A ‘trend’ is a series or progression of higher highs and higher lows with even or ‘comfortable’ swings between them (vice versa for a down-trend).  There are few erratic moves and the price action is typically contained by a key moving average, especially the 20 period exponential.

The trend structure allows for clean and elegant entries, stop-loss placements, and profit target placement.  These are the ideal environments for traders, but they set-up less frequently than traders like.

Might FOREX offer a greater degree of stable trendiness intraday?

First, let’s look at the Euro/Japanese Yen 5-minute chart on May 9th (you’ll need to click on these images so you can view the larger size)

Notice the price rolling over early in the morning (1:00am) and then the trend developing at 3:30am which progressed with a stable series of lower lows and lower highs, with each lower high terminating at the falling 20 period moving average (thus setting up a trade).

All trades profited and none were even threatened with the stop (traditionally above the 50 period average) being threatened.

Next, let’s view today’s action in the Euro/Japanese Yen cross (as of 11:00am CST):

We see the same pattern of a breakout and then when the moving averages cross (6:30 am) a large trend move (momentum move) is underway, with the 20 period moving average setting up good trade ideas.  Price never breached this level and set up three quick and easy trades (without complicated mathematical indicators).

Finally, let’s step back a day to May 12th and view the Euro/US Dollar pair:

Again, we have a breakout and uptrend (as defined by the moving average orientation) and then price pulls back near the 20 period average and sets up trade ideas.  The strength of the trend was so powerful that price couldn’t complete a full retracement to the key average.

I’m encouraged by what I’m practicing in the FOREX markets, and see potential here.  Don’t be surprised to see me post more charts with clean entries/exits and targets in the near future!

The stock is forming a broad H&S pattern, and the Right Shoulder actually developed a mini-H&S pattern within it - it’s one of the strangest patterns I’ve seen.

I annotated this chart for visual clarity.  The black lines represent the larger structure and the red arcs represent the smaller, mini-pattern.

Price is now forcefully breaking the neckline of both the smaller and the larger patterns, and price could be headed much lower if the measuring implication holds.

Typically, we measure the distance from the Head (highest price) down to the Neckline (horizontal support line - not drawn) and then project that distance downward from the ‘break of the neck.’

In this case, the larger structure provides a distance of approximately $10 ($50 down to $40) and then if we subtract that from the neckline (around $40) then that projects price down to $30.  These are rough estimates.

The smaller structure is on its way to achieving its target:  $46 minus $40 equals $6, which is then subtracted from $40 to give us a mini-target of $34.

Let’s take the annotations off the chart and view the price structure itself:

You can also point out a double top formation at the $51 level.

A sort of broadening formation formed from February until April (which also is a type of reversal pattern).

There are a variety of other patterns you could have identified in this chart, many of which were ominous patterns indeed.

It’s always good to find ideal patterns and then annotate them and store the files for future reference, with the goal being superior pattern recognition in real time as patterns unfold.

Let’s see what’s up:

The stock broke a rectangle consolidation period from $34 to $39 per share, giving us a $5 range. If we add the $5 to the break-out zone of $39, then this gives us a classic price projection of $44, which would challenge all-time high prices.

The stock has been doing well throughout May, and volume is surging to the upside, further confirming the rectangle break. Notice how volume trailed off as the triangle consolidation pattern formed - this is in line with the classic texts of technical analysis.

Let’s pull it back to the monthly chart for a clearer perspective:

First, notice the recent volume surge in the stock (black arc).

Next, notice that the $40 per share zone has been significant resistance for quite some time. In mid-2007, price surged above this level but quickly fell the same month, which actually registered a negative month close (akin to a failed breakout which led to a price reversal).

Now, price is eeking above the $40 per share resistance zone and will mark the first monthly close above this zone if the stock can hold onto its gains for the next two or so weeks.

Also, notice price forming a clean ascending triangle - the break of which (to the upside) would potentially project prices to $60 or beyond (long-term, of course).

This stock is certainly one to keep your eye on to see if price can continue its momentum and inch its way to new highs over the next few weeks or months. Of course, it’s good for the Dow to see such a stock having excellent relative strength.

