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Weekly Market Newsletter 11-8-2010

2010-11-08T09:34:00.002-05:00

The Week Ahead: The unemployment rate remained unchanged while pending home sales fell 1.8% after expectations were for it to rise 3%. Still, markets were undeterred and rose 3% or more last week. A quiet reporting week relative to last week starts Tuesday with the ICSC Index which will track the major retail chain store sales followed by the Wholesale Trade numbers. Wednesday, markets get a look at the International Trade figures and Jobless Claims. Thursday is Veteran's Day but stock markets are open. Friday, Consumer Sentiment and Money Supply reports are released.

Stocks to Watch: Earnings from the financial sector beat all other sectors with a 95% increase in Q3 as the lagging KBW Bank ETF (KBE) rose to its highest level since early August. Conversely, telecom sector earnings fell by 9%. Sprint Nextel (S ) sank to its August lows on fears that mobile provider Clearwire (CLWR) which provides a 4th generation mobile network to Sprint could fail as its cash will last only to the middle of next year unless further credit is secured. Massey Energy (MEE), 6 months after its mining disaster, is the subject of takeover rumors with at least 3 mining companies interested.

Special Note: U.S. stock indexes broke above their April highs with the exception of the S&P 100 (OEX) and Russell 2000. Confirmation from all averages would imply a new cycle breakout starting from the July low that may carry into next year with the bullish seasonal bias from November to January. A note of caution though is the Daily Sentiment Index (trade-futures.com) for S&P traders which at 94% bulls nears a 4 year extreme, and the percentage of bulls minus bears near 30% is the highest since the bear market began in 2007 (American Association of Individual Investors). Also, company insiders are selling at a pace not seen since 1990.

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Weekly Market Newsletter October 18, 2010

2010-10-18T09:59:00.003-04:00

The Week Ahead: With the second quantitative easing program by the Fed on the way, currency markets have seen many imbalances as most foreign currencies rise against the falling dollar. This situation may be addressed on Friday as G20 finance ministers and bank governors meet in Seoul, South Korea. The first two notable reports on Monday are the Industrial Production number and the Housing Market Index. The Housing Starts figures get attention on Tuesday and the Fed's Beige Book on Wednesday. Two additional reports on Thursday include Jobless Claims and Leading Indicators for the economy.

Stocks to Watch: Bank stocks continued to slide against the market's trend. Bank of America (BAC) had its rating cut by S&P do to foreclosure concerns and J.P. Morgan (JPM) is reviewing its foreclosure procedures. Capital One (COF) nosedived 7.6% as it increased the amount of credit balances it does not expect to collect on. Technology stocks continued to soar with Google's (GOOG) better than expected earnings and Apple Computer (AAPL) due to report after Monday's close. Seagate Technology (STX) was approached to go private by a potential buyer and the stock shot up 22%.

Special Note: The number of S&P 500 stocks now above their 50 day moving average is just under 93% about where this percentage was at the April high. Also keep in mind that the Daily Sentiment Index (trade-futures.com) has also reached the same levels as the April high for both the S&P 500 and Nasdaq at a bullish 92% and 90% respectively. Being bullish near term is a crowded trade. Another noteworthy point is that despites technology's rapid ascent some of the generals have been noticeably lagging such as Cisco Systems, Intel, and Microsoft among others which are all down for the year.

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Weekly Market Newsletter 10-11-2010

2010-10-11T12:24:00.001-04:00

The Week Ahead: Job losses continued to mount after September showed an additional 95,000 people lost employment net of the private sector's small gain. A couple of retail sales reports including the Redbook numbers will be out by Tuesday after the Columbus Holiday on Monday. The MBA Purchase Applications figures on Wednesday will provide a peak at coming home sales. The International Trade report and the Producer Price Index are released Thursday. Multiple reports arriving on Friday include: the Consumer Price Index, Retail Sales, Consumer Sentiment, and Business Inventories.

Stocks to Watch: With grain prices on the rise, agricultural related companies have been some of the best performers including Agrium (AGU) and CF Industries (CF) both hitting 52 week highs. On the other hand companies that buy loads of grains and meat are on the decline such as Tyson Foods (TSN) which was down 8% on big volume and Smithfield Foods (SFD) which was down 7%. The hedge fund Pershing Square now holds close to a 17% stake in JC Penney (JCP) and 11% in Fortune Brands (FO) as both companies reached 2010 highs.

Special Note: The major indexes have now surged up 5 of the last 6 weeks despite a declining 5 day moving average of the advanced decline line and a sliding relative strength indicator. Most of the technical and sentiment extremes noted over the past month are still in effect. The disparity between the weak fundamentals the economy is exhibiting and market performance is expanding. This behavior typically pre-stages a period of high volatility for share prices.

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Weekly Market Newsletter, 10-04-2010

2010-10-04T11:49:00.001-04:00

The Week Ahead: Manufacturing activity grew at a slower pace in September versus August confirming other reports that economic growth is slowing. Reports to watch on Monday are Factory Orders and Pending Home Sales. Tuesday, the service sector will be tracked by the ISM Non-Manufacturing Index. Chain Store Sales will give a peak at the health of the retail consumer on Thursday, and the Consumer Credit figures will show if outstanding credit is still contracting. The Employment Report on Friday a month ahead of elections will take on added importance to the market.

Stocks to Watch: Citigroup (C) jumped 4.6% on a huge 770 million shares as the U.S. Treasury has now sold half the shares it received from the bailout. Energy and Material Sectors outperformed with Consol Energy (CNX) rising 3.7% as the mining company will close its Utah mine and layoff 231 workers. Freeport Mcmoran (FCX) reached a multi-month high as gold prices hit record highs. The Wall Street Journal reported that Gymboree Corp. (GYMB) is seeking private equity buyers that may have an interest in the company. Fidelity National Financial (FNF) and First American (FAF) came under pressure as questions arose over paperwork that may put millions of real estate titles into question.

Special Note: Markets are starting to show waning upside momentum as the S&P 500 is up a net 3.5 points over the last 9 trading days. Daily Sentiment readings from trade-futures.com are once again at extreme bullish levels typically found near peaks for many markets such as stocks 87%, gold 90%, silver 95%, bonds 93%, Euro 90% and many other commodities. Talk of a second quantitative easing or QE2 by the Federal Reserve no doubt has sparked much of the enthusiasm for the different asset classes, but the market seems to have discounted much of the upside from this potential action already.

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Weekly Market Newsletter, September 20, 2010

2010-09-20T10:26:00.002-04:00

The Week Ahead: Gold and Silver price breakouts are helping to fuel speculation of higher prices in all markets even as the CPI was flat at its core rate, and household net worth fell 3% in the second quarter. Significant reports to watch will be: the Housing Market Index on Monday, the Housing Starts figures on Tuesday followed later by the Federal Reserve's announcement of interest rate policy, the Existing Home Sales and Leading Indicators on Thursday, and Durable Goods Orders preceding the New Home Sales numbers on Friday.

Stocks to Watch: Oracle Corp. (ORCL) beat the street estimates in its most recent quarterly report sending the stock up 8% on 5 times normal volume and reaching levels not seen since 2001. Micron Technology (MU) and Sandisk Corp. (SNDK) both sank as falling chip prices worldwide and weaker demand for consumer electronics are expected to squeeze profits. NetSuite ( N) reached a 52 week high as the business software firm will add 150 new workers for its 'cloud computing' services. Finally, Arena Pharmaceutical (ARNA) continued to collapse after the FDA rejected its obesity medicine.

Special Note: The Nasdaq 100 technology index (NDX) has done something beyond what it last did in January 1991 and that is 12 consecutive days without its prices touching the 5 day moving average. There are a number of extreme overbought readings the market is flashing now including a new 60 year low in the cash holdings of mutual funds now at 3.4% which is below the levels of the market peaks of 2000 and 2007. Another is the American Association of Individual Investors (AAII) whose sentiment poll shows more bulls now than at the recent April peak and less bears than the all time peak in the DOW and S&P 500 in 2007..

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Weekly Market Newsletter, September 13 2010

2010-09-13T10:18:00.002-04:00

The Week Ahead: Slow growth continues to plague the U.S. economy. An additional 4 million jobs have been lost since the beginning of the Obama Administration. Retail Sales which makes up 2/3 of GDP will be released on Tuesday and afterwards Business Inventories will be announced. The MBA Purchase Applications will measure the health of the housing market on Wednesday with the Industrial Production report to follow. By Thursday, markets will focus on the Producer Price Index (PPI) then on Friday the Consumer Price Index (CPI) followed by Consumer Sentiment.

Stocks to Watch: PG&E Corp. (PCG) fell 8.35% on ten times normal volume after a gas line explosion in California. The stock was near its 2007 high before the incident happened. Nokia (NOK) has a new CEO aboard and a new N8 Smart Phone coming out later this week pushing the stock up nearly 2%. The company has the largest phone software business worldwide. Watson Pharmaceutical (WPI) dropped 4% after a competitor's potassium drug was approved by the FDA for return to the market.

Special Note: An upward wedge pattern or triangle on the DOW and S&P 500 in recent days is similar to a larger wedge that occurred from July 13 to August 9 that concluded at the most recent peak last month. Look for the completion of this very short term pattern this week with a stab above the 200 day moving average followed by a protracted sell off. Are stock analysts bullish or bearish? Bloomberg recently reported that 29% of brokerage firm ratings of stocks were buys while over 54% were holds and only 5% were sells.

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Stock Market Weekly Update, Sep 07, 2010

2010-09-07T21:52:00.002-04:00

The Week Ahead: Unemployment inched up a notch on the U-3 measurement to 9.6%, but U-6 unemployment pushed to 16.7%. The private sector did add jobs for the eighth consecutive month. Two retail reports on Wednesday, the ICSC-Goldman Store Sales and the Redbook will give clues to consumer retail purchases. The Fed Beige Book and Consumer Credit will also be released. Thursday brings the International Trade figures as well as the Jobless Claims. Friday ends a short week with the Wholesale Trade numbers.

Stocks to Watch: After hitting new 52 week lows last Tuesday, the Select Sector Financial ETF (XLF) was one of the best performers last week as bank, insurance, and real estate stocks led the way. Campbell Soup (CPB) fell 3% on two times normal volume even after beating year ago numbers and estimates possibly indicating a trend change. Agricultural stocks charged higher as corn prices are now higher than a year ago: Caterpillar (CAT) rose 2.2%, Deere & Co. climbed 1.3%, and an exchange traded note that tracks corn prices and other grains (JJG) was up 3.3% reaching a 52 week high just 3 months after hitting a 52 week low.

Special Note: The stock markets surge from oversold levels early last week was either a flash in the pan due to seasonal factors surrounding the Labor Day holiday or the start of another advance in what appears to be a sideways trading range since May. One indication in support of the latter is the push through the 50 day moving average which in recent months has acted as a magnet to the 200 day moving average. Another is that some foreign indexes like the London FTSE index and the India Fund (IFN) have pushed through their August highs. An argument for the former is that September is historically the weakest month of the year.

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Stock Market Weekly Update, August 30th, 2010

2010-08-30T10:40:00.001-04:00

The Week Ahead: A large downward revision to GDP from 2.4% to 1.6% for the second quarter and a lower revision to Consumer sentiment is more evidence that the economy is accelerating lower. Time will tell if the Fed's monetary tools which it stands ready to use can head off the current nosedive. Personal Income and Spending numbers are released Monday. A Consumer Confidence Report is due Tuesday. Auto Sales, the ISM Manufacturing Index, and Construction Spending make for a busy Wednesday. Productivity, Factory Orders, and Pending Home Sales will make Thursday equally busy. By Friday, all eyes will focus on the Employment Report for August followed by the ISM Non-Manufacturing Index.

Stocks to Watch: Although the Board at 3 Par (PAR) has endorsed Dell Computer's offer to buy it for $27 a share, it is Hewlett-Packard that is in a better position to buy 3 Par with its $30 per share offer and larger enterprise hardware and services business. Other data storage stocks rose strongly as well such as Compellent Technologies (CML) up 15% and Netezza Corp. (NZ) up 33% on better than expected quarterly profits and record revenues. Speculation has pushed Arc Sight (ARST) up 40% the last two sessions on takeover rumors especially since the buyout of McAfee by Intel Corp.

Special Note: With many economic reports due this week, the stock market sports an upward seasonal bias ahead of the Labor Day weekend. Near term the three major indexes are coming out of oversold conditions, but if economic data proves to be lopsidedly weak then any bounce could be short lived. Technical traders will be interested to know that the CBOE US Equity Put/Call Ratio reached .39 last Monday the lowest it has been since nearing a 10 year extreme of .33 on April 14 just 12 days before this years market top on April 26.

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Stock Market Weekly Update, August 16th, 2010

2010-08-16T11:56:00.002-04:00

The Week Ahead: Evidence continues to mount that the economic recovery is slowing as nearly all retailers reported lower sales and consumer sentiment still sits at depressed levels. With earnings now uncertain, investors will place more emphasis on future economic reports starting with Tuesday's Housing Starts, Producer Price Index, and Industrial Production numbers. By Thursday, markets will focus on the Jobless Claims report which has been trending higher and finally the Leading Indicators.

Stocks to Watch: The Blackstone Group (BX) announced its intention to buy Dynegy Inc. (DYN) for $572 million as the ladder jumped 63% on the news. IBM will pay $488 million in cash or $21 a share to buy Unica (UNCA) which more than doubled on the news. After a profitable 2nd quarter, J.C. Penney (JCP) cut its earnings goal for the year. The stock has now reached a 16 month low. Dillard's (DDS) reached a 6 month low dropping 5% after reporting lower revenues.

Special Note: The technical backdrop shows another outside down week formed similar to late in June where higher highs, lower lows, and a lower close developed compared to the previous week raising the possibility of a sharper decline to follow near term. Also, the NYSE had an unusual occurrence on Friday the 13th where at least 2.2% of equities hit 52 week highs and 2.2% hit 52 week lows triggering the Hindenburg Omen. Four other technical requirements were also met. If one or more signals occur in the next 36 days it will confirm and indicate a higher than usual probability of a severe stock market decline to follow in the next four months.

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Stock Market Weekly Update, August 9th, 2010

2010-08-09T10:35:00.002-04:00

The Week Ahead: For the second straight month the economy lost jobs this time shedding 131,000 in July and hinting that the economy may be rolling over again. Some experts site less regulation and lower taxes as what is really needed to grow the economy. The Productivity and Costs report is revealed Tuesday, but the Federal Reserve Policy announcement later in the day is what traders will focus on. International Trade data is released on Wednesday but by Friday a whole host of reports including: the CPI, Retail Sales, Consumer Sentiment, and Business inventories will give markets much more insight into the economy.

Stocks to Watch: Goldman Sachs outlook for US Treasury yields to drop to 2.5% had corporate bond fund ETF's on the move like ishares iboxx Investop (LQD), but strong resistance lies just overhead. Boeing Co. (BA) had 25 plane cancellations and more than half were for the large Dreamliner fleet by a Middle Eastern leasing company. Investors dumped shares of the Washington Post Co. (WPO) having sited federal investigators looking into recruitment and student loan application issues pertaining to its Kaplan unit. Other career college companies were down hard as well such as: CECO (6%), APEI (32%), and DV (6%).

Special Note: The S&P 500 and Dow Industrials have formed a wedge shaped pattern since early July. The resolution to this many times is a spike in prices followed by a dramatic reversal so look for this volatile action possibly this week. It is worth noting that according to the Investment Company Institute the mutual fund cash-to-asset ratio was just 3.5% and 3.6% in April and May respectively. Once again these low cash percentages matched record lows amidst a 50 year history of data at levels last seen near the all time peak in 2007. Less extreme readings of 4% were recorded near the 1973 peak and 2000 peak.

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Stock Market Weekly Update, August 2nd, 2010

2010-08-02T22:32:00.001-04:00

The Week Ahead: Economic growth since the 4th quarter of 2009 continues to slow with the initial GDP coming in at 2.4% for the 2nd quarter. Consumer sentiment also reached its lowest point in 6 months. Several more economic reports to watch include: Monday's ISM Manufacturing Index and Construction Spending. Tuesday's Auto Sales, Personal Income & Spending, and Factory Orders. Wednesday's ISM Non-Manufacturing Index. Thursday's Chain Store Sales and Friday's all important Employment Report.

