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

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.


Chart courtesy of

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. 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:


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


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.


Toll Brothers:


All charts courtesy of

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!


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


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

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.


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.


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:

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

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