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Monday 1/31/11. Market Monday: The Week Ahead

• My Prediction
• A Brief Look Back
• Economic Reports
• Options Expiration
• Swing and Position Traders: Chart Pattern Indicator
• Swing Traders: Pivot Points
• Consecutive Price Trends
• Buy-and-Hold: 12-Month SMA
• Earnings, Chart Patterns & Industries

My Prediction

I show a picture of the Nasdaq composite on the daily scale. It shows a double top at A and B. Price confirmed the pattern at B when it closed below the low at C.

Using the measure rule says that the height of the pattern projected downward gives a minimum target. That means taking the height of A to C and subtracting it from C to get D (about 2.600).

That measure uses the full height. For a closer target, I multiply the height (80 points in this case) by 72% since that's how often the full height measure rule works for Adam & Adam double tops. Doing so gives a closer target that price reaches at least 90% of the time. In this example, it doesn't raise the bottom red line much (13 points).

What do I think will happen? I believe the drop is just like the plunge the markets took (Feb 2010?) when rumors of unworkable Greece debt hit the markets. The fear was overblown then and so is this dip. The fear is that the world's oil price will rise if Egypt and other Arab nations become unstable. High oil prices will grind our economy and the rest of the world to a halt, threatening the economic recovery.

I think the markets will recover in short order. I don't expect a lasting downturn to occur here and view this as a buying opportunity. Either that or the world is coming to an end. Repent and return those library books!

A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

For the Week...

Year to Date...

Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

Report	Time	A-F Rating	Description
Personal income & consumption	8:30 M	C+	Measures sources of income to predict future demand.
Personal consumption expenditures	8:30 M	C+	Covers durables, non-durables, and services.
Chicago purchasing managers index	9:45 M	B	Monitors regional manufacturing activity.
Construction spending	10:00 T	D	Covers residential/non-residential/public spending on new construction.
Auto & truck sales	3:00 T	C-	Monthly sales of domestically produced vehicles.
Crude inventories	10:30 W	?	My guess: Measures oil inventory.
Productivity & costs	8:30 Th	D+	Cost of producing a unit of output.
Initial jobless claims	8:30 Th	C+	Counts people filing for state unemployment benefits.
Factory orders	10:00 Th	D+	Durable/non-durable goods orders w/factory inventories.
4 Employment reports	8:30 F	A	Nonfarm payrolls, unemployment rate, avg workweek, hourly earnings.

Options Expiration

No options expire this week.

Swing and Position Traders: Chart Pattern Indicator

As of 01/28/2011, the CPI had:

The chart pattern indicator is bearish with 2 of 3 full triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

Swing Traders: Pivot Points

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

• Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
• S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
• If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
• In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
• A move outside of daily R1 or S1 usually does not mean a breakout.
• The odds suggest that the entire week's price action will remain between weekly R2 and S2.
• Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
• Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
• Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Consecutive Price Trends

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

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

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

Buy-and-Hold: 12-Month SMA

Earnings, Chart Patterns & Industries

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

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

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

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

-- Thomas Bulkowski

Thursday 1/27/11. Can You Survive by Trading?

Recently, Randy C. wrote me an email that asked a question that no one had posed before. I won't share the details, but it asked in essence, "Can I make enough money trading to live on?"

The answer is yes and no. I'm not trying to be flippant, but it's like trying to describe to a blind person what the color orange looks like. If the person was blind from birth, he would have no idea what orange looks like. But if he recently lost his vision, then the answer is easy.

In trading terms, making money is an individual thing. One person took $100,000, read my "Getting Started in Chart Patterns" book, and turned it into $1,000,000 in 13 months. He invested in ETFs that focused on metals a few years ago. He made it sound easy, but he's the exception to the rule.

An article in the September 2005 issue of Active Trader magazine discussed an accounting firm that handled the tax returns for over 1,000 stock traders. In 2004, 36% of the them showed a profit and just 4% made over $50,000. Can you live on $50k annually?

How did I do it?

My parents were not rich nor did I have rich uncles. Any money I inherited totaled less than $5,000. I didn't win the lottery or marry rich (I'm single) or luck into found money.

In other words, the money I have I worked for. What makes me unique is that I know how to save and how to invest.

I told Randy to cancel his Cable TV and throw away the cell phone. Cut expenses to the bone. How about putting on a few sweaters and lowering the thermostat to 60...or lower, in the winter? Why buy a car every two years like my neighbor across the street? My 1988 Grand Am works just fine for the 400 miles I put on the thing each year. What do I need a new one for (but airbags and such would be nice).

