Thursday, May 31, 2007

New High Weekly Close In The Cards...Or A Dead Man's Hand

Or is this setting up to be a trap to get everybody long the market? Hence the "Dead Man's Hand". It is hard to fight the tape.

These are both charts of the S&P 500 Index. The monthly chart shows the high water mark from back in 2000, 1552.87. The other chart shows the various levels based on the opening range created in the beginning of this trading year. Support using this concept is 1524.10 and the next target is 1547.77. The chart can be clicked and enlarged to see the levels marked by the dashed lines.

The Elliott Wave Principle

The Elliott Wave Principle

In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets and observed that certain patterns repeat themselves. He offered proof of his discovery by making astonishingly accurate stock market forecasts. What appears random and unrelated, Elliott said, will actually trace out a recognizable pattern once you learn what to look for. Elliott called his discovery "The Elliott Wave Principle," and its implications were huge. He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.

Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he discovered the complete body of R.N. Elliott's work in the New York Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In Elliott Wave Principle, Prechter and Frost's forecast called for a roaring bull market in the 1980s, to be followed by a record bear market. Needless to say, knowledge of the Wave Principle among private and professional investors grew dramatically in the 1980s.

When investors and traders first discover the Elliott Wave Principle, there are several reactions:

*Disbelief that markets are patterned and largely predictable by technical analysis alone
*Joyous "irrational exuberance" at having found a "crystal ball" to foretell the future
*And finally the correct, and useful response "Wow, here is a valuable new tool I should learn to use."

Just like any system or structure found in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature’s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology, and the things humans create, like roads, residential subdivisions… and as recent discoveries have confirmed in market prices.

Natural systems, including Elliott wave patterns in market charts, "grow" through time, and their forms are defined by interruptions to that growth.

Here's what is meant by that. When your hands formed in the womb, they first looked like round paddles growing equally in all directions. Then, in the places between your fingers, cells ceased growing or died, and growth was directed to the five digits. This structured progress and regress is essential to all forms of growth. That this "punctuated growth" appears in market data is only natural as Robert Prechter, Jr., the world's foremost Elliott wave expert and president of Elliott Wave International, says, "Everything that thrives must have setbacks."

The first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: "impulse waves," and "corrective waves."

Impulse waves are composed of five sub-waves and move in the same direction as the trend of the next larger size (labeled as 1, 2, 3, 4, 5). Impulse waves are called so because they powerfully impel the market.

A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size (labeled as a, b, c). Corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any preceding impulse wave.

As the figure to the right shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose sub-waves are denoted by numbers, and the three-wave corrective phase, whose sub-waves are denoted by letters.

What R.N. Elliott set out to describe using the Elliott Wave Principle was how the market actually behaves. There are a number of specific variations on the underlying theme, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable requirements as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is necessary to understand what the markets can do, and at least as important, what it does not do.

You have only just begun to learn the power and complexity of the Elliott Wave Principle. So, don't let your Elliott wave education end here. Join Elliott Wave International's free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle and learn how to use this valuable tool in your own trading and investing.

To start your Elliott wave education now, click here.

Tuesday, May 29, 2007

New week ------ End Of The Month

"We thought that we had the answers, it was the questions we had wrong."



This is a standard chart of the S&P 500 Index showing the support lines formulated from the opening range from the start of the calender year. The market did not act well when it reached the +4 area @1524. It could test this area one more time, but if it can't get past this level, it should retrace back to 1500.43 and if selling picks up 1476.76.

Below is a two day intra day chart of the S&P 500 futures from Thursday and Friday. The high Friday was the midpoint of the entire down move from Thursday. This level and the 61.8 level of 1523.8 should be an area to watch to see if the bounce from Friday can continue with any momentum. The volume Friday was very low, so until this bounce proves itself, it should be kept in context. Watch the first 15minutes of today's open to get a feel for the area to base trades off of, this concept is covered HERE.

Below is the corresponding chart for the Nasdaq 100 Index (NDX).

A few other charts to keep an eye on. The bulls are saying the market is going higher because of the reports on the high level of short interest in the market. News could be colored with a positive slant over the short term.

