Online Trading Blog

The Week Ahead: The Dubai World postponement of interest payments is a reminder of the still unfolding credit crisis taking shape world wide. Discounters expected to have best sales numbers this Christmas. Auto sales are released Tuesday. The Federal Reserves Beige Book comes out on Wednesday. The third quarter productivity and cost figures are due Thursday. The employment report for November will be released Friday morning.

Stocks to Watch: Amidst the myriad of selling done on Friday after the Dubai announcement, it is interesting to note a few winners: W Holding Company (WHI), a Puerto Rican bank, China Nep Chain Drugstore (NPD), and Sturm Ruger & CO. (RGR), a firearms maker. India regulators estimate larger than expected fraud as much as $2.5 billion at Satyam Computer Services (SAY). Oil and gold stocks were some of the weakest groups on Friday, but Alcoa (AA), American Express (AXP), Caterpillar (CAT), and Travelers (TRV) were the weakest DOW stocks.

Special Note: Most of the damage from the Dubai World debt situation occurred in the Asian markets many of which were already well off their peaks from August and September. U.S. markets are due for a pull back with the Dow Industrials up 5 months in a row. Perhaps this serves as a catalyst for such a development. Also the Dow Industrials was the only Index to reach a new high for 2009 last week. Similarly gold is the only commodity making all time highs. Broad support for a sustained uptrend from here is lacking.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Head and shoulders top is a very popular chart pattern indicating bearish trend reversal. It is a long-term chart pattern and is considered among the most reliable chart patterns. The formation, with three peaks, resembles the head and shoulders of a man, and hence the name.


There are strict rules for identifying a head and shoulders pattern. The requirements include,

• A typical pattern formation takes 2 to 4 months to complete.
• The pattern must have three parts - a left shoulder, a head and a right shoulder.
• The left shoulder is formed by a price peak and then a decline.
• The head is also a peak and a decline but rises higher than left shoulder.
• The right shoulder is a peak and decline which does not rise as much as the head.
• A horizontal/diagonal neck line is also drawn connecting the lows of shoulders, which serves as support.
• The volume should be high at left shoulder but declines as the pattern forms. The sell-offs (declines) are noticeable with increase in volume.

The head and shoulders top pattern is not confirmed until the price closes below the neckline. The breakthrough is also watched carefully; small volume breakthrough below the neckline may be false. Traders usually use a 3% filter or two days of trading below the neckline to confirm the pattern.

Head and shoulders pattern is considered as a good shorting opportunity as the price tends to decline fast because there is no support available once it breaks the neckline.

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Slow stochastic oscillator is created to reduce the sensitivity of fast stochastic oscillator that gives too many trading signals. Slow stochastic oscillator is created by smoothing the fast stochastic oscillator; applying a three period moving average to fast %K. That simply means that the slow %K is exactly similar to the %D, the signal line, of the fast stochastic indicator.


The %D of slow stochastic oscillator is created by applying an additional three period moving average to slow %K. The standard period for calculating slow stochastic oscillator is also 14 days; but traders can change it to get custom results. Trading with the slow stochastic oscillator is exactly the same as the fast stochastic; the only difference is the reduced sensitivity which gives lesser number of accurate signals.

• Buy signals are generated when %K crosses above %D and sell signals are generated when %K crosses below %D.
• Buy signals are generated on bullish divergences on %D (first trough is below oversold level) and sell signals are generated on bearish divergences on %D (first peak is above overbought level).
• The trough and peak formations are also good indicators, narrow troughs indicate that bears are weak and the following rally can be strong; similarly narrow tops indicate that bulls are weak and the following correction can be strong.

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The great diversity of sector and broad-index ETFs allows traders to practice different sector rotation strategies. To know more about this, read ETF Sector rotation strategy and Sector ETF investing advantages and disadvantages.