Stocks to Watch: Intel Corp. (INTC) shares fell as it may be close to buying Germany's Infineon Technologies according to the Wall Street Journal which would give them a bigger play in smart phone semi-conductors. Geron Corp. (GERN) lost less money than a year ago but shot up 17% as the FDA is allowing early stage testing on experimental stem cell therapies such as the companies new spinal cord injury treatment. Orexigen Therapeutics (OREX) leaped over 9% as patients using its experimental weight-loss drug were shown to be more likely to lose weight than a placebo. An FDA Advisory Panel will review the medicine later this year.

Special Note: July's 7% gain in the major indexes was led by Material stocks which climbed 12.2% and Industrials gaining 10.3%. Healthcare was the laggard at 1.3%, but 80% of its companies reported better than expected earnings. Watch the formation of the head and shoulders pattern that started at the January high to the April top to the present juncture on the DOW, S&P 500, and NASDAQ. Thus far all the characteristics pertinent to this technical formation appear to be in place. A break below the July low would confirm the pattern, but a move above the January high would weaken it.

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Stock Market Weekly Update, July 26th, 2010

2010-07-26T13:05:00.002-04:00

The Week Ahead: The claimed success of the European Bank Stress Test has markets around the world relieved and rallying despite the details of how the tests were conducted to be somewhat secretive. Nonetheless, watch for more uncertainty not less going forward. New Home Sales will be announced on Monday. The S&P Case Shiller Home Price Index and Consumer Confidence are released Tuesday. Durable Goods Orders are due by Wednesday. The week will end with 2 more significant reports: The GDP figure for Q2 and Consumer Sentiment. All these reports are of course are lagging or coincident by their nature.

Stocks to Watch: General Electric (GE) raised their dividend after the historic cut a year ago and also announced a stock buyback as the stock rose 3%. Ford (F ) climbed 5.71% as it handily beat estimates and year ago earnings. The company will continue to pay down debt and sees 2011 results to be even better. Auto parts maker Johnson Controls (JCI) missed on its quarterly numbers and fell 4.5% as did bio medical firm Beckman Coulter (BEC), but it lost 21% of its value. Great Atlantic & Pacific Tea Company (GAP), the old A&P collapsed 33.6% on its earnings miss and management shake-up.

Special Note: Two important technical measures to be watchful for are: 1.) The Volatility Index (VIX) which is approaching oversold levels on a short and intermediate term basis and could be setting up for another round of downside volatility late this month or early August. 2.) An 8 to 9 day pattern of market turns has been in effect since mid May on the Dow Industrials and S&P 500. It is due to turn down early this week. Look for a continuation of this sequence or a move that carries prices higher into early August.

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Weekly Market Newsletter July 19, 2010

2010-07-20T09:45:00.001-04:00

The Week Ahead: The economic outlook dimmed on revenue declines by some large cap companies such as General Electric, Citigroup, and Bank of America. Volume swelled on a sharp market reversal in stocks, and consumer sentiment dropped to March '09 levels. The housing market will be in focus starting with the Housing Market Index on Monday, Housing Starts on Tuesday, and Existing Home Sales on Thursday. Look for possible surprises in the Jobless Claims figures and Leading Indicators on Thursday.

Stocks to Watch: The impact of financial reform on earnings has investors concerned that Bank of America (BAC) could be hurt to the tune of $10 billion going forward. General Electric (GE) fell 4.59% on heavy volume as 1/3 of its business is in Finance. Charles Schwab Corp. (SCHW) rose 4.05% on flat earnings, but some analysts believe that the company's decision to waive fewer fees will be a positive for profits later. Earnings from International Business Machines (IBM) on Monday, and McDonalds (MCD), and Verizon (VZ) on Friday will be key in that these 3 companies are the best performing DOW stocks since the April high.

Special Note: It appears stock indexes are entering another volatile downside phase based on there down sloping choppy nature since the "flash crash" low in early May. Consider this in light of a recent Wall Street Journal article on July 12 explaining how in sync stocks are to the S&P 500. According to a measure of correlation that calculates the percentage of stocks moving in the same direction as the index, stocks in the S&P 500 have been tracking the index to the highest degree since the 1987 crash creating dramatic moves both up and down in stocks when they seemingly move together in the same direction.

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Stock Market Weekly Update, July 12th, 2010

2010-07-12T10:32:00.002-04:00

The Week Ahead: Another countertrend rally in stocks gave the major indexes there best week in a year as markets gear up for second quarter earnings reports starting with Alcoa (AA) on Monday. Markets will also be looking at the International Trade numbers on Tuesday as well as Retail Sales and Business Inventories on Wednesday. By Thursday, the focus will shift to the Producer Price Index and Industrial Production. Friday ends the week with the Consumer Price Index and Consumer Sentiment.

Stocks to Watch: Google's (GOOG) license renewal in China after the censorship battle preserves its presence in the world's most populace internet market, but the stocks trend has been down since day 1 of 2010. Research In Motion (RIMM) bolted higher by 7.8% on twice its normal volume as it tries to reverse a slide that started last September after announcing an on-line applications store and consumer internet service in China. Commercial Insurer ACE Limited (ACE) vaulted higher by 4.7% as it will be added to the S&P 500 on Wednesday replacing Millipore Corp. which was acquired.

Special Note: Despite the markets downtrend the major indexes have managed to rise in 3 of the past 5 weeks with minimal or no net progress. More immediately the rise of the past 3 days has seen the number of issues advancing more each day but on lesser volume as seen for instance by the Russell 3000 where almost two-thirds of the index moved up. This may be indicating that traders are not confident in the underlying strength propelling the rally and are nervously backing away. Strong resistance lies directly overhead on near term charts.

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Weekly Market Newsletter, June 7th, 2010

2010-06-07T22:33:00.002-04:00

The Week Ahead: The jobs report failed to inspire confidence in stocks as all but 20,000 jobs created were temporary census workers. The report was a catalyst for the Dow Industrials to fall below 10,000 on increasing volume. Nervous markets will be watching the Consumer Credit report on Monday, Wholesale Trade numbers and the Fed Beige Book data on Wednesday. By Thursday, expect the International Trade numbers as well as the Jobless Claims for the past week. Friday's Retail Sales, Business Inventories, and Consumer Sentiment releases will rap up a busy and likely volatile week.

Stocks to Watch: Industrial and Material stocks faired the worst do to ties with the global economy. Heavier than normal volume was associated with Caterpillar (CAT), Boeing (BA), and General Electric (GE). Others include Textron (TXT), Jacobs Engineering (JEC), and trucking company Ryder Systems (R ). Worries about less global demand for steel impacted US Steel (X ), AK Steel (AK), and Cliffs Natural Resources (CLF). Concerns about European debt problems can be seen through ETF stocks of Europe such as the I-shares for Italy (EWI), Spain (EWP), and Belgium (EWK) whose debt is greater than Spain and Portugal relative to the size of its economy.

Special Note: During the the market peak in 2007 and subsequent low in 2009, many analysts cited US companies market presence in countries overseas as a saving grace for continued earnings growth despite a weak domestic economy. The burgeoning debt crisis is proving to have no boundaries as seen by a growing list of European countries including the recent threat of default by Hungary. How long can earnings be sustained as economies around the world endure budget cuts and contraction of the very debt that helped sustain their growth?

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Weekly Market Newsletter June 1, 2010

2010-06-01T09:09:00.002-04:00

The Week Ahead: Markets head into June concerned about higher oil prices do to the Gulf oil spill, the weakest consumer spending report in seven months, and Spain's credit rating being cut by Fitch. Further insight will be provided by three reports on Tuesday: Auto Sales, the ISM Manufacturing Index, and Construction Spending. In addition to this watch Thursday's Jobless Claims, Productivity and Costs, Factory Orders, and the ISM Non-Manufacturing Index. Lastly, Friday's Employment Report may have the most impact on stocks and bonds.

Stocks to Watch: Stocks related to the oil spill disaster in the Gulf continue to weaken as Halliburton (HAL), Baker Hughes (BHI), Diamond Offshore Drilling (DO), and FMC Technology (FTI) headed lower. Nabors Industries (NBR) bucked the trend as it is mostly a land driller and its stock headed higher. The growing possibility of a weakening European economy had Dow Chemical (DOW) down as 2/3 of the company's sales come from overseas. Blue Coat Systems (BCSI), a network security management firm, lost 1/4 of its value on a ratings cut over concerns about its European business.

Special Note: Volatility in May was the worst in over a year for the Dow Industrials. The biggest losing sectors were Energy down 11.8%, Industrials down 9.8%, and Materials down 9.7%. The rate of change in the core CPI figures which excludes food and energy fell to the lowest level since 1966. In addition to this, the now privately computed M3 money supply numbers show the broadest aggregate measure to have declined by almost 10% on an annualized basis. Perhaps deflation is the real threat going forward in all asset related markets.

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Bearish Measured Move Pattern

2010-05-27T08:56:00.003-04:00

Bearish measured move or measured move down is a three phased continuation chart pattern. The pattern starts as reversal of an existing uptrend but is considered as continuation pattern as the pattern is only confirmed after the second phase. The 3 phases of bearish measured move are reversal decline phase, consolidation/retracement phase and continuation decline phase.

The requirements of bearish measured move pattern include,

The pattern should begin at the top/end of a strong uptrend.
The reversal decline phase starts near a high. The downward price decline should be pretty orderly; usually breaking a major support and forming a price channel. This phase lasts from a few weeks to many months. If the price is greatly curved, then the validity of the pattern is challenged.
The consolidation/retracement phase follows the first phase. If it is a price retracement, it can be up to 67% of the first phase. Consolidation patterns such as rectangle chart pattern and descending triangle or retracement patterns such as rising wedge, bearish flag and bearish pennant formations should occur at the end of this phase.
The continuation decline phase should (almost) match the slope of the first phase.
Volume confirmation is no so important. Generally, the volume should increase at the beginning of both decline phases and should decrease at the end of the retracement phase.

With bearish measured move pattern, traders can go short at the confirmation of breakout of consolidation/retracement phase. Traders should use appropriate price target suiting the continuation pattern at the end of the consolidation phase.

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Bullish Measured Move Chart Pattern

2010-05-26T08:50:00.003-04:00

Bullish measured move or measured move up is a continuation chart pattern which starts as a reversal pattern. This is a three phased formation which forms over several months. The 3 phases of bullish measured move are reversal advance phase, consolidation/correction phase and continuation advance phase.

The requirements of a bullish measured chart pattern include,

The pattern should form at the end of a strong downtrend.
The reversal advance phase starts near an established low and lasts for a few weeks to many months. The upward price increase should be orderly; usually forming a price channel. If this uptrend is greatly curved, then the validity of the pattern is greatly challenged.
The consolidation/correction phase occurs after an extended uptrend. The correction can be up to 63% of the reversal advance. Consolidation patterns such as rectangle chart pattern and ascending triangle or correction patterns such as falling wedge or sloping flag formations should occur at the end of this phase.
The continuation advance phase usually matches the slope of the first phase.
The volume should increase at the beginning of both advance phases and should decrease at the end of the consolidation phase.

With bullish measured move, traders can go long at the confirmation of breakout of consolidation/correction phase. Traders should use appropriate price target suiting the continuation pattern at the end of the consolidation phase.

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Weekly Market Newsletter, May 24th, 2010

2010-05-24T21:53:00.003-04:00

The Week Ahead: Financial regulatory reform is seen contributing to market volatility as the final bill is hoped to be completed by July 4 and includes an overhaul on derivatives. Triple digit moves for the DOW could become the norm as evidenced again on Friday's reversal up day. Watch Existing Home sales numbers on Monday and the Consumer Confidence report on Tuesday. Durable Goods Orders and New Home Sales figures are released Wednesday. The GDP report on Thursday will be closely watched while Friday ends the week with Personal Income & Outlays and a consumer sentiment report.

Stocks to Watch: The Cme Group (CME) and Intercontinental Exchange (ICE) are two entities that are seen as probable winners benefiting from the Financial Reform package regarding derivatives if differences between the House and Senate get worked out by July. Technology stocks like Dell Computer (DELL) fell nearly 7%, but Marvell Technology (MRVL) rose over 8% on a big quarterly jump in revenues. Ann Taylor Stores (ANN), having tripled in the past year, showed margin growth last quarter with less discounting.

Special Note: Foreign equity indexes have been leading the charge to the downside versus the perceived lower risk U.S. markets. With key levels beginning to breakdown on the major indexes such as the 200 day moving average the " flash crash" low made earlier this month, and the 10,365 area on the DOW mentioned here last week investors may want to adopt a more defensive posture near term until the volatility calms down. This may mean selling into rallies or buying puts against long positions for protection.

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Trading Rectangle Chart Pattern

2010-05-18T08:13:00.003-04:00

Rectangle pattern is a trend-continuation chart pattern indicating the continuation of an existing trend after a period of consolidation. It is an easy-to-recognize chart pattern with (almost) equal highs and lows. Rectangle chart pattern resembles symmetrical triangle formation, another trend-continuation pattern.

The requirements of rectangle chart pattern include,

There should be prior trend existing in the market. The trend shouldn’t be too mature; strong and extended prior trends provide lesser chances of trend continuation.
To qualify as a rectangle pattern, there should be two relatively equal reaction highs and lows. The parallel line connecting reaction highs forms the upper resistance line and the line connecting reaction lows forms the lower support line.
The breakout is confirmed when the price breaks out of the upper or lower line in the direction of the trend. For bullish breakouts the broken resistance level turns into potential support level, and vice versa.
The volume is not so important with the pattern; but the breakout should be noticeable with increase in volume.
The duration of the pattern can range from a few weeks to many months. Generally long-duration patterns are more reliable than short ones. If the pattern takes less than 3 weeks to develop, it is considered as a flag pattern.

Rectangle chart pattern forms as a result of strong competition between bulls and bears. After a strong trend, the prices begin to consolidate as bulls fail to make new highs exceeding the resistance level and bears fail to make new lows below support level. After a period of consolidation, breakout occurs, usually in the direction of the previous trend. Traders can enter trades after the confirmation of breakout; the immediate price target is the vertical height of the rectangle added/subtracted from the breakout point.

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Stock Market Weekly Update, May 17, 2010

2010-05-17T09:13:00.001-04:00

The Week Ahead: Retail sales are up for the seventh month in a row, but with globally linked economies many investors question how the European slow down will impact the U.S. recovery especially exports as the rising value of the Dollar versus the Euro inflates prices. More clues to the U.S. economy via Housing starts and the Producer Price Index are due Tuesday while Wednesday spotlights the Consumer Price Index. The Jobless Claims, Leading Indicators, and the Philadelphia Fed Survey will round out this weeks reports on Thursday.

Stocks to Watch: Financial stocks have led recent weakness in the market as seen by the Select Sector SPDR's Financial ETF (XLF). Credit card companies such as Visa (V) and Mastercard (MA) declined sharply as the Senate moved to regulate debit card fees as part of financial reform, but some analysts see this getting deleted in the final bill. Tivo (TIVO) crashed 41% on a federal appeals court planned rehearing of a patent suit with DISH and Echostar. Hewlett-Packard (HPQ) may have trouble hitting revenue targets as 20% of its business could be hurt by the Euro plunge.

Special Note: Back to back triple digit declines for the Dow Industrials may have investors on edge this week. A look at the Volatility Index (VIX) shows a significant reversal on an intermediate and longer term basis with much higher than normal downside volatility. A technically sensitive area on a DOW chart surrounds 10,365. Recall September 29, 2008 when Congress initially rejected the TARP bailout and the market plunged 777 points. After the TARP approval and market bounce, the DOW fell back through 10,365 and hit an air pocket plunging 3000 points over the next 7 weeks. Correlate this with the recent market plunge and bounce with ties to the recent European bailout package for Greece.

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Triple Top Chart Pattern

2010-05-12T09:13:00.003-04:00

Triple top is a trend reversal chart pattern indicating the reversal of an existing uptrend and the start of a new downtrend. The pattern is relatively rare but considered a very reliable signal for short selling and to close long positions. Triple top pattern usually takes lesser time to form than triple bottom pattern and the typical time range is 3 to 6 months.

The requirements of triple top chart formation include,

The pattern should form at the top of a relatively long uptrend or during sideways movement after an uptrend.
There should be three price highs (tops) of almost equal heights. There should be reasonable time interval between each high.
The price breakout of support level marks the trend reversal. The breakout point is the lowest low level during the pattern formation.
The volume should diminish as the pattern forms and the breakout should be noticeable with increase in trading volume.

