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- Thursday, 11/27/2008. Holiday. No blog today.
- Wednesday, 11/26/2008. New Targets for the Indices.
- Tuesday, 11/25/2008. Tutorial Tuesday: The Nature of Bottoms
- Monday, 11/24/2008. Option Trading Tips from Greenwalt
- Thursday, 11/20/2008. Falling Wedge Breakout in the Nasdaq
- Wednesday, 11/19/2008. Double Top in the S&P 500.
- Tuesday, 11/18/2008. Tutorial Tuesday: Why The Need for Speed?
- Monday, 11/17/2008. More Down? Hints in Health Care.
- Thursday, 11/13/2008. Bounce Day Today!
- Wednesday, 11/12/2008. Does Head-and-Shoulders Bottom Mean Up?
- Tuesday, 11/11/2008. Stocks: 5 Potential Buys.
- Monday, 11/10/2008. New 3x ETFs.
- Thursday, 11/6/2008. The 5% Rule: When Not to Buy.
- Wednesday, 11/5/2008. What are the Best and Worst Industries?
- Tuesday, 11/4/2008. Where is the Dow Headed?
- Monday, 11/3/2008. Chart Pattern Indicator Review.
Thursday, 11/27/2008. Holiday. No blog today.
Today is a US holiday, so the markets are closed, and I am making lasagna with green beans, garlic bread, salad and "cherry delight" (like a cheese cake, only lighter) as dessert. Woo-hoo!
-- Thomas Bulkowski
Wednesday, 11/26/2008. New Targets for the Indices.
The following quotes are taken from Tom’s Targets, above, and I added a brief explanation for the new target. For the full history, click on the associated target at the top of the page.
The red arrows () at page top beside the target means that price has to drop to reach the target. Green arrows () mean it has
to rise to the target.
The current price is as of the close on Tuesday 11/25.
The indices are moving up as a pullback to the recent congestion area and the Obama effect. I believe that once the hype of his economic team and plans dies down, the downward trend will
resume. My price targets reflect a resumption of the bear market.
Dow Utilities: 370.40. Target: 300 by 1/1/2009
New target: As of 11/23, I am keeping the same 300 target, but giving the index more time: 1/1/2009.
Dow Transports: 3,300.13. Target: 2,800 by 1/1/2009
New target: As of 11/23, the index hit my target on 10/24. I see a continued drop to 2800 by 1/1/2009. That would match a head-and-shoulders
bottom on the weekly scale from Feb to May 2004.
Dow Industrials: 8,443.39. Target: 7,000 by 1/15/2009
New target: As of 11/23, the index hit my target 3 days ago. I believe it is now pulling back to the congestion area. That will continue for
a few days but it will resume the downtrend after that. New target is 7000 with a date of 1/15/2009. That would be near support from valleys/peaks in 10/1997, 9/1998, and 10/2002.
Wilshire 5000: 8,438.52. Target: 7,000 by 1/15/2009
New target:As of 11/23, the index hit my target on 10/24, so I am resetting it to 7000 by 1/15/2009. My data does not extend before 2000, so
this is just a guess.
Nasdaq Composite: 1,472.02. Target: 1,200 by 12/15/2008
New target:As of 11/23, the stock hit my target of 1550 on 10/24. I now see it dropping to 1200 by 12/15. That would match support on 4/1997 and 7/2002.
Russell 2000: 436.80. Target: 350 by 12/15/2008
New target:As of 11/23, the index hit my 475 target on 10/23. I now see it dropping to 350 by 12/15. That would match support from valleys in 4/97,
S&P 500: 851.81. Target: 700 by 1/15/2009
New target:As of 11/23, the index reached my 850 target on 10/27. I see it dropping to 700 by 1/15/2009. There is a small knot of congestion in 1996
where I think it will find support.
-- Thomas Bulkowski
Tuesday, 11/25/2008. Tutorial Tuesday: The Nature of Bottoms
When price bottoms, what does it look like? Is it a rounded turn, V-shaped, or have multiple valleys before price begins climbing again? Let’s take a look at
some examples to answer that question.
The chart shows the Dow Industrials (^DJI) on the monthly scale. The main chart shows the Dow during the crash of 1987. Price made a large drop over two days in October 1987,
shown here as a large black bar at A. Price bounced to form a higher valley at B. Notice that the decline was
steep and the index did not slide along the same price. It bounced and began a new trend higher.
Look at the upper right of the chart. I show the Dow during world war II. Price made a V-shaped bottom, trending downward in a straight-line run and then recovering in a mirror
image of the decline.
The years from 1962 to 1963 shows a different pattern. This pattern is similar to the bottom during 1987. The decline to the bottom at I
is a steep, straight-line run down followed by a higher valley at J. This time, though, price moves up at a slower velocity than it did on the
way down to I.
The next inset shows the price action during the bear market in 2002 to 2003. Price forms a multiple bottom low, resembling a head-and-shoulders bottom,
with the head at K and the right shoulder at L. Notice that the bottom at L
is above the bottom at K.
Finally, we come to the current price chart. Price drops in a rounded turn, easing over and then tumbling. The speed of the decline is what makes this pattern distinctive.
It resembles the 1962 and 1987 declines. Will it also bounce like those patterns?
