The Thursday Measured Move and Intraday Tactics

Aug 8, 2008: 10:38 AM CST

Let’s take a quick look at a very interesting pattern that occurred during Thursday’s intraday index trading session and also at some of the opportunities from price structure that set-up during the day.

DIA – Dow Jones ETF (5-minute):

First, the morning began with a large overnight gap of roughly 100 points, putting us in the lower probability that a gap of that nature will be faded, but there was a 61.8% (Fibonacci) retracement of the gap, so even still, there was a partial gap-fade position, the support of which was found at the rising 200 period SMA.

Price then retraced upwards, failing at the confluence of the falling 20 and 50 period EMAs before forming a 45 degree pullback which failed to make new lows on the day and just nipped beneath the 200 period MA.

The pattern I wanted to highlight is the “Measured Move” pattern, or the “A to B equals C to D” relationship which is always an eye-grabber when it happens.  It’s a version of a bull flag, but it is not a definitional bull flag, but is best described as a “measured” or “Equal” move, and the pattern sets up with an initial impulse move, followed by a comfortable 45 degree angle retracement, and entry is triggered at the break of the tight upper trend channel, with a target being an exact “measured move” of the first A to B leg.

Even if you miss the entry, you can still gain clues to price direction and structure once you observe the pattern is completing – many times an intermediate or even actual price high (or low) is printed with a measured move-style pattern.  The move formed a semi-double top, and then price consolidated about the 20 and 50 period moving averages before forming a tight range (consolidation) and then breaking lower slowly at first before the quick retest (red arrow) which retested the break-out zone and formed a solid short-sale entry.

Price then burst out of consolidation to make a new trend move and new significant lows on the day.  Large moves tend to begin out of balance, or consolidation.

So far today (Friday), price has burst to the upside and filled the previous gap, trading as of this writing at $116.40 in a surprise chart move (the day began with a slight gap down).  I’m sure we’ll have some interesting patterns to discuss in today’s action as well!

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July Select Stats – Overnight Holding vs Intraday

Aug 7, 2008: 2:29 PM CST

I’m adding a new feature to the research side of the blog, which asks the question, “Would it have been more profitable to trade exclusively intraday or to hold overnight exclusively or some mixture?”

Essentially, the question asks ‘what might you be giving up if anything by not holding a trade overnight’?

To run these statistics, I created a simple Excel file that takes daily stock data from Yahoo Finance and then has two formulas:

The “hold overnight only” formula is the following:  Today’s Open minus Yesterday’s Close

The “trade intraday only” formula is the following:  Today’s Close minus Today’s Open

I have hand-selected popular stocks and ran them through these formula to see what the difference would have been.  Let me know if you have suggestions for further analysis.

DIA – Dow Jones ETF… a proxy for the broader market (and my favorite ETF to trade).

DIA Monthly Change: $1.32 (1.17%)

Overnight Only:  $1.61 (1.43%)
Intraday Only:    -$1.33 (-1.17%)

Google (GOOG): Monthly Change:  -$45.83 (-8.82%)

Overnight Only: -$20.08 (-3.86%)
Intraday Only:   -$32.59 (-6.07%)

Apple Inc (AAPL): Monthly Change: -$5.28 (-3.22%)

Overnight Only:  -$7.57 (-5.28%)
Intraday Only:    -$0.92 (-0.53%)
(see explanation below)

Exxon-Mobil (XOM): Monthly Change:  -$7.44 (-8.47%)

Overnight Only:  -$0.95 (-1.08%)
Intraday Only:    -$6.75 (-7.64%)

Though the DIA (Dow Jones) gained a small percentage point for July, had you only bought at the morning and sold at the close – taking no overnight risk – you actually would have lost just over a percentage point.

You would have lost money either way with Google, but you would have actually lost more money had you tried to avoid overnight risk.

With Exxon-Mobil, you would have done much poorer by refusing to take a trade home overnight.

The only of the four stocks I tested that did not show this pattern was Apple (AAPL), which actually would have cost more profits to hold overnight.  Keep in mind that Apple experienced a singular, large $17 overnight gap when it announced earnings guidance on July 22nd.  If we eliminate this whole day from the study (including the $13 intraday rally that took place on the same day), the “overnight numbers” would be a gain of $5.42 by holding overnight only vs a loss of $13.94 by holding intraday only – much more in line with the other stocks).

Perhaps this is encouraging news for the short-sellers, as the edge may be in shorting stocks intraday in this environment and not holding overnight, but these four stocks are far too little to draw any conclusions, as is attempting to draw any conclusions from a single month’s data alone.

I am showing this study as an initial idea in development, which will have me coming back and testing more stocks and longer time periods to see what the results will be when those examinations are complete.

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NewsFlashr Rolls Out New Features

Aug 7, 2008: 9:50 AM CST

Today, the NewsFlashr website – an all in one news search engine – launched a new tool that allows you to search keywords across all headlines.

Right now on their homepage (www.newsflashr.com), they show the top eight “hot topics” for world, business, politics, entertainment, sports, in a quick, simple tabular format which allows ease of seeing what’s hot in the news circuits right now.  There’s no longer a need to wade through multiple websites to find cutting-edge news stories and then decide what might be important or interesting to read – or what’s being discussed across different forums right now.

If you click on a particular topic (let’s say Business, for example), then the site lists the top keywords across all major financial or online news sites, such as Yahoo, CNN, Fox News, USA Today, Barrons, and others.

