by pulling back to a high of 487 before tumbling to a low of 430. I think today’s hammer candlestick means price will recover in the coming weeks. Look for it to return to the congestion zone between 460 to 485 by November 1.

Dow Transports: 5,400

Old target: "As of August 3, I see the throwback to the Eve and Adam double bottom completing when the average drops to 4,825 before moving up to 5,300 by mid September."

New target: The average only made it as low as 4756. In these turbulent times, the average is holding up surprisingly well. I see it moving higher due to the continued drop in the price of oil. Look for it to reach 5400 by Nov 1, placing it near the old peaks of July 2007 and May 2008.

Dow Industrials: 11,900

Old target: "As of August 3, I see the average still dropping down to 10,900 by September 1, forming a double bottom. 9/3 I changed the target date to October 15."

New target: The average hit a low of 10743 today, well below the 10,900 target. I see the average climbing to 11,900 by Nov 1, maybe even 12,000, but that seemed too ambitious. This will be the beginning of a Big W chart pattern, so if I am right, we could be at the start of a nice uphill run to 13,000.

Wilshire 5000: 13,000

Old target: "As of September 7, I see the index dropping to the July 2008 low, 12,220, and then I will re-evaluate."

New target: It reached a low of 11947 today, so it hit my target and then some. I see it reaching 13,000 by Nov 1. Beyond that and it will hit trendline resistance connecting the October 2007 peak but slicing through the May peak. The 13,000 target is also close to the August 2008 peak.

Nasdaq Composite: 2,400

Old target: "As of August 3, look for the index to rise to a high of 2,400 before dropping to form a mirrored bottom (like the one in January 2008) at 2,225 by mid September."

New target: The composite reached my target and continued lower, reaching a new low of 2,210 today. I am raising the target to 2,400 because I think the unconfirmed triple bottom since March 2008 will support it, and 2,350 begins a congestion zone in late August. Coupled with trendline resistance from the Dec 2007 peak on down, 2,400 should serve as a good target.

Russell 2000: 740

Old target: "As of September 7, I see the index dropping to the 62% Fibonacci retrace at about 690 and if it pierces that, it could drop to 670, matching the lows in June to August 2006."

New target: Today, the index dropped to 679, very close to my 670 target. I think it will reverse and move higher, so my new target is 740 by Nov 1. Then it should hit overhead resistance setup by a down-sloping trendline starting from the October 2007 peak. Before it gets there, though, it could move lower. The other indices look similar, but this one is different, making it harder to read. This could form a fourth bottom, but if my other predictions are correct, I would not expect that to happen.

S & P 500: 1,300

Old target: "As of August 3, I still see the index moving lower to form a double bottom at 1,200 by September 1. 9/3: I adjusted the date to October 15."

New target: The index reached a low of 1,214 today, and I see it rising in the coming weeks, back to 1,300 where it should hit overhead resistance setup by the August peak.

-- Thomas Bulkowski

Top

Tuesday, 9/16/2008. Expect A Bounce.

The Wilshire 5000 index (^DWC) on the weekly scale

Is it over? That is the question many of you are asking. I looked at the 9 indices that I track and all but two (Dow transports and Russell 2000) are at support zones. That suggests, but does not guarantee, that you will see the market bounce. After such a large decline, you can expect the market to retrace some of its losses. It may make a lower low tomorrow (meaning Tuesday since I am writing this on Monday evening) but it should retrace at least half of the prior candle’s height. I explored that behavior in my Encyclopedia of Candlestick Charts book. For the Dow industrials, that means the average should climb to 11,167 (about 250 points from Monday’s close) sometime during coming days. If it breaks through support, then that means more of a decline ahead.

Let’s talk about the Wilshire 5000 index chart that appears above. This is representative of what I see in nearly all of the indices. Price is resting on a support zone as shown by the red line and points A through E. The index could drop to say, 12,000, and a close below that would begin to worry me.

