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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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Industrials (^DJI):
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Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 04/28/2017
20,941 -40.82 -0.2%
9,098 -96.36 -1.0%
704 -3.23 -0.5%
6,048 -1.33 0.0%
2,384 -4.57 -0.2%
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6.0%
0.6%
6.8%
12.3%
6.5%
Tom's Targets    Overview: 04/17/2017
20,100 or 21,150 by 05/01/2017
8,500 or 9,500 by 05/01/2017
725 or 685 by 05/01/2017
6,150 or 5,900 by 05/15/2017
2,275 or 2,425 by 05/01/2017
Mutt Winners: None YTD

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.

September 2009 Headlines


Archives


Tuesday 9/29/09. My Trade: 34% in One Day.

Picture of YRC Worldwide (YRCW) on the daily scale.

I have often told people and learned this the hard way: When the market gives you a gift, take it, and run to the bank with the profits.

The chart of YRC Worldwide (YRC) shows a trade completed just a few days ago in which I made 34%. Let me tell you about it.

I had been watching this stock since the weekend before September 14, based on the flat base pattern I saw developing in the stock. If you switch to the linear scale, you'll see what I mean. Price moves horizontally since November 2007.

With the stock trading at 4, it had the potential to reach 12 -- a triple. The downside is a complete loss of capital: $4. In other words, the company could go bankrupt.

When the stock looked as if it was going to breakout of the congestion area (day C on the chart), I decided to place a buy order for the open the next day. The inset shows the buy price at A.

As an end-of-day trader, I didn't see the move up until after the close when I checked on the trade. I couldn't believe it! The stock was up over 30% from my buy price. "Dump it!" was my first thought.

The reason for selling these moon shots is a event pattern called an inverted dead-cat bounce. Often, but not always, when price shoots up by 5%, 10% or even more, the stock may make a new high the next day but then pros like me will take profits. That selling will take the stock down.

I checked the news on yahoo but they only reported the large gain. Everything else was old news. I did notice that two other trucking companies were upgraded by a brokerage that same day, so I figured this was a sympathy move. In other words, there was nothing propping up the stock.

I figured that within a few minutes of the open, the stock would hit a new high but then close lower. Instead of trying to day trade it and perhaps missing a good exit price, I decided to sell at the open. That is point B on the chart.

I bought at 4.40 and sold at 5.91, making 34% in one day. As the inset shows, price has closed below my purchase price.

Is this another buying opportunity? Maybe, but hints of "substantial layoffs" coming means the company is still losing customers. The more business it loses, the more employees it has to lay off and the more their debt weighs on performance. They just might go bankrupt, and I'm not sure the risk is worth the reward now.

After the trade completed, I learned that there is a large short position in the stock. Yahoo!finance says it's 29% of shares outstanding. Since the number is dated August 11, it could be that short covering after the broker upgrade was the reason for the move up. My guess is the short position has diminished to the point that it might not be a factor.

-- Thomas Bulkowski

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Thursday 9/24/09. International Trading: A Gift from Mexico!

Picture of EWW, an etf covering Mexico

When I was a hardware design engineer for Raytheon, they sent me on a junket to White Sands Missile Range to install and test one of my circuits in the Patriot air defence system. While there, I visited Carlsbad Caverns, or tried to. I drove 400 miles only to find that the rains had flooded a road leading to the cave.

I also visited Mexico. I remember my coworkers saying that the kids would come up to you and ask to shine your shoes, so I made sure to change into sneakers. I picked up a few onyx elephants and a ring which I wear to this day.

Anyway, the chart on the right is an exchange traded fund titled, "iShares MSCI Mexico Investable Mkt Idx" (EWW) that, according to yahoo!finance, "seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the Mexican market, as measured by the MSCI Mexico Investable Market index."

I show the chart because of the irregular broadening top chart pattern. I say irregular because the bottom trendline only has two touches of minor lows (which is ok, but I like three better). The top trendline also cuts through the middle peak if you redraw it to anchor the start of the line.

Broadening tops breakout downward 50.3% of the time, so the breakout direction is random, according to my tests.

This one could push through the top trendline after staging a partial decline. That occurs when price touches the top trendline and drops, but does not come close to the bottom trendline before heading back up. An immediate upward breakout follows 72% of the time. All of these statistics are from my Encyclopedia of chart patterns, second edition book, on sale in the lobby.

And if you do buy anything from Amazon.com, please do so through this website. By that I mean click on a book picture to take you to Amazon and then buy everything you see. At no additional cost to you, I receive a small referral fee from each purchase that helps support this website.

