Posted on March 30th, 2013 at 10:11 pm
by Jeff White
Last week, traders had just 4 days to get it done, and by the end of the week we had minor breakouts to new highs in all 3 of the major averages. The one curious piece of the puzzle is the index that has led the way higher since November isn’t joining the others – should we be concerned?
As we head into a new week of trading, it’s time once again to take a look at the indexes and the key levels they’re dealing with. This will impact how individual names move, so it’s where every new trading week begins.
Hit the gear icon on the player to select HD and then go full-screen for best quality.
Posted on March 27th, 2013 at 5:58 pm
by Jeff White
I was asked this past week why AAPL looked to be above a downtrend line on one chart but beneath the same downtrend line on another. Great question!
The short answer is that the scaling is different on the two charts.
You might have seen the words ‘arithmetic’ and ‘logarithmic’ in your charting program or your trading platform and wondered what they were. Aside from fancy words you might want to throw around at your next cocktail party, they’re really just references to the spacing of price on your charts. Arithmetic charts depict price moves in equally fixed increments, whereas logarithmic charts depict percentage moves in equally fixed increments. There’s more to them than that, but for the purpose of this post, that’s the grass-roots difference. (For a much more in-depth explanation, here’s a video from the Khan Academy.)
Who, you might ask, would use one over the other? I’m glad you asked! Generally, longer-term traders and investors prefer logarithmic charts as they’re wanting to see percentage moves to scale. And typically you’ll find that shorter-term traders prefer arithmetic charts as they want to see similar $ moves to scale.
What’s so interesting is that even though the same prices are being plotted on a chart, it can give you a bit of a funky comparison when looking at one vs. another. At the top of this post I mentioned AAPL in relation to its downtrend line. It’s now above that trend line on both arithmetic and logarithmic charts, so I’ve clipped back the chart a few days for the purpose of this example.
On the arithmetic chart, AAPL cleared its downtrend line on March 18 as it cleared the $445 level (which I happened to highlight the night before for members).
These two charts highlight very distinct differences even for a very basic trend line crossing. The arithmetic scale provided an earlier entry in price ($13) in this case, whereas the logarithmic scale required more time before price appeared to be on the move. To a swing trader like me utilizing trend lines frequently, that’s a significant difference.
Decide what’s best for you, and understand which of the two are most relevant to your trading style and timeframe.
Posted on March 26th, 2013 at 6:37 am
by Jeff White
The 50-period moving average is one often used by traders. In fact, simply applying a moving average to a chart will in some programs even default to a 50-period, and it’s one you’ll find on the charts depicted in many trading books and magazines.
It’s clearly popular, but is it relevant?
Maybe.
My take on moving averages is that they should only be applied when a trend is present, should only be relied upon as confirmation of what you should already be seeing in price, and that they should be customized to fit the pace of the existing trend. After all, that’s what a moving average is showing you – the pace of the trend.
What I mean by that is that a stock that’s accelerating higher with exceptional momentum should have a different period moving average than the steady-as-she-goes creeper of a stock. Generally speaking, the hotter the pace of the trend, the smaller should be the period of the MA. Likewise, the slower the pace of the trend, the more useful a longer-period moving average will be. Read this paragraph again slowly before you proceed! Too many traders think there’s magic in a moving average, but it’s simply something to reflect the pace of the trend, whether it’s a 50-period, a 13-period or any other number.
So there’s the explanation of it. Let’s get to what matters: some examples.
Up first is UNXL, which has been moving higher at a very rapid pace to put it mildly. The 50-day MA (shown in blue) is nowhere close to price, and therefore is completely irrelevant. Perhaps it was useful pack in late January, but keep in mind that as the trend accelerates in pace, the slower moving averages will simply get left behind and no longer matter. In this case, the 15-day MA (shown in red) has been keeping the recent pace of the trend. The stock is trending with great momentum, and a shorter period moving average is far more useful right now.
Up next is PII, which has been moving at a really slow pace. This is your grandfather’s uptrend, and the 200-day MA (shown in orange) is more useful here because it more closely tracks the pace of the trend. It’s a period that has been respected multiple times in recent months, whereas the (blue) 50-day has been totally ignored numerous times by price – it’s irrelevant because the pace of this trend is slower.
