Trend Technician » Other Stories

John Roque on Financial Stocks

admin — Mon, 08 Feb 2010 16:57:51 +0000

A lot of traders, myself included, have a tendency to excuse their wrongness with the notion that they were right, just at the wrong time. In fact I have a technique for using calls to alleviate just this issue. John Roque was notorious for warning about how financials would underperform, just before they skyrocketed upward. He now wants us to be skeptical again:

Sadly I was on the same boat with him then and I’m on the same boat with him again. While I generally wouldn’t want to touch financials, if I had to take a position in the “premium” issues, I would be short. Goldman Sachs has had a huge run. It’s priced for a “V” recovery that isn’t going to happen. This isn’t a technical view, but I wouldn’t trust an indicator that told me otherwise.

Trading the NASDAQ For 2010

admin — Sat, 30 Jan 2010 19:28:21 +0000

Everyone liked the candlestick video so much I thought I’d point out another cool video that makes a good point about how to look at things simply. Those who’ve been reading my technical analysis basics series can tell that I’m a fan of simple chart analysis. This video gives a great example of looking at trends with an eye for a solid trendline, and using other tools for confirming data.

Given several other indicators of broader economic welfare, most potently the money supply, I’ve got a bit of a bearish feel already. The NASDAQ in particular has been a bit overzealous in it’s climb and seems a possibility for an appealing short. Looking at the trendlines in this video you can see some compelling indications that it may be time to start closing out longs at a bare minimum. Of course the evidence has mounted since this video was made and it was a good opportunity to make some money, or at least save some.

It’s also pretty striking to look at the kind of climb we’ve had without any significant retracement. Even if it’s only a short-term dip, there could very well be some money making opportunities here. I never rush in when fighting the trend long-term, but if you’ve been long you’ve made quite a bit of money and you should at least take a look and see if there’s evidence that the tide might be turning.

Click Here to Watch The Video

Technical Analysis Basics: Trends and Trading Ranges

admin — Sun, 06 Dec 2009 02:46:03 +0000

This article is part of the Trend Technician Technical Analysis Basics series. Be sure to read the rest of the series.

Once we understand the concepts of support and resistance we can talk about the two basic states a trend can be in: A trading range and a trend.

A Downtrend -- Note the lower highs as well as the lower lows.

A trend exists when prices are moving in a direction. When prices are consistently becoming higher, you are in an uptrend and when prices are consistantly lower you are in a downtrend. This distinction may sound arbitrary but the basic definition is that when prices are reaching higher highs and higher lows then the price is moving upwards and vice versa for downwards. When prices are not trending they are considered to be in a trading range. In this state, most prices hit roughly the same highs and the same lows.

Obviously these defintions only make sense in terms of a timespan. A particular issue can be in a long-term uptrend, but a short term downtrend. This is usually defined by what time period a bar represents on a graph and what kind of timespan in which you are planning on executing your trade. Moreover traders oftentimes tend to avoid issues when they are in a trading range, however this can be a great opportunity to profit using options.

Trading Trends and Trading Ranges

The rules of trading trends are fairly obvious. You very rarely want to trade against the trend for the timespan in which you are investing. While you might trade against a long-term trend if you plan on holding for only a short period of time, or against a short-term trend if you’re planning on holding for a long period of time, typically you want to trade with the trend. Additionally, profit taking can be very difficult in trading ranges.

Technical Analysis Basics: Price

admin — Mon, 03 Aug 2009 03:33:52 +0000

This article is part of the Trend Technician Technical Analysis Basics series. Be sure to read the rest of the series.

You wouldn’t think that price would merit its own post, but you have to start at the beginning. Price and volume, which we’ll discuss next are the two major components of charts. All the other data is a derivative of these two pieces of data. Price data however is not a simple number. Typically in technical analysis you deal with four distinct price numbers:

Open
High
Low
Close

These four numbers are fairly self explanatory, but let’s go over them quickly anyway. Open is the price at which the issue trades during a given time period. High is the highest price at which an issue trades during a given time period and low is the lowest. Close is the final price of the stock during the time period.

You’ll notice that in this discussion I speak in terms of time periods in a general sense. That’s because charts can have any level of granulatrity. In an intra-day chart, the period in question may be an hour or even in some cases a smaller fraction of time. In other charts, the same time period could be a day or a week or even a month. In any of these cases, however you can still have an open, a high, a low and a closing price.

When charting these prices, you can represent these values in many ways. Probably the most common type of chart is a bar chart. In these types of charts, each period is represented by a bar. The bar stretches from the period’s low to it’s high. It also has a tick on the left side for the open and a tick on the right side for the close. There are other types of charts, which we will discuss later.

