Watch out for the waves Sandpipers!!

This is a basic chart of the NYSE Composite with volume and the advance/decline line moving average in the bottom section.

1. Shows that volume on the rally the past few days is not matching the volume on the decline we had a week and two weeks back.

2. Shows the rising prices in the market along with the declining slope in the advance decline moving average. This was a key that this move into new high territory was being carried by less and less stocks. That doesn't mean that the rally is not real, just that it could be healthier and more stocks should have participated.

3. Shows that the low last week was an oversold area, confirmed by the divergence in the advance/decline moving average. This divergence was an indication that the sell pressure from the week before was not as great as two weeks ago. This is a good point to enter the market with a stop close by. How far can this rally go?

? Is an area that looks hard to enter into new positions. The advance/decline moving average is now above its recent high, yet prices have not recovered in the same way. How much steam is left, where are the new buyers going to come from. It's hard to know the answers, but caution is warranted.



This is the corresponding chart of the Nasdaq Composite.



The two charts here are both of the Nasdaq 100 Index and the S&P 500 Index. The bottom most section of the chart is a spread between the two(NDX/SPX). In a healthy bull market technology is seen as a leader. This is in the 1 area on the first chart. This was the bull market that ended in 2000. The spread showed a strong upward slope and stayed above its moving average. After 2000, when the glass became half empty, technology lead on the downside also. Its gains are greater in bull markets and losses harder to handle in bear markets. It is where growth and innovation are, it is where the new companies of tomorrow are supposed to be. In the second chart it is evident that the S&P 500 is as strong, if not stronger, that the NDX. The NDX has times that it leads, and those are great rallies to trade in, but lately it isn't showing strength on a relative scale. It doesn't mean that there are not winning stocks, it just means you have to be a lot more selective and accepting of profits when they come. There is no need to be greedy, when the wind is in your face; just take what the market gives you.

Short Attentionspan Theatre.......

It seems investors have been waiting for the Federal Reserve Board to change their wording in regards to interest rates for so long now. The hope was that they would take away their bias towards raising rates. Well be careful what you wish for. All the people who fool themselves into the idea that lower rates are good for the market are probably pinning their hopes on it can save the housing sector and reverse the recent trend in the real estate market. Human nature runs in cycles, and can not be derailed like a runaway train. It can be made to seem like somethings its not, but the inevitable cycle will run in course. How many successful attempts have their been by foreign central banks to manipulate their currencies? None come to mind, and many failures of large scale are evident.

So today the Fed dropped its tightening bias, and everyone had a party buying stocks. It is important to look at why they removed their bias, and what do they see on the horizon that maybe are not evident now. Their fear of inflation is not balanced by some other concerns. What happens when rates stop going up? Well for one the dollar becomes weaker and this can cause many things which the party goers today who bought stocks might not be focused on.



This is a weekly chart of the US Dollar Index. Its value in the beginning of 2002 was around 120. By the beginning of 2005 it was in the 80 range. That is a significant drop of over 30%. We do not feel this effect here domestically day to day as much as foreign investors and holders of our debt feel it. If you were a foreign owner of our stock market in 2002, and held it to 2005, you lost 30% just in the currency conversion regardless of what stocks you owned. It could not have been a profitable time.

This next chart shows the interest rate on the 10yr treasury versus the S&P 500. As rates were going down in, because of the underlying weakness in the economy, stocks followed. Once rates seemed to stabilize, then the focus went back to seeking value in equities. This was fueled by the fact they with rates so low, it was possible to borrow money in other parts of the world and invest it here in the states, for a seemingly risk free trade.



So now that the Fed has said rates are on hold, it can be good news if we are in a sweet spot. If they do however start cutting rates this fall, it will be because of some weakness in the economy. Most likely this will be the unemployment rate and its effects on the psychology of consumers. Will this mean inflation won't be a factor? No it won't mean that at all. We are large consumers without a doubt, but we are not the only reason for inflation. Twenty years ago we could get wrapped up in ourselves, and think we were the world. Today our consumption could decrease and inflation could still continue to grow because China and India are growing large scale economies.

When the US Dollar continues its down trend, the stronger currencies should be those from economies based with strong commodity resources. Two that come to mind are Canada and Australia, both are large mining countries and Canada has a significant energy industry. With today's rally we can see the strength in some of the metals and mining stocks. As the US Dollar weakens, it will make commodities traded in dollars more expensive to compensate for the dollar losing value. Below are some stocks that are in the metal and mining industry, that had some triangle formations. Look for volume to accompany any breakouts. Be selective and go with the best looking patterns.