• Rotating market weighted sector ETFs: market weighted sector ETFs are ETFs created on the basis of market capitalization indexes. That means the ETF will be more biased towards large-cap stocks. These ETFs provide comprehensive exposure to each sector. They can offer good profits when a sector as a whole is outperforming others.
• Rotating equal weighted sector ETFs: here all the stocks are given equal weight. Thus the ETF will be more biased towards small-cap stocks (as they will be more in number). They offer good profits when small-cap stocks are outperforming others but are also riskier as they don’t represent the actual economy.
• Rotating fundamentally weighted sector ETFs: here the stocks are given weightage according to the company fundamentals such as cash flow, sales, book value, dividend etc. They are new additions to the sector ETFs and are good candidates for long-term investing strategies. The downside is that not much performance history is available.
• Rotating only sector ETFs: this is a good and popular strategy, where the traders buy ETFs tracking sectors that show positive turnovers, sell those showing negative turnovers, and give weight to sectors according to their performances.
• Rotating broad and sector ETFs: this strategy allows traders to profit both from sector and broad indexes. It also helps if the trader wants to profit from a specific sector performance but doesn’t want to lose the portfolio diversity; he can trade both types of ETFs together. For example, if he wants 40% weight to a specific sector in a portfolio, he can buy a broad index ETF having 15% weight to the sector and can have a 25% portfolio allocation to a sector specific ETF.

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The Week Ahead: A good report that half the states added jobs in October was diminished by the fact that most were temp jobs. A shortened Thanksgiving week starts with existing home sales on Monday. The S&P/ Case Shiller Home Price Index is released Tuesday along with the consumer confidence numbers. New home sales, durable goods, and personal income data arrive on Wednesday. Markets are closed on Thursday, and a shortened trading day on Friday closes the week out.

Stocks to Watch: D.R. Horton (DHI) showed a much larger loss than expected in there Q4 report as the stock continued to roll over in a continued weak housing sector. Noble Corp. (NE) broke through recent support near $40 as analysts see Pemex of Mexico cutting back on oil jack-up contracts. Griffon Corp. (GFF) surprised investors with a turnaround in earnings with .21 vs. .20 (loss) in there Q4 report. Netlist Inc. (NLST), a computer storage products company, has experienced quite a run up in price as its Hypercloud product gets noticed according to a Barron's blog.

Special Note: Most of the market divergences from last week are still in place with the exception of the Dow Transports. This behavior can coincide with a short term peak but more importantly a longer term cresting process. As long as the the main indexes hold positive ground for the year as a whole, chances of a continuation to higher highs heading into the first quarter of 2010 are still probable before the next important peak. Investors may want to use stop-loss orders to protect against sharp downside moves.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Both umbrella and inverted umbrella are candlesticks indicating high decision in the market; and are often interpreted as reversal patterns. Both are single candlestick patterns having a long shadow. Umbrella candlestick is a doji having a long lower shadow (thus resembles an umbrella) and inverted umbrella candlestick is a doji having a long upper shadow.


Requirements of umbrella and inverted umbrella candlestick patterns:

• The real body of the candlestick should be very small, preferably just a horizontal line.
• For umbrella formation, there should be a very long lower shadow and no upper shadow.
• For inverted umbrella formation, there should be a very long upper shadow and no lower shadow.

Umbrella candlestick forms when the sellers dominate the day to drive the price to low levels but the buyers fight back to close the day at or very close to the opening price, which is also the highest price of the day. Inverted umbrella forms when buyers dominate the day but sellers fight back to close at the opening price, which is also the lowest price of the day.

Both umbrella and inverted umbrella are considered bullish reversal patterns when they are formed at the end of a significant downtrend or after a very long bearish candlestick. Both are considered bearish reversal patterns when formed at the end of a significant uptrend or after a very long bullish candlestick. They are also important reversal indicators when formed in a support or resistance level. With both umbrella and inverted umbrella, traders should always look for confirmation of trend change.

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Ultimate oscillator is a useful technical indicator developed by Larry Williams and first described in 1985. It was developed to avoid the false signals generated by many indicators when used in different time periods. This oscillator represents a stock's price action during three different time frames. Ultimate oscillator is a weighted average of three oscillators representing short, intermediate, and long term market cycles or the 7, 14 and 28 periods. The shorter periods are included within the longer period; that is, the 28 period time-frame comprises the 14 and 7 period. Thus shorter periods get more weightage.

