Traders' Library

September 30, Market Analysis and Trading Plan.

By Steve Palmquist, excerpt from the Timely Trades Letter.

Timely Trades Letter™:

September 30, 2009:

NASDAQ Outlook & Key Trading Levels

The market bounced during Monday's session on very light volume. Tuesday's session saw the market trading in a narrow range and closing down a few points, again on light volume. On Wednesday the market traded in a wide range and then closed down about two points on well above average volume. The volume pattern has changed recently, with three of the last six days being down on well above average volume. Prior to the last six days the volume pattern was mostly positive. The change in volume pattern implies caution until the market breaks above the 2160 resistance area.

Monday's bounce formed a nice Morning Star pattern. These patterns often mark the end of a pullback, but in this case the the volume pattern, and the formation of the morning star just under a key resistance area, has me continuing to watch for a break above resistance rather than act on the morning star. If this pattern had formed well below resistance, I would have taken it as a signal to resume picking up longs. You can find more information on how to use Morning Star patterns and their test results in chapter six of Money Making Candlestick Patterns. 

The market continues to base just under the 2160 horizontal resistance area. As noted in previous Letters this is normal behavior for the market as it approaches a key resistance area. The way to play this typical pattern is to take profits on longs as the market approaches resistance, and then let the market break out of the trading range before doing significant trading. Tight ranges like the current environment typically do not see many setups triggering, and the ones that do usually do not run far. Rather than risk getting shaken out in a series of 'pop and drops' it is best to let the market rest and then go with it when it resumes its journey.

Michael Jardine's Monitoring the Wave Count (from New Frontiers in Fibonacci Trading)

Good day everyone! Today's selection comes from Michael Jardine's best-selling book, New Frontiers in Fibonacci Trading: Charting Techniques, Strategies, and Simple Applications. There has been renewed interest in this book, and Michael is currently working on a follow-up book due out in first quarter 2010. Enjoy and please feel free to post comments.

Reprinted from Chapter 5: 9/11: Monitoring the Wave Count

The market is dynamic. If we liken it to a pond, the major events of each day are made up of several large stones thrown into that pond. They will send out waves, and some will create a large wake. The most significant points are found where those waves and wakes cross.

Review of Jeff Greenblatt's Breakthrough Strategies for Predicting Any Market

Enjoy reading this review from Seeking Alpha contributor Radu Haraga about our author Jeff Greenblatt's book, Breakthrough Strategies for Predicting Any Market: Charting Elliott Wave, Lucas, Fibonacci, and Time for Profit. This was one of my first editorial projects here at Marketplace Books and one of my proudest accomplishments. I hope you pick up a copy and check it out yourself.

http://seekingalpha.com/instablog/375714-radu-haraga/26456-a-book-review-jeff-greenblatt-s-breakthrough-strategies-to-predicting-any-market

*Keep in mind that we do not solicit reviews from Seeking Alpha. Their contributors ask us for review copies and we send them out. What they write after that is completely up to them.... Thanks!!

Short Trades Reduce Risk and Increase Profit Opportunities

by Chuck Hughes

We don’t often think of short trades as a way of reducing portfolio risk. Normally short trades are considered high risk but in this video we are going to demonstrate that short trades not only reduce portfolio risk but can also dramatically increase the profit potential of your trading portfolio.

What the Future Holds for Natural Gas

By Kevin Grewal, Editorial Director at www.SmartStops.net
 
With the recent attractiveness of commodities, in particularly natural gas, the energy source has become a hot topic amongst investors and has therefore, witnessed a recent uptrend. As for the future of the odorless gas, there are various signs that indicate it may be bleak.
 
First of all, the flock towards natural gas has forced the CFTC to talk about imposing position limits on the equities that track the commodity.  Although these limits have not been enforced, the talks alone have been harmful.  Secondly, it seems like the depleted oil fields and aquifers which are used to store natural gas in the U.S. have reached capacity.  In fact the Energy Department said that stockpiles may surpass the record of 3.545 trillion cubic feet by as much as 350 billion cubic feet this fall, which means that customers will have to pay a penalty for exceeding their limits. This could further force producers to dump excess fuel on the market.

