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Tuesday 11/30/10. Tutorial Tuesday: Cups and Caps Trading Setup

Last week I released a trading setup that I tested based on the work of Joseph Stowell, called cups and caps.

Pictured is the first part of that setup, the three bar net line for up trends (there is a similar one for down trends). Access the link for a complete explanation. Briefly, the price trend changes from up to down when it closes below the three bar net line.

I tested this pattern on 88 long only ETFs from March 12, 2001 to October 1, 2010, which left the S&P 500 index flat, as part of a system using a 10-week (50-day) simple moving average to remove trades from a bear market.

The weekly ETFs did best with gains averaging 3.4% in 120 days with drawdowns of 9.0% (maximum per trade, averaged over all trades) and an average drop below the buy price during the trade of 7.6% (what I call the hold time loss). That's a bit large since many ETFs suffered large intraday moves during the flash crash in May. The quotes from that day could be bogus, too. During the hold time, the S&P 500 index dropped an average of 1.5%. The win/loss ratio was 49%, meaning that it made $344 almost half the time it traded on an initial investment of $10,000.

You might try playing with the three-bar net line for markets other than equities (futures and such). The bond market was his primary target as I recall, but the setup seems to test well for stocks, too. Perhaps the combination of the three-bar net line with his cups and caps patterns might prove useful to your trading setups.

-- Thomas Bulkowski

Monday 11/29/10. Market Monday: The Week Ahead

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

My Prediction

I show a picture of the Nasdaq on the daily scale. It is the interesting index this week.

Why do I show price going in two directions? First, if you believe in Elliott wave then the index should follow an ABC correction. That means price should make a leg down (A) followed by an upward retrace (B) and completing the move by another down leg (C).

If you think that's hogwash, then price will move up to form a double top chart pattern. That's when price stalls at or near the old high, in this case the price of the November peak. Then price should drop below the low to the left of B, confirming the double top as a valid chart pattern. It implies a drop to about 2375, but I'm just eyeballing that.

Of course, the index could just continue moving higher instead of reversing near the price of the November peak.

What's my guess? I don't think the ABC correction will happen. I favor a move up to the old high. After that, we'll see.

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
Chicago purchasing managers index	9:45 T	B	Monitors regional manufacturing activity.
Consumer confidence	10:00 T	B-	Surveys 5,000 households for trends.
Productivity & costs	8:30 W	D+	Cost of producing a unit of output.
Construction spending	10:00 W	D	Covers residential/non-residential/public spending on new construction.
Auto & truck sales	2:00 W	C-	Monthly sales of domestically produced vehicles.
FEDs Beige book	2:00 W	?	Reports on economic conditions.
Initial jobless claims	8:30 Th	C+	Counts people filing for state unemployment benefits.
4 Employment reports	8:30 F	A	Nonfarm payrolls, unemployment rate, avg workweek, hourly earnings.
Factory orders	10:00 F	D+	Durable/non-durable goods orders w/factory inventories.

Options Expiration

No options expire this week.

Swing and Position Traders: Chart Pattern Indicator

On 11/26/2010, 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 either underway or should be starting soon. The sessions could be more volatile.

Mutual funds will begin dividend distributions and rebalancing their portfolios for the approaching year end (starts in late November).

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

Tuesday 11/23/2010. Tutorial Tuesday: Trading Setup Quiz

Look at the chart of two fictitious ascending triangles on the daily scale. The triangle is outlined in blue with a horizontal top trendline and an up-sloping bottom trendline. Both A and B show upward breakouts but there is a difference between the two charts.

Which setup (A or B) represents the best trading opportunity?

The difference, if you did’t find it, is in the five days leading to the breakout. In A, price makes a straight-line run but in B, price runs into a congestion area in the five days before the breakout.

I proved in a study that the differences between trading a chart pattern with a straight-line run (A) and a congestion area (B) is not huge. In the straight-line run, on average, the rise after the breakout will be farther, but the risk of failure increases, too. Throwbacks will occur more often and that is usually a bad thing.

When looking for chart patterns, trade those with a congestion area forming just before the breakout. If a straight-line run appears, then consider waiting for a throwback to occur and complete. Once price starts moving up again, then enter the trade.