Ultimate oscillator is a range bound oscillator, having values ranging from 0 to 100. Like relative strength indicator or RSI, values below 30 are considered oversold and values above 70 are considered overbought. The center line of 50 is often used to find trend changes.

Traders can generate buy and sell signals using ultimate oscillator indicator. Remember, the oscillator offers much better results when used with other indicators.

• Buy signals are generated when positive divergence of the oscillator and price occurs; and sell signals are generated when negative divergence occurs.
• Buy signals are also generated when the oscillator falls below 30 and then rises back above previous high during the bullish divergence.
• Similarly sell signals are generated when the oscillator rises above and then falls back below previous low during the bearish divergence.
• Traders should close long positions when the oscillator rises above 70 or when the oscillator rises above 50 and then falls below 45.
• Traders should close short positions when the oscillator falls below 30.

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ETF liquidation is simply the shutting down of an Exchange Traded Fund. The fund stops trading on listed markets at a point of time, the holdings are then liquidated to pay money to the investors holding the shares. The recent trend of ETF liquidation started in early 2008 and has resulted in the shrinking of the entire ETF market.

Most ETF liquidations occur because of the fact that they are not profitable to the company which created them. This low profitability can be due to many reasons.

• Lack of investor interest.
• Lack of liquidity and very low trading volume.
• Lack of sufficient funds (low total asset value) which makes it difficult to manage the fund at low profit margins.
• Other reasons like tracking a narrow sector/index, high expense ratio, high competition, tracking error, overall market trend.

When an exchange traded fund undergoes liquidation, it informs the market it is listed in and the investors about the day on which the trade will cease. Trader shareholders have two options, they can either sell the shares before the last trade date or hold the shares for receiving the money from the fund manager after the underlying shares are sold. The liquidation distribution amount is calculated based on the net asset value (NAV) of the ETF.

If the ETFs are held in a taxable account, then the liquidation can create a tax amount. The investors may have to pay the capital gain taxes, either at long-term capital gains rate or short-term ordinary income tax rate.

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The Week Ahead: The U.S. trade deficit expanded 18% in September the biggest one month increase in 10 years while consumer sentiment took an unexpected drop. Again markets shrugged off the news as stocks rose for the second straight week. On Monday, Ben Bernanke will speak in New York City and retail sales and business inventories are released. The PPI and Industrial Production numbers are due out on Tuesday. The CPI and housing starts data are released Wednesday. The leading indicators for October come out Thursday.

Stocks to Watch: Copa Holdings (CPA) beat Q3 earnings from a year ago despite a 7% drop in revenues as the stock reached 2 year highs. Esco Technologies (ESE), an engineering firm, also showed better numbers versus last year but fell 11% because of a poor outlook for 2010. Assured Guaranty (AGO) had its debt downgraded by Moody's, but rose 20% as J.P. Morgan issued an overweight rating on the stock. Two new issues to track: Dollar General (DG) and Rue 21 Inc. (RUE), a teen clothing retailer, both successfully traded up on Friday.

Special Note: Stocks here in the U.S. and abroad continue diverging behavior. Examples include the Dow Industrials at new 2009 high but the Dow Transports and Utilites not confirming. Nasdaq 100 Index at new high but Russell 2000 not confirming. Hang Seng Index at new high, but Shanghai Composite and Japan's Nikkei Index not confirming. London FTSE at new high but Paris CAC-40 and Frankfurt Dax Index not confirming and many others. The implications of this behavior are significant and will likely determine the direction stocks will take between now and year end. More next week.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Panic selling is characterized by frenzied selling of investments with least regard to the prices obtained. This very often results in a great decline in the price of the instrument; panic selling is spurred by anxiety and emotion, rather than by discretion.

Panic selling usually starts with a strong extended bull market. Some securities/sectors become the leaders of this bullish trend, they are extensively highlighted by the media, and they make the investors/traders feel like they will never drop in value (eg: the dot com companies of the dot com bubble period). In due time the traders will realize that the market/security is not as strong as they expected or is overvalued; and is going to fall. A bad news or under achievement info triggers the panic selling and eventually markets fall.

