Market Commentary

Today was a solid day for the longs, where the market opened down yet was resilient enough finish the day up close to the highs around 2%. It traded up because of the FASB meeting tomorrow, where they will vote on Mark-to-Market. With the trading today, people seem to be assuming that they will relax MtoM. But if it is not changed, watch for some massive selling, especially in the financial names such as GS, C, BAC, MS. Even if the rules are changed like the market is expecting, don't expect a major rally because it seems to already be priced in.

Their will probably be some profit taking the next few weeks; people will be waiting for the second quarter earning results. I believe them to be bad, so as a trader it is good to take any profits within the next couple weeks, and build some short positions, esp in the financial names. Building a long position in the FAZ would be a good play in the next few weeks.

Tomorrow will be an interesting day and we will see if this rally will continue at least till the end of the week, maybe hitting resistance around $8000.

Dow Jones Industrial Average
Possible Support Levels: Has been and will likely continue to be around $7500. If that is broken, I could see it slow down around the 21 MA, with further consolidation into the next few weeks back retesting the recent lows.

Possible Resistance Level: Most likely resistance level would be around $8000, also where the 100 MA will meet it. If it can break through that, then next possible resistance level would be around $8500-9000.

We are in a pretty tight range right now, and the next trend would probably be lower once it breaks through support.

Market Commentary and Trading Ideas (8-7-08)

Market Commentary

The markets continue to stay within this short term uptrend and long term down trend. With bad retail news moving the markets lower today, it seems that the stimulus checks did a lot more than the mainstream media wanted to give it credit for. Hopefully the US consumer can start to spend their money again and keep the economy healthy. As we thought the old support is still acting like new resistance; if we fail to break through this 11700 level/ 50 Day MA then the market will likely fall to the 11100-11300 level and if that is taken out, the market will hopefully test and re-bounce off the 10900-11000. If we can break though the 11700 level, then we will probably find resistance around the 12000 level or the 100 Day MA.

Trading and Investing Ideas

Mastercard (MA)

Mastercard right now is on the decline, mainly from tough times in the market and a bad earning report. This should not be of much concern. Mastercard is trading right now at its 200 Day MA, which most growth stocks have a positive test to from time to time and most bounce higher. It is very oversold right now and it should be considered for a short term swing trade or even I believe this is a good spot to enter if you want to invest for the longer term. Its biggest competitor is Visa, the 2 companies basically run the credit card business. Also, their earnings report should also have another look at. Yes, their earnings were lower than analysts thought, but you have to dive deep and see that their revenue was up 25%, a pretty big move. The MACD is relatively oversold and looks to be reversing soon. 

Thermo Fisher Scientific (TMO)

TMO seems to have broken out of an 8 month consolidated/rectangle pattern to the upside. 100 Day MA crossing 200 Day MA is a good sign that this trend could be real. A hold of this new support/ prior resistance of around 59.50 will keep this pattern/breakout solid with a price target of around 64-70. MACD is kinda scary with the fast line starting to roll over, but even if it does, TMO can still stay above the support line. The stock looks strong even in this market place because it has continued to stay above its prior lows, while the Dow Jones hasn't. This is more of a trade with your stop loss around 55. Options maybe a good trade to take advantage of its leverage incase of a small rapid move. 

Medco Health Solutions (MHS)

MHS is in a bullish continuation wedge pattern. To keep the pattern constructive it should hit its uptrend support line around 45-46 allowing it to bounce back up and will hopefully complete this pattern by breaking through its downtrend resistance line with heavy volume. The pattern would be broken if it breaks under the uptrend support line but it will most likely find support and bounce back at the 44 level. MACD is neutral and Accum/Distr remains positive. RSI isn't showing anything worth noting. If pattern is completed and breaks through its resistance the first resistance level would be around 51-52, and second level would be around 54. Short term trading would be a good strategy and an even riskier play would be to buy it once it hits the bottom support line, but with options a great potential profit would be in store. 