In the DIA 5-minute chart, we see the day start with an opening gap that was filled and then the market trended in the direction of the original gap.  Remember that gaps initially are momentum impulses, and we expect momentum to lead price action.  It’s an excellent strategy to buy pullbacks in momentum moves.

Price then rose steadily and crested into a steady pullback to the rising 50 period moving average, setting up a better buy signal which rewarded the patient with higher prices.

I also pointed out this morning the “U-Turn Buy” that was developing on the indexes and I hope you profited from its development and resolution.  Such ’steady’ moves can produce easy profits because the price action itself is so clean.

Let’s look at the 15-min SPY chart to get a better view of this pattern:

The red arrow represents the lengthy momentum divergence which preceded the U-Turn (or Saucer) set-up.

The signal to enter would have been (aggressively) when price breached the falling 20 period moving average and (conservatively) when it breached the 50 period (first purple arrow).

The confirmation zone, or strong trade idea, came as price pulled back cleanly to the rising 20 period moving average following a new momentum high.  The target would have been at least the 200 period moving average if not greater due to the structure of price.

Notice how - if you look at the daily chart - the $138.50 price area represented the daily 20 period moving average.  The balance gently shifted from sellers to buyers - such moments are amazing to watch unfold in the marketplace.

You can almost ‘feel’ the balance shifting through simple visual inspection of the price action alone to see that the strength of the selling weakened as the pace of the buying first met selling and then exceeded it.

The “U-Turn” or shift in price was complete (or confirmed) with a positive momentum divergence.

Also, on the daily chart, price sat at support where the even shift began, which further added confirmation to the potential for (short-term) higher prices.

Let’s talk about the gap-fade trade that worked out marvelously this morning:

Quickly, the ideal gap-fade technique is the following:

1.  Fade the gap down to yesterday’s close

2.  Exit the ‘fade’ at the close and then reverse your position to trade in the direction of the impulse

3.  Exit at the intraday high (or sell half the position there and perhaps play for a larger target with what’s left… if you’re aggressive).

These three parameters hit perfectly today, though it’s not always the case that they work out as ideal as today’s action has.  I always recommend printing out and annotating any ‘near perfect’ patterns or trades that develop.

Let’s keep an eye on price for the day.  Be sure to check out the Market Club for trading ideas and commentary.

Good trading!

First, the Dow Jones ($INDU):

The market failed at the resistance provided by the (now) falling 200 day moving average, and from prior support at the 13,000 level (which also serves as a sort of ’round number’ psychological resistance.

There is obvious support beneath the market, via the 50 period moving average along with the rising trendline drawn since March.  Whether or not the market holds at these levels is the question, but I would guess that the support zones ‘appear’ on the surface to be stronger than the resistance levels, but the market often behaves in ways against the obvious solution.

Breaking 12,500 on the Dow could set up a retest of the lows at 11,700, but a clean break above 13,200 could set up an eventual retest of the 13,600 or perhaps 14,000 level.  Trading at these levels will generate a good deal of media coverage, because there still are plenty of expectations that the market will (or should) be headed lower.

Let’s focus on two sectors now:

The Materials Sector (XLB), which has done very well this year, but could be forming a Head and Shoulders Pattern.

Notice the key momentum divergence that has occurred as price cautiously probes new highs.  The rounded swing action has formed a potential ’slanted’ head and shoulders pattern.  A break of the neckline, via the ‘measuring rule,’ could take price down to the $40 level which would coincide with the rising 200 day moving average.

Unsurprisingly, Materials stocks have been doing well lately, including Alcoa (AA) and US Steel (X).

Let’s look at the worst performing sector of the year - the Health Care sector (XLV);

The highest price of the year was formed around January 14th with the low being in mid-March.

A rectangle consolidation (continuation) pattern formed throughout February and met its measuring objective (which I also wanted to highlight) on the chart.

It could also be considered a ‘measured move’ via a type of horizontal strange (flat) flag style pattern, where the measured move is equal to the ‘pole’ or price action preceding the consolidation.

Price is now struggling to overcome key moving average resistance, but the worst could be over for this sector (provided it does not break beneath the $30 level on to new lows).

Notice how the falling 20 period moving average (exponential) has served significantly as overhead resistance, thwarting any rallies ever since late 2006.