There are many reasons for panic selling, most of which are related to human behavior.

• Fear of loss - Optimism and greed are the main human emotions driving the markets to new highs. But in higher levels, the optimism diminishes and doubts about the future arise. This leads to fear of losing money and the tendency to close off the positions as early as possible.
• Fear of missing an opportunity - many times this emotion is stronger than fear of loss. Most investors want to beat all others around them, thus quick and senseless decisions are often made.
• Search for leadership - Trusting a few media persons or market gurus without doing your own research can be devastating, because as they fail all (most) followers fail.
• Laziness - Investors and traders often forget to do the basic trading fundamentals like proper portfolio management and risk management.

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Bearish thrusting is a bearish trend continuation candlestick pattern indicating the continuation of an existing downtrend after a bullish day. It is a two candlestick formation which closely resembles bearish in-neck pattern and bullish piercing line pattern. Bearish thrusting is a weak candlestick pattern.


Requirements of bearish thrusting candlestick pattern include,

• The pattern should form in a downtrend.
• The first day is a long bearish day characterized by a black or colored candlestick.
• The second day is a bullish day characterized by a white or colorless candlestick which opens a gap below but closes within the real-body of the first day candlestick.
• The close of second day candlestick must not exceed the mid-point of the first day candlestick; if it exceeds the same, it forms bullish piercing line pattern - a strong bullish reversal formation.

Bearish thrusting candlestick pattern is the result of a failed rally in a down market. As the second candlestick does not exceed the mid-point of first candlestick, the downtrend is expected to continue.

Bearish thrusting pattern is less reliable than bearish in-neck and on-neck formations. Confirmation of the trend continuation is required, which can be a bearish candlestick, a gap down opening or a lower close on the next trading day.

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Andrews' pitchfork, originally named Median Line Studies, is a well known trend indicator which primarily shows support and resistance levels of an existing trend. The indicator was developed by Dr. Alan H. Andrews and with its median and side lines it resembles the farmers' pitchfork. Andrews' pitchfork is a simple indicator which can be used to enter buy and sell signals as well as to evaluate overall market cycles and trend changes.


Andrews' pitchfork consists of three lines, a median or middle line, an upper resistance line and a lower support line. The lines are plotted to the future from an identified trend. The middle line originates from a peak or trough and passes through the midpoint of the distance between another peak and trough, from which the upper and lower lines start respectively and run parallel to the median line. Most price movements occur within the channel created by the indicator.

Andrews' pitchfork can be used to trade within the lines and outside the lines. When trading within the lines, the upper line should be taken as the resistance and lower line as the support. Sell signals can be entered when the price pulls back from the upper resistance line and buy signals entered when the price reverses from lower support levels. The price movements outside the lines are considered short-lived and trading can be done accordingly.

According to Andrews, most of the price movements (up to 80%) occur towards the median line and this constitutes the long-term trend. But if price fails to show a trend towards the median line (from either side), it indicates a change of trend in a new direction; if the price is now above median line, it is a new bullish trend and if the price is below median line, it is a new bearish trend. Many traders also use Andrews' pitchfork to forecast the size of the next trend, based on the size of the previous trend.

Note: The indicator offers better results when it is confirmed by other price and volume indicators.

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REIT exchange traded funds (ETFs) are ETFs which invest in securities of Real Estate Investment Trusts (REITs). They allow the shareholders to indirectly benefit from the profit of publicly traded REITs which hold profit from residential and commercial real estate markets. REIT ETFs are gaining in popularity and they are most noted for their above average dividend yields.

Now there are a number of REIT ETFs available which track different real estate indexes; the most tracked/common indexes are the Dow Jones U.S. REIT Index and MSCI U.S. REIT Index. Here are some popular REIT ETFs.

