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Thursday 3/31/11. Psst. Wanna Make 25% in 4 Months?

I was playing with common stock offerings, trying to build a trading setup on the behavior of the event pattern. Since price drops after an offering, I tried to short it and lost about $63 per trade on a $10,000 investment.

I tried going long and made only $53 per trade. Yawn.

Then I tried something new and made $2,500 per trade (on average). What's better is the setup has never failed (100% win/loss ratio)! We've struck the mother lode! Well, there is a tiny problem. It's called drawdown.

Here's what I did. I looked at 267 common stock offerings from March 2004 to November 2009, which includes the recent bear market.

After the company prices the common stock offering, do the following.

• If the current high is more than 10% below the pre-announcement close, place a buy stop at the high price plus a penny. This is optional, but I wanted at least a 10% profit per trade.
• Trail the stop lower each day until buying in.
• Place a limit order to sell at the closing price the day before the company made its announcement.
• Cash your check at the bank. It's Miller Time!

That's all there is to it. The secret, is buying and holding, of course, and being willing to ride out any dips along the way.

For example, shown is a picture of Atlas Air Worldwide on the daily scale. Point D is the day price closed before the offering of common stock. It's the target price for the trade. The company announced the offering at A (but did NOT price the offering yet) and price gapped lower. They announced the PRICE of the offering at B. Many times, the announcement and pricing occur on the say day, but not in this example. Wait until they PRICE the offering.

From B onward, place a buy stop a penny above the day's high and lower it each day as the high price drops. That will get you into the stock at the opening price at C. The percentage move from C to D should be at least 10%. Otherwise, skip the trade (in other words, don't actually place a limit order until the high price is more than 10% below D. You don't have to follow this step).

Once you are into the trade, place a limit order to sell when price hits D.

That's going to take some time, so hold your nose while the stock fluctuates. In both bull and bear markets, the stocks are going to drop below the purchase price. One in my study dropped 84% before recovering. If you want to limit drawdown to 10% (think of placing a stop 10% below the buy price), then gains drop from $2500 to $560, on average. Yes, using stops are painful...

The trade shown here made 33% in 34 days.

Here's the numbers.

• I included commissions of $10 per trade ($20 round trip)
• I invested $10,000 per trade (I did not allow profits to accumulate, so each trade began with 10k).
• The average gain for bull market trades is $2,500.35 in 65 trades, or 25% per trade.
• For those trades, the average drawdown per trade was 14%, median was 10% and max was 55%
• The hold time averaged 116 days (about 4 months)

• If including bear market results...
• The average gain is $2,697.91 (27%) in 71 trades.
• The drawdown per trade averages 17%, median is 11%, and maximum is 73%.
• The hold time average is 127 days or about 4+ months

• If you DON'T require a 10% minimum profit margin (the distance from C to D in the figure), for bull and bear market trades...
• The average gain is $1,387.69 (14%) in 182 trades.
• The drawdown per trade averages 11%, median is 6%, and maximum is 84%.
• The hold time average is 75 days or about 2.5 months.

-- Thomas Bulkowski

Tuesday 3/29/11. Tutorial Tuesday: The Nvidia Trade

Not every trade I made is a winning one and this is an example. I show Nvidia on the daily chart.

I saw a high and tight flag forming in Nvidia. A HTF occurs when price doubles in less than two months. That occurs starting at A and rising up to B. The flag portion usually isn't a flag at all, but in this case, it is (C).

I waited for price to close above the top of the flag/flagpole before buying the stock as the chart shows. I checked the industry strength (of the 20 stocks in the industry, between 14 and 19 were up over 1 to 6 months before the buy), the stock was up and so was the market over the same 1 to 6 month period.

Noise for the stock was low, at 30% over 1 month and rising to 43% over six months, with strong strength relative to the S&P 500 index. That meant the stock was outperforming the general market.

