I was getting ready to write a book review for Mike Bellafiore’s new book One Good Trade (Wiley Finance) and then came across this article from Mike that I thought was fun to share:

“My Book is Sold Out!  A Social Media Tale”

First, let me say congratulations to Mike Bellafiore for that accomplishment, and to everyone through StockTwits.com, Twitter, and other blog/websites.

As Mike wrote:

“My book One Good Trade is sold out. This took three weeks. A rush reprint will be underway soon. Save a few exceptions, it is now only available on the Kindle. I was told, “This has never happened before with a trading book.” This is a social media tale.”

I just checked on Amazon.com and a New book sells for $37.80 while the cheapest price currently listed for a used book – 5 copies listed as of right now – is $59.38.  That’s also a lesson in supply and demand!

Mike shares his thanks and explains how StockTwits, Twitter, and others – through reviews, contests, and other mentions (tweets, retweets) helped accomplish this feat.

To me, it’s a clear sign that social media is helping to change so much of our daily lives and expectations.  Social media – Twitter, Facebook, StockTwits (for us in the stock market world), etc is connecting people in ways that traditional media cannot.

It’s also good to see one of our own in the trading community succeed. Mike works so hard not just in his daily trading, but in his educational outreaches through his blog – SMB Training – and participation on StockTwits.tv, Twitter (@smbcapital), and all the other things he does to help the trading community.

One Good Trade really is a unique, great book that gives a one-of-a-kind glimpse into “the highly competitive world of proprietary trading.”

That’s one reason it’s sold out – with the exception of Jack Schwager’s Market Wizards books, few books give us personal insights into the world of actual trading firms.

Even Mr. Schwager’s popular books only stepped us inside the minds of leading traders – most of the time not their trading rooms (though there was the account of the FOREX trader who was so active in the markets, he had televisions installed in his bathroom… but that’s another story).

Dr. Alexander Elder’s appropriately titled book Come into My Trading Room was a similar endeavor, as it interviewed traders and invited the reader “into their room,” but it focused on specific traders and their diverse strategies – not proprietary firms.

Mike walks you into that secretive world, pulls back the curtain, and reveals personal lessons/stories he has experienced – both good and bad – that gives the reader insights not just into trading strategies they use, but personal accounts of traders at their firm who have succeeded big – or failed big.

He explains what characteristics top-traders at the firm share – and specific reasons/accounts why traders have failed and been fired from the desk.

I’ll write a more detailed review as soon as I get word that more copies are available – again, congratulations to Mike and everyone for this big accomplishment!

Corey Rosenbloom, CMT

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If you incorporate any type of political forecasting into your investment or trading decisions, now might be the time to start thinking about the make-up of Congress when the United States votes in November – recent commentary and analysis reports show there could be big changes that you need to be factoring into your decision-making process.

A quick primer – the US House of Representatives is a 435 member body where all Representatives are up for re-election every two years – 2010 being a “Mid-Term” election year.

Currently, Democrats hold 253 seats while Republicans hold 178 seats – a majority is 218 seats – the Majority Party elects the Speaker of the House and essentially controls the conduct of business.

The Senate is a 100-member body where each state sends two Senators to Congress, and Democrats effectively (with two independents) hold a 59 to 41 seat majority.

For a bill to pass Congress and become law, it must pass – in identical form – both the House and the Senate and then be signed by the President.

So why do you need to know what is likely to happen in November and how it might affect the market?

Because a string of recent reports show that Republicans are increasingly likely to sweep many of the contests in November and beat enough incumbent Democrats so as to recapture the majority in the House.

If that were the case, then the US Government would enter a period of “Gridlock” similar to that of the 1994 – 2001 period where a Democratic President must negotiate with a Republican Congress (or at least one House with a majority of Republicans) to get a Bill to become Law.

That means that the President must enact more moderate legislation, compromising with Republicans, or no further legislation will be passed as bills supported by Democrats will be blocked in the House by Republicans.

What it all means is really beyond the scope of this post, but it is a big deal that you should know is an increasing likelihood that will affect future legislation and have an effect on the stock market.

Here are some of the recent reports that are worth a read if you are interested:

“A Forecast of the 2010 House Election Outcome”

Quick Quotes:

“To answer this question (who will win the House) we have run 1,000 simulations of the 2010 House elections…. Our current forecast for 2010 shows that the Republicans are likely to regain the House majority.”

“By our reckoning, the most likely scenario is a Republican majority in the neighborhood of 229 seats versus 206 for the Democrats for a 50-seat loss for the Democrats. Taking into account the uncertainty in our model, the Republicans have a 79% chance of winning the House.”

Other recent reports:

New York Times House Races Reference Page Link (here).