Continuation from the last post in the next article; short strategy and scanning.


"The less you know, the more you believe."


Friday, May 25, 2007

Offense or Defense?

"A man may die, nations may rise and fall, but an idea lives on. "

John F. Kennedy

This the standard chart of the S&P 500 Index. It shows the advance/decline moving average in the top section and volume in the lower pane. In price area of the chart the colored lines mark the levels based off the opening range strategy covered in a recent post(review of strategy link here). The green and red lines show the targets below the current market if selling continues. Most of the selling was probably done yesterday, the Friday before a three day holiday weekend is usually a light trading day. Any strength in the market today could be a good opportunity to look at buying June puts in either the SPY or OEX.

This is a chart of the OEX S&P 100 large cap stocks. The area shown in the red box shows "stems" at the top of these candle sticks. This is an area the market traded but failed to finish the day there and sold off. Four of them in a row is not a bullish sign for prices in this area, lack of buyers to say the least. Volume shows that the last couple days selling had the upper hand. This is an area to watch short term, could be a top for now. A put strategy using the levels shown in this chart might lead one to buy the June 685 puts and sell the June 675 puts. This is not an aggressive strategy, but could offer some protection if selling continues before the third Friday in June. Time will tell. This strategy can be applied to the SPY and the QQQQ, depending which market fits the portfolio being hedged. If anyone has any specific questions about how to do this or what might be a more aggressive strategy, feel free to click the "email me" button and ask what might fit your specific situation best. Shorting selling is a great way to make money in a shorter period of time than most long trades, but it is something that takes time to learn. Using puts is a great way to get a taste of what goes on.


Scanning for winning ideas is something that is made easier by using one of the many software programs available. This can either be done on a large basket of stocks or a select group filtered for some fundamental criteria; cash flow, price-to-sales, debt. Taking yesterday's down performance, any stocks that show up that had large volume surge and a positive day might be worth putting on a radar screen for future consideration. The scan going to be used for this is below.

Close > Close Yesterday
Close Yesterday < Close 2days Ago
Volume > 20day Average Volume * 2
Average Volume > 100,000 shares

Here a few that showed up.

The next topic will deal with a more detailed scan that looks at things on a longer time horizon. It will also cover some more shorting ideas and what to look for in short trade set ups.

Wednesday, May 23, 2007

Time For Smaller Cap Issues ?

"Think of yourself as on the threshold of unparalleled success. A whole, clear, glorious life lies before you. Achieve! Achieve!"

Andrew Carnegie

Below is a chart comparing the S&P600 Small Cap Index and the S&P 100 Index. In the bottom section is the spread(S&P600 / S&P100) between the two indexes. This spread shows which group of stocks is performing best. Since the beginning of April the larger cap stocks in the S&P 100 have been outperforming small cap stocks. Over the past few days this looks to be changing and the smaller cap issues are getting some interest.

An example of a small cap company first mentioned back in mid March. is Zoltek(ZOLT).

Zolt has started another move up and looks like it could reach its first target around $41.50 without much trouble. A few other stocks in the same sector that look good are below. Carbon fiber is a great area to look for investments. As Boeing's business grows on global demand, assume that suppliers and products that go into production of aerospace products should have a strong underlying demand.

SGL Carbon AG (ADR)

Hexcel Corporation

Scanning through smaller cap stocks looking for bases and volume spikes could point out some future winners. The process of how to go about this will be covered in the next post.


Below is a chart showing the S&P 500 with its Advance/Decline moving average.

As the S&P500 Index gets to the old high area from back in 2000, it is good to keep an eye on which groupings of stocks are getting the attention. Below is a chart showing the Midcap S&P400 Index.

As the market goes higher, look for signs of strength to confirm bullishness, but also look for cracks in the bullish case and have a plan B. The market has had a nice recovery off of the February weakness. There is no need to be overly greedy after the move we have had. Look for stocks breaking out of basis with strong volume and triangle patterns doing the same. The next post will deal with scanning for these type situations. Below is a chart of the the Wilshire 5000 Index and section showing the % of stocks trading over their 40period moving average.