Triple top pattern is the result of three failed attempts to make a new high. As bulls continuously fail to break the resistance, the bears start to capitalize on that. The breaking of support level indicates the start of a new downtrend; and this support then turn into a resistance. The immediate price target is derived by subtracting the vertical height from the breakout point to the highs, from the breakout level.

On development, the triple top formation resembles many other patterns like double top pattern and ascending triangle formation. It differs from head and shoulders top pattern in the height of the middle top.

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Bump and Run Reversal Chart Pattern

2010-05-11T08:30:00.002-04:00

Bump and run reversal or BARR is a chart pattern indicating the reversal of an existing trend. The pattern was first identified by Thomas Bulkowski and was originally named Bump and Run Formation (BARF). Bump and run reversal is usually a long-term chart pattern which forms as a result of excessive speculation that drives the price too fast to the extremes and then shows a reversal.

There are both bullish and bearish versions of bump and run reversal. Bullish BARR pattern forms when excessive speculation drives the price down forming a large downtrend and an over-sold situation. The price rises sharply when more investors start to buy. Similarly bearish BARR pattern forms when excessive speculation drives the price up too fast, forming an over-bought situation. The price starts to fall when investors start to sell.

Bump and run reversal pattern comprises 3 different phases:

The lead-in phase is identified by a gradual trend development where the price rises/falls forming a trend. The trendline is moderately steep with average/low trading volume. The lead-in phase takes a month or more to form.
The bump phase is identified by sharp increase or decrease in price in the direction of the trend. The new trendline deviates too much (45 to 65 degrees) from the original trendline; and there is also a great increase in trading volume.
The run phase is identified when the price falls/rises to cross the original trendline. The breakout confirms trend reversal.

Before crossing the original trendline, the price bounces back many times to form a double top or double bottom. Traders can enter the trade when the breakout is confirmed.

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Stock Market Weekly Update, April 19, 2010

2010-05-10T10:32:00.002-04:00

The Week Ahead: The largest employment increase of the economic recovery was not the focus of markets as the sudden 1000 point intra-day collapse in the Dow Industrials Thursday still had investors reeling at Friday's market open. With the exception of a few order imbalances though, the NYSE had no structural deficiencies. Ben Bernanke will speak on both Monday and Thursday. International trade figures and Treasury Budget numbers will be reported on Wednesday. Jobless Claims are due Thursday while four reports are released Friday: Retail Sales, Industrial Production, Consumer Sentiment, and Business Inventories

Stocks to Watch: Tech stocks were hardest hit in the past week as some of the more widely held like Apple Computer (AAPL), Cisco Systems (CSCO), and Amazon.com (AMZN) are down sharply from their recent highs. Other stocks in the food group like Kraft Foods (KFT) bucked the trend and is still up 10% since January. Despite gold prices testing their all time highs late last week, gold stocks like Newmont Mining (NEM), Freeport Mcmoran (FCX), and Barrick Gold (ABX) all dropped over 2%.

Special Note: Much conjecture is building as to the size of a potential correction for the major indexes. The decennial pattern mentioned here last January 4 may have some warning. For the Dow Industrials the first year of the decade or '0' year going back to 1900 the corrections ranged from 15% in 1950 to 46% in 1930. The average correction was about 25%, but with the advent of derivatives and other leveraged products not to mention the interlinked nature that excessive debts worldwide has had on the financial world and sovereign nations perhaps something closer to the upper end of the the correction range is in store.

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Overtrading - The Signs and Effects

2010-05-07T08:53:00.002-04:00

Overtrading is one of the most dangerous common trading mistakes practiced by traders. They buy and sell more to get more profits, but this often results in big losses and very poor money management. Overtrading can be of two types; the first is trading with more open positions than he can handle (more trades) and second is the risking of most of the capital on a single trade (bad position sizing). Overtrading results in many terrible consequences.

Capital Loss: Overtrading results in over-exposure to risk and poor risk management which can result in capital loss.
Poor money management: often the trader opens new positions even when most of his money is still in the market. In other words, he is keener on opening positions than closing them.
No trading plan: traders can be very engaged in finding new hot opportunities but can be very poor with their position sizes, stop-losses, and price targets. Often, no fundamental or technical analysis is done.
Behavioral changes: as the number of losing trades increases, traders get angrier, more panicky and frustrated, and search more for opportunities. They usually start to risk more to make up for the losses.

Overtrading can be identified and controlled. The common signs of overtrading include,

Deviating frequently and too much from the core trading plan/strategy.
Too much searching for opportunities like subscribing to a number of newsletters, constantly switching news channels, asking others, frequently calling the broker, and so on.
Trading hurriedly. They feel better when they trade; and so they trade often.
Over-reacting to price changes and news; getting over-excited or desperate at times.

Double Bottom Chart Pattern

2010-05-06T08:50:00.002-04:00

Double bottom is a popular trend reversal chart pattern which indicates the end of an existing downtrend and the start of an intermediate/long-term uptrend. As the name suggests, double bottom pattern is identified when the price forms two troughs of (almost) same lows.

The requirements of double bottom chart pattern include,

The pattern should form at the bottom of an extended downtrend.
There should be two price troughs of almost the same depth which should be separated by a clear price peak. The highest point of this peak is the reaction high or confirmation point.
There should be enough time interval between two bottoms. The ideal interval is 4 months; but can range from 4 weeks to many months. The longer the pattern takes to form, the higher its significance.
The volume should decline as the pattern forms, but the bottoms are noticeable with increase in volume.
The trend reversal is confirmed when the price crosses above the reaction high after forming the second bottom. Volume expands on confirmation and gaps are common.

Double bottom chart pattern is a clear indication of the weakening of an existing downtrend. Price begin to fall from overbought levels at the first bottom but the existing market sentiment or some other news drives the price to drop to second bottom. But prices don't fall much from first bottom level and tend to rise from there after successfully testing this support level. Traders should go long only after confirmation of trend reversal.

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Chaikin's Volatility Indicator

2010-05-05T09:11:00.002-04:00

Chaikin's volatility indicator measures the market volatility based on the trading range between high and low prices for a given period. The indicator was developed by Marc Chaikin and hence the name. Chaikin's volatility indicator values are derived by calculating the exponential moving average (EMA) of the difference between high and low for a period and then calculating the percentage change in moving average over a period.

HL Avg = EMA of (High - Low)
Chaikin's = {(HL Avg - HL Avg N) / HL Avg N} * 100

When HL Avg is the high-low range for a given day and N denotes the same value ‘n’ periods ago. Usually both the EMA period and ROC period (n) are 10 days, but traders can use custom values to increase or decrease sensitivity.

In general, high values of Chaikin's volatility indicator indicate increased market volatility and low values indicate low volatility. There are two basic methods to interpret Chaikin's graphs.

Assume that market tops are accompanied by increased volatility and market bottoms are accompanied by decreased volatility.
Assume that increase in indicator over a shorter time period indicates near-future market bottom and decrease in indicator over a longer period indicates near-future market top.

Unlike Average True Range (ATR) indicator, Chaikin's volatility does not take trading gaps into account. The indicator offers better results when used together with other indicators like moving averages and price envelops.

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Different Ways to Trade Forex Currencies

2010-05-04T09:03:00.002-04:00

Global Forex market offers great flexibility to traders and suits different trading styles. Here are 4 different ways to trade Forex currencies.

Currency carry trades: Forex carry trading is a popular Forex trading strategy which aims at profiting from the difference in interest rate between two currencies like NZD/JPY. The trader buys high-interest rate currency spending low-interest rate currency and maximizes any profit chance by using high leverage and high position size.
Political trades: political factors like elections, political stability/instability, agreements/disagreements between countries, all these can trigger price changes to the related currencies. There are many Forex traders who search for these types of opportunities and position themselves according to the news.
Economic trades: world economies are closely related to one another. Many traders use economic disparities as a profitable opportunity. For example, traders can buy currencies of countries with strong fundamentals like better unemployment rate, GDP growth, and retail sales rate, spending those of countries with not-so-good fundamentals. One other example is profiting from the ever-changing oil and gas prices.
Volatility trades: There are many currency pairs like GBP/JPY which are fairly volatile to offer some pretty good intra/inter-day trading opportunities. In order to profit from these opportunities, traders should be thorough in their decision making and technical analysis.

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Stock Market Weekly Update, April 19, 2010

2010-05-03T09:36:00.002-04:00

The Week Ahead: The service sector highlighted the first quarter GDP report which came in at 3.2% the third increase in a row. Auto sales, Personal Income and Spending, Construction Spending, and the ISM Manufacturing Index will all be reported on Monday. Factory Orders and Pending Home Sales numbers are due Tuesday. The ISM Non-Manufacturing Index will track service sector activity on Wednesday. Productivity and Jobless claims will be released Thursday. The Employment numbers for April will round out the week.

Stocks to Watch: Goldman Sachs (GS) continued its slide falling 15% in April as a criminal fraud investigation was added to the recent civil lawsuits hitting the company. Transocean Ltd. (RIG) has now lost 20% of its value since the oil rig it owned sank in the Gulf of Mexico. British Petroleum (BP) has fallen 13% since the Gulf accident. Coinstar (CSTR) which operates DVD kiosks hit a new all time high after tripling it bottom line for Q1 from a year ago. Finally, McAfee (MFE) fell 12% after reporting a 30% drop in Q1 profits and a weak outlook for Q2.

Special Note: The month of April in stocks was led by consumer focused stocks which rose 6% on average. Healthcare related companies showed the worst performance down 3.9%. Volatility is once again on the increase based on the VIX index. The burgeoning debt problems by sovereign entities such as Greece, Portugal, Spain, and Iceland appear to be at the forefront of another financial crises similar to 2008 when faulty sub-prime loans led to the demise of Lehman and Bear Stearns. The interconnected nature of sovereign debt has even larger implications for financial markets.

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Double Top Chart Pattern

2010-04-28T09:04:00.003-04:00

Double top is a popular reversal chart pattern indicating the end of an uptrend and the start of a downtrend. As the name suggests, the pattern is identified when the price forms two peaks of (almost) the same height. Double top formation is also known as 'M - pattern' and is usually easy to find.

The requirements of double top chart pattern include:

The pattern should form at the top of an extended uptrend.
The price should form two peaks of almost identical height; and the peaks should be separated by a distinct trough. The lowest point of this trough is known as reaction low or confirmation point.
The volume should decline as the pattern forms; but the formations of peaks are associated with increase in trading volume. Usually the first top formation has more volume than the second one.
The pattern is confirmed when the price crosses below the reaction low after forming second top. Volume tends to expand on this price breakout.

Double top chart pattern is a clear indication of the uptrend weakening. The prices are at overbought levels at the first peak and tend to fall from there. This fall or some other fundamental or news factors trigger the price to move up to form the second peak. But the price does not move much beyond the first peak and will fall from there after testing this resistance level.

Traders should short only after confirmation of trend reversal. The immediate price target is derived by subtracting the vertical distance from the reaction low to the first peak, from the breakout point.

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Stock Market Weekly Update, April 26, 2010

2010-04-27T04:44:00.001-04:00

The Week Ahead: As the tax incentive deadline for home purchases approaches April 30, new home sales rose by 22% in March. A Consumer Confidence report due out Tuesday may show another rise from the March levels. The FOMC meeting on interest rates begins on Tuesday with its decision arriving Wednesday afternoon. Look for the jobless claims number on Thursday. Friday brings multiple reports including the GDP for Q1, the Employment Cost Index, and the University of Michigan's Consumer Sentiment Index.

Stocks to Watch: Schlumberger Ltd. (SLB) earnings for Q1 were lower than a year ago but beat estimates as the stock rose to a 52 week high. Xerox Corp. (XRX) boosted 2010 guidance as its stock rose 8% to a one and half year high. Coal stocks were on the move with higher energy prices. Watch Alpha Natural Resources (ANR), Patriot Coal (PCX), and Peabody Energy (BTU) which received an analyst upgrade. Insurance giant Travelers (TRV) fell 1% on heavy volume as did Microsoft (MSFT) after earnings call.

Special Note: In addition to the overbought readings mentioned last week, the rise in stocks since the February 5 low has been accompanied with lagging upside momentum the whole time and waning NYSE volume on a ten day basis. Furthermore, key company insiders have seen their selling of stock shares rise to a level of over 4 times the rate of which they are buying. Evidence continues to suggest the market is building toward an important top possibly later in the second quarter.

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Concept of Currency Cross Triangulation

2010-04-26T08:48:00.001-04:00

In the global Forex market, the exchange rate of currencies depends on one another. Currency cross triangulation involves using a third currency to find the conversion rate and/or to convert two different currencies. Usually this third currency used is a standard currency like US Dollar or Euro; this interim currency is known as triangulation currency.

Currency cross triangulation is needed by major companies, governments, investors, and exporters to transact currencies; especially if they are transacting two non standard currencies. This triangulation process effectively eliminates the need of buying and selling an interim currency. Here is the example. Before the introduction of currency cross triangulation, for an effective conversion of CHF (Swiss Franc) to GBP (British Pound), a company needed to sell CHF to buy USD (US Dollar) and then sell USD to buy GBP. But now they can just use the USD/CHF and GBP/USD exchange rate to find the exchange rate of GPB/CHF.

As evident from the above example, one can find the price of one currency pair by crossing two standard pairs that involve a third currency; the formula is AAA/BBB * CCC/AAA = CCC/BBB. This is especially important because of the fact that many spot currency cross pairs are not traded against each other in the inter-bank market. Often, there can be some small price disparities in cross triangulation which can give rise to opportunities of triangular forex arbitrage, which usually last for a very short time.

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1-2-3 Reversal Chart Pattern Trading

2010-04-23T08:48:00.005-04:00

1-2-3 chart pattern is a trend reversal chart pattern indicating the reversal of an existing trend. The formation usually occurs at the end of a strong trend. 1-2-3 pattern occurs frequently in trending markets and is considered very reliable. There are bullish and bearish variations for this pattern.

1-2-3 formation starts from a big price movement in the direction of an existing trend to form a highest-high/lowest-low (point 1), then the price reverses for a correction (point 2), then again turns back to retest the support/resistance (point 3) and finally the price reverses and breaks through to start a new trend. The point 3 should not reach or exceed the point 1 level; if it reaches 1, then the pattern is not considered a valid one.

Bullish 1-2-3 chart pattern or 1-2-3 buy pattern forms at the end of an existing downtrend. The price first falls, then starts reversing, but falls again to form point 3 and then reverses and breaks free to form a new uptrend. Bearish 1 2 3 pattern or 1-2-3 sell pattern forms at the end of an existing uptrend. The price first forms a highest high, then starts falling but rises from point 3 and then reverses and breaks free to form a new downtrend.

1-2-3 chart pattern is easy to trade and supports both short-term and long-term trading. The breakout is confirmed when the price breaks the range created in between point 1 and 2. Traders can enter trades when breakout is confirmed.

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Stock Market Weekly Update, April 19, 2010

2010-04-19T21:50:00.002-04:00

The Week Ahead: The fraud charges leveled against Goldman Sachs by the SEC has added a new level of uncertainty for markets in terms of the next shoe to drop in the financial sector and where this will lead to next. First quarter reports by major companies such as IBM, Citigroup, Apple Computer, Microsoft, Wells Fargo, Boeing, Amazon, and Yahoo will be under a microscope. Noteworthy reports include: Leading Indicators on Monday. The Producer Price Index, Jobless Claims, and Existing Home Sales on Thursday. Durable Goods and New Home Sales on Friday.

Stocks to Watch: Goldman Sachs (GS) shares imploded by 13% on ten times normal volume. General Electric beat estimates for their Q1 earnings, but were still lower than year ago levels. Strength in its investment banking business helped Bank of America (BAC) beat Q1 estimates as the company also set aside less money for bad loans. Google (GOOG) failed to impress investors in its Q1 report as the stock fell to 3 week lows. Boston Scientific (BSX) got the FDA approval it needed to restart sales of its implantable defibrillator devices in the U.S.

Special Note: Some interesting overbought readings were recorded for the stock market not the least of which is the 30 day NYSE TRIN at levels not seen since spring of 2007. Another is the ten day average of the CBOE put/call ratio which at .46 is its lowest level in 10 years. The Volatility Index or VIX reached its lowest close since October 2007 at 16.14. Finally the Daily Sentiment Index hit an extreme at 92% bulls. These measures serve as a reminder of the higher than normal risk one assumes when entering stocks in general near term.