-- Thomas Bulkowski

Monday 11/22/10. 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 markets are closed on Thursday so overweight people can add to their waist line. They also close early on Friday so those obese people can hit the gym early and laugh from the sidelines as they watch other people working out.

I show the same picture as last week because nothing of substance has changed. The markets retraced their gains as the picture shows, dropping a bit lower than I imagined. Now they seem to be recovering and I expect the indices to continue moving higher.

With a plethora of reports coming out on Wednesday, that's the day to watch even if none of them are too meaningful.

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
Gross domestic product	8:30 T	B	Measures economic activity; GDP deflator measures inflation.
Existing home sales	10:00 T	C	Counts sales of used homes.
FOMC Minutes	2:00 T	?	Minutes of the prior Federal Reserve meeting.
Personal income & consumption	8:30 W	C+	Measures sources of income to predict future demand.
Personal consumption expenditures	8:30 W	C+	Covers durables, non-durables, and services.
Durable goods orders	8:30 W	B	Measures orders, shipments of goods with lifespans >3 years.
Initial jobless claims	8:30 W	C+	Counts people filing for state unemployment benefits.
New home sales	10:00 W	C+	Shows sales of single-family homes.
Crude inventories	10:30 W	?	My guess: Measures oil inventory.

Options Expiration

No options expire this week.

Swing and Position Traders: Chart Pattern Indicator

As of 11/19/2010, the CPI had:

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

Swing Traders: Pivot Points

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

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

Here are the formulas:

Consecutive Price Trends

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

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

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

Buy-and-Hold: 12-Month SMA

Earnings, Chart Patterns & Industries

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

Mutual funds will begin dividend distributions and rebalancing their portfolios for the approaching year end (starts in late November).

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 11/18/10. Case Study: When Not to Trade

Each time we ponder a trade, we weigh the positives with the negatives. Here's an example of a trade evaluation for JDS Uniphase (JDSU). I first looked at this pattern on November 8 which I show as a vertical brown line.

On the weekly scale, which I show in the blue inset, appears a pipe bottom chart pattern. Pipe bottoms are bullish patterns that sport two downward and adjacent spikes that drop below the surrounding terrain. That pipe appears on the daily chart starting in mid October. The pipe bottom provides the buy signal for the trade because the pipe bottom acts as a reversal of the downward price trend. However, before we buy, let's look closer at the technical picture.

1. Unconfirmed pipe bottom. The pipe bottom becomes valid when price closes above the top of the two-day spike. That hasn't happened yet. The horizontal green line represents the breakout price and as the two candles show, their closes are below the green line.

   An unconfirmed chart pattern is not a deal breaker since you want to evaluate your trades before they breakout, not after. Entering a trade too late is a big no-no. Too late means after price rises more than 5% above the "ideal" entry price (often the breakout price). I say that because that's what my research has shown.

   This is an unconfirmed pipe bottom, so a trade has not signaled yet.

2. Nothing to reverse. Look again at the inset that shows the pipe bottom. How far has price dropped, leading to the start of the pipe? The first candle on the left is close to the prior peak, so the drop hasn't been far (even though this is a close-up view). The stock peaked at 13 and the top of the pipe is just below 12. Let's call it 12 since that's near where we'd be buying (hopefully, anyway) if this confirmed. The drop is just 1 point. That's not much of a drop to reverse, is it?

Look at the move from the September low near 9 to the peak at 13. Imagine that price dropped that far before the pipe appeared. Now that would be a move worth reversing! To put it succinctly, a reversal pattern needs something to reverse.

3. Overhead resistance. The two parallel red lines show a nice congestion region setup by flat bottoms and an irregular top. Not shown is another peak with overhead resistance which I mark as C on the chart. That region comes from a peak in April that extends from 13 to 14.

So, from 12.25 to 14 is a ceiling of overhead resistance. That could form a challenge to price moving higher.