Volume was not consistently rising over the prior 3 weeks, suggesting an increased chance of failure, a hint that I ignored.

A volatility stop of 15% below the current price was too far. I snuck it below the flag low, shown by the dashed line, at 21.73. On the up side, I was looking for a 50% move, to 36.

The stock scored +2, suggesting a higher probability of reaching the median rise of 31.07.

Earnings were due Feb 11, just outside of the 2 week window. On January 25, I received a fill at 24.23.

As the stock moved higher and then seesawed up and down, I listened to the reports that said the stock was a sell, that traders should take profits. I hoped that they were wrong, but traders listening to those voices heard what they wanted to hear.

Instead of resuming the move upward, the stock collapsed and hit my stop at 21.73 on March 1, for a loss of 10.5%.

Here's what I wrote about the sell reason: "Stopped out at 21.73. I checked in the morning and the stock was up, so instead of closing out the trade for a small loss, I decided to let it ride. The market reversed and near the close, it hit my stop, dropping 4.4% in one day and expanding the loss. Ouch. I had a feeling this one wouldn't work out... Maybe I should have taken the AADT confirmed, as a warning."

The AADT is an Adam & Adam double top chart pattern shown at D and E, confirmed when price closed below the valley between the two peaks, F, later that month.

-- Thomas Bulkowski

Monday 3/28/11. 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 chart shows the Dow industrials on the daily scale. Yes, it's true. The daily scale.

Price has been on an upward tear since bottoming at D. That suggests it needs a rest.

I show overhead resistance at A, B, and C. Price is within the BC region now, as the chart shows, setup by the thick block of congestion in late February and early March.

With the height of the candles getting shorter, it suggests a slackening of upward momentum. Thus, I expect the upward price trend to stall sometime this week. Price will probably bounce between B and C while it catches its breath. Then I expect an upward push through A, but it could also stall there.

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.
Consumer confidence	10:00 T	B-	Surveys 5,000 households for trends.
Crude inventories	10:30 W	?	My guess: Measures oil inventory.
Initial jobless claims	8:30 Th	C+	Counts people filing for state unemployment benefits.
Chicago purchasing managers index	9:45 Th	B	Monitors regional manufacturing activity.
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.
Construction spending	10:00 F	D	Covers residential/non-residential/public spending on new construction.
Auto & truck sales	3:00 F	C-	Monthly sales of domestically produced vehicles.

Options Expiration

No options expire this week.

Swing and Position Traders: Chart Pattern Indicator

As of 03/25/2011, the CPI had:

The chart pattern indicator is bullish with 1 of 3 full triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

Swing Traders: Pivot Points

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

• 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 over.

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 3/24/11. A Trade With Pride!

In mid January, I was hunting around for stocks to buy and found one in Pride (PDE), shown in the chart on the daily scale.

I looked at insider selling and wrote, "1/16/11 Insider selling at $20-30, but it looks to be a monthly sell program of small shares (500 by one insider). Many other insiders have sold since October, also monthly. Company is a deep water driller with long-term contracts in place for most of their rigs. Earnings consensus leans toward selling. Earnings due Feb 14."

I felt that the upside was 45, which became my long-term target. I scored the triangle and found it had a +1 score with a target of 42.84. That means the probability of the stock reaching 42.84 was good.

I checked the noise and found that it was only 36% over the prior month and 47% over 3 and 6 months. That suggested the stock was trending. In this case, however, the trends were short lived -- up and down swings of straight-line runs as the chart shows.

The price trend of the stock and market were up over 1, 2 and 6 months. The industry was up in 12 of 14 stocks over 1 month, but over 2 and 6 months, all 14 stocks were rising. That suggested a coming turn in the industry (or at least isolated weakness). I chose to focus on the positive, that the industry was moving up.

The average volume was rising over the prior 3 weeks, suggesting a lower failure rate. The stock was also outperforming the S&P 500 and there was a 35% chance that the 1-day downward trend would continue. Most of this information is found by my computer, which also told me that the best day to buy this stock was Thursday.