I started out small, investing $2,000 when I saved enough to afford that. I bought stocks between $5 and $20. When I made another $2k, I bought another stock. Eventually, my portfolio grew enough so that when I found a promising candidate to buy, another stock needed to be sold. I had "rotation" among my holdings.

I was lucky enough to begin investing at the start of the bull market in the early 80s. When the market environment changed, so did my trading style. I moved from investing to position trading to swing to day and back again as conditions warranted.

With the growing cost of health care and other expenses, my cost of living is up to $12,000 annually. I have no debt. All I have to do is make 12k and I'm set for a year.

I told Randy that he should paper trade the markets. I've read that the Forex market trends more than stocks. Thus, it should be easier to make money there. But I also warned about the evils of leverage.

I wrote a SFO article about a trader that lost no more than $5,000 in any one trade in his entire career. Then he moved to Forex and fell in love with leverage. He placed a bet using $1.3 million of borrowed money and ended up guessing wrong. Ask Forex or futures traders if they have ever blown out their account...

Another trader I know made $100,000 in his first full year as a trader. His first year! Wow. Unfortunately, his cost of living was, wait for it...$100,000, so he just broke even. The next year, his well-tested mechanical trading system stopped working. Oops. The last I heard, he was trying to sell his house.

Can you make money trading? I can. Maybe you can, too. Some say the real question is this: Can you hold onto your money long enough to learn how to trade?

And it also helps if you buy anything at Amazon.com by going through this website first. Just click on the picture of one of my books on the left. No, you don't have to buy the book, but clicking on the picture takes you to Amazon and it passes a code to them. If you buy anything while there, I receive a small referral fee, but you have to go through this site first, each time. And if you see an ad on this site that interests, you, click on that, too. I have an individual health policy that likes to go up 20% annually and having some extra spending money for food doesn't hurt either!  

-- Thomas Bulkowski

Tuesday 1/25/11. Tutorial Tuesday: The Monsanto Gambit

Here's a swing trade I completed in the last few days, pictured on the right using the daily scale.

This trade began with the ugly double bottom chart pattern. I don't show it in the figure, but the first bottom is in July and the second is in October. The second bottom squeaks by with just over 5% separation between low prices (5% is the minimum). The tall white candle two days before I bought confirmed the ugly double bottom as a valid chart pattern.

The top of a congestion region (not shown) that stretched from late 2008 to early 2010 was at 88, and the bottom of that region was 70. Thus, that was the target area I was shooting for. If the stock performed well, then 88 was a possible upside target based on a Big W chart pattern (the same as the ugly double bottom but with taller sides). However, I felt that 70 was an easy move.

A check of the industry showed that 11 of 12 stocks were trending higher along with the general market. The next earnings were in January, far enough away that I didn't have to worry about the stock making an adverse move on earnings news.

I placed a stop at 58.07 which is just below the recent congestion region. The bottom dashed line is the price level of the stop. The top dashed line is the start of the target area.

I bought the stock on November 8 and received a fill at 62.30 with a potential loss of less than 7% (based on the stop price).

On November 17, I removed the stop "because world events are taking the market lower, allowing the stock to be stopped out. I don't think this is going to fall far (not below 40), so I think I can hold until it recovers from any drop." That's what I wrote in my trading notebook.

I also doubled my position on that day and received a fill at 60.10, averaging down since I had faith that the stock would recover.

Notice that if I did not remove the stop, I would have been taken out a few days after the second buy. And let me also say that this is one of the few times in my trading career where I have removed a stop. It's not something any serious trade does lightly.

My notes about the second buy are thus: "I am going to buy more because this has thrown back to the tight congestion area (buy at support). With an ugly double bottom in place, I think this is a low risk, high probability win scenario. Sell at 70."

The congestion area I show circled in red, and it's also the region I used to place the stop (a penny below the tall white candle in the first part of that area).

As the chart shows, the stock responded and moved higher. With a good gain, I placed a stop at 71.68, which is a penny below the highest low three candles back (at the time). The highest low is at A and that counts as 1. The third low is at B, which is also below a gap. This is an example of using the 3-bar net line, a technique that I have blogged about.

The day before the stock and the general market tumbled (not the Dow industrials, which held up well), I saw the tight congestion region at A and thought of moving up the stop. I didn't because a higher low had not been posted.