4. Exhaustion gap. Look at point A. What type of gap is it? With overhead resistance just above, my guess is it's an exhaustion gap, which it is. It appears after a trend which began at the November low. Thus, I'd be looking for price to end the trend based on that gap.
5. Earnings surprise. The company announced earnings at B and judging by the reaction, it's clear that some lucky traders either guessed right or got the word early. Price left the November congestion area and moved up and continued rising until price gapped.

A good earnings surprise often has price move up followed by a retrace within a week or two. Thus, that pattern suggested that price would not climb much higher and even if it did, it would likely be cheaper in a week or two. That's what we see happening now.

6. General market. Look at the chart of the S&P 500 index and notice how it's been trending higher since the September low. I expect a retrace to occur, so buying a stock with the expectation of an extended move higher is probably wishful thinking.

The above discusses reasons that highlight danger signals. For a buy-and-hold trade, buy it and pray. For a position trade, you can still buy it but pray more (or mumble louder, hoping he hears you). For a swing trade, or even the position trade, wait for a better entry price. In fact, with overhead resistance so thick, I'd look elsewhere for a more promising trade, regardless of the trading style.

-- Thomas Bulkowski

Tuesday 11/16/10. Tutorial Tuesday: Oscillators

Active Trader magazine's staff wrote an article titled "The trouble with oscillators" for the August 2006 issue, and I'd like to share some of their conclusions.

They compared the fast stochastic %k, commodity channel index (CCI), relative strength index (RSI), momentum (10 day close to close change), and price oscillator (close to average close 10 days ago). They paired the oscillators to check for correlation using daily data from the iShares MSCI France index fund (EWQ) from April 2001 to March 2006. I'm not sure why they chose that fund and the article doesn't explain either.

For those of you not understanding what correlation is, it's a way of answering questions like, "Do people good at math make better engineers?" or "Do people good at math make better artists?" In this case, it measures how closely the various oscillators issue the same signals near the same time.

In eight of ten tests for correlation, all but two of the oscillator combinations (Fast %k/momentum and CCI/momentum) resulted in correlations above 0.80 (highly correlated) with the other two having correlations of 0.73 and 0.70 respectively. In other words, despite the different construction of each oscillator, most of them issued the same trading signals during the period studied.

They go on to say that it's a myth that "Every oscillator is a unique indicator with unique characteristics." Oscillators use some variation of momentum and there are few ways to calculate that: price change over time or the ratio of the derivatives of price change (such as moving averages).

It's a myth that "oscillators lead price action." They write that "Oscillators cannot 'lead' price: All indicators or mathematical calculations are derivatives of price; every oscillator value depends on price action that has already occurred. Nothing can occur in an oscillator before it occurs in price."

Finally, it's a myth that "certain look-back periods or indicator settings are 'better' than others." They say that the markets are dynamic and that one setting today might be useless going forward. They say that many oscillators were developed before personal computers and so testing was error prone and not exhaustive. For example, they say that Wilder based his 14-day RSI look back on half the 28-day lunar cycle. Translating the cycle into trading days (20 to 21 per month) means the look back should be 10-11 days and not 14.

What about oscillators with adaptive settings? "Some analysts have designed dynamic indicators that adjust oscillator parameters depending on volatility and directional changes, but such adjustments typically have limited effectiveness in addressing the root problems."

Of course, some of this analysis is based on using one obscure ETF for a 5-year period, but they make good points. If you are using multiple oscillators in your trading system, graph them on the same chart and see if they all turn near the same time. Check their correlation. Do they really add value?

-- Thomas Bulkowski

Monday 11/15/10. 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 picture for this week's market action is cloudy, but let me see if I can shine a bright light to clear the picture.

I show a chart of the S&P 500 index on the daily scale. Circled at A is the obvious support level. It's resting on peaks formed in June and August. Those peaks are where the 50% retrace of the move up from the August lows resides. Point A represents a longer-term retrace target, of course. I don't expect the index to drop that far -- certainly not this week.

Point C is a less obvious choice for support since it represents a loose congestion area. Price moves sideways to up, inching its way higher. Point B is a major top, and a natural source of support or resistance.