Now let’s look at how you can determine when the bear market is over. Returning to the 1987 chart, price touches down at A and
bounces to make a higher valley at B. This pattern is called an ugly double bottom. In a traditional
double bottom, price touches down at two valleys that are near the same price. In an ugly double bottom, the second valley is higher than the first. It is an ugly version
of a traditional double bottom.
When price turns from trending down to trending up, it always makes a higher bottom. I show that higher bottom at point B. To be sure
that the trend has changed, wait for a close above the high between A and B. That occurs at
The inset in blue shows a clearer picture. Valley D is the first bottom followed by a higher low
at E. Price has to close above F to validate the reversal. That occurs when price closes above
the green line at G.
Looking at the other charts, point C is near where price bottoms in the higher valley, but I do not show the complete down on this chart.
Points J and L are the higher valleys.
The 2008 bottom will have to form a higher low, then confirm it by closing above the peak between the two bottoms. The chart shows the first bottom still in development.
Also notice that I am using the monthly chart. Although the ugly double bottom pattern occurs on all time scales, the monthly chart shows that the change from trending down
to up takes months to form.
Looking at the Dow chart from 1936 onward, I see that the steeper the decline into the first bottom, the less likely it is that the index will form a multiple valley bottom
like the recent transition from bear to bull market in 2002 to 2003. Rather, I believe the turn will look like 1987 where we had a steep drop followed by a higher valley and
To sum this up, look at the monthly charts for a higher bottom. When that occurs and price closes above the peak between the two valleys, then we have completed the
transition from bear to bull market.
-- Thomas Bulkowski
Monday, 11/24/2008. Option Trading Tips from Greenwalt
I will be on the Gabriel Wisdom (http://www.businesstalkradio.net) radio show on
Monday evening, during the second half hour of the show. It is a nationwide broadcast that begins at 7 PM EST, and we will be discussing the direction of the market. If it
is not available in your area, you can listen to a webcast of it. Visit the link for more information.
I was reading an Active Trader magazine interview (December 2008) of Bill Greenwalt by David Bukey and I wanted to share some of his option tips with you.
- Greenwalt’s Rainmaker fund ran into trouble after 9/11 when the fund sold option strangles, out of the money (OTM) puts and calls on the S&P 500. In a calm market,
you can clean up, but lose money if the market trends strongly in one direction. The short options were uncovered, so they lost money.
- A revised approach looks for stocks that have fallen a lot, formed a base, and then climbed above the 10- and 20-day moving average. He would buy the stock and sell a call
and earned up to 90% a year. The approach worked this way.
His current strategy is to sell option premium on OTM puts and calls on the S&P 500 index (SPX). The strike prices are far enough out of the money that they often expire
worthless, but you have to manage risk.
His options have an 80% to 90% probability of expiring worthless.
The article says, "We have learned two lessons -- limit risk and don’t take directional bets." He gives an example of thinking that the S&P is going up from 1,200 to 1,300,
and says you have only one way to win and three ways to lose. 1. The index can drop resulting in a loss. 2. The index can go nowhere and you lose. 3. The index can rise but not enough,
and not soon enough, so you lose. 4. The index can rise enough for you to make money. His strategy is to do the reverse, so he makes money in three out of four ways.
His options strategy is market neutral but includes protective options -- an iron condor that includes a credit spread on either side of the market. He started using credit spreads
in 2006 and now 90% of his positions are credit spreads. He warns that the iron condor "does not work well with rapid expanding movements in the underlying market."
For an iron condor, any type of market is fine (up, down, or sideways) provided the market does not make an extended move in one direction.
He prefers a medium to medium-high level of volatility, whatever that means.
As an example, the article discusses a hypothetical trade in the S&P 500. On Monday, Sept 15, the index traded at 1,200 and it has a 10% probability of finishing at 1,150 by
Friday, Sept 19. Instead of selling a 1,150 put, he would sell the Sept 1,090 strike with a 0.1% probability of being hit by expiration. Although he could sell the 1,150 put for
$6.50, the 1,090 would fetch $1.40 but with an almost certain probability, especially since the "market has dropped a lot already and there are quite a few support levels between
1,200 and 1,090." He would avoid selling calls because to get a decent premium, you'd have to have close strike prices.
- Look for the largest percentage losers.
- The 10-day MA must cross above the 20-day MA at least twice due to many false starts.
- Research the fundamentals. Keep only those stocks with little or no debt. They are the survivors.
- Stocks must be under $30 per share (for a better percentage return on the premium).
For more information about the interview, you can visit www.activetradermag.com and buy the article there.
-- Thomas Bulkowski
Thursday, 11/20/2008. Falling Wedge Breakout in the Nasdaq
The chart shows the Nasdaq composite (^IXIC) on the daily scale. Outlined in red is a falling wedge chart pattern.
A falling wedge is one of the chart patterns that do not work well, meaning they tend to fail frequently and price does not reach its objective as often as it could (just 36% of the time
for downward breakouts in a bear market, as
a matter of fact).
What we see on the chart
shows two trendlines that converge. The convergence is slight, and it almost looks like a down-sloping channel -- two parallel trendlines.
Circled in green is where price pierces the bottom trendline. That is decidedly bearish, but it agrees what I see in many other stocks and indices
that I follow.
Looking at the performance numbers from my book,
Encyclopedia of Chart Patterns, Second Edition (pictured),
downward breakouts in a bear market are rare, happing just 14% of the time. Since price trends downward into the pattern and breaks out downward, this one acts as a bearish continuation pattern.