The two blue lines highlight a falling wedge chart pattern which is bullish. This wedge is not as well formed as it could be (more of a funnel shape), and the failure of the index to touch the top trendline at F could spell trouble. Think of F as a partial rise which usually predicts a downward breakout. That would not be good news for the markets. As the chart shows, there is still room for the index to drop before it touches the bottom blue line. Then you could see the index bounce up to the top trendline...or it could just keep on dropping. My guess is you will see a bounce. It will touch the bottom trendline and bounce upward, climbing to F.

-- Thomas Bulkowski

Top

Monday, 9/15/2008. Where do I Invest my Money?

This question came from an email, and I did a poor job of answering it because I interpreted it as "Where do I put my cash?" So here is how I split my assets.

IRAs (individual retirement accounts)

For diversity, I put my IRAs in mutual funds (usually in international funds) and let them manage it while I handle everything else on the domestic side.

I started IRA contributions in February 1983 and by August 1987, the value of the fund had climbed almost 64%, or 14% annually. Just 4 months later, it was worth a total of 10.5%, for an annual rise of 2%. The reason for the big drop was the crash of October 1987. These types of declines should be expected to hit your account, but given enough time, your holdings should recover.

When I retired in my 30s in 1993, I stopped contributing to my IRA. Why? Because I knew that my income would grow instead of dropping from that point onward. Using 1993 as a baseline, my IRA holdings have climbed an average of 12.13% annually, which I consider quite good. If I had exited at the very top, at the end of February 2000, my annual return would have been 55%. Now that is a nice return! The raging bull market brought my net worth up and the bear market brought it right back down. And I just sat and watched it all happen. Oops.

Cash

Of course you need money in cash to pay your bills. Years ago, the banks offered free checking with interest and a minimum balance of about $250. But now, the minimum balance is often so high ($1,000, $2,500 and so on) that you can do better getting a regular checking account paying no interest and stuffing your excess cash into a money market fund (MMF). The MMF will allow you to write checks, but often in minimum amounts of $100. It is worth asking if your bank has free checking that pays interest and has a low minimum balance.

Money Market Funds

I use my MMF to pay the big bills, but otherwise, I leave it alone. It pays an interest rate that varies each day by small amounts and the best one I have is paying 2.24% (compound yield), as of 9/12. I have about 20% of my funds in this "emergency fund" MMF.

Brokers

In my brokerage account, I have cash sucked into a MMF daily. That way, I earn interest on my cash balance. Unfortunately, the MMFs that brokers offer suck, meaning they do not pay as well as MMFs offered by other, unrelated, companies. I only sign up with brokers that have a daily sweep MMF because the interest can add up over the course of a year.

Within my brokerage account, I am currently 28% in cash. Dividend paying utility stocks represent 51% of my holdings, but one stock I own pays a 7% dividend. Dividends are important to me since I can still make a profit even if the value of my holdings drop a bit. Stock dividends also qualify for special tax treatment but that could change, depending on who gets elected and which party dominates congress.

If 20% of my funds are in emergency MMFs, then the other 80% are in brokerage accounts, either sitting in a MMF or in stocks.

Bonds and CDs

I have never owned a bond fund because returns from the stock market are much better over time. I have owned certificates of deposit (CDs) once, and a few US Savings Bonds, which I dumped when the interest rate payments either expired or were less than what I could currently earn. I do not like CDs because of the penalty attached for early withdrawal and the interest rates are slightly above what a MMF pays. If you expect interest rates to rise, then stick with a MMF. If rates jump to 18% like they did in the early 1980s then you will want to buy every CD you can find.

Asset Allocation

I remember reading about a method to determine how much funds you should have parked in the stock market. The formula is 100 minus your age gives the percentage. If you are 30, then 100 - 30 means 70% of your cash should be in stocks and split the other 30% among cash, bonds and so on. It serves as a good benchmark because as you grow older, current income becomes more important than capital gains (meaning you use the income to pay for food while avoiding the risk of being invested and seeing 20% of your holdings disappear in a 1987 type crash).