This was supposed to be a buy-and-hold investment based on a busted triple top (numbered in the chart), a congestion breakout (circled), and an ascending triangle. I show the triangle in red.

Here's what I wrote in my notebook as my buy reason: "I like the oil strength, with gulf drilling resuming. I think this will take a hit this quarter, but will recover by next quarter. This is due to the BP blowout and deep water drilling halt. My question is this: why hasn't this stock done better like HERO has?" [FULL DISCLOSURE: I also own HERO] "This is an ascending triangle play. It shows congestion here, but I expect that will lead to a good move higher. It's a buying opportunity.

I bought on January 18 and received a fill at 33.74 with a stop at 30.93, below the volatility stop recommendation of 31.71 and below a recent minor low.

Two days after I bought, the stock started sinking. That's one reason why I dislike ascending triangles, but since this was buy and hold with a stop in place, I put it out of my mind.

On approximately, February 8, I placed a limit order to sell if the stock reached 41. Why 41? Because the gap up was created by a takeover offer by Ensco valued at 41.60. I was willing to give up the 60 cents to avoid the risk of a deal collapsing or being locked in for 6 months until the thing closed (or however long it takes).

Usually, stocks with takeover offers flat-line like a dead animal, but not this one. With the price of oil rising, the value of the deal also climbed. Hence the stock moved higher and took me out at 41 but continued moving up.

Since I wasn't interested in taking stock in the merged company, I decided to sell and made 21.4% in about 6 weeks.

-- Thomas Bulkowski

Tuesday 3/22/11. Tutorial Tuesday: A Unique Question

Yes, that's a bee pictured. I think he's listening to his ipod or kissing his sweet ass good-bye.

A week or so ago, Dhiren asked a question that hasn't been posed before, but it's a good one. He asked if it's better to buy a stock before or after the breakout.

I've done it both ways. Before I get to that, let's talk numbers.

Many years ago, I did a study of double tops and bottoms. I counted the number of patterns that confirmed (price closed beyond the breakout price) versus those that didn't make it.

For double tops, I found that price failed to close below the valley between the two peaks 65% of the time. That means price continued rising.

For double bottoms, the failure rate was 64%. That means price continued dropping 64% of the time instead of rising far enough to close above the peak between the two valleys.

Unfortunately, I haven't checked which works better on actual trades. The numbers suggest waiting for the breakout gives the best results. I know that when I buy before the breakout, it seems to take forever for the stock to actually break out and sometimes it doesn't.

Waiting for the breakout often means buying at a higher price, suggesting higher risk of failure (a reversal). I've mentioned that if you can't buy within 5% of the breakout price, then skip the trade and wait for a throwback. If you buy after a 5% rise, you increase the risk of failure and lower profits, too. Don't chase price. Wait a week or two and there's a 55% chance that price will throwback, allowing you to buy in at a good price.

-- Thomas Bulkowski

Monday 3/21/11. 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 major US indices didn't show anything exciting this week nor did gold or silver ETFS. So, I decided to look at the Japan index fund (EWJ), shown in the figure to the right.

As you can see, an Adam & Adam double top at A and B points the way lower when it confirms at C.

An Adam top differs from an Eve top by its shape. Adam tops are pointed and narrow looking. Often they are composed on one long spike. Eve tops are rounded and wider. They can also have spikes but the spikes tend to be shorter and more numerous.

Why the emphasis on the type of top? Because there are slight performance differences between the four variations of Adam and Eve tops (and bottoms, for that matter).

Confirmation means that price closes below the valley between the two peaks. By the time this double top confirmed, the exchange-traded fund was tumbling, gapping lower.

What does the figure tell me? My guess is that price will continue to recover.

I think that the devastation of the tsunami and earthquake represent an opportunity for their economy to jump start. All of that rebuilding activity will create many jobs. But first, the have to survive, and that won't be easy.

