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Friday, November 18, 2011

Occupy Wall Street and Frankenstein's Monster

Dear Members of the Occupy Wall Street Movement,

I write this letter to you out of both admiration and concern. My admiration stems from your willingness to make your voices heard, as is your right (and obligation) as citizens of the country you love, to address the many failings of our modern economy.

The strife of the poor and the relentless brick-by-brick dismantling of the great American middle-class are concerns that I and many others share, as no society can prosper or be truly free when hard-working families can no longer taste the fruits of their labor because of excessive debt and inflation.

Members of OWS and the Tea Party have separately taken valuable time from their busy lives in efforts to shine a light on these issues. Your voices have attracted media attention and served notice to the defenders of the status quo in business and government that change is necessary to restore America to economic greatness.

Not only are the power centers aware of you now, they might even be beginning to fear you. As well they should. The Founding Fathers believed a government should fear its citizenry. As Thomas Jefferson said, "The price of freedom is eternal vigilance." The country and our “leaders” have been asleep at the post lately, but you have been rousting your fellow citizens from a deep slumber and for this you have my heartfelt thanks.


But my concern arises from the fact that the villagers with the torches and the pitchforks have arrived at the gates of the wrong castle.

The monster you seek to slay is but the creation of the true perpetrators of the wanton destruction of the economy. Wall Street is Frankenstein's Monster, and it has indeed been let loose upon the land to trample everything in its path. But without access to cheap credit, the Wall Street Casino pit bosses could never have devised credit default swaps and other derivatives of mass destruction. No, they could not have caused this economic carnage alone. It was monetary and banking policy set by a higher source that fostered the environment for the incubation of the monster. As such, it serves little purpose to kill it as Dr. Frankenstein, the real villain in this story, will merely create a new beast if left unchecked.

Dr. Frankenstein, for the purpose of our analogy, is the Federal Reserve and it is the institution which must be shut down if any real reform is to begin. It is the central power in our country and through the tools at its disposal – the setting of interest rates and the expansion and contraction of the money supply – it can create not only recessions and depressions, booms and busts and income inequality, but ultimately the indentured servitude of the American people.

The Fed, from the moment it came into being, reintroduced to the U.S. a centuries-old fraud called fractional reserve banking which has served to addict the government and the general populace on a powerful narcotic of financial bubbles, debt, inflation and globalism. The mechanics behind this swindling of the citizenry is so vast and complex that it is outside the scope of this letter and only the bullet points are presented here. I heartily recommend everyone read the book “The Creature From Jeckyll Island” by G. Edward Griffin for a definitive account on the subject.

To the uninitiated, fractional reserve banking is the process by which money is effectively created from nothing. To give an example of how this works, you take $100 dollars you earned from your hard labors and deposit it at your bank. So the bank now has that $100 on deposit in real money. Because the bankers know that very few people will withdraw money at any one given time, they are only required by their rules to keep 10% in their coffers which in this case is $10. They lend out the remaining $90 to customers or other banks and charge them interest. Since both the depositor (you) and the subsequent borrower both have claim to that $90, they have in effect created money where there was no money. Now, let’s say your $90 was lent to Bank B. Bank B then keeps $9 in reserve and loans out $81 to another bank or customer who pays them interest and so on and so on.

The bank pays you a nominal interest rate on deposits but charges you a much higher interest rate when you borrow. When banks receive a loan from another bank it is at the prime rate, so the interest they pay will be vastly lower than what you pay if you borrow from them as a customer. The difference in the interest rates minus the amount they pay depositors becomes bank profit. In effect, you give them money nearly interest-free and they profit off usurious interest on money they create, counterfeit really, with a keystroke on a computer, off of your real labor.

Now multiply this scenario by roughly 300 million customers and you can see how the velocity of the money supply expands nearly at the rate of the known Universe. That is inflation and it often runs the gamut from a few percent to double digits in some years. More dollars are chasing a relatively stable amount of goods, which pushes prices higher and eats away at the purchasing power of your dollars and savings. This is often called the “hidden tax” and your piddling 1% interest-bearing savings account doesn’t look so good now.


In essence, the wages you earned for your services in the work place were determined by a very shrewd assessment between you and your employer of your relative worth to each other. The worker and the employer both agree that the service and the wages when weighed on the scales are essentially in equilibrium. But then this "real" money (because its worth is honored by both parties) is then completely corrupted by being thrown into a slush-fund with fiat money that is created by the banks, money that has no correlate in worth, whether as goods or services, because they only exist as an expectation or projection. Hence you have "good money thrown after bad".

The above was merely an example of a small scale transaction between a customer and a local bank. The Federal Reserve, however, does the same thing on a much larger scale, as they are the sole, monopolistic central bank for a much larger customer: Uncle Sam.

Since the government has rarely run a budget surplus since the creation of the Fed in 1913, our deficits have to be financed somehow. This is accomplished by the selling of U.S. debt instruments made by our government (treasury bonds, for example) to the Fed, who then creates money out of thin air - in much the same manner as our earlier scenario - to loan to the government at interest. The Fed then takes the bonds as collateral. Even though the bonds are essentially IOUs, they are treated the same as hard money since they are backed by the full faith and taxing power of the U.S. government which has never defaulted. The Fed then loans out the debt instruments to its member banks who, in turn, do the same 10:1 loan daisy chain we spoke of earlier. The Fed does indeed repatriate the interest payments (after expenses) back to Uncle Sam, but the commercial banks underneath the Fed benefit from fiat money being loaned out to customers for whom interest is NOT repatriated.

All of this equates to the Fed acting as the major creditor to the United States government, and the government is ultimately you and I. You can understand the magnitude of our national debt and subsequent debt enslavement when you fathom that the Federal Reserve is not federal at all, but a private consortium of banking interests. That’s correct: only a small amount of the debt is owed to holders of treasury instruments like your sister or grandfather. The rest is owed to private bankers for whom patriotism is of little consequence. They are loyal mostly to profit. And as with all debts, they must be paid, with either fiat dollars or hard assets. That is where the indentured servitude comes into play.

When a person or the government borrows at interest, it can only be paid one way: with future labor. We can’t create money out of nothing. Only the Federal Reserve can do that as they were given full control of the money supply in the Federal Reserve Act of 1913.

As the debt rises (and is compounded by inflation eroding your dollar’s value), more and more of your toiling goes to paying interest and keeping up with inflation. You are then in the position of getting a second or third job and you have less time to enjoy life and spend time with your friends and family. For the government, it means needing more and more workers to prop up zombie entitlement programs like Social Security and Medicare. As debt spirals out of control, eventually you (or the government) will default and your tangible, hard assets like your home or car will become the possession of the bankers.

They have denied that they want those assets. The mantra we’ve heard is that “we’re not in the real estate business,” and they tagged these houses as “toxic assets.” Homes, however, can never be toxic assets. They are hard assets with actual value that were mispriced because of the Fed’s housing bubble. But honestly, knowing what you now know, if you were a banker would you rather have dollars created out of thin air and backed by nothing or homes built on terra firma that you can sell at higher prices when the next boom-bust cycle comes around?

In every walk of life and in every era of mankind, a debtor is always beholden to and will do the bidding of his creditors, lest they pull the plug and recall that debt. This is the true reason for bank bailouts, TARP, and “too big to fail”. The Fed simply called in its favor to its government debtors and Dr. Frankenstein’s vassals in Congress flipped the switch for the master and made all the bankers problems go away at, you guessed it, your expense. As long as we are in hoc to the Federal Reserve it will not be the last time, either.