1 1 2 3 5 8 13 21 34 55 89 144 And Triangles

phi = (sqrt5 – 1)/2

What do these numbers mean and how do they relate to trading or investing? Well it is probably easier to make an argument that they don't have any business in trading, and people who try to apply them are projecting them on the market. That would be an easy argument and it would do a major disservice to the theory and what this ratio represents. Names like Euclid, Luca Pacioli, Fibonacci and,Pythagoras probably scare some people and cause painful flashbacks of high school math for others, but they are worth looking at to see how we can apply "all that crap I learned in high school" to gain something productive today.



The ratio of segments in this 5-pointed star (pentagram)are considered sacred to Plato & Pythagoras in their mystery schools. Note that each larger (or smaller) section is related by the phi ratio, so that a power series of the golden ratio raised to successively higher (or lower) powers is automatically generated: phi, phi^2, phi^3, phi^4, phi^5, etc.

To apply this to the market, we can often become to creative(art) or too scientific in our approach. In most charting software there exists a function that will let us draw the Fibonacci extensions and retracement numbers with just the click of a button.



What we do with this tool in the chart above is to start with the lower high in 2000 and then measure to the low in 2002. The high we are using is 1530.09 and the low is 775.68. The lines that are drawn act as a type of map for the market. We should recognize when the market gets back to these levels and see how it acts. The levels act as targets, and once reached and shown to hold, then become support for the next wave up. How are these levels calculated? We take the High and subtract the low to give a value for the move down, 1530.09-775.68=754.41. 754.41 is our key number now in these calculations. We want to multiply 754.41 by 0.50 to get the 50% retracement of the move. the other two numbers at minimum that should be used are 0.382 and 0.618. The are derived from our Fibonacci numbers. If we divide any Fibonacci number by the next number in the sequence we will get approximately 0.618(21/34=0.61764). The flip side of this is of we take inverse of this, 1-0.618=0.382. These are just 2 of the basic numbers that can be used. In the above chart of the S&P 500, it is apparent that these levels show to be valid when reached. This could be for many magical reasons, or just a self fulfilling prophecy because so many people use them. Regardless of the way, it is good to have a knowledge of where these levels exist in the major indexes.

Triangle patterns are one of the most reliable chart patterns to look for. The are formed by a series of lower highs coupled by a series of higher lows. Below is an example, Williams Companies, WMB.



This shows one of the smaller breakouts this stock has had. Its breakout was accompanied by strong volume, and once the rally stalled, it formed a tight triangle on the weekly chart. The Fibonacci numbers and ratios not only gave an indication where the bottom of this triangle might form if it was a healthy breakout, but it also gave a price target for the next break out! If we went back to our example of 21 and 34, and instead divided 34/21, we would get 1.619. This is very close to the 161.8% extension number given by are chart tool. Another way to check the system is to look at the width of the triangle around the middle area. In WMB it is around 1.30,(16.50-15.20). If we then take 1.30 and multiply by the 1.618, we would get 2.10. If we then add 16.50 and 2.10, we get a secondary target that gives us a safe price target for our break out of the triangle of 18.60. This is not a huge trade, but not bad on a percentage basis, and the risk was definable. It is also a product of the size of the triangle formed. The bigger the triangle, the more potential the trade has.

Next post will continue with triangles and touch on how to find them using a computer program.

The Second Mouse Gets The Cheese

The Monday after the quadruple witching is often one of light volume. So much activity has gone on the past few weeks, that it is a time to take a breather and start anew in looking forward for another quarter. Since the third Friday of March is past, all options are now being traded for the month of April and the futures on indexes are now trading the June contract. Everyone has rolled over. This can lead to a lot of over analysis, but one thing it means is the roll over trade and hedging associated with that are done for a while.

Yesterday's volume was light, but that can be expected the Monday before a Federal Reserve announcement on interest rates. Today before the market opens we will have some economic reports from the housing sector. Combine these two events, and the light volume on Monday, and the 115point up day in to Dow Jones isn't something to hang your hat on. With the down moves we have had in the past two weeks, the focus on risk is something that more and more traders/managers are thinking about. Over the past couple decades the market usually has a 10% correction about once ever 18months on average. It has been too long since we have had one, we are due. Having a correction does not mean the end of the world. It can be painful if you ignore the signs and pretend that everything always goes up and there isn't anything to fear. One thing to watch for is the volume on up days versus down days. If we have down days that are on heavy volume and the rally days are on light volume, don't get carried away trying to be bullish. It is best to wait for some really heavy volume on an up day of close to 2%. The with some follow through after that day, you can have something to buy positions off of and use as a stop or support area. Right now the risk reward is not in favor of being bullish. You do not have to be the first mouse to buy!! Don't pick bottoms, didn't your mom tell you that?