Large cap issues have carried this rally. It could be time for smaller cap issues to catch up while the larger cap names work off their overbought conditions.

Monday, May 21, 2007

Being Prepared

"Chaos in the midst of chaos isn't funny, but chaos in the midst of order is."

Steve Martin

Looking back on the dip the market took in February makes it seem like not such a big deal, just an over reaction. It was however a chaotic day and like Steve Martin says, chaos in the mist of chaos isn't a lot of fun. After a positive day on option expiration last Friday, the market is well within reach of the 2000 weekly closing high of 1527.46 area. Is this area just going to be a blip on the screen on the way to higher and higher numbers or is it going to act like a short term goal and lead to reflection about if the glass is half full or half empty? The dip in February is in the rear view mirror, yesterday's news, but it is important to have a plan for the next speed bump. They are out there.. a review of a strategy that worked well last time might be fuel for some new ideas; Red Right-20 Bingo Cross.

Having a plan and thinking of what-if strategies isn't being a worry wort, its being smart and planning ahead. These days can be an opportunity or a costly event, it all depends on preparation and planning. Making a wish list of key stocks that would be worth buying when they are sale is one way to prepare. Another way to stay prepared is to make sure your portfolio is balanced. If you have a couple stocks that are carrying the entire load of your gains, it worth re-balancing your holdings and having some ammo for when opportunities arise.

Recently discovered company doing business in the Liquid Natural Gas sector.

Chart Industries, Inc. (Chart Industries) is an independent global manufacturer of engineered equipment used in the production, storage and end-use of hydrocarbon and industrial gases. The Company supplies engineered equipment used throughout the global liquid gas supply chain. The largest portion of end-use applications for its products is energy-related, accounting for 56% of sales and 58% of orders during the year ended December 31, 2006, and 79% of backlog in 2006. The majority of its products, including vacuum-insulated containment vessels, heat exchangers, cold boxes and other cryogenic components, are used throughout the liquid gas supply chain for the purification, liquefaction, distribution, storage and end-use of hydrocarbon and industrial gases. The Company operates in three segments: Energy and Chemicals (E&C), Distribution and Storage (D&S) and BioMedical. On May 26, 2006, the Company acquired Cooler Service Company, Inc., an air-cooled heat exchanger business (CSC).


Interest Rates are important to watch. Below is a chart of the 5yr Treasury Interest Rates. Both charts going over concepts covered in the posts from last week.

Interesting bond article.

Another must read, commentary by Bill Gross.

Thursday, May 17, 2007

Closing in on 1527.46

"There are only two options regarding commitment. You're either IN or you're OUT. There's no such thing as life in-between."

Pat Riley


This is the chart of the S&P 500 based on the 3day opening range from the start of the year. 1500.43 passed a test for now and it looks like 1524 is the next target. With the large cap stocks leading the way, this should be attainable. Friday is option expiration, so that could be an area that is drawing a lot of attention. Another number to keep in mind is that 1527.46 is the high weekly close from back in 2000. It is acting like a magnet. Below is the weekly chart showing the weekly closing high.

This concept of the opening range can be seen in Wednesday's S&P futures chart. It is important to draw these lines after you have 3 five minute bars. The chart below shows the opening range marked with black lines, and red and green lines showing the levels above and below the opening range.

The red circle shows the target reached on the down move. The green circle shows a higher low which signaled the possible end of the down move. The market then retraced back to the opening range and broke above, tested the top of the opening range once and then went on to finish at the high of the day. Below is the same chart but with a triangle pattern marked and levels from the system mentioned the past few posts. This system can be reviewed here.

Some areas to watch include the Dow Jones Transportation Index along with the sub-index of the railroads. Below are both charts with their corresponding triangles marked.

Two railroad stocks that have started to move out of their triangle patters are Burlington Northern-BNI and Union Pacific-UNP. Below are charts of both with triangle patterns outlined.

The next post will start to cover how to filter and scan a database of stocks for triangle patters over various time frames.