G. Edward Griffin succinctly explained the way debt and inflation (as controlled by the Fed) will work in tandem to lead the people to bankruptcy:

“Inflation can be likened to a game of Monopoly in which the game's banker has no limit to the amount of money he can distribute. With each throw of the dice he reaches under the table and brings up another stack of those paper tokens, which all the players must use as money. If the banker is also one of the players – and in our real world that is exactly the case – obviously he is going to end up owning all the property. But, in the meantime, the increasing flood of money swirls out from the banker and engulfs the players. As the quantity of money becomes greater, the relative worth of each token becomes less, and the prices bid for the properties goes up. The game is called Monopoly for a reason. In the end, one person holds all the property and everyone else is bankrupt. But what does it matter? It is only a game."

"Unfortunately, it is not a game in the real world. It is our livelihood, our food, and our shelter. It does make a difference if there is only one winner, and it makes a big difference if that winner obtained his monopoly simply by manufacturing everyone's money.”

What makes this all the more outrageous is how contrary fractional reserve banking and the Fed are to the ideals of the Founding Fathers of our country. They warned us of the evils of usurious bankers controlling the nation’s currency.

George Washington, in a letter to Jabez Bowen wrote, “Paper money has had the effect in your State that it ever will have, to ruin commerce--oppress the honest, and open a door to every species of fraud and injustice.”

In a letter to John Taylor in 1816, Thomas Jefferson wrote, “And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."

He also stated to John Wayles Eppes, “Bank-paper must be suppressed, and the circulating medium must be restored to the nation to whom it belongs.”

How truly wretched that such fervent opponents of fiat currency would have their visages printed upon the Federal Reserve Notes that we today call money.

Only by heeding the words of the wise, past and present, can we hope to prosper again as a nation. If it doesn’t happen soon, the Monopoly game will be over and Dr. Frankenstein’s victory will be complete.

But always remember, capitalism is not the problem. Capitalism, through innovation, industriousness and self-reliance, gave America the standard of living that has been slowly squandered. Corruption of power and cronyism between banks and governmental officials are the real root causes of our maladies. Ignore the zealots in your movement who say otherwise.

There is much to do. Write to your congressmen to demand action. Peacefully and respectfully make your voices heard by putting your best foot forward. Find common ground with the Tea Party. Continue lending a hand to the least amongst us. Steep yourselves in economic theory and join with those, like Ron Paul, who for so long were lone voices in the political wilderness warning America of this economic meltdown.

Removing the undue influence of the Federal Reserve is the most important step Occupy Wall Street can take along the path towards returning the control of the people’s money back to the citizenry as Washington and Jefferson desired.

Thank you very kindly for taking the time to read this.

May the warmest regards keep you strong in the cold, challenging months ahead,

A Fellow Citizen

Friday, October 21, 2011

Economic Meltdown Hall of Fame Class of 2011

Actors have the Academy Awards as the pinnacle of achievement. Athletes have Hall of Fames. Presidents have Mount Rushmore.

What do great economic minds who warned the country of the disastrous results of financial bubbles get? There is that Nobel Prize thing, but that is rigged in the favor of insiders and is the domain of partisan hacks.

No, for the most part these distinguished thinkers are usually mocked and called Chicken Littles on CNBC or Fox Business, ignored by the mainstream media and sabotaged in the halls of Congress.

We here at The Chartographer's Map Room believe they deserve far better treatment. After all, if someone who can throw a ball 100 mph can be exalted by the public, shouldn't our brave thinkers who were lone voices crying in the wilderness get some love? We think so, too.

So, welcome to our first annual Economic Hall of Fame induction ceremony. Honorees had to meet two essential criteria:

1. That they are independent thinkers and truth-tellers and aren't Wall Street shills. If they are involved in government, they must be people who put the truth and ideals ahead of partisan politics and can cross political aisles as necessary.

2. That they had to be ahead of their time and had predicted some aspect of the economic disaster in which our country is embroiled.

So without further ado, here are the six distinguished individuals of the Class of 2011: (And yes, there will be an Economic Meltdown Hall of Shame coming soon as well)



Ron Paul:
Presidential candidate who has been an advocate for Austrian Economics before it was cool. Steadfastly refuses to compromise his principles for votes. Recognized early that financial bubbles and fiscal irresponsibility would place the U.S. economy on the brink.




Peter Schiff:
Endured scathing mockery from lesser minds on CNBC and Fox Business with a smile and good cheer. He nailed almost every aspect of the meltdown, yet no one except Ben Stein had the good grace to apologize to him. Worst of all, most of the fools who were wrong are still getting airtime on financial television.


Ross Perot: That giant sucking sound of U.S. jobs being outsourced can be tracked all the way back to the early 1990s, when NAFTA and other one-sided "free trade agreements" were enacted. The man who heard that noise first? Former Presidential candidate, Ross Perot.


Pat Buchanan: He's been called every pejorative in the dictionary for what he's written about immigration and shifting demographics and its effects on the culture and the economy. What he hasn't been called often enough is simply, "correct". He's warned about NAFTA, globalism, outsourcing, a lack of economic patriotism, the destruction of the nuclear family and the dwindling of the presence of worker's unions. All of these have been factors in leading us to national financial insolvency.


David Walker: That rarest of governmental officials: a high-ranking civil servant who vastly outperformed his salary. The former Comptroller of the Government Accounting Office toured the country for years warning the nation of the dangers of partisan budget shenanigans and "the demographic tsunami that will never recede. He was ignored by Washington. But not here.


Nouriel Roubini: "Dr. Doom" proved painfully correct in his essay, The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to
Financial Disaster
. Mr. Roubini also deserves a nomination for this concise and cogent interview with the Wall Street Journal.

Thursday, October 20, 2011

Buying Gold Until the Trend Breaks

Whenever one actively trades a massive bull market, such as gold today, it is best to buy near its dominant support line and sell once it veers too far from its moving averages.


I believe gold's month-long consolidation period is at its end and expect it to rally from the 1600-1625 per troy ounce level. If you look at the gold weekly chart below, you will see the past 6 or 7 times it has kissed its trendline have been excellent buying opportunities. The trend is the trend until proven otherwise.

A wise strategy to cover you in case the trend does break, is to place a stop-loss order a reasonable distance below the trendline to avoid a fakeout.

I saw people rushing in to buy gold when it started going parabolic at 1900. It was, in fact, the time to sell. We had come too far too fast. To be a good trader, you simply cannot chase stocks or commodities. This is why I will continue to belabor the point: Buy Normalcy and Sell Mania.

Chart courtesy of StockCharts.com.

Friday, October 14, 2011

Fighting the Invisible Hand and the Plunge Protection Team

In my last post of 10/4, I stated buyers would need to step in that day to avert a crash. Boy, did they ever. The 1100 level on the SPX was breached and took us to the 1075 area when Ben Bernanke and the Plunge Protection Team rode to the rescue with reassuring comments that traders ate up with knife and fork.

This is a fairly common occurrence and one you have to account for when you attempt to trade from the short side. It's yet another reason why it is FAR easier to trade bull markets. When you go short in bear markets, you not only have to fight the faster pace of trading and volatility (since fear is stronger than greed) but also the Invisible Hand of the PPT.


Although no governmental official will ever acknowledge intervention in the stock market and it sounds like some grand, kooky conspiracy theory, traders have known about the PPT and the President's Working Group on Financial Markets for years.

