Links: Market Top or Correction?

Jun 9, 2007: 8:16 PM CST

Chris Perruna posted a brief article with a few major points and well-annotated charts in his article “A Natural Correction or a Top?“.

Perruna notes, “Corrections are due when markets move up by 30% over their levels from the prior year.”

He also annotates charts on Crude Oil, the Nasdaq, and the Dow Jones.

I wanted to point to this brief analysis and have readers address the points he makes.

Also, if you wanted a major linkfest a Sunday afternoon reading, The Big Picture provides a plethora of links from blogs in categories such as the overall economy, market, and housing.

The Active Trader makes a bold statement with the post “What the Market Will Do Next” and notes that there could be similarities between the February 07 ‘crash’ and the June 07 ‘thing’.  The chart deserves a look.

Bill Cara’s Saturday report is another absolutely wonderful reference, containing various tables of ETFs and stocks sorted by one week relative price performance, as well as great market analysis.


Morning Charts on Momentum Divergence Unwind

Jun 8, 2007: 6:36 AM CST

Attached are swing charts with the 3/10 MACD momentum oscillator. The most recent daily bar on each index turned red following the decline, meaning we have extended 2.5 Average True Range readings from the market peak (near Dow 13,700 and S&P 1,540).

I know I write a lot that “Momentum Proceeds Price” in the form of divergences, but it tends to be true more often than not. Momentum readings definately can form a strong tool for your trading strategy, though they are not the ‘end all’ for a trading strategy alone.

Longer Swing Chart of the Dow:


Four month chart of the Dow:


In both charts, please note the rising price swings and declining peaks in the bottom pane oscillator. This is no coincidence. Buying pressure (strength) began to weaken as the rally continued. It was literally as if the buyers were running out of steam to push prices higher and any sort of news or reason would cause avalanche selling to trigger stops and anxious short trades in an environment with few buyers.

The same is true for the broader S&P 500 index:


The price swings and momentum divergence is a bit clearer in the S&P than the Dow because the Dow failed to make clear price swings, but rather it formed a pattern of almost a pure rise with extremely shallow (one day) counter-swings.

As a bonus, here is a Chart of the 10 Year Bond Price (@TY futures). Remember falling bond prices occur because of rising yields, and the bond market tends to lead the stock market in price and anticipation of economic conditions. This is true in terms of intermarket relations, but Kevin at Kevin’s Market Blog recently posted a possible day-trading indicator using indtraday pricing of the 20 year T-bond fund leading the S&P by an hour.  The bond market has been in free-fall since mid-May, signaling plenty of warning of (possible) impending doom.


The 10 Year Treasury Bond (price) is making new price lows and new momentum lows. It is only 30 points away from a 52-week low set almost exactly this time last year (7/07/06). That price low was 104.00 and we now stand at 104.30. Price is making lower lows and lower highs and the bonds are in a technically confirmed downtrend.

Caution is important and so is your own analysis on the markets and economic conditions.


Today’s Market Decline and Implications

Jun 7, 2007: 6:06 PM CST

Normally, I like to post charts of the general indexes and do minimal annotations and speak from the perspective of my own swing charts and momentum readings, but I wanted to showcase a few excellent brief commentaries on today’s action.

TraderMike writes a very concise yet informative post with an excerpt from the Worden Report in his “Stock Market Recap”. TraderMike posts some of the best snap charts of the daily action of the major indexes and is always worth a study.

The Trading Goddess, another popular blog, offers a quick S&P chart in the article “The Overall Market Tone has Changed… For Now“.

I wanted also to highlight a newer blog – Active Trader Blog – who recently posted a quick chart and post about the action and I had to reference his concluding question: “The ball has fallen off the building…will it crash or bounce?”. The author uses similar techniques as I and similar chart set-ups and I wanted to highlight the remainder of his posts and blogs. The blog is also frequently updated.

I actually almost referenced his site last night when I read his post Markets Doing as Expected where I wanted to reference his index chart and note the clear momentum divergence in the MACD bottom pane indicator.

The market was experiencing a prolonged momentum divergence and extremely overbought (overextended) conditions and a snap-back like this (400 Dow points suddenly in 3 days) is absolutely an expected result of such conditions. It was not a question of ‘if’ but ‘when’ and as Active Trader says, we must wait and see if it is over.

From StockCharts, we see a rare picture – it’s a day where almost everything has turned red on the market summary page.

First, ALL major US Indexes were down over 1% each. Notice the 3% daily damage to the Utilities (sensitive to rate increases).


All S&P Sector SPDRs were down as well. All 9 market sectors suffered.