Those tend to perform less well than their reversal counterparts, but the differences are slight (an average drop of 23% versus 25%). I am not forecasting a 23% from here although we could
see that. Doing the math on the measure rule target gives an additional decline of 26%. Ouch!
The measure rule for downward breakouts is the height of the pattern multiplied by how often it works in a bear market, subtracted from the breakout price. That means a target of 1221,
and that would match the price level of October 2002, just as we were coming out of the bear market. If we were to continue the decline from here (1386), there is a minor low in March 2003,
which would be my guess as to where the composite might pause.
-- Thomas Bulkowski
Wednesday, 11/19/2008. Double Top in the S&P 500.
Wilfried Bartsch in Germany is looking for someone that speaks German and understands how to use Patternz. If you can help then contact him at email@example.com.
# # #
I got bored from working on my website’s candlestick pages, so I put glasses on my dog, just for fun. I was so thrilled with the look that I grabbed my camera. Shows is the result
of a few shots before the batteries died. Props help, don’t they?
She would look like me if she lost most of her hair.
# # #
The chart below shows the S&P 500 index (^GSPC) on the monthly scale. The twin peak pattern at C and
D won’t be an Eve & Eve double top until confirmation. Confirmation is when price closes below the horizontal
red line. Point A still has a bit to go (50 points).
When I wrote the first edition of my book, Encyclopedia of Chart Patterns, I counted the number of twin peaks that did not confirm. That means
price dropped but never closed below the lowest valley between the two peaks before moving up to a new high.
What is that failure rate to confirm a double top? Sixty five percent.
Even if price closes below the
red line, there is no guarantee that it will fulfill the measure rule.
The measure rule takes the height of the pattern and subtracts it from the
breakout (confirmation) price. Since it misses the target so frequently, I multiply the height by how often it reaches the target -- 73% for this chart pattern.
I won't bore you with the math but the target
is 179. The lowest price on the chart is 435. In other words, I do not think such large patterns even come close to obeying the measure rule.
My guess is the lowest it will fall would be to the launch point, about 450 (the middle of the congestion area at B. That still
seems too far. Along the way is another congestion area circled in green at about 650. That would be my guess, but we have to confirm
the double top first. Will that happen? Are we at a bottom here?
Let me put it this way. I see lots of indications of support, that this could be the bottom, but I also see many indications that price
has broken through support already. I am betting that the bad news is not fully factored into the markets yet, and we have more downside ahead. Thus, I look at this congestion zone (daily scale,
not shown), as just a pause in a bear market. But I could be wrong. It is just too soon to tell.
-- Thomas Bulkowski
Tuesday, 11/18/2008. Tutorial Tuesday: Why The Need for Speed?
I looked at 16,664 stock market chart patterns of various types using daily price data from 1991 to 2005, encompassing both bull and bear markets. I found the following.
- The price velocity leading to a chart pattern often resumes after the breakout. If price moved at a high
velocity leading to the chart pattern, high velocity resumes after the breakout. The same is true of low velocity moves: A low velocity move after the
breakout follows a low velocity move leading to the chart pattern.
A frequency distribution shows that a high downward inbound velocity leads to higher post breakout velocity between 62% and 68% of the time. A high upward inbound
velocity gives a high outbound velocity between 62% and 70% of the time.
The numbers suggest that you concentrate on steep straight-line runs leading to the start of a chart pattern.
- Price drops further (downward breakout) after a high velocity run leading to the chart pattern, regardless of the market conditions (bull or bear markets).
If you settle on using high inbound velocity, then trade chart patterns that breakout downward in a bull market. The widest performance difference for downward breakouts occur in a
bull market (21% versus 16% for high/low inbound velocity, respectively). That may not sound like much, but the high velocity return is 31% higher (31% = (21-16)/16) than the low velocity move.
- Upward breakouts from chart patterns perform better if velocity was slow leading to the chart pattern, regardless of the market conditions (bull or bear markets).
For slow inbound velocity down trends, the best performance comes after an upward breakout in a bear market. That sounds weird because you should trade with the trend (bull market,
upward breakout or bear market/downward breakout), but you can justify it by thinking about speed. A slow downtrend in a stock shows strength when others are dropping faster.
The performance difference is smaller, 29% versus 26% or a 12% improvement, for inbound low/high velocity down trends, respectively.
For more information, read the velocity study.
What does all of this mean? In this market, I still haven’t got a prayer of making money!
-- Thomas Bulkowski
Monday, 11/17/2008. More Down? Hints in Health Care.
This is from Active Trader magazine, December 2008 issue, concerning Richard Fuld, Former CEO of bankrupt Lehman Brothers: "In testimony before the House Oversight Committee, when asked if his nearly $500 million in executive compensation was ’fair’ Fuld responded that he had only received about $310 million."
On Friday evening, I worked on a to-do list so I can arrange the stuff I wanted to get done into some sort of priority list. I am working on the candlestick
pages now, and I have added about
70 new ones to the website. The to-do list is almost 40 items long and some of them will require months of tedious work, but I like to be kept busy.
Speaking of being kept busy, my computer continually rebooted this (Sunday) morning so I had to use system/restore to erase the most recent update from Microsoft. As soon as I got my computer up
and running, I see it was contacting Microsoft to download the same broken update again. I can tell that this is going to be a fun day...