The main reason I show the above chart is not only to highlight a broadening top but to illustrate how well the international market is doing this year. For diversification reasons, I let mutt fund managers handle my IRA money. Near the start of this year, I put my money into four funds: energy, health care, international, and one that buys small companies. Since health care was supposed to be the big thing this year, I doubled my bet in that fund and in energy.

Healthcare has been the dud this year, gaining about 13% year to date (but I've made 24% since I bought later). The big winner has been the international fund, up 37% (or 43% if you piggybacked my buy). So, take a look at the international scene. You will find that as the US economy recovers, so will the rest of the world. And there's money to be made outside our borders.

There is a table on the blog What's Hot Wednesday which shows the countries that are doing best this year and in the past week. That's a good place to start shopping.

-- Thomas Bulkowski

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Tuesday 9/22/09. Tutorial Tuesday: Dogs of the Dow.

In 1991, the team of Higgins and Downes introduced the world to what is now called the Dogs of the Dow strategy upon publication of their book, Beating the Dow, pictured on the right. They published a revision in 2000 (shown).

At the time, the book made quite a splash, including having a few mutual funds based on the strategy. Why? Because the technique, which I'll describe below, seemed to work well. According to them, following the method from 1973 to June 1991 would have made a cumulative profit of 1,753.14% compared to the complete Dow return of 559.31%, not including commissions and taxes. As fantastic as that seems, it's just 16.61% annually for the Dogs and 10.43% for the regular Dow stocks.

In 13 of 19 contests, or 68% of the time, the Dogs beat the Dow. However, according to one source, the Dogs only beat the Dow once in the last 5 years (in 2006). As of year end 2008, the Dogs have posted annual returns less than the Dow stocks in each of the last 1, 3, 5, 10, and 15 years. It's as if once a technique becomes well known, it stops working.

There are other variations of the Dogs of the Dow, namely the Flying Five, Little/Small Dogs of the Dow, Foolish Four, and Penultimate Profit Prospect. The Flying Five, Little Dogs, and Small Dogs of the Dow (all are synonyms) have flopped (failed to consistently outperform the Dow) over the last 1 to 15 years as well, according to one source I checked.

Here are the rules for the Dogs of the Dow setup.

  1. At the end of each year (or any period you choose), rank the stocks in the Dow Jones industrials according to yield (dividend/price).
  2. Select the 10 with the highest yields. In case of a tie, select the stock with the lowest price.
  3. Buy an equal dollar amount of each stock.
  4. Hold those stocks for a year then go back to step 1.

Here are the rules for the Flying Five, Little Dogs, and Small Dogs of the Dow.

  1. At the end of each year (or any period you choose), rank the stocks in the Dow Jones industrials according to yield (dividend/price).
  2. Select the 10 with the highest yields.
  3. From the 10 highest yielding stocks, select the 5 with the lowest price (that is, highest yield/lowest price).
  4. Buy an equal dollar amount of each stock.
  5. Hold those stocks for a year then go back to step 1.

Picture of a dog

The rules for the Penultimate Profit Prospect are as follows.

  1. At the end of each year (or any period you choose), rank the stocks in the Dow Jones industrials according to yield (dividend/price).
  2. Pick the second lowest priced highest yielding stock.
  3. Buy it.
  4. Hold it for a year while praying for a miracle then go back to step 1.

The Foolish Four is from the Motley Fools, as you might have guessed. They have several variations on the basic theme.

  1. Find the five lowest priced, highest yielding stocks as described above.
  2. Throw out the lowest priced stock of those five.
  3. Put 40% of your investment in the penultimate profit prospect (see above) and 20% in the other three stocks.

The Motley Fool website warns that performance since introduction has declined.

I am testing the Dogs of the Dow and hope to complete it in a week or so, but inclement weather is closing in and it's time to be gone... You know I'm rushed since I can't find a dog picture from my shots worth posting.

-- Thomas Bulkowski

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Thursday 9/17/09. When Divergence Fails

Picture of Beazer (BZH) on the daily scale

Shown is a picture of Beazer (BZH) on the daily scale. It's zoomed to fit the page, so it may look blurry (then again, my vision is getting worse as I age, so it could be me only).

On the top of the chart are price bars with the Wilder relative strength index sell signals overlayed as vertical red bars. That's the way I programmed my software to display it, so you probably won't be able to duplicate this on your setup.