Short term, this week, I expect the indices to drop a bit and find support. I show that in the picture by the horizontal line. Combining support at B and C suggests the S&P will drop to find support and then bounce higher. The bounce may come this week but more likely next week or even later. The red line on the "hard right edge" is what I expect to see happen in the coming two weeks.

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
Retail sales	8:30 M	A-	Reports total retail sales (not services). Are people spending?
Business inventories	10:00 M	C-	Reports manufacturing, wholesale, retail inventories.
Producer price index	8:30 T	B-	Measures wholesale goods cost. An indication of future inflation.
Industrial production	9:15 T	B-	Production of utilities, mines, and manufacturers.
Capacity utilization	9:15 T	B-	Gauges economic activity, hints of inflation.
Consumer price index	8:30 W	B+	Inflation report. Measures cost of goods and services.
Housing starts	8:30 W	B-	Number of homes beginning construction.
Building permits	8:30 W	B-	Measures building permits for new construction.
Initial jobless claims	8:30 Th	C+	Counts people filing for state unemployment benefits.
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 11/12/2010, the CPI had:

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

Swing Traders: Pivot Points

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

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

Here are the formulas:

Consecutive Price Trends

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

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

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

Buy-and-Hold: 12-Month SMA

Earnings, Chart Patterns & Industries

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

Mutual funds will begin dividend distributions and rebalancing their portfolios for the approaching year end (starts in late November).

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 11/11/10. Another Day, Another Near Drowning!

After rescuing two wasps and a bee from drowning in my birdbath, I discovered that if I placed a rock in there, they wouldn't drown. It would give them a perch to climb out.

Today, I saw one wasp standing on the rock and leaning far over for a drink (that was before I refilled the bath and snapped the pic). That's how most of them slide into the water and get into trouble, except that they try it from the lip of the bath. It's smooth plastic and they lose their grip, tumbling into the water.

I show a picture of a wasp drinking from my birdbath. The top half is a zoom of the wasp, circled in red on the bottom half.

When I was younger, I almost drowned in Chapman's pond. Standing on a submerged and inverted washing machine drum in the middle of the pond, I dove not toward shore, but into deep water.

I panicked.

I started thrashing around, splashing.

My mind and body separated. My brain became a bystander watching from the sidelines. It just watched, doing nothing to help, commanding nothing, paralyzed with the fear of plunging into water well over my head.

My body struggled for survival, every muscle jerking in uncontrollable movements.

Eric Chapman swam over. He grabbed me. "You all right?"

His brief touch was all that was needed to return sanity to my world and get my brain commanding my body again. "Yup," I said and swam to shore.

Eric claims I saved his life, too. Same pond. Different time. He sat on the edge of a raft and tumbled into the water backward, but his swimming trunks got caught on a nail.

Face underwater and upside down, he couldn't reach the nail to free himself, especially with the weight of his body pinning his swimsuit to the nail.

I grabbed his trunks and tried to free them. It took several seconds, but I succeeded.

Chapman's pond became part of John Glenn blvd -- paved over in other words. Maybe that's a good thing.

-- Thomas Bulkowski

Tuesday 11/9/10. Tutorial Tuesday: The Darvas Box

For those of you not living in the United States, this may sound strange, but twice a year we turn our clocks either forward or backward 1 hour. Some say its to extend the retail shopping hours but it's mostly used to torture people. How, for instance, do you tell your dog about daylight savings time? "I don't care if you have to pee! Go back to sleep for another hour!"

$ $ $

Late last week I released one of the more useless trading setups that I've tested: The Darvas box. It's based on a trading strategy developed by Darvas and supposedly used to make $2,000,000 in the 50s. Perhaps it worked well then but it doesn't now, at least not on the daily scale using my testing techniques.

Here are the rules.

1. Find a new 12-month high.
2. Find the top of the box, which is the highest high for the next three days (4 days total).
3. After finding the top, look for the bottom of the box. It's the lowest low for the next three days (4 days total).
4. Once the box is complete, a close (Darvas used a new high) above the top of the box signals a buy. Buy at the open the next day.
5. A close below the bottom of the box is the sell signal. Exit at the open the next day and then go back to step 1.