GILD, on the other hand has been respecting the 50-day for some time now. Pullbacks to that area have proven to be good entries on the long side. Although it still guarantees nothing going forward, the 50-day has proven useful for many months in this particular stock.
Finally, remember that all stocks will completely ignore ANY moving average when price gets caught in a trading range, so no moving average is relevant when that is the case. Pull them off your charts when that is the case! Here’s a look at BRCM and look at how frequently the 50-day MA was ignored as price zigged and zagged across it in recent months:
Here’s the bottom line: the 50-day MA might or might not be useful. Far too many traders leave it on their chart indefinitely and give it undue credit in too many cases. As price approaches it, they say “well there’s the 50-day so this is a good setup” and they don’t even stop to examine whether the 50-day MA has even been relevant recently. Don’t make that senseless mistake!
Instead of applying it (or any other fixed moving average) to every chart you examine, why not create a custom-made indicator for the trends you’re looking at? Maybe a faster MA will be more useful, or maybe a slower one. Just don’t get tied to one fixed-pace moving average and decide it’s the be-all, end-all solution for your trading, because that simply is not the case. Be more creative than that! Fiddle with the period until you get something useful!
If this is over your head and you need the 101 on technical analysis, don’t worry. That is the kind of thing we teach in our Basic Course, and you need to be in that course if you need more help understanding the charts or the fundamentals of trading.
Posted on March 22nd, 2013 at 4:16 pm
by Jeff White
Stocks churned last week just beneath their highs as the day-to-day Cyprus news continued to dominate the mood. This weekend brings another deadline which traders will anxiously be watching, and that could set the tone in the early going this week.
As we head into a new week of trading, it’s time once again to take a look at the indexes and the key levels they’re dealing with. This will impact how individual names move, so it’s where every new trading week begins.
Hit the gear icon on the player to select HD and then go full-screen for best quality.
Posted on March 15th, 2013 at 5:02 pm
by Jeff White
Main Street continues to be impressed by Wall Street and last week’s milestone for the Dow (10 straight advances into Thursday) was one not seen in many years. But does the bull still have some pep in his step? Let’s talk it over!
As we head into a new week of trading, it’s time once again to take a look at the indexes and the key levels they’re dealing with. This will impact how individual names move, so it’s where every new trading week begins.
Hit the gear icon on the player to select HD and then go full-screen for best quality.
Posted on March 8th, 2013 at 6:16 pm
by Jeff White
The indexes all reached new milestones last week as the NAZ and S&P 500 made new multi-year highs while the DJIA and RUT each reached new all-time highs. The bulls are still running, and there’s not yet a reason to expect that to change.
As we head into a new week of trading, it’s time once again to take a look at the indexes and the key levels they’re dealing with. This will impact how individual names move, so it’s where every new trading week begins.
Hit the gear icon on the player to select HD and then go full-screen for best quality.
Posted on March 3rd, 2013 at 1:56 pm
by Jeff White
Last week the indexes churned quite a bit with a Bernanke testimony, sequestration and the start of a new month all unable to drive prices convincingly in either direction. Ultimately, we finished mixed.
As we head into a new week of trading, it’s time once again to take a look at the indexes and the key levels they’re dealing with. This will impact how individual names move, so it’s where every new trading week begins.
Hit the gear icon on the player to select HD and then go full-screen for best quality.
Posted on February 24th, 2013 at 3:28 pm
by Jeff White
Last week we finally saw some selling kick in, and it was enough to shake things up a bit in the short term. Will it mark a lasting turning point, or is it merely another buying opportunity? Let’s talk it over and see what the charts have to say.
As we head into a new week of trading, it’s time once again to take a look at the indexes and the key levels they’re dealing with. This will impact how individual names move, so it’s where every new trading week begins.
Hit the gear icon on the player to select HD and then go full-screen for best quality.
Posted on February 21st, 2013 at 11:20 am
by Jeff White
As a kid, I’d get on any ride. No roller coaster intimidated me, I was game for anything. But then something happened, and I’m not sure what it was. Some kind of mental obstacle just appeared, and I’m not sure why. All I know is that in recent years, I backed away from the big rides. I got on some of them, but I didn’t like them! Why?