Government has a vested interest in preventing market crashes and averting chaotic market conditions for obvious reasons. No incumbent wants to witness a market crash on their watch. It naturally decreases his chance of re-election. Nor does the Federal Reserve since its members are political appointees.

Economies, markets, banking systems, governments and currencies are all confidence games in essence. Once confidence is broken in any, panic ensues. Panic is the ultimate doomsday scenario for all of the above entities and some form of intervention WILL occur. Whether it be Fed injections, governmental bailouts, or reassuring words or outright lies from officials (to wit, think Hank Paulson and Ben Bernanke denying the Housing Bubble), some Hail Mary pass will be attempted to assuage the public that things will turn out just fine.



Market interventions are historically rare but more common of late with the manifold problems the world faces. Please do not take this to mean there are PPT injections into the market on a daily basis. But the PPT uses interventions as a brake on chaotic selling and preventing crashes at strategic technical moments.

If I could see that a significant close below 1100 on the S&P would spur a crash, then so can the PPT. It is why I said in my last post that the trading day of 10/4/11 was THE day of importance but also threw in the caveat that there might be one desperate attempt to keep the SPX above 1100.


One could rant and rave about how wrong and anti-free markets this is, and they would be right. However, it is a given. If you attempt to make money by trading the short side, expect a well-timed intervention when things are at their bleakest and act accordingly.

As a cautionary tale, Ben Bernanke roasted me badly on 8/16/2007. I had predicted the economic debacle for quite a while and determined that the moment of reckoning had come technically. I bought about $5,000 in cheap, out-of-the-money puts and the market fell dramatically but orderly. My puts within a few days had increased to $25,000. I sold about 1/4 to at least lock in a small profit in a worst-case scenario but let the rest ride as a crash was imminent and a life-changing opportunity was coming.

On that fateful morning, the futures were down massively. The most I had ever seen. The Nikkei was down almost 900 points and when the markets opened within minutes we were down 45 handles on the SPX. My puts went up exponentially that morning alone and I was literally planning an early retirement. It was options expiration as well.

Within a half-hour of the opening of trading, after more shorts had been brought in by the technical break, Ben Bernanke announced a liquidity injection causing the mother of all bear traps and short-covering rallies. The SPX rallied 30 handles in moments and ended higher on the day. The market was saved from a crash for a short while seemingly out of the blue. My early retirement was now just a measly $2,000 profit. Let's just say I was not happy with Chairman Bernanke and the PPT that day.

(Pardon my language in that link, by the way. It was not my finest hour as a human being, but the purpose of this blog is to show you the nitty-gritty of trading and I have to be transparent to build an intellectually valid trust with my readers. A member of that message board had accused those of us who were short of being ghoulish profiteers and I unloaded on him.)

The PPT knew the importance of that day. They knew by giving the market some crack on options expiration that they could cause a bear trap of epic proportions and lift the markets higher. It was my rude awakening into the ways of the PPT. I vowed from that moment forward I would never allow the PPT to burn me again and whenever I am short, I am always aware that the Invisible Hand is out there ready to guide the market where it wants it to go. It was an expensive lesson that I hope you don't have to learn. It also was the day I learned slow, steady gains and disciplined trading was the right path to follow.

Monday, October 3, 2011

Urgent Market Alert 10/4/11

Well, the market is officially at its "uh oh" moment. The S&P finally put in the lower low I was expecting in exactly the time frame predicted in late August. October has historically been a lousy month for the market and the breaking of 1100 should kick off even more significant selling. There could be one more last gasp attempt to elevate back above 1100, since it did not get significantly below (and the VIX has not broken its flag yet). But I don't expect that to occur. Here's why:

The moving averages are now curling downward, 1100 and Fib 38% have been breached (with a big, ugly red candle) and refer to my previous posts for the hideous monthly charts. Add to this, the longest and harshest wave down on my Elliott Wave count is still to come.

If the market is to keep from crashing, buyers will have to step in on the 10/4/11 trading day.

All charts courtesy of StockCharts.com

Daily chart:


Weekly chart:


Monthly chart:

Saturday, October 1, 2011

Too Big to Fail

By Matthew G. Pickup,
Guest Contributor

Once, not too long ago, it was widely held that capitalism was a game of winners and losers. The players would proceed on the basis that the market would either respond favorably or unfavorably to their respective offerings. The game was only viable if the possibility of great reward was accompanied by great risk. After all, what incentive is there to play any game if one does not at the very least pay lip service to honest competition?

So here we are, circa 2009-2011, and the jig is up. The game is rigged. The Wall Street paper traders, who incidentally create nothing, can and do reap the rewards of speculation but perversely can also rely on tax payer hand outs to resurrect their failed business ventures under the hateful rubric ‘too big to fail'. Historians and scholars have for years struggled to find the right translation for Voltaire’s infamous phrase ‘ecrasez l’enfame.” One widely agreed upon construction is ‘crush the hateful thing.’ Could Voltaire have meant and felt exactly the same thing about the Ancien Regime as we today feel about the monstrous entitlement that belies ‘too big to fail’? Crush the hateful thing.

So. We’ve all heard the hated phrase. Like an insufferable smug uncle, they (you know who they are) pat you on the back and say ‘sometimes ya gotta take one for the team son’. Naturally the plutocrats and their creatures amongst the cognoscenti media sell this tough love in the language of unassailable technocrat authority – you can hear the sonorous lecturing tone dripping with condescension (Sen. Dianne Feinstein, Warren Buffet anyone?) for the great unwashed middle classes who have the chutzpah to argue from the evidence of their senses (to say nothing of common sense) and the quaint audacity of Aristotelian logic. The law of the excluded middle says; A) the lot of the middle class is improving; B) the lot of the middle class is worsening. It cannot be both A and B. In exhibit A we have stagnant wages, spiraling living costs, rampant joblessness, decaying infrastructure, failing schools, criminalization of dissent, signs of rapid acceleration towards a police state and wholesale demographic replacement via unchecked third world immigration. Clearly, all signs point to B.

No, our new plutocrat overlords on Wall Street and Washington are here to set the record straight; while risk and reward , success or failure (bankruptcy) may be part of small capitalism, who cares if Vinny’s Pizzeria, or Rob’s Hardware and Supply thrives or dies, really, but woe betide America if the sumptuous life styles of the great paper traders and high wizards of arcane finance should ever diminish, for so vital are the services of these celestial personages that ruin for them must, perforce, mean the collapse of our economy, civil society and possibly even Western Civilization itself. Too big to fail. Verily, they are Capitalists and they are to ordinary men as man is to the ape. Yessir, be glad you worked all that overtime at the autobody shop, Joe, because while all your sacrifice and drudgery almost certainly will not buy your children a brighter future, the sweat of your brow means a few more years of rich Bernaise sauce and chateau lefite for your infinitely more refined and well manicured betters in the Hamptons. Be proud of your toil, and as the yoked oxen stoically plow the hard ground so should your unsung servitude be your badge of pride. The great paper traders can hang on to their Swiss chalets a little longer and their lovely pleasure craft are a few more years postponed from being commandeered by the People's Republic of China as fishing junkets for the glory of the proletariat.