# # #
Shown is the SPDR health care select sector (XLV) exchange traded fund on the daily scale. It shows a nicely shaped symmetrical triangle. At
A price broke out downward from the triangle then pulled back into it the next day in a tall white candle followed by another downward breakout.
(a close below the trendline).
This is not a classic example of a pullback (no white space between price and the breakout area), but it does give a warning. Since 87% of pullbacks resume
the downward price trend, it suggests that the
health care sector has more downside in store. Other stocks and ETFs are showing patterns of indecision, such as symmetrical triangles, ascending,
and descending triangles. They have not broken out yet and until they do, the actual breakout direction is just a guess (ascending triangles
breakout upward 70% of the time and descending triangles breakout downward 64% of the time). This ETF may be ahead of the others and it is warning of additional bearish moves in
-- Thomas Bulkowski
Thursday, 11/13/2008. Bounce Day Today!
I am getting sick and tired of losing money on my long term holdings. Perhaps you feel the same. This is a picture I shot a few days ago in my back yard. At least this worker is still employed.
The Dow Jones industrials have been down for 5 out of the last 6 trading days, so we are overdue for a bounce. If you do a Fibonacci retrace of the move down from
November 4, you get: 38% = 8792, 50% = 8958, 62% = 9124. Those are the potential bounce targets. What I think will happen is that the industrials will bounce up about half way,
call it 9000, then round down again and start heading lower. It is possible that the Dow will just continue lower from here (8282), matching or exceeding the low posted on October 10 at 7882.
At the rate we are dropping, that is just a day’s worth of trading away.
My thinking here is that we are overdue for a bounce, as I mentioned, but the outlook and the news reports are just too gloomy. It is as if the world is on fire and all we have is
a garden hose. Even though the markets look 6 to 9 months out, the picture does not seem to be improving. Thus, at the top of the bounce, I may buy some of the ETFs that short
the market. This would be a hedge for existing positions and an opportunity to make a few bucks in a falling market.
Another possibility is that we are at the bottom here. We have a base that has formed and all the Dow needs is some good news to turn it around. But I just can’t see
where that news might come from. Everything seems to be getting worse. So, my guess is a short term bounce followed by additional declines.
-- Thomas Bulkowski
Wednesday, 11/12/2008. Does Head-and-Shoulders Bottom Mean Up?
This is a note to Lew Daniels. I've emailed you three times and get delivery failure. Tell your ISP to accept my emails or resend using another ISP. Configure Patternz like
that shown on the troubleshooting page.
# # #
I visited the doctor today not because I was feeling bad, but because I felt it was time to waste almost three hours of my life. I spent several minutes writing down my medical history then
retold most of it to the nurse while she typed it into the computer. Go figure. If they let the patients type it in directly, what a time saver, but no. They shuffled me into the wrong examination
room and I sat there for 2 hours. Then they moved me into another exam room and I sat for another 1/2 hour. Finally the physician’s assistant came in and re-added some of the same info
that the nurse took down.
He felt my lymph nodes around my neck and said they were not swollen enough to be of concern. But I did have ear wax. "Want it removed?" Sure. So, they hosed me down, and I could hear
high frequencies again. Wow. If I die of lymphoma, it started 3 weeks ago. Mark your calendar. I feel just fine, which is suspicious.
Cancer doesn't hurt in the early stages.
# # #
The chart shows the Dow industrials on the daily scale. Several of you have written about the head-and-shoulders bottom that you see in the Dow or on one of the other
indices. Refer to the blue inset. A left shoulder forms then a head below the shoulder but not too far below nor too close. The right shoulder should be
about equal to the left. Too far above or below it and it will look unsymmetrical. A head-and-shoulders should look like a person, not an alien with a tall neck nor one with lopsided shoulders.
If other traders cannot recognize the pattern then they will not trade it.
I think that the left shoulder is too close in price to the head, plus, there is the lower low at A. I prefer to think of the chart pattern as a
symmetrical triangle. The breakout from this triangle may signal a trend change. Downward would be bad news for those holding
stock. Even if it is downward, I would not get too excited until price dropped below the level of the head. The left shoulder and head should be a support area, so we could see a turn there
or near that area.
An upward breakout from the triangle would probably signal that we have found a bottom...at least for a month or two. It will likely take that long for price to move up, round over,
and then form another bottom -- a double bottom.
-- Thomas Bulkowski
Tuesday, 11/11/2008. Stocks: 5 Potential Buys.
SUNDAY ADDENDUM: I posted this note on Saturday, and revised it the next day.
The chart shows General Dynamics (GD) on the monthly scale. Notice the straight-line run up from the bear market low in 2003. If you draw an up-sloping trendline (a portion of
it appears in green) on the monthly log scale from late 1994 to now, it nears or touches four points, the most recent is the October 2008 low.
That suggests price is near a buy point (a bounce off the trendline), providing the stock returns to its 24 year uptrend. The top of the channel would be about 95 and the low is about 50.
I consider the October low as the last touch, even though it has not actually touched the trendline. A look at the prior touches shows that the touch lasts no more than 1 month.
