My Stock Winners

On May 12, 2006, the euro’s rally from the November 2005 lows exceeded the 61.8% retracement resistance of the decline from the highs of December 2004 (Fig. 3a, point 1). This indicated that the euro’s uptrend had resumed, which is consistent with the completion of the falling wedge formation that was shown in Fig. 2. Now, let’s look more closely at the rally from the November lows at 1.1661 to the May highs at 1.3003. So far, the euro has held above the 38.2% support level at 1.2500 with next support at 1.2330, the 50% retracement level. The daily chart does show a flag formation, lines a and b.The completion of this formation would indicate that the Euro’s uptrend had resumed.

Most investors by nature will “go long” when they buy stocks. Few investors naturally will short stocks (or bet on their decline) because they really don’t know what to look for. Some investors see the shorting process as somewhat counter-intuitive to the traditional investing process since many stocks do appreciate over time. That said, there is a lot of money to be made by shorting, and in this article, we’ll give you a list of signs that show when a stock might be ripe for a fall.

Technical Trends
Look at a chart of the stock you are thinking about shorting. What is the general trend? Is the stock under accumulation or distribution?

It is not uncommon to see a stock that has been in a downtrend continue to trade in that same pattern for an extended period of time. Many traders will use various technical indicators to confirm the move lower, but drawing a simple trendline may be all that is needed to give a trader a better idea of where their investment is headed.

As you can see from the chart below, the declining trend will make it difficult for an investor to gain on a move higher because the position will need to fight against the major underlying trend, which in this case is downward

Insider Selling
There are plenty of reasons why an insider might sell his or her stock. This may include buying a home, or simply a desire to book some profits. However, if a number of insiders are selling the stock in large quantities, it may be a wise move to view this as a harbinger of things to come. Keep in mind that execs have extraordinary insight into their companies. Use this information to your advantage and time your short sales accordingly.

Amazon’s insiders sold over 1 millions of shares in just the past few months.

Fundamentals Deteriorating
You don’t need to find a company that is on the verge of bankruptcy to successfully short its stock. On the contrary, you need to see only a mild deterioration in a company’s overall fundamentals for big holders of the stock, such as mutual funds, to get fed up and dump the shares.

Overvalue
Amazon is currently trading at a PE ratio of 120, forward earning of around 60 makes it a clear short sell candidate.

The weekly chart above, Fig. 2, shows the entire rally from the euro’s late 2000 lows at .8245 up through the latter part of July 2006. I have outlined the euro’s first three major corrections; the first labeled b-c, retraced 38.2%, the second (d-e) retraced 50%, and the third (f-g) resulted in a 61.8% correction. This illustrates the Fibonacci symmetry that is often seen in a major rally or decline. The major Fibonacci support levels of the rally from .8245 to 1.3687 were calculated as follows: 23.6%-1.2402, 38.2%-1.1608, 50%-1.0966, and 61.8%-1.032. The euro, after attempting to rally from the daily 50% support level (Fig. 1), again turned lower, breaking back below the daily 50% support (1.2716) at point 2, and then the 61.8% (1.2486) support level. You will note on the weekly chart above (Fig. 2) that the major 23.6% support at 1.2402 was also broken. The euro did attempt another rally in the middle of 2005, but then turned lower late in the year declining to a low of 1.1661 and holding just above the weekly 38.2% support level at 1.1608 (point 3). The euro formed a classical falling wedge formation in 2005, lines B and C, which was resolved on January 7, 2006 at point 4. This indicated that the euro would move higher in 2006, which we will see when we look at the rebound in terms of Fibonacci ratios.

Trading Tips – Introduction to Fibonacci – Part 2
In the previous article, I introduced how the Fibonacci ratios of 0.236, 0.382, 0.500, and 0.618 could be used in a strongly rising market to determine good levels of support where new positions could be considered. These are noted in the charts that follow as percent levels: 23.6%, 38.2%, 50%, and 61.8%. In this article, I will continue the discussion of the Euro FX Composite through July 2006 and then look at some examples of how the Fibonacci analysis can be applied to stocks and to intra-day data.