The price is probably the most important component of any analysis, but it isn’t the only one. Without understanding volume, which we will discuss next, the price data can be misleading.

Price Data From a Bar Chart

How Bad Trading Psychology Crushed Me In 2009

admin — Sat, 25 Jul 2009 22:31:08 +0000

I’m not perfect, but then you’ve probably already deduced that. I thought I’d share some experiences with you to show how when people abandon their plan it can be demonstrative of the worst kind of psychological trading problems. These are exactly the kind of things that kill you when you’re making a trade — You enter into your position with a plan and then you decide something has “changed things,” so you abort the plan. In the end you always pay the price for this kind of behavior.

2009 has gotten me this way a couple of times. The problem is that I genuinely believe we’re in circumstances unlike any we’ve seen before. This causes me to “rethink” things far too often for my own good. Here’s a typical example of what I’ve done a couple of times. I decided at one point to go long TLT (Long Term Treasuries) as a hedge against some other positions. I sold a call off the position as well to limit my downside. The plan was if the trade moved the other way I would double up the position to increase my exposure and even out the hedge.

So of course TLT has a huge downward move, much larger than I expected. I start thinking about the economy and I get worried and I decide just to let my current position ride instead of doubling up. Of course TLT recovers part of the way. Had I doubled up my position as I had planned when I entered the position, that trade would have become a neutral one. Instead it was quite a loser and offset the gain in the position it was hedging.

I committed similar folly with a position in energy stocks. Basically I keep convincing myself that the unprecedented market conditions overcome my plan. Don’t get me wrong, it’s fine to decide that unanticipated news has affected your plan. But when this happens, you need to close out your position, take a step back and decide what makes sense. Instead I tookthe “middle ground” and start improvising and making it up as I go. This is completely self destructive. Once you have a plan, you stick with it.

Read more about psychology in my Trading Psychology feature.

Photo Credit: George E. Norkus

Don’t Trade Without a “Stop”

admin — Thu, 16 Jul 2009 21:11:23 +0000

If you’re trading without a “stop,” you are playing Russian Roulette with your money. “Stop Loss Orders” or “stops” are orders you place with your brokers to indicate that if your position moves against you to a certain point you will exit the trade. You have a “stop price” where if the issue trades at that price or worse, the order turns into a market order to sell or buy. Many traders don’t actually place the order but have a price at which they will exit the trade, which they still call a “stop.” In fact some traders prefer not to place an actual order because they fear they will influence price execution and get “stopped out” when they wouldn’t have otherwise. Regardless of how you execute the exit, you should never enter any position without a price at which you know you’re wrong and get out of the trade.

The Psychology of the Stop

The psychology of trading is fraught with peril. In many ways once the trade is on you can become fixated on making that trade work out. The problem is, when you’re doing the research and working out your trade, you’re perfectly rational. Once you’ve placed the order however, you can start lying to yourself and costing yourself money by convincing yourself to stay with a trade that’s turned against you. By always trading with a stop, you can set the extent of your trade while you’re still acting completely rationally. This can be a huge money saver.

When you’re deciding to enter a trade, you should be deciding a priace at which you’ve been proven wrong. You have reasons why you think the market is going to move in a certain way, which is why you’re considering entering the postion. You also need to set at what price your analysis no longer holds true and it’s time to get out. By doing this while you still have all your pros and cons fresh in your mind you can make the best decision and prevent yourself from taking unnecessary chances.

Moving the Stop

SPY With Parabolic

Another key thing to remember is that once you’re in the trade you don’t just forget about your stop. By moving your stop you can also keep from giving back all your profits or making other costly mistakes. Never let a profit run into a loss. Here you can see a subsection of a chart of the S&P 500 Index [Trend Analysis]. This chart has the parabolic indicator overlaid on it which is one strategy for moving your stop while in a trade.

We’ll discuss Parabolic in another article, but it provides a useful visual of how a stop might move during a trade. It also illustrates that this also doesn’t apply only when going long but when going short as well. You should always be looking for when you’ve been proven wrong and cut your losses when you have been.

You Don’t Have To Always Be Right

No one is right all the time, and trading with stops are simply a matter of managing your money to reflect this. If you are right only one half of the time but make more when you’re right than you lose when you’re wrong, you will have success. You are trying to play the odds and you want to make sure that when you’re wrong, you minimize the damage and that when you’re right, you maximize the reward.