$ $ $

My new car arrived on Saturday. I tried to have my insurance cover it on Friday evening when I found out it would be ready the next day (I didn't have collision or comprehensive) and my agent was closed for the weekend. The national toll-free number couldn't help me either. But my agent checked his email and phone message and fixed me up anyway. Thanks Carl!

The dealership couldn't find any cars that I wanted (base car with security and cargo net as options but those are installed by the dealer) so they found one in Oklahoma and drove it here. That meant an odometer reading of 215 miles, thank you very much. I asked them to throw in another option, like floor mats (too expensive) or cargo cover (too expensive). Sigh.

Spent most of the day Saturday and Sunday reading the 6 or 7 manuals that come with the car plus trying to figure out how to store my fire extinguisher, tools, and other junk in the back of the car. Looks like I'll have to build some type of box to hold the items and to keep them from view. In other words, I folded down the back seats to open up the cargo space. That means anything placed back there becomes a Tomahawk missile during a hard stop. Gaddafi knows what I'm talking about...

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
Existing home sales	10:00 M	C	Counts sales of used homes.
New home sales	10:00 W	C+	Shows sales of single-family homes.
Crude inventories	10:30 W	?	My guess: Measures oil inventory.
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 03/18/2011, 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 over.

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 3/17/11. How Now Dow?

I was talking to a financial consultant yesterday about the Dow, so I thought I'd share a few thoughts with you about where I think the market is headed in the coming days and weeks.

The chart shows a falling Dow industrials (daily scale) with the industrials seeming to gather steam. I thought that the decline would end at 11,800 but clearly that's not going to happen since price closed at 11,613 today. Thus, the next closest support is 11,000 to 11,400 but the Dow could turn here because there is some minor support at 11,600.

Those that believe volume shows support will see the spike in mid December at 11,400 as being a key area. Thus, that would be my guess where price turns.

Having said all of that, the nuclear situation in Japan could be a problem for weeks unless they cover the reactors with concrete. Thus, each day could be an adventure, either a buying opportunity or a panic sell.

$ $ $

Yesterday, I completed a deal for a new car: Scion XD. I know. You've never heard of it. It's a Toyota (that's a-toy-ot spelled backwards). They gave me $750 on my 23 year old Grand Am and included a 42" Samsung TV, all for less than $18,000 (my final cost). Since I put on all of 500 miles a year, this car should last a lifetime. Reliability is predicted to be top ranked by Consumer Reports, and I loved the no haggle pricing scheme Scion has. They took my trade in, gave me a new XB (not XD. The XB looks like a box on roller skates) to drive while I'm waiting for my car to arrive.

I can't wait for the TV. I feel as if I bought a $17,700 TV and the car came for free. I'll be my first TV without a convert box attached. Yippee!

-- Thomas Bulkowski

Tuesday 3/15/11. Tutorial Tuesday: A Swinging Idea

Ferro appears on the chart using the daily scale.

Look at the drop from A to B. It's a straight-line run down from 6 to 2, or 4 points. Add those 4 points to A and what do you get? C.

This is an example of what Stan Weinstein calls the swing rule. Measure the drop from A to B and add it to A to get a price prediction.

Obviously, price must rise above D for this to work. That can be a tall order since D is often a resistance area setup by the prior peak at A.

This setup is also rare. I don't know if the straight-line run down (AB) or up (BD) is significant. I don't know how accurate the prediction is either. However, I plan to test this setup to see what it reveals. Until then, perhaps you can use this to help predict how far price is going to rise once it "busts" a potential double top.

-- Thomas Bulkowski

Monday 3/14/11. 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 the Dow industrials on the daily scale.

Circled at A is a congestion region that I believe will act as support in the coming days.

Price at B has dipped its toe into the top of the region as if reluctant jump in.

Compare area B with C. Both have price moving down into the support region after a strong move up but C made a strong thrust up, breaking out upward from the support area.