Previously, we looked at the euro from the lows in 2001-2002 up through the correction, which ended in April-May of 2004. The Euro FX, after rallying from the lows at point g, moved sideways for the next five months with support at 1.1944 and resistance at 1.2449. The resistance was overcome on October 15, 2004 (point 1) and the euro quickly surpassed the previous highs, reaching the 1.3687 level on December 30, 2004 (point h) The initial correction from these highs was quite sharp as the 23.6% support level was broken, which was followed four weeks later by the 38.2% support at 1.2930. The euro was finally able to reach the 50% support level on February 2, 2005 (point 2) and then turned higher. At this point it was important to look at the long-term Fibonacci support levels as well…

To be continued..

The euro moved sharply higher from the low at 1.0759 and quickly tested the previous highs before it underwent a two week correction. The breakout to new highs was supported by heavier volume and the euro continued to rally sharply, making an initial peak in early 2004. The euro managed to make further new rally highs in February at 1.2919 (point f). In little over a week, the uptrend and the 23.6% level were both broken at point 3, indicating a correction was definitely underway. The 38.2% support level at 1.2093 was also soon broken, which made a decline to the 50% level at 1.1839 more likely. This level was also violated, so it was very important that the 61.8% support level at 1.1584 held. The euro finally made its lows at 1.1745 during the week of April 27th, 2004. The longer term support levels of the rally from .8571 to 1.2919 (not shown on the chart) were as follows: 23.6% at 1.1871, 38.2% at 1.1249 and the 50% at 1.0734. Even though the longer term 23.6% support was broken, the decline held well above the 38.2% support at 1.1249. I mention this to demonstrate that one does not always see the convergence of long and short term Fibonacci targets, as was evident in the prior example.

In the next article I will continue my discussion of the Fibonacci analysis of the euro and take you up through the 2005 peak at 1.3687. Also we will take a look at how Fibonacci analysis can also be used to analyze both the resistance levels during rallies within major downtrends as well as the short-term swings on the intra-day charts.

So far we have just been focusing on the daily rallies, but it is important to never lose track of the big picture. We have discussed the importance of looking at the weekly charts and it is important to also keep an eye on the longer term Fibonacci analysis. In Fig. 3 we were focusing on the euro’s rally from .9571 to 1.1928, but at the same time we should be looking at the Fibonacci analysis using the previous low of .8549 and the high at 1.1928. The 23.6% support level of this rally was at 1.1130, which was broken the week of August 23, 2003 along with the weekly uptrend. The next level from the longer term chart was the 38.2% support at 1.0637. Therefore, you had the daily 50% support level at 1.0749 and the weekly 38.2% support level at 1.0637. The convergence of these Fibonacci levels (see circle labeled e) made this a critical level of support. The euro as discussed earlier made a low of 1.0759.

The euro rallied sharply over the next four months, forming a short-term peak in early March, then, after a four-week correction, resumed its uptrend. The euro eventually reached the 1.1950 level (point d) and then moved sideways for two weeks before starting a deeper correction. At this point, the analyst would start to examine the entire rally from the low at .9571 (point c) to the high of 1.1928 (point d). Once again, we look at the difference between the high and low to determine the Fibonacci levels to watch: 1.1950 - .9571 = .2357. The 23.6% level at 1.1371 was broken on July 3rd and the 38.2% level at 1.1027 held until August 21st when it was also broken. This made the next key level of support at 1.0749 the 50% support level. After the 38.2% support was broken, one was able to identify the continuation pattern (blue lines) that eventually took the euro to a low of 1.0759, just holding above the 50% Fibonacci level. The break through resistance at point 2, completed the continuation pattern.