Below that is a portion of the RSI chart. The green "buy" zone was cut off so I could fit the chart on this page. The color changes into white at 70 and 30 and the RSI is setup with 14 day look backs on the buy and sell signals. All of that are typical settings for the RSI.

Now look at the yellow line on the lower chart and the blue line on the upper chart. The yellow line trends lower and the blue line slopes upward. It does this over a month's time, which I feel is important. Narrower than a month may not provide a strong signal but divergence setup by two peaks on the RSI chart about a month apart I consider reliable.

The opposite trending lines highlight bearish divergence. Bearish divergence occurs when price moves up and the indicator moves down. Since price often, but not always, follows the indicator, bearish divergence is, well, bearish.

The commodity channel index is another indicator that I look at for short-term timing signals, but mostly for divergence. It also showed bearish divergence in the stock.

With the stock moving down the last few days before I sold and with bearish divergence from both the CCI and RSI, I decided to sell the stock.

Today (Wednesday as I write this), the stock zipped up 14%. So, now you know why I'm not that big a fan of indicators. Of course chart patterns lie just as much as indicators do, so that's the way it goes.

I made 29.8% on the stock. That's not bad for a day's work (that's true, of course, but it took me 114 days). .

-- Thomas Bulkowski

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Tuesday 9/15/09. Tutorial Tuesday: When Candles and Chart Patterns Collide!

Over the weekend, I released a new study of candlesticks and chart patterns. I used my database of chart patterns and looked at the candlestick the day before the breakout. I found some interesting results. The following table gives a taste.

Upward Breakouts   Downward Breakouts
Chart PatternCandlestick   Chart PatternCandlestick
Broadening bottomDoji, northern   Broadening topDoji, southern
Cup with handleDoji, northern    
Double bottom, Eve and EveLong day, white   Double top, Eve and EveMarubozu, opening black
Flag, high and tightMarubozu, opening white    
Head-and-shoulders bottomMarubozu, opening white   Head-and-shoulders topMarubozu, opening black
Triangle, ascendingDoji, northern   Triangle, ascendingDoji, southern
Triangle, descendingDoji, southern   Triangle, descendingDoji, southern
Triangle, symmetricalDoji, northern   Triangle, symmetricalMarubozu, black
Triple bottomLong day, white   Triple topMarubozu, opening black

Let's say you are looking at an ascending triangle in a bull market. Crack open my Encyclopedia of Chart Patterns, Second Edition book (pictured on the lower left) to page 719. If you add up the upward breakout numbers (663+103) and divide it by the total pattern count (1,092) you discover that an ascending triangle breaks out upward 70% of the time.

Turn to page 722. At the bottom of Table 47.4 is a line that says "Breakout distance to apex." For bull markets with an upward breakout, the distance averages 61% of the way to the apex.

Consult your favorite chart of the stock showing the ascending triangle. Is price about two-thirds of the way to the apex? If yes and a northern doji appears as the most recent candle, then price might, just might, breakout the next day.

That is valuable trading information, and with a little luck, your profits will more than cover the cost of the book.

-- Thomas Bulkowski

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Thursday 9/10/09. Is Gold Tarnished?

Chart of GLD on the weekly scale

A few weeks ago, I was speaking on the phone to Trang Ho, an "Exchange Traded and Mutual Funds Reporter" for Investor's Business Daily, and we discusses gold, specifically the GLD exchange traded fund (ETF). I show a picture of it.

I laid out the two scenarios if price were to drop or move up. The upward one came to fruition as the chart shows.

Pictured is a large symmetrical triangle on the weekly scale because the daily chart wouldn't fit. There is nothing special about this chart because we've seen symmetrical triangles before. However, I told Trang that if price were to breakout upward, it would likely stall at the old high. I show that marked by the green line near the top of the chart. That line marks overhead resistance.

My guess now is the same as it was then. GLD has hit overhead resistance and will fall back. It might make another run for the resistance line and if it does push through, then it will likely have a good move up.

If that happens and you extend the two red trendlines until they join, then expect GLD to reverse direction there. That may sound odd, but it works forming a minor high 75% of the time and a lasting direction change 60% of the time. You can read the study which describes it.

-- Thomas Bulkowski

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Tuesday 9/8/09. Tutorial Tuesday: Does Market Rise Around Holidays?

On Friday, my Dell (rhymes with "Smell") LCD monitor started to blink on and off at me. At first, I thought it was just from inactivity. If you don't play with your computer for 10 minutes or so, the monitor drops into standby mode and powers down. So I pushed the mouse and the monitor turned on again. Then it went off. Without moving anything, it started blinking at me every few seconds.