That is how I split my holdings. Your situation will vary from mine, so you may want to let the mutt fund managers run more of your assets and then watch performance closely. I am working on a test portfolio geared toward mutual funds that I hope to release soon.

-- Thomas Bulkowski

Top

Thursday, 9/11/2008. Has Russell 1000 Bottomed?

The Russell 1000 index (^RUI) on the daily scale If you read yesterday’s blog entry, the world did not end today. It turns out that the collider is just powering up. They will run tests until December before they begin smashing particles together. Thus, around the holidays, expect to receive a black hole as a gift.

For those of you clicking on the August 25 link to my review of Kathy Lien’s book, you can find it here. The link is fixed. And if you ever find any broken links, then email me at: my email address.

For those of you in the U.S., this is the anniversary of the 9-11 attacks. I happened to turn on the television and watched the second plane crash into one of the twin towers and stayed glued to the TV to witness the events as they unfolded. My brother called and told me that he had a meeting on the 101st floor of one of the towers the day before. Some of the people he met with were dead. Since he didn’t have access to a TV, he asked what was happening. "The second tower is down," I said. "What do you mean?" "I mean it fell. It pancaked down." I found the event to be very emotional, very moving. No documentary or movie that I have seen has come close to capturing what I experienced on that day.

Anyway, I show the Russell 1000 (^RUI) on the daily scale. This chart is representative of most of the major indices. They are approaching a prior bottom, in this case, I show that as point D approaching C.

I find it helpful to scan the rest of the chart looking for similar situations, just to see how the security handled it then. Point A marks the low and B drops to meet it before the index climbs. That is what I expect to happen soon. On this chart, the four turning points, A - D bottom near the same price. On the longer term chart (not shown), you will see that the market is resting on or near a support zone formed by peaks and valleys near 650 from as far back as December 2005. My guess as to market direction (for the Russell 1000, anyway) is that it will probably ease lower before it begins climbing again. That is what happened from A to B, with B bottoming slightly lower than A, and that is what I expect now, as the green line shows.

-- Thomas Bulkowski

Top

Wednesday, 9/10/2008. World is Ending. Put Up Your Shields!

My dog before shields are put up. My dog after raising shields.

The news reported that the Large Hadron Collider (LHC) particle accelerator will begin an experiment tomorrow (Wednesday) to smash particles together. Worried researchers have speculated that microscopic black holes will swallow the earth, strangelets could change ordinary matter into strange matter, vacuum bubbles could knock the universe into a more stable state, killing us all, and magnetic monopoles could cause protons to decay, all as a side effect of the experiment.

I looked down at my dog, who was staring at me (left picture) and I said (right picture), "Put up your shields."

 

A chart of UltraShort QQQ ProShares (QID) on the daily scale. On August 19 I reported the purchase of the UltraShort QQQ ProShares (QID), which is unusual for me. Often, I keep my trades quiet because I don’t want you big spenders to push price up or down before I can complete the trade, and I do not want it said that I am cheerleading securities that I own. I was excited at seeing the morning doji star and wanted to share it with you. I bought the security on August 14, at the start of the candle pattern on the belief that the stock market would drop.

The QID is an exchange traded fund that, according to yahoo!finance, "seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the NASDAQ-100 index." When the market goes down, the QIDs go up. The morning doji star (circled) worked as I had hoped and price rose. In fact, it has climbed farther and faster than I expected. But the large overlap tells me that the QIDs are getting tired. If you own this, then I would put a stop a few pennies below the current candle low (at 46.77) but hope it continues higher. Since it closed at 49.52, close to the round number 50, it might be time to dump this one and take your profits.

I bought this at 39.91 and with it trading at 49.52, that is a paper gain of 24% in about 3 weeks. Unfortunately, I sold the turkey on August 28 (point A) for a small gain because it looked like the market was turning lower. Oops.

-- Thomas Bulkowski

Top

Tuesday, 9/9/2008. Housing Comes Alive!