Region B seems to be staging a downward breakout. Will the support zone that's underneath the B region at A actually cause price to rebound? Perhaps this week's market action will answer that.

I believe that it will, that the congestion region at C is about a month long and B is almost as long. This week could be the time what price makes a determined breakout. My guess is a drop to the bottom of the A region before a pullback and continued move up.

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
International trade	8:30 T	C+	Import/export prices, trade balance. US economy vs others.
FOMC Rate decision	2:15 T	?	The Federal Reserves reports on interest rate changes.
Housing starts	8:30 W	B-	Number of homes beginning construction.
Building permits	8:30 W	B-	Measures building permits for new construction.
Producer price index	8:30 W	B-	Measures wholesale goods cost. An indication of future inflation.
Crude inventories	10:30 W	?	My guess: Measures oil inventory.
Initial jobless claims	8:30 Th	C+	Counts people filing for state unemployment benefits.
Consumer price index	8:30 Th	B+	Inflation report. Measures cost of goods and services.
Industrial production	9:15 Th	B-	Production of utilities, mines, and manufacturers.
Capacity utilization	9:15 Th	B-	Gauges economic activity, hints of inflation.
Leading indicators	10:00 Th	D-	Summary of already known reports.

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 03/11/2011, 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 over.

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

Saturday 3/12/11. Saturday Supplement

First, I'd like to thank the many people that suggested tips on how to fix my car and to those that gave me their opinion about buying a new one. I spent 3 hours at the library yesterday reading Consumer Reports and studying what exactly I was looking for. I'll do more of that today on the internet and then go window shopping next week.

Second, a reminder... I've only receive a few trading horror stories so far. With over 30,000 people visiting my website almost 85,000 times a month, I'm sure you can do better. Here's my request.

If you've ever blown out your account (large loss) or made a big win, or even a trade you're especially proud of, then I'd like to hear about it. Tell me your story. I'm looking for stories to include in my new book, anecdotes that will spice up an otherwise boring read. Perhaps you can help. If so, then send the details to me at the below address. I make no guarantees and often change the names to assure anonymity.

Thanks again!

Finally, turn your clocks ahead one hour at 2 AM tonight. This is a ritual we in the US do twice a year, but no one knows why.

-- Thomas Bulkowski

Thursday 3/10/11. The Doctor Visit

Have you ever had a loved one get taken to the hospital and had trouble sleeping because you're worrying so much? That's what happened to me starting on Saturday. Since then, I've been waking up at 3 AM to 5 AM, unable to sleep. I am speaking, of course, about my car. When I tried to start it on Saturday, it was dead. Even the check engine light had trouble coming on.

Dead battery, you say? Yes. So I whipped out my Wal-Mart emergency battery that you put in parallel with the car's battery. It's like having jumper cables except you don't need another car. It made the dash board lights glow like they should have, but the car wouldn't start. Wouldn't even crank over. Not even a clicking sound.

I disconnected the car's battery and charged it, put it back in the car and still it wouldn't start. It wouldn't even turn over.

I took my ohm meter and measured the resistance across the battery leads (not the battery, but the batt's wires leading to the car. Almost a short. Then I disconnected the fuses, one at a time, to see if I could isolate which circuit was shorting out. All of the circuits checked out.

I stopped at that point and called a tow truck which carted my car to the garage about a mile away. They reported that the car started without a problem! They checked out the wiring, fuses, everything they could think of and couldn't find a problem. They held the car overnight and checked it in the morning. No problem. Kept it another day, too.

This morning (Wednesday), I walked down there since they didn't answer their phone. It turns out they are moving and no one was there except the owner. He couldn't reproduce the car's problem.

So, I picked up my car, paid $65 to cover the towing and left. He spent countless hours trying to reproduce the problem and didn't charge me anything. Plus, he offered $500 for my 23 year old Grand Am. When I find the right new car, for which I am now shopping, I'll give him a call.