I had that sinking feeling you get when your computer crashes, only this time I knew it was a hardware problem. I re-seated the connections (cables), both power and data on both ends, but that didn't help.

I read the manual and loaded a DVD for additional help (a cute trick if your computer is blinking on and off. Fortunately, I have 2 computers I use). It suggested I remove the data cable and power up the monitor again. When I did this, it took about 10 minutes or so but the monitor started the same thing: powering up and down repeatedly.

My guess is it's a power supply problem, but it could be a faulty switch (you can usually hear the sizzle as the switch shorts, which I didn't hear). This Dell monitor lasted just over 3 years, which I think is unusually short.

I did some internet searching and then ran off to my local Walmart and bought a 22 inch beauty from Acer for $168 ($182 including tax). The monitor was sooo big, I had to knock out an outside wall to fit it into my office!

# # #

I received an email from a person that said price the day before a market holiday goes up. I thought I'd spend Monday and see if that was true or not. I used 571 stocks from 1995 onward covering both bull and bear markets. Here are the results

HolidayPre HolidayPost HolidayMarket
New Year's Day44.50%46.80%Bull
Martin Luther King Jr.56.50%45.90%Bull
Washington's Birthday39.20%50.70%Bull
Memorial Day56.50%48.40%Bull
Independence Day46.90%44.00%Bull
Labor Day55.30%67.80%Bull
Thanksgiving56.70%48.90%Bull
Christmas44.70%47.10%Bull
 
New Year's Day47.20%44.00%Bear
Martin Luther King Jr.46.10%31.70%Bear
Washington's Birthday36.90%28.80%Bear
Memorial Day27.90%53.30%Bear
Independence Day49.70%50.90%Bear
Labor Day44.20%37.80%Bear
Thanksgiving44.20%77.20%Bear
Christmas67.10%62.00%Bear

I highlighted in red the highest number in each column. Oddly the day after labor day shows price closing higher 67.8% of the time. Yum! The day before memorial day, price drops 72.10% (or it closes higher 27.90%) of the time in a bear market. Ouch.

I will repackage the results into a study that I will release soon.

-- Thomas Bulkowski

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Thursday 9/3/09. New Dow Head-and-Shoulders, But Where?

Chart of the Dow industrials on the daily scale

The chart shows the Dow industrials on the daily scale with an extrapolation of what I think will happen in the future. Since I busted my crystal ball back in 2008 during the bear market, my evaluation is only a guess.

The vertical red line represents where I constructed a mirror of price action on the right of the chart using the left. The candle colors are wrong, so ignore that.

Mirroring has worked very well in the past when trying to predict the future. I see a left shoulder (LS) and head already in place. How far down does the Dow drop between the head and right shoulder is anyone's guess, but my thinking is that the drop will be a shallow one. Another week or so of down before a recover begins.

Then the index will climb to form the right shoulder, peaking near the height of the left shoulder, site of overhead resistance. Being in September, I expect the markets to remain weak just as they have in years past, taking the index lower. It will confirm the head-and-shoulders top when price closes below the green neckline.

Beyond that, I expect Fibonacci to take over. The turn will come when the index retraces half the move up from the July low. That also places it at the price level of the June peak, which is a convenient support area. From there, the Dow will move sideways, searching for direction since it will be October and that is often a time of weakness in the markets.

Going into November, I expect the index to begin its race upward to a Christmas rally. At least that is the present I am hoping for this year.

-- Thomas Bulkowski

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Tuesday 9/1/09. Tutorial Tuesday: Scaling Out of a Trade. Good or Bad?

A long time ago, I decided to test whether or not scaling out of a trade made sense. Scaling out means selling not thy whole wad at one time, but selling only a portion of your holdings each time. For my trades, I determined that you lose more money than if you just sell the entire position at once.

The September 2009 issue of Active Trader magazine has an article titled, "Scaling out as an exit technique," by Howard Bandy. I will get to his conclusions in a moment. But first, I programmed an Excel spreadsheet just to crunch the numbers on a series of hypothetical trades. They appear in the table below.

 Test 1Test 2Test 3Test 4Test 5
Entry price$10.00$10.00$10.00$10.00$10.00$10.00$10.00$10.00$10.00$10.00
Scale out price $12.50 $12.50 $12.50 $9.00 $9.00
Ending price$15.00$15.00$12.50$12.50$10.00$10.00$9.00$8.00$8.00$8.00
Net$980.00$720.00$480.00$470.00$(20.00)$220.00$(220.00)$(330.00)$(420.00)$(330.00)
BestBuyHold BuyHold  ScaleOutBuyHold  ScaleOut

Test 1

In the first test, I bought 200 shares at 10 and sold it all at 15 (buy & hold), giving me a profit of $980 after deducting $20 for round trip ($10 for buying and $10 for selling) commissions. Scaling out half of the position (100 shares) midway to the 15 target gives a profit of $720. Scaling out is worse.