The rally continued for six more weeks before the euro made its high versus the dollar at 1.0185 (point b), and turned lower. The euro also declined the following week, consistent with a deeper correction. In order to determine at what level the correction might end, you take the distance from the low (point a) to the high (point b) then subtract this distance times 0.236, 0.382, 0.500, and 0.618 (Fibonacci ratios) from the high to get four difference retracement levels. These are shown on the chart as 23.6%, 38.2%, 50%, and 61.8%. Most software programs allow you to do this very easily. You will note that the 23.6% level was broken the sixth day after the highs. Fibonacci analysis would conclude that the next level to watch was the 38.6% support level at .9560. The euro reached this level on September 17th (point c) but then rallied to close the week higher. This became an important level of support because if it were broken, the next Fibonacci support level was at .9367, which corresponds to the 50% retracement level. Any long positions that were established after point c should have been initially protected with a stop under the 38.6% support level. The continuation pattern was completed on October 30, 2002, at point 1, indicating that the uptrend had resumed.

It should be no surprise to most of you that, in addition to the tools and knowledge that you bring to trading, the mental component is equally, if not more, important. In order to act at the right time, not only must you have done the analysis, but you also must have confidence in your analysis. Novice traders will often go through a frustrating period where they act too late, and the next time act too soon, losing money both times. This is sometimes the result of faulty analysis, but more often it is because they lack the confidence to act based on their analysis. Of course, everyone is different, and some successful traders require just a minimum of analytical tools to trade successfully, while others prefer to have several confirming analytical tools before making their decision. Fibonacci analysis is one such technical tool, and it is based on a series of numbers developed by an Italian mathematician, Leonardo Fibonacci, in the 12th century. From a trading perspective there are many basic as well as advanced ways that they can beneficial to the trader. Suffice it to say that this series of numbers and the relationship of one number to another in the series have been found throughout nature. The most notable relationship can be found by dividing one Fibonacci number by the next one in the series, which will give you the golden ratio, 0.618. In these articles, I will just cover the basics; however, if you would like a more detailed discussion of Fibonacci, I recommend Joe DiNapoli’s book Trading with DiNapoli Levels: The Practical Application of Fibonacci Analysis to Investment Markets.

There are two primary ways that I use Fibonacci analysis in my trading, one is to further identify or confirm support or resistance levels and the other is to help identify price targets. In this article I will concentrate on identifying levels of support. Often times, a trader will look at a market and realize that when they were not paying attention a significant level of support or resistance was broken and the market has already moved significantly confirming the breakout. The problem then becomes determining a favorable level at which to enter the market. Many times, the novice will wait several days for a correction, but won’t have enough patience, and end up jumping in at just the wrong time. Fibonacci analysis can help the trader to better define both their entry and exit price. For these examples, I will use long-term data of Euro FX global futures, which will demonstrate that the Fibonacci relationships can repeat over and over again. The euro declined from its inception in January 1999, and in late 2000 and early 2001 formed a double bottom formation (see blue arrow). The euro turned up in 2002, breaking first its short-term downtrend and then confirming the double bottom on June 1, 2001 (point 1). This chart shows a series of rallies and declines over the next four years that are labeled “a�? through “i.�? We will discuss each of these phases in more detail.

Trading Tips ? Introduction to Fibonacci ? Part I

It should be no surprise to most of you that, in addition to the tools and knowledge that you bring to trading, the mental component is equally, if not more, important. In order to act at the right time, not only must you have done the analysis, but you also must have confidence in your analysis. Novice traders will often go through a frustrating period where they act too late, and the next time act too soon, losing money both times. This is sometimes the result of faulty analysis, but more often it is because they lack the confidence to act based on their analysis. Of course, everyone is different, and some successful traders require just a minimum of analytical tools to trade successfully, while others prefer to have several confirming analytical tools before making their decision. Fibonacci analysis is one such technical tool, and it is based on a series of numbers developed by an Italian mathematician, Leonardo Fibonacci, in the 12th century. From a trading perspective there are many basic as well as advanced ways that they can beneficial to the trader. Suffice it to say that this series of numbers and the relationship of one number to another in the series have been found throughout nature. The most notable relationship can be found by dividing one Fibonacci number by the next one in the series, which will give you the golden ratio, 0.618.

