Intraday Fibonacci Lessons July 27

Jul 27, 2009: 7:26 PM CST

The SPY (S&P 500) ETF gave as a few examples of how to use simple Fibonacci retracements for specific purposes of price targeting and trade entry.  Let’s take a look at the chart to see what we can learn.


(Click for Full-Size Image)

The full description and background for this lesson is in today’s “Teaching Moment” from the Idealized Trades Daily Subscription Service, but wanted to hit the highlights here.

When price made its initial large downswing from the $98.40 highs to the $97.34 lows, one could have entered long as price began to rise off the lows, breaking above the $97.50 highs off of a positive TICK divergence (not shown here) and doji on the 5-min chart.

How would you set your target?  Or what price would you play for?

Drawing a specific Fibonacci Retracement grid from the highs to the lows could help answer that question.

First, let me say you would place a stop a slight distance – not too close but not to far – from the $97.34 swing lows.

The resulting 38.2%, 50.0%, and 61.8% Fibonacci retracements of the large morning down-swing come in at $97.75, $97.87, and $98.00 respectively – all of which could serve as logical price targets.

The 38.2% would be a conservative upside target; the 50.0% would serve as a moderate target, while the 61.8% would serve as an aggressive price target – your risk tolerance and trading tactics would determine what target to play for and how to size your position – that is for another post.

The 61.8% target would serve as a ‘maxmium’ or ‘best case scenario’ target (as observed when putting on the trade).

Notice how price retraced (rallied) all the way up to this level, found resistance as expected (blowing through the 38% and 50% retracements with ease… which gave clues that odds shifted further upside to come) and did retrace at the $98.00 zone (which corresponded with “Round-Number” confluence resistance).

Not only was this a trade exit (long) target, but it could have served as a ’short-sale’ entry particularly since we formed an internal TICK divergence and bearish reversal candles (on the 5-min chart) at the $98.00 level.

The logic is the same on the second “Blue” Fibonacci grid I’ve drawn – only we’re looking for where the price will likely find support and thus a target (exit) to cover our short sale.

For a full, 2-page “Teaching Moment” description of this concept (wonderful example today) as well as a description of the various TICK Divergences and trading opportunities on the day – including how to recognize odds favored a Range Day developing (what to watch) and what strategies to use, please continue reading the day’s description in the “Idealized Trades” report.

Each day, I walk you through the price action, sharing ‘teaching moments’ like this as I see examples and describing how opportunities develop that form entries, targets, and stop-loss placement.  The more you learn and see these concepts and have them shown to you, the better you’ll be in real time (in the heat of battle!) to recognize opportunities and manage the trades as they develop.

Corey Rosenbloom, CMT Continue Reading…

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Gold Forming Symmetrical Triangle – Waiting for Breakout

Jul 27, 2009: 10:43 AM CST

Gold prices appear to be forming a type of symmetrical triangle consolidation as seen in both the daily and weekly timeframes as of July 26, 2009.  Let’s take a look and note critical support and resistance levels.

All eyes of course are focused on the $1,000 per ounce level, as a breakout there would most likely lead to a large price run-up in gold.  However, we’re not quite there yet.

The key levels to watch on a ‘wider’ basis are the $1,000 level (critical resistance) and the $850 level (which also reflects Fibonacci support – not shown).  A breakdown from $850 would lead to an almost certain retest of $700… but again we’re not there yet.

For now, a symmetrical triangle consolidation pattern is forming, which currently compresses price between $910 and $960.  The triangle is nearing completion and perhaps the ‘best’ play would be a clean break above the upper line to target a ‘magnet trade’ to $1,000, or beneath the lower line also to target a ‘magnet trade’ down to $850.

Until then, we are getting little guidiance from the 20 or 50 day EMA (in a consolidation phase, moving averages are virtually useless as support and resistance) so we focus on price highs and lows for clues.

For full analysis of the Monthly, Weekly, and Daily charts of Gold, including Fibonacci grids and possible Elliott Wave counts, please subscribe to our new “Weekly Intermarket Technical Analysis” reports (20+ PDF pages each Sunday at $47.oo per month), which also cover the 10-Year Note Price, S&P 500, Crude Oil, and the US Dollar index – noting trading opportunities, key levels to watch for targets, trade entries, and management, and a broader ‘macro-view’ of interrelated markets.

Corey Rosenbloom, CMT Continue Reading…

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A Quick Comparison of 3x Funds BGZ and BGU

Jul 25, 2009: 2:54 PM CST

With the S&P 500 up over 40% from its March 6 low, I thought it would be a good idea to take a quick look at 3x Leveraged Bullish Fund BGU and 3x Leveraged Fund BGZ for a chart and percentage comparison.  Let’s see them in action!

3x Leveraged Bullish Fund BGU

What’s surprised me the most is how closely BGU has tracked with the Dow and S&P 500 and doesn’t seem to be as affected by the “percentage decay” that other leveraged funds have suffered (see BGZ below).  It looks almost identical to the underlying index, despite being 3x leveraged.  That’s rare in the leveraged fund world.

We see the same “Broadening Formation” I discussed in a previous post on the Dow Jones.  The pattern is completing its upside target as shown here.

The one thing to watch is the glaring volume non-confirmation (or declining trend in volume) – volume spiked off the March 2009 lows at over 35 Million shares and now averages slightly above 10 Million – a significant drop-off.