A day trader I know that also teaches others to day trade recommends scaling out. On the first trade of the day, he sells a portion to lock in a profit, booking a win to place you in the proper frame of mind. I can't argue with that from a psychological point of view, but I grab my wallet as I say that. It doesn't make much sense otherwise. What you're doing is cutting your profits short instead of letting them accumulate. I think his advice is wrong, but that's just me. Perhaps novice traders need the mental crutch.

Test 2

In the second test, price starts moving up from 10, climbs above 12.50 but does not reach the sell target at 15. A stop takes you out at 12.50 for a gain of $480 (buy & hold). Scaling out half of the position at $12.50 costs you commissions, leaving you with a net gain of $470, so scaling out is worse.

Test 3

The third test is similar to the last one. Price climbs from 10 to over 12.50 but does not reach 15. This time, though, your stop is at the entry price of 10 (break even), so you lose the cost of commissions ($20)(buy & hold). Scaling out, however, means you sell half your holdings at 12.50 and the rest at 10 for a gain of $220. Scaling out works better in this scenario.

Test 4

Test 4 is when price drops. You buy 200 shares at 10 and it drops to 9, leaving you with a net loss of $220 (buy & hold). If you were to scale out at $9 on the hope that price would rebound but it drops to 8 instead, that gives you a loss of $330, which is worse than just selling the entire position at one time. Scaling out is worse.

Test 5

In the last test, you decide to hold onto a losing position longer, riding it down to 8 for a net loss of $420 (buy & hold). The scaling out method, selling half of the position at 9 saves you money, booking a net loss of $330.

In three of five scenarios, scaling out costs you more money than selling your entire position.

In my trading experience, test 1 and test 4 are what happens. In the first test, selling shares along the way up to a target costs you money. In test 4, hoping a losing position will see price rise again also costs you money when price continues lower. Selling the entire position at once saves you from a bigger loss caused by scaling out.

You will want to evaluate which of the tests shown in the table applies to your trading.

Active Trader

Instead of providing an exhaustive review of the article, let me just tell you his conclusions.

This is what he writes. For both winning and losing trades, "...the closer the profit target is to the entry price, the more the average profit is reduced." My interpretation of this is that singles and doubles are fine, but the big bucks come from the home runs. "...setting the maximum-loss stop to the break even price dramatically reduces profit." Once his system enters a trade in which it scales out, he raises his stop loss to the initial entry price (break even). He concludes that using a break even stop forces the system to exit trades that would otherwise be profitable.

Looking at winning trades only gives the same conclusion. Scaling out of trades when the price target is near the entry price reduces profitability. Once you scale out of the trade, using a stop loss set at break even hurts profitability.

What about losing positions? Scaling out reduces the size of the loss but it does not turn losing trades into winning ones.

Maximum-Loss Stop

He then tests the maximum loss stop by using it as soon as the trade is entered. He finds that doing so "greatly reduces the profitability of the system." The farther away from the entry price the stop is placed, the more profitable the system becomes. This finding is not new. If you use stops, profits drop because they take you out of your big winners. I proved that to myself when I looked at my own trades years ago. This is not giving permission to avoid using stops. Rather, it highlights the need to know when to sell and when to hold.

He also says that placing a stop 2 standard deviations below the entry price cuts profits in half! Wow. So if you use Bollinger bands each set 2 standard deviations away from the moving average as an exit, you may be wondering why performance is so poor...

He concludes by saying that moving the stop to break even when scaling out reduces profits to one-third. Ouch.

What Do I Use?

Do I scale out of a trade? Yes, but only to reduce the position size. For example, earlier this year I had over 70% of my portfolio in utility stocks. With the markets trending since March, I decided to diversify and sold one utility stock completely and cut the remaining size of several others. That dropped the utility sector to 50%, which I consider still much too large. However, I can't find anything worth buying recently, so I am just collecting dividends at the rate of 5% to 8%.

Other than that, no, I don't scale out. When I sell a position, I sell it all, especially if it's for a loss. Scaling out of a losing position is an excellent way to lose more money.

-- Thomas Bulkowski

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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.