Mark Larson on Market Wizards

"As a trader since 1998 and an author of four trading books,, hands down Market Wizards is a must read. I’ve taught thousands of people how to successfully use options and technical indicators to trade both bullish and bearish markets but in order to be successful you must have the discipline that Jack has spoke about for over twenty years. Market Wizards is the first book I encourage any trader to read even before reading mine. The real key to success is understanding risk versus reward and patience."

 

-- by Mark Larson

Author of Big Money, Less Risk: Trade Options and The Complete Guide to Technical Indicators.

 

***Don't forget to weigh in with your own thoughts and reflections on Jack Schwager's Market Wizards for its 20th anniversary year! Read the post here!

Hashbrown Casserole

This is one tasty little casserole (as featured at one of our office potlucks- thank you Becky). I think it would be perfect for a pre-football party! Go Ravens! enjoy---

 

1 bag of hash brown’s any brand 1 can of cream of mushroom soup 1 can of cream of chicken soup 1 stick of butter 1 cup of shredded cheese 1 cup of onions 1/2 pound bacon 1 container of sour cream   Cook the bacon, cut up in small pieces then mix everything together in a baking dish and bake for 1 hour at 350

Learning Video Heikin Ashi candles

In my technical analysis part 12, we will have a look at the heikin ashi candle chart and the use of this technique to smooth price data together with the zero-lagging technique I presented earlier in the video about moving averages.

Sylvain vervoort
http://stocata.org/

S&P500 Technical Analysis update sept. 26, 2009

The index did not break the proposed support level of 1039 last week. So, we are still in the trade because also the SATS2 expert is still green. Volume was not high in the reaction up to now since the bearish engulfing candle pattern at the top. There are no divergences in the daily chart, except the fast BB%b, so I do not expect a bigger reaction for the moment. In the hourly chart we may have completed a reaction wave 4, ready to start the up move for wave 5. Nevertheless trying to hold on to as much profit as possible, I will keep a stop at around 1035. Looking at the state of the charts now, we will need to have a look at the charts that moment in time before really closing the trade. For now there remain two counts possible for the Elliott wave count. Personally I am in favor of the correction wave solution. This means that after the top of this wave {C} and, as a consequence also the end of correction wave [B], there will be a wave [C] down to a level of 650. No panic yet, for now price is still up. The SATS expert continues with a green color. We stay within the smaller pitchfork within the larger one. There is a good chance that we will now continue the move to the 1120 target within the boundaries of this pitchfork.

Simultaneously Profiting from Stock Movement and Volatility Decay

Good Friday morning!! This excerpt is taken from Trading Options at Expiration by Jeff Augen (thank you to our friends at FT Press). A look at a portion of Chapter 3: Day Trading Strategies.

Accelerating option price decay combined with favorable underlying stock movements often generates very large returns for well-structured positions. As we have seen, call ratios are excellent examples because they are composed of a long side that can benefit from upward price movement of the stock and a short side that provides a hedge against an underlying price decline. If the stock rises, the long side gains faster than the short side, which is further out-of-the-money and suffers disproportionate value decay when implied volatility shrinks. These dynamics allow an investor to capture most, if not all, of the impending overnight time decay without the risk of an overnight position.

One of the best trade structures involves long and short options that are both out-of-the-money with the long strike just above the stock price. Figure 3.6 depicts a trade that was constructed along these guidelines using Google call options on expiration Thursday 2008/08/14. With the stock trading at $497.70 the initial position was long $500 calls and short three times as many $510 calls. As the stock price climbed, implied volatility collapse disproportionately impacted the value of the short $510 calls. At the closing bell, with the stock at $505.17, the long $500 calls traded for nearly twice their opening price, whereas the short side gained just 14%. These changes yielded a profit of 226% as the trade value climbed from $1.20 to $3.91.

4 Reasons Gold Will Remain Shiny

By Kevin Grewal, Editorial Director at www.SmartStops.net
 
Gold fell to a two week low after an unexpected dip in existing home sales put a damper on economic recovery and put inflation expectations into questions, but there are plenty of indicators suggesting that the precious metal is far from being overbought.
 