(Ladies and gentlemen it is with the gravest trepidation and existential dread that I inform you of breaking news that the Euro is in peril. Something about the insolvency of Greece spreading like an unspeakable contagion across the Continent, threatening to bring down the very European Union itself! Horror of horrors, sic gloria et transit mundi. Obviously the situation cries out for a bailout which only the prosperous North can deliver. Apparently however the self righteous heartlessness of the Teutonic peoples in their cold and misty hinterland has reared its ugly head for they do not want to help their Mediterranean brothers. These mean spirited Goths talk of a strong work ethic and spending within ones means and all this self reliance stuff. Where is their humanity I ask? The Greek model was a noble one: shorter weeks, perpetual job security and a lavish welfare state, yes its true that it was fiscally unsustainable but the intentions were good and that’s the important thing. We would do well to be mindful of the wise teachings of professor Jeffries, who tirelessly cried out against the perpetual victimization of the Sun People by the callous predatory Ice People.)

To wit, in America we have socialism for the rich, underwritten by the waning middle class, in Europe we have socialism for the profligate Mediterranean South, paid for by Northern Europe, whose citizens mostly get up before 10 in the morning. Do we begin to see a trend?

The author proposes the following allegory for illustration. At some point in the history of conservation, the relevant authorities realized that in attempting total suppression of natural forest fires they has in fact created the perfect conditions for truly cataclysmic conflagrations, fires that could utterly destroy a forest. This is because natural fires cleanse forests from accumulating detritus and decay and allow for the possibility of new growth. When the natural order is subverted the massive accumulation of decaying biomass provides the necessary fuel for an unstoppable Biblical-scale firestorm. So in attempting to protect nature they had brought into being an unnatural occurrence the results of which were the opposite of their intentions.

If half of the American dream is that the ambition of a hot dog vendor can lead him to rule over a mighty business empire the other half demands that the hubris of a CEO can bring him down to selling hot dogs.

Unhappy about all of this? Deal with it. Be happy because the Nanny State will give you the table scraps and leftovers …to quote from the peerless insight of Jello BiAfra: “Do not attempt to think or depression may occur…at last, everything is done for you.” George Orwell famously said that his nightmare vision of the future was of a jack boot kicking a face over and over and over again, ad infinitum. Well this author’s present nightmare is of the middle class taking it in the shorts over and over and over and over…

Thursday, September 29, 2011

The Doldrums Before the Storm

There hasn't been much to comment on this week. This large bearish flag/compound head and shoulders pattern we've been trading in for the past 6 weeks in the S&P is just taking its own time as is its wont.

The prognosis remains decidedly bearish as the 50 and 200 day EMAs are both curved downward and the monthly MACD death cross is imminent. 1100 remains the important number on the S&P.

While we await the Big Picture unfolding, there are short-term trading opportunities. When trapped in trading ranges, oftentimes trading off candlesticks will be fruitful. During this flag, candles with big wicks have proven to be good for two-to-three day reversals. I've circled some of the reversal candles on the chart below.

All charts courtesy of StockCharts.

Daily chart:


Big Picture:

Saturday, September 24, 2011

Important Charts - Where We've Been and Where We're At

I'm working on a large project that aims to show you where we are in the economic cycle and where we are heading in the coming years. Hopefully it will be of some use to you and your trading. I fear it's not going to be the most pleasant read.

To get started, this is a flow chart I made about the mess we are in and how we arrived here. The next flow chart (coming soon) will be my projection.


Pictures are worth a thousand words. Check out the Dow Industrials and the chart notes below. Trading volatility is a-comin one way or another. Chart is courtesy of Stockcharts.


And here is an even longer view of the market: Monthly Historical Chart

Sorry for the crude formatting, but apparently Blogger and Word don't convert well. I'll figure out computers some day!

Thursday, September 22, 2011

Important Day on the S&P - Mid-Day Update

Just a quick post to remind you all of the importance of the 1100-1120 range. The markets are getting pummeled today, down 40 handles on the S&P.

There is a head and shoulders developing, right after the July-Aug H&S. 1120 and 1100 are major support lines that appear poised to crumble and the VIX is close to breaking out.

So far, the market has behaved almost exactly as predicted in my thesis of late August. Please refer to my post below for a recap:

Rally Has Been Unconvincing

Buying Normalcy and Selling Mania

My friend and fellow blogger, Max over at Dumb Money, recently asked for some thoughts on IAU, the iShares for Comex gold.

I decided to use IAU for a simple chart tutorial of how to do what the great Alexander Elder calls, "buying normalcy and selling mania".

When a stock, ETF or commodity is in a trending environment, a good way to recognize normalcy is to check the 26-week exponential moving average (EMA) on the chart.

Weekly EMAs tend to act like magnets pulling the stock back to its proper long-term valuation. When the EMA is sloping higher it means the dominant trend is bullish. That is normalcy. Mania is when it exceeds its normal channel.

A simple but effective way to trade this is to buy a stock when it returns to its weekly EMA and sell it when it deviates to its upper channel or Bollinger Band. The reverse is true in bear markets.

See the chart below for an example:


Chart courtesy of StockCharts.com

Tuesday, September 20, 2011

Is Gold Still a Buy?

Having been a gold bull since early in the last decade, one of the most difficult questions I receive from friends, family and readers is, "What should I do about my gold now that it is trading so high?", or, "I don't have any gold, should I buy now?"

If I had been asked back in, say, 2000-2004, the answer would have been a simple "buy as much as you can afford". From 2004 to last year, it would have been, "buy on the dips."

But now that the gold chart is starting its parabolic climb, the answer has to be more nuanced. I wish I could give a clearer answer than "it depends", but I cannot. An answer can only be tailored individually based on a number of factors such as:

What is your average price per ounce?
How many ounces do you own?
Is it physical gold, mining stocks or the GLD ETF?
Is it all fully-paid or was some bought on (gulp!) margin or credit card?
How is it weighted as a percentage of your portfolio?

In order to make an educated decision on what to do about gold, one first needs to look at the phases of massive historical bull markets in order to judge what phase we are in now.

To judge for yourself where gold is in its advance, refer to my posts about the phases of bull markets: Phases of a Bull Market and Sample Charts of a Bull Market.

Personally, I believe we have entered the first stages of gold's parabolic phase.

Gold:


Chart courtesy of http://stockcharts.com

It seems history is repeating and the easy money has already been made. What we don't know is how high gold will go during this phase. It should still have plenty of upside from here, but building an initial position at this point could be perilous and steadily selling portions of an existing account to lock in some profits may be warranted as it spikes.

But despite the chart going parabolic, the economic fundamentals of gold are still strong, thus making decisions even tougher. There still exists the danger of a global currency meltdown, which would make selling all of a position just as perilous as initiating a position at these levels.

It may be prudent to hold at least a smattering of precious metals as the ultimate hedge to disaster, but it's a portion you would have to be comfortable losing after the parabolic spike brings prices down massively.

After all, these are challenging times we live in financially and despite what some profess, no one knows exactly what the future holds. Being properly hedged and keeping your head in rough times is usually the best course. As always, I am not an investment advisor and this is not a recommendation to buy or sell. Do your own due diligence and best of luck to you all.

Monday, September 19, 2011

Once Upon a Time in America...

Once upon a time in America...

...we made things. Things that were built to last decades if not centuries. Made of the finest materials and crafted with the finest tools by the finest workers here in the home of the Industrial Revolution.

...we traded these things to a world that clamored for our products. We had vast trading surpluses that fostered true national wealth. Wealth that made it possible for a middle-class, blue-collar worker to afford a home in a nice neighborhood while his wife had the option of staying home to raise a family.

..."globalization" was the U.S. rising tide lifting the world's boat through mutually-beneficial trade.

...Social Security was not yet a Ponzi scheme.

...we would have been ashamed to trade freedom for safety.