I finally find a mechanic I trust and he's moving. Go figure. Maybe tonight I'll be able to sleep, but I think my car is telling me it's time for a new one.

If you have a recommendation for a car (or one to avoid), let me know at the below email address.

-- Thomas Bulkowski

Tuesday 3/8/11. Tutorial Tuesday: The FTO Trade

In November 2010, I became interested in Frontier Oil (FTO) stock, shown in the figure. Buy indications? The stock was trending higher along with the industry but not the S&P 500 index.

On the weekly scale, I found a flat base pattern.

The commodity channel index (CCI) said to buy the day before. The RSI and Bollinger bands said nothing of interest. I usually ignore all three anyway...

I saw overhead resistance at 17 and 25, so with the stock trading at 15.50, there was nearby overhead resistance. I considered this a long-term holding, so I used no stop.

This is what I wrote in my notebook about the trade: "Chart pattern traded: Descending triangle, trendline breakout, and flat base. Descending triangle is long-term from peak in June '09, but bottom is irregular. Trendline is on top of the descending triangle. Flat base goes back to Jan 2009.

"Buy reason: Upward breakout from down trendline on weekly scale since June 09. Overhead resistance at 17 is going to be a problem. And who knows about environmental regulation going into 2012. I don't see this doing much, but it could begin trending based on the monthly scale and past rises followed by 1-2 years of flat movement."

I bought the stock and received a fill at 15.47 on 11/26/10.

Fast forward to mid February. With price shooting up in a fast, straight-line run, I decided to protect some of my profits with a stop. From my notebook, "2/16/11. I placed a stop below February 14's low, at 24.68. This is 3-lines back (including today's). I want to make sure I capture the rapid rise upward with a trailing stop."

I raised the stop again, on 2/17. "2/17/11 stop raised to 25.35, below 3 day low."

I show the February 17's candle at A so the low three lines back (including A) is where the dashed line is. A week later, the stock hit my stop and took me out at 25.35 for a 64% gain in about three months.

-- Thomas Bulkowski

Monday 3/7/11. 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 haven't discusses silver for a long time, so I show a weekly chart of the exchange traded fund SLV. According to yahoo, "the objective of the investment is to reflect the price of silver owned by the trust less the trust's expenses and liabilities. Although the fund is not the exact equivalent of an investment in silver, they provide investors with an alternative that allows a level of participation in the silver market through the securities market."

Price begins its move up at A and completing its rise at B. The height of this run is 30.44 - 17.48 or 12.96. Let's call it 13. If you add the height to the low at C, 26.03, you get a target of 38.99. Let's call that 39. The ETF is currently at 34.69, so it still has more to go. Or does it?

Studies of the measured move, of which I write, shows that the AB leg is 30% shorter (70% as long), on average, than the first leg: 46% gain in 87 days versus a rise of 32% in 60 days.

Thus, if I multiply the first leg length by 70% and add that to C, I should get a more accurate target: 13 x 70% + 26.03 or 35.13. The current close at 34.69 is close to the target, suggesting the move is coming to an end. Since the ETF has no prior resistance at this level, it could continue to move up, but the numbers say that the move higher will be reaching into the thin air...

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 credit	3:00 M	D-	Measures auto, credit card and other debt.
Wholesale inventories	10:00 W	D-	Wholesale sales and inventory statistics.
Crude inventories	10:30 W	?	My guess: Measures oil inventory.
Initial jobless claims	8:30 Th	C+	Counts people filing for state unemployment benefits.
Trade balance	8:30 Th	C+	Signals balance of exports & imports.
Treasury budget	2:00 Th	D	Tracks budget deficit. Important in April (tax filing).
Retail sales	8:30 F	A-	Reports total retail sales (not services). Are people spending?
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

On 03/04/2011, the chart pattern indicator (CPI) had:

The chart pattern indicator is bearish with 1 of 3 half triangles showing (). Additional triangles are a measure of strength with solid triangles meaning a more reliable signal than half triangles.

