Amazon AMZN Chart Apr 25

Apr 25, 2007: 6:41 PM CST

With so many charts showing ‘euphoric’ gap patterns (often based on earnings releases/momentum), I couldn’t pass up posting today’s action in Amazon (AMZN) which increased 27% in one day!

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By the way, the Nasdaq made a fresh 6 year high and the Dow closed comfortably above 13,000, making yet another all-time closing high. Headlines and statements like this are becoming more common and are less exciting to the general public.

I’ve said it every time I close a market post – do not attempt to short creeping uptrends in the market. Creeping uptrends continue because of various reasons, one being short-covering.   Leave it to the professionals. Either go long or stay out when the market is making new highs.  Wait for the market to tip its hand before attempting a short, otherwise you attempt to buck the trend.

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Some Dow Components Go Euphoric

Apr 25, 2007: 12:48 AM CST

I must admit I am impressed with the strength of the recent rally, especially in the market leading Dow Jones Index (which is still just comprised of 30 large-cap stocks). The Dow came within 10 points of touching the psychological 13,000 mark today, and it appears likely we will test this high soon.

What people are not seeing is euphoric gaps and strength under the radar in certain Dow Jones components, which is creating an almost ‘false’ index reading (in terms of few stocks making significant contributions to the index). This has always been a criticism of the Dow, and I wanted to point out a few of these “anomalies” of recent price action.

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Although this is not a complete list of the Dow Components, it may seem like it because so many of them have experienced radical price movements (radical as compared to recent price action).

One has to wonder where the strength is coming from, and what forces are driving this market dramatically higher (even into record territory as an index).

I glance at least weekly and assess the technical picture of the Dow 30 components and many of the leading S&P 500 components to assess trend and the ‘health’ of the stock, as well as possible discretionary trade ideas based on patterns/indicators/momentum.

It is very rare that frequent gaps occur, and rare for sustained unidirectional price movement (the market pulses in swings – usually small swings).

Realize that there is either underlying, dramatic strength in the market… or panicking bears rushing as fast as possible to cover their short positions.

Some have said that the rally is in part because of tax refund checks and inflows to mutual funds after the April 15th tax date. Maybe. The facts of price movement are clear, but the reasons may not be.

View these charts and determine what conclusion you think for yourself as to what’s happening and what the most likely upcoming movement will be.

(Disclosure:  I hold no current positions in the mentioned stocks, but recently exited a swing trade on CAT on April 20th and have day-traded IBM April 24th and before).

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Three Educational Charts

Apr 23, 2007: 10:10 PM CST

Here are three charts that show past opportunities and some possibilities for the futures. All charts are for educational purposes and have minimal annotation.

US Dollar Index – Weekly

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Comments:

  • Downtrending and may make new price lows
  • Potential support at the 2005 low – if broken, few levels of support below
  • Head and Shoulders pattern led to dramatic price decline
  • Note annotated momentum divergences which led to small targets
  • All Three Moving Averages are clearly sloping lower and aligned bearishly

Net Flix – NFLX – Weekly
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  • “Squeeze Play” led to possibility for playing for a large target – note momentum divergence building during squeeze
  • Consolidation currently taking place. Watch for break of triangle formation. May be months ahead.
  • Notice the pure swing action in the chart

Sears Holding – SHLD

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  • Notice the “Squeeze Play” that led to a large target
  • Note the “Impulse Buy” trade that occurred after price expansion and New Momentum High
  • Note the “Three Swings” or “Three Pushes” that occurred after volatility/price expansion and the trades at the moving average pullbacks
  • Notice the momentum divergence forming as the “Three Push” pattern completes itself
  • Very bullish action, as confirmed by the alignment and slope of the moving averages

(Disclosure – I have no current positions in the highlighted stocks, but have traded positions in SHLD)

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Link: Lauriston Letter – Golden Trading Rules

Apr 23, 2007: 7:33 PM CST

Lauriston at the Lauriston Letter recently polled readers to send in their responses regarding what would be the top ten fundamental (or core) trading rules to follow.

The responses are compiled here (at this link) and include not only critical insights into the highest probability activities, but insights from traders helping other traders.

The Lauriston Letter always has excellent participation in terms of comments of readers, and you can gain insights from reading post responses as well.

Study the list and see what you would add or take out of the list and drop Lauriston a line if you have personal insights.

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Link: Trader Gav – Money Management Interactive Chart

Apr 23, 2007: 7:29 PM CST

TraderGav (Gavin) posted an excellent resource regarding Risk/Reward and Accuracy.

His post describes why it is essential to have an edge in trading, but of particular interest, he provides an Excel Sheet which allows you to input your risk/reward average and play around and see what accuracy rates net what results, given risk/reward.

Download the file, read the article, and see that being 100% accurate  or even 80% or 60% accurate) in your trading can net you great profits.  In fact, you can envision a situation in which you are correct 30% of the time, yet still make large profits (often done with a trend-following system).

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