The stock hit my stop on January 19 at 71.67, for a gain of 15% on the first trade and 19% on the second.

-- Thomas Bulkowski

Monday 1/24/11. Market Monday: The Week Ahead

• My Prediction
• A Brief Look Back
• Economic Reports
• Options Expiration
• Swing and Position Traders: Chart Pattern Indicator
• Swing Traders: Pivot Points
• Consecutive Price Trends
• Buy-and-Hold: 12-Month SMA
• Earnings, Chart Patterns & Industries

My Prediction

The Dow has weathered the recent turmoil in the markets better than the Nasdaq. The strong push higher in the Nasdaq during the last few months suggested a larger give back when the trend ended. That is what appears to have happened for the last few days.

The Dow, by contrast, just keeps moving higher as the chart on the right shows. But how much higher will it go?

One way to guess at that is to do a 38% Fibonacci extension. Take the difference from B (11,451) to A (9,936) or 1,515, multiply it by 38% or 576 and add that to B to get a target of about 12,000.

My target is just above that, 12,100, but who's counting? The 12,000 number is a round number (numbers that end in 0) which tend to show more resistance. The 12100 number is based on overhead resistance setup by a few spikes/congestion regions in 2007 and 2008.

A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

For the Week...

Year to Date...

Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

Report	Time	A-F Rating	Description
Consumer confidence	10:00 T	B-	Surveys 5,000 households for trends.
New home sales	10:00 W	C+	Shows sales of single-family homes.
Crude inventories	10:30 W	?	My guess: Measures oil inventory.
FOMC Rate decision	2:15 W	?	The Federal Reserves reports on interest rate changes.
Initial jobless claims	8:30 Th	C+	Counts people filing for state unemployment benefits.
Durable goods orders	8:30 Th	B	Measures orders, shipments of goods with lifespans >3 years.
Gross domestic product	8:30 F	B	Measures economic activity; GDP deflator measures inflation.
Michigan sentiment	9:55 F	B-	Consumer sentiment: Measures strength of consumer spending.

Options Expiration

No options expire this week.

Swing and Position Traders: Chart Pattern Indicator

As of 01/21/2011, the CPI had:

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

Swing Traders: Pivot Points

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

• Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
• S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
• If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
• In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
• A move outside of daily R1 or S1 usually does not mean a breakout.
• The odds suggest that the entire week's price action will remain between weekly R2 and S2.
• Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
• Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
• Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Consecutive Price Trends

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

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

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

Buy-and-Hold: 12-Month SMA

Earnings, Chart Patterns & Industries

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

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

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

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

-- Thomas Bulkowski

Thursday 1/20/11. Annual Check List

When I watch the local news while I'm making lunch, they sometimes show someone's place burning down. Then they make a curious remark: "The smoke detectors were not working."

My smoke detectors beep when the battery gets low (the one in the garage goes off every 6 months or so, because it's colder than the house). However, many recommend that you replace the batteries in your smoke detector annually. So, here's the first item on Tom's Annual Check List.

• Change or at least check the batteries in each smoke detector.

Next, go into your medicine cabinet. Authorities will tell you that if it's located in the bathroom, then you're making a mistake. High humidity ruins drugs. Check the expiration date on each bottle and throw out the expired ones. Why? I recall seeing the BBC show Vets, and they told the tale of a poor sap that used flea powder on his dog. The problem was that the powder expired. After expiration, it turned lethal to the dog, too, not just fleas. The defective product was recalled, but many old packages were still around and still being used. Now imagine that the expired drug in your medicine cabinet works the same way. Uh-oh. Throw it out, and you don't have that type of worry.

• Throw out expired medications.

Have you checked your credit report? You can do so for free once each year, for each of the three main credit bureaus. Here's the website: https://www.annualcreditreport.com.

Notice that it has https where "s" is for a secure site. They will ask you for your social security number and other security questions to make sure you are who you think you are, so be prepared. One bureau asked me the street where I lived 30 years ago. I think the sites double as an Alzheimer's test.

• Check your three credit reports annually.

Finally, register your phone on the national do not call list. Here's the website: https://www.donotcall.gov/default.aspx. Notice that it's another secure website. You can enter an existing phone number and check that it's still on the list. Numbers on the list are not removed, so you only have to register once.

• Add your phone number to the national do not call list.