As if that wasn’t enough bad news, every major market industry suffered today.
Only disk drives, hardware, and hospitals escaped a full 1% or more decline.


As if the whole of the US market declining wasn’t enough, every single MSCI iShares (via StockCharts) international fund was down.


And now it’s time to see green. What was green today? Hint: Most were green by greater than 2%


That’s right – the Treasury Bonds Yields. Bond prices fell, stock prices fell as a result of bond yields increasing extremely rapidly.

What’s likely to be worse is that traders could set off a panic selling wave for any reason whatsoever, especially those who ‘fear’ losing large gains they have recently made in this rising market that defied seasonal patterns (‘sell in May’) and overbought conditions, as well as a wave of relatively negative economic news for so long.

Please be careful and don’t panic out of positions because of a day’s action. Also, don’t jump in short just because every thing’s red for the same reason. Have a plan for what you do and how you trade and do so within contained risk parameters. The traders with whom I spoke with today said they survived because of risk controls. Others made a large profit short. Do what you understand and know why you do it – and know how to objectively quantify your actions and results so that you can make corrections as necessary when you were wrong or the market moved unexpectedly against you.

Remember, if you feel frozen, take any action at all. Put a stop-order in or a bracket order (a bracket order is a simultaneous entry of an upside stop-market exit and a downside stop market exit so that you’re guaranteed to exit the stop either at a price better than the current price or a bit worse than the current price. Either way, you will be taken out of your position). See my post on “Deer in Headlights” if you linked directly to this page.

It goes without saying: Be safe and learn from what’s happening.


How to Avoid “Deer in the Headlights” Syndrome

Jun 6, 2007: 8:35 PM CST

If this scenario has not happened to you, you haven’t been trading enough:

You’re excited. You see your set-up or read a great news report on a company and can’t wait to execute the trade. You do, buying a bit larger position than you’re used to, but this is the ‘sure fire’ trade they say that will make your year right in front of your eyes. Excitedly, you watch as you start to make money!

Suddenly, without warning, something goes wrong. “Why has the stock retraced to my buy point?!” you ask. “They must be shaking out the weak hands. I have to be strong!” you exclaim.

Before long, you’re underwater, but that’s ok. You didn’t bother to place a hard stop yet because, well, this was a great trade. Or maybe you did place a stop and you pulled it out when the market approached, sure that the market would reverse right when ‘they’ took your stock away by wicked stop-running tactics.

So now the stock has blown through your original stop and you’re still in the trade… losing money as a flood of (in this case) sellers are entering the market and driving the price lower against you.


You don’t know what to do. Your palms are sweating, your heart is racing and your head is pounding. “How could this be happening to me [again]?!” you exclaim.

You have just experienced “Deer in the Headlights” Trading Syndrome. You’re in a situation you never anticipated and you’re losing money faster than expected. You know you should exit (or get out of the road or oncoming traffic) but you can’t.

I can point to at least three occasions in my personal day-trading where this has happened and they stand out in my memory because they cost me so much money and I felt horrible for days after experiencing such unexpected and deep losses. Events like this force you to the crossroads – either you quit and walk away disgusted or you get back up and learn your lesson and vow never to let that happen again.

How can you prevent this from happening?

This is a little harsh, but really the only way to ‘overcome’ this is to have it happen to you personally – and I don’t mean superficially. I mean, you have to have an experience where it hurts your account, your pride, everything. But for those of you to whom this has not happened (and you are actively trading… especially day-trading), it will and the best thing to do is be prepared.

First, include this (or a similar) sentence into your trading plan:

“I will honor my stops” and “I will only take positions that are within my position sizing limits” or alternately “I will not take positions larger than normal” (define what this means for you personally.

But IF you violate these rules (that’s ok – don’t beat yourself up too much yet), then there’s one thing left to prevent a catastrophic loss that erodes days or weeks of profits:

When you are psychologically frozen, TAKE ANY ACTION AT ALL to unfreeze yourself.

What do I mean? Place a physical stop. Place a bracket order. Hit the “sell now” button. DO SOMETHING.

When you take action, you physically release the ‘block’ on your brain functioning. It might be the wrong action at the time, but it is an ACTION. Perhaps the stock will reverse but you can’t take this chance. Don’t lower your stop to the next technical decision node, be it a trendline or a moving average or a Fibonacci projection. Your mind is clearest when you evaluate risk/reward and support/resistance when you don’t have a position on. Negative psychological effects are at their lowest when our trading account is clear of positions and we can evaluate a bit clearer.