You can see that during the touch in 2003 at A. Price climbed thereafter. Thus, we may already have seen the low in the stock and price will climb
Of course, this time could be different. Price might drop to the trendline and continue lower, especially if defense spending gets cuts in favor of strengthen the
Returning to the stock, during the past year, the stock formed a
triple top (peaks 1, 2, and 3), suggesting that
the straight-line run up is over or at least taking an extended pause. The breakout from
this bearish pattern pushed the stock down to a low of 51.90 from a peak of 95.12 at 2. Since the decline is nearly 50%, it suggests that the
recent decline has deflated the bullish enthusiasm for the stock created by the straight-line run. The stock can now resume is upward pace, but whether or not it will actually do that is
If you measure the Fibonacci retrace of the move from A to 2, you get the red
lines shown on the chart (this is a log scale, so the lines are not equidistant).
I have a target of 73 for the stock. If you switch to the daily scale and draw a Fibonacci retrace
from the peak on August 28 to the low on October 24, you get 73 and that also corresponds with overhead resistance.
I researched the company and feel that this is a long term value play. The fundamental ratios are at the lowest point over the past 5 years. Standard and Poors suggest the outlook is good
for this stock through mid 2010 (suggesting that when January 2010 comes and the market looks 6 to 9 months ahead, look for a peak then), but could soften if defense spending is curtailed.
Clearly, fighting two wars has increased the wear and tear on the machinery of war. Those tools will need to be replaced and new tools purchased.
The main idea behind this stock, and my Saturday search for others, is a resumption of the straight-line move up. I looked for stocks that had few if any pauses along the road up since
the last bear market ended. My belief is that the consistent up trend will resume now that the stocks have been beaten down. This assumption may be wrong.
I searched through my database of 556 stocks that I follow on a daily basis and uncovered 58 that had monthly charts similar to the straight-line run of GD. I removed the charts I didn’t
like and whittled it down to 11 then I hit the books. I removed half of those based on fundamentals and the longer term outlook. What remains are 5 stocks, all of which I consider potential
buy candidates, but not at current prices. By that, I expect the stock market to continue declining. If that happens, these stocks will drop also. Consider these stocks as items on a shopping
list to be bought only if you can find them on sale. Wait for the sale (unless, of course, the market starts to make a determined and lasting move up...in which case, you should have bought
them all and bought heavily). Here are the five.
|Energen||EGN||29.18||46||1.70%||36||Diversified natural gas|
The price is as of Friday, November 7. Relative strength is out of 49 industries, with 1 being the strongest performing over the past 6 months. The target price is explained below.
Here is additional information on the stocks.
|Stock||S&P Rating||Ford Rating||3 Month Performance||Comments|
|General Dynamics||Buy||Buy||Neutral||S&P expects defense spending cuts in fiscal 2010. Valuation ratios are at 5 year lows and price is at bottom of P/E channel. This is a good value play. Target: 50% fib retrace of down move from Aug 28 high to 10/24 low.
|Energen||Buy||Hold||Above Average||Insiders selling. Valuation ratios are at 5 year lows (value play) but expect slow growth especially if natural gas prices drop. Fib retrace from high on 6/23 to low on 10/10: Expect target retrace to $46 (38%) to $52 (50%).
|Potash||Buy||Strong buy||Above Average||Value ratios low to mid range. Not a value play, but expanding potash production by 2012 by 16m tons. Target: 38% fib retrace of June 19 high to 10/24 low, with overhead resistance. Has decent shot at $150.|
|Agrium||Not rated||Strong buy||Above Average||Value ratios low to mid range. OK value play, but price could be cheaper. High at 6/18 to low on 10/24 for Fib retrace of 38% to $60 but could poop out at $50|
|Gilead Sciences||Buy||Hold||Below Average||LOTS of insider selling. Value ratios low to mid range. Has a $3b share buyback plan in place. This is overvalued, so wait for price to drop to 40 or below before buying. Fib retrace from 8/13 high to 10/10 low of 62% to $49. Stock looks very choppy on daily scale.|
In the second table, I discuss the target prices mentioned in the first table (go figure). S&P and Ford ratings are taken from their research reports. The 3 month performance is
Ford’s guess as to the strength of the stock in the coming three months.
According to S&P, Energen has hedged 75% of their 2008 production and 61% of 2009’s, but if oil and natural gas continue declining, the stock will not benefit. Monitor the
price of oil and natural gas before buying this stock.
On Friday, Potash said that they tentatively settled a strike at three of their mines (ratification vote is scheduled for Nov 13). The stock bounced up 3 when the news hit the wires,
but gave back most of that in afternoon trading. This is good news for the company and bad for competitors like Mosaic (MOS). However, the quarterly report of earnings due in about 3 months
from October 23 (their last report) is likely to be bad because of the strike. That may present another buying opportunity if the stock gets whacked.
According to S&P, Agrium benefited from high prices of some fertilizers when China raised export tariffs. Recently (late September), industry prices have softened on inventory build up and
troubles with buyers getting credit. Thus, I probably won’t be buying this company and I consider it overpriced now.
Gilead shows a fine monthly chart, holding up the best of the bunch for the longest until the very recent downtrend. On the daily scale, the picture is one of very choppy price movement.
I do not trust this loose appearance. Biotech stocks tend have more dead-cat bounces than many other industries.
I consider the stock overpriced.
Of the five stocks, I like GD and POT the best. That does not mean I will buy them at the open on Monday. I consider the market to be weak and these stocks will likely suffer along
with the market should it tumble more. But they represent value plays that over the next year or two, could be rewarding holdings.
-- Thomas Bulkowski
Monday, 11/10/2008. New 3x ETFs.