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How to Avoid Overtrading

2010-04-15T07:44:00.003-04:00

Overtrading is a 'must avoid' trading practice, yet it is practiced by a high percentage of traders trading stocks, currency pairs, futures and so on. It is not that much a hard-to-overcome habit; one just needs a sound plan and dedicated implementation. Here are some tips to avoid overtrading:

Create a trading plan and stick to it. The plan should address what to trade, when to trade and how to trade.
Create a small list. Rather than trading each and everything, create a small list of fundamentally/technically evaluated stocks and search for opportunities. Keep the list short, and periodically update the list.
Do some research. Before entering a trade, make sure there is a chance of profitability. Use the most convenient tools/indicators to evaluate each opportunity. In short, never go blind.
Don't make your money flow too complex. Keep your risk to low levels, ideally below 2% of your capital, and limit the number of your open positions.
Be patient and consistent. No market can make you rich overnight and no single trade can make you a successful trader. The rule of thumb is 'the predator should be more patient than the prey'.
Evaluate regularly. Ideally at the end of the day evaluate your trades and decisions. Evaluate how well you implemented the plan or answer why you deviated from the plan.

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Murrey Math Lines Trading

2010-04-14T08:32:00.003-04:00

Murrey math lines (MML) is a relatively new trading indicator showing supports and resistances, and helps in finding trends and trend changes. The indicator was developed by T. Henning Murrey and has some similarity to Fibonacci retracement and pivot points. MML was created based on the observations of Gann studies and is a simple way to implement Gann.

Murrey math lines comprise 9 equidistant lines which run parallel to one another. MM lines from the bottom are at the levels 0/8, 1/8, 2/8, 3/8, 4/8, 5/8, 6/8, 7/8 and 8/8. 0/8 is the oversold line and 8/8 the overbought line; these are the hardest lines to cross and around 75% of the time, the crossing triggers price reversal. The range between 3/8 and 5/8 is the normal trading range and price tends to consolidate at these levels before falling (3/8 line) or rising (5/8) beyond this trading range.

Like Fibonacci retracements, when the price is between two lines, the upper line is considered as resistance and lower line is considered as support. When the price rises above 5/8 and touches 6/8, it has a tendency to reverse to retest the 5/8 level before heading high. The same is also applicable to downtrends; the price tends to reverse to retest the 3/8 level before heading down.

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Investing in Precious Metal ETFs

2010-04-13T08:52:00.001-04:00

In recent years, exchange traded funds tracking precious metals like gold, silver, platinum and palladium has become extremely popular among investors. Actually it was mutually beneficial; the growth of precious metals made ETFs more popular and the popularity of ETFs made precious metals more precious. There are many reasons behind this success.

Precious metal ETFs provide a great opportunity to individuals who don't have enough money and desire to buy the physical metal commodity but want to benefit from their price growth.
There is a growing acceptance of precious metal investments as good hedging tools against inflation, weak dollar and economic recession. The fact that precious metal prices are increasing steadily over the years has enhanced this belief.
Precious metal ETFs tracking physical commodities, future contracts, metal stocks, and more offer opportunities for all kinds of investors.
Moreover, some investors find themselves much more comfortable investing in these ETFs rather than investing in stocks, bonds, and currencies, which can be a little more complex and time consuming.

Although considered good hedging instruments, investing in precious gold ETFs can be risky. The fact that most precious metals have grown exponentially to a possible market correction and higher tax treatment can make them less favorable to investors.

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TRIX Momentum Technical Indicator

2010-04-09T08:48:00.001-04:00

TRIX or Triple exponential momentum technical indicator is a moving average based technical indicator used to smooth out price changes to find trends and trend changes. The indicator was developed by Jack Hoton. TRIX works like an oscillator indicator moving above and below the zero level. TRIX is the comparison of two triple smoothed exponential moving averages for a certain time period.

TRIX is plotted just like any other oscillator indicator; signals are generated when the oscillator crosses the zero line. Buy signals are generated when TRIX crosses above the zero line and sell signals are generated when TRIX crosses below the zero line. Many traders also use another exponential moving average for the same period as a signal line for finding divergences. Bullish divergence is identified when TRIX crosses above the signal line while below zero and bearish divergence is identified when TRIX crosses below the signal line while above zero.

TRIX is a very useful technical indicator as it offers very good smoothing which reduces false signals; besides, it is a leading and not a lagging indicator. Traders can adjust time periods to suit their trading style; usually active traders use a 9-day period and investors use a 30-day period. The signals generated by TRIX are generally pretty accurate and are very good to enter a trade. But traders should use other indicators or divergences to exit trades as waiting for the indicator to cross the zero line can eat up a large part of the profit.

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Donchian Channel Trend Indicator

2010-04-07T08:22:00.003-04:00

Donchian channel trend indicator is a popular technical analysis indicator used to find trends and trend changes. This is a channel indicator which gives better insights when the market is trendy. The indicator was developed by Richard Donchian, hence the name.

In Donchian channel indicator, the channel is created in between the upper and lower bands. The upper band is the moving average of highest high prices and the lower band is the moving average of lowest low prices for a certain period. Typical period is 20 days or 4 weeks, but this can be adjusted to make the indicator more or less sensitive. The middle band is optional; it is the average of two bands and is often used for identifying trend changes.

Trading with Donchian channel indicator is easy. The idea is to enter a trade when there is a trend breakout and capitalize on it as long as that trend continues. Traders can go long, or cover their open short positions, when the price crosses the upper channel. Similarly traders can go short, or close their long positions, when the price crosses the lower channel.

Unlike other channel indicators like Bollinger bands, Donchian channel is a simple indicator to plot and follow as it is the simple moving average of only two values - the highest high and lowest low - for a period. Donchian channel often offers the same result as the Aroon indicator, but in different format. Aroon indicator records 100% when the price breaks the Donchian channel.

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Weekly Market Newsletter, April 5, 2010

2010-04-05T23:12:00.002-04:00

The Week Ahead: Monday markets will react to the unemployment report from the holiday last Friday as it showed the largest net payroll increase since 2007. Another lagging economic report the ISM Non-Manufacturing Index will gauge the service sector on Monday while the pending home sales number arrives the same day. The Consumer Credit report is released Wednesday. Watch the jobless claims numbers on Thursday and the Wholesale Trade figures on Friday.

Stocks to Watch: Data storage device maker Xyratex Ltd. (XRTX) reached a 52 week high on better than expected earnings and outlook for the year as the stock is now up over 12 fold in 14 months. Netapp (NTAP), a competitor also moved up in sympathy. With auto sales strong in March auto parts companies like TRW Automotive (TRW), Tenneco (TEN), Borg Warner (BWA), and Arvinmeritor (ARM) continued there torrid pace of gains over the past year. Used car sales doubled at Carmax (KMX) with better than expected profits but margins fell as the stock climbed 4%.

Special Note: The current leg of advance in the major market indices will bump into resistance in the low 11,000's for the Dow Industrials, 1,200 on the S&P 500, and 2,450 for the Nasdaq. Beyond that the pattern that began in March '09 entails another small correction followed by another advance probably above the high made in the year 2000 at 11,750 on the DOW sometime this summer. If this were to occur, it potentially sets up the largest head and shoulders pattern in market history with all the repercussions that would follow.

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Trailing Stop Loss Orders

2010-04-05T06:00:00.000-04:00

Trailing stop loss orders are stop loss orders which are considered better than normal stop-loss orders. Like normal stop-losses they limit losses; but can also be used to protect the profits.

With trailing stops, traders can specify the stop-loss level at a percentage or price below or above the current market price. The stop-loss level is re-calculated every time the price moves in the direction of the trend. But when the trend reverses, the last calculated stop loss stays intact and the order is executed when the price hits the stop loss price. Trailing stop loss orders are of two types.

Sell trailing stops: They are used for closing long positions. The trailing stop losses are placed at a percentage or price below current market price. The stop loss rises with the price but does not fall with the price. Orders are executed when the price falls to hit the stop-loss level. Eg: a 10% sell trailing stop loss order placed when a stock is trading at $50 will create effective stop loss of $45 (10% subtracted from $50), when the price rises to $60 the stop becomes $54 and when the price hits $70 it becomes $63. Now if the price declines from there, the stop-loss won’t change and the order is executed at $63.

Buy trailing stops: Is just the reverse of sell trailing stops and are used for closing short positions. The stops are placed above market price. Their value declines as price declines but does not rise with the price. Eg: 10% buy trailing stop loss order placed when the price is at $50 will create an effective stop-loss of $45. When the price falls to $40 the stop becomes $36. But if the price rises from there, the stop-loss remains at $36 and the orders are executed when the price hits $36.

Trailing stops are very useful trading tools. Many traders use them together with other trading indicators, like volatility and momentum indicators, to get more accurate or custom exit points. For more information, read Setting Stop Losses and Parabolic Stop and Reverse (SAR).

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What is Front End Load?

2010-04-01T08:40:00.001-04:00

Front end load is a commission or sales fee that an investor has to pay when he purchases an investment. Front end load is usually applicable to mutual funds and insurance policies. The amount is paid to the intermediaries of the transaction, such as a broker, financial planner or investment advisor, as commission.

Front end load reduces the total size of the investment. For example a front end load of 5% means that if you invest $100 you can get only $95 worth shares of a fund. These sales charges are not a part of the fund’s operating expenses and thus make no difference in expense ratio. When evaluating the portfolio performance, front end load can create a big difference. Front end load can differ with funds and also differ if the fund is included in a retirement plan like 401(k) or so.

There is always a debate regarding investing in front end load funds against investing in no-load funds. Statistics shows that front end load funds do not outperform no-load funds. Thus it is often advised to stay away from them if you can find a good no-load counterpart. But there are many funds which consider shares purchased with front end load as Class A shares (know more about different stock classes), or charge reduced sales charges, etc. Thus before investing in these funds one should always carefully review the merits and demerits.

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Rounded Bottom Chart Pattern

2010-03-31T08:16:00.003-04:00

Rounded bottom, also known as bowl, saucer or rounding turn pattern, is a bullish trend reversal chart pattern indicating the end of an existing downtrend and the start of a new uptrend. It is an elongated U-shaped formation with reasonably smooth and rounded bottom without any major spikes. Rounded bottom pattern shows the consolidation of the trend and a gradual shift from bearish trend to bullish trend; thus this is better suited for long-term traders.

Volume changes are also important with rounded bottom chart pattern. The volume should correspond to the price pattern; that is, volume should decrease when price decreases, and increase when price increases. The duration of the pattern can be from just a few weeks to many months. The longer the pattern takes to form, the more reliable it is.

With rounded bottom formation, traders can go long when the breakout is confirmed. The breakout can be either the price where the price crosses above its moving average or where its crosses above the starting price of the pattern; the first one is more used and more reliable. The reliability and the bullishness of the pattern are greatly challenged when the formation does not have a smooth rounded shape or when the price crosses below its moving average.

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Williams' Accumulation-Distribution Indicator

2010-03-29T23:20:00.001-04:00

Williams' accumulation distribution indicator, or Williams' A/D or WAD indicator, is a popular indicator for finding trend changes. The indicator was developed by Larry Williams. Williams' A/D tracks the buying and selling pressure of a security and signals buying and selling opportunities.

Williams' accumulation/distribution defines the market trends and movements in two simple terms; accumulation - days where more volume is associated with upward price movements, and distribution - days where more volume is associated with downward price movements. WAD is determined by adding today's A/D value to yesterday's A/D value.

Today's A/D value = Today's close – TRL or TRH

Where TRL is the true range low; it is either yesterday's close or today's low price, whichever value is lower. TRH is the true range high; it is either yesterday's close or today's low price, whichever value is higher. TRL is used to calculate A/D value when today's close is lower than yesterday’s, and TRH is used when today's value is higher than yesterday’s.

Like most others, WAD values of each day can be added to create a continuous indicator. Signals can be generated when the price trend diverges from indicator. Buy signals are generated on bullish divergences when price reaches a new low but WAD does not confirm it and sell signals are generated on bearish divergences when price reaches a new high but WAD does not confirm it. Like most other indicators, Williams' accumulation distribution offer better results when used together with other indicators.

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What are Closet Index Funds?

2010-03-29T08:00:00.000-04:00

Closet index funds are funds which describe themselves as actively managed, but actually track an index closely. They have high expense ratios like an actively managed mutual fund but a portfolio similar to an index fund; the returns also resemble index fund returns. In short, closet index funds charge an investor high for the returns gained from investing in a low-cost index fund or ETF.

Over the long term, the high expense rates of closet index funds can eat up the portfolio returns; and this can affect the bottom line when the market is stagnant, moving sidewise or is bearish. Well, many closet index funds start as actively managed funds, the increase in fund assets over time makes it difficult for the fund managers to actively manage the portfolio. So, in order to achieve at least the benchmark index’s performance, the fund manager tries to copy the index in the portfolio; this creates a closet index fund.

For a regular investor it is not a good deal to invest in a closet index fund when cheaper options like index funds and ETFs are available. Investors need to consider the following aspects when investing:

R-squared ratio - tells how much a fund is similar to an index, values close to 100 can indicate that the fund is a closet index fund.
Fund beta - beta values close to 1.0 means that the fund is performing like the index.
Average annual returns - comparing returns of fund and index/index fund can reveal the similarity between them.
Portfolio holdings review - is the direct mechanism for revealing how much a funds portfolio is similar to an index.

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Rounded Top Chart Pattern

2010-03-25T22:59:00.003-04:00

Rounded top, also known as inverted bowl or saucer top pattern, is a bearish trend reversal chart pattern indicating the end of an existing uptrend and start of a new downtrend. It is a dome shaped formation with a fairly smooth and rounded top without any noticeable spikes. Rounded top chart pattern is a gradual market shift from bullish sentiment to bearish sentiment; thus favoring usually long-term traders.

In rounded top formation, usually the volume shows just the opposite pattern to the price; that is, when the price is rising volume tends to decrease, and when price is declining volume tends to increase. The duration of the pattern can range from some weeks to many months. Generally, the pattern is more reliable when it takes more than two months to form.

Traders can sell when the pattern is confirmed. Different traders use different methods to confirm the trend reversal. Generally, the start of a downtrend is confirmed when the price breaks below its moving average or when it breaks below the starting price of the pattern. But the reliability of the bearish signals is greatly challenged when the price breaks above its moving average instead of breaking below.

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Advantages of Stock Dividend Reinvestment Plans

2010-03-25T08:52:00.000-04:00

Dividend reinvestment plans or DRIPs are very popular among investors, especially the small investors. Investing in these can be considered as a mutually beneficial strategy for both companies and investors. But they also have some pitfalls.

Advantages of DRIPs

They have low minimum requirements and have easy to follow rules.
Like dollar cost averaging, the strategy helps investors to grow their portfolio overtime by dripping money.
DRIPs allow investors to reinvest their profit to make more profit; usually free of cost.
Most companies offer discounts over market price for purchasing their stocks via DRIPs.
They are very good long term investing plans which do not require much time or effort after enrolling a program.
The company also benefits via many means, DRIPs provide a stable base of shareholders, stabilized share price as the percentage of DRIP shares increases, and reinvesting of dividend within the company.

Disadvantages of DRIPs

Lack of diversification as investors are investing in only one company.
Need good initial screening as investors need to invest in a company having very good long-term growth possibility and offering good dividend payments.
They are not good plans for investors looking for profiting from fluctuations in share prices.
They are not suitable for traders trading for their livelihood.

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Different Types of Style ETFs

2010-03-24T09:15:00.000-04:00

Style ETFs are of different types. They can be categorized by the investment type and market capitalization. There are mainly 6 types of style ETFs.

Value Style ETFs: Are style ETFs which passively track value stocks; stocks having a market price lower than their true value. They track a value index like Morningstar Large Value Index.
Growth style ETFs: Are style ETFs which passively track growth stocks; stocks having high growth potential. They track a growth index like Russell Midcap Growth Index.
Neutral Style ETFs: Are style ETFs which passively track stocks which are neither growth nor value.
Small Cap Style ETFs: passively track small-cap stocks. Eg: S&P/Barra SmallCap 600 index.
Mid Cap Style ETFs: passively track mid-cap stocks. Eg: S&P MidCap 400 Index.
Large Cap Style ETFs: passively track large-cap stocks. Eg: WisdomTree Earnings.

The number of styles available for a market also differs. For example Dow Jones has all six styles of composite indexes, but Russell has only two styles. The index reconstitution period also differs with indexes; it can be annual or semi-annual. Moreover, the factors/rules used to classify stocks to include it in a style can also vary.

