AVERAGE DAILY VOLUME (ADV)

The theory behind Average Daily Volume is for execution.

The chances for a significant breakout or breakdown is enhanced by achieving around 50% of the average daily volume in the first hour of trading for the trend of your position. 

 

In another respect, if prices have been rising up to noon and the volume is only about 25% of the average daily volume, it is a signal that demand (buying) is drying up.  When the volume dries up on the buying (new highs on lower than average volume due to lack of demand), it is the signal for a reversal in the Bull trend; as prices seep downward, it will eventually trigger the stops of the Bulls creating a domino effect downward.  Likewise, if prices have been declining up to noon and the volume is only about 25% of the average daily volume, it is a signal that supply (selling) is drying up.

 

MARKET MAKERS

Market Maker (MM) is a brokerage or bank that maintains a firm bid and ask price in a given security by standing ready, willing, and able to buy or sell at publicly quoted prices (called making a market). These firms display bid and offer prices for specific numbers of specific securities, and if these prices are met, they will immediately buy for or sell from their own accounts. Market makers are very important for maintaining liquidity and efficiency for the particular securities that they make markets in. At most firms, there is a strict separation of the market-making side and the brokerage side, since otherwise there might be an incentive for brokers to recommend securities simply because the firm makes a market in that security.

Market Makers test the highs and lows in the first hour of the trading session for market direction. This is the rudder for the day. After the first hour, prices can be highly erratic from the publics' emotional trading, even to a point outside of the first hour's channel. The last hour is the confirmation of the direction where prices normally settle back to a sensible range. This is why you sell in the first hour trying to capture the peak of the MM's range test, and buy in the last hour or check your mental stop at the confirmation price.

A hard stop loss with your broker is like a For Sale Sign to the market makers and they will spike toward the stop and flick it off like a frog's tongue on a mosquito, then return to the base trading range immediately afterward; you can see this event every day at the open and close on a minute real time chart.

MM's are repeatedly triggering your stops.  They can't see a Trailing Stop, but they know how the public thinks, and spike up and down within the ranges of typical stops every day during the first hour of the trading session and at the close.

EMOTIONAL COMPONENT OF THE MARKET-TECHNICAL INDICATORS

TECHNICAL INDICATORS: Technical analysis is the only way to measure the emotional component of the market.

MOMENTUM:

Rate of Change (ROC)
Stochastics (%K,%D)
Relative Strength Index (RSI)
Commodity Channel Index (CCI)
Williams %R (Wm%R)
StochRSI
TRIX
Ultimate Oscillator (ULT)
Aroon

TREND:

Moving Averages
Moving Average Convergence Divergence (MACD)
Average True Range (ATR)
Wilder's DMI (ADX)
Price Oscillator (PPO)

VOLUME:

Accumulation Distribution
Chaikin Money Flow (CMF)
Volume Rate of Change
Volume Oscillator (PVO)
Demand Index
On Balance Volume (OBV)
Money Flow Index (MFI)

PULL-BACKS, CORRECTIONS, AND BEAR MARKETS

A Pull-Back is a move where the market interrupts the prevailing bullish trend, or retraces from a breakout, but does not retrace beyond the start of the trend or the beginning of the breakout. A pull-back which declines further to the beginning of the trend or the breakout would instead become a reversal or a breakout failure and becomes a Correction when the decline exceeds 10% and a   Bear Market when the decline exceeds 20%. 

DISTRIBUTION: Distribution is indicated by one or more of the major market indexes decline on increased volume from the previous day. Churning in the market indexes is also a sign of distribution. This occurs when a day's attempted advance stalls (shows very little change in price) on greater volume than the day before. 

BEAR MARKET CONFIRMATION: Four days of distribution, if correctly spotted over a two or three week period are often enough to turn a previous advancing market into a decline. The beginnings of a bear market usually follow a "test" of the previous bull market high on low volume followed by sharp declines on high volume. The confirmation date of a bear market is the date prices on both the DOW and TRANSPORTS break below the low point of the last bull market correction and continue to move downward.

APPLE MOVES MARKETS

1.     Apple is the world’s largest company by market value with a 4.5% weight in the S&P 500 and 20% weight in the NASDAQ 100.

