Thursday, October 7, 2010

Waiting.....






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PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Wednesday, October 6, 2010

Rally Goes Flat Quick








PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Bulls Not Following Through...........So Far


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Tuesday, October 5, 2010

Bulls Gore Bears Quickly and Control the Markets







Don't forget to download the free booklet, "How To Use Bar Patterns To Spot Trade Set-ups", for more basic technical analysis methods, like the ones I just mentioned, to add to your toolbox.






The euro made a new high, negated the possible 5 wave impulsive decline I was tracking yesterday.  It looks like it will be making a charge to the 1.40 level.  Again, when the euro tops, so should equities.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Bears Don't Follow Through....Bulls Back in Firm Control


With today's rally to a new swing high, the decline from last Thursday's high (as shown here in the Dow) is a 3 wave move.  This means it's just a correction and suggests the market will charge higher in the coming days/weeks.



Not only is the decline in 3 waves, but the rally we're seeing now looks impulsive.  So the EWP evidence is strong that the market will continue charging to new highs in the coming days/weeks and at least attempt to enter my 1173-1181 reversal zone I've mentioned in the past.

One thing to note is that this big rally is supposedly in reaction to the Bank of Japan lowering interest rates to zero, and some other positive US data.  The move by the BoJ is more important to me.  These rallies from government intervention are often short lived and completely reversed.  So the action may have thrown a wrench into the wave count and make it difficult for wavers to get on board the short side.  Just like I want to see follow-through for the bears on the short side, I also want to see it on the bull side on rallies.  So tomorrow and Thursday will be more important than what happens today.

The euro made a nice 5 wave decline last night that I eluded to in yesterday's post. But the start of that 5 wave decline was exceeded early this morning so that count is invalidated.  When the euro turns, so should stocks.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Monday, October 4, 2010

Pretty Good Action Today for the Bears......Now the Follow-Through?


Internals today tell me that the decline was quite strong and the modest bump up in volume MIGHT be a good indicator of what might be coming this week.  If the market continues to decline while volume increases, it will be a big indication that minor wave 2 has topped and we're in minor wave 3.  The decline today was led by the small caps and technology while the VIX closed up 4.58%, so risk was pulling back today which could be the first signs of full on risk aversion coming back to the forefront after the long "risk on" trade that resulted from the Fed announcing they're going to become everyone's trading/investing backstop.  I expect volume to continue to increase on the move down otherwise we'll have to consider this pullback to just be part of a correction before charging to new highs.  But we'll wait to see what happens first before we start thinking about all that.


So it looks like my count from late last week was more accurate than the one I posted Sunday night.  It appears the ending diagonal (Elliott Wave Tutorial, 3.1), which is better represented in the Dow, has ended with a "throw-over" spike higher and reversal.  As I stated last Thursday, in Prechter and Frost's Elliott Wave Principle they state that, "Within a parallel channel or the converging lines of a diagonal, if a fifth wave approaches its upper trendline...[on heavy volume], it indicates a possible penetration of the upper line, which Elliott called 'throw-over'" (p. 73).  Thursday's uptick in volume into the 1.2 billion shares level certainly qualifies as heavy volume since volume of the past several weeks has held steadily below 1 billion shares most of the time.  So we certainly have a good structure here for solid Elliott Wave Principle counts that can give us solid confidence that some degree of top is already in place.

So we now need to see the decline unfold in larger impulsive patterns to help confirm that the larger trend has in fact turned down.  The larger the 5 wave impulsive patterns we see to the downside, the larger the degree of trend that has been reversed.  So we need to keep establishing shelves of resistance that can keep an impulsive count on track at larger and larger degrees.  Right now I see the 1148.26 level in the S&P cash index as a key level that needs to remain intact for now in order for us to remain confident that a significant top is in, and not just a minor short term setback.



Although the financials looked like they were going to continue with some strength into today's action, they ended up closing at about the same percentage down as the Dow, which was the strongest of the main indices I track.  But the financials are still dragging massively from the S&P as you can on the hourly charts.  As long as this behavior continues, it flashes a big warning sign for the bulls.  The market cannot sustain any meaningful rally over the long term without financials in my view.

Today's S&P close was the lowest close since September 23rd, signaling that the market wants to head lower for at least the short term.  Also notice on the daily chart that the RSI was diverging lower while price continued higher and it has now resulted in the lowest price close in over a week. 

The daily stochastics also show a diverging structure, trending to the downside, and with plenty of room to run as well.  Another bearish structure seen through a basic technical indicator.