The DJ US home construction index fund (ITB) on the daily scale

Back on August 20, I wrote about the housing industry, saying that it was toast. I never expected that the government would dig into my pockets to bail out Fannie Mae and Freddie Mac. They are picking your pockets, too, of course. But the housing industry liked the news by soaring nearly 10%, based on the stocks I follow.

The chart shows the action in the Dow Jones US home construction index fund (ITB), an exchange traded fund that "seeks results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Select Home Construction index," according to yahoo!finance.

The Adam & Adam double top turned into just another few bumps along the road (a busted double top, which usually means a good bullish run). Why do I say that? Because price never closed below the low between the two peaks, which I show as a red line. Thus, the Adam & Adam peaks do not represent a double top. An analysis of such setups shows that just 35% of the time does price actually drop that far. I was wrong to suggest in my August 20 blog entry that price would likely confirm the twin peaks and move lower.

Since I was wrong once, why not try again? After such a strong up move today, I see price showing weakness in the coming days and backtracking some of the gains. After that, I expect that price will continue moving higher. If my plugged toilet this morning is any indication, I could be full of, well, you know. And if you happen to talk to Mr. Government, tell him or her that I am not too happy to find their hands in my pockets again.

-- Thomas Bulkowski

Top

Monday, 9/8/2008. Three Trading Tips

A picture of a hibiscus flower in my back yard

Since this entry lacks color, I thought I would display a photo that I took this morning (Friday) in my back yard. It is a picture of a hibiscus with blossoms more than 6" across.

Sometimes a provocative email from a struggling trader allows me to pass on helpful tips. I received one such email today (Thursday, 9/4), so I wanted to share them with you.

  • Tip 1: Don’t Invest. Wait for the Best.
  • Imagine that you are contemplating a trade, but the chart pattern doesn’t look quite right. You have doubts. Is the left shoulder too far below the right for a proper head-and-shoulders top? Are the two bottoms of an Adam & Eve double bottom too far apart in time or price or is it another combination of Adam and Eve? Such doubts are good to have. You are questioning your entry setup. But if you have to ask me for help with a trade then you should look elsewhere for a more promising setup. If you have doubts about a pattern then others may share similar feelings.

    Sometimes, chart patterns and technical analysis in general are a self-fulfilling prophesy. For example, you can mathematically show that round numbers are no more likely to act as support or resistance than other numbers, but if traders believe that they do, then the technique works. That’s why double bottoms spaced a few months apart work better than do those spaced a year apart (in the first edition of my book, Encyclopedia of Chart Patterns, I show a chart of price rise after the breakout versus bottom separation. The rise is lower for those bottoms spaced farther apart. In the second edition, for example, Eve & Eve double bottoms with narrowly spaced bottoms show rises of 44% in a bull market but those spaced wider apart show post breakout rises averaging just 37%). Traders see the narrower double bottom and trade it, overlooking the wider one.

    Do your wallet or purse a favor and wait for a setup in which you are confident that other traders will see it the same way that you do.

  • Tip 2: Avoid Overconfidence
  • My worst trades are those in which I know that I am right. I am so confident in my position that when price drops, I average down (buy more at a lower price, dropping the average purchase price). That technique works well for buy-and-hold providing that price recovers, but it is often a disaster for more frequent traders. What happens is that the price drops enough so that the pain of losing gets so hurtful that you sell just before the stock begins to recover. Not only do you take a huge loss, but feel additional pain as price recovers and you watch it from the sidelines. You kick yourself for not holding on a few days longer. That belief creates a bad habit. The next time this happens, you will hold longer, suffering an even larger loss.

    Overconfidence leads to failure.

    The next time you feel that the trade is a no-brainer, that it can’t lose, recognize that you’re about to lose big. Skip the trade. Sometimes the best trade you can make is none at all.

  • Tip 3: Chart Patterns only Work in Trends
  • If price is in a trading range, meaning that it is bouncing up and down but not really moving anywhere, then a chart pattern could signal the start of a new trend. However, the breakout may be fake and price returns to moving sideways.