2.     68% Margin on Apple iPhone 5 (cost $207 - $238 depending on 16,32,64 GB)

3.     Retail comprises two thirds of GDP

 

ARE YOU A ONE WAY TRADER?

The most important step toward profits is to identify the Market Trend; this is 50% of the game! Trade in harmony with the trend.  The action of the whole Market tells you when the selling is better than the buying and vice versa.  To become a successful trader, you must learn to judge by the action of the Market.  It is the action of the Market which carries the greatest influence with insiders. If the Market is declining sell short or raise cash and sit on the sidelines; likewise, if the Market is rising go long.

 

If you have a Bull Complex by all means get rid of it. Under its control you are a one way trader. You are biased, therefore unqualified to form an opinion uncolored by your leaning toward the Bull side. So, if you must have a complex, make it a Bear. Bad as it is one sided, you might better be a biased Bear than a biased Bull. The biggest and quickest money is on the Bear side. But why favor either side? Why not be a Bull in a Bull Market and a Bear in a Bear Market. If you say I can't sell them short, then you have no business to trade. Instead, become an investor if you like, and buy in panics and big slumps. But if you intend to be a trader, you must learn to operate on both sides fluently. After all, what difference does it make whether you buy first or sell first? Your objective is to derive a profit. So get rid of your complexes, if any, and ride 'em both ways. -- Richard D. Wyckoff

TRADING AROUND A CORE POSITION

Late August Due Diligence (DD) persuaded me into a core position for Speculating (months) in Xinyuan Real Estate Co. (XIN).  I was willing to hold a core position for several months.

 

I planned to scale in beginning with a position consisting of 10% of my capital/portfolio at $3.01.  I was prepared to add another 5% on a 20% dip around $2.40 but it broke out and I took a third off at $3.44 for 14% gain and another third off  at $3.28 for 9% gain. Friday, I added a third back (doubled up) at $3.16 for a 6% of capital/portfolio at $3.09 average just below the $3.10 support.  I plan to add another third if it pulls back to the $2.70 support reestablishing the 10% core position and another 5% around $2.40 to complete the 15% intended core position; otherwise I will scale out a third twice with gains if it breaks out of the current flag and repeat the process over and over again.

SCALING IN WHEN SPECULATING (weeks to months)

Rising tides lift ships and falling tides lower ships.  When uncertain with the Market direction over the course of a few months, scale in when speculating (weeks to months) on a stock.  For example, a full position should not exceed 20% of your capital/portfolio as discussed in “Risk Management” October 19.

I wanted to speculate in my IRA with Apple September before it broke above $700 with new all-time highs but I was uncertain with the Market Trend into the end of the year.  I opened half (10%) position at $694.  The Market appeared heavy the end of September so I trimmed the position back to 5% taking a 3% loss with plans to add back on the dip. Early October it dipped to the 100 Day Moving Average (DMA) at $630 and I doubled back up to 10%.  The day October earnings reported I scaled back in another 5% on the dip at $602.  I now have a 15% position in Apple at an average $643.  I am prepared to complete my scaling in of 5% around $500 in the event it dips that low; otherwise, I am content with the 15% position with a target around $800 (25% gain) over the course of a few months.

January 27, 2013 Update:
Added final scale-in January 15th at $489 for a $585 average full position and held into earnings.  Apple dipped on the best quarterly earnings in its history and is teasing with the $425 gap.  Not exactly what I planned, but will hold into September or $730 for a 25% gain.

May 26, 2013 Update:
Quite a wild ride down to the April 2013 low at $385.10 before reversing and currently trading above the 50 DMA at $445 and a 10 P/E.  I continue to hold a full position at $585 into September or $730.

MY CORE DAY/SWING TRADING STRATEGIES

DON'T:

1. Don't open a position in premarket.
2. Don't enter a setup before it breaks out.
3. Don't enter a position trading below ADV - average daily volume (less than quarter ADV first half  hour and/or half ADV the first hour of regular trading session).
4. Don't hold over night if not trading near High of the Day (HOD).
5. Don't allow a gain to turn into a loss.

DO:

1. Sell in the first hour and buy in the last hour.
2. Enter a position with "Changing of Guard" turns from red (negative %) to green (positive %).