-- Thomas Bulkowski

Tuesday 1/18/11. Market Monday on Tuesday: The Week Ahead

• My Prediction
• A Brief Look Back
• Economic Reports
• Options Expiration
• Swing and Position Traders: Chart Pattern Indicator
• Swing Traders: Pivot Points
• Consecutive Price Trends
• Buy-and-Hold: 12-Month SMA
• Earnings, Chart Patterns & Industries

My Prediction

I show a picture of the Dow utilities index on the weekly scale. It shows an ascending triangle. It's not a perfect triangle because of the excess amount of white space in the middle of the pattern.

To identify an ascending triangle, look for prices to hit a ceiling upon which you can draw a horizontal (or nearly so) trendline. Along the bottom, price forms higher lows and a line drawn beneath them angles upward and joins with the top trendline like that shown in red. Price should cross from trendline to trendline filling the space with price movement, but that's what this triangle is missing.

The breakout from ascending triangles is upward 70% of the time (testing found this).

What this chart tells me is that despite global warming and issues of new pollution control measures the utilities will have to adopt in the coming years, this year should be a good one for utility companies.

A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

For the Week...

Year to Date...

Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

Report	Time	A-F Rating	Description
Monday: Market holiday
Housing starts	8:30 W	B-	Number of homes beginning construction.
Building permits	8:30 W	B-	Measures building permits for new construction.
Initial jobless claims	8:30 Th	C+	Counts people filing for state unemployment benefits.
Existing home sales	10:00 Th	C	Counts sales of used homes.
Leading indicators	10:00 Th	D-	Summary of already known reports.
Crude inventories	11:00 Th	?	My guess: Measures oil inventory.

Options Expiration

The following is courtesy of the Options Industry Council.

Many options expire this week, so traders will be looking to close out their positions ahead of that, and that suggests increased volatility (large daily price swings).

Swing and Position Traders: Chart Pattern Indicator

As of 01/14/2011, the CPI had:

The chart pattern indicator is bullish with 2 of 3 full triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

Swing Traders: Pivot Points

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

• Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
• S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
• If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
• In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
• A move outside of daily R1 or S1 usually does not mean a breakout.
• The odds suggest that the entire week's price action will remain between weekly R2 and S2.
• Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
• Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
• Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Consecutive Price Trends

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

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

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

Buy-and-Hold: 12-Month SMA

Earnings, Chart Patterns & Industries

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

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

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

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

-- Thomas Bulkowski

Thursday 1/13/10. The Best Performing Chart Patterns!

Below, I show a table of the best performing chart patterns for upward breakouts (top half) and downward breakouts (bottom half), sorted by the 2 month's performance.

I scanned my database of chart patterns (the popular ones) and found almost 20,000 samples. I then measured the price move 1, 2, 3 and 6 months after the breakout. I show only a max of 3 months below. This measurement technique is different that the one I used in my books. There, I measured the move assuming a perfect trade, from breakout to ultimate high or low (after which price dropped or rose by at least 20%).

This table is just another way of slicing the same information. However, it does contain surprises.

Flags placing second (upward breakouts) and pennants coming in fourth surprised me. Also notice that the cup with handle doesn't appear in the list. That's because performance is poor -- it ranked 11th, so it didn't make the top 10.

Click on the associated link for more information about a chart pattern.

-- Thomas Bulkowski

Tuesday, 1/11/11. Tutorial Tuesday: What Are ETNs?

Until I read the February 2011 issue of Active Trader magazine ("Exchange-traded notes"), I would have corrected someone saying "ETN" when I thought they meant "ETF." An ETF is an exchange traded fund. An ETN is an exchange traded note. They are the new kids on the block, having been created in 2006 by Barclays Bank, according to the article.

As you might have guessed from the name, ETNs trade debt instruments instead of stocks.

According to an earlier February 2008 article ("The ABCs of ETFs"), "ETNs are debt instruments, meaning the company offering the ETN is assuming all the risk for the product. So if the company were to go bankrupt, the ETN would become worthless. This differs from ETF trusts because, while the company holding the trust could become insolvent, the trust would still exist and could be managed by another firm." That's an important distinction that investors in Lehman Brothers ETN discovered when Lehman failed in 2008.

ETNs are bought and sold like stocks and listed on the major exchanges. ETNs represent a promise by the issuer to deliver a specified return, and that return is disclosed in the terms of the note. ETNs can expire, but often that expiration date is years into the future.

Because an ETN has a fixed return, it helps reduce the tracking error more common to ETFs, according to the 2011 article. Tracking error is the difference between the ETNs return and the return of the underlying security.