Let’s compare the ‘chart perfection’ (in terms of tracking the underlying index) and now look at the Bearish Fund.

3x Leveraged Fund BGZ

This pattern is what we would expect with a 3x (or even 2x) leveraged fund – quick swing ups (quick percentage gains) as the underlying index moves in a favorable direction but then a collapse as the index moves (in this c case) higher.

The risk in these funds is holding for a long time and trying to get back to break-even, which will never happen.

Notice that the S&P 500 made a swing low in December 2008 near 750 as the 3x Leveraged Bear Fund peaked at $130.  However, when the S&P 500 made the March 2009 low of 666, the BGZ traded at a lower high of $118.  The expectation was for the leveraged fund to make a much higher high but it was not the case – herein lies a major flaw of leveraged funds.

Leveraged funds suffer from percentage decay… the best example being that if you lost 50% of your capital, you could not muster a 50% gain to get back to where you started – you would need a 100% gain on your remaining capital.

As the underlying index (S&P 500, Dow, etc) fluctuates, the gains and losses of the leveraged fund will be magnified.  This contributes to the inherent “price decay” in leveraged funds and why they are more appropriate vehicles for intraday or very, very short term trading tactics only.

The main point is that you CANNOT give leveraged funds “room to run” in a losing position… but that is for a whole other discussion.

Price has fallen from $120 to $30 – and we would need a 400% gain in the BGZ to get back to where price was on March 6th.  That implies a 133% loss in the S&P 500 to reach those levels – clearly, this will not happen.

On a quick note – volume appears to be rising (flowing into) this 3x Bearish fund (or at least has not been trailing off like the broader indexes).

Let’s now zoom-in to the period from the March 9, 2009 low and compare percentages of these funds:

Percentage Comparison off the March Lows:

The S&P is up 43% from the March lows and the BGU 3x Bullish fund has rallied an amazing 170%!

However, the BGZ has fallen 75% from its earlier peak.

Remember that these funds are not for the faint of heart and perhaps should be avoided by new traders – prove your success and profits through the ‘plain vanilla’ SPY, QQQQ, and DIA market funds before jumping into the leveraged fund world – remember that it takes a lot more energy and time to recover from a large loss than from avoiding one.

Check out our new weekly and daily subscription models at our new Premium Section of Afraid to Trade.com

Corey Rosenbloom, CMT
Afraid to Trade.com

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Weekend NewsFlashr Editor Picks for July 25

Jul 25, 2009: 11:49 AM CST

Here are this week’s “Editor’s Picks” from the NewsFlashr Investment/Business Blog section!  With all the content across over 70 blogs, these selections provide a way to hit the highlights in an even quicker fashion.

Dr. Steenbarger of Trader Feed shares a brief but information-packed post on how to Be the Best You Can Be as a Trader.

The Kirk Report takes a look at the most recent 10 day rally and notes his insights and thoughts on the amazing action.

Wall Street Cheat Sheet recently interviewed Mike Bellafiore of SMB Capital, where Mike shares his experiences, market lessons, and trading wisdom – and what it’s like to work at a prop trading firm.

Rob Hanna of Quantifiable Edges shares research on the recent “12 Day Winning Streak” in the NASDAQ (did you know it hasn’t happened since 1997?)

A Dash of Insight takes an ambitious look at “Politics, Ideology, and Investing.”

The Zen Trader gives us a lengthy post explaining ways to profit if the Federal Reserve’s strategy of ‘cleaning up’ easy money policy fails.

The Correct Call site shows some of the top ETFs that could be expected to outperform the S&P 500

Grindstone Financial shares some cautions that we “not read too much into these rallies.”

Continue Reading…

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Dow and S&P Structure Completing Broadening Formations

Jul 23, 2009: 5:35 PM CST

I first mentioned the possibility that the Dow Jones index was forming a “Broadening Formation” on July 15th and that pattern now appears to be the dominant structure with a price target that has almost completed.  Please take a look at the original post and then let’s see the updated structure as of today’s powerful move up.

If we connect the doji highs in June (which are ascending) and begin a trendine from the May highs, we see the following upper trendline which has a price projection target around 9,200 to 9,350, which seems to be a highly likely target towards which price is heading.

With the break above the June highs today, and above key resistance, it shows the resilience of the buyers (bulls) to defy any sort of chart resistance or internal non-confirmations to achieve new highs – it also speaks to the sellers who are having to cover positions by purchasing back borrowed shares.

It’s possible that the shorts covering stops will help give the fuel needed to complete this formation – which has bearish overtones if it plays out as expected.

A broadening formation is a sign that a market is swinging wildly in both directions as neither side can find value and a struggle for dominance is playing out – that’s exactly the case we’re seeing now.

Let’s take a quick look at the S&P 500 which is showing the same structure:

S&P 500:

The explanation is the same for the S&P 500, though it would appear the target would be about the 1,000 area for the pattern to complete.

Despite the new price highs, volume barely made a new high in the S&P 5oo for July and the Dow Jones failed to make a new July high in volume.  Summertime trading sessions are known for reduced volume so take this into account – though it still is a slight non-confirmation of higher prices.

For more information on these patterns, and a description of tactics on trading today’s session (including recognizing the day’s structure and how to use the TICK to time entries into a developing trend day), please subscribe to our new “Idealized Trades” intraday reports at our new Premium Section of Afraid to Trade.  There are sample daily reports to see if this service might be productive for you.

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