With all of the foreign investment in the United States, and the fact that many commodities trade in US Dollars, it is helpful from time to time to look at what the dollar is doing against other currencies. Below is a chart of the US Dollar Index. It compares the Dollar against a basket of foreign currencies. If you are a foreign holder of our debt(bonds) or stocks, you probably watch this data more so than someone in the states. It is something we should all watch. If stocks are not performing well and the dollar is going down, well foreign investors are then losing on two trades; the stocks they own and the dollars they own it with. As an example let us say XYZ is $100, and the stock market goes down 5% and the currency goes down 5%. It is a double loss, and is felt more by foreign holders of our stocks than by domestic investors. One other thing to watch is as the dollar goes down in value, it should cause all those commodities, oil especially, to go up in value. This is just based on the currency fluctuation, regardless of supply and demand. All these little things can add up. The day when China's stock market was down 9%, our market followed and was down. Our bond market however, which China is a major holders of our bonds, rallied as there was a flight to safety. So everyone is looking at the China market being down so much, but China's holdings in our bonds had a great day. I look to seeing this situation happen a few more times. It hurts our stocks some, but bonds going up keeps our interest rates down. With our rates down, the world hopes we will consume and consume, and they can sell us all the boat loads of rubber dog poo and other happy meal toys they produce.



With uncertainty in the market, it seems to make sense to focus on commodity based stocks. This is a large group, and the next few posts will deal with Oil and Metals.

Finding Winners On A Down Day

This is a chart of the S&P500 ending last Friday. The daily pivot number for today is 1389.36, and the three day pivot is 1382.81. Currently the futures are up 6.8 overnight, but it is still early. With the weakness and the concern in the housing market, any data that comes out to show things there are worse than expected, might give cause for more concern. Tuesday is a big day for some housing economic numbers, here is a link to the economic calendar found on Yahoo, http://biz.yahoo.com/c/ec/200712.html

Last Friday was option expiration, so there could be some relief to the upside for the short term, but those couple big down days we have had recently, should not be forgotten.

Using a computer to scan market data is becoming easier and easier. Even people without programming expertise can write some simple scans to filter out some interesting stocks and chart patterns. These scans can be made simple or complex. In the examples here, the results are from a scan used to look for stocks that are positive for the day on increasing volume. This scan does not take into account fundamental data, just the price action and volume for the day compared to its past performance.

C > C1 AND V > V1 AND C > 5 AND V > 1000 AND V > XAVGV8 * 1.25

1. C>C1=close today has to be greater than the close yesterday.
2. V>V1=volume today has to be greater than the volume yesterday.
3. C>5=limits are universe to stocks greater than $5.
4. V>1000=volume has to be greater than 100k shares.
5. V>XAVGV8*1.25=volume has to be greater than the average volume by 25%.

Two stocks that showed up are related by the fact that they deal with the manufacture of carbon fiber. This is a sector that is growing because of the demands for greater fuel efficiency in transportation(Boeing), and in the demand for more high performance materials in the defense sector. Carbon fiber is an area that should be looked at as a sector that is ripe for growth and consolidation. Greater days ahead as demand increases.



Zoltek Companies, Inc., through its wholly owned subsidiaries, engages in the development, manufacture, and marketing of carbon fibers for various applications. Its carbon fibers are used as the primary building material in commercial products. The company also manufactures and sells filament winding and pultrusion equipment used in the production of composite parts. In addition, the company produces oxidized acrylic fiber for flame and heat resistant applications; and technical fibers, which are used to manufacture aircraft brake pads and other friction applications. It has operations primarily in the United States and Europe and sells its carbon fibers worldwide.



Hexcel Corporation, together with its subsidiaries, engages in the development, manufacture, and marketing of advanced structural materials in the United States, Europe, and internationally. It operates in three segments: Composites, Reinforcements, and Structures. The Composites segment offers carbon fibers; prepregs; structural adhesives; honeycomb, parts, and composite panels; fiber reinforced thermoplastics; molding compounds; and polyurethane systems, gel coats, and laminates. The Reinforcements segment manufactures and markets industrial fabrics and other specialty reinforcement products. The Structures segment produces composite structures, such as aerodynamic fairings, wing panels, and other aircraft components. Its products are applied in commercial and military aircraft, space launch vehicles and satellites, body armor, wind turbine blades, printed wiring boards, high-speed trains and ferries, cars and trucks, window blinds, bikes, skis, and various other recreational equipments. Hexcel Corporation serves commercial aerospace, industrial, space and defense, and electronics industries.

These are just a couple carbon fiber stocks, CYT, GTI and, SGG are others to look at, if interested. Writing simple programs to scan market data for certain criteria can be as simple or as difficult as you make it. If you are an investor who just likes to follow your holdings and occasionally look for new ideas, you can have the computer do a lot of the work for you. If you are trader that is looking for ideas every day or even multiple times a day, have a computer scanning the market is like having your own assistant. One simple service available is Telechart, http://www.worden.com/. They offer an 30day free trial. You have to write your own filters and scans, but it is well worth learning, and there are many resources on the web to help. Telechart is not the only one out there, but its a great place to start.