20 Trading Tactics & Money Management Tips

1. Trade in the direction of the major trend
2. Keep trading as simple as possible and use what you know
3. Buy the dips and sell the rips in an uptrend and downtrend respectively
4. Knowledge is power in the world of technical analysis, keep learning
5. Make sure to cut losses, and let profits run as far as your system deems necessary 
6. Be a contrarian, don't follow what the talking heads are telling you 
7. Use stops to limit your losses, DO NOT USE MENTAL STOPS
8. You should trade a plan and plan a trade
9. Understand a new trading system before diving right into it
10. Use different time frames to select proper entry and exit points
11. Back test and look at historical data before using a trading plan
12. Scan trends from the long term to the short term
13. Use sound money management strategies 
14. Make decisions when the market is closed, unless you are day trading
15. Make sure you diversify, but it can be bad to over diversify
16. Don't throw good money after bad, unless you are buying down in a major uptrend, keeping in mind to use stops
17. Know how to position size
18. Keep your risk/reward at least 2-to-1
19. Use fundamental analysis to screen for stocks and use technical analysis for when you buy and the overall market trend
20. Use the 3 elements of successful trading: Market Forecasting, Patterns/Timing, and Money Management

• Market Forecasting- You looks for which way the market is going. Follow weekly and monthly time frames to determine the major trends. Look for higher highs and higher lows compared to lower highs and lower lows. Follow any economic data that is released or any news from the FED or our government. If the trend seems up, you can assume that you should have long positions; and visa versa. Beware of conflicting news, if you see the major trend has been up for a long time, and bad economic data is released, it might be better to be in smaller positions and wait for the market to clear things up.
• Patterns/Timing- Use different chart patterns to select entry and exit points. You can look at these patterns in candlestick charting, or in other ways like chart patterns including bullish triangles, wedge patterns, cup and handle patterns, flags and pennants, head and shoulder patterns, and rectangle patterns. Most of these are continuation patterns, and you need to see volume decrease as the pattern is about to break out, and once it does, you should see a surge is volume. Also, use support and resistance lines to yet better define entry and exit points and changes in stock momentum.
• Money Management- You must have discipline in order to properly be sound in managing your money. You must cut your losses at the most an 8% loss from your purchase price. You have to build in stops soon after you buy a security. You have to make sure to diversify, know how to size your positions, control your risk, use stops, have high risk/reward ratios, know when to trade aggressively or to sit back and trade more conservatively during market uncertainties.

Trading like a Business

The Keys to Successful Trading

Know that the talking heads and "experts" aren't prophets

Some of the experts that try to predict the market, actually make money trading, however they don't make money because they predicted the market correctly, they make money because thay have traded the market correctly.

• They don't profit from their predictions
• They have learned to be disciplined in their trading
• They profit from proper risk control and cash management
• Most don't have better performance records

See and feel what the market is doing

We make money trading when we understand what the market is doing. If you start shorting stocks and the market goes up, it's the markets way of telling you that YOU ARE WRONG. Don't go against what the market is telling you.

• Don't fight the market
• Let the market tell you what to do and when to do it
• The market can change at any point, so be ready and get out of poorly timed positions

Have a long enough time horizon

You can't think that you are going to make a lot of money really fast. But don't be discouraged that it can't happen, because it very much CAN happen. The get rich quick scheme is the general short-term business thinking in America; you have to get that mindset out of your head. A trading system must have time to work by leaving enough time and money around to change it if it doesn't work.

• Trade for profits over time
• Give your trading system enough time to work
• Don't over trade your capital, in case the trading system needs to be changed

Know that market and human psychology is a major part of trading 

See what prices the major swings of the market change at by using support and resistance lines, as well as other types of trend lines. This is related to market psychology. Human psychology is having well disciplined rules. Such as position sizing, risk management, stop-losses, entry and exit points, and time horizon.