...a medical product made of $10 worth of parts wouldn't be billed to Medicare at $1,000 per unit. And it wouldn't have been paid.

...a gold standard kept inflation and debt in check.

...an unwritten, latent economic patriotism existed. CEOs knew they were entitled to profits and a higher standard of living than their workers because of their risk-taking and acumen but they were Americans before they were moguls and societal pressure would have kept jobs here.

...we wouldn't trade with countries that artificially suppress its currencies.

...there was no endless media blitz turning us into mindless consumers who need to keep up with the Joneses.

...politicians lied. Most of them, most of the time.

...government was small.

...the stock market was for professionals, amateurs and gamblers who knew the risk. But NOT pension funds who put employees retirement at wild risk.

Today in America...

...we don't make things. We push papers.

...we buy things. Shoddily-made things built to last a few months made of the worst pot metal, most often by near-slave labor in countries starting their own Industrial Revolution.

...we buy their stuff because we clamor for cheap goods because the middle-class can't afford anything else. We have vast national trade deficits that foster true debt. Debt that is suffocating the middle-class and forcing two-income families to take second and third jobs.

...we have a "service economy" squandering the wealth of the manufacturing basw built by prior generations.

...we have a "service economy" that only transfers what little wealth is left between people and institutions here at home. Countries that have true wealth from trading surpluses also have people willing and able to provide services. They don't necessarily need ours.

...we are dependent on others holding our Treasury instruments not pulling the plug and calling us on our debt.

..."globalization" means we give away our trading advantages and jobs.

...the Federal Reserve robs you blind through the printing press and inflation.

...heads of huge conglomerates act like modern-day P.T. Barnums, exploiting every advantage and sucker available in every way possible for maximum profits. They are profiteers before they are Americans.

...CEOs of certain Wall Street investment banks made as much in one year as approximately 2,000 EMTs or truck drivers. One group comforts your grandma when she's sick and needs immediate medical care. One delivers you the goods you need to survive while working in often dangerous conditions. Another gave you a worldwide derivative bubble in the hundreds of trillions and have brought the economy to the brink.

...government is expanding at about the same rate as the universe.

...politicians still lie. Almost all of them, almost all the time. Except Ron Paul, who is the only candidate who saw this whole thing coming before the Tea Party even existed.

Tomorrow in America...

...let's stop kicking the can down the road and fix this mess together. We have future generations to think about here.

Saturday, September 17, 2011

The Joy of Trading

By now, we've established a surfeit of traits and mindsets that can damage your trading account. Let's shelve the negatives for a moment and focus on a few of the joyous aspects of trading:

Self-Sufficiency

There are so many parts of our lives over which we exercise little to no control. At work, we are told what to do and when. At home, there are bills and taxes that have to be paid. Friends and family can become frail and ill and we're powerless to change it.

But when you turn on your computer to do your research and enter your trades, you know that success or failure is yours and yours alone. It is a liberating feeling if you embrace it.

Having an Outlet for Your Passion


If you're like me, you are inquisitive by nature and have a love for trying to make the unknown known. In this respect, trading can be an art. Where else can you delve into the details of technical analysis and use your wisdom to see through governmental and corporate spin to come to sound conclusions that can make you money? I enjoy the challenge and I hope you do as well.

Learning the Powers of Increments

Once you banish forever the notion of getting rich quickly, the discipline of slow and steady trading gains can manifest itself into the rest of your life. Taking one baby step each day can help you get into better shape, improve your education or find more fulfilling work.

When you put artificial deadlines on things, stress seeps in and your form suffers because the magnitude of the goal is overwhelming viewed from this lens. I could not have started this blog unless I knew to take baby steps. Trading in increments will increase your bottom-line and give you the confidence to do the same in the rest of your life as well.

Being in the Position to Help Others


If and when you get to the point of prosperity, you will have the opportunity to improve the lives of others through philanthropy, mentoring and having the free time to volunteer. There also exists the potential to retire early and spend more time with friends and family. I'm not all the way there yet and maybe you're not either, but this is my ultimate motivation and the reason I trade.

I hope you're all having a great weekend and I will post again soon.

Friday, September 16, 2011

Tips for Improving Your Trading Psychology, Part III

4. BIAS IS FOR THE NEWS MEDIA, NOT TRADERS

One of the items you should have on your trading checklist is whether your transaction is an investment or a trade. It's difficult to overemphasize the importance of knowing this before you hit the buy button on your platform.

If you choose to buy a stock and deem it a trade on your checklist, then keep it as such until you close it out. Never, never, never let a trade turn into an investment. When you do, it leads you into falling in love with a stock and that, in turn, leads to stubbornness and bias.

When you are biased, your mind slips into rooting for a stock and ignoring price action. Cheering as if you were holding a beer and wearing a giant foam finger is living in Fantasyland. Price action is reality.

In this day and age of extreme market volatility, bias can absolutely level your account. Here's how it can happen:

Say Trady McTrader believes KLM Corporation has good support at $40/share with favorable moving averages. His research shows it could hit its upper band at $42 and plans a stop-loss at $39.50 in case his technical analysis should be proven wrong. That's a 4:1 risk/reward ratio. He buys 500 shares, risking less than 2% of his trading capital. To this point Trady has done everything right.

A few days later KLM has moved up to $41.92/share and he's already pleased with his acumen. He also hears a news report that KLM is set to expand into new markets in the coming five years. The market Cupid just shot an arrow straight into his heart. He's now thinking of abandoning his initial upper target and letting it roll a bit longer. In fact, McTrader buys another 500 shares, this time on margin. Now his average price is almost $41/share.

Well, as it turns out, savvier traders already modeled KLM's expected growth into the price of the stock and it actually went down the next day. And the next. And the next. All the way down near his initial stop of $39.50, which he never raised despite his average price having risen. He's now around $1500 in the red. Trady's spirits are low but he's convinced himself that KLM will rally and he will more than break even. He now commits the cardinal sin of short-term trading: he takes off his initial stop-loss.

After a few days of gyration in KLM, weak S&P technicals bring all stocks down violently. KLM falls down to $36 that week and Trady is too depressed to even look at the charts. He couldn't sleep a wink and, as he tossed and turned, he decided he would sell at the market price the next day. The pain of a $5000 paper loss was too much and he finally capitulated and got out with a small bounce to $36.50. But he did not take notice that the technicals of both KLM and the S&P both improved and he misses a huge wave that brings KLM up to $47 within the next two months.

Trady McTrader tried to serve two masters by trading and investing at the same time. As such, he had neither the conviction of a long-term investor nor the nimbleness of a short-term trader. His mind became addled with stress and confusion and his decision-making suffered.

Every trader has had a moment like this to a varying degree. I know I have. I'm reasonably sure a similar thought-process occurred in the mind of the rogue trader fellow who lost $2 billion for UBS recently. Whether it's the loss of a few hundred dollars or a few hundred-thousand, many traders with great potential never recover from such mistakes.

Now you can see the importance of having a clear and consistent mind from the time you enter a trade to the time you exit. A savvy short-term trader understands that his mind will play tricks on him every moment his money is tied up in a trade. To him a stock is just a piece of paper, unworthy of love. Love your wife and kids more by not having to explain why you lost a large sum of hard-earned cash because your infatuation with a stock led you to ignore your stop-loss.