The temporary rise in the U.S. Dollar which scuffed gold's protective appeal against inflation, the decrease in demand for the metal in jewelery and higher scrap sales still hasn't put much of a damper on investment demand.  Many believe this is temporary because the fundamentals of the dollar remain weak.  Additionally, many investors are still piling into gold in fears that when the velocity of money picks, a spike in inflation will follow.
 
A third indicator that the shiny metal is still high in demand is that retail investors aren't the only ones hoarding gold.  In the second quarter of the year, China bought nearly 600 tons of gold and Russia owned nearly 100 tons.  Experts believe that these two nations are buying gold in fears of their exposure to the U.S. dollar and a method to add diversification. 

The Dollar, Natenberg, Robertson, and the Psychedelic Furs...

Happy Friday everyone!!

Morning briefing for Sept. 25 (Dr. Brett Steenbarger)

5 Reasons the Market will Moderate (WSJ, MarketBeat)

Trader Spotlight: FuturesTrader71 Trading the Fed (stocktwits)

The Dollar May Not Be Doomed (seeking alpha)

Friday Outlook- Another Strong Volume Sell-off (seeking alpha, David Fry)

Natenberg, Basic Option Volatility Strategies (reading the markets)

Are flash orders really so bad? (quantitative trading)

Julian Robertson: "We're in for some real rough sledding" (credit writedowns)

Reacting to News: The RIMM Lesson (a dash of insight)

Psychedelic Furs: The Ghost In You (trader rock)

Driving West in 1970 by Robert Bly (poetry foundation)

Traveling across the USA with Pearl Jam (Spin)

It's hard being a Cowboys cheerleader (Rick Reilly, espn)

Sylvain Vervoort's NEW BOOK: Capturing Profit with Technical Analysis

YAY!!!!

Sylvain Vervoort's long awaited book, Capturing Profit with Technical Analysis: Hands-on Rules for Exploiting Candlestick, Indicator, and Money Management Techniques is finally out and on sale right now!

[BTW, for us editors and authors, a new book is like a baby being born. I'm one proud parent! Feel free to send congratulatory chocolates to me and Sylvain!!]

PSST, AN UPDATE: email me for a free preview chapter.

Ten Rules for Successfully Trading the Head and Shoulders

This excerpt is taken from The New Commodity Trading Guide by George Kleinman. (FT Press) Let's take a look at a section of Chapter 3: Two Chart Patterns that Work.

Ten Rules for Successfully Trading the Head and Shoulders

1. Never anticipate. When I first discovered H&S patterns, I had an excellent trade and then it seemed I started finding them everywhere. I would start to sell after a right shoulder and a head developed, only to lose money. I would see complete H&S patterns develop and take action before penetration of the neckline, only to have my head handed to me. As Yogi Berra said, "It ain't over till it's over." Wait until the pattern is completed before you trade it.

2. The bigger the H&S pattern and the longer it takes to develop, the bigger the subsequent resulting move.

September 23 Market Analysis & Trading Plan

Timely Trades Letter™:

September 23, 2009:

NASDAQ Outlook & Key Trading Levels:

The market continued moving sideways just under horizontal resistance during Monday's session, on about average volume. On Tuesday the market moved up to the 2160 horizontal resistance area on increasing volume. During Wednesday's session the market tested the 2160 horizontal resistance area, and then pulled back to close down about fifteen points on increasing volume. THe market has not yet picked the direction of its next move. Until it does I want to exercise caution.

The Fed was meeting this week, with the announcement at 11:15 pacific time on Wednesday. As noted in previous Letters I enter all the Fed meeting dates in my calendar and generally trade lightly if at all during the day prior to the announcement. The normal action of the market is to be quiet on the announcement day and then move sharply just after the announcement. The initial movement just after the announcement is often reversed within an hour, so I generally trade later in the day on Fed announcement days or wait until the following day. The action today was normal, the market initially moved up just after the announcement; and then reversed to close down fifteen points on the day. Understanding how this usually works, and waiting until after the announcement to trade, has been a good strategy over the years. I want to adjust my trading style based on how the market usually behaves in a given situation, rather than just using the same style all the time. Adjusting to Fed announcement days is another example of that.