Figure 1

There are two primary ways that I use Fibonacci analysis in my trading, one is to further identify or confirm support or resistance levels and the other is to help identify price targets. In this article I will concentrate on identifying levels of support. Often times, a trader will look at a market and realize that when they were not paying attention a significant level of support or resistance was broken and the market has already moved significantly confirming the breakout. The problem then becomes determining a favorable level at which to enter the market. Many times, the novice will wait several days for a correction, but won?t have enough patience, and end up jumping in at just the wrong time. Fibonacci analysis can help the trader to better define both their entry and exit price. For these examples, I will use long-term data of Euro FX global futures, which will demonstrate that the Fibonacci relationships can repeat over and over again. The euro declined from its inception in January 1999, and in late 2000 and early 2001 formed a double bottom formation (see blue arrow). The euro turned up in 2002, breaking first its short-term downtrend and then confirming the double bottom on June 1, 2001 (point 1). This chart shows a series of rallies and declines over the next four years that are labeled ?a? through ?i.? We will discuss each of these phases in more detail.

The double bottom is a major reversal pattern that forms after an extended downtrend. As its name implies, the pattern is made up of two consecutive troughs that are roughly equal, with a moderate peak in between.

Although there can be variations, the classic double bottom usually marks an intermediate or long-term change in trend. Many potential double bottoms can form along the way down, but until key resistance is broken, a reversal cannot be confirmed. To help clarify, we will look at the key points in the formation and then walk through an example.

Prior Trend: With any reversal pattern, there must be an existing trend to reverse. In the case of the double bottom, a significant downtrend of several months should be in place.
First Trough: The first trough should mark the lowest point of the current trend. As such, the first trough is fairly normal in appearance and the downtrend remains firmly in place.
Peak: After the first trough, an advance takes place that typically ranges from 10 to 20%. Volume on the advance from the first trough is usually inconsequential, but an increase could signal early accumulation. The high of the peak is sometimes rounded or drawn out a bit from the hesitation to go back down. This hesitation indicates that demand is increasing, but still not strong enough for a breakout.
Second Trough: The decline off the reaction high usually occurs with low volume and meets support from the previous low. Support from the previous low should be expected. Even after establishing support, only the possibility of a double bottom exists, it still needs to be confirmed. The time period between troughs can vary from a few weeks to many months, with the norm being 1-3 months. While exact troughs are preferable, there is some room to maneuver and usually a trough within 3% of the previous is considered valid.
Advance from Trough: Volume is more important for the double bottom than the double top. There should clear evidence that volume and buying pressure are accelerating during the advance off of the second trough. An accelerated ascent, perhaps marked with a gap or two, also indicates a potential change in sentiment.
Resistance Break: Even after trading up to resistance, the double top and trend reversal are still not complete. Breaking resistance from the highest point between the troughs completes the double bottom. This too should occur with an increase in volume and/or an accelerated ascent.
Resistance Turned Support: Broken resistance becomes potential support and there is sometimes a test of this newfound support level with the first correction. Such a test can offer a second chance to close a short position or initiate a long.
Price Target: The distance from the resistance breakout to trough lows can be added on top of the resistance break to estimate a target. This would imply that the bigger the formation is, the larger the potential advance.

Anticipated breakout to Stage 2 from Major Support (MS). CIN has been trying to bottom for a month and, in the process, has built a base of MS. There is also some interesting bar-by-bar analysis that suggests that a bullish move might be at hand. On Aug. 22nd, at the most bearish time of the day, it was a very bearish 10/10 bar; however, it did not take out a prior low, and closed well off the low, leaving a Bottoming Tail (BT). Then 3 days later, it gapped down, creating a minor bearish mortgage play, but had no downside follow through and closed very bullish with a wide range body. The gap down also was a higher low than the mentioned BT candle. Then, CIN consolidated for two additional days in the upper part of the week’s range, above its 20MA. These are all signs that buyers are stepping up to support the stock at these levels. Additionally, although not shown, the weekly chart is also on MS, threatening a similar break to Stage 2. There is little supply to halt a move out.