Wednesday, September 14, 2011

Phases of a Bull Market - Charts

Continuing my previous post on how to build positions, here are some charts showing the last three major sector bull markets (gold, homebuilding and NASDAQ) and the common anatomy. There are very clear Accumulation, Participation and Parabolic/Mania Phases in all three. What we don't know is how high and far gold will go.

Gold:


Toll Brothers:


NASDAQ:


All charts courtesy of www.stockcharts.com

Monday, September 12, 2011

Building Positions and The Phases of a Bull Market Explained

The focus of this blog is usually about short-term swing trading which is moving in and out of positions which are held from several days to a few months. But it is also important to know about longer-term position building.

Both fundamental and technical analysis can be equally worthy tools to be used in your trading and investing career, but you need to know how and when to use each of them.

I am of the belief that markets trade irrationally more often than not in the shorter term. Have you ever noticed how often an index or stock will move contrary to underlying conditions or major news reports? It happens all the time, to the point where many traders do not even need to listen to news reports as they are all about price action.

Shorter-term traders who use technical analysis dominate the intraday and daily gyrations of markets. Longer-term traders who use fundamentals often place a floor (or a ceiling) under a security when selling (or buying) becomes too irrational and they see value coming into play. And so over the long haul, fundamentals usually trump technicals. So as a general rule of thumb, you should place greater emphasis on using TA the shorter your planned trading duration. The reverse is true for longer term holdings...your time should mostly be spent researching an entity's balance sheet and whether you buy into its "long-term story".

There is a common anatomy to the charts of massive bull runs. After a stock or commodity has fallen out of favor for a significant length of time, you will see a relative flat-lining that will last several years as all but the most astute investors have given it up for dead. During this time, those investors are quietly buying shares as their research has indicated there is extreme future value to this stock or commodity, largely because they see swirling macroeconomic winds that can kick start a major bull market. This is often called the Accumulation Phase. Fundamentals take precedence at this time. This phase requires the investor to have a strong belief in their thesis and supreme patience as they wait for the second phase.

A cup-and-handle or rounded bottom technical pattern often appears in this time. Once the price breaks out above resistance with some volume, trend traders and fund managers begin to "buy-in" as well. This starts the next phase which is usually the longest and most lucrative, called the Participation Phase. It typically lasts for years with a long, steady grind upwards. There are surges and corrections, but it is mostly an orderly, "buy the dips" environment. Fundamentals and technicals are in alignment during the Participation Phase and it is the easiest to actively trade. The stock or commodity gains more interest in the press and amongst active participants, which helps spawn the last and most volatile phase.

The final section is called by various investors as either the Parabolic, Mania, Bubble or Blow-Off Phase. At this point, everything becomes irrational. The chart will resemble a massive super-spike with massive weekly gains and very few corrections. Main Street hears the hype in the news and wants to get on board the rising roller coaster as well.

At this point, Wall Street and the original investors realize that the end of the bull run is near and they start unwinding their holdings and seek to lock in massive profits. There is a saying on Wall Street that "when your taxi driver is giving you a hot stock tip, it's over". Think the Dotcom bubble in 2000 and housing bubble in 2005. Wall Street gets off the roller coaster near the top and lets Main Street ride it to the bottom. The very moment you hear the phrases, "it's different this time" or "we've entered a new paradigm" on CNBC, run to your computer and sell big chunks of your position.

If you are planning to take a significant long-term position in a security, it is vital you know these three phases and recognize your place in time.

I will be editing this post in the next day or two to include some charts to cite as examples, but I really need to get some sleep. So stay tuned and as always thanks for reading!

Sunday, September 11, 2011

Comments Section

I've recently enabled the comments section for this blog. Please feel free to comment not just on the articles but also anything that tickles your fancy.

If you have questions or ideas for topics you'd like to see covered, I would enjoy your input. I am very new to blogging, this being my third week. I have much to learn and I'm sure you all have much to teach as well.

One caveat: since this is an educational and informational blog, I won't be able to respond to questions where a recommendation is sought. I will be posting many charts in the years to come in an abstract capacity, both historical and live, to show you how I use technical analysis to trade. You may take from them what you will, but they will never be recommendations. Technical analysis only increases our odds of finding winning trades, but here are no sure things.

Best regards and keep reading!

Sincerely,

Rob
The Chartographer

Saturday, September 10, 2011

The CNBC Chop Shop

One of the first mistakes a novice trader will make is turning on CNBC looking for stock tips. After all, those slick Wall Street-types in the suspenders and expensive suits being interviewed on live television by those pretty reporters must know more about the market than a mere beginner, right?

Well they do. But not in the way you think. Their expertise is not in knowing the direction a stock will take -because not a soul alive knows that for certain- but in how to manipulate the media and small investor so that they find bagholders for the securities in which they make a market.

In gambling terms, Wall Street firms are the equivalent of "The House". Their version of a rake is called the spread. They make a killing whether you win or lose. And they love starry-eyed beginners who have visions of yachts, trophy wives and early retirement in their eyes. The way they generate more fees and find fresh bagholders is through hype and greed.

This is where CNBC comes in. Wall Street and CNBC have a symbiotic relationship: Wall Street needs an outlet to promote its securities and services and CNBC needs targeted ad revenue. Both have a vested interest in generating a bull market, since trading volume and financial television ratings are significantly higher in prosperous times.

As a result, CNBC has almost no news objectivity. Maria Bartiromo hitches rides on lavish CitiGroup corporate jets. Corporate CEOs like the since disgraced Angelo Mozillo of Countrywide are fawned over like golden idols. Bullish Wall Street analysts pumping their stocks are treated with the utmost reverence. Governmental officials like Hank Paulson, who also have a vested interest in bull markets and bubbles, were never pressed even as they lied through their teeth about the housing contagion. On the rare occasion a bearish guest appears, such as the proven-correct Peter Schiff, they are openly mocked.

Listening to CNBC, in any way other than as a contrarian indicator, will torpedo your account. If you had listened to CNBC over the years you would have bought tech stocks at the very top of the bubble in early 2000, bought homebuilder stocks in the summer of 2005, put a buy order on Dow 14,000 in 2007 and sold short when analysts turned bearish in March 2009 at Dow 6,500.

Do yourself and your trading account a favor and tune out the CNBC and Wall Street spin. Rely on your own research and common sense when trading. Seek out knowledge not hot stock tips. All the "booyahs!" you shared with Jim Cramer over the years won't mean a thing if you're broke.

Thursday, September 8, 2011

Tips for Improving Your Trading Psychology, Part II

3. DON'T THINK ABOUT THE MONEY (TOO MUCH, ANYWAY)

This sounds completely counter-intuitive considering the whole reason we trade is to make money. But you won't achieve greater results until you stop thinking about money. I've found this is a tough one for most people at times, myself included. When traders focus on the outcome of making money (or losing it) instead of the process behind it, it activates the greed-and-fear emotional centers of the mind.

I used to literally shake in anticipation when I placed a trade; partly out of fear of losing my hard-earned savings, partly thinking about getting rich quickly. I also risked way too much money on each trade. It put me in a tense mood for as long as I was in a position. Throughout the day, I would check the second-by-second changes on the 5-minute chart much like a bad baker keeps opening up the oven to make sure his cake isn't burning. I wouldn't give my trades a chance to work because I kept alternating between fear and greed. All perspective and rationale went out the window. Swing trades turned into day trades.

The way I combated this was three-fold:

A. I reduced the amount I risked on any one trade to 1-2%. If I was wrong, it was not enough of a loss to destroy my confidence or shake my nerves.