Since ETNs are a comparatively recent invention, trading volume can be thin, so check that before investing.

-- Thomas Bulkowski

Monday 1/10/11. Market Monday: The Week Ahead

• My Prediction
• A Brief Look Back
• Economic Reports
• Options Expiration
• Swing and Position Traders: Chart Pattern Indicator
• Swing Traders: Pivot Points
• Consecutive Price Trends
• Buy-and-Hold: 12-Month SMA
• Earnings, Chart Patterns & Industries

My Prediction

I show a picture of SPDR Gold Shares (GLD) exchange traded fund on the daily scale.

The peaks marked A, B, and C could be viewed as a head-and-shoulders top chart pattern. However, I think that the three tops are close enough to the same price that it better qualifies as a triple top. The "head" (point B), for example, is not significantly above the other two peaks, disqualifying it as a head-and-shoulders top.

Having said that, a neckline connecting the two armpits appears on the chart as line D. When price closes below this line, then it suggests a trend change.

Line E, is the usual confirmation line that would qualify the triple top as a valid chart pattern once GLD closed below it. That hasn't happened yet. Thus, all that is really shown on the chart are three bumps and not a triple top.

It's possible that once price closes below E, that GLD will retrace back to its launch price. That would mean a decline back to 113, the July low. Often price stops before reaching the launch price, so a better target would be 116 to 119, based on this chart. On the longer-term chart, there is support at 122-123, which is a better target.

Will a drop of such magnitude occur? It certainly is possible. My guess is that yes, a GLD will drop to the 120 to 124 region, but it will take months for that to happen.

Alternatively, the fund could bust the triple top by closing above peak B, the highest of the three peaks. That would suggest a strong move upward.

A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

For the Week...

Year to Date...

Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

Report	Time	A-F Rating	Description
Wholesale inventories	10:00 T	D-	Wholesale sales and inventory statistics.
International trade	8:30 W	C+	Import/export prices, trade balance. US economy vs others.
Crude inventories	10:30 W	?	My guess: Measures oil inventory.
Treasury budget	2:00 W	D	Tracks budget deficit. Important in April (tax filing).
FEDs Beige book	2:00 W	?	Reports on economic conditions.
Initial jobless claims	8:30 Th	C+	Counts people filing for state unemployment benefits.
Producer price index	8:30 Th	B-	Measures wholesale goods cost. An indication of future inflation.
Trade balance	8:30 Th	C+	Signals balance of exports & imports.
Consumer price index	8:30 F	B+	Inflation report. Measures cost of goods and services.
Retail sales	8:30 F	A-	Reports total retail sales (not services). Are people spending?
Industrial production	9:15 F	B-	Production of utilities, mines, and manufacturers.
Capacity utilization	9:15 F	B-	Gauges economic activity, hints of inflation.
Business inventories	10:00 F	C-	Reports manufacturing, wholesale, retail inventories.

Options Expiration

No options expire this week.

Swing and Position Traders: Chart Pattern Indicator

As of 01/07/2011, the CPI had:

The chart pattern indicator is bullish with 2 of 3 full triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

Swing Traders: Pivot Points

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

• Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
• S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
• If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
• In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
• A move outside of daily R1 or S1 usually does not mean a breakout.
• The odds suggest that the entire week's price action will remain between weekly R2 and S2.
• Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
• Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
• Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Consecutive Price Trends

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

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

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

Buy-and-Hold: 12-Month SMA

Earnings, Chart Patterns & Industries

Earnings season will be starting in about 4 days.

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

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

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

-- Thomas Bulkowski

Thursday 1/6/10. Putting Noise to Work: New Findings

I've been exploring noise, something I wrote a tutorial on and blogged about. The research is now paying fruit and I'd like to share some of the findings with you.

I started with double bottoms, a chart pattern that most of you are probably familiar with. I measured the noise in the month, 3 months, and 6 months leading to the start of the first bottom and tracked the post-breakout performance.

The most significant performance improvement came from a 6 month noise look back (meaning I looked at the noise 6 months before the start of the chart pattern). Stocks with noise below the median improved performance by 26% compared to those with above median noise!

The next finding concerns the throwback rate. Double bottoms with below median noise suffered more throwbacks than did those with above median noise.

This surprised me. The results showed the same trend regardless of the 1, 3 or 6 month look back (and I had over 2,000 double bottom samples).

Then I looked at noise after the breakout. I found that the same throwback trend occurred (meaning more throwbacks occur after chart patterns with below median noise) with the various types of double bottoms, regardless of the look back used.