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Dividend Reinvestment Plan or DRIP

2010-03-04T08:57:00.000-05:00

Dividend reinvestment plan or DRIP, sometimes called DRP, is a very popular investment strategy which helps investors to gradually grow their share in a company. DRIP is an investment program run by a company for its shareholders. As the name suggests, it includes reinvesting the dividend owned to purchase more company stocks.

Dividend reinvestment plans usually work like dollar cost averaging, but have some unique features and benefits. The main beneficiaries of DRIPs are small investors who wish to benefit from the long-term performance of companies by buying-and-holding those shares. There are now many companies offering DRIPs and one can enroll oneself in a plan by buying as low as one share of the company. Many companies allow their DRIP investors to purchase stocks at discounted rate and most of these plans have very low minimum requirements.

Most dividend reinvestment plans come with two unique features.

No commission or brokerage fee: as the investor is directly dealing with the company, no brokerage fee is involved. Moreover, most companies reinvest the dividend without any fees or commissions.
Percentage share ownership: dividends are reinvested in a way that the investors can own partial stocks in addition to whole numbers. For example a $1 dividend for a $10 stock can be reinvested to own 1/10 of a share. The company keeps detailed records of share ownerships.

Bearish Matching High Candlestick Pattern

2010-03-03T08:07:00.000-05:00

Matching high is a bearish trend reversal candlestick pattern indicating the reversal of an existing uptrend. The pattern generally forms at the top of an existing downtrend; but is less popular than bullish matching low pattern. This is a two candlestick pattern composed of two bullish (white or colorless) candlesticks.

The requirements of bearish matching high candlestick pattern include,

The pattern should form in an established uptrend.
The first day is a long bullish day closing at a new high.
The second day is also a bullish day which closes at or very close to the first day's close.

Bearish matching high candlestick pattern forms when the price tends to reverse after touching a short-term resistance level. The fact that the second day is a bullish day, which closed at previous day's close, indicates that the resistance is successfully tested; now the trend can reverse as traders tend to close their open positions.

Bearish matching high is a moderately reliable candlestick pattern, which requires confirmation of trend reversal before one can take any short positions.

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What are Style ETFs?

2010-03-02T08:02:00.000-05:00

Style ETFs, as the name suggests, are exchange traded funds which passively follow an investing style like growth investing style or value investing style. Rather than investing directly in growth or value stocks, they track specific style indexes like S&P, Russell or Barra style composites. Eg: Russell 2000 growth, Russell 2000 value, S&P/Barra Small Caps, etc. By following a specific style, style ETFs try to achieve some specific portfolio goals like less risk or more return rather than tracking a more broad/narrow index.

Style ETFs are very good instruments to include in an investing portfolio.

They help investors to passively explore an investing style; thus can be used to achieve some specific investing goals.
They are very good instruments for portfolio diversification.
They allow investors to test different investing strategies; and their past performance can be evaluated and compared to easily find out a most suitable investing style.
They are very good hedging tools; especially when you are dealing with a less-diversified portfolio composed of one style investments.
They are good instruments for long-term investments and take less time to screen than screening stocks they passively track.

Now there are many style ETFs available for investors, especially for US investors. They vary greatly in investing style and the index they follow. One thing to remember is, the style indexes are reconstituted periodically; once or twice a year. Thus one index can have very different stocks than the other, so does a style ETF tracking it. Thus finding the right style ETF can greatly enhance portfolio performance.

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Stock Market Weekly Update, March 1, 2010

2010-03-01T10:04:00.000-05:00

The Week Ahead: Despite the strong Q4 GDP number, the economy is lagging badly in many areas not the least of which is the poorer showing in new home sales from January to February do to high unemployment and higher lending standards. Future GDP comparisons will be tough. The ISM Manufacturing Index, Personal Income, and Construction Spending reports will start the week off on Monday. Auto Sales arrive Tuesday. The Non-Mfg. Index on Wednesday will provide a peak at the service sector. Factory orders on Thursday and the Employment Report on Friday should be the most noteworthy of the week.

Stocks to Watch: Bancorpsouth (BXS), a regional bank, fell 13.74% after it delayed its annual report do to the review of asset quality measurements and setting aside $35 million for bad loans. Deckers (DECK) footwear beat estimates handily as sales and profits margins rose propelling the stock to 52 week highs. Nuvasive (NUVA), a medical device maker, shot up 35% on word that Aetna insurance will cover its final surgery procedure, but Rockwell Medical (RMTI) collapsed 27% after disappointing results for its experimental anemia drug.

Special Note: The Mutual Fund Cash to Asset Ratio of 3.6% at year end 2009 has reached the second lowest level since the data for this series began tracking it in the 1960's. As some may be aware, readings this low notoriously accompany major tops in stocks nearby. The last reading near this level was in July 2007 when the ratio reached its lowest 3.4% three months before the big top. It's an important contrary statistic to keep in mind as it is showing extreme bullish sentiment among fund managers with little wiggle room to meet redemptions.

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Channel Stuffing - Painted Fundamentals

2010-02-26T08:49:00.000-05:00

Channel stuffing, also known as trade loading, is an illegal business practice used by companies to blow up their sales and earnings figures. It is the ponzi practice of sending more products through its distribution channel than the distributors/retailers can sell. When the products are shipped from the company, they may be considered as sold and may be used to boost the figures.

Companies can do channel stuffing for various reasons like,

Painting the fundamentals like sales and earnings figures; to get better stock prices and media attention.
To meet up with competitors' (or its own previous) performances or targets.
To highlight/paint its performance over a specific channel like international trades or a specific product.
Poor sales force management can also be a cause; trying to meet-up the long-term target in a short-term.

Channel stuffing can be regarded as a short-term practice with long-term consequences.

As more products are shipped, the distributors tend to return the unsold ones or stop giving further orders; thus the future figures get worse.
Creating more products for channel stuffing can demand factory overtimes, and returning unsold products or lack of orders can result in factory shutdowns.
The fundamentals can become less and less attractive and can adversely affect stock prices.
The marketing and selling of products become more and more complex and unmanageable.

Many companies regardless of their size have been identified and criticized for their channel stuffing activities. In the U.S., the Securities and Exchange Commission has litigated some companies for these activities.

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Bullish Matching Low Candlestick Pattern

2010-02-25T08:31:00.000-05:00

Matching low is a bullish trend reversal candlestick pattern showing the reversal of an existing downtrend. The pattern usually forms at the end of strong downtrends and somewhat resembles bullish ladder bottom pattern. This is a two candlestick pattern formed of two bearish (black or colored) candlesticks.

The requirements of a bullish matching low candlestick pattern include,

The pattern should be formed in an established downtrend.
The first day is a long bearish day closing at a new low.
The second day is also a bearish day where price closes at or is very close to the first day's closing price.

Bullish matching low candlestick pattern occurs when prices tend to bounce back after touching a short-term support level. The first day candlestick shows that the downtrend is still strong. On the second day the prices open above previous close, but close at previous close. This indicates that the support level has been successfully tested and it is now time for the shorts to cover their position. On the next trading day, the price can reverse to form an uptrend.

Matching low is a moderately reliable candlestick formation. Traders can enter trades after the confirmation of trend-reversal, which can be a bullish candlestick, gap above opening or higher close on the next trading day.

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Treynor Ratio or Reward-to-Volatility Ratio

2010-02-24T08:39:00.000-05:00

Treynor ratio, also known as Treynor Index and Reward to Volatility ratio, is used to measure the return for risk taken. The ratio was developed by Jack L. Treynor, hence the name. Treynor ratio is similar to Sharpe ratio; the difference is that it uses the beta or the volatility factor to evaluate the returns rather than the standard deviation of portfolio returns.

Reward to volatility ratio is calculated by subtracting the average risk free portfolio return from the average portfolio return and then dividing the result by beta value of the portfolio.

Treynor Ratio = (Rp - Rf) / Beta

Where Rp is the portfolio return and Rf is the return from a risk free investment like a US treasury bond.

Treynor ratio is also interpreted like Sharpe ratio; high values mean better return for risk taken or better portfolio performance and lower values mean just the opposite. It should be noted that Treynor ratio measures just the actual returns and does not account for any effect of active portfolio management. The ratio best works for sub-portfolios of a broader diversified portfolio. As the ratio measures the reward against systematic risk, it is not very useful for measuring returns of a less diversified portfolio with high unsystematic risk.

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Weekly Market Newsletter, February 22, 2010

2010-02-23T08:10:00.000-05:00

The Week Ahead: Core inflation fell for the first time since 1982, but this did not stop the Fed from a surprise discount rate hike for banks. Fed chairman Bernanke may elaborate more about this at his semi-annual testimony to Congress beginning on Wednesday. Before that markets will watch two reports on Tuesday: The Case Shiller Home Price Index and Consumer Confidence. By Thursday the Durable Goods numbers will come out, and Friday ends the month with a modified Q4 GDP number and existing home sales figures.

Stocks to Watch: Increased enrollment for Medicaid and Medicare from an aging population helped Amerigroup (AGP) with much better than expected profits for Q4 as the stock rose 9%. Education company Apollo Group (APOL) warned quarterly results would not meet expectations because more students were not paying tuition bills. Solar stocks came under pressure when First Solar (FSLR) cast a shadow over the 2010 outlook for its business and Canadian Solar (CSIQ) warned profit margins won't be as large as predicted. Astrazeneca (AZN) faces two legal battles for product liability and defending patents for its cholesterol drug.

Special Note: The Dow Industrials are retesting the 10,400 approximate resistance level (mentioned here two weeks back) from its recent low made on February 5 at 9835. Volume as expected has consistently dried up to reach this level opposite the strong volume push when it originally broke through this level. The next week or two should decide whether the bulls or bears win this territorial battle. It appears though that the downside potential outweighs the upside potential by as much as 3 to 1 so risks should be taken accordingly.

Market commentary provided by Barry Ward, registered principal, NobleTrading.com, Inc.

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Conduit Theory of Investment

2010-02-22T10:03:00.000-05:00

Conduit theory, also known as pipeline theory, is related to avoiding double taxation; taxation at both corporate and individual levels. The theory states that investment firms that pass all capital gains, dividend yields and interests on to its shareholders must not be taxed at corporate level. The shareholders are taxed only at individual levels for capital gains and income.

The idea behind conduit theory of investment is that the firms that are merely acting as conduit for passing capital gains to their shareholders should not be treated as regular companies and should not be taxed like them. A regular company is taxed for its earnings and profits at corporate level and the stock holders are also taxed for their dividend yields. The main beneficiaries of conduit theory are Real Estate Investment Trusts, mutual funds and similar regulated investment companies.

The tax benefit associated with conduit theory has its existence on IRS regulation M. The firms are exempted from tax as long as they satisfy certain federal rules. Conduit theory of investment has both proponents and opponents. Supporters of the theory believe that the theory has a good business sense and common sense; and the opposition believes that it gives investment firms an added advantage over other companies, especially other financial institutions.

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Bullish Pennant Chart Pattern

2010-02-19T09:12:00.000-05:00

Bullish pennant is a bullish trend continuation chart pattern indicating the continuation of an existing uptrend after a short-term indecision in the market. The formation is very similar to bullish flag pattern but in pennant formation the consolidation after the pole is pennant or triangular shaped rather than flag shaped (being parallel). Bullish pennant pattern is also similar to symmetrical triangle formation, ascending triangle formation and falling wedge formation; the major difference is that this is a shorter term pattern.

Bullish pennant chart pattern forms when there is a consolidation phase in the existing uptrend; the trendlines converge to form a triangular shape and then breakout to continue the existing trend. The volume tends to diminish as the trend develops and the breakout is associated with a great spike in trading volume. The duration of the pattern can range from one to three weeks.

Traders can enter trades once the breakout is confirmed. The target price should be the price equaling the height of the pole from the breakout price. Bullish pennant chart pattern is considered less reliable when there is no significant change in volume during the pattern formation, no increase in volume at breakout and if the pattern took more time to develop (more than four weeks). If the volume tends to increase during the pattern formation rather than decrease, then there is also a possibility of trend reversal.

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Jensen's Alpha Indicator

2010-02-18T09:05:00.000-05:00

Jensen's Alpha, also known as Jensen's measurement, Jensen's performance index and ex-post alpha, is a measurement of abnormal return from a portfolio or security. It is named after its developer, Michael Jensen. Jensen's alpha indicator was first used in the 1970s to evaluate the performance of mutual funds in relation to a benchmark or expected performance. For a better awareness read what is Alpha Indicator.

Jensen's alpha is a modification of the traditional alpha indicator and it also considers risk free rates. The modified formula is,

Alpha p = rp - [rf + Beta p (rM - rf)]

Where Alpha p is Jensen's Alpha, rp is the average portfolio return expected, rf is the risk free rate, Beta p is the beta of the portfolio and rM is the expected market return or benchmark return.

The basic idea behind Jensen's performance index is that when measuring a portfolio performance, one should also consider the risk of the portfolio in addition to the risk. For example if two mutual funds have the same return, the one with lower risk will be the better one to invest in.

Jensen's alpha is interpreted just as the alpha indicator. Positive values indicate that the portfolio is earning excess returns than benchmark, and negative values indicate that it is earning lower than the benchmark.

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Regulated Investment Company or RIC

2010-02-17T09:06:00.001-05:00

Regulated Investment Company or RIC is an investment trust that does not need to pay federal income taxes for distributing capital gains, dividends or interest. The individuals receiving the distributions are taxed. This eliminates double taxation - paying tax at both corporate and individual levels. A regulated investment company can be a mutual fund trust, a unit investment trust (UIT) or real estate investment trust (REIT).

To qualify as a regulated investment company, an investment trust should satisfy certain standards.

The company should receive at least 90% of its income from its investments - as interest, dividends and capital gains.
The company should distribute at least 90% of its income to its shareholders.
The company should have a minimum diversification of assets.
If the company also needs to avoid the 4% excise tax, it should distribute at least 98% of its income.

Regulated investment companies qualify for the tax exemption as per IRS regulation M. They can be open-ended or closed-ended; meaning the number of shares is either varying or fixed respectively. If the investment company operates in more than one country or invest the money in foreign markets, then they need to sign (multiple) agreements to prevent double taxation.

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NobleTrading Weekly Update, 16 February 2010

2010-02-16T08:14:00.000-05:00

The Week Ahead: Retail sales increases in January are reason for optimism among investors but expectations for February are likely to offset the January increase as the economy struggles to gain traction. Housing Starts, Industrial Production, and Capacity Utilization reports arrive on Wednesday of a Holiday shortened week. The Producer Price Index and Leading Indicators will be Thursday's focus while the Consumer Price Index on Friday will provide clues to the inflation/deflation outlook.

Stocks to Watch: A number of food establishments benefited from increased traffic and sales revenue as Chipotle Mexican Grill (CMG), Panera Bread (PNRA), and Cheesecake Factory (CAKE) all benefited with new 52 week highs. Ingersoll-rand (IR) dropped 8% and fell to multi month lows after coming in with weaker Q4 results and a dimmed outlook. Computer Storage firm Compellant Technologies (CML) hit a 5 month low after falling 25% as analysts downgraded the stock. General Cable (BGC) came in with half the earnings forecasted and the stock promptly dropped 13% to 10 month lows.

Special Note: Worries that China raising the reserve requirements for banks to slow the growth of loan demand to head off potential bubbles may have merit. Typically these government responses are more the cause of bubbles bursting than anything else. Witness the collapse of the Nasdaq bubble as the Fed raised interest rates in 2000 here in the U.S. More importantly though China and Hong Kong have been leading other markets around the world in up and down trends with the current trend reversal being no different as the Shanghai Composite and Hang Seng Index rolled over last August and November respectively.

Market commentary provided by Barry Ward, registered principal, NobleTrading.com, Inc.

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What is Contrarian Investing?

2010-02-12T09:07:00.000-05:00

Contrarian investing is an investing strategy that simply means going against the market. Contrarian investors go against current market views, indicators and trends to outperform the market. For example, they may sell stocks on high and buy at low even when the trends are strong. They may also prefer to buy stocks which are ignored by investors and may sell those ones which are hot favorites. The basic idea is to get into a good deal even before others realize it.

