Financial Market Fisherman

Mar 06 2009

An important juncture that may be missed by most

Published by Dean under DOW, Financial Market Fisherman, Fundamental Analysis, NASDAQ, SP500, Stocks, Technical Analysis, Trade, Trading Plan

It is not often I write publicly about my thoughts on the markets; however I feel compelled to share what I have noticed and read about in recent times, and the results of some good old research.

We have an interesting time regarding the equity markets, not only are they all moving in similar directions, many are or have been expecting most of them to rebound.

I believe we are at the moment where a bottom is about to be made that will offer a good opportunity for the next 6 months or so, however, what I also believe is that the signs or signals that create this bottom will not be what most expect.

First of all, I’d like you to shoot over to this web site and check out the chart, and once you have had a good look at it (and the two charts below it), return here.
http://social.stocktock.com/profiles/blogs/1937-vs-2008-updated-daily

Now, you have to admit, it’s a pretty compelling chart.

After watching this for a while and noticing its continual correlation, I decided to get down and look on a more microscopic level. And here is what I found regarding the last few months of the QQQQ and the period of the DOW being compared to on the blog above.

Before I go on, for those who don’t study Elliott Wave, don’t worry, this is not about Elliott Wave, and I’ll be making some important points to bolster my case, that have nothing to do with Elliott Wave, however for those who do, take a look at the waves. It’s just uncanny.

Now, what I also noticed (which has nothing to do with Elliott Wave), is that if you look at the last down move and the bottom, on the DOW in March of 1938 (picture below; importantly, the DJ30 went up 60% in 8 months from that low), tell me what you notice? I notice a clear lack of comparative volatility to the October low, and not only that, I see no reversal patterns or bars of any real significance; nothing that stands out like we saw in Oct. Now take a look at any recent chart such as the QQQQ, SP500, DJ30, and look at the Oct 2008 lows and see if notice a very similar theme. All technical traders would have seen this time as the bottom based on the patterns, bars and volatility. They were duped!

Now, let’s look at another piece of information I found during my reading travels. Marc Faber is a well respected voice, and he suggested that many traders will be expecting a capitulation, but will be disappointed, simply because there is no one left to capitulate. So what does this suggest? To me it suggests that at this point in time, there are more watchers of the market than there are participants, and this is easy to believe when you consider all the talk of how everyone is sitting on mounds of cash, not quite knowing where to put it.

With all this, I am putting forward the possibility that the market is going to turn around quite soon but it will not be a capitulation of market participants, but a capitulation of watchers. In other words, just as everyone gives up and turns off the TV, stops reading the Financial section, stops subscribing to newsletters, etc etc etc, then we’ll see a bottom. There will be no significant reversal bars or patterns, just a good old down day followed by an up day followed by another up day, and so on. Most will simply put this rally down to a bear market rally and that is great. This will enable the market to go in the path of least resistance, which will be up.

Just my thoughts, and for what it is worth, I will be going long stocks soon, and I am not in the camp of tight stops. They are for purely technical traders and as such I am only looking at what I am willing to lose should I be wrong and the next rally does turn out to be just a bear market rally.

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Aug 11 2008

A Trading Pattern For The Impatient Or Time Sensitive Trader

Published by Dean under Discretionary System, Financial Market Fisherman, Psychology, SP500, Technical Analysis, Trade, Trading Plan, Trading System

Your major focus in trading should be the softer side of trading, the business and psychological side of it; the harder side which relates more to the technical side is a secondary thought, however in this article I am combining the two because one of my favourite patterns is an ideal pattern for the impatient trader who does not like to hold on to trades for too long.

Impatience is not a good trait to have in the markets when trading or investing. It breeds laziness when it comes to research, planning and analysis, it causes some to exit trades too early, and it causes other’s to constantly monitor their positions. To add to this, trades that linger on can incur costs such as time premium erosion for options traders, and interest costs for CFD traders or stock traders using margin, to name a couple.

Weaknesses are a part of human nature; your job is to ‘manage’ them, not to try and eliminate them or even turn them into strengths. We were brought up to take our weaknesses and try and turn them into strengths which I believe is the wrong approach. Build on your strengths and manage your weaknesses is the best motto I ever heard.