Tuesday, May 15, 2007

Triangles In The Real World

"Adversity is the state in which man mostly easily becomes acquainted with himself, being especially free of admirers then."

John Wooden

Yesterday's post covered a concept for determining price targets for triangle formations. Sometimes ideas seem so simple on paper but don't hold the test when applied to real world trading. There were two examples used yesterday that were based on longer term weekly/monthly charts. Below is an example from Monday's S&P Futures market.

This is a 5minute chart covering the last two trading days. Yesterday a descending triangle was formed. As this triangle was forming, it was possible to see it setting up as the 1510 level was support and the series of highs were lower. As the price contracted, it was easily possible to see the width of the triangle and estimate the potential of the move once it broke. A descending triangle is usually a bearish triangle, so a bias to the short side was not a stretch. Taking the middle width of the triangle(A-B=X), we have a value of 3.8. The next step is to multiple 3.8 by 1.618 to give us the range to subtract from point B. This will give us our target, 1503.85. This chart above is not made up. This happens more than people think on all sorts of different time frames.


This is a chart of the S&P 500 Index showing the swing levels based on the opening range. This concept was covered under the post Cliffnotes For Offense And Defense. It is important to watch the volume and advance/decline numbers as the market trades through 1500.43 level. If this level is broken with higher volume, the market should drift down to the second swing level 1476.76. This won't happen in one day, but should be the downside target the more time we spend under 1500.43.

It is worth watching how the brokerage stocks(Bear Stearns,Goldman Sachs,Merrill Lynch,Morgan Stanley,Lehman Brothers) trade today. There is talk about junk bond bubbles and Ben Bernanke is speaking today. There are also economic numbers related to inflation being released over the next couple days. A second chart to watch is the Dow Jones Transportation Index. Both could give a heads up to what direction the market is heading. Both charts are below.

NDX 100 Index

NYSE Composite Index

Monday, May 14, 2007

Triangle Targets 1

"If you can believe it, the mind can achieve it."

Ronnie Lott

This diagram represents a generic triangle pattern. Points A and B mark the approximate midpoint of each trend line forming the triangle. The distance between point A and B gives a number which is to be used for estimating price targets when the triangle pattern is broken. The distance between A and B is marked X. To estimate the potential move when the triangle is broken, X is multiplied by 1.618 and then added to A or subtracted from B. These are the primary targets that could be expected, A + (X*1.618) and B - (X*1.618).

The 1.618 is not chosen out of thin air, it is derived from a ratio in the Fibonacci sequence. If you divide the a number in the sequence by the number preceding it, you will approximately get 1.618.


If X is multiplied by 2.618 and the same process is applied to both points A and B, we then get a second set of price targets. 2.618 is also a result a ratio resulting from the Fibonacci sequence.


Below are some of the same examples used from Thursday's post, with the price targets applied.


Below is an example when the pattern is broken to the downside.

Next post will cover some more triangle concepts.


Friday, May 11, 2007

What Is The Wind Direction?

"My goal in sailing isn't to be brilliant or flashy in individual races, just to be consistent over the long run."

Dennis Connor
Mr. America's Cup

Swing Level +1 = Red line 9416.27
Swing Level +2 = Green line 9623.19
Swing Level +3 = Blue line 9830.11

Swing Level +1 = Red line 1867.06

These charts show the NYSE Composite Index (NYSE) and the Nasdaq 100 Index (NDX) with levels marked based on the opening range of the year. This concept was discussed earlier in the week, Cliffnotes For Offense And Defense. The NDX is approaching both the +1Swing support number and the lower trend line in its channel. As bad as yesterday felt, the volume was not overly high and the index is still holding the up channel. The NYSE has broken a trend line but again volume was not heavy. The +2Swing level is only 40pts away, and could act as near term support. The inflation related economic numbers to be released before the market open will probably play an important role in if we test these levels today.

The continuation of the triangle pattern strategy article from Thursday will be posted this weekend.

Louis Vuitton Cup - Semi Final - 14.05.2007 - 25.05.2007