Back on the 27th August we took a look at MEO flagging its wedge formation. Trading the wedge formation can be profitable in a short space of time if volume supports the move as was the case in MEO. The stock is currently trading at 72c
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Update – MEO
Monday, September 21st, 2009Update – JML
Monday, September 21st, 2009A quick update on a couple of stocks we have spoken about in the CFD posts;
Jabiru Metals – we used as an example of a breakout strategy back on the 26th August. The stock was trading in a range between 30c and 36c. It broke from that range implying a target price of 42c. Its now exceeded this and continues to look strong.
Read the tape – it can tell an interesting story.
Monday, September 21st, 2009One of the most famous stock market books ever written, the Reminiscence of a Stock Operator, presents some key principals that are as relevant today as they were back in 1923 when the book was written. Edwin Lefevre describes the exploits of Larry Livingston, a career trader who cuts his teeth in the bucket shops of the late 1800’s. An uncanny ability to ‘read to tape’ and pick the prevailing trends in the market was learnt as a quotation board boy in a stock-brokerage office. It tracks the wins and the losses, the wealth and the hardship in the life of a trader. One common theme throughout the book is the tape – which tracks the buyers and sellers in the market and the prices they are willing to deal. The tape tells a story about a stock more important and influential that anything the media could construct. In today’s world of sophisticated trading platforms, the tape takes on a slightly different form and is referred to as the market depth. The open interest of buyers and sellers, and the volume of shares changing hands can offer a key insight into what’s really happening in a stock.
You need not look further than Telstra and its recent price action. On the 21/8/09 the Futures Fund sold more than 600 million shares in the Telco in an off market trade with institutions at $3.47. The trade showed up in market volume the following day and stuck out like Alf Stewart on a Mardi Gras float. A big red bar on anyone’s chart should ring some alarm bells. It was not until yesterday when reports surfaced that the Government had made Telstra an offer it just can’t refuse. The offer will see Telstra either voluntarily separate its retail and wholesale arms, or face government intervention in the form of forced functional separation and a ban from acquiring additional wireless spectrum necessary to evolve its NextG mobile network. ‘Google’ Telstra news and you’ll get the full story however ‘the tape’ gave an insight into the issues at the telco before any news had leaked (at least not the public).
An argument could be made that the market is at the start of a new major bull run. I don’t know one way or the other, but we are seeing a greater number of stocks breaking to new highs. On a scan yesterday afternoon, 70 stocks came up as closing to new 100 day highs. This number will grow as the market continues to strengthen. Trading ‘breakouts’ or stocks making new highs over a certain number of days is a valid strategy and one that was made famous by the “Turtle Traders”. Volume is an important characteristic when looking at stocks that are breaking out to new highs. Before entering on a breakout, ask your self – is there significantly high volume pushing the stock to new highs. I like to see twice the daily average volume over the past 15 trading day. I also like to see that buyers are in control of the stock into the close. This means that the close minus the open is greater than the high minus the close. Plus, the trend must be in the direction of the breakout.
Soldiering on with the assumption that we’re at the start of a major bull run, and understanding that their will be bumps in the road along the way, we need to understand when selling pressure is bearish or bullish. If a stock pulls back, we look for the pull back to occur on declining volume to be comfortable the stock is trading inline with the general flow of the market. If the volume intensifies, look more closely at the second day of declines. In a lot of instances, stocks that have been trading in an uptrend for quite some time, can have a ‘blow off’ day where traders will panic to lock in profits. Although its very hard to do, it can be beneficial to wait for a second day before making a definitive decision on the best way forward. This can be seen in Extract Resources (EXT) during its recent run higher. It has paid to take a step back and monitor the volume on any pullback that has occurred.
Although volume is only one part of the puzzle when it comes to analyzing stocks, it’s often an under utilized indicator that can give real insight into the flow of smart money.