B. I dedicated myself to proper research with targeted entries and exits. Preparation fights fear and greed.

C. I mentally prepared myself to lose that 1-2% but not a penny more and, in fact, traded like it was already as good as gone. I told myself that if I made money it was just a bonus.. The end result was it completely dampered the greed factor by keeping my expectations realistic and it forced me to stay vigilant by never lowering my stop losses, thus taking fear out of the equation as well.

Now when I move in and out of a position, money is the furthest thing from my mind. I am merely focusing on my art. Do this and money is much more likely to follow.

Part III coming soon.

Wednesday, September 7, 2011

Bank of America (BAC) Abandoned Baby Candlestick

I am noticing some interesting chart patterns on the XLF (Financial Sector ETF) and on Bank of America (BAC) in particular. Both charts are showing an inverse head-and-shoulders pattern on the daily time frame but with significant resistance on the weekly charts. Hence, I am expecting a short-term bounce before the long-term trend asserts itself.

Also worth noting is the abandoned baby candlestick pattern on Bank of America. It is a very rare bullish three-day reversal pattern when a stock is in a downtrend. The first day is a down day. The second day is a gap-down doji where the shadows do not intersect with either the first or third day. The last candle is an up day that also gapped away from the second day. I've circled it on the Bank of America daily chart below.

A short-term strengthening in the Financial Sector would be bullish for the market since it is such a large component of the S&P 500. It could help the S&P backtest to the 1260-1280 neckline/resistance area before failing, which fits in with my original thesis.

BAC daily:


BAC weekly:


XLF daily:


XLF weekly:


All charts courtesy of http://stockcharts.com

Monday, September 5, 2011

Tips for Improving Your Trading Psychology, Part I

If you ask any successful trader what is the most important factor to a long and prosperous career in the markets, invariably the answer is discipline. You simply must have the proper mentality or you will be like the 95% of traders who lose over time.

Those who wash out do so for many different reasons on the surface:

Insufficient starting capital
Trying to get rich quickly
Holding onto losses too long
Trading too frequently
Burning out

But, scratching beyond the surface, all of these are just symptoms of a trader having the wrong psychology. That leads to emotional trading, which over time will be the death of one's account. Being emotional is one of the best parts of being human...but believe me when I tell you it has NO place in your trading. You need to flip that switch into the off position from the time you do your research to the time you exit your position.

The good news is attaining the right trading psychology is entirely possible and ultimately quite enjoyable. Following these tips will yield bottom-line results and reduce your level of stress...and that is precisely what will keep you trading in the long run.

1. DO NOT BECOME A MARKET JUNKIE

People in this industry will tell you such bromides as "money never sleeps" or "you need to eat, drink and breathe the market". Please. What they are saying is they are slaves to the markets and thus to fear and greed. I've worked with people like this. Even if they made money over a short stretch they've usually given it all back in time because such a mentality leads to short attention spans, stress and a lack of proper sleep. This is a breeding ground for impulsiveness. They are in no condition to make prudent decisions, yet they trade way too often trying to greedily catch every move. They are usually nervous wrecks, coke addicts or on the verge of a coronary.

You, on the other hand, want to be a free human being who uses the market judiciously to achieve your long-term objectives. You do this by trading longer time horizons (swing or position trading instead of day-trading) and placing smaller trades risking less than 2% of your capital. You get to relax and see your friends and family when your day is over while they are worrying endlessly that their highly leveraged account could be blown up by after-market news. They are following every intraday gyration in Asia and Europe on CNBC at 3 a.m. while you are sleeping soundly. They are the hare whose heart will fail. You are the tortoise built to last.

2. CONQUER DOUBT AND IMPULSIVENESS THROUGH PREPARATION

Poor traders and novices chase price moves impulsively through fear and greed at the same time: fearing a stock will take off without them aboard and greedily hoping it will go straight up without a hitch. They do not know the Fibonacci retracement and support/resistance levels of the stock they are chasing. They do not realize that a stock will often come back to a targeted price. All they think is they have to get in NOW. They make their pricing decisions in the moment with lights flashing and the CNBC white noise blaring. They use market orders with no stops or exit strategy. They don't read charts correctly if at all. They don't prepare. Over time, they fail.

You make your pricing decisions when the market is closed, away from noise and hype. When you are serene. You've pored over your charts and know key support/resistance numbers. All trades are filtered through your pre-trade checklist. You place limit and stop loss orders and use trailing stops and/or adjust your stops manually when the trade is going your way. You're confident when you hit that Buy or Sell button that you have done all you reasonably can and that the risk-reward ratio was there even if the trade is a loser. You are prepared. Over time, you prosper.

Click here for Part II: http://swingtrading101.blogspot.com/2011/09/tips-for-improving-your-trading_08.html

Friday, September 2, 2011

The Rally the Past Two Weeks Has Been Unconvincing

No one wants a bull market more than I do. They are far easier to trade and only a Grinch enjoys seeing their friend's and neighbor's 401(k)s taking massive hits. I want to be long America.

But I can only place trades based on what I see on a chart and what I know about the state of the economy. Neither fundamentals nor medium-term technicals are bullish and September and October are setting up for more fireworks on the downside.

The bullish case seems to center around two subjects: corporate profits and the Federal Reserve promising more candy to the markets.

The latter requires little discussion here as common sense tells us the previous rounds of governmental stimuli and Fed injections did nothing but exacerbate the mess in which our country finds itself.

As for corporate profits, while they have indeed improved since the initial economic crisis, this is likely already manifested in the rally in equities. But investors pay a premium for equities not just for profits but also for growth. And without growth, there is no reason P/E ratios can't go down to very low levels.

Corporations have hoarded cash and have not grown as witnessed by persistent unemployment. To climb on a soapbox for a moment, this is a highly myopic strategy on their part. The only way to spur growth is to reinvest profits into business expansion and hiring more people. There will be no pulling out of this near-Depression until the American middle-class is working in decently-paying, full-time jobs and can spend a little to fuel the economy. And hopefully save a little of their paychecks this time around. Wouldn't the long-term benefits of spurring growth and getting Americans working again be worth a few pennies per share to a corporation's investors? Sadly, I am not holding my breath.

Now, on to the technicals:

Two weeks ago on my blog, I warned that the first wave breakdown from the head-and-shoulders top on the S&P chart was likely complete and a retracement back to the neckline was probable. There was significant data pointing to this scenario; MACD Histogram divergence, a graveyard doji pattern and 38% Fibonacci support from the March 2009 lows.

This proved to be correct but I am looking to switch back to a short position soon as the rally has been unconvincing. It looks to be an Elliott Wave A-B-C correction of the first wave down. The next wave should be the deepest and longest. The Volatility Index chart confirms this as it is showing a bullish flag continuation pattern which is decidedly bearish for stocks.

There is also little room left for the rally to run. There is a heavy band of resistance in the 1260 area where the neckline, downtrending moving averages and the 62% Fibonacci support of the recent move all reside. Please see the charts and notes below for reference.

If the bulls can break above the 1260-1280 area I will reconsider my thesis. There is no place for bias in trading and one must always be nimble enough to exit when the market proves him or her wrong.

As always, this is for informational and educational purposes only. I am not an investment advisor. For full disclosure, at the time of this writing I am completely flat in my account but looking for an entry to short the SPY.

All charts courtesy of http://stockcharts.com

The Big Picture:



And the daily:


Finally, the VIX:


Thank you for taking the time to read this update! I wish you all a good night and safe and happy trading.