“39 Seats Away, Republicans Hungry to Take Back the House“  – The Atlantic

“New Forecast Shows Democrats Losing 6 or 7 Senate Seats” – FiveThirtyEight

(As of today, it looks like the Democrats will hold on very slightly to the Majority in the Senate, maybe ending November with an incoming 52 or 53 seat Majority – down from 59 currently).

And for those of us who like betting odds, InTrade (which was very useful in many 2008 election forecasts) currently shows the odds for a Republican take-over of the House to be 77%.

The November elections are just over three months away, so the standard disclaimer “Anything Can Happen” certainly applies, but it’s my experience in projecting/forecasting political races that trends tend to take hold and build momentum, and things don’t change much (barring a major shock) between the start of Fall and the November elections.

Start thinking now about how this might affect legislation and its impact on the financial markets – as in, political stalemate and stagnation with no major legislation passing from 2011 – 2013 without major compromises – 2013 is when a new (or current) President will take office as will a new (or old) Congress.

The stalemate and compromise seemed to work well from 1995 until 2001 – will history repeat if the Republicans do take the House majority in November (technically in January 2011)?

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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From a pure price standpoint, as I highlighted recently in the post “Pure Price Levels to Watch in the NASDAQ, Dow, and S&P 500,” the levels I highlighted came into play in a major way on Friday, with the market sell-off stopping in its tracks at the key test of the 1,040 level in the S&P 500.

Specifically, buyers rushed in again to scoop up shares/contracts there – creating the fourth such major bounce off this level in 2010.

Bears be warned – this level is becoming a literal brick wall.

After the May “Flash Crash,” buyers rushed into to support the market (creating support might be a better term) at the 1,040 level with a huge long lower shadow hammer candle.

We came back to that level in early June and a rally from 1,040 to 1,130 (90 points) materialized suddenly.

For whatever reasons, buyers failed to hold support at 1,040, and instead supported the market at 1,010 on the early July lows as the market rallied again to test 1,030 before falling back recently in August to test the established support at 1,040.

And twice this week, as we see below, buyers rushed in to save the day again – in a convincing way:

We had an initial steep plunge on the morning of August 25th which was stopped int its tracks at the 1,040 level, resulting in a sudden 20 point rally.

And on Friday, following the GDP report, the market sold-off to the 1,040 level again, but this time buyers came in even more violently – no, that big lower shadow is not a mistake.

If you check out the 1-min and 5-min chart, you’ll see a sharp plunge that stops exactly at 1,040 again and the market is now 25 points higher in one day.

In my intraday reports, I often advocate thinking in “concepts” instead of individual trades, and this is a higher timeframe concept I’ve been writing about each night – the ‘mystery magical support’ at 1,040.

Seeing this level as a prior support zone, when price again retested the level, we thus expected the level to hold again – and wow it sure did.

This doesn’t have to be complicated – it’s really Technical Analysis 101.

Look at the chart, find obvious support or resistance levels, and then expect those levels to hold in the future unless proven otherwise by a breakout.

We tend to overcomplicate things and get caught up in the “Hows and Whys” of what happens, which leaves our minds twisted and turned in so many conflicting directions.  That’s why it can be helpful every once in a while to pull all the indicators off the chart and just let your eye be drawn to key levels that the market deems to be important.

Right now, that level is 1,040… and above that, 1,130.

All things being equal, keep your attention on those levels until the market proves otherwise – and until then, it may be best to expect the market to play ping-pong between those two prices.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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Sometimes it can be very helpful to pull off all the indicators on the chart and look at a pure price chart in order to gain a perspective of what price levels hold the most significance at the moment.

That’s what this post is – a price purism look at the three major US Equity Indexes in terms of what closing price level, along with what “spike” price level, you should memorize for a reference going forward.

Let’s start first with the Dow Jones:

The goal of price purism charts is to figure out very quickly what levels leap off the chart at you as significant.

For the Dow Jones, there’s a clear level – logically – at the psychologically important “Dow 10,000.”

Price has managed to close and bounce off of that level twice since May, falling under it only twice.  Not even the recent downturn was able to close the index under 10,000 – yet.

Under the ‘psychological’ level, we have a secondary level at 9,800.  Twice, the index ’spiked’ down to that level and bounced off of it.

The one exception we’ll find to the support levels in all cases is the July lows – which broke the key support levels in a vicious bear trap.

For now, keep focused on the 10,000 level and then under that the 9,800 level in the Dow… and of course anything under 9,600 would push the index down to a fresh new 2010 low.

Next is chart-wise similar S& 500:

To me, the levels in the S&P 500 are clearer.

We have a clean level of closing support at the 1,050 level and then a second “spike low” level at 1,040 – that’s easy to memorize.