It wasn’t the speed, it was about control. Going fast doesn’t spook me, I’ve driven 150mph too many times. But in those cases, I’ve been the one choosing the speed, having control.
On a flight last fall, however, I was reminded just how little is within my control. It was at night leaving Philly in a nasty thunderstorm – the kind which paints the radar red. Why we took off, I have no idea, but it certainly got my attention. That plane got tossed all over the sky, and at one point I’d swear we dropped 2,000 feet in a couple of seconds. I was honestly terrified, but the Lord got me through it!
Following that gut check, I went to Disney World with my family. After the thunderstorm flight, no roller coaster held sway over me. I pushed the pictured 458 Italia to its limits around the track, but more importantly I rode every coaster and thrill ride in every park, without fear, because my perspective had shifted. Just like as a kid, I knew I wouldn’t die! That sounds ridiculous, but my fear was removed and I was released to have fun again. I had overcome my worry through reason and as a by-product of some circumstances (US Scareways).
So what does this all have to do with trading?
In trading, we have the ongoing opportunity to push ourselves, to confront fears, and to reason our way beyond obstacles which have simply appeared. But it’s not as if we can just push through and ignore it. Fear is our mind’s way of warning us of danger, right? So it isn’t wise to just ignore it, nor is it easy. I hear from traders almost every day who are too afraid to trade. They’re handcuffed and simply cannot pull the trigger no matter how pretty a setup happens to be. It’s overwhelming to them to just enter a position.
Getting beyond those mental hurdles takes a shift in perspective. It takes reasoning, and it takes some adjustments. Whereas that extremely turbulent flight happened by chance, in trading we have to create some of those new circumstances in order to train our minds to think differently again. That takes intentional effort, not sitting back and hoping things will suddenly feel different.
Maybe it means temporarily eliminating certain types of plays which have harmed you in the past. Or maybe it means you still step out in the way of some (assessed) risk, but you do so with extremely small positions. You know they can’t destroy you, and the aim is to get back in the saddle – not to immediately make money. That can happen later.
If you find yourself shell-shocked in the markets, for whatever reason, start creating a different reality, somehow. Find a way and be creative if you need to. Take baby steps until your confidence returns. Learn some new techniques, and only size up when you’re emotionally stable again. But you have to find a way to limit your risk and get beyond the worry of ruin. It’s the only way you’ll return to profitability and start having some fun again in the markets.
Posted on February 19th, 2013 at 11:55 am
by Jeff White
The RHT daily chart is caught in a downtrend channel over the past few months, yet zooming out on the chart reveals what looks to be a pullback within the context of an overall uptrend.
So…who’s right, the bulls or bears here?
Both of them can be, and that’s because your view on a chart and the way you respond to what you see should be a function of your timeframe.
Short-term traders should pay the most attention to the most recent price action, which reveals a bounce within a correction phase that’s been underway since last spring. Bounces within the channel have been getting sold, so the short side is the one that will pay best until that changes (break of upper trend line, currently near $57). Also note how choppy the bounces within the channel have been vs. the declines which have been far smoother.
This intermediate-term chart shows RHT working lower in a well-defined channel with bounces to the upper end being followed by smoother selloffs to lower lows.
Those with a longer-term view see this as a pullback within a longer-term uptrend, which could present another opportunity for upside once it gets resolved. Those with holding times of months or beyond can wait for a turn up out of this channel to indicate the potential for another leg higher as strength returns.
This long-term weekly chart of RHT shows the stock has produced a sizeable advance over the past few years with the price action of the past few months looking like merely a pullback within the longer-term trend. A turn up out of this channel would be needed to set this stock back on the course of higher prices, but it’s a real possibility.
Opinions are a dime a dozen, and that’s not what you need for your trading. Instead, first consider your timeframe and then seek to discover some if/then scenarios for taking action.
Successful trading isn’t about predicting what happens next, it’s about taking the right kinds of risk with your capital. That becomes far easier when you stay objective with the price action you’re seeing on your preferred timeframe.
As a kid, I’d get on any ride. No roller coaster intimidated me, I was game for anything. But then something happened, and I’m not sure what it was. Some kind of mental obstacle just appeared, and I’m not sure why. All I know is that in recent years, I backed away from the big rides. I got on some of them, but I didn’t like them! Why?
