Earnings Season Begins

Apr 10, 2007: 9:30 AM CST

The second earnings season of the year is set to begin at the close today (April 10th) when Alcoa releases its earnings for the first quarter 2007. Other Dow and S&P components will release earnings this week and next as well, meaning that volatility and possible market gaps are likely if actual earnings differ from estimates.

Technical traders beware if you are taking a week-long swing position in a company – ALWAYS be sure to view Yahoo finance or some other source so that you can document and plan ahead of a particular company’s earnings release. For pure technical traders, it is often best not to hold a position just ahead of earnings announcements, as predictability and reliability of price swings greatly decreases.

Some traders use earnings releases as strict gambles, and do so will call or put options. I do not recommend this, yet one can make a lot (or lose a lot) of money trying to guess earnings.

Remember that a company can report great (increased) earnings, but if they fall even a penny shy of consensus estimates, investors and traders can punish the stock quickly and those who hold positions in it.

The Trading Bandit also offers his perspective on earnings season which I recommend studying.

Also, it is often not enough to know the earnings releases of companies you wish to trade, but also you must know related companies, and especially industry leaders and their earnings releases. There have been countless examples of a leading stock announcing poor earnings and it dragging down a multitude of other stocks both in its sector and industry. This is because investors are trying to predict the direction of the sector (based on current earnings extrapolated to future earnings) and if the leader fared poorly, they expect “followers” to fare poorly as well.

Remember, traders drive price, but not all price is driven by technical analysis, and sometimes, it is best for pure technical traders to stand aside or trade lighter when fundamental data will be ruling price movement, unless you stick to basic price and volume (and sentiment) analysis to drive technical decisions.

Be safe, and best of luck during this earnings season.


Impulse Buys in Dow and THE Dow

Apr 9, 2007: 8:54 PM CST

We survived the Jobs data to the upside, with positive surprises higher than expected. Perhaps the economy is doing better than expected?

The Jobs Report is a lesson in how good news can be bad news for the market, and that a deeper level of analysis is required for proper market study. While there are other blogs more suited for Economic Trends and analysis, suffice it to say that the news is not nearly as important as the interpretation and reaction to the news. After all, people placing trades (calculated ‘bets’ on the future) move prices, and not news itself.

In fact, news releases are quickly digested and priced into the market. While it is best to combine fundamental and technical analysis, it is far easier to analyze techncial data (focusing on price and volume) than fundamental.

As such, here is a chart of the Dow Jones Index, which just fulfilled an “Impulse Buy” trade.


Notice the New Momentum High on March 26th, followed by a reaction against the impulse, and the buy condition occurred when the market found support at the 20 period moving average. The trade’s goal was to reach the most recent swing high, which was achieved. We appear to be ready for a counterswing to bring price lower temporarily before swinging back up to a higher high.

Let it be stated that the market is reaching the gap area created by the February decline, and this likely will serve as a temporary resistance area as the supply of sellers come back into the market. This is probably not the time to be initiating new money into the market – be patient for a quick pullback before entering. We do have a confirmed, technical uptrend still in tact.

I also wanted to illustrate the “Impulse Buy” pattern with a recent chart of DOW. Dow Chemical Company, that is.


Stops would be placed conservatively below the 50 period moving average… but if the stop was too close, it would have been another instance of the “perversion trade” where the stop was rinsed (taken out) and then the move occurred quickly after the stop.  This is another case of tolerating a little “heat” (volatility) in price in expectation of the anticipated price move.


Link: TraderFeed and Behavioral Finance Articles

Apr 9, 2007: 8:39 AM CST

Brett Steenbarger recently posted a link to four articles by Professor Andrew Lo that are helpful to trading. Dr. Steenbarger summarizes each article, and I recommend them also for deep reading on academic literature. Topics include academic studies on emotion, day trading, sentiment, risk taking, fear/greed, and randomness in the market.

Dr. Andrew Lo’s website also contains more free articles from the pioneer in Behavioral Finance, and I recommend a visit and study of his site as well.

It’s not always easy reading, but the articles provide insights based on academic data and experiments that provide higher quality than many of the “popular psychology” books and “easy to read” information. Take the time to study this information from an outstanding academic scholar.

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A 1, 2, 3 Method for Quantifying Trade Ideas

Apr 7, 2007: 12:22 PM CST

Do you feel overwhelmed with opportunities when you complete an evening scan of your charts?

Adopt a simple quantification method to separate trade ideas into three categories for increased possibility of action, and decreased confusion.

This method assumes that you scan various charts either on the evenings or on the weekends, and are looking for key set-ups based on an individual trading system. This also assumes you find too many possibilities to narrow down into actionable trade ideas.