Contrarian is a strategy which can be followed in both bull market and bear market. The strategy works best when the markets are wrong; like in bubbles and bursts. The most similar strategies to contrarian investing are value investing strategy and deep value investing strategy. Like value investors, contrarian investors look for mispriced stocks using indicators like book value and P/E ratio. But contrarian investors also consider the market sentiment using indicators like volume indicators, earning forecasts, industry performances, analyst and media commentaries, etc before making decisions.

Contrarian investing involves very high risks and it demands high levels of market knowledge, intelligence, trading experience, market research and trading data. There are some contrarians who just like go against the market all the time; which can't be a good strategy as the market is right most of the time. The right strategy can be to look for opportunities where the market 'can' be wrong.

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Single Day Patterns to Look For

2010-02-11T07:12:00.000-05:00

Single day patterns formed in a trading chart can be used to enter and exit trades. They can be helpful for both active traders and long-term investors. Although most single day trading patterns are considered less reliable, they can still provide a good indication of changing trends and future market movements. Moreover, every big change starts with single candlestick/day. Here are three single day chart patterns to look for.

Gap patterns: Gaps are common chart phenomena which can indicate possible trend changes. They are formed as a result of unexpected news and developments. But all gap patterns are not reliable and not good indicators. For a more detailed understanding, read different gap patterns and how to trade the gaps.

Islands of reversal patterns: Islands of reversals are a popular and reliable pattern of trend reversals. These are easy to identify and trade. Islands of reversals can be used by both active traders and investors alike. Like gap patterns, islands of reversals should be accompanied by drastic changes in trading volume.

Stars and doji candlesticks: When reviewed with respect to the trading volume and existing trend, star and doji candlesticks can offer very good insights of trend changes. These are also components of many reliable candlestick patterns. For more information, read star candlestick patterns and doji candlestick patterns.

Wide-range days: If the price range of day is amazingly wide, then that can indicate a possible trend change. Often high volatility is caused by intraday news. The direction of close, existing trend, volume and next day's openings of wide-range days can indicate future trends.

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What is Alpha Indicator?

2010-02-10T08:24:00.000-05:00

Alpha is an important trading indicator which measures the performance of a fund or security or portfolio with respect to a benchmark or predicted return and to the risk taken. Simply, alpha is the difference between the actual performance and expected performance. Positive alpha means the fund/portfolio outperformed the benchmark, negative alpha means the same underperformed the benchmark and a value of zero means that it performed as expected.

Alpha = (Rp - (b * Rb))/n

Where Rp is the total portfolio/security/fund return, B is the beta value of the security, Rb is the total benchmark/expected return and n is the number of observations.

Alpha indicator is considered as a measurement indicator of the investor's or fund manager's stock/investment screening ability. Often investment models like capital asset pricing model or CAPM and Three factor model are used to calculate the expected return from a portfolio or security with respect to the risk taken; high risk investments should offer high returns. If the actual performance beats this expected value, then the fund manager or investor has added to the return. For example if CAPM estimates a 10% return from the portfolio but the actual return is 15%, then the portfolio outperformed the benchmark by 5%.

Alpha indicator is considered one among the five important technicals of a fund's performance; others include beta indicator, standard deviation, Sharpe ratio and R-squared indicator. There are some other variations of alpha indicator like Jenson alpha which is used to get custom or more accurate results.

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What is Style Drift?

2010-02-09T08:24:00.000-05:00

Style drift is the divergence of an investment portfolio from its stated investment objectives. This is a common issue for many mutual funds and portfolios managed by money managers. Style drift can be intentional or unintentional. Although style drift is considered a 'bad thing'; sometimes it helps the fund to outperform others or to minimize risks through careful investments.

Most mutual fund style drifts occur when the fund manager deviates from long-term strategy to reap some short-term profits. Other causes include,

Change of investing strategies with respect to changing market conditions.
Re-allocation of portfolio asset for adjusting risk or reward.
Change of fund's management team.
Performance of similar funds, demanding portfolio adjustment to meet them.
Outperformance or underperformance of some assets in the funds holding.
Giving more freedom to the fund manager for active portfolio management.

In general, a fund manager's ability to stick with the original goal is considered a positive attitude. There are some services available to monitor the funds style, performances and asset allocation changes. Portfolio that tracks specific indexes (eg: index funds and ETFs) are often immune to style drifts because the indexes are usually very broad and transparent.

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NobleTrading Market Update, February 8, 2010

2010-02-08T09:21:00.000-05:00

The Week Ahead: The markets continued a four week slide, but began to rebound from a low point reached after the employment report was digested showing a still deeply damaged job market. Tech stocks led the way off the low. A relatively quiet reporting period could provide a respite for stocks. Watch Tuesday's Wholesale Trade Inventories, Thursday's Retail Sales and Business Inventories, and Friday's University of Michigan's Consumer Sentiment reading.

Stocks to Watch: Auto parts makers were weak compared to the indexes after American Axle & Manufacturing (AXL) provided a disappointing outlook for the year in their Q4 earnings release. TRW Automotive (TRW), Dana Holding (DAN), and Arvinmeritor (ARM) all fell in sympathy. Airgas (ARG) soared to nearly an all time high after a $60 cash tender offer by rival Air Products (APD) which correspondingly dropped. Key earnings reports come from Disney (DIS), Coca Cola (KO), and Pepsi (PEP) later this week.

Special Note: If a near term rebound is starting, then an upside resistance target would be an internal long term trend line on the Dow Industrials that was broken in 2008 at the 9600 level. A steep sell off occurred after to the March '09 low of 6670. The 10 1/2 month rebound retested this line now at the 10,400 level for this year. Having brief success pushing through this resistance in early January, the DOW has once again smashed through this line on increasing volume. An upward push to retest this resistance line (similar to the retest in October '08) would be normal before the bear trend resumed.

Market commentary provided by Barry Ward, registered principal, NobleTrading.com, Inc.

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How Dogs of the Dow Works?

2010-02-05T08:00:00.000-05:00

Dogs of the Dow investing strategy tries to beat normal market returns via a passive investing strategy that takes only a little time. Although it is regarded as a contrarian investing strategy where investors move against the market, it is not like that always. A Dogs of the Dow investor simply invests equal amounts of money in 10 Dow Johns Industrial Average stocks having the highest dividend yield at the start of a year.

The Dogs of the Dow strategy holds that the high dividend ratio of a stock indicates that the stock is cheap (oversold), and the faith of the company management on the company's future performance. Thus investing in them holds a dual benefit: the above average price increases once the market realizes the true potential of the stock, and relatively high dividend yield. With dogs, there is no need of extensive market understanding or technical analysis. The steps involved in the strategy are,

After the market close of the last day of the year, 10 stocks with the highest dividend yield are identified from 30 DJIA stocks. Now there are many sites/resources which provide this list.
The investor invests equal amounts of money in each stock.
At the start of the next year the same process is repeated.
Selling of old stocks and buying new, investors can sell off those stocks that are out of the Dogs list and buy those that have got into the list.
The investor should sell-off the stocks they are holding after one year and one day; thus he can qualify for long-term capital gain tax benefits.

Now there are some variations of the Dogs of the Dow strategy available for getting certain custom benefits. Besides, it is not mandatory to readjust the portfolio on the first day of each year.

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Bearish Ladder Top Pattern

2010-02-04T08:08:00.000-05:00

Ladder top is a bearish trend-reversal pattern indicating the reversal of an existing uptrend. It is a five candlestick pattern which is less popular than bullish ladder bottom pattern and is somewhat similar to bearish deliberation candlestick pattern. Bearish ladder top is a moderately reliable pattern.

The requirements of bearish ladder top pattern include,

The pattern should form at the top of a strong uptrend.
The first three days are bullish days noticeable with long white/colorless candlesticks that close above the previous ones. This formation is similar to three white soldiers pattern which is bullish and formed at the bottom of a downtrend.
The fourth day is also bullish with a small real-body candlestick with a long lower shadow; it is a hanging man candlestick.
The fifth day is a bearish day, noticeable with a long bearish (dark or colored) candlestick which opens below the real-body of the fourth day candlestick.

Ladder top candlestick formation occurs when bulls lose control over the markets. The bullish candlestick on the first three days indicates that the bulls are controlling the market but the hanging man candlestick creates doubts on their minds. Traders start to sell-off their positions but the increased buying activity at the end of the day helps to close the day on a new high. The bearish candlestick on the fifth day indicates that the bears are taking control of the market and a new downtrend is beginning.

With ladder top candlestick pattern, trades should wait till the price crosses the low of the fifth candlestick.

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Trading with Linear Regression Curve

2010-02-03T08:32:00.000-05:00

Linear regression curve is a useful indicator created on the basis of linear regression. It is a curve line that best fits the prices of a time period. In short it can be considered as small linear regression trendlines with hidden ends that are connected to one another at their center portions or can be taken as a moving average of linear regression trendlines. For a better understanding, also read linear regression channels.

Linear regression curve gives the fair value of the stock or other security. This can be used to easily identify long-term and short term price trends, and price deviations. With linear regression curve, traders can use custom time periods to get custom signals. Traders can also generate trading signals.

Signals can be generated when price moves a certain percentage away from the curve. Buy signals can be generated when price moves some points below the linear regression curve and sell signals when it moves above the curve. The idea is that the price will eventually return to the curve (fair value).
Traders can also time their trades. Buy signals can be generated in a good uptrend only when the price moves below the curve. Similarly sell signals can be generated in a downtrend when the price moves above the curve.

Like most other indicators, linear regression curve gives better results when used in conjunction with other indicators.

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Benefits of Exchange Traded Grantor Trusts

2010-02-02T08:27:00.000-05:00

Although traded like exchange traded funds, grantor trusts differ greatly from ETF in their portfolio management and performance. They offer many advantages over ETFs but also have many disadvantages; and thus are not suitable for all types of traders. For a better understanding, read Grantor Trust Exchange Traded Funds.

Advantages of Exchange Traded Grantor Trusts

They let you invest in specific commodities without buying futures contracts or owning the commodity.
They directly distribute dividends. Shareholders will receive dividends immediately after a stock in the portfolio pays dividends.
They have low expense ratios because there is no expense involved in rebalancing or managing the portfolio.
The shareholders also retain the voting rights for companies' stocks held in the basket.
They let you invest in specific sectors or markets for a long term without many additional expenses.
They are tax efficient because the portfolio is fixed. Investors can time their taxes by timing the selling of shares.

Disadvantages of Exchange Traded Grantor Trusts

The fixed portfolio can be a problem. As they track commodities/specific sector stocks, there is more downside risk.
Overtime mergers and acquisitions can make the portfolio more concentrated towards a specific stock.
Dividends are not reinvested, limiting the chances of maximizing the profit opportunities.
Many grantor trusts operate for a fixed time and have a limited life.
As the portfolio is fixed, they are not suitable for short-term and market timing strategies.

NobleTrading Weekly Newsletter, February 1, 2010

2010-02-01T09:29:00.000-05:00

The Week Ahead: Strong GDP numbers and rising consumer sentiment were not enough to prevent a 3.5% decline for the month of January. This is the markets worst month since last February and bears watching closely from here. Investors will sift through 3 reports on Monday: Construction spending, Personal Income, and the ISM Manufacturing Index. On Tuesday auto sales and pending home sales are reported while the main report on Wednesday is the ISM Non-Manufacturing Index. A productivity report and factory orders is due Thursday, but the main event is Friday's jobs report.

Stocks to Watch: Berkshire Hathaway (BRKB) rose to a new 52 week high after its historic stock split and addition to the S&P 500. Gannett CO. (GCI) the newspaper publisher reported ad revenue declining but is looking for a strong political ad season with big elections later this year and upbeat auto ad revenue as well. Arch Coal (ACI) broke down sharply on a disappointing 2010 guidance. Sandisk (SDNK) likewise broke sharply lower after its earnings report. Look for Exxon Mobile (XOM) to report Monday and Cisco (CSCO) on Wednesday.

Special Note: The three major indexes DJIA, S&P 500, and Nasdaq all broke through and closed below there 5 month moving averages on expanding volume. The volatility has clearly picked up. The 10 month moving average currently rising through 9450 on the DOW usually acts like a magnet for prices after the 5 month average is breached. Despite near term bounces, the area surrounding the mid 9000's could be the next area of support for a more substantial rally. Incidentally, foreign currencies and commodities including gold have all fallen sharply the last two months as stocks play catch up.

Market commentary provided by Barry Ward, registered principal, NobleTrading.com, Inc.

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Mutual Funds - Advantages and Disadvantages

2010-01-29T10:31:00.000-05:00

Since their introduction, mutual funds have been a very popular investing vehicles; especially for those who do not have time, enough resources and knowledge for active trading.

Advantages of Mutual Funds

Diversification: a typical mutual fund invests in 50 to 300 securities and thus has reduced overall portfolio risk. Generally, this level of diversification at individual levels needs huge amounts of money.
Portfolio management: by investing in a good mutual fund, you are actually hiring some professional portfolio managers to look after your portfolio. They buy and sell stocks and make necessary portfolio adjustments for you.
Easy to handle: mutual funds are relatively easy to buy and sell. They have low minimum investments like $2,500 or $5,000 and can be traded once per day at the closing net asset value of NAV.
Dividend reinvestment: the income from the funds can be used to purchase more shares of the fund.

Disadvantages of Mutual Funds

Not suitable for active traders: The facts that they are traded once per day as per NAV and have some sales charges make them unsuitable for active trading.
High expense ratios: mutual funds typically have higher expense ratio than index funds and ETFs. More over the fees including in buying and selling them can make them less profitable.
Management issues: the performance of the fund manager greatly determines the performance of the fund. Thus unnecessary trades, wrong market timings and poor replacements can affect fund performance.
Taxes: the capital gains from mutual fund investments are usually subjected to taxes at individual level.

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Williams %R Indicator

2010-01-28T08:46:00.000-05:00

Williams %R, or simply just %R, is a momentum indicator popularly used by traders to find overbought and oversold levels. The indicator is similar to the %K of Stochastic Oscillator; the difference is that %R compares close to the highest high of a period opposing the lowest low as in stochastic oscillator. The formula is,

Williams %R = [{Close(t) - High(n) } / {High(n) - Low (n) } ] * 100

Where 't' represents today and n represents the number of periods.

Unlike most other indicators, Williams %R indicator has a negative scale; the values range from 0 (highest value) to -100 (lowest value). A close nearer to the highest high period will take the indicator nearer to 0 (overbought) and a close nearer to the lowest low of the period will take the indicator nearer to -100 (oversold). The typical period is 14, but traders can adjust it to make the indicator more or less sensitive.

Generally, values ranging from 0 to -20 are considered overbought and those from -80 to -100 are considered oversold. But often overbought does not mean it's the time to sell, or oversold does not mean it's the time to buy, because in strong trends the prices can remain in one range for an extended period of time. Traders should trade in the direction of the trend. During the periods of strong uptrend, traders can buy when the indicator falls to oversold values; and during strong downtrends, traders can short when the indicator shows overbought readings. Bullish and bearish divergences are also good signals, crossing of -50 from below or above.

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Bond Unit Investment Trusts

2010-01-26T08:24:00.001-05:00

Bond unit investment trusts or bond UITs are one of the two types of UITs holding bonds in their portfolio. They invest in government and corporate bonds and shares are made available to the investors. The shares, termed units, are fixed in number and represent a small fixed portion of a large diversified portfolio. To know more, read 'Unit Investment Trusts or UITs'.

Different bond unit investment trusts have different portfolio combinations. Some invest in government bonds, some in corporate bonds and others in both. Some trusts invest their money in domestic bonds; others also invest in foreign bonds. Some invest more in tax-exempt bonds and others in taxable bonds. Thus the risk and return differs considerably and investors can choose whichever suits their goals.

Bond UITs have a fixed portfolio and a fixed maturity date ranging from just some months to over 25 years. The maturity date usually corresponds to the maturity date of the bonds invested. Payments are made monthly, quarterly or semi-annually. The principal is paid off to the investors as the bonds mature. Investors can also sell their units in secondary markets at market price prior to the bond UIT maturity date.

Bond UITs are good long-term investment options. The advantages include fixed and predictable income, some tax advantages, highly diversified investment, low minimum investment, no maintenance fees, etc. The downsides include: they are not suitable for short-term investments, no outperformance, and not suitable for investing the urgent money.