Ultimately the stop is your protection from catastrophe. Many people don’t want to be wrong, but I’d rather be wrong with money than right without it. One key thing that many traders forget is that being stopped out of a trade doesn’t mean you can’t retake a position, it simply means it’s time to re-evaluate and make sure your trade still makes sense or wait until it does again.

Photo Credit: Kass & Rachel

General Mills: Dividend Growth with Pop Potential

admin — Mon, 13 Jul 2009 01:52:21 +0000

General Mills is an interesting analysis candidate. Many people like to disregard the fundamentals and simply follow the trend, but I see no reason not to put every component in your favor. If two stocks have similar charts and one has no debt and a great dividend and the other the opposite, I’m going to be much more reluctant to go long on the second one. Thus let’s start out with some appealing factors about General Mills from a fundamental standpoint.

The first thing that grabs your eye is that it’s sporting a 3.2% dividend yield. Dividends are particularly appealing in an era of wild uncertainty. When compared with a stock with no dividend, a stock like this seems to have a much more solid price floor. A P/E of 15 is not particularly good or bad in this environment. Lower multiples have been fairly common these days, and I’d like to see it lower; but General Mills is a very well-known stock, and 15 isn’t outrageous. Interestingly it converts 9 cents of free cash flow for every 1 dollar of sales. It also has stable margins. Ultimately all this suggests a boring, but relatively safe bet in the current market.

Now that you know you’re not playing with fire, let’s take a look at the chart. The trend analysis suggests that we’re in the midst of an uptrend in both the long and short term, with a new 3 month high in July. You can check these up to date results with trend analysis, giving you a breakdown of several salient indicators. Ultimately for a safe stock the chart looks pretty good from the trend analysis. It did however hit a new 3 day low on Friday, so let’s keep digging.

The final question is the chart itself. Looking at that recent gap up it was followed by a few new highs, but then seemed to peter out. I would be hesistant to enter a position until it made a new high or closed the gap. If I went long on this right now I would use a close stop. The nice thing about waiting for an upside breakout is then it becomes a very straightforward play. You simply go long and put your stop about 1.5% inside the trading range.

The purpose of this discussion is an example of how I use value investing in combination with trend analysis to identify the approach. It doesn’t constitute any kind of recommendation on General Mills. Your milage may vary.

Photo credit: yaybiscuits123

8 Must-Have FREE Online Investing Tools

admin — Fri, 10 Jul 2009 03:20:52 +0000

The world of finance has changed amazingly during the rise of the Internet. What used to be expensive pay services are now available for free online. Here are some examples of fantastic information and data that is available absolutely free.

INO TV – http://tv.ino.com/

INO’s TV service is an invaluable source of information. The service itself costs about $100 to watch all the educational videos that you want, but you can get 4 for free simply by registering. Of course if you go ahead and subscribe, that will be money well spent as well, but at a minimum you should register and get your four videos for free.

Yahoo’s Interactive Charts and Historical Data – http://finance.yahoo.com

Not that long ago I was writing my own charting software because I couldn’t stand what was available. Now I can get a killer interactive chart tool written in Javascript for free on demand. I don’t have to even download data or anything. Additionally, if I do want the data, I can just hop to the historical data section and download almost everything I could want. You can even download it to a spreadsheet.

Investor’s Hub - http://ih.advfn.com/

The one thing I can’t get from Yahoo! as far as I know is a full database of financials. Investor’s Hub provides a fantastic historical database of earnings, cash flow and balance sheet information for public companies. For example, if you want to get a detailed picture of a company’s financials without parsing their filings, this site is a live saver. Here, for example are the annual reports for Caterpillar. You can see quarterly data is available as well.

Edgar - http://www.sec.gov/edgar.shtml

EDGAR, the Electronic Data-Gathering, Analysis, and Retrieval system is a database with filings by public companies. In the olden days I used to write scripts to scrape data from here to do historical analysis of companies. While this information is now easily available on sites like Investor’s Hub, it can still be a good place to go make sure a company you’re getting involved in is what you think it is and that the numbers you’re looking at have some basis in reality. I’ve saved myself from catastrophes when a company’s financials and chart looked too good to be true simply by reading their quarterly report. In two cases in particular I learned about litigation they were almost certainly going to lose.

Investing In Bonds - http://www.investinginbonds.com/

Investing in Bonds is a good way to get some broad information on a sector that can be quite cryptic. The well written articles and indexes can help you make wise decisions in the bond markets. Bond information does not flow as freely as stock data yet, but this site is lessening the gap.