You will need to develop this idea as your own, but the guiding principles include ranking any chart patterns or trade set-ups into three categories:

Tier 1 Ideas:

Set-ups that you identify as triggering immediately, and you need to enter the trade the next day.

This might include pullbacks to key moving averages or support zones (in a trending stock), or rallies into resistance you identify that you want to enter a short trade. This also might be an indicator reading turning up out of oversold and indicating a direct buy signal ripe for the taking the next morning.

Tier 2 Ideas:

Set-ups you identify as forming and developing, and will likely trigger for entry within 2 – 5 days.

This is when you see a neutral reading in an indicator on its pathway to oversold (or overbought) that will soon signal a buy (or sell) signal related to your system. It might also indicate a trend thrust (impulse) you missed, but want to enter when the stock retraces to a set zone where you desire to be a buyer, and you want to enter the trade WHEN this happens.

Tier 2 Ideas are deserving to be in your watchlist with entry zones listed, or conditions listed that – when triggered – will move up to Tier 1 Ideas to be entered.

Tier 3 Ideas:

These would be general market structure identification where you would like to keep a stock in your watchlist to grab your attention when it sets up a trade entry signal based on your system. These might include strong stocks in strong sectors in an uptrend that are just now consolidating in range that offer no discernable trading opportunity, but you like the previous price action or the core fundamentals of the stock you desire to trade.

Your goal with these is simply to continue scanning them until they give buy signals based on your system. Just because a stock has a great story or good fundamentals does not make it a trade candidate until it signals a set-up based on your system/strategies. You should give these the least attention in your scans, but not drop them from memory or your watchlist because – in the future – you will anticipate trading this stock when it conforms to your system or signals.

It is not enough to keep one watchlist and believe that you will capture all the opportunities you are seeking. It is frustrating to keep a great watchlist and be overwhelmed by the possibilities and rush yourself into trades when you should have been patient and selected the best candidates for immediate price performance.

Dividing your opportunities into (at least) three watchlists – ranked by immediacy of possible price action – can help you narrow down to the highest probability moves while allowing yourself opportunities to enter new trades when they trigger should your tier 1 ideas result in a stop (or loss). This also keeps you engaged in the market and analysis, and continues to sharpen your skills.

Your goal in trading is to simplify the process and cut down on the multitude of decisions, so that you identify and execute the highest probability trades according to the system you have developed for yourself.

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Jobs Report Friday and Tactics

Apr 5, 2007: 9:00 AM CST

Following the surge Tuesday, the market is consolidating yet again, but this time the likely culprit is the upcoming holiday weekend (the Market will be closed Friday) and the release of the Jobs/Economic Report Friday morning. The report often swings the market quite forcefully in either direction, and for short-term traders, it is often best to go into this report flat.

If you are new to trading and are using charts and technical analysis only, realize that some days are better to flatten (exit) your positions and wait for a major report to pass and then enter after the report if the market continued in your direction (or at least stayed neutral in movement).

With the market so shaky (in terms of economic data), fundamentals and economic news tend to drive charts, not price patterns or indicators. At these times, you are most likely to see standard chart patterns and indicator signals fail (or become instantly profitable). What I am saying is that, although people move markets (by trading), there are various groups of traders, and the “big money” tend to establish/close positions based on larger economic macrodata and short term traders try to ride their coattails when they suspect their movement.

Now, with my warning stated, realize that with sudden (expected) volatility, the opportunity to profit is great with these opportunities. If you suspect you can predict the report and establish a position ahead of it, you can easily capture 100 or more Dow points (or actual dollars in stocks) within 30 minutes of the report’s release (including Federal Reserve Meetings/Policies).

Realize that trading this way (ahead of a report you anticipate) can easily equate to gambling, as there is little edge (repeatable profit over time) using this strategy. To play out your edge, it is best to take signals, but be aware of key days in the market where price will become suddenly volatile because of an announced report (this is akin to trading earnings releases in stocks – probably not a good idea for most people).

Be safe, know that we could see a major gap (in either direction) in the market ETFs and other stocks Monday morning, and be sure to enjoy the Easter weekend!

(Bonus quote from Yahoo Market News this morning: “The market went up on fumes this week,” said Philip S. Dow, managing director of equity strategy at RBC Dain Rauscher. “Nobody has any wild expectations to the positive for the jobs report. But, barring some kind of negative report, I still think we’ll see the market tread water.”)

Might I add: If the expectations are so negative, and if the report surprises to the upside, then the market will likely rally hard and gap up strongly Monday (a warning to the shorts). There is no way to know what will happen until it happens, but don’t let it catch you off guard.

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