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NobleTrading Weekly Update, January 25, 2010

2010-01-25T10:44:00.000-05:00

The Week Ahead: Ben Bernanke's confirmation for a second term is losing some support by key Senators but may not be enough to block his second term approval this week. The Fed will hold a two day meeting starting Tuesday culminating in a interest rate decision on Wednesday afternoon. On Monday existing home sales will be released followed by Tuesday's Consumer Confidence report. Wedenesday brings new home sales data. Thursday look for the Durable Goods report. Friday the market gets a peak at the advanced Q4 GDP number for the economy.

Stocks to Watch: Apple Computer (AAPL) will announce earnings after the close on Monday and may introduce a tablet computer, but the stock did break below its 50 day moving average on increasing volume. Texas Instruments (TXN) will also announce at Monday's close as semiconductors have generally been weaker than other tech stocks. Harley Davidson (HOG) is searching for growth oversees in India as a year or more slowdown is expected before a turnaround. Exelon (EXC) declined on a Q4 earnings fall versus a year ago and worries that climate legislation could be in doubt.

Special Note: After reaching new 2010 highs last Tuesday, the Dow Industrials gave up 2 1/2 months worth of gains by Friday. This change of character was confirmed by the weekly MACD indicator as a crossover of the indicators two moving averages to the downside occurred for the first time since a buy signal crossover to the upside last March. The volatility should bring enhanced trading opportunities, but with a sell signal given rally's may be cut short abruptly as investors look to lock in profits from the past year.

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Bearish Flag Chart Pattern

2010-01-21T07:58:00.000-05:00

Bearish flag or bear flag is a bearish chart pattern formed in a strong bearish trend indicating the continuation of the downtrend after a small pause. This is considered as a highly reliable chart pattern and often formed in strong downtrends; in fact, one can often see more than one bear flag in a strong downtrend. Bearish flag pattern resembles bearish pennant chart formation, but here the price consolidation is between two parallel trendlines forming a rectangular flag shape as against converging to form a triangular or pennant shape.

A bear flag has two parts, a pole or mast, and a flag. The pole precedes the flag and is formed when the price sharply (near vertically) declines; usually because of some negative news/report or negative fundamentals. The flag is the price consolidation phase where the price moves within a short range. The flag can be either horizontal or slightly upwards; the second one more common. The formation then breaks out to continue the existing downtrend and the price is drawn to new lows.

Trading volume tends to decline during the formation of bearish flag pattern but the breakouts are noticeable with increase in trading volume. If there is no volume drop in flag formation or no volume rise in breakout, then the reliability of the pattern is greatly challenged. In addition, if the volume increases during flag formation rather than decreases, then there is also a chance of trend reversal. Traders can go short once the breakout is confirmed and the immediate price target should be the downward length of the pole from the breakout point.

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Bullish Flag Chart Pattern

2010-01-20T08:21:00.000-05:00

Bullish flag or bull flag is a bullish trend continuation chart pattern indicating the continuation of an existing bullish trend after a small pause. The pattern is a very reliable one and is highly welcomed by day traders and swing traders; in fact often one can see more than one bull flag in a strong uptrend. Bullish flag formation resembles bullish pennant chart pattern, but the difference is that here the price forms two parallel trendlines or a rectangular shape opposed to the price convergence in pennant formation.

The bullish flag formation has two components - a pole or mast, and the flag. The pole is formed when the price rises sharply to a new high; and is usually fundamentally triggered. The flag is the consolidation phase where the price rises and falls within a short range. The flags can be horizontal, formed because of strong support and resistance levels, but are often slightly declined. Then the prices breakout to continue the uptrend and the prices advance to new highs.

Volume tends to decline as the flag forms but the breakouts are noticeable with considerable rise in trading volume. If there is no significant volume increase in breakout, the reliability of the pattern is greatly challenged. The pattern usually stays for a short-term, and is usually completed within four weeks. Lengthier patterns are also less reliable. Traders can buy stocks once the prices breakout. The immediate target price can be the upward length of the pole from the breakout.

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NobleTrading Weekly Newsletter, 19 January 2010

2010-01-19T09:20:00.000-05:00

The Week Ahead: A fourth quarter earnings report from J.P. Morgan still left lingering doubts about an economic recovery as losses on credit cards and mortgages deepened and may be an indicator of future bank earnings to come. Key reports to watch are Wednesday's Producer Price Index and Housing Starts as well as Thursday's Jobless Claims figure and the Leading Indicators for the economy.

Stocks to Watch: Look for the rail stocks to report earnings such as CSX Corp. (CSX) on Tuesday while Union Pacific (UNP), and Burlington Northern (BNI) report on Wednesday. IBM will also report numbers this week. Johnson and Johnson (JNJ) was hit with an expanded product recall and was also accused of paying bribes to help sales of its anti-psychotic medicine. Leap Wireless (LEAP) shot up 10% on 4 times normal volume on rumors that the company may be for sale. Interactive Data (IDC) is also reviewing alternatives as its stock rose 14%.

Special Note: Friday's downturn was especially harsh coming on the heels of an upbeat Intel earnings report. The selling was broad based as evidenced by the advance/decline ratio and up volume versus down volume. Furthermore, the high on Thursday was not confirmed by the Nasdaq, Dow Transports, Dow Utilities, or the broader based Value Line and DJ Wilshire 5000. Look for the uptrend line that started from last March to be breached at approximately the 10525 level. If so, this would be real evidence of a trend change in the market.

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Unit Investment Trusts or UITs

2010-01-18T10:27:00.000-05:00

Unit Investment Trusts or UITs are investment companies which buy and hold a portfolio of stocks or bonds, and make their shares, termed 'units', available to investors. Like closed ended funds, UITs have a fixed number of units and have low management fees as the shares are not redeemed or created often. Like mutual funds, UITs have a portfolio of diversified investments like many corporate bonds or stocks.

Unit investment trusts are offered to investors via initial public offerings or IPOs, and have a typical price of $1,000 per unit. They are managed by either a RIC (Regulated Investment Trust) or a grantor trust. Many UITs allow investors to buy and sell the shares in secondary markets after the IPO. The portfolio is already defined and fixed; there is no buying or selling of portfolio assets after the portfolio creation. Thus the investment objective is kept intact and the management costs are kept to low levels. The only exception is that some portfolio adjustments may arise because of corporate mergers, acquisitions and bankruptcy.

Unit investment trusts have a fixed life span. For bond UITs it is usually the maturity date of the bonds in the portfolio. On the termination date, the remaining portfolio is dissolved and paid to the unit holders according to the number of units they hold. The advantages of investing in UITs include diversification, low maintenance costs and fixed portfolio. Before choosing unit investment trusts, investors should carefully consider the portfolio assets and invest in one which most fulfils one's investment objectives.

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Economic Decoupling Theory - Present Status

2010-01-15T08:46:00.000-05:00

The market performances of the past two years have shown that the widely popular 'Decoupling Theory of Emerging Markets' has proved to be wrong. As per the theory, the emerging economies, especially the BRIC economies, have broadened and deepened enough so that they were insulated from US recession. But in reality many of these economies were worse hit than the US economy during the recession period. For more in this regard, read decoupling theory of emerging markets.

Experts now come up with many reasons for the failure of the decoupling theory.

The theory was a premature one; and even the basic assumption was not all that right. Perhaps the emerging markets have not yet broadened and deepened enough to decouple.
Although the GDP growth for these nations has shown increase recently and new trade relationships have been developed, the US is still their primary trading partner. So decoupling from the US economy is not easy.
The popularity of decoupling theory itself tempted many US and developed nation investors to invest hugely in emerging markets. When investors withdraw their money, these economies shrink.
The proponents of the theory neglected the effect of one other major well performing theory - the theory of globalization, where one economy is tightly coupled to another.

One possible reason for the popularity of the theory was the good performance of emerging markets during the first phase of US recession where the economic slowdown was entirely domestic because of the crash in the housing sector.

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Trading in a Choppy Market

2010-01-14T07:43:00.000-05:00

Trading in choppy markets, where prices move up and down without any major trends, requires strategies different from those used while trading in trendy markets. The traditional buy and hold and long-term investment strategies may not be very profitable. To know more, read what is a choppy market?

Buy-low sell-high (buy support and sell resistance) is often the best strategy for choppy markets. Prices often go up and down without forming any major trends; traders can better explore small price differences by having high position sizes and utilizing leverage. Short selling can also be profitable; traders can sell high and buy low.
Trading with oscillator indicators can be a good strategy. Statistics shows that indicators like Relative Strength Index or RSI and Stochastic Oscillator offer better buy and sell signals in choppy markets than trending ones.
Long term traders and investors should limit their trades and invest after proper screening. More trades means more trading cost and less profit. Traders should do proper fundamental analysis before investing as shifting from one hot stock to another won't be a profitable strategy.
When trading in choppy markets, all types of traders should set small profit targets and strict stop-losses.

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Bearish Pennant Chart Pattern

2010-01-13T09:59:00.000-05:00

Bearish pennant is a bearish trend continuation chart pattern showing continuation of a prevailing downtrend after a short-term trend continuation. This chart formation is very similar to bearish flag formation, the difference is that in pennant, the consolidation phase after the pole is triangular or pennant shapes as against flag or parallel shapes in flag formation. Bearish pennant formation also resembles symmetrical triangle formation, descending triangle formation and rising wedge formation; but this is a shorter term pattern.

Bearish pennant pattern is formed when there is a consolidation phase, because of indecision in existing downtrend. The trend lines converge to form a pennant shape which then breakout to continue the downtrend. Like flag formation, the volume tends to decrease as the pattern develops. The breakout is noticeable with great increase in volume. The duration of the pattern can be 1 to 3 weeks.

Traders can go short after the confirmation of breakout. The target price should be the height of the pole from the breakout price. Bearish pennant chart formation is less reliable when there is no significant change in volume as the pattern forms, no increase in volume on breakout or when the pattern takes more than 4 weeks to develop. There is also a chance of trend reversal if there is an increase in volume rather than a decrease.

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Advantages of Dogs of the Dow Strategy

2010-01-12T08:04:00.000-05:00

Past performance statistics and simplicity has made Dogs of the Dow a favorite investing strategy for many investors. It can be regarded as an investing strategy with many merits and some demerits. To know more, read Dogs of the Dow investing strategy.

Advantages of Dogs of the Dow

It is a very simple investing strategy that doesn't need much market knowledge, data mining and technical analysis.
It is a passive investing strategy that requires very little time.
The strategy has less downside risk and good reward potential as one is investing in low priced stocks that constitute one third of DJIA in terms of number.
It removes fear, greed and anxiety from investing.
The strategy is also tax savvy and helps investors to get good quarterly dividends.
The strategy offers very good diversification, especially when it constitutes below 25% of a portfolio.
It minimizes the trading costs involved in investing.
The past history of the strategy is very good as most of the time the strategy has managed to beat the average early Dow return.

Disadvantages of Dogs of the Dow

The past performance of the strategy does not guarantee future performance.
The strategy is based on dividend yield, which is not a standard indicator like P/E ratio or price-to-book ratio.
Although not yet noticed, companies can adjust their dividends to get into or get out of the Dogs list. This can harm the strategy goals.
The strategy does not suit active traders/investors and it demands great patience.
Market cycles and economic changes can affect the returns.
As the strategy involves buying and selling at year start, the investors are not likely to benefit fully from interim price benefits.

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NobleTrading Market Update, January 11, 2010

2010-01-11T09:41:00.000-05:00

The Week Ahead: A busy economic calendar could bring many cross currents to stock prices after an upward advance in week one of the new year. After Tuesday's Trade Balance numbers, the Fed's Beige Book will be released on Wednesday. Retail sales figures will be closely watched on Thursday as well as Business Inventories in the post holiday season. Friday precedes a three day holiday weekend, but ends with the CPI report, Industrial Production, Capacity Utilization, and the Univ. of Michigan Consumer Sentiment survey.

Stocks to Watch: Earnings reports begin this week with Alcoa (AA) on Monday. Steel stocks: US Steel (X ), Ak Steel (AKS), Nucor (NUE), and Worthington Ind. (WOR) continued to accelerate on bullish analyst calls for a pick up in production on firming prices. Palm Inc. (PALM) announced at the Consumer Electronics Show that it will sell smart phones through Verizon Wireless and shot up 11% on 3 times normal volume. Best Buy (BBY), despite a 9% increase in consumer sales, sold off as mostly lower profit margin items were purchased.

Special Note: Seasonal bullish forces maintained the upper hand in stocks out of the gate in 2010 with the S&P 500 leading the way with 12 of the last 14 days advancing. Wall Street analysts and strategists at Barron's and Bloomberg are once again unanimous on the prospects for an up year despite the 60-80% advances off the March '09 lows for the major indices. This kind of complacency is already factored into the Volatility Index (VIX) which has already entered a major area of support meaning the risk for downside volatility is high.

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

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What is a Choppy Market?

2010-01-08T07:49:00.000-05:00

Choppy market is a market condition devoid of any clear direction or trend. The prices move up and down without forming any major trends. Choppy market is a term derived from the phrase choppy seas where the waves prevent the boats from moving large distances in a direction. Choppy markets can be formed due to many reasons like lack of any significant news or economic development, no significant changes in international relationships, stable politics/economy/rates/growths/etc.

Choppy markets usually occur after an extended bullish or bearish trend, and the prices remain on their high or low levels for an extended period of time without moving significantly higher or lower. The period of a choppy market can be from just a few weeks to even years. The phenomenon is more evident in specific sectors or stocks than a broad market.

Choppy markets are not the best times for investors and less-experienced traders to profit from the market; but are very good occasions for active traders who buy lower and sell high. The trading volume, the highest high, lowest low, day highs and lows, daily price ranges, etc can be used to find a good trading strategy. Choppy markets are also good for automated trading and for using various trading indicators. The lack of any significant trend can also help beginners to better educate themselves and test their trading strategies.

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Bullish Ladder Bottom Pattern

2010-01-07T08:51:00.000-05:00

Ladder bottom is a bullish trend-reversal pattern indicating the reversal of the existing downtrend. It is a five candlestick pattern which is somewhat similar to bullish concealing baby swallow pattern. Bullish ladder bottom is a moderately reliable pattern.

The requirements for the bullish ladder bottom pattern include,

The pattern should be formed at the bottom of a significant downtrend.
The first three days are noticeable with three long bearish (black/colored) candlesticks which close below the previous candlesticks. This formation is identical to three black crows candlestick pattern.
The fourth day is also bearish with a small real-body and long upper shadow; it is an inverted hammer candlestick.
The fifth day is a bullish day noticeable with a long bullish (white/colorless) candlestick which opens above the real-body of the fourth day candlestick.

Ladder bottom candlestick formation occurs when bears lose control over the existing downtrend. The bearish candlestick on the first three days indicates that the bears are controlling the market but the inverted hammer on the fourth day indicates that shorts are covering their positions and the trend is getting weak. The bullish candlestick on the fifth day indicates (a) the bulls have gained control over the market and (b) the beginning of a new uptrend.

The reliability of the Bullish ladder bottom pattern increases with increase in trading volume of fifth trading day, with higher closing of the fifth day candlestick and with significant reversal of previous downtrend. Before taking a position, traders should confirm the trend reversal which can be a bullish candlestick, a gap above opening or higher close on the next trading day.

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Reducing Trading Costs with ECN Credits

2010-01-06T09:32:00.000-05:00

Active traders can reduce and save their trading costs by slightly altering the entry and exit points, choosing the right order type and routing it to the right ECN. The strategy is widely followed by institutional traders; and retail traders can also practice that. Although the cost saving per trade can be low, it can add-up for a period.

Most of today's stock trading is done through Electronic Communication Networks or ECNs. Many ECNs offer credits to traders for adding liquidity and charge debit (fee) for removing liquidity. For example, ARCA offers 0.0023 ($2.3 for 1000 shares) credit for adding liquidity and the trading charge is 0.003 ($3 for 1000 shares) if the liquidity is removed. For a stock with ask and bid prices of $10.10 and $10.11 respectively, the trader gets credited when he sells at $10.11 or buys at $10.10 (for adding liquidity to the market), and debited when he sells at $10.10 and buys at $10.11. Now for a $5 per trade brokerage fee, the total charge for executing a trade is $2.7 ($5 - $2.3) if you received the ECN credit and is $8 ($5 + $3) if you have not received the ECN credit.

Different ECNs have different credit/debit structures and they also change it with time. Some ECNs do not charge for removing liquidity or they charge very low, making them ideal candidates if you want to trade by removing liquidity; and for trades that add liquidity you can use an ECN which offers high ECN credits. But focusing too much on ECN credits can harm your trades, especially on trending markets where traders cannot wait longer to 'get filled'. There are also many other trading fees which count in the total portfolio return.