At this moment, the most popular terms are the following:

Banks
Toyota
Rates (interest rates)
Wal-Mart
AIG

You can click on specific news stories that catch your eye on these topics.

My favorite usage of the site is the comprehensive, detailed “Feeds View” pages, which spread out each of the major news or blog web sources and list the most recent posts from that source.  To get this resource, you’ll need to click in the upper-right side of the page on the red button “Feeds View.”

From here, it’s as if you’ve spread out the top newspapers or websites in front of you and are viewing the most recent headlines from these sources.  The words “Just In” have now been added to show news stories that were just published – you can also display headlines by time or by Alexa (page-view) rank.

Check out and bookmark the Business Feed section to take a birds-eye view of all the major financial publishers and what they’re providing news-wise right now, which is updated every 15 minutes.   I now have this page as my homepage, so that I can be constantly up-to-date with major news stories.  Feed views also exist for Politics, Sports, World-News, Technology and also blogs that accompany these major news carriers.

In an age where there’s so much information and so little time to digest it all, NewsFlashr provides the essential tool to view dozens of headlines simultaneously, and then decide what’s important to you, and what’s in the public consciousness right now.

(The NewsFlashr Team also run the Instant Bull website, which is a powerful tool for stock-specific resources, information across news sources (such as earnings, analyst estimates, etc), and popular message board posts).

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Gap Fade Stats for July

Aug 6, 2008: 10:51 PM CST

It’s time to see how many gaps were formed and filled through the month of July!  July recorded the best performance so far for the ‘gap fill’ strategy – let’s look at the numbers.

For these studies, I use the DIA (Dow Jones ETF) and consider a ‘gap’ as being any opening price that is at least 20 cents (20 Dow Points) different than its closing price.  A gap fill is signaled once price does gap and then trades back to at least equal to the prior day’s close.

“Fading a Gap” means shorting a gap-up and buying a gap down, usually as soon as it happens.

For the month of July 2008, 15 out of 21 trading days opened with a gap of at least 20 cents (that’s 71% of days opened with some sort of gap!).

Of these 15 gap opening days, 12 gaps filled, meaning 80% of all gaps in July were filled!

Teasing the numbers a little, we find the following:

8 of 10 (80%) of gap ups were filled.
4 of 5 (80%) of gap downs were filled.

What if we increase our definition of a gap to mean at least $0.50 change (or 50 Dow Points) from prior close to the morning’s open:

8 of 21 days (38%) showed a morning gap of at least 50 cents.

6 of these 8 days’ gaps were filled, for a ‘gap fill’ percentage of 75%.

2 of 3 (66%) of gap ups were filled.
4 of 5 (80%0 of gap downs were filled.

Let’s define a “gap” as being greater than $1.00.

There were 4 trading days that showed an overnight gap greater than $1.00, and 3 of these gaps filled (75%).

These are fascinating statistics for gap-fill traders and for all market participants in general.  For gap-faders, July was about ‘as good as it gets!’

For an individual month’s performance, check out the following monthly posts from Afraid to Trade:

January Gap Fade Statistics
February Gap Fade Statistics
March Gap Fade Statistics
April Gap Fade Statistics
May Gap Fade Statistics
June Gap Fade Statistics

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Critical Test of US Dollar and CRB Index Coming Up

Aug 6, 2008: 10:15 AM CST

There could be a curious inflection in the current price movement of the Commodity Index ($CRB) and the US Dollar Index ($USD), which could make or break the current trends in place.  Let’s see what I mean.

The US Dollar Index:

The US Dollar Index has experienced a lengthy downtrend, has paused, consolidated, formed higher highs and higher lows, and officially reversed its downtrend to an uptrend on the daily time frame (not yet on the weekly).

The breakout from the triangle consolidation was encouraging, and we are just shy of achieving the target (height of the triangle plus the breakout), which will complete an “A to B equals C to D” relationship (almost like a zig-zag on the chart).  This price projection target is roughly $74, which is almost achieved, but interestingly enough, the target corresponds almost perfectly with the falling 200 day moving average.

One would expect some sort of price correction or retracement at this level (which would be bullish for commodities short-term), but should dollar bulls push price beyond the 200 day SMA, that would be a remarkable and definite shift – one which could officially reverse all prior trends for some time to come.  I strongly recommend you keep an eye on this market for signs of continued strength.

The CRB Index:

The commodity indexes trade almost perfectly inverse the US Dollar Index, such that strength in the dollar is often bearish for commodities, which is what has happened recently with the dollar’s rise.

The CRB Index faces an almost mirror image of the critical test for the US Dollar – this time, the test is to see if commodity buyers/bulls can support the index at the critical $395 level, which corresponds with the 200 day simple moving average – if bears push price through this level, then we could see a significant shift (downwards) in the price of commodities (as many hope).  Breaking through this line would send crude oil and gold (and other commodity) prices even lower.

However, a successful test of this level, which likely has higher odds, could mean a temporary shift back to ‘the way things were’ with short-term higher oil and gold prices.  At a minimum, I do think we’re due for a retracement back up, perhaps to test the $420 level which corresponds with the 20 day EMA.  If we don’t get this retest soon, all bets are off and we could see a protracted slide – the protracted slide development would surprise me much more than the gentle retracement.

Follow these markets, realize what the broader picture may mean for the US Stock market or the market you are trading, and pay attention to inter-market trends.

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