Buyers have swooped in to support the market at both the 1,050 and then the ‘none shall pass’ level at 1,040 – again with the exception of the bear trap from July’s low.

The NASDAQ is a little different in terms of closing and spike levels – as we see from its daily chart:

The NASDAQ really doesn’t have a spike low fire-wall like the Dow Jones and S&P 500 have – and the key level to watch in the NASDAQ is 2,150.

What’s interesting is that the NASDAQ – often seen as a leader for the S&P 500 and Dow Jones (meaning what the NASDAQ does first, the others do later) – has broken the key closing support level at 2,150 and moved closer to testing the July – and subsequently 2010 – low at the 2,070 level.

Buyers and bulls need to get this index back above 2,150 quickly if they want to hold the market up here and prevent a potential swift decline.

And that’s the overall thesis we have right now -

First, watch all these key closing and spike low price reference levels for potential support.

If buyers/bulls are unable to keep the indexes above the key support levels – and then above the respective July ‘bear trap’ lows, then we could see a very sharp, quick sell-off as buyers throw in the towel on this market.

They have a chance as long as the index remains above these support levels – but their chances fade dramatically on a break to fresh 2010 – and subsequently fresh 52-week lows.

That will get a lot of media attention that could create further selling which will drive prices even lower.

For now – watch these levels as the key to the future.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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India’s Nifty 50 stock market index – symbol $CNXN in StockCharts.com – has been outperforming the S&P 500 not just in 2010, but off the March 2009 stock market lows.

There’s a helpful indicator or tool that doesn’t seem to be discussed all that much anymore that reveals comparative strength between markets.  It’s the Relative Strength tool (not the RSI) and it’s been making breakout after breakout along the ride higher in the Nifty Index.

Let’s take a look at the Weekly and Daily Nifty chart and see its Relative Strength to the S&P 500 and focus on the breakout RS signals that have occurred just prior to breakout moves in the index.

This principle applies to all markets and stocks – even if you don’t follow the India’s market.

First, the Nifty Weekly:

In the top chart we have the Nifty ($CNXN) chart price and standard moving averages.

In the indicator panel, I’m showing the Relative Strength of the Nifty to the US S&P 500.

To create your own relative strength chart, type in the first symbol you want to reference – in this case $CNXN and then the second signal – usually a market index – you wish to compare it – in this case the $SPX.

There’s a formula you must use and it’s like this:

$CNXN:$SPX

A colon divides the two symbols.  Other software programs may have different ways to display Relative Strength charts.

When the RS line is flat, it means that both markets are doing the same thing – performing in line with each other – neither is stronger or weaker.

When the RS line is rising, it means the first symbol (the numerator in a division fraction) is outperforming the second symbol (the denominator in a fraction).  Thus, the first market is showing “Relative Strength” to the second when the line is rising.

And of course, if the line is falling, it means the first symbol is underperforming the second symbol.

The Nifty and the S&P 500 traded in line with each other for most of 2008 and into 2009 – both falling together – but the Nifty suddenly began rising steadily from October 2008, eventually breaking out of its Relative Strength trend channel in March 2009.

Almost immediately after breaking the relative strength horizontal trendline, the Nifty index rallied sharply, further outperforming the S&P 500.

Then, both markets performed similarly through the remainder of 2009 into 2010 – both rising in 2009 and then rising then falling in 2010 together.

But wait – the Nifty began rising in April and then broke out again from the relative strength horizontal trendline in May 2010.

In fact, let’s now zoom in to see that closer:

This time, I’ve added the actual S&P 500 index to the middle panel and kept the same Relative Strength graph on the bottom.

This way you can compare how the Nifty and S&P move together and what it means when the RS line is rising – or consolidating.

By the way, if you wish to trade the Nifty Index, you can use the ETF with symbol INDY – it’s relatively new.

The Nifty and the S&P 500 performed almost exactly – rising and falling together – until the Nifty broke the RS trendline in late May 2010.

Once again, immediately after the breakout, the Nifty index surged higher while the S&P 500 traded flat to lower, causing the RS line to rise sharply.

During July, the RS line declined but recently – in August – the Nifty broke out again from a parallel RS trend channel sharply as the Nifty rose the last few days while the S&P 500 sold-off.

As long as the RS line continues rising, we can assume the Nifty will continue outperforming the S&P 500.

Keep in mind that the Nifty is at fresh new recovery highs (actually, not that far from its 2007 peak of 6,300) while the S&P 500 is down about 14% from its 2010 new recovery high, and still 33% down from its 2007 peak of 1,576.

This pair example shows how to use Relative Strength analysis – and again you can do so with a particular stock to the S&P 500 (or NASDAQ), or other market to the S&P 500… or other overseas markets to each other.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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