Yahoo Finance Stock Screener - http://screener.finance.yahoo.com/newscreener.html

It may seem that I’m in love with Yahoo! finance, but they really do have some good tools. They have two different versions of their stock screener. Either one is a great place to start building up a list of stocks to analyze. It can be a great tool when you seem to be unable to get your cash allotment down to the level you would prefer because you can’t find appropriate investment vehicles.

ClearStation - http://clearstation.etrade.com/

I used to track all my purchases on ClearStation. For a long time it had the best available online charts. It still remains a valuable community to get some “crowdsourcing” insight into the markets. You can use it for paper trading and for getting the sentiment of the public at large. It also tends to have a better level of conversation than most Internet stock discussions, although don’t expect too much, this is the Internet after all.

When so many tools are freely available you’re putting yourself at a handicap if you do not use them. Be sure to make use of these tools and seek out more to make yourself as informed as possible. Education is one of the best weapons to prepare yourself in the markets.

Photo Credit: Peter Martin Hall

Using Moving Averages

admin — Wed, 08 Jul 2009 20:52:32 +0000

Moving averages and chart analysis are the two most fundamental components of technical analysis. Even the most hardened technical analysis skeptic will admit that a moving average has its uses. Being able to read a chart is a key skill and moving averages can help provide an objective piece of insight to the process. Understanding moving averages begins with understanding the different types of indicators available.

Types of Moving Averages

There are many ways to calculate moving averages. The first is a simple moving average in which a given number of days’ values are added up and then divided by the number of days. So for example to calculate a 10 day simple moving average of closing price we would add up the previous 10 days’ close and then divide them by 10. As we did this daily the plotted points would form a useful indicator.

While the simple moving average is handy because it is easy to calculate, an exponential moving average is more commonly used. In this type of moving average the weight of each day’s data decreases as you get further from the current period. Thus as a day gets further in the past its influence on the moving average becomes less, instead of simply disappearing on the day it moves out of the term. While there are many other ways to calculate moving averages, these two are the most commonly used.

Using the Averages

Moving averages have many ways they can be used in trading. Prices often have a tendency to “bounce off” of the averages as they trend. As a stock trends up it tends to stay above its moving average but also tends to touch it periodically in the process. This can be useful in identifying what kind of trend you are in for different periods. Traders will often use a 10 day EMA for a short term trend, a 50 day EMA for a medium term trend and a 200 day EMA for a long term trend.

Also with the different time periods associated with these different trends, you can use moving average crossovers as a signal. This is the basis of the MACD histogram. Watching the convergence and divergence of different moving average periods can give you insight into how each trend is changing relatively.

Price crossovers can also be used to watch for a change in trend. If a chart has been trending in one direction, staying above its EMA and then crosses over to the other side, this can be an indicator that the trend has ended. This can be a good time to either close or open a position.

Moving averages are one of the most fundamental concepts to understand in your technical analysis education. Many other indicators are based on them in one way or another. Even if you eschew more complicated indicators they can be useful in simple chart analysis and should be part of any trader’s understanding.

How to Trade Gold in July 2009

admin — Fri, 03 Jul 2009 03:17:59 +0000

Gold is either a really good or really bad investment right now, how do you tell which? When it comes to the fundamentals, the same simple questions is driving gold that’s driving all other issues right now: Are we going to have a recovery and inflation, or continued woes and deflation? This question is particularly important for gold which really has no other utility other than as an inflation hedge, or as a safety play during panic.

Because this one question of whether we’re going to have inflation or deflation drives pretty much all markets right now, how do we answer the question? The answer is: we don’t. The outcomes and time-frames are such a matter of conjecture that trying to decipher the truth is a fool’s errand. In times like this our real goal is to divine the psychology of the market. We don’t care so much whether there’s going to be inflation or deflation, as we care what the market thinks is going to happen.

Obviously if we’re trying to measure market sentiment, technical analysis is our friend. Let’s take a look at some video that I find compelling:

Gold Chart Analysis

While the section about energy fields is interesting, I find the identification of the head and shoulders pattern much more compelling. How easy is that to trade. If it breaks out to the upside around 1k, then you go long with a stop back inside the range. You would expect some significant run with that breakout as well.

To get a detailed snapshot of gold at the given time you can get a free trend analysis here:

Spot Price of Gold

Just enter your email and name and you’ll get a detailed analysis of gold prices, completely up to date and completely free. I usually build my charts on the spot price of gold, even though I often trade using the ETFs or another vehicle. Whatever derivatives I may use, they will be driven by the spot price so that’s where I start my analysis. These charts can help make sure you don’t miss out on a big swing.