I show an example of Darvas boxes in the chart on the right. The first peak occurs (let's assume a yearly high), when price peaks and then makes lower highs for the next three days. In other words, each of the three highs remain below the first peak.

Another example of a box top is in the left inset. Price makes a new high and then the following three days have high prices that remain below the high set on the first day. The three days need not have consecutively lower highs (each day's high is lower than the prior) to qualify as the inset shows.

This same philosophy applies to bottoms and the right inset shows this. Each low need not be a consecutively higher low (each low is above the prior one). Rather, they can be any value providing they remain above the bottom set by the first day.

The box bottom in September is the first one that qualifies after the box top (remember, the top must appear first and be at a yearly high). In the first example, the box top is at about 88 and the bottom is at 78, for a tall box.

When price rises to a new high in October, it signals a buy, which I show in blue. The actual purchase would be made at the market open the next day. Since price has made a new high, the search for a box top would begin and be found a few days later. I raised the peak on the black box to show a new high (that is, I lengthened the black candle on the first box top in October). Your quotes may show a different combination of peaks and valleys. A box bottom follows when price bottoms followed by three higher lows. The October box top would be about 90 and the bottom would be about 87.

Price makes a new high and forms a valid box top. Again, the search for a box bottom begins but does not occur by the time the chart ends. However, price has closed below the box bottom, signaling a sale which would occur at the market open the next day.

This example may not be a valid Darvas box because I didn't check whether it's at a yearly high but look at the buy and sell prices. This box loses money! Looking at the setup in several stocks reveals that on the daily scale, the system follows this configuration, that of opening a trade just before price peaks, ending in a losing trade.

You can click on the link to view results using weekly Darvas boxes. That appears to work but since it doesn't work on the daily scale, I'd just hold my nose and walk away. Good trading systems should work on all time frames. Maybe you can get it to work for your market.

-- Thomas Bulkowski

Monday 11/8/10. 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

Not much has changed from the prior week. The explosive move on Thursday sent me back to the drawing boards in terms of market direction. I switched them on Friday evening (from down to up in 2 of 3 indices). I was expecting a retrace of the strong move up from the August low, but a retrace seems premature now.

I show a picture of the transports on the weekly scale for your viewing pleasure, starting with the congestion region circled in green. The red line represents a 38% extension of the AB move. In other words, I computed the height of AB and multiplied it by 138% to get the red line. Notice that it hits the green circle. Thus, that's where I expect the transports to rise -- to about 5,200, by December.

Part of the belief that the indices will do well is that they have historically behaved well going into the new year. November tends to be a weak time to buy since price tends to rise. The research at the link is based on actual trades, so your results and analysis may vary.

A Brief Look Back

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

For the Week...

Year to Date...

Economic Reports

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

Report	Time	A-F Rating	Description
Wholesale inventories	10:00 T	D-	Wholesale sales and inventory statistics.
Initial jobless claims	8:30 W	C+	Counts people filing for state unemployment benefits.
Trade balance	8:30 W	C+	Signals balance of exports & imports.
International trade	8:30 W	C+	Import/export prices, trade balance. US economy vs others.
Crude inventories	10:30 W	?	My guess: Measures oil inventory.
Treasury budget	2:00 Th	D	Tracks budget deficit. Important in April (tax filing).

Options Expiration

No options expire this week.

Bank holiday on Thursday (Veterans Day), but markets remain open.

Swing and Position Traders: Chart Pattern Indicator

As of 11/05/2010, 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 either underway or should be starting soon. The sessions could be more volatile.

Mutual funds will begin dividend distributions and rebalancing their portfolios for the approaching year end (starts in late November).

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 11/6/10. Turn Clocks Back 1 Hour!

Thursday 11/4/10. Fraud Warning Signs!

In the mail today, I received a brochure from the US postal service that I thought I'd pass on. It contained good advice about detecting the signs of fraud and some tips. Here's the list, courtesy of the USPS.

• Sounds too good to be true.
• Pressures you to act "right away!"
• Guarantees success.
• Promises unusually high returns.
• Requires an upfront investment, even for a "free" prize.
• Buyers want to overpay you for an item and have you send them the difference.
• Doesn't have the look of a real business.
• Something just doesn't feel right.
 