Key Principals;
1. Volume should increase as a stock makes new highs. I like to see 2 times the average volume over 15 trading days
2. A pullback on light volume can often be bullish
3. A pullback on high volume is bearish however it’s often beneficial to see how the stock settles on day two of the pull back. – note this does increase the risk
4. Volume spikes (days of super high volume) are worth scanning the market for. 10 times average volume should suffice.
5. Steady volume when a stock is trading in a channel equates to accumulation. A break to the upside is likely.
Longer term look at the Dow
Tuesday, September 15th, 2009Some months ago we plotted a number of longer term patterns in the US market. Looking at the Dow Jones Industrial Average below, we noted an inverse head and shoulders pattern with the neckline around 9120. This pattern suggested a break of the neckline would be bullish in the medium to longer term. This has occurred and the pattern is now firmly in play. We also noted the existence of an Ascending Triangle which is quite common as part of a broader head and shoulders pattern. Essentially both chart patterns are traded using the same set up. Buying a break of resistance and setting a target equal to the depth of the pattern. In this case, the depth equals 2600 implying a pattern target of 11700.
This is certainly a longer term target however we’ll look for a number of factors to monitor progress. The higher low structure is our primary concern. Each dip in the market should remain higher than the last. If this occur as it has been, the trend remains strong. The biggest immediate test of this occurs around 9700 which is historical resistance. The next key level becomes 10,000, a psychologically important number the market will focus on. We’ll revisit this longer term pattern regularly to update you on the broader market structure.
BOW – Pattern Target
Monday, September 7th, 2009When you look to trade an ascending triangle, one of the key benefits to this pattern is its defined price target on the upside. The target is taken from the depth of the pattern and added to the breakout – from our example last week in Bow Energy (BOW), the break out level was $1.35 with the depth of the pattern of 20c implying a price taregt of $1.55. BOW is trading around this level today.
Ascending Triangle – Bow Energy
Friday, August 28th, 2009Looking at Bow Energy Intra Day today I noticed a clear break of a short term ascending triangle – the breakout level was $1.35 for intra-day trading. Also below – find an article on the chart pattern I wrote some time ago.
Written 29/6/09
The psychology of markets can be identified by looking at specific patterns in price. The theme is not new and technical analyst’s have been trading the markets successfully for decades picking reoccurring patterns that identify what the crowd is doing. Early examples include the ballroom dancer Nicholas Darvas who was made famous for his development of the Darvas Box used to trade stocks breaking from a consolidation zone, and Ralph Elliot who is renowned for developing Elliot Wave Theory that aims to identify the stages of market cycles. These are true market theorists who developed ground breaking principles that we all now have the benefit of applying.
Over the coming weeks, we’ll discuss price patterns, technical indicators and the predictive advantages they can have. We’ll kick off this week with a look at Ascending Triangles which aim to pick stocks in an uptrend that have taken a breather or paused for some reflection. It’s important that we understand the psychology behind a pattern to get in tune with the markets. An Ascending triangle is quite simple to understand but first let’s look at an example; Extract Resources (EXT).
From December 2008 we saw a significant run up in EXT from below $1 to a peak of $5.40. A couple of points on the rally. Volume was building throughout the run with a significant spike towards the end of the rally. Had you held a position in this stock, watching the fall in volume over the last three days of the move would have given you a clear indication that the rally was about to falter.
As the rally faltered, we saw a volume spike on a large down day as traders scrambled to get out at any price after seeing their open profit erode. One analogy that is often used in the markets is penguins following each other off the ice shelf. In this example however the volume and aggressive nature of the sell off didn’t last long as new buyers (who may have missed the rally entirely or could of possibly sold out earlier predicting a pull back) found value in EXT at $3.50 (just after hitting $5.40), this supported prices pushing it back up to the high around $5.40.
Those trader’s who failed to get out last time, took this opportunity to get out second time around. This occurred twice before a break occurred on the third time. A break occurs when there are more buyers in the market than sellers, with the buyers prepared to pay more for the stock. There was a couple of days of indecision before momentum really kicked in and volume intensified. Note; Its important to look towards volume to underpin the move higher. Like other patterns in the market, we’re not looking for perfection, but rather a pattern that has the likely hood of occurring time and time again.
See below some additional examples of the ascending triangle in action.