Direxion has offered eight new ETFs (exchange traded funds) that are triple the volatility of the underlying securities. That means
you can watch your losses grow three times as fast as normal! The following table shows the funds that are trading now.
|Direxion Large Cap Bull 3x||BGU||Seeks 300% of the daily movement of the Russell 1000 index|
|Direxion Small Cap Bull 3x||TNA||Seeks 300% of the daily movement of the Russell 2000 index|
|Direxion Large Cap Bear 3x||BGZ||Seeks 300% of the inverse of the daily movement of the Russell 1000 index|
|Direxion Small Cap Bear 3x||TZA||Seeks 300% of the inverse of the daily movement of the Russell 2000 index|
Information on the following funds is sketchy but described on the Direxion website. I am not sure they are publically traded yet. Do your research before
investing in them.
|Direxion Energy Bull 3x||ERX||Seeks 300% of the daily movement of the Russell 1000 energy index|
|Direxion Financial Bull 3x||FAS||Seeks 300% of the daily movement of the Russell 1000 financial index|
|Direxion Energy Bear 3x||ERY||Seeks 300% of the inverse of the daily movement of the Russell 1000 energy index|
|Direxion Financial Bear 3x||FAZ||Seeks 300% of the inverse of the daily movement of the Russell 1000 financial services index|
The financial consultant that alerted me to these funds says that she will not trade them as such, but use them to hedge existing positions. In other words, if she owns small cap stocks,
she may want to buy the TZA fund because it shorts the small caps. If the small caps go down, the fund should rise at three times the rate and help offset any losses in her long portfolio.
Since these funds are new, watch the bid-ask spread and do your research on them before investing. With three times the normal leverage, you can gain or lose a lot of money
in a short time. Trade them with care.
-- Thomas Bulkowski
Thursday, 11/6/2008. The 5% Rule: When Not to Buy.
At the end of each year, I review the stocks trades that I made during the year. If you make a thousand trades as a day trader, then you will want to perform your analysis more often.
I built an Excel spreadsheet that I sometimes use to gauge if I am early or late getting into and out of a trade. I discovered that if I cannot enter
a trade within 5% of where I wanted, then I should pass on the trade. Why? Because entering a trade later than that not only increases the risk of failure, but diminishes the profit
potential. I call this the 5% rule.
Let me give you an example. The chart shows ExxonMobile (XOM) stock on the daily scale. It formed an ascending triangle from November 2004 to February 2005,
shown here in red.
An ascending triangle is a chart pattern formed by overhead resistance at a fixed price and underlying support that trends upward.
If you connect the peaks with a straight line and another along the ascending valleys, you see two converging trendlines. Price should touch each trendline at least twice. The average
an ascending triangle occurs between 57% and 63% of the way to the triangle apex (where the two trendlines meet), depending on the bull/bear market and up/down breakout direction.
Since a close above the top trendline would represent an upward breakout, we know what the buy price should be. I placed a buy stop a penny above the top trend line, at 52.06,
shown here at point A.
A penny is well within the 5% window which would have a top of 52.05 x 5% or 54.65. Thus, if I discovered the ascending triangle when price was at 55, that would have been more than
5% above the proper entry price (the breakout price). I sold the stock at point B.
If you want to read how I handled this trade, then you can take the quiz where I discuss the trade. Each quiz is a compressed Word document and
you can find over 150 quizzes available for download, many of them based on actual trades.
Returning to the 5% rule, I use the breakout price as where the 5% entry window begins. The breakout is often where price pierces a trendline. With an upward breakout from a
ascending triangle, the breakout price is easy. But for slanting trendlines, like in a symmetrical triangle, the breakout price is a bit harder to gauge.
Why is the 5% rule so important? Because of throwbacks. I show the ideal throwback in the figure. Throwbacks occur about half the time, but it
depends on the particular chart pattern. After a breakout, price will rise an average of 3 days but climb 6% to 8%. Then the uptrend stops and begins throwing back to the breakout.
Within an average of 10 days after the breakout, price has completed the journey to the breakout price or trendline. After that, anything can happen, but 86% of the time, price
continues moving up.
Thus, if you buy in 5% after the breakout, you are close to buying in near the top of the throwback. Within a day or two, price has dropped and you are faced with holding
a losing position. If price continues lower than your stop (and you DO have a stop in place, don’t you?), then it will cash you out for a loss. If you buy in at the
breakout price, the stock can throwback and you can likely ride out the throwback and wait for price to recover.
Above all else, do not chase price upward, hesitating to buy into a situation. You may have another chance to buy in at a better price within two weeks or so. If price
has not thrown back by then, then it likely will not. Look for another trading setup. Often, stocks in the same industry form the same patterns. There, you may find a breakout waiting
to spring from another stock.
-- Thomas Bulkowski
Wednesday, 11/5/2008. What are the Best and Worst Industries?
With the Dow making a surprising 300 plus point move up, you may want to go shopping before the bargains disappear. Where should you start looking? Here is a list of the
top 10 performance industries over the last 6 months. I show the weekly change, monthly change, and half year change followed by the stocks that I follow in the industry.