OTHER:

1. Stochastics have a greater influence over Bollinger Bands.
2. Fair Value = SQUARE ROOT (22.5 x EPS x Book)

SUPPORT (Demand) and RESISTANCE (Supply)

Charts have great value to traders who understand them, because they constantly reflect the relation of Supply (resistance) and Demand (support). They reflect the development of forces that are likely to act as soon as they are strong enough to overcome the resistance that opposes them.  They present in graphic form accumulated evidence as to whether or not this resistance will be overcome.

A support level is a price level where the price tends to find support as it is going down. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed BELOW this level, by an amount exceeding some noise, it is likely to continue dropping until it finds another support level and the old support becomes resistance level.

A resistance level is the opposite of a support level. It is where the price tends to find resistance as it is going up. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed ABOVE this level, by an amount exceeding some noise, it is likely that it will continue rising until it finds another resistance level and the old resistance becomes support level.

Proactive support and resistance methods are 'predictive' in that they often outline areas where price has not actually been. They are based upon current price action that through analysis has been shown to be predictive of future price action. Proactive support and resistance methods include Measured Moves, Swing Ratio Projection/Confluence (Static (Square of Nine), Dynamic (Fibonacci)), Calculated Pivots, Volatility Based (Bollinger Bands), Trend lines/Channels and Moving averages, VWAP, Market Profile (VAH, VAL and POC).

Reactive support and resistance are the opposite: they are formed directly as a result of price action or volume behavior. They include Volume Profile, Price Swing lows/highs, Initial Balance, Open Gaps, certain Candle Patterns (e.g. Engulfing, Tweezers) and OHLC.

A price histogram is useful in showing at what price a market has spent more relative time. Psychological levels near round numbers often serve as support and resistance. More recently, volatility (Bollinger Bands) has been used to calculate potential support and resistance.

Most commonly used are Price Swing low and highs, Trend Lines, Channels, Moving Averages, Fibonacci Retracements, Swing rules, Psychological Level, Bollinger Bands, Candle Patterns (gaps, tweezers, engulfing).

When prices are above a gap they act as strong support, and when prices are below a gap they act as strong resistance. Also, moving averages act as "key supports" and "key resistance" zones. So when the price retreats to a MA it will bounce back up off it, so you would add just above a MA. If no strong support is available on a pull back it would be best to pass on adding more.

 

 

PROFITING FROM JUDGMENT NOT EMOTIONS

Bad news generally comes out at the bottom and the good news at the top of the swings.

 

The public usually buys on good news and sells on bad (trade on their emotions, not their judgment) Insiders and professionals do the opposite.

Trade the chart, not the noise (news, opinions, tips)

 

 

CHART PATTERNS AND TIPS FOR SHORTING

CHART PATTERNS FOR SELLING SHORT:
During a bull market and the transitioning to a bear trend, the “Inverted” Head and Shoulders pattern is the only pattern with a favorable failure rate less than 5%. As the market confirms a downward trend, an Inverted Cup with Handle, Pipe Tops, and Inverted Head and Shoulders ordered according to their performance are the patterns with a favorable failure rate less than 2%, a decline of at least 26%, and an ultimate low in less than 55 days.

 CLIMAX TOPS: Many leading stocks top in explosive fashion. They make climax runs (when a stock suddenly advances at a much faster rate for one of two weeks after an advance of many months). In addition, they often end in exhaustion gaps (when a stock's price opens up on a gap from the prior day's close) on heavy volume. These and related bull market climax signals are discussed in detail below:
1.Largest daily price run-up. If a stock's price is extended for many months (it's had a significant price run-up from its buy point of a sound and proper base) and closes for the day with a larger price increase than on any previous up days since the beginning of the whole move up, watch out! this usually occurs very close to a stock's peak, or top.
2.Heaviest daily volume. The ultimate top might occur on the heaviest volume day since the beginning of the advance.
3. Exhaustion gap. If a stock has been advancing rapidly is greatly extended from its original base many months ago and then opens on a gap up in price from the previous day's close, the advance it near its peak. For example, a two-point gap in a stock's price would occur if it closed at its high of $50 for the day and the next morning opened at $52 and held above $52 during the day. This is called an exhaustion gap.
4. Climax top activity. Sell if a stock's advance gets so active that it has a rapid price run up for two or three weeks on a weekly chart (8 to 10 days on a daily chart). This called a climax top. The price spread from the stock's low to high for the week will be greater than on any prior week since the beginning of the original move many months ago. In a few cases near the top of a climax run a stock may retrace the prior week's low to its high point and close the week up a little, with volume remaining very high. I call this "railroad tracks" because on a weekly chart you'll see two parallel vertical lines. This is a sign of continued heavy volume distribution without real additional price progress for the week.
5. Signs of distribution. After a long advance, heavy daily volume without further upside price progress signals distribution. Sell your stock before unsuspecting buyers are overwhelmed.
6. Stock splits. Sell if a stock runs up 25% to 50% for one or two weeks on a stock split.  Stocks tend to top around excessive stock splits. If a stock's price is extended from its base and a stock split is announced, in many cases the stock should be sold.