• Dow Jones Wilshire REIT ETF (RWR)
• iShares Dow Jones U.S. Real Estate Index Fd (IYR)
• iShares Cohen & Steers Realty Majors Index Fd (ICF)
• First Trust S&P REIT Index Fd (FRI)
• Vanguard REIT ETF (VNQ)

Real Estate Investment Trusts ETFs have the characteristics of both stocks and fixed income securities. Like stocks, the ETF share prices swing with news and events, and with the ups and downs of the real estate market. To qualify for corporate tax breaks at trust level, REITs should pay out most of their profits (often around 90%) to its shareholders; this offers high dividends to ETF share holders. They are also considered as good portfolio diversification tools as the real estate market does not move together with equity market. However, REIT ETFs are considered risky investments and investors should read the prospects carefully and choose the ETF best suited for them.

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The Week Ahead: Double digit unemployment at 10.2% wasn't enough to stop stocks from rising after a previous week sell-off, but with the real unemployment rate or U-6 climbing to 17.5% can November's up start for stocks continue? More employment news comes out Monday via the Employment Trends Index for October. News flow slows ahead of Veteran's Day on Wednesday when the bond market will be closed. Then jobless claims figures arrive on Thursday and import prices on Friday.

Stocks to Watch: Sunoco Inc. (SUN) showed a Q3 loss versus a large profit a year ago because of weak demand for its fuel and chemicals with no sign of improvement in the refining market until 2010. Rosetta Stone (RST) sank to new lows after a Q4 profit drop of 12% as consumers spending on their language products suffers because of the recession. FreightCar America (RAIL) has not seen any recovery in the economy as they had no net orders for rail cars in Q3 compared to 2300 a year ago and profits dropped significantly. Insurance giant, The Travelers Company (TRV,) earned a high grade from Goldman Sachs and was upgraded to buy.

Special Note: The Dow Industrials and S&P 500 could still be poised for new highs this year as they have held their October lows, but other major indexes like the Russell 2000, Dow Transports, Dow Utilities, S&P 600 Small Caps, and the Nasdaq Composite have broken through their respective October lows. This sets up a possible inter-market bearish divergence of significance if the ladder indexes fail to achieve new high as well. Something investors should be aware of given the quick start this month and the 8 month rally in stocks.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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System trading, also known as mechanical trading, automated trading, algorithmic trading and rule based trading, is one of the two popular trading methods; the other is discretionary trading. It is the trading practice where a trading system trades on behalf of a trader. The system makes all trading decisions with respect to the rules set by the trader and the info available at the time. System traders rely on the ability of the system to find trading opportunities and to execute trades.

Usually all the trading decisions like entry and exit points, stop-losses and position sizes are made by the system, but it is possible to override the decisions. Most trading systems come with standard trading rules, which need to be customized according to the traders' trading goals, risk tolerance and the securities/markets traded. As all trades are done automatically, traders can practice complicated trading strategies.

• The first thing to note is that the system makes absolute trading decisions. A buy or sell process is triggered once all the requirements are met; and the system never trades until the minimum requirements are met.
• System trading eliminates human emotions like fear and greed from influencing the trading.
• As the decisions are made automatically, traders can conduct large-scale trades with complex strategies like arbitrage.
• The strategy is better for short-term trading like intraday trading and swing trading; but not for long-term trading and investing.
• The strategy is good for persons who want speed and accuracy in their trades; and who want to save time.
• System trading is usually less flexible and adaptable than discretionary trading.
• While system trading favors novice traders more than discretionary trading, the system still requires to be fine-tuned for making good profits with minimum risk/loss.

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Zig Zag indicator is used by traders to reduce the "noise" in a trending security. It is very useful in finding price trends, finding support and resistance levels and in evaluating chart patterns like head and shoulders pattern, double tops and double bottoms. Actually Zig-Zag is not considered a true indicator, but as a filtering program to eliminate random price swings of a given period.

There is not an exact formula for zig zag indicator; it is a computer program which wipes out all price movements less than x percent or points. For example if you use a 5% filtering, all price movements of the stock less than 5% will be eliminated from the graph. Traders can also set the zig-zag amount in points. Thus the indicator helps the traders to better explore the market cycles and long-term chart patterns.