Some traders who don’t like to be in trades for too long will use an exit strategy that will force them out of the trade if the particular stock or market consolidates and moves sideways for a few days, which is a good strategy. Let’s look at an entry technique which is the trading pattern for the impatient trader.

This pattern signals a turning of the market. It does not necessarily signal a top or bottom, it will sometimes just signal a correction, either way; it tells you that a swift and sharp move the other way is imminent, and usually enough to give a good reward to risk. The emphasis here is ‘swift and sharp’, because this is what the impatient trader is looking for.

The pattern unfolds in 5 waves with the highs and lows of the waves overlapping each other to the point where the 5th wave ends in a spike. Here is a diagram showing what to expect at the end of a run up, and the end of a run down.

This is what you need to see and how to trade it:

1. You join the highs of wave 1 and 3 together, and the lows of wave 2 and 4 together if in an up market, and these lines need to converge [or lows of waves 1 and 3, and highs of waves 2 and 4 if in a down market].
2. You want the high of wave 5 to break the upper line and spike [low of wave 5 to break lower line and spike].
3. The break of the lower line is your entry [the break of upper line is your entry].
4. Your stop goes on the other side of the 5th wave.
5. You want your exit or your first profit target to be within the range between the low of wave 1 and wave 2.
6. You shouldn’t take the trade if this range does not offer you at least a reward to risk ratio of 1:1, however this is obviously a personal choice

This is an example that occurred on the SP500 index in July 2008 on a 30 minute chart.

Elliott Wave users will be familiar with this pattern, known as an ending, leading and 5th wave diagonal; others may know it as three drives pattern, and others may just say it’s a wedge pattern.

The point I wanted to make in this article, so as to benefit you is that when these patterns occur they produce swift and sharp moves and this is an obvious benefit to those who don’t like spending too much time in the markets, whether it’s due to being impatient or because of trading instruments that are time sensitive.

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Jun 26 2008

Using candlesticks to signal reversals

Published by Dean under Backtest, Discretionary System, Financial Market Fisherman, Fundamental Analysis, Mechanical System, Money Management, Technical Analysis, Terminate, Trade, Trading, Trading Plan, Trading System, Trend, Trigger

Candlesticks in trading have two main purposes;

One is to tell the trader the open, low, high and closing price of that particular time period, and two, whether the close was higher (green bodied), or lower (red bodied) than the open.

However they can alert the trained eye to pending reversals offering the chance for a trader to get a head start on a possible new trend, or to alert the trader who is already in the markets that the trend is ending and to tighten stops or take profits now.

The two candlestick patterns we are demonstrating here is the hammer (& hangman), and the tweezers (also known as railway tracks).

When looking at either pattern, they look quite different, however when it comes to what is going on in the market place, the same thing is happening. So let’s see what that is.

After a significant run up in price, the market will exhaust itself or be overbought; however this is when the most action usually takes place. The reason is because towards the end of the trend, the misinformed public are still buying, not wanting to miss out on what is probably a well talked about market and trend. However at the same time, the professional traders are the ones selling to the misinformed public.

This activity creates a resistance to any higher prices because all the late buying is being absorbed by the professional selling. On a candlestick chart, this will often be shown by either a bearish pair of tweezers or a hangman. Essentially price moves up and then moves all the way back down again, in the space of one or two candles (see diagram below).

Likewise, after a significant move down the market will exhaust itself or be oversold; the misinformed public are the ones selling because they can’t handle their losses anymore, and the professionals are the ones buying from them.

Again, this activity creates support for price and the candlestick patterns will show price move down and then all the way back up again. This is shown by a bullish pair of tweezers or a hammer.

The bearish tweezers pattern and the hangman show the same activity, price moves up, and then moves back down roughly the equivalent amount. The bullish tweezers pattern and the hammer show the same, price moves down and then moves back up roughly the same distance.

If you look at the diagram below, you’ll see this in action. The main difference between the tweezers and the hangman or hammer is the time period. The tweezers are two candles, but the activity is the same. The other difference is that the colour of the hangman or hammers body is not relevant because the open and close are very close to each other.

Two things that make these candlestick patterns more powerful is when the range of the candles are longer than the average range, and there is higher than average volume to go with it.