And now the MACD "squeeze" is occurring big time on the daily chart.  You can see the moving averages are pinched, creating the "squeeze" on the histogram (circled in red).  This is another bearish structure and signals a big trend reversal may be setting up, and could already be in the making as we can see from what I mentioned above.

Don't forget to download the free booklet, "How To Use Bar Patterns To Spot Trade Set-ups", for more basic technical analysis methods, like the ones I just mentioned, to add to your toolbox.

FOREX




Today's decline in the euro is a promising start to what could be the initial signal that the major top I'm looking for might be in.  I was really hoping we'd break to a new low beneath 1.3665 to confirm that the decline was a 5 wave drop on the 15min chart.  This would of course be a great sign that wave 2 had completed and the euro's descent to much lower levels is underway.  This would also be another piece of evidence that the stock market has also topped as well.  So I'll be watching the pair into the Asian and european sessions tonight to see if it can in fact break that 1.3665 level soon, and add another check mark to the list of evidence we want to see to confirm that a major top in both equities and the euro is likely in.

Right now the odds favor those major tops being in right now, but we're far from confirming it with high certainty.  But that doesn't mean I don't see good opportunities for the bears here with good risk/reward ratios in various markets.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Sunday, October 3, 2010

The Week Ahead; Also a Look at Forex (EUR and GBP)

Administrative note: it's come to my attention that some bloggers are posting my charts and posts directly to their blogs.  I have no problem with this AS LONG AS THEY GIVE ME CREDIT FOR THE WORK.  That primarily means leaving a hyperlink to my website (http://principleanalysis.blogspot.com/) and leaving my website address on the charts.  Thank you.



My stance still remains solid for a high to be in place as of last Thursday.  But the lack of follow through, SO FAR, has me preparing for further upside.  Perhaps the ending diagonal type pattern (Elliott Wave Tutorial, 3.1) will extend a bit further, leading to more choppy rising potential.  A sharp blast higher would probably negate this count and make the rise a thrust from a 4th wave triangle with an attempt to get into the 1173-1181 zone I mentioned in previous posts.



Above is just a time relationship chart I did over the weekend showing why I have less confidence in a top being in now than I did going into Friday's action.  That doesn't mean a top may not be in, but the chances just seem a little less likely at this point.

As you can see from the 5min S&P chart, the impulsive decline from last Thursday was 27 bars, or 135 minutes while the ensuing corrective rally has taken 127 bars and 635 minutes.  That's quite a loooooong correction relative to the impulsive wave down it's correcting.  So if a top was in Thursday, I expect heavy selling early Monday morning to eliminate some doubt.



On the daily chart of the S&P you can see the results of divergence on the ROC compared to price.  When the ROC has not confirmed a new high or low, it has resulted in a solid reversal in the past.  Currently, we have a potential divergence in the ROC from the S&P's price, so a turn down in price with a nice daily close down should confirm this and help us add to the evidence of a major top being place.

For other basic technical indicators to help supplement your trading, don't forget to check out the free "How To Use Bar Patterns To Spot Trade Set-ups"  trading booklet while it's still available for free.


The daily euro count is looking ready for a top and reversal, although there are no signs of that happening yet.  The RSI is entering significantly overbought territory on the daily chart, the rally is looking like a 3 wave move and has entered a strong fibonacci reversal zone.  I think when the euro turns, so will stocks.




As I've stated before, the daily british pound vs. the dollar chart shows a divergence between the euro vs the dollar daily chart as the euro has been making new highs will the pound has not.  The last time this happened, it led to thousands of pips being shed from the EUR/USD.  But it also should be noted that the divergence lasted quite a few weeks before the euro fell.  So the current divergence doesn't imply that it will top tomorrow, but I feel that it does show that the major top and decline I'm expecting is imminent. 

The hourly charts of the euro and pound also show a divergence.  The euro has climbed significantly in this respect while the pound has failed to make new highs and has been flat.  So as long as this divergence occurs on the hourly charts, it's possible we'll find a top in the euro very soon.

PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Friday, October 1, 2010

Guest Article on Forex Trading


Why Do 95% of Traders Fail?
Most people who decide to embark upon the journey of becoming a professional trader in the stature of the legendary George Soros have no idea how difficult the path to consistent profitability is going to be.  New traders often think they will be able to open a trading account with as little as $10,000 and be able to live off of trading profits the rest of their lives.  But oh, how different reality tends to be.  Everyone knows the industry statistic that 95% of traders fail.  That is reality.  Most traders who open a trading account will lose most or all of the trading account within a few months.
Many people will realize the reality of life as a trader is much more difficult than what they had originally anticipated; thus, they give up on trading and move on to a new professional pursuit.  Then, there is a second group of people that blow up that first account, but they develop a love for trading and decide to refund the account, study, and continue toward the quest of consistent profitability.  Eventually as the months and years go on, more and more of this remaining group of traders fall by the wayside and give up on the dream of trading consistently.  And in the end, only about 5% of traders succeed and make a legitimate living from trading financial markets.  The question we need to answer is why?
I believe it can be argued that a large majority of the 95% of traders that fail, fail due to preventable reasons.  In other words, there are practical things traders can do to prevent failure, and unfortunately most traders do not implement these practical steps.  In this article we will address one specific step traders can take to dramatically increase the probability of trading success over the long-term.
Before we delve into the specific action step, let’s examine more closely why traders fail.  Although there are many generalities such as lack of discipline, poor money management, etc, the real reason traders fail is simple—they are losing money!  Why are they losing money?  It has to be one of two reasons.  Either they do not have a strategy that yields positive expectancy (makes money over time), or they do not execute their strategy.  Every trader who has failed and given up on trading has failed because of one of these two aspects of trading.
Strategy Development
Fundamentally, a technical trading strategy must yield positive expectancy.  Positive expectancy is a statistics term from mathematics that means when the strategy is backtested over historical data, it yields positive expectancy, or it makes money.  If a strategy cannot make money when tested over historical data, then it has negative expectancy, and cannot expect to produce profits in the future.  Thus, a trader who trades a strategy with negative expectancy has no chance of profiting in financial markets over the long-term, even on a forex demo account.
Thus, a trader must test his strategy over historical data and prove that his approach makes money.  This can be done in two ways.  The first is to have a programmer code out the strategy and then backtest the strategy and gather hard data concerning win/loss percentage, max drawdown, average winner, average loser, etc.  All of this data should be analyzed very closely in order to assess how to best trade the strategy in real-time in order to maximize profitability.  This exercise will give you a huge amount of confidence in your trading strategy, and when it is not performing at its peak, you will have the ultra-important element of confidence in order to continue trading the strategy and not give up.
The second option you have is to manually backtest the system.  This includes scrolling back through years and years of historical data with forex brokers in order to test your strategy in all market conditions.  Each time the setup occurs, take notes on whether the strategy was a winner or a loser, and why.  This style of backtesting is much more tedious and consumes much more time, but it can bring an even stronger sense of confidence to a trader.
In conclusion, there are many reasons that traders fail, but one of the primary reasons is that they have not become convinced of the merits of the strategy they are trading, and this is absolutely essential to long-term success as a trader.  Conducting personal research will help invaluably.

Bears Keep Putting the Smack Down, but Waiting for Follow-Through



The 5min Dow chart above shows that both yesterday and today the bulls came out of the gates strong, gearing up to gather momentum and surge this market to the moon with a vacuum affect first thing in the morning.  It failed miserably both times suggesting a process of reversing the bullish trend may be underway. 

Yesterday the rally was reversed sharply in an impulsive manner to a new low.  Then today the bulls rallied again right at the open, but not nearly as strong or high, and yet again the bears put the smack down and brought the market to a new low.  So the bulls are showing some exhaustion and the bears are starting to wakeup.  But now the bears need to gain control and not just play defense

Right now the move after the impulse decline yesterday morning is sideways and choppy, fulfilling its expectation of being a correction, which I am calling Submicro wave (2) which is shown in yesterday's post.  But the action from the high this morning is not impulsive so it suggests a new high on the day above the Dow's 10,866 will occur either today or Monday before Submicro wave (3) gets underway.  But the rally should stay below yesterday's high at 10,949.  Now this is what the market action would be if it moved in perfect Elliott Wave form.  But we know that's not always the case.  So even though the perfect scenario would mean a new high on the day while remaining below yesterday's high for Submicro wave (2) to top, we know that it can actually tank hard to the downside at any time.  So beware.

Aside from the lack of an impulsive decline today, we should also note that the euro rallied big today and is showing no signs of weakness, the VIX is falling, and Goldman Sachs and financials are showing relative strength to the rest of the market which all suggests the market isn't quite ready to get Submicro wave (3) underway quite yet. 

But as long as yesterday's highs remain intact, I'm firmly bearish in the short term.

PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

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