Technical analysis deals strictly in probabilities, not certainties. You cannot AFFORD to play in probabilities when you are rapidly losing money. It is best to kill the trade immediately, or alternatively, place a hard exit stop just below the current price (market order, that is, not a limit order. When you want out, you want out. Don’t play games for a few cents). If the market takes you out, at least the ‘pain’ stops. Odds usually favor the stock continuing its rapid descent rather than reversing. In the rare cases the stock does reverse after your exit, that’s fine. It’s just probabilities. You cannot AFFORD one trade to continue to go against you and negate weeks of profits. It is NOT an option and you must prevent large losses literally at any cost.

In summary, when you are gripped by fear and frozen by a rapidly losing position, TAKE ANY ACTION in your account – exit immediately or place a market stop-out order slightly away from price but do NOT play games, do not perform sophisticated technical analysis, and do not remain motionless.

When a car hits a deer, not only is the deer ‘damaged,’ (or killed) but so is the car (and sometimes the people in it).

When the market hits you like a car, the market is never the one injured – you are. Sudden catastrophic losses may destroy something more valuable than your trading capital: Your will to trade and your hopes and dreams in one fell-swoop. Prevent this above all else.

(deer in headlights guy picture credit:


How to find Strong Stocks using Scans

Jun 5, 2007: 8:47 AM CST

Although there are various websites and programs used to find strong and weak industries and sectors in the market, I use and compare results with Investortools. I do deep analytical scans the first weekend of the month and then cursory updates as needed (or desired) on the weekends if I’m not satisfied with potential candidates.

Here is a step-by-step guide to using’s Industry Strength Scan toolbar.

You do need an account to do this effectively, and signing up is free (I have no affiliation with A membership fee page is here. Basic service is $20 a month.

  1. Click on the EXPLORE tab (top of the page – reddish orange)
  2. On the little orange menu bar, click on INDUSTRY RANKINGS <—-link is here
  3. A table appears which describes broad trends in numerical form – default is 6 months and can be changed as desired
  4. Click on SEE HISTORICAL TRENDS for the graphical (color) chart — the default now is 1 year. Alter this as needed
  5. I generally change the period to 3 and 6 month trends depending on my purpose for scanning
  6. On the left side of the page is an explanation of how to read the chart properly

That covers how to view the trend charts and institutional money flow charts I post at times.

Now, that’s great and all, but how about using the table to find strong and weak stocks right now?!

Here is the procedure for scanning many charts quickly to find a strong watchlist of stocks:

  1. Click on any of the NAMES of the Industry Groups on the left. Generally scan the top 5 and bottom 5 and any interesting prospects you see.
  2. This brings up a list of all the charts of the companies in that group (the “stocks” bar tells you how many companies)
  3. Click on CHART CONTROLS to setup the charts the way you prefer them (it remembers your preferences if you sign-in
  4. I use the following: Six month charts, candlesticks, daily, simple moving averages 20, 50, and 200
  5. Next (important) go to FILTER CONTROLS
  6. Filter down as desired – I use ‘average volume’ = 400,000 and ‘minimum price’ = $25. Use your own filters
  7. View the general trends of multiple charts
  8. Make note of any ‘outstanding’ stocks up or down and view them with your normal charting program/website

Here’s an example of a “strong stock” from a “strong industry” as displayed in the chart scan screen:

A couple of notes from personal observation:

  • Stocks in strong industries tend to show greater relative strength and vice versa for weakness
  • Money flow is graphed left to right (date-wise).
  • The ideal pattern is red on the right, yellow in the middle, green on the left. This shows money is flowing IN to the group.

The “26” means it was in the 26th percentile of all stocks, then moved to the 47th and 62nd percentile, and now it’s in the 90th percentile.

  • You will generally find the above pattern in the upper-middle of the chart.
  • Ignore industry groups with less than 10 stocks in it. One stock can skew the results and provide erratic chart jumping behavior
  • Clear industry flow with a great number stocks in the industry tends to provide more reliable signals and candidates
  • This is no magic bullet system. You still need to overlay candidates into your system and practice money management/risk control.
  • There are always stocks on runaway uptrends and dismal downtrends no matter what the general market is doing. Always.
  • It is probably best to stay away from the ‘muddy middle’ of the chart because there isn’t much interest
  • For short candidates, scan the opposite pattern where money is flowing OUT of an industry
  • You can test your ideas historically simply by clicking on a date on the top of the chart (below the months) and the chart will refresh with that date as current and you can scan and see what ‘would have happened’ if you made decisions based on the readings of a particular date.
  • You can alphabetize industry groups by clicking on “Industry Group”
  • There are so many ways you can use these scans. Experiment.