7. Increase in consecutive down days. The number of consecutive down days in price versus up days in price will probably change and increase after most stocks start down from their top. You may see four or five days down, followed by two or three days up whereas before you would have seen four days up and then two or three down.
8. Upper channel line. In a few cases, you should sell if a stock hits its upper channel line after a huge run-up. (on a stock chart, channel lines are somewhat parallel lines drawn by connecting the lows of the price pattern with one line and then connecting the highs made over several months with another straight line.) Studies show that stocks surging above their upper channel line should be sold.
9. 200-day moving average line. Some stocks may be sold when they are 70% to 100% or more above their 200-day moving average price line.
10. Selling on the way down from the top. If you didn't sell early while the stock was still advancing, sell, on the way down from the peak. After the first break down, some stocks may pull back up in price one time."

 

SELECTION CRITERIA FOR SHORTING A STOCK :

1. DON’T short with a RISING moving average, RS line, or MACD line.
2. DON’T short stocks with low volume (trades thinly) because it doesn't take much to panic the other shorts.
3. DON’T fall for a sucker short (too good to be true).
4. DON’T short a stock in a strong industry group.
5. Best if the stock had a significant run-up before topping out with no significant areas of support below.
6. Best to short with relative weakness (stock price dropping and index is going up).
7. Best to short when volume is higher than when the stock was climbing.
8. Best to short when short % of float is greater than 8% and stock has a negative cash flow.
9. Best not to short a stock with a small number of shares outstanding.

NOTES ON SELLING SHORT:

1.Half the shorts don't pull back to the breakdown point.
2.Sell in the first hour of the market's open and buy-to-cover in the last hour.
3.Stocks decline faster than they rise.
4.If shorted above the 50 DMA, the stock will bounce with lower highs off the 50DMA with lower volume due to cost averaging down effects of buyers.
5.Less reward when shorting below the 50 DMA and the 200 DMA.
6.Shorts perform poorly during June, holidays, and with light volume due to short squeezes.
7.Short stock opportunities are found when the stock doesn't participate in a market rally (relative weakness).
8.If you are short on a stock at the end of the business day before it goes ex-dividend, you pay the dividend (your account is credited) on the payable date.
9.Buy to cover during consolidations.

PRICE TARGETS FOR SPECULATION

Unless indicated, otherwise, my chart analysis data will be supported by Thomas N.Bulkowski's Encyclopedia of Chart Patterns 2nd edition. The main database consists of 500 stocks, each with a duration of 5 years beginning from mid-1991; 500,000 data points (500 stocks x 200 trade days per year x 5 years)! The data base captured the 1992-1996 Presidential Cycle perfectly for use in today's 2008-2012 Cycle. I even like the idea it didn't include the tech bubble. His sampling is from a large population and should be highly accurate; Bulkowski's only bias was stocks below $1.00 were removed assuming bankruptcy.

The following Chart Patterns yield the best returns, the the lowest risk for failure, and least amount of days to the price target in both a Bull and Bear Market:

 1. High and Tight Flags average 69% rise in a Bull Market, 42% rise in a Bear Market, 0% failure rate in both Bull and Bear Markets, 39 days to high in a Bull Market, and 25 days to the high in a Bear Market.

2. Pennants average 25% rise in a Bull Market, 21% rise in a Bear Market, 2% failure rate in a Bull Market and 2% failure rate in Bear Markets, 22 days to high in a Bull Market, and 18 days to the high in a Bear Market.

3. Bump-and-Run Reversal Bottoms average 38% rise in a Bull Market, 31% rise in a Bear Market, 2% failure rate in a Bull Market and 1% failure rate in Bear Markets, 186 days to high in a Bull Market, and 109 days to the high in a Bear Market.