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Dogs of the Dow Investing Strategy

2010-01-05T08:56:00.000-05:00

Dogs of the Dow is a very popular investing strategy that includes investing in 10 DJIA (Dow Johns Industrial Average) stocks with highest dividend yield at the start of a year. The portfolio is readjusted at the start of every year to include the 10 stocks with highest dividend yield; these stocks are known as the 'dogs'. Dogs of the Dow strategy was formulated in 1972 but was popularized by Michael O’Higgins in 1991 through his book 'Beating the Dow'.

Dogs of the Dow investing strategy aims at outperforming normal indexes like S&P 500 and Dow Johns itself. Looking at the history, most times the strategy outperformed the indexes by a healthy average. The period from 1973 to 1996 was most successful, when the dogs outperformed Dow by around 6%. The fact that DJIA is comprised of 30 well established and respected companies of the world and you are investing in 10 cheapest stocks among them makes this a sound investing strategy with reduced downside risk.

Dogs of the Dow is a very passive investing strategy; it can take may be one or two hours to invest and to make portfolio adjustments. The strategy also takes out technical analysis, emotion and market timing from the equation. The stocks to be invested are already defined and one just has to follow the rules. But like everything else, the past performance of the strategy does not guarantee future benefits. The strategy is so popular now that it places high pressure on those 10 dogs involved to do better.

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Stock Market Weekly Update, January 4, 2010

2010-01-04T08:34:00.000-05:00

The Week Ahead: The new year opens with the Nasdaq leading the way with a 43.89% gain in 09' led by Amazon.Com, Apple Computer, and Google. The S&P 500 gained 23.45% and the Dow Industrials returned 18.82%. Economic statistics generally have improved from year ago levels after the federal stimulus money with the exception being the continued downtrend in the employment numbers. Construction jobs have been hit hardest and likely will still be problematic in 2010. This Friday's Employment report could be the first positive reading since late in 2007.

Stocks to Watch: Conagra (CAG) is suing Dean Foods (DF) for trademark infringements, but neither stock was impacted much as both have had steady chart patterns for the past year. YRC Worldwide (YRCW), a trucking company announced a successful debt for equity exchange, but this is considered dilutive as the stock continued its poor performance. Wimm Bill Dann Foods (WBD), a Russian dairy products company was upgraded by CitiGroup despite its huge run-up the past 13 months. Intelli-Check (IDN) rallied strongly on prospects for its defense ID device.

Special Note: The January barometer will be in focus this month. Basically as January goes so goes the year, but it did not work in '09. A better predictor could be the decennial pattern when the last year of a decade rallies. Typically the first year of the new decade is a down year as evidenced by 7 of the past 11 decades in the Dow Industrials. Even more interesting is that of the last 11 decades, the first year or '0' year prices have exceeded the low of the '9' year 8 times or 73% of the time going back to 1900. It last occurred in 1980. Is it due to happen in 2010?

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

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What is Asset Play Trading?

2009-12-31T08:10:00.000-05:00

Asset play refers to stocks of companies which have more combined asset than its market capitalization. In short, it is the undervalued stocks in relation to the total asset owned by the company. Trading asset play stocks is a very attractive value investing strategy as traders can profit when the market realizes the true value of the stocks and then the stocks are correctly valued.

The market can have many asset play stocks because of many reasons.

The market very often trades on news and technicals rather than fundamentals.
The performance of an industry or a sector can affect the total valuation of stocks related to the industry/sector.
Often the media ignores some smaller, less popular companies making small profits but have sound fundamentals.

Finding an asset play opportunity can be difficult, investors should be aware of the true asset value of the company and total number of shares outstanding. The asset valuation standards and the asset value itself change from time to time.

Asset play is a risky investment strategy that requires good timing, money management and research. Investing in just any undervalued stocks can be risky, as for profiting the market needs to realize the true value of the stock; and the market can interpret the true value differently from the investor's point of view.

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Shooting Star Candlestick Pattern

2009-12-30T08:31:00.000-05:00

Shooting star is a bearish trend-reversal candlestick pattern indicating reversal of an existing uptrend. It is a comparatively rare and single candlestick pattern which is formed at the top of an uptrend. When the formation occurs at the bottom of a downtrend it is called inverted hammer pattern. Shooting star formation is very similar to gravestone doji formation; the difference is that the candlestick has a small real-body.

The requirements of a shooting star candlestick pattern include,

The pattern should form at the top of a significant uptrend.
The candlestick should have a long upper shadow and no/very small lower shadow.
The small real-body of the candlestick should be at the lower end; at or near the low of the day.
Often the candlestick is formed a gap above the real-body of the previous candlestick; exception - Forex charts.

Shooting star candlestick pattern occurs when the existing bullish trend weakens and the selling pressure increases. The fact that bears have managed to close the day at or near the low of the day even when the price forms a new high, indicates that the bears are getting hold of the market.

Shooting star candlestick formation is considered a bearish weak reversal pattern. It is a very good indicator of resistance levels on a chart. The reliability of the pattern increases with the strength of the existing uptrend, and with increase of upper shadow and shortening of real-body and lower shadow. With shooting star pattern confirmation of trend-reversal is needed, which can be a gap down opening, a bearish candlestick or lower close on the next trading day.

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Sharpe Ratio Performance Indicator

2009-12-29T09:57:00.000-05:00

Sharpe ratio, also known as Sharp Index, Sharp ratio & Reward-to-Variability ratio, is a popular indicator for measuring return-to-risk. This is a simple ratio developed by 1990 Economics Nobel laureate William F Sharpe which measures the risk adjusted return from a portfolio/asset using just three components: portfolio return, risk-free return like 10-year US Treasury bond return and the standard deviation of portfolio returns.

Sharpe ratio is calculated by subtracting the risk free return from the portfolio return and then dividing the result by the standard deviation.

Sharpe Ratio = (Rp - Rf) / StdDev

Where Rp is the portfolio return, Rf is the risk-free return and StdDev is the standard deviation of portfolio return.

Sharpe ratio is a very good indicator of portfolio performance and is widely utilized to compare portfolio performances. The values of the ratio can be positive or negative, where positive values indicate better performance compared to risk-free investments and negative values indicate worse performance than the same. In general, values above 1 are considered good portfolio performance, 2 or above are very good and values above 3 are excellent.

Sharpe ratio reveals whether the excess return from a portfolio is because of smart decision making and investing or just because of taking more risks. For example, if two portfolios generated 12% and 15% returns but the first one took much less risk than the second, then the 12% return can be considered as the better performing portfolio. Some variations of the indicator such as Sortino ratio are also available.

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Trading Water ETFs

2009-12-28T10:08:00.000-05:00

Water exchange traded funds (Water ETFs) are an interesting sub-group of ETFs. They track indexes composed of stocks of companies involved in water related business; like water purification, water bottling, irrigation, pump and filter manufacturing, water distribution, beverages, and so on. Water ETFs are very good instruments to diversify a portfolio, to make long-term investments and to passively invest in a growing industry.

Now there are a number of ETFs which track various 'water indexes', major ones include PowerShares Water Resource ETF and iShares Dow Jones US Utilities Index ETF. Some main indexes that water ETFs track are Palisades Water Index, Dow Jones US Water Index, ISE B&S Water Index, S&P 1500 Water Utilities Index, Bloomberg World Water Index and MSCI Work Water Index. These indexes differ considerably from one another in capitalization, composition and performance.

World water consumption and irrigation needs are growing daily and the demand for pure water is always on the rise. Thus investing in water ETFs can offer good returns. But the trader should be careful with his ETF picking and portfolio management. ETFs tracking a very small market/sector, can be riskier investments, and it is not wise to allocate a major part of the portfolio to these funds.

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Island of Reversal Patterns

2009-12-23T09:38:00.000-05:00

Island of reversal is a very popular chart/candlestick pattern indicating the reversal of an existing trend. It is considered a very strong reversal indicator when formed after a strong trend. Island of candlestick is a candlestick or group of candlesticks (or sessions) which gap away from the existing trend. There are island bottom reversals (bullish) and island top reversals (bearish).

Island of reversal is one of the easy to identify patterns. Bullish islands of reversals form at the end of downtrends where prices gap down to form new lows but will soon gap up (after one or more sessions) to fill the gap, starting a new uptrend. Similarly bearish islands of reversals form at the end of uptrends where prices gap up to form new highs but soon gap down to fill the gap, starting a new downtrend.

Island of reversal patterns are usually associated with dramatic changes in trading volume. Usually the gaps are noticeable with high trading volume and the peak/trough is noticeable by low trading volume. Island of reversals are patterns which favor both short-term and long-term traders. Patterns which include one or two gap-away trading sessions favor short-term traders whereas those including many sessions favor long-term traders. The reliability of both bottom patterns increases with significance of prior trend.

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Stock Market Weekly Update, December 21

2009-12-21T09:55:00.000-05:00

The Week Ahead: A shortened holiday week with decreasing volume will be the trading environment the next four days with a similar pattern likely in the final week of this year and decade. Reports to watch are Tuesday's final GDP number for the third quarter and the existing home sales figure. Wednesday look for new home sales data along with the personal income and spending numbers. The week ends Thursday with weekly jobless claims and the Durable Goods report for November.

Stocks to Watch: Patient investors may want to take a look at bank stock State Street Corp. (STT) according to the Keefe Bruyette brokerage who upgraded the stock which recently corrected. On the contrary, C.R. Bard (BCR) was downgraded by Standard and Poors on the belief that medical device makers face tough head winds in the coming year. Trucking company Con-Way (CNW) was upgraded to a buy by BB&T but the stock has already moved 34% in the last three weeks. Finally, an EU panel has recommended Amgen's (AMGN) osteoporosis drug for approval, and so far the stock lifted only marginally.

Special Note: The technical picture for stock indexes in general show a probable push to higher highs into January, but it strongly appears to be an exhaustive move in a 10 month long rally. From a world perspective, the following pattern is evolving from east to west. Shanghai in China (8/4/09 peak), Nikkei in Japan (8/31/09 peak), KOSPI in South Korea (9/23/09 peak) ASX in Australia (10/21/09) peak, Hang Seng in Hong Kong (11/18/09 top), FTSE in London (11/16/09 top). Markets here in the U.S. and Brazil appear to be topping with seasonal strength in small caps etc. providing some underlying strength.

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

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Auction Market Preferred Stock or AMPS

2009-12-18T09:07:00.000-05:00

Auction market preferred stocks or AMPS, also known as Auction Rate Preferred Stocks or ARPS and money market preferred stocks, are preferred stocks with a changing dividend rate. The dividend rate is changed every seven weeks (49 days) according to the result of Dutch auctions. To learn more about preferred stocks, visit common stock and preferred stock and different types of preferred stocks.

Contrary to most preferred stocks, which are considered fixed-rate investments, auction market preferred stocks are considered floating-rate investments. The total number of shares available for Dutch option is determined by the number of shares that the existing shareholders want to sell. The auction settles on a clearing rate, the lowest bid price at which all stocks can be sold. This clearing rate is used to determine the dividend rate.

AMPS can be a good investment for many investors; these tend to offer better returns than traditional preferred stocks. The auctions also reveal the true value of the stocks with respect to the current market yield/performance and risk levels. But the recent financial crisis made many auctions fail because of the lack of interest. By the end of 2008 many financial companies had repurchased their ARPS.

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How to Trade the Gaps?

2009-12-16T08:05:00.000-05:00

Gaps in price charts are considered good trading opportunities and indicators. Most gaps are triggered by news, rumors or market sentiments and moves prices in a certain direction. Gaps are often filled and are associated with different candlestick/chart patterns. For a better understanding, read different gap patterns.

The first and foremost thing in trading the gap is determining the type of gap pattern formed. Is that a continuation or a reversal pattern? It is always good to trade with the market rather than going against it.
Check whether the gap can fill in the near future. Common gaps and exhaustion gaps are often filled more quickly than breakaway gaps and runaway gaps.
The volume associated with the gap pattern is also important. A breakaway gap without high volume can be filled in the near future than those with high volume.
The reliability of the triggering factor of the gap is also important. Gaps created on rumors are more likely to be filled than those on fact/stats. Similarly gaps created because of over optimistic/pessimistic trader behaviors can be short lived.
Many common gaps can be filled within the trading day (called fading); this offers very good opportunities to day traders.
Gaps formed often act as supports/resistances for future movements. Thus crossing of price below/above these levels respectively can trigger strong reversals as there is no other immediate support/resistance available.
Gaps are much more reliable, when their direction is also confirmed by other indicators.
When fading against the trend, it is good to determine the high and low points and to use proper risk minimizing strategies.

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Median Price, Typical Price & Weighted Close

2009-12-16T07:57:00.000-05:00

Median price, typical price and weighted close are indicators for reducing noise in a trading chart, and are widely used as filters of other moving average systems. These indicators, when used alone, do not provide any significant results other than smoothing the graph, but they are key ingredients of many other powerful and popular trend indicators.

Median Price (MP):

MP = (High + Low) / 2

Medium price, as the name suggests, is simply the mid-point of a trading period. A line connecting MPs of continuous trading periods can be used to generate buy and sell signals.

Typical Price (TP):

TP = (High + Low + Close) / 3

Typical price is a widely used indicator which can give a more realistic result of the average price of a period as it includes information about the whole trading day. Typical price is used in commodity channel indicator or CCI and money flow index or MFI indicators. It can also be used in conjunction with other moving averages to generate signals.

Weighted Close (WC)

WC = (High + Low + Close * 2) / 4

Weighted close is similar to typical price except that it gives more weight to a period’s closing price. Weighted close charts have an extra smoothing and simplicity of interpretation.

Most traders use all the above three with a running moving average like 21-day exponential moving average to generate signals. When the price crosses the MA from below, buy signals are generated and when the price crosses from above, sell signals are generated. This is a reliable strategy but a lagging one.

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Grantor Trust Exchange Traded Funds

2009-12-15T08:47:00.001-05:00

Exchange traded grantor trust funds can be defined as investments in a changeless basket of investment agents. The investment vehicles are such that they may consist of common stocks or commodities and would enable access to a particular indutry or sector. Exchange grantor trusts trade on an exchange. The trade resembles that of stocks.

There are some key differences between the trading of grantor trust ETFs and that of other ETFs.

Grantor trust ETFs usually do not track any indexes or market.
The ETF portfolio is fixed; there is no periodic portfolio rebalancing; the original assets stay fixed.
Grantor trust ETFs often hold physical commodities like gold and other precious metals, currencies, etc.
Some grantor trust ETFs can also hold securities; as the portfolio is fixed over time the portfolio can become more concentrated as companies grow, acquire and merge.
Like unit investment trusts, grantor ETFs directly distribute dividends to shareholders. There is no reinvesting.
They are also not usually SEC registered investment companies.
As there is almost no portfolio management costs, grantor ETFs have very low expense ratios.

Grantor trust exchange traded funds are created to overcome the limitation of holding physical commodities in an ETF portfolio. Investors can use them to get access to specific market sectors or commodities. Grantor trust ETFs can be good instruments for long-term investments but are not suited for very short-term trading.

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Stock Market Weekly Update, December 14

2009-12-14T09:46:00.000-05:00

The Week Ahead: A jump in retail sales and stronger than expected consumer sentiment helped stocks recover from lows set earlier in the week. The November Producer Price Index will be released on Tuesday and the Federal Open Market Committee will begin a two day meeting on interest rate policy. The Consumer Price Index and housing starts data begins a busy Tuesday with the FOMC decision arriving in the afternoon. Thursday brings jobless claims and the leading indicators for November.

Stocks to Watch: With oil prices near a two month low, airline stocks were up especially Delta Airlines (DAL) after the easing of air restrictions between the U.S. and Japan. Harsco Corp. (HSC) sees a better than expected 2010 earnings picture than was previously estimated as the stock bounced off its 200 day moving average. A new issue Concord Medical Services (CCM) which operates radiology centers in China fell to $9.50 a share after a 12 million ADS offering @ $11.

Special Note: With the market up strongly from the March low, it is not surprising to see consumers and investors more upbeat about the economy as evidenced by some lagging indicators. Much speculation has been made about the potential for billions of dollars of sideline money to come into the market, but no clear correlation has ever really linked the two in the past. In fact the argument can be made that investors are fully invested with the equity mutual fund cash holdings at 3.7% (InvestorsIntelligence.com) just above its record low of 3.4% in July 2007.

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

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