Swing Traders: Pivot Points

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

• 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 over.

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 3/3/11. Blog Questions Answered!

Two people asked a similar question in the last week or two so I thought I'd address it here. How do you make use of Wednesday's and Friday's blog posts?

Let's take What's Hot Wednesday's first. I push a button on my computer and it combs my database of 660 securities and finds those with the lowest noise and best performance since the prior week.

If you want to know what stock is likely making a straight-line run, then look at the list of noise stocks. Those with low noise tend to have little price overlap. Holly (HOC) started moving back in September and made a nice straight-line run until about two weeks ago when the markets became uneasy. It appears on the list for 1, 3, and 6 month low noise. If you're a momentum player, this is a wonderful list to look at and maybe buy high and sell higher.

I look at which stocks have made big moves in the past week, both up and down. If you want to diversify, then look at the country list to see what ETFs are doing well. Finally, looking at the stocks and seeing more than one from the same industry will tell you which industry is doing well and where your investment dollars should be placed. Food Processing appears on two lists, three times and a check of the stocks shows that they are moving up as well. Again, here's an opportunity to make a momentum play.

Let me be clear: I'm NOT suggesting you buy any of these stocks. But it's a starting place to understand what the market is doing, and what sectors are moving.

Friday

Pattern Trading Setups for the Weekend comes out on Friday. I look at the numbers in the preamble to see how accurate they are. How many chart patterns were found and what does it mean? That's in bold before the tables.

The table below the preamble shows the chart patterns that I found during the prior week. These are the patterns I MANUALLY found, not those found by Patternz. They may or may not have confirmed as a valid chart pattern. Clicking on the pattern's name will take you to the website page describing them. Clicking on the symbol will give you details about the stock and pattern. These details may not be readily available to you, but it's something I can dig up easily enough.

Along the right side of the table is a list of industries. Since most patterns are reversals, seeing an industry pop up too often suggests that it's in danger of turning either up or down. That's hard to pick out from the list. You can probably copy the list into a spreadsheet and sort, just to get a count of an industry you're thinking of buying.

If you have a pet pattern that you like to trade then this is the place to go. The ones I've found are listed here. It's a starting place for additional research.

I know of one website that charges for information such as this...and you're getting it all for free. Make good use of it, but do so carefully.

-- Thomas Bulkowski

Tuesday 3/1/11. Tutorial Tuesday: The Teradyne Triple

I show a picture of Teradyne (TER) on the weekly scale. It's a trade for which I was recently stopped out.

I first began having an interest in buying Teradyne in mid April 2009 after price retraced 38% from the move up from the March low. That would have put me into the stock at 4.55. However, I delayed entry for about two weeks. By then the stock had reached 5.94, the price at which it filled.

As an explanation about the buy, I wrote in my notebook, "Big W, Eve & Eve double bottom. S&P rates this a buy, but with a high risk assessment. Sees a 56% decline in revs in 2009, but a 41% increase in 2010. Ford says sell. This is not a value play."

The bear market had just ended, so buying anything was a high risk proposition (meaning no one really knew if the bear was dead). I saw upside potential of 9 to 12 or even 13.

By the end of June, the rating agencies hardened their stance. I wrote, "6/26/09 S&P strong buy. Says that the worst is behind the company in terms of sales. Has no long term debt. Expects sales to improve in 2nd half. Ford says strong sell!"

My notes say that I placed a sell order on April 27, 2010, if the stock closed below 9.93. However, before price dropped that far, I wrote this:

On the chart, the dashed lines are overhead resistance areas. The thicker one at the top is my optimum target. Since price had closed above that area, I was happy to take profits if I got stopped out.

The stock hit my stop on February 23 on market weakness. I made 194% on the trade or almost a triple.

-- Thomas Bulkowski