A year or two ago, one person emailed me with the idea about how "trendy" a chart pattern was. My research on noise is beginning to shed light on that issue. I separated the noise into the various types of Adam and Eve double bottoms. Eve & Adam double bottoms outperform tremendously when you consider noise into the picture. The average move from the breakout to the ultimate high (a perfect trade, so don't expect to duplicate it) is 28%. If the double bottom shows below median noise, the performance shoots to 48%. Adam & Adam double bottoms also tie with a 48% gain. Those two types of double bottoms show the best post-breakout trends (they are "trendy").

This says that you should concentrate on Eve & Adam or Adam & Adam double bottoms with below median noise. Samples are somewhat few (157 for EADBs and 238 for AADBs), meaning the results may change with additional samples. I would expect the trend to remain but the performance numbers to narrow somewhat with additional samples.

-- Thomas Bulkowski

Tuesday, 1/4/11. Tutorial Tuesday: 5 Tips to Determine Market Direction

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. 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.

3. Tall candles with unusually long shadows, like the ones pictured on the left, suggest that price bounced off support or resistance. In non-candle speak, these are called spikes or tails. 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.
4. 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.
5. Once the session begins, keep an eye on the clock. Why? Because price often reverses 15 to 20 minutes into a trading session. 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 reversal 15 to 20 minutes into the session and then buy long.

-- Thomas Bulkowski

Monday 1/3/11. Market Monday: The Week Ahead

• My Prediction
• A Brief Look Back
• Economic Reports
• Options Expiration
• Swing and Position Traders: Chart Pattern Indicator
• Swing Traders: Pivot Points
• Consecutive Price Trends
• Buy-and-Hold: 12-Month SMA
• Earnings, Chart Patterns & Industries

My Prediction

No prediction this week because it's late Sunday night and I've run out of time today. Let me give you a quick review of the year's performance instead.

The model portfolios had a mixed year.

A Brief Look Back

The following are economic reports that moved the markets last week. The numbers refer to the close-to-close move in the Dow industrials.

For the Week...

Economic Reports

The following information is derived from yahoo!finance and sometimes Bloomberg.com with times local to the east coast.

Report	Time	A-F Rating	Description
Construction spending	10:00 M	D	Covers residential/non-residential/public spending on new construction.
Factory orders	10:00 T	D+	Durable/non-durable goods orders w/factory inventories.
FOMC Minutes	2:00 T	?	Minutes of the prior Federal Reserve meeting.
Auto & truck sales	3:00 T	C-	Monthly sales of domestically produced vehicles.
Crude inventories	10:30 W	?	My guess: Measures oil inventory.
Initial jobless claims	8:30 Th	C+	Counts people filing for state unemployment benefits.
4 Employment reports	8:30 F	A	Nonfarm payrolls, unemployment rate, avg workweek, hourly earnings.
Consumer credit	2:00 F	D-	Measures auto, credit card and other debt.

Options Expiration

No options expire this week.

Swing and Position Traders: Chart Pattern Indicator

On 12/31/2010, the chart pattern indicator (CPI) had:

The chart pattern indicator is bearish with 2 of 3 half triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

Swing Traders: Pivot Points

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

• Seekinger doesn't look at the range of S2 to R2 as support and resistance levels. Rather, he considers them oversold (S) and overbought (R) areas.
• S2 to R2 range of values across daily, weekly, and monthly periods: If two values are close together then they lend more significance to the area.
• If the market trends on day 1, the odds rise tremendously that the market will be range bound between daily S1 and daily R1 the next day.
• In a quiet market when traders are waiting for an important earnings announcement or economic report, look for daily R1 and S1 levels to hold and for the market to return to the daily pivot.
• A move outside of daily R1 or S1 usually does not mean a breakout.
• The odds suggest that the entire week's price action will remain between weekly R2 and S2.
• Avoid going long when the market moves above weekly R2 (it's overbought) and avoid going short when price moves below weekly S2 (oversold).
• Consider going short at weekly R1 or long at weekly S1 with a profit objective of the weekly pivot.
• Consider going long at weekly S2 or short at weekly R2 with a profit objective of weekly S1 or R1, respectively.

Here are the formulas:

Consecutive Price Trends

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

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

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

Buy-and-Hold: 12-Month SMA

Earnings, Chart Patterns & Industries

Earnings season will be starting in about 11 days.

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

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

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

-- Thomas Bulkowski