    In these turbulent markets, I see lots of chart patterns with breakouts showing price rising but not enough to justify raising a stop to break even. My trading is suffering right along yours. I take loss after loss but know that if I don’t play the market, a trend will start and I will miss it. I do not know what the solution is to this problem. If I could tell when a market was trending, I would be retired. OK, so I did retire at 36, but you know what I mean. I want all of my picks to work. I want every chart pattern breakout to lead to a long up trend.

    I plan to examine all of my trades, searching for a thread common of disaster among the losers. I just have to push aside the cloth and find it. Maybe it will lead to discovery, and if it does, then you will read about it here.

-- Thomas Bulkowski

Top

Thursday, 9/4/2008. Utilities Show Identical Three Crows. What Does it Mean?

A chart of the Dow utility average (^DJU) on the daily scale. The chart shows the Dow utility average on the daily scale and it is an interesting picture. Before I get to that, let me discuss what I wrote about the average on August 3. For reference, I show the closest date on the chart as August 4 when the average closed at 462.54. "As of 8/3, look for the average to break through support, dropping to 425 and then pulling back to the base of the head-and-shoulders top (weekly scale) at 470. All of that may take longer than a month, so I am looking for a September 15 target date."

The average dropped as low as 458.37 before climbing to 486.64 and exceeding my 470 target. I have not formulated a new target for the utilities but have adjusted the times on some of the other indices. I will take a closer look at time and price targets soon. You can read my target information by clicking on the link near the top of this page in the box labeled "Tom’s Targets."

Returning to the utility average, the last three days show a great example of a candlestick pattern called identical three crows. This three-line pattern forms in an uptrend and it is composed of three tall black candles of similar size that open near the prior close. The candle pattern ends at B and I show a zoom-in on the pattern in the inset.

What does the candle mean? Theoretically (meaning, according to the many sources I checked), the pattern acts as a bearish reversal. When I tested it, the candle behaved itself and was a bearish reversal 79% of the time, ranking it 4 out of 103 patterns (where 1 is best). Since each candle should appear similar in size and be tall, the pattern is rare, ranking 83 out of 103 where 1 is the most popular pattern. Performance after price closes below the low in the pattern is dismal with price actually recovering during days 3 and 5 following the breakout (bear market only). If price closes above the top candle, then it tends to soar, flying over 10% ten days after the breakout in a bear market. Thus, this candle leads to outstanding performance if price rises and dreadful performance if price drops.

Since the average is meeting support from the August low, you might see the average reverse or at least pause for a few days soon. That would breathe a sigh of relief to people like me that own utility stocks. For additional information on this candle pattern, refer to pages 427 to 435 in my Encyclopedia of Candlestick Charts book, pictured on the left.

-- Thomas Bulkowski

Top

Wednesday, 9/3/2008. How to Buy Intraday using Cycles.

A chart of a stock for the last 10 days.

Shown is a stock chart using a 10 day look back on the 5 minute scale, courtesy of bigcharts.com. I drew vertical blue lines to separate the days more clearly for this presentation.

Pretend you are interested in buying the stock at a good price. Thus, you will be looking for cycle lows: common times when price makes a low. Knowing when price is about to make a low gives you an edge. You can pull the trigger (buy) with more confidence. I show red circles highlighting the locations when the stock made a low near the same time.

The first five circles bottom about 1.5 to 2 hours into the session (and you should be able to pick out the times on your intraday chart better than this one by zooming into the individual day) and the two circles on the right bottom later. For end-of day traders like me, use the cycle information to help locate times when you should focus on the stock instead of sitting and watching it all day. Cycles can help you determine when it will be a good time to buy (look for cycles among the valleys) or to sell (cycles among the peaks). I have used this technique several times for entries and it works for both end-of-day traders and can also help day traders plan when price is going the reverse, based on prior cycles.