Zig zag trading indicator is widely used in Elliot wave analysis. The indicator is a lagging indicator and has zero predictive power. The last leg of the indicator is generated dynamically; it can change as the last leg is not set until the future price is already known. Traders should never use zig zag indicator for generating entry and exit points but for just understanding past price movements. The indicator can offer better results when used with other indicators and chart patterns.

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Concealing baby swallow is a bullish trend-reversal candlestick pattern indicating the start of a new uptrend after a downtrend. It is a four candlestick pattern comprised of all bearish (black or colored) candlesticks. Bullish concealing baby swallow pattern is a highly reliable pattern, where trend reversal occurs because of the extreme bearishness of the trend.


The requirements of a bullish concealing baby swallow pattern include,

• The market should be characterized by a significant downtrend.
• The first two days are characterized by bearish marubozu candlesticks without any upper or lower shadows.
• The third day is a bearish day opening below a gap and is characterized by an inverted hammer formation, the shadow of which trades into the body of the second day candlestick.
• The fourth day is also a bearish marubozu day which opens a gap above the third candlestick and completely encloses the third day candlestick.

Bullish concealing baby swallow formation occurs when there is a strong bearish sentiment in the market. The bearish marubozu formations of the first two days indicate that the downtrend is strong. But the long upper shadow of the third day candlestick and gap above opening of the fourth day candlestick indicate that the trend is weakening. The fourth day also offers a perfect opportunity for shorts to cover their position. Once that's done, the trend is expected to reverse.

Bullish concealing baby swallow is a highly reliable formation; however, a bullish candlestick with a gap-up or a higher close on the next trading day is necessary for confirmation of the trend.

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BRIC ETFs are exchange traded funds which invest in stocks associated with BRIC nations, which are Brazil, Russia, India and China. These are countries which are considered as the leaders of emerging economies because of steady and fast economic (GDP) growth in the past and are constantly exploring their high levels of natural/human resources. BRIC ETFs allow investors to passively benefit from this growth.

BRIC ETFs are excellent ways to diversify the investment portfolio. They are also believed to offer better returns than ETFs tracking NYSE and S&P; or American and European markets as a whole. Different BRIC ETFs may have different weightage for different countries; for example Claymore BRIC ETF (EEF) has the following allocation proportions - Brazil 46%, Russia 5%, India 13% and China 36%. Apart from tracking the securities traded in BRIC exchanges, many BRIC ETFs also track stocks of BRIC countries traded in American and European markets.

Many investors consider BRIC ETFs as an alternative way to profit when the dollar and US economy are weak. BRIC ETFs usually have higher expense ratios than traditional ETFs. They are also considered risky as the political climate of these nations can change drastically. The recent recession, which hit these economies too, has also raised some concerns over these economies. The decoupling theory of emerging markets, which stated these economies will grow independently, has also proved wrong so far.

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The Week Ahead: Investors were spooked by a falling consumer confidence number while personal income and spending data showed the biggest drop in 10 months. The data continues to flow starting Monday with pending home sales and construction spending. Auto sales arrive Tuesday as the FOMC begins a two day meeting on interest rate policy. The FOMC decision will be announced Wednesday afternoon. Third quarter productivity and jobless claims data are announced Thursday which precedes Friday's all important Employment Report.

Stocks to Watch: Zale Corp. (ZLC) after showing a much larger Q4 loss versus a year ago is undergoing an SEC probe of their accounting practices. Manitowoc Company (MTW) beat earnings estimates for Q3 despite being substantially lower than last year, and Standard & Poors kept a strong buy on the stock. Stanley Inc. (SXE), an IT services firm beat Q2 estimates and year ago levels in their earnings report as the stock pushed back above a declining 200 day moving average. Microstrategy (MSTR) handily beat estimates for Q3 as the stock vaulted to an 18 month high.

Special Note: The S&P 500's decline in October halted seven straight up months as the broad based index tests its October low. Several indexes registered bearish outside down weeks including the Dow Transports, Russell 2000, and S&P 600 Small Cap Indexes where higher highs and lower lows were made than the previous week and closed lower. This candlestick bar pattern is quite often associated with major reversals in stocks and can be considered a precursor for a larger decline than the 9% drop in July despite a 65% rise since the March low in the S&P.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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