• Accept losses as a cost of doing business; every business has losses
• Use historical statistics to back test market psychology
• Allow the market and your trading system determine the profits
• Like to trade, don't do it as a hobby

Know when to enter and exit a trade

You must go into every trade with some idea of when you will take profits. Some people including me have a mathematical formula to help exit for profit. Most people have stop-losses around 8%  as a good means of discipline and risk management. Make sure you execute your system the way you wanted to, with good risk management you can still be able to change it if your system doesn't work out. Always be in the market one way or the other. Even if the market is going down you can still profit by buying puts or buying short ETFs if you don't want to use margin and short equities.

Drop-off in Oil May be Ending? (7-26-08)

With oil and other commodities off their record highs, people wonder when will this downtrend in energy end? With oil dropping like a stone, it leaves investors feeling good about inflation worries and trust that the US dollar will finally rally, stopping this down trend. 

But don't be too happy too soon. Even with oil off its record highs many people were hoping that this mess in the markets would finally be over. It seemed to be over for about a week, when two days of closing at the bottom for the day has left the market uncertain for the future.

We have to remember that much of the surge in the Energy stocks have been from the total debacle in the Financial stocks. With the financials still posting bad numbers and writing down more debt, it has left us still in a big mess even with oil continuing to drop. I know that Merrill Lynch believes that the Energy sector will continue to show long term leadership.

But there is some light at the end of the tunnel. Citigroup and Bank of America have posted better than expected earnings. Merrill Lynch has written off all of its bad debt from their books. This is good news for the financials. 

But we have to see what's going on right now; and right now oil (USO) is hitting a decent support line and also the 100 day MA. Along with the support, the oscillators are all reading oversold. I think this down trend could continue for the next few days, not going lower than 95-97 on the USO, before leveling out for a few weeks to a couple of months.

I think after oil (USO) consolidates around the 97-104 level and not going above the 108-110 level for a couple of months and depending on supply news, which should continue to rise, it should break support and start to consolidate around the 200 day MA and support around 87-94.

Managing the Trade

To better manage your trading philosophy you should create trading rules, you should know when to sell for profit or loss, and you should keep losses under control. 

Creating Trading Rules- 

When you decide to make a trade, you should have a plan from entry to exit. Knowing when to sell is just as important as knowing when to buy. This is different from traditional investing, where you buy a security just to hold it and hope for a gain, not knowing what gain you might collect. If you want to increase your capital, it's knowing when to sell that really counts. You could get in at every right position and still not make nearly as much as you could have if you just knew the basics of when to sell. But even with technical analysis, it is harder to pick exits than entries.

The process of successful technical trading rests on 2 pillars:

-Controlling losses

-Taking money off the table if a gain is seen when a change in the security or market is keeping your indicators guessing of future price moves. 

Some Questions About Trading

Since the name of the game is money management, these are some questions to see what type of risk you are willing to allow for yourself.

How much capital should I put into technical trading?- No real answer exists. If you want to spend a lot of time learning trading and different indicators and realize you could lose and risk a lot, it's your choice. You must want to learn and get better if you want to risk a lot of your money with riskier securities, options, or futures etc. Don't commit a lot of capital if this is just a hobby to take up your time; even if you are a part time trader, don't think of it as a game, think of it to make a extra income for yourself.

How many securities should I trade?- As a rule, you want to diversify with equities. It reduces risk and allows you to stay in the market. For beginners, maybe 3-5 would be plenty, but making sure to check them on a daily/weekly basis. But even for the most experienced traders no more than 10-15. It would be too hard to keep track of that many using technical analysis, maybe for the buy and hold approach but thats another day.

Which securities should I trade?- This is harder and depends much of how much risk you are willing to take. If you can afford to risk a lot you might want to invest in options/futures or very risk/high volatility equities. If you don't want to take on much risk, blue chip stocks or non risky/low volatility may be better for you. Most people (esp. young people)should trade all kinds; high risk and low risk equities and even some options/futures once in awhile. 

Having an Emergency Plan of Action

You have to realize that no indicator or string of indicators predict stock moves 100% of the time; its just not there and not possible, don't let anyone tell you otherwise. You have to treat trading like a business. And all business have losses once in awhile, but with trading the most profitable "business' knows how to control their losses. You have to see what the indicator is telling you, not trying to manipulate the indicator to show what you think you are seeing. You also have to realize that even if all of your indicators say buy, catastrophe does happen within the markets and can change the course of any security in a matter of minutes.