Since each stock will show different cycle patterns, you will have to do your own analysis. Do not depend on every stock making a low 1.5 to 2 hours into the trading day. This is just an example. The low you pick may not be the lowest low of the day but one where you can get in at a good price. When you look at your intraday chart as the expected time of reversal nears, if the stock is trending higher then forget it. The cycle is broken and it will not work this day. But, if the stock is trending downward, then it could reverse near the expected time. Look for underlying support or the stock to form a bottom, perhaps move horizontally for several price bars. The 10-day chart will tell you how typical reversals look, either V-shaped or more flat, wider looking (an Adam bottom versus an Eve bottom, if you know what those are). If price looks to be turning near the cycle low time, then consider buying.

-- Thomas Bulkowski

Top

Tuesday, 9/2/2008. Tredegar in Trouble.

A picture of a Praying Mantis and a toad.

Last night, I looked out my back window and saw a praying mantis and a toad standing next to each other. Finding it remarkable enough, I grabbed my camera. The two were kind enough to pose for me as I closed in, blinding them repeatedly with my flash. What I find interesting about this shot, and the others that I took, is that the praying mantis is still alive. Had he moved much, the toad would have noticed and probably eaten him. As I approached, the mantis only swiveled his head to make sure I wasn’t going to do something unkind.

The picture asks one question. What are they looking at?

The answer is only a guess: Dinner. Actually, I believe they are both searching for dinner. They are facing the back of my house, looking over a flowerbed that is adjacent to the porch. A light is directly above them and it attracts many insects. Often I see toads perched on my porch, waiting for Japanese beetles or other insects to land. The toads are lots of fun to watch as they jump to their prey, open their mouths and make this popping sound as their tongues shoot out and snag the target.

A chart of Tredegar (TG) on the daily scale. Turning to the investment side of business, I show a chart of Tredegar (TG) on the daily scale. Why does the chart interest me? Because it shows a cup with handle chart pattern. I did not notice that at first. Rather, I saw the breakout from congestion near D and focused on that.

A cup with handle is a complicated pattern if you follow the O’Neil guidelines. Briefly, here they are, courtesy of my book, Encyclopedia of Chart Patterns

  1. Improving relative strength.
  2. High volume during prior uptrend.
  3. 30% or higher rise leading to the cup
  4. U-shaped cup.
  5. Cups without handles are allowed.
  6. Cup duration from 7 to 65 weeks.
  7. Cup depth is usually between 12% to 33% but can be more.
  8. Handle duration is 1 to 2 weeks.
  9. Price and volume trend downward in the handle.
  10. Handle forms in the upper half of the cup and above the 200-day moving average.
  11. Handle price drop should be 10% to 15% from the high, but could be higher for large cups.
  12. Breakout volume should be at least 50% above normal.

I wrote in my book, "I applied as many of his [O’Neil] guidelines as I could and found that fewer than 10% of the patterns I considered valid cups were chosen. Plus, the performance of the selected few was not as good as the cups I found using the Bulkowski guidelines." It is not unusual to have differences of opinion between research results and interpretation of the guidelines.

Often, traders will forget that price has to rise by 30% leading to the cup. I show that rise from A to B. The cup is from B to D, with the handle from D to E. The jog at C is unusual but I do not consider it important.

This looks like a perfectly acceptable cup with handle. Why do I consider Tredegar in trouble?

A chart of Tredegar (TG) on the weekly scale

The weekly chart shows the answer, but it is more of a guess, really. Anything can happen, but looking at a longer time scale than the one you normally trade can show additional warning signs or support your buy/sell thesis.

This chart shows a rounding bottom in late 2005. It is not a true cup with handle because the rise leading to the cup is not tall enough (less than 30%). Nevertheless, I think it shows what may happen to this stock.

At H, price climbed above the top of the right lip shown at G. Then what happened? Price plummeted from a high of 17.06 (H) to a low of 13.70 (at J), a decline of almost 20%. If that were to happen to Cup 1, that would be a costly entry mistake. So, I will wait for price to drop to about 16, (point F in the top chart) before taking a serious look at this stock.

-- Thomas Bulkowski

Top

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Use the best: Linux for servers, Mac for graphics, and Windows for Solitaire.