4. Ascending and Inverted Scallops average 43% rise in a Bull Market, 26% rise in a Bear Market, 4% failure rate in a Bull Market and 7% failure rate in Bear Markets, 137 days to high in a Bull Market, and 104 days to the high in a Bear Market.

5. Head & Shoulders Bottoms average 38% rise in a Bull Market, 30% rise in a Bear Market, 3% failure rate in a Bull Market and 4% failure rate in Bear Markets, 176 days to high in a Bull Market, and 107 days to the high in a Bear Market.

6. Cup with and without Handle average 34% rise in a Bull Market, 23% rise in a Bear Market, 5% failure rate in a Bull Market and 7% failure rate in Bear Markets, 167 days to high in a Bull Market, and 63 days to the high in a Bear Market.

7. The worst case scenario for All Double Bottoms (Adam & Adam, Adam and Eve, Eve & Adam, and Eve & Eve) average 35% rise in a Bull Market, 23% rise in a Bear Market, 5% failure rate in a Bull Market and 8% failure rate in Bear Markets, 170 days to high in a Bull Market, and 105 days to the high in a Bear Market.

RISK MANAGEMENT

Stewardship

Good stewardship of your finances does require some effort. But the return is more than sufficient for the effort. This is why it is recommended not to exceed more than 5 positions. It is easy to lose focus with any more than 5.  Think of the stewardship of your portfolio as raising 5 toddlers. For their welfare and growth, you can't afford to take your eyes off of them for any given length of time.

 DO NOT TRY TO RECOVER LOSSES OVER NIGHT, OR TIE UP OVER 20% OF YOUR CAPITAL IN ONE POSITION.

Buy half positions to start. When they're up 2% (using alerts), Finish the Position

 "Stops on a Portfolio/Total Account"

1. Never take more than a 5% loss in your account in a single week

2. Never take more than a 10% loss in your account in a single month

 Risk : Reward

Risk: (Buy Price less Mental Stop Loss)

Reward: (Price Target less Buy Price)

Do not pursue if the Risk to Reward is less than 1 : 3.

Position Sizing

Do not risk more than 2% of your trading capital on any one position.

For example, your trading portfolio is valued at $10,000.

You want to execute a position on a stock priced at $100. with a MENTAL STOP at $95. The number of shares on your position would be calculated as follows ...

2% of $10,000 equals $200.

$200 divided by a tolerable stop loss at $5 ($100 price - $95 STOP LOSS) equals 40 shares.

This too, is subject to your comfort level (i.e. You may want to increase the STOP LOSS to $10, so you would only purchase 20 shares.)

SUGGESTED READS

Beginners:

HOW TO MAKE MONEY IN STOCKS by William J. O’Neil
A must Market foundation for Investors (months to years), Speculators (weeks to months) and Traders (day to weeks).

Intermediate:

SECRETS FOR PROFITING IN BULL AND BEAR MARKETS by Stan Weinstein

Advanced:

TECHNICAL ANALYSIS OF STOCK TRENDS by Edwards and Magee.

Reference:

ENCYCLOPEDIA OF CHART PATTERNS by Thomas N. Bulkowski

Enjoyment:

JAPANESE CANDLESTICK CHARTING TECHNIQUES by Steve Nison

REMINISCENCES OF A STOCK OPERATOR by Edwin Lefevre

JESSE LIVERMORE WORLD’S GREATEST STOCK TRADER by Richard Smitten

THE BATTLE FOR INVESTMENT SURVIVAL by Gerald M. Loeb

From a library of dozens of books I have read on the Market, the above should provide you with all the tools for success.  There are hundreds of others that make excellent door stops if you have the money.

 

WEINSTEIN'S SWING RULE

 

 

Simple concept with a high degree of accuracy. 

 

Take the peak price before a decline and subtract the next low price from it, then add the results to the peak price.

 

For example near term (days) $1.80 peak ignoring shadow extremes less $1.55 is $.25 plus $1.80 equals near term price target at $2.05. 

 

Short term (weeks) swing rule $1.80 less $1.20 is $.60 plus $1.80 equals short term target price at $2.40.

 

Long term (months) swing rule $1.80 peak less $1.00 is $.80 plus $1.80 is long term price target at $2.60.