I have not looked at the individual stocks, so I am not making any recommendations. However industries that are near the top of the list tend to remain strong.
|Industry||Weekly Change||Monthly Change||6 Month Change||Symbols|
|Biotechnology||7.80%||0.70%||-0.51%||AGN, ABC, AMGN, BRL, BIIB, DNA, GILD, HGSI, IMCL, SVNT, TECH, VRTX, IBB|
|Household Products||7.90%||-4.80%||-8.29%|| BTH, CHD, CLX, CL, KMB, LBY, NWL, NUS, PG, IYK|
|Food Processing||3.50%||-1.70%||-12.21%|| ADM, CPB, CAG, GIS, HSY, K, KFT, LANC, PPC, SLE|
|Electric Utility (West)||3.60%||-1.60%||-13.23%|| BKH, EIX, HE, IDA, TEG, PCG, PNW, POR, PSD, XEL|
|Retail Building Supply||9.40%||-2.30%||-13.43%|| BECN, BLDR, FAST, HD, IBI, LOW, LL, TSCO, WSO|
|Drug||8.80%||-3.10%||-13.96%|| ALKS, BMY, CEPH, HITK, IDXX, INCY, LLY, MEDX, MRK, MYL, NOVN, PFE, SEPR, TEVA, WYE, IHE|
|Air Transport||17.20%||4.10%||-16.93%|| ALK, AMR, CAL, EXPD, FDX, JBLU, LUV, UPS|
|Electric Utility (East)||2.30%||-1.80%||-16.93%|| AES, CV, CHG, ED, D, DUK, EXC, FE, FPL, NST, PGN, PEG, SO, TE, UIL|
|Natural Gas (Distributor)||11.10%||4.30%||-17.91%|| CLNE, CPNO, EP, EOG, LG, NJR, GAS, NSH, SWX, UGI, WGL, WMB|
|Electric Utility (Central)||1.80%||-3.30%||-19.84%|| AEE, AEP, CNP, CNL, DPL, DTE, EDE, GXP, MGEE, NI, OGE, IDU|
The following table shows the ten worst performing industries, sorted by the close to close price change over 6 months. The columns follow the same format as above. The industries
that compose the bottom of the list tend to underperform for a long time. The weak remain weak, in other words. I would avoid buying positions in these industries but
there might be some gems hidden amoung the dirt.
|Industry||Weekly Change||Monthly Change||6 Month Change||Symbols|
|Metal Fabricating||24.40%||-2.70%||-40.33%|| BOOM, ITW, KMT, LDSH, LAWS, MLI, PCP, SGR, TKR, TIE, VMI|
|Insurance (Prop/Casualty)||9.70%||-9.80%||-41.79%|| ALL, AIG, CB, CINF, CNA, HIG, L, PGR, TRV|
|Semiconductor Cap Equip.||11.60%||-7.20%||-41.89%|| AMAT, BRKS, ISIL, KLAC, KLIC, LRCX, MTSN, NVLS, RMBS, SMTC, TER, VSEA, XLNX|
|Semiconductor||11.60%||-4.20%||-42.55%|| AEIS, AMD, CREE, CY, FORM, IDTI, INTC, IRF, LSI, WFR, MU, NSM, NVDA, QLGC, RFMD, SPSN, IGW|
|Insurance (Life)||10.40%||-20.80%||-42.86%|| DFG, GNW, LNC, MET, NFS, PL, PRU, SFG, UAM|
|Petroleum (Producing)||22.90%||0.40%||-43.00%|| APC, APA, ATW, CXG, CPX, CLR, FST, HP, HERO, NBL, OXY, PDE, UDRL, XTO|
|Machinery||14.10%||-10.40%||-43.96%|| CMCO, CMI, CW, DOV, FLOW, FLS, GGG, HURC, IEX|
|Oilfield Svcs/Equipment||19.40%||-9.90%||-44.71%||BJS, DO, DRQ, ESV, GLBL, MTRX, NBR, NOV, NE, PTEN, PDC, RDC, RES, SLB, SII, SE, RIG, IYE, IEO, IEZ, PXE, PXJ|
|Securities Brokerage||10.30%||-17.90%||-45.42%|| ETFC, GS, MS, RJF, SCHW, AMTD, IAI|
|Metals and Mining (Div.)||17.00%||-9.70%||-54.87%|| AA, ACI, CENX, WIRE, FCX, HL, KALU, RTI, PCU, SLT, SWC, IYM, GLD|
-- Thomas Bulkowski
Tuesday, 11/4/2008. Where is the Dow Headed?
Before I get to where the Dow is headed, let me tell you a story. Several years ago, after I turned in my manuscript for the second edition of Encyclopedia
of Chart Patterns (pictured), I told my editor that since the first edition was a best selling book, that it broke new ground because no one had ever published a comprehensive list
of performance statistics on chart patterns, I wanted the biggest names to be given the opportunity to endorse it. We came up with five names: Acampora, Murphy, Pring, Schwager,
and Williams. The first four declined. Only Williams took a look at the manuscript and his endorsement graces the book jacket (thank you, Larry! As well as Perry Kaufman who has been
there from the first edition).
My editor said that if I schmoozed the names, contacted them and told them that they were Gods, that when I asked for their endorsement the next time, they might give it.
I was not only angry but insulted. I felt that a book should stand on its merits and not on who you know.
Guess what happened today? I received a manuscript and letter saying that John Murphy wanted my endorsement for his next book: the second edition of Visual Investor.
# # #
Let’s talk about the Dow industrials.
Although I would love to see the Dow recover, I still have stocks that I want to buy, but not at this price. The Dow has to drop. Look at the chart. Notice that as the index has climbed
during the last few days, the candles have gotten shorter. Today was a doji, a northern doji to be exact. Price has trended upward leading to the doji
and the opening and closing prices are close enough that the body appears as a thin line.
