Intermarket Relationships Chart Update

Jul 1, 2007: 3:20 PM CST

The major story over the last month has been the impact of rising bond yields and their effect on the overall market.  This updated chart from provides a graphical representation of what has transpired over the month of June in terms of major market relationships:



The Yield on the 10 Year Treasury Bond (Note) has indeed taken a toll on the overall market and on interest rate sensitive areas.  The 3.18% rise during July resulted in a stock market (S&P 500) correction of 1.76% (and a few major distribution days) as well as the Financial (and Banking) sector being taken down 4.81% and 3.96% respectively.

Housing and Real Estate Investment Trusts were hit hardest in June for a variety of reasons, suffering 9.62% and a major 11.56% respectively.  Utilities – a sector that is very sensitive to interest rate increases – was not hit as hard as it could have been.

What this signals for the overall market is that continued upward pressure on bond yields, or some extraneous market dislocation could send already skiddish investors to cash out their positions and move to safer positions, which would undoubtedly put large negative pressure on US equities.

Problem areas remain the sub-prime mortgage/lending areas, as well as global interest rates and economic conditions.

Always view the larger picture when considering swing trading or position trading candidates.

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Market Index Updates at a Glance

Jun 30, 2007: 9:30 AM CST

It was a wild week of trading, to say the least!  I’m glad we made it to the weekend so we can pause and update our charts and catch a breath!

Next week is expected to be a very low volume week because the 4th of July falls directly in the middle – on Wednesday!  Some people may take off Monday – Wednesday, some Wednesday – Friday, and some may take the entire week.  I’ll still be trading but it will be small positions and I’ll be trying out new ideas I believe.

As of the close Friday, the Dow and S&P remain trapped between their 50 period and 20 period moving averages and appear to have hovered there for the last few sessions.  I’d like to see a clean break before committing larger swing positions – it appears the market is in pause mode (finally) now and volatility shouldn’t pick-up too excessively – if it does, a lot of traders will be caught unawares.  Don’t be lulled to sleep in low volatility environments.

I have purposely zoomed in to two-month charts of these indexes to highlight the contraction in swing and volatility – and to show the ‘trap between the moving averages’.

The Dow and the S&P chart are similar (from a perspective of technical analysis)  in terms of swings and relative price levels:



On these charts, we almost set-up a “Sweet Spot” trade.  These occur when a market has had an extended run, momentum divergences are present, a lower swing high forms (initial warning), a lower-low forms, price swings up to attempt a retest of the highs, failure occurs and price takes out the recently established lower low.

In terms of a swing chart perspective, this has not happened, but the market was dangerously close.  Luckily (for the bulls) price only bounced off the recent low and did not create a lower low – rather, we setup a support zone and should be entering a trading range for the time being (which coincides with low volume in the “summer doldrums” which has yet to materialize.

From what I’m seeing, it’s probably best not to put on bold, ‘all in’ swing or position trades just yet, but only you can determine this based on your analysis and your style.

The Nasdaq is also choppy, we was the Russell.



Take some time off to do some study and analysis this week… or just take time off and have fun.

I’m a big proponent of the notion that there is much more to life than trading.

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Link: Paul Castro’s Blog at Vestopia

Jun 30, 2007: 9:08 AM CST

I wanted to highlight a blog and service some of you may not be aware of yet.

Paul Castro is an author and investment director at  and he provides timely analysis on the market and news events, including his recent post “Tick-Tock” which is definitely worth consideration.

In the post, Mr. Castro discusses various points regarding China’s $5 billion investment in the recent Blackstone Group IPO, the fact that foreign purchases of US equities reached a record in April 2007 (foreigners purchased a total of $28.1B worth of US equities… the last time this happened was February 2000), implications of a falling bullish percentage reading on point and figure charts, and an interesting take on the “trucker” indicator (read to find out what that is!).

For those who wish to subscribe to his free service (invitations limited), he provides deeper analysis and also a listing of all the transactions he has entered or is monitoring (has buy orders in the market) for entry.

Head over to his blog, check out some of his posts, and learn from his unique perspective.  Momentum or certain swing traders will be rewarded, as his style of investment approach utilizes those skills and pattern recognitions.


Link: What are Your Goals in Trading?

Jun 29, 2007: 11:28 AM CST

Stockbee posted a thought-provoking column entitled “What are Your Goals in Trading?” that addresses the age-old question, “Should I trade to be right or should I trade to make money?”

At first glance, and to many new traders, it would seem these two concepts are irrelevant because you make money when you are right… don’t you?  The true answer is “not always.” The corrolary would be “You don’t make money when you’re wrong…” but sometimes you do (with hedges or certain option strategies).

Some strategies don’t require market prediction at all (some of these include ‘delta neutral’ strategies or ‘technical decision node’ spread entry strategies).

Nevertheless, Pradeep offers some quick logic and thought-provoking questions for you to consider in your trading.  If you are trading to be right (perfect), my suggestion is to reconsider and see why this strategy is a failed (or impossible) one.

If you are trading to make money (aren’t we all?  Not necessarily), then let go of your psychological need to be right and focus on achieving consistency in your analysis and trade execution (and trade management).

Fighting the ‘need to be right’ is something I have battled for years and, honestly, still do.  I get hurt when my trades don’t work out and I have to use mental techniques to get me back in the right frame of mind after a large loss or series of smaller losses.  It hurts my pride, absolutely!  But I’ve learned that making money and analysis/prediction acccuracy are not necessarily the same thing.  In fact, letting go – as difficult as it is – has a comforting effect at times – try it for yourself, even if the exercise is a small one.

Check out the link and give yourself a serious gut-check this weekend if your profits aren’t what you feel they should be and try to return to the basics.


Link: Position Sizing and Expectancy

Jun 28, 2007: 11:43 AM CST

Chris Perruna recently posted on the topic of Position Sizing and Expectancy (as discussed in great detail by Dr. Van Tharp – book reference included in post).

Attached are a few quotes from the post:

Most traders look for three major factors when developing a system:

  • How much to trade on each position
  • The right odds or positive expectancy
  • Number of trades or how much opportunity the system presents

Expectancy tells you what you can expect to make (win or lose) for every dollar risked.

It is your profit percentage per win multiplied by your win rate minus your loss percentage per loss multiplied by your loss rate.

Chris gives some mathematical examples for you to study and also lists Dr. Tharp’s formula for calculating expecancy.

He also generously offers three Excel spreadsheets, including an Interactive Portfolio management sheet.  Be sure to thank him for being so generous in this regard.

Check out the post and also Dr. Tharp’s book Trade Your Way to Financial Freedom.

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