Thursday, September 1, 2011

Pre-Unemployment Report Long Straddle Strategy

The market has a tendency to trade in a range before big news events. One of the most important, especially in this huge recession, are the unemployment numbers. It is being released tomorrow morning. In the S&P chart, you can see two small candles(and I expect a smallish candle today) amidst a sea of big candles. Usually, this signifies a large move is coming.

Since we don't know how the market will react to any news, one way a trader could play the expected volatility is to purchase an option straddle. An option straddle is the purchase of an at-the-money call and an at-the-money put with the same strike price, same security and same expiration. Being long a straddle enables a trader to profit by a large movement either up or down. If the underlying stock or index stays relatively choppy or near the strike price, the trade will be a loser. There are many more facets to options trading and I will go into them at a later date.

Options trading is extremely high risk and only experienced traders should attempt it. But since this is an educational site, I want people to see the different strategies a trader will consider in different market dynamics. My indicators are mostly near-term bullish, yet there is significant resistance at the 1260 head-and-shoulders neckline and the VIX is in a continuation pattern indicating prices going lower. In such an inconclusive environment, a play on a day or two of volatility could be warranted. This is a trade I am considering, but I am in no way recommending you to follow.

All charts courtesy of http://stockcharts.com


Wednesday, August 31, 2011

In Praise of Boring Old McDonald's

One of the accepted rules of trading states that "the trend is your friend". A good method for catching a trend is to buy a stock when its long-term 26-week EMA is sloping upwards and there is a concurrent pullback to its 22-day EMA. A beautiful example of a currently trending stock is McDonald's. I've posted its chart below.

Even as the broader market has been crushed in the past month, McDonald's has kept chugging along. Repeatedly pocketing a few bucks buying the dips to the 22EMA and selling at the top of the trading channel isn't as sexy as trading a high-flyer, but it's been easy to trade and ultimately that's what keeps the bread (and Big Macs) on the table.

All charts courtesy of http://stockcharts.com

First, the weekly:


Then the daily:

Monday, August 29, 2011

Why Weekly Charts Matter

In the age of short attention spans and instant trading gratification, the poor, neglected weekly chart still provides you with ample clues towards key price levels and big shifts in momentum. Even if you trade short-term only, you need to be cognizant of the weekly. Check it faithfully.

To illustrate this point, I made some S&P chart notes of what the weekly can show you. It is rather eye-opening, is it not?

All charts courtesy of http://stockcharts.com


Saturday, August 27, 2011

Example of a Trading Checklist

All good traders keep a log. In order to evaluate your trades, both winners and losers, you need to know what you were thinking at the time. I use my log as both a checklist to consult before entering trades and as a post-trade evaluation tool. Since I'm a bit of a Luddite, I use paper and pencil normally. But for those of you who prefer Excel, I made this little spreadsheet that contains the same information. Feel free to use it or improve it!

Friday, August 26, 2011

Technical Analysis Tools - MACD, Part I

MOVING AVERAGE CONVERGENCE/DIVERGENCE (MACD) - INTRODUCTION

For this series of posts, I will be discussing some of the most commonly used technical analysis tools in the swing trading community. There are an endless number of technical indicators on most technical analysis and trading websites and it can be mighty daunting to sort through them when you are getting your feet wet. So to start, I will focus on what I find most useful and later in the series I will delve into the more arcane ones.

When I first started trading, I was of the mind that the more indicators you use, the better. I could not have been further from the truth! Using too many indicators leads to confusion, frustration and a trip to the drugstore for some extra-strength Tylenol. Worst of all it can lead to trading paralysis along the lines of: "this indicator says to buy, this one says to sell, and the other ten say to do nothing! What should I do????" So my sage words of advice that I will pound into you (and myself) again and again is "Keep It Simple, Stupid". Find the three or four most trustworthy indicators you find after experimentation on a simulator and through backtesting and master them. You should choose ones that you find easy to understand and that will help you avoid Trader's Block. Using this approach will give you clarity, calmness and quiet confidence, all of which are totally necessary to being a successful trader.

As I write this series of posts, I will spare you the underlying mathematical equations in these indicators. Most successful traders do not know anything beyond the nuts-and-bolts nor do they need to. A good driver doesn't need to be a mechanic to steer his vehicle the right way. The basics work just fine.

Without further ado, I will start off with the Moving Average Convergence/Divergence, better known by its initials of MACD. The MACD consists of two plot lines on a stock chart that paints a picture of where stocks have been in both the short and long term. Since past is prologue in the stock market, I find it to be one of if not the most useful of tools when interpreted properly. The same way a meteorologist will track an existing hurricane by studying the pathways and tendencies of hurricanes throughout history in the hope they can predict its path, a studious trader will pore through his/her charts and look at how it has performed in the past to glean the stock's next big move. The MACD greatly aids in this endeavor. It helps a trader by indicating the strength of a given trend.

My next post will be a synopsis of the MACD and how it works. The third part will be the one you care about...how to trade it properly.





Tuesday, August 23, 2011

Sometimes Flat is the Best Position

With today's 3.2% up day on the S&P,  my warning yesterday for profitable shorts to unwind their positions proved prescient. We bounced from oversold levels and the bullish Histogram divergence and Graveyard Doji proved too much and the bears threw in the towel, at least for a day.

My indicators have not yet turned to "Enter Long" from "Exit Short" so I still have no comfortable entry for either a long or short trade. Wednesday should tell us more. I will be watching to see if we break the falling wedge we are in or if we work to a lower low with a more classic bottom and more pronounced divergences. This latter scenario would actually strengthen my belief that a rally back to the Head and Shoulders neckline will be coming in the next month or so.

It's important to note that if one goes counter-trend in a volatile environment, it can only be done following strict rules. I only do so when there are clear divergences on the MACD, as it is the strongest technical indicator around. Even then, I trade just a very small portion of my account. Fewer shares with a wider stop if the reward outweighs the risk. Trying to catch a bottom is perilous and has destroyed better traders than myself. Discipline is all that keeps us in this game for the long haul, doubly so in when going against the primary trend. Until then, I'm sitting tight and flat until the market tells me which way to trade instead of listening to my own biases.

Good night all! Will update more tomorrow.




Monday, August 22, 2011

A Day for Closing Short Positions

If you've been short recently, and I certainly hope you've been, today may have been a good day to unwind and take profits. I closed the last of my short positions late in the day when it became apparent that a Graveyard Doji was forming on the S&P 500.

For those new to Japanese Candlestick analysis, a Graveyard Doji is formed on a day where the price opens AND closes at or near the low of the day with a big intraday move higher. In a downtrend this is deemed a possible bullish reversal. It does require a confirmation the next day and in and of itself is not always worthy of using as the basis of a trade.

However, there were other factors that led me to close out all my shorts. Pull up a daily chart of the S&P and you can see a potential higher low might be carving itself out on the MACD Histogram while the S&P might be heading to a lower low. Such a Histogram divergence will often presage a major reversal and would be very bullish in the near term. These are good signals for profitable shorts to be prudent and lock in profits before the "pucker factor" gets too high.

My thesis is the market will make a lower low in the next two weeks (with divergences as we are highly, highly oversold) to complete this leg down with a subsequent rally to retest the neckline of the Head and Shoulders pattern. After that rally is complete we should return to the primary downtrend.

Although I believe a short-term reversal to be imminent, there's no way on God's green Earth I'm going long until I see a LOT more confirmation. And even then, it would be a small, tight trade since it would be against the primary trend. Trade safely always. Talk to you all again soon!

 





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