If you have studied doji like I did in my
Encyclopedia of Candlestick Charts
book (pictured), you will discover that doji act randomly -- even northern doji. Indecision, some call it. I call them a useless breed. However, with the height growing shorter, it looks as if the upward momentum has run
out of steam and a reversal may occur. If a reversal of the uptrend occurs, that would take the average lower, perhaps to tie the recent lows. More likely, though, is a 62% Fibonacci retrace of
the uptrend of the last 5 days (target: about 8,200 from the current close of 9319).
A similar setup occurred from July 15 to 28, shown inside the red box. Price climbed and the candles grew shorter. Then prices dropped, bottoming out
62% of the way back to the start (the last candle shows the bottom of the retrace).
Since a northern doji breaks out upward 51% of the time, an upward breakout could mean a climb to about 9,700.
That is a 62% retrace of the straight-line run down from October 3. The Dow could climb higher than that, and I am sure it will...one day.
My December 1 target remains at 7,900. I do not think we will see the Dow drop that far (matching the low on October 10), but Europe is going into recession and we will be, too, if we
are not already there. Thus, even though the Dow looks 6 months ahead of where we are (so it’s said), I do not see a light at the end of the tunnel. And if you do, then consider that
headed for you is probably a train!
-- Thomas Bulkowski
Monday, 11/3/2008. Chart Pattern Indicator Review.
I spent early Sunday morning testing variations of the chart pattern indicator (CPI),
an indicator I developed months ago, a chart of which appears below. None of the variations work better
than the one shown. Let’s talk about it.
The idea behind the CPI is that bearish patterns appear near market tops and bullish ones appear near market bottoms. My free Patternz program counts
those chart patterns and displays the result as a percentage. Extreme readings signal a potential change in market trend.
During development of the CPI, I discovered that the NR7 chart pattern gave the best signals. NR7 suggests a large move follows the smallest high-low range of the
prior 6 days (7 days total). In the inset of the chart, I show an NR7, taken from the chart. The last day has
the shortest high-low range of the 7 days. Bullish NR7s are those that breakout upward.
Bearish ones breakout downward. A breakout occurs when price closes either above the top or below the bottom of the NR7 (the 7 days).
The CPI is a ratio of bullish NR7s to the total
of bullish and bearish ones. Percentages above 50 are bullish and below 50 are bearish. However, I set the trigger levels to 35 and 65, based on testing. A
green vertical bar appears if the ratio is above 65% (bullish) and a red vertical bar appears if the ratio drops
below 35% (bearish). Between 35% and 65% is neutral territory, but a prior buy or sell signal remains in effect during those times.
That all sounds simple enough, but there is a problem. How long does it take price to breakout from an NR7? It could take one day to many months if the height of the NR7 is unusually
tall and if price flat lines like a dead animal (testing revealed one NR7 had not broken out for 11 months). Thus, I place a time limit for the breakout to occur -- 7 days, or the NR7
gets thrown out. Suffice it to say that you can receive a buy signal today from the program which says, "You
should have bought [up to] a week ago."
If you are an end-of-day trader, the signal comes too late to be useful. Worse yet, prior buy signals can change to sell (and vice versa) for up to a week.
Nothing I have tried cures that problem without degrading the signal quality in the process. However, the CPI does signal a shift in the bullish or bearish market winds. Compare the
signals to the turning points of the S&P 500 index (graphed as a bar chart). I believe the indicator adds value, despite the lag, but I do not use it for trading signals.
To be safe, wait a week before depending on a signal. If you do that, much of the whipsaw that you see on the chart disappears. In other words, if you receive two signals within a
week, throw out both. (The first gets thrown out since it is wrong, and the second gets tossed because it agrees with the signal prior to the pair appearing). Using this method, I show
red dots above the signals that remain. The chart becomes much more accurate and useful.
The Recent Buy Signal
I received an indicator signal change after the close on October 30. The message said I should have bought two days before, on October 28. The next day (October 31), I received a revised buy signal
which said I should have bought 4 days before, on October 27. The green vertical bar appears on the October 27 date since it is the first bullish
signal of the pair.
Announcement of these signal changes are posted on my website via the RSS feed. Signal changes also appear on the home
page and on this page, in the above box under "Test Portfolios and CPI."
Since the signal can change for up to a week, if the market were to dive Monday, it could change the buy signal to a sell. The odds of that happening are
remote, so the buy signal is probably valid. The lag or delay between when the program tells me of a signal change and when it actually occurs, is why I consider the CPI a weekly indicator
and not a daily one.
This chart is the same as the prior one only the signals have been removed to show the CPI line. I highlight areas of divergence.
Divergence is when the indicator peaks or valleys point in one direction
and the chart trends in another direction (the lines diverge). The green bearish divergence is premature since price turns lower
At 5, the bullish divergence signals, but the S&P 500 index does not rise much (to 6) before resuming the
downtrend. Nevertheless, the indicator can highlight coming trend changes, too, by using divergence.
In short, the indicator says we are in a bullish trend, but it does not say how long that trend will last. Climbing 11% in a week, like the markets did, I view as wildly optimistic.
We may see the indices drop back to the lows or at least pause (but what do I know?).
It will be interesting to see how the market reacts to the winner of the presidential election.
-- Thomas Bulkowski