Stock; Karoon Gas (KAR)
Buy; Triggered on a break of $8.00
Stop; Two or three day low – below the breakout level. Alternatove stop could be 2 X ATR
Target; determined by the depth of the pattern. In this case, $2.50. Implied target of $10.50
Stock breaking from a wedge
Thursday, August 27th, 2009I’ve noticed quite a lot of volume going through MEO Australia this morning as it broke from a wedge formation – often a precursor for a quick move in the direction of the break – traditionally a day trading stock.
Breakout trading
Wednesday, August 26th, 2009Stocks breaking from consolidation – what can it mean?
Consolidation refers to a state of relative equilibrium between buyers and sellers where the area know as “support” is viewed as a “cheap” entry point while the upside is limited to the point known as “resistance” we’re traders view the security as over valued. When this key level of support or resistance gives way on a change in perception by market participants, this can create profitable trading opportunities. The upside target is often calculated by the depth of the channel the stock has broken from. It is also important to see that the underlying volume in the stock has increased significantly. A high level of volume can indicate the start of a strong move. One example on the market today could be; Jabiru Metals (JML).
What is a CFD?
Tuesday, August 25th, 2009What is a CFD?
A CFD (Contract for Difference) is an agreement to exchange the difference between the entry price and exit price of an underlying share. For example if you buy a CFD at $10 and sell at $12 then you will receive the $2 difference. If you buy a CFD at $10 and sell at $8 then they pay the $2 difference.
When you enter a CFD contract this does not involve buying the underlying instrument, even though the movement of the CFD is directly linked to the share price. Because you do not own the share you are only required to provide a deposit which could be as low as 5% for Australian shares. This means you can trade up to 20 times your initial capital.
Why Trade CFDs
Leverage: CFDs enable you to obtain full exposure to a share for a fraction of the price of buying the underlying instrument. CFDs require only a small initial margin as a trading deposit.
The ability to go ‘short’: CFDs allow you to sell shares you don’t own. This enables you to benefit from falling share prices.
Simplicity: CFDs mirror the price and liquidity of the underlying market
Hedging: CFDs allow you to employ more advanced strategies such as hedging your existing share portfolio.
Dividends and Corporate actions: CFDs allow you to benefit from dividends or bonus issues which may occur in the underlying instrument on which the CFD is based.
Cost: Trader Dealer provides the most competitive brokerage structure on the Australian market. Trade $100,000 of stock for just $66. But that’s not all, trade unlimited times in the one stock on the one and well book it as one trade at the end of the day.
Gold – two scenarios for bullion
Tuesday, August 25th, 2009
Gold has been quite subdued since June with some conflicting economic pressures containing it to a relatively tight range. The main aspect impacting the price of Gold undoubtedly is the US dollar. Gold and the US dollar have had an inverse relationship for the past six months or so with weakness in the greenback pushing bullion higher and vice versa. Looking at the US dollar Index, which measures the value of the US dollar against a basket of six other major currencies, we see that it’s trading at critical levels. Two broader patters are obvious in the chart below.
Now looking at the gold chart independently of the Dollar index, we see a wedge formation with a series of higher lows and lower highs constricting the relative price movement in Gold. Although the marginal bias in a pattern like this is to break in the direction of the prevailing trend it’s by no means a forgone conclusion. The only real conclusion that can be made is that Gold is likely to break one way or the other with quite a degree of velocity.
Two trains of thought are evident at this juncture;
- The rise in equity markets have come too far too soon with underlying earnings unable to support the inflated share prices that we’re currently seeing. Equity markets roll over and the US dollar benefits from a flight to safety. This is a bearish scenario for gold which is likely to break below key support of $930 an ounce with a move to $880 likely.
- Equity markets continue to be bullish with the signs of economic recovery filtering through to company earnings supporting higher equity prices. At this stage, traders look towards the fundamentals of the US dollar and view the large quantitative easing strategy (printing money to buy debt) as a negative for the greenback. The US dollar breaks support increasing the appeal of gold as a store of value. Gold is then likely to trade above $1000 an ounce before year end.
Option one is supported by the majority of market commentators – Option two would therefore be going against the crowd – sometimes its better the tread your own path!