Price recently tested the $74 zone, and is currently failing to penetrate the average, which could set-up a retest of the $71 area before a potential base of support is built… or the index could probe new lows.

At the same time the Dollar Index is set to make new potential lows, the CRB Commodity Index made a new high this week, potentially preceding a low in the Dollar.  Oil led commodities higher, testing an all-time high of $126 per barrel.

Let’s continue to watch these markets and how they may affect the overall US Stock Market, or particular market you’re currently trading.

I’ve been doing a fair amount of trading system development and optimization thanks to TradeStation, Tradecision, and Excel and have found some surprising initial results.

For the purpose of this post, let’s focus only on the % Win rate, which is the percentage of overall trades that turn out to be winners.  Most newer traders assume that professionals have very high win rates because they make accurate market calls - but that’s not usually the case.

The more important statistic is actually how much money you make per trade vs how much you lose per trade, combined with overall drawdown stats. Keep this in mind, as maximizing your % Win rate may not lead to an overall net profitable system.

So, how can you increase your win rate easily and effortlessly?

1.  Lower Your Profit Target

Lowering your profit target will often result in a higher win rate, but it can come at the expense of your net profitable rate, because it can eliminate large dollar wins.  Sometimes, a handful of large dollar gains can be the difference between a winning and losing system.  Nevertheless, lowering your targets will often increase your Win % rate.

2.  Raise Your Stop-Loss Value

Increasing your stop-loss will also raise your % Win Rate due to giving the price more room to swing to achieve your profit target.  This accounts for market volatility and could result in more profit targets being hit before stop-losses are.  Of course, a few large losses also can offset the net profit of a system.

While adopting either (or both) of these strategies will (likely) increase your win % rate, your net profit may suffer, depending on the type of strategy you’re using.

I highly recommend ‘breaking the mold’ of the traditional 3 to 1 reward to risk ratio and testing different values to see what would happen to your system.  While % Win Rate is not the most important statistic, realize that it is important, and knowing how different parameters affect the rate can help build confidence in your trading strategy.

The day started with an overnight gap down that didn’t fill, although price achieved a 50% retracement.

Gaps that fail to fill can lead to larger trend moves in the original direction of the gap, which in this case took price to new lows.

There were two entries (trades) that could have been taken to the short side in that structure:

Both trades set-up as price retraced to the declining 5-period moving average (with a stop just above the falling 50 period MA).  Generally, it’s best to play for a small target, but in the structure of a trend day, you can use a type of trailing stop strategy (trailed above the 20 period MA).

Price formed divergences into the noon hour, and the 1:30 time formed a higher low, setting up a potential “Sweet Spot” trend reversal trade (with the purple hour that triggered when price rose above the 1:00 swing high).

In terms of being interesting, I wanted to highlight the strange consolidation pattern for the 2:00 hour.  Price was literally sandwiched between the falling 50 and rising 20 period moving average before breaking out to the upside just after 3:30.  It’s rare to see price respond so starkly to these averages in such a clear pattern.

Also, notice the new momentum highs at 1:00 and 2:00 (momentum precedes price, meaning that intraday swing price highs were likely yet to come).

Apple has been doing exceptionally well on the daily chart, but could be encountering resistance which is setting up a sell swing (or brief retracement).  There’s plenty of volatility and price range in this stock to do well as an intraday trader, but if you want to play the daily chart, you might consider options strategies.

It could be another good year for Apple and I’ll continue to update you on patterns and trends I see developing in this and other stocks!

Adam Hewison today released a new brief info-movie for your benefit. I thought it was funny that he described crude oil as “The gift that keeps on giving… or taking.”

Further, he writes:

With crude oil hitting historic highs today, I thought it would be a good idea to do a short video updating you on our “Trade Triangle” technology and the signals we have generated in the June crude oil contract.

This five-minute video will give you an insight into how you can approach the crude oil market using MarketClub’s “Trade Triangle” technology. This approach takes a great deal of the emotion out of trading which is crucial for any successful trader.

I hope you enjoy the video and learn how to employ our technology into your own trading.

Check out the video “May Crude OIl” and also other videos (link at the video page) for other “Trader’s Educational Whiteboard” brief videos.

Beyond this video, be sure to check out the page “Market Club Introduction” and consider joining this beneficial and affordable service.