• Never click on a link inside an email to visit a web site. Instead, type the address into your browser.
• Verify an online company with the Better Business Bureau.
• Review statements, receipts and packing slips for accuracy.
• Shred confidential documents before trashing them.
• Your bank will never email or call you for your account number.
• Don't wire money to people you don't know.
• Be cautious of work-at-home job offers.
• There are no legitimate jobs that involve reshipping items or financial instruments from your home.
• Foreign lotteries are illegal in the U.S. You can't win no matter what they say.
• Check your monthly bank and credit card statements for charges you don't recognize.
 
• Order a copy of your credit report from each of the three national credit bureaus once a year at https://www.annualcreditreport.com. It's free.
• Report online fraud to the Federal Trade Commission at https://www.ftccomplaintassistant.gov/.
• U.S. postal inspection services: https://postalinspectors.uspis.gov/, 1-877-876-2455
• Federal Trade Commission: http://ftc.gov/, 1-877-FTC-HELP
• For more information on recognizing and preventing frauds and scams, visit http://deliveringtrust.com/
• How can I check on a broker?
• How can I check on a registered advisor?

-- Thomas Bulkowski

11/2/10. Tutorial Tuesday: Small Change to Website

At the request of a financial consultant, I made a change to Tom's Targets that are shown at the top of most pages on this website. If you click on the Tom's Targets phrase, it explains what you are looking at, that the numbers are the targets that I expect the indices to hit over the coming week or two. The Overview link gives a general view of the markets.

Circled in red below those two are the targets and here is where I made a change. I now show two targets per index instead of one. The target on the left, adjacent to the arrow, is the target that I think the index will reach by the associated date. If I'm wrong, the second target represents how far in the opposite direction I expect the index to move.

For example, I expect the Dow industrials to drop to 10,750 by mid November. If I'm wrong, then the index could rise up to 11,750 in the same time frame.

$ $ $

In the last several days, multiple people have asked how I'm doing. On this page, I show my trading results from 2000 to 2006. For this year, I've completed 31 round trip trades with a 71% win/loss ratio. For every dollar I lost, I've gained almost $8. Overall gains are about 19% and that includes both realized and unrealized gains. That's respectable, given that the best performing of the three major indices is the Nasdaq and it's up 10.5% this year.

-- Thomas Bulkowski

Monday 11/1/10. 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

Today's chart shows a frightening picture of what may come in the markets. It's a snapshot of the Dow industrials on the daily scale. I took the cyan colored box and moved the image to the right side of the chart, so that it follows the current price action.

Notice how similar the two pieces (the old rise versus the recent rise) look. Both follow similar trajectories. Both moves cover a similar distance. Does this mean the Dow is going to tumble in the next two weeks?

My guess is that we'll have a buying opportunity coming before the end of the year. I see many stocks being hammered after reporting weak earnings. That has been reflected in the indices by the reluctance of them to move higher. And that tells me the markets are going to come down. I don't expect a swift plunge like what happened in May, but I do expect a decline.

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.
Construction spending	10:00 M	D	Covers residential/non-residential/public spending on new construction.
Factory orders	10:00 W	D+	Durable/non-durable goods orders w/factory inventories.
Crude inventories	10:30 W	?	My guess: Measures oil inventory.
Auto & truck sales	2:00 W	C-	Monthly sales of domestically produced vehicles.
FOMC Rate decision	2:15 W	?	The Federal Reserves reports on interest rate changes.
Initial jobless claims	8:30 Th	C+	Counts people filing for state unemployment benefits.
Productivity & costs	8:30 Th	D+	Cost of producing a unit of output.
4 Employment reports	8:30 F	A	Nonfarm payrolls, unemployment rate, avg workweek, hourly earnings.
Consumer credit	3:00 F	D-	Measures auto, credit card and other debt.

Options Expiration

No options expire this week.

Swing and Position Traders: Chart Pattern Indicator

As of 10/29/2010, 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 either underway or should be starting soon. The sessions could be more volatile.

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

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

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

-- Thomas Bulkowski