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Jun 16 2008

Using Oscillators to get a feel for the market

Published by Dean under Backtest, Discretionary System, Financial Market Fisherman, Mechanical System, Technical Analysis, Terminate, Trade, Trading, Trading Plan, Trading System, Trend, Trigger

Oscillators are great tools when used wisely. They offer many ways in which they can be used, divergence, over bought/over sold, crossovers to name a few.

They can also be used to get a feel for the markets, whether trending or in a range.

If a trader wants to use oscillators to get a feel for the markets, what they need is some recent price action and a belief that the current trend or range will continue long enough to create some more opportunities.

For example, if you believe you are in an uptrend, and the trend has quite a way to go, you can then use an oscillator such as the ‘stochastics oscillator’ to tell you how deep the corrections are likely to go, based on how the oscillator behaved recently.

All you need to do is adjust the oscillators variable until the indicator produces a repetitive signal and one that you feel you can use.

Take a look at the chart below.

This is a daily chart and what has been added is a stochastics with a 25,5,5 setting. The most important variable was the first number, 25. Not because 25 works better than any other number, but because for this market, during this trend, 25 offered simple triggers as to when the corrections were likely to end and the trend continue, as shown by the arrows.

All you do as the trader is determine what number gives you the best signals or triggers for a possible trade.

When in an uptrend, look to use the oscillator as a signal that a correction is ending, and not when the trend itself is ending. Likewise, in a downtrend, use the oscillator as a signal that a bear market rally is ending, and not the downtrend itself.

However, when in a ranging or sideways market, you can use the oscillator as a way to signal when the top and the bottom of the range have been made.

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Jun 16 2008

The A-B-C pattern - a great opportunity

Published by Dean under Discretionary System, Financial Market Fisherman, Technical Analysis, Terminate, Trade, Trading, Trading Plan, Trading System, Trend, Trigger

During trending markets you will always have corrections. They are an inevitable part of a trend, and as such provide excellent trading opportunities.

What’s more corrections can often appear as certain shapes and structures that can be seen quite easily to the trained eye, offering similar opportunities time and time again.

One of those familiar shapes or structures is an A-B-C pattern. The a-b-c pattern is quite common and as such has varying names depending on the theory or the analyst using it; however its characteristics are the same.

If you are in a trend, the a-b-c pattern will make 3 waves or swings, waves A and C will run counter to the trend, and wave B will run in the same direction as the trend. When the pattern is complete, the main trend will resume.

The a-b-c pattern is never picture perfect, even though traders would love it to be, but two common characteristics that make it easier to trade are the following:

1. Waves A and C will often appear similar in length.
2. The whole pattern will often run within a channel.

If you look at the chart below you can see a nice a-b-c pattern, following the characteristics just mentioned.

The trend is up, and then wave A swings down against the trend, wave B swings back up with the trend, finally wave C swings back down. Also, the lengths of waves A and C appear similar in length, and the whole pattern fits within a small channel.

You wont always see them appear in such a nice fashion, which can make them harder to trade, however when you do, they offer a great opportunity.

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Jun 16 2008

The Butterfly - a termination pattern

Published by Dean under Discretionary System, Financial Market Fisherman, SP500, Technical Analysis, Terminate, Trade, Trading, Trading Plan, Trading System, Trend

If you are a chart pattern seeker, you may or may not have heard of the termination pattern called the ‘butterfly’. The butterfly pattern is so named because it displays what appears to be a left and a right wing.

The pattern is a termination pattern, either signaling the end of an uptrend (bearish butterfly), or the end of a down trend (bullish butterfly).

There is one important characteristic of the butterfly pattern which is to do with the right wing. The right wing will always put in a higher low and a higher high than the left wing if the trend has been up, and a lower high and a lower low if the trend has been down.

In the chart below, you’ll see a bullish butterfly which appeared on the SPY at the beginning of 2008.

The high of the right wing is lower than the high of the left wing. The low of the right wing is lower than the low of the left wing. It can be thought that the extreme of the right wing sucks late comers into the last of the trend before turning around.

There is no right or wrong way to trade a butterfly; however the head of the butterfly is a good place to enter the trade, which can be seen on this chart with the red dashed line.