Gaps occur when there is a dramatic change in market conditions. They can occur at the beginning of a trading session (i.e. most NASDAQ stocks) or even during the session itself. There are three types of gaps that are of interest to us when we analyze charts: breakaway, measured (also known as continuation) and exhaustion gaps. Today we will discuss the breakaway gap.

Breakaway gaps occur at the end of moves in the opposite direction of the previous trend, signaling a reversal. They can also occur after a consolidation. Either way, they tell us that buying (or selling) pressure is strong and that we can normally expect price to continue in the direction of the gap.

Our first example, ABS, shows a nice breakaway gap in mid-February. At the time, how can we know for sure that this is a breakaway gap? By looking at other chart patterns to help us - we also have a trendline break as well as a volume climax at the same time. All three of these patterns indicate a trend reversal.

HON gives us an example of a breakaway gap out of consolidation in late February. This gap broke through potential resistance. Other signs of a continued move up are the fact that the gap bar was preceded by a breakout move from an ascending triangle formation.

Our final example, CHL, is meant to illustrate the fact that the significance of a gap is relative to the security. When you see a gap occur, be sure and look at the chart and determine whether this gap actually means something or is merely a continuation of normal behavior. Pay particularly close attention to the significance of a gap on NASDAQ stocks.

Breakaway gaps are helpful, but they are NOT tradable without further confirmation. Notice that in both of the examples above I made sure to look for other chart patterns to help confirm the significance of the breakaway gap. Learning to identify and correctly interpret a breakaway gap will also help you identify strong reversal and breakout candidates.

Of course, combining the weekly and daily data can often allow the trader to further fine tune their entries and exits. The daily chart shows the completion of the triangle formation and the quick rally to the $17 area, line A. For the next ten trading days, LYO consolidated as it frequently dropped to the S1 support, (dashed line), and occasionally the S2 level, (solid red line). With the close above the previous highs, (line A), at point 1, it was a good time to raise the stop from $15.19 to $16.43. The LYO quickly ran up to the $19 area and two days later, on July 22nd, (point 2), was the only time the S1 and S2 levels were violated. Despite this strong drop, the stop was never in danger, and once the resistance at $19, (line C), was overcome at point 3, the stop could have been raised to $16.93, or just above break-even. The daily OBV was also positive during the July-September period as it continued to make higher highs, confirming the price action.

In conclusion, I hope you have started to see how the pivot points might be integrated into your trading. Also, I hope that any time you consider a trade that you will calculate the reward/risk ratio on each trade you place. If you only take trades where the reward/risk ratio is over 3, you will be better able to protect your trading capital. In the next part of this series, I will further explore pivot point analysis and show how it can be used to exit trades and to scale out of positions.

Often times, traders cannot resist the urge to buy or sell at these extremes, only to have the position quickly go against them and stop them out. Invariably, the market will then resume its original direction, leaving the trader without a position and very frustrated. By noting the relationship of prices to the STARC bands, one can gauge the risk on both the long or short side.

For the first chart (Fig.1) I have selected one of the most volatile markets, crude oil. During the period from April through late May, crude had several wide swings which illustrates the usefulness of the STARC bands. During early April, the upper STARC+ band was tested, indicating that this was a high-risk time to buy and prices quickly reversed, testing the lower STARC- band just seven days later. The drop to the lower STARC- band on 4/13/05 was conversely a high-risk time to sell and a therefore a low-risk time to buy. Just six days later crude rallied from a low of $49.60 to a high of $56, as once again the upper STARC+ band was tested. Just three days later the lower band was again tested as crude had dropped over $6 per barrel. Obviously, focusing on these swings was appropriate for only the very short-term traders. A more useful example for most traders is when the downtrend (line A) was broken on June 1st at point 1.

There were some other valuable technical reasons, in addition to the trendline break, that suggested crude oil had resumed its uptrend. For example the OBV, which we discussed in earlier articles, had been acting very positive before the trendline break. Even though prices were making lower lows in April and May (line B) the OBV was making higher lows (line D). This was confirmed when the OBV moved above its resistance (line C) four days before the price resistance (line A) was broken.