What is Thy Bidding My Master

How to bid in auctions:
The formulas explained here, in their simplest form, can be applied to any purchase you make with the intent to resell for profit and many other applications, from gold bullion to a piece of real estate at an auction. Given the fact that those real estate auctions are everywhere now you should know this before you bid on one.  There is no big mystery to the math, but the real work is done during the due diligence period before the auctions, which is when experience comes into play.

1) Determine your profit margin. Say you want to make 25% P (P= Profit) on a property worth $180K FMV (FMV = Fair Market Value). Your highest bid (HB) then is calculated as follows:
HB = FMV * (1-P)
HB = 180,000 * 0.75
= 135,000

2) Typically those auctions, live or online, have a buyer's premium (BP) watch out and read the ffine print. So you have to add that to your calculation. In this case your New Highest Bid (NHB) is recalculated as follows:
Assume your BP is 5% (0.05)
NHB = HB / (1+BP)
NHB = 135,000/(1.05)
= 128,572

So 128,572 NHB or thereabouts is your maximum bid to achieve the profit margin you seek. Simple as that.

Keep these formulas in mind when you are buying anything with the intent to resell. Do your homework before you participate in these auctions whether in person or online, and don't get carried away in a bidding war. I know this is not stock related, but it’s similar to figuring out your buy limit order and not chasing a stock. It’s all in the ball park.

Peace and profits to all,
@stockaddict

Support and Resistance Zones. A New Concept in Technical Analysis.

Swing trading is my favorite trading style; the planning ahead and the follow through. Win or lose you know you did a good job following your plan. When you win you are confident in knowing that you can do it again with a similar plan. When you lose with a disciplined stop your solace is in knowing that you followed your plan, then you learn from your loss and move on.

One of my most common swing trading styles is buying support on signs of strength.  I apply the concept of Support and Resistance Zones to stocks that do not have a clear support or resistance line to contain 100% of the move. You will find in most cases that a double line can be drawn to contain an area that encompasses the unruly moves and creates a narrow range instead of a simple line.  These zones contain candles, or wicks and tails of candles of such unruly stock, especially when charting on different time frames.

Typically the inside line of the zone contains the majority of the stock move and has the most tags, while the outer line contains the straggling candle(s) action.

The TA support/buy zone is a tight price range where it is acceptable for me, from a Risk/Reward point of view, to buy/accumulate a stock when near or in that zone.  Similar to line support, when zone support is violated on a close it indicates that the current pattern is no longer valid and we need to step aside until the
new pattern emerges.  If a stock breaks out above the top of the resistance zone then the stock has broken out depending on volume and other factors, and vice versa for a breakdown from the support zone.

An example of this idea as well as trading a range bound stock can be seen in the chart of DAKT which can look too messy to swing trade. Take a look yourself before you see the marked up chart below and see if you can identify these zones or you decide it's just too messy for you to trade. Such a chart is a swing traders dream, at least this swing trader.

You buy/scale in anywhere under ~7.5 while in the support zone and sell/scale out while in the 9-9.5 resistance zone. rinse and repeat. just set your buys, stops and sells and forget-aboud-it.


Here are some posted examples of my charts with the zones that are usually drawn with single lines by chartists.

SPX

CRUS

XRT

SA

GS

BBEP

WFT

If you find such patterns, keep them on your pattern trade list.  You can set alerts or you can leave a limit buy order in place while you go on with your busy days.

Hope that helps.  I enjoy teaching the "trade", so go ahead and ask questions.

Peace and profits to all.
@stockaddict

Sector Moves - The Wind At Your Back.

A Sector breakout is one of the many opportunities in the market that offer high probability setups. Sector moves weigh heavily on underlying stock moves and therefore looking at sectors and subsectors on a regular basis should be a regular part of traders’ homework. A well rounded trader knows that both top-down and bottom-up approach are necessary to find good probability setups in the markets for day, swing, trend, and longer-term hold time-frames.  This is the wind at your back that raises the probability of success in your trading.

Many sectors have been showing strength since last week, one of which is the retail sector.  The XRTs weekly candle closed very strong and above breakout levels. Furthermore the sector has been basing for the last five months carving a solid base to spring from in either direction (pure TA). This is a trigger to delve into the stocks comprising this sector to confirm the strength. Last week’s blog highlights some of the findings from broken down-trends to overall strength and the opportunity of violent moves that ensue.
Now the XRT has had four weeks in a row of buying pressure and is due for some consolidation in the names that had big moves, but keep this sector on your radar for weeks and months to come as long as the uptrend is intact.

