For Those Who Like Prediction… a Link

Apr 10, 2007: 11:18 PM CST

If you like newsletters or market predictions, a great site I discovered recently is Carl Futia’s site. Carl Futia obtained a PhD in Mathematical Economics.

He uses the Theory of Contrary Opinion and Box Theory (which he describes on his site). He frequently updates futures, including the Nasdaq and S&P.

Today, he posted price targets and support for a few major stocks, including Google (GOOG), IBM, and CME.

If you like outside opinions on price, the site is worth a look. Especially check out his warning post entitled “Should You Speculate” (his answer might surprise you).

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For Fibonacci Lovers: Recent Dow Action

Apr 10, 2007: 10:08 PM CST

Hey Fibonacci Enthusiasts: An interesting pattern occured in the Dow Jones Index that I thought was worth showing.

Since March 19th, we have had (in order):

  • A 5 day rally
  • A 3 day decline (counter-rally)
  • An 8 day rally

These not only constitute perfect Fibonacci sequence numbers, but evidence of greater (recent) buying pressure in the short-term.

dow-apr10.png

When people think of Fibonacci numbers, they often think of retracements/support/resistance/price projections. Also recognize that – at times – Fibonacci patterns are evident in daily price action and in trends (up days vs. down days). This would be a difficult way to trade, but it is worth analyzing and seeing if there is a possible edge. If for nothing else, it provides good market trivia.

Another interesting bit of trivia:

According to a Wall Street Journal Article, the Dow rising eight days in a row has set a record not achieved in the last four years!

This is further evidence of the lack of “trendiness” in the last few years of market action (and higher odds for mean reversion, than sequential price continuation on subsequent days).

If Fibonacci is correct, and if our Stochastic sell signal is correct, and if prior resistance is correct (two days of failure at 12,600), and if the prior gap serving as resistance is correct, then we should see short-term lower prices (a counter-wave or corrective price wave).

If not, then the market just did more than set a record – it beat high odds of a temporary (but brief) decline.

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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.

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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.

dow-apr-9.png

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.

dow-chemical-apr9.jpg

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.

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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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