One last note. There are some guidelines according to some users of the butterfly that the wings need to be a certain Fibonacci proportion to each other. I have not found this to be the case; however this is a personal choice and you may want to seek further historical evidence.

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Jun 11 2008

Using MACD to ‘clip’ the trend

Published by Dean under Backtest, Discretionary System, Financial Market Fisherman, Mechanical System, Technical Analysis, Terminate, Trade, Trading, Trading Plan, Trading System, Trend, Trigger

Do you use the MACD or even moving average crossovers as a way to determine the overall trend in your analysis? One thing you may have come across in the past is that although these are great methods, they always produce drawdown periods for you when the market is correcting or consolidating, and sometimes these periods can last for months.

One way to eliminate or reduce the effects of these consolidation periods is to ‘clip the trend’, and here we’ll demonstrate how to do this using the MACD indicator.

If you are in an uptrend, when the leading MACD line crosses below the trigger line, the uptrend is now clipped, leaving you with a decision to either not trade this market, or to look for shorts. Once the leading line crosses back above the trigger line, you can once again trade this market or now look for longs.

Likewise; if you are in a downtrend, when the leading MACD line crosses above the trigger line, the downtrend is now clipped, leaving you with the decision to either stay out of this market or look for longs. Once the leading line crosses back below the trigger line, you can once again trade this market or now look for shorts.

On the chart below, we have an up trending market which is being shown by both the MACD being above zero (one method for determining a trend), and a moving average crossover, where the short mav is above the long mav (the red line above the green line on the upper part of the chart).

The black arrows are showing you where the trend is being ‘clipped’ by the action of the MACD crossover (leading red line crosses below green trigger line), and as you can see on all occasions, a consolidation period forms, which is not ideal for a trader wanting to trade the trend.

The red circles are demonstrating when the leading MACD line crosses back above the trigger line and where the trend once again resumes.

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Jun 05 2008

Using Bollinger Bands to signal tops or bottoms with divergence

Published by Dean under Backtest, Discretionary System, Financial Market Fisherman, Mechanical System, Technical Analysis, Trade, Trading Plan, Trading System, Trend

There are quite a few uses for Bollinger Bands in trading and today we’ll look at one of them: Divergence.

Divergence is a common element of oscillating indicators such as stochastics, MACD and RSI to name a few, but the Bollinger Bands can display divergence too.

When divergence takes place several things will happen. In this example, we’ll discuss price making a top and the bollinger bands alerting us to this.

1. First, price will make a high and break above the upper band, and usually quite significantly.

2. Second, price will then head back into the bands, retreating from the high.

3. Third, price will then make a new high but will NOT break out of the upper band.

When you see this series of events, you have bollinger band divergence.

The picture below will give you a visual example of the three events that I have just described. Whether you already use bollinger bands or not, this can be a very useful tool to add to your tool box.

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Jun 05 2008

Using trend lines to project prices

Published by Dean under Discretionary System, Financial Market Fisherman, Mechanical System, Technical Analysis, Trade, Trading Plan, Trading System, Trend

Using trend lines is a great way to determine a trend, but if a trend line is broken, you can still use the trend line to give you a possible price projection area.

On occassions the trend line will reflect a symmetry with price where the greatest distance price has travelled from the trend line one way, will be similar to the distance price will travel from the trend line the other way.

In order to get an idea of the price projection you must first have a trend line in place, and then a break of that trend line. Once you have these two, take the greatest distance from the trend line price travelled ‘before’ breaking the trend line, and project that distance from the point of the trend line break.

The following picture will demonstrate how this is done. If you use trend lines in your trading try it out to see how often it works for you in your market and time frame. It may just add another edge to your trading.

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Financial Market Fisherman

Fishing the Markets for Opportunity - Only when you have peace within can you be in harmony with the markets

Archive for the 'Trade' Category

An important juncture that may be missed by most

A Trading Pattern For The Impatient Or Time Sensitive Trader

Using candlesticks to signal reversals

Using Oscillators to get a feel for the market

The A-B-C pattern - a great opportunity

The Butterfly - a termination pattern

Using MACD to ‘clip’ the trend

Using Bollinger Bands to signal tops or bottoms with divergence

Using trend lines to project prices