Take Money off the Table

When you have a gain in a trade, when have you made enough? How do you know when you should take profits? Some traders take a profit no matter how small, if they can get one. Little books or websites give any concrete information on when enough is enough. I and many always say that it doesn't hurt to take some profit. You don't have to sell it all if you still have faith, but to take some off the table early will save you in the long run. Take some profits when your security is about to hit some minor resistance levels or about to hit some of the bigger moving averages like the 50, 100, or 200. After the April/May rally of '08 ended, it hit the 200 day MA and has been tumbling since. Take some profits if one or more of your indicators is showing too overbought or if you use Bollinger Band take some profits when it hits the top band. To be a better and more disciplined trader you must never say or think, "woulda, coulda, shoulda" and tell your friends the profits you could have made, because they don't care that you "almost" doubled your money on a single trade.

Controlling Losses

In William O'Neils book, 'How to Make Money In Stock", he give a good point when to take losses. He says and I agree to take losses if your trade has gone to -8%. And not so enforced he says sell at 25%, unless the stock looks more powerful. His idea allows you to make 3 bad trades and 1 good trade and still be in the money. An easy way to control loses is by not putting a lot of your capital at stake; and knowing how to size up the dollar value on your position. Not more than 5-10% of your capital should be at risk on any one trade/security for most people. If your willing to risk it all on an all or nothing bet, be my guest and best of luck to you. The 8% stop is a overall good number to stop an take you losses from a security (options is harder to gauge because they are much more volatile). But don't think you will sell at 8%, You must create a stop because mental stops are a fallacy. Mental stops con the person into letting the security take control of them. They watch as it falls past the stop and have hope that the stock will rebound. The trend is your friend so it probably won't. To pretend that you have a mental stop or refuse to place stops is to avoid accepting that trading does insure losses (some of the time)and to think other wise is plain arrogant. 

Japanese Candlestick Simple but Useful Patterns

Simple Patterns

There are multiple forms of candlestick chart patterns, with the simplest depicted at the left.

In my charts I use green for the white stick (bullish) and red for the black stick (bearish).

Here is a quick overview of their names:

1.White candlestick - signals uptrend movement (those occur in different lengths; the longer the body, the more significant the price increase)
2.Black candlestick - signals downtrend movement (those occur in different lengths; the longer the body, the more significant the price decrease)
3.Long lower shadow - bullish signal (the lower wick must be at least the body's size; the longer the lower wick, the more reliable the signal)
4.Long upper shadow - bearish signal (the upper wick must be at least the body's size; the longer the upper wick, the more reliable the signal)
5.Hammer - a bullish pattern during a downtrend (long lower wick and small or no body); Shaven head - a bullish pattern during a downtrend & a bearish pattern during an uptrend (no upper wick); Hanging man - bearish pattern during an uptrend (long lower wick, small or no body; wick has the multiple length of the body.

6.Inverted hammer - signals bottom reversal, however confirmation must be obtained from next trade (may be either a white or black body); Shaven bottom - signaling bottom reversal, however confirmation must be obtained from next trade (no lower wick); Shooting star - a bearish pattern during an uptrend (small body, long upper wick, small or no lower wick)
7.Spinning top white - neutral pattern, meaningful in combination with other candlestick patterns
8.Spinning top black - neutral pattern, meaningful in combination with other candlestick patterns

9.Doji - neutral pattern, meaningful in combination with other candlestick patterns

10.Long legged doji - signals a top reversal

11.Dragonfly doji - signals trend reversal (no upper wick, long lower wick)
12.Gravestone doji - signals trend reversal (no lower wick, long upper wick)

13.Marubozu white - dominant bullish trades, continued bullish trend (no upper, no lower wick)
14.Marubozu black - dominant bearish trades, continued bearish trend (no upper, no lower wick)

(Wikipedia)