The market is just under the 2160 horizontal resistance area, and I do not want to be loading up on longs when the market is stalled just under resistance. The reason for this is that stocks tend to 'pop and drop' when the market is near resistance, and they run much farther when the market is trending above resistance. Rather than guess which way the market is going to go next, it is better to hold off on most longs until the market moves above Wednesday's high with good volume. If the market continues up, passing Wednesday's high on good volume, I will return to adding long triggers to my trading positions. The market has a lot of room to run to the next resistance area, so if it decides to continue up there should be plenty of good trading ahead. However as a market adaptive trader, I want to let the market prove itself before putting my money on the table.

Investing in Energy ETFs

By Kevin Grewal, Editorial Director at www.SmartStops.net

Lately, the producer price index, known as PPI, has shown exhuberance, indicating that economies are starting to bounce back, the demand for products is improving and inflation should not be much of a worry.
 
In August, the PPI, which measures the average change in sales prices, rose 1.7%, after witnessing declines of 0.9% in July and 1.8% in June.  When looking at PPI's sister, the Consumer Price Index, better known as the CPI, it is up 0.4% over the same month.  What this means is that companies were able to get a profit by selling goods to consumers at a slightly higher price than it cost to make them, further enhancing the equity markets.  
 
One issue that some have had with this recent rise in PPI is its heavy dependence on energy.  In fact, when one eliminates food and energy from the reading, the PPI rose by only 0.2% in August.  This further supports the importance of energy on the overall health of the economy.

Jay Kaeppel on Market Wizards

Market Wizards is hands down the best trading book of all-time.  I reread it from time to time because it helps me refocus.  The main thing to note in my mind is just how many times these top traders talk about cutting losses and risk control.  They each beat this topic like a drum.  Interestingly the interviewees never reveal specific trading methods.  So the primary lesson is not that there is some “best” trading method but rather that risk control is the name of the game.

 

--Jay Kaeppel

Author, Seasonal Stock Market Trends: The Definitive Guide to Calendar-Based Stock Market Trading; The Four Biggest Mistakes in Options Trading, 2nd ed.

20 Years of Market Wizards by Jack Schwager

Over 20 years ago, Jack Schwager began the research for one of the greatest trading books of all time, Market Wizards. Since its release, it has helped hundreds of thousands of traders understand what it takes to succeed in the markets and reassured them that no matter what anyone says, all traders face their demons.

In honor of this anniversary, we are encouraging readers to post their comments on how this book has impacted their trading and their lives. So take just a few seconds and let us know who recommended the book to you, where you were when you read it, the most important lesson you learned from it... or just to say congratulations to Jack. Be sure to stop back and see what others (including some well known traders) have to say about this classic. You will be able to use the "Market Wizards" category to get a full listing of new posts on this topic! Thanks and congratulations Jack!

----John Boyer, VP of TradersLibrary.com

Pros and Cons of LEAPS

Good to be back in town after cheering my heart out (and my voice out) in San Diego for the Ravens! (woo!) Today, I am featuring an excerpt from Marty Kearney's course book/DVD package called LEAPS Trading Strategies: Powerful Techniques for Options Trading Success. Marty is a popular senior instructor at the Options Institute of the CBOE. If you didn't get the chance to meet him at our Forum this year, please look into it! He's great! If you like what you read, make sure you check out this book. It comes with free online access to the video seminar, to online charts, an interactive self-test, and more.

From Chapter 2: Why Bother With LEAPS?

PROS AND CONS

It is worthwhile to compare the pros and cons of LEAPS over short-term options as a way to determine whether they are actually a sensible alternative. (See Table 2.2)

Go Ravens!

Jody's on her way back from a trip to San Diego today, where she went to cheer on the Ravens as they battled the Chargers yesterday.

Check out Ray Lewis' game-ending hit that sealed the Ravens win!

-- associate editor Courtney