This is just one way to find stocks that are worth trading with high probability and less risk.  “May the wind be ever at your back” with these sector moves.

Peace and profits to all,
@stockaddict

Intrinsic Movers

This market reminds me of the time the engine of our boat broke down on the way back from Murion islands.  We had a great day filled with fun and frolicking, but now we are stuck in the middle of the ocean off Ningaloo reef in Western Australia, waiting for help to arrive.  Similarly, 2009 was a fun filled year, you couldn’t pick a stock that didn’t move up.  But now we are stuck possibly a range or a down channel waiting for the big orders to come in and move us in the “right” direction again.  Have the opportunities dried up?  Are there no trades out there to be had for swing and longer holds?    Not really, the market always presents opportunities, you just need to go fishing while you wait to have a little sashimi.

In this type of environment, where there’s no clear wind direction to fill your sails, my style changes a bit.  I go to my “intrinsic movers”.  A favorite in any market really, but proves most useful, with a high probability of success, when many other stocks and indexes are bobbing in the waves.   The pattern that best serves these movers is the long-term down channel (and to a lesser degree the long-term triangle) breakout.  Not the little flags and pennants that everyone looks at after a big move already happened, those will likely fail in this environment, but the ones that took months in the making.  Whether you’re talking about a penny stock or a  hundred dollar stock or ETF this is one of your fishing tools regardless of the circumstances.

Once the down channel breaks its resistance and confirms by closing two days in a row outside of the channel you will see some big moves coming in any tape.  This is due to the nature of the pattern; you have the short-term channel players who shorted at the top of the channel, and the longer-term trend riders who shorted at much higher levels.  They will see the channel dissolving and will want to get out before anyone else does.  Therefore you get a violent initial move that you can ride blissfully with either a trailing stop of a manual/mental stop to get you out before the move is done.

There are many examples I’ve posted over time.  Take sugar ETF SSG for example.  I posted the chart of the breakout back in December when the channel broke to the upside.  A violent move from 65 to 85 in about a month ensued.

Another obvious one is the US Dollar UUP, after a long downtrend that started in March 2009, also broke the channel with such violence that you couldn’t miss the opportunity.  Crowded or not, those labels don’t negate the opportunity these down-channel-breaks present.   I posted this chart many times on chart.ly.
RMD, I posted the chart of this stock back in August with its long down trend, AZO December 9 CQP as well as many others .  All had a strong down trend that caused the price to catapult after the channel break.

This does not mean that we will have an uptrend after the break of the down trend, just a change of the current pattern.  If you are a fundy player who thinks the stock is undervalued, this is your signal to get in as well instead of “averaging down”.   There are other details that entail, but this is the crux of this trading style.
Many of the retail stocks are going through this right now including M and JCP as well as a few others I’ve tweeted about recently.  This is purely a technical play, more of a knee jerk reaction type of move really with a high probability of success.

Add this to your bag of tricks and have fun with it.  There’s always an opportunity in the markets no matter what direction we’re moving, the more patterns and tools you have the better prepared you will be for any market.

Peace and profits to all,
@stockaddict

Natural Gas Commodity Prices Drop to a 7-Year Low!

Natural gas closed yesterday (Aug 20,09) at 2.945 per million BTUs on NYME, the lowest closing level for a front-month contract since August 12 of 2002 according to the CME group. The next possible support target is 2.52 per million BTUs, which is the level of March 2002. August has historically been a bad month for Natural gas futures as this 17-year-study chart shows.

(Click on image to enlarge)

The price drop was exasperated by the rise in supply as the EIA reports a rise of 55 billion cubic feet to stand at 3204 Bcf, which is 562 Bcf higher than last year at this time and 513 above the 5-year average. Barring any storms, the glut of supply will continue to hurt prices. – data source MarketWatch

The economic recession is also tampering demand, but new clean energy politics is on the table. T. Boone Pickens has been lobbying congress to use natural gas as the clean-energy solution for vehicles to rid our dependence on oil. “He touted natural gas as the best alternative vehicular fuel because it’s a domestic resource that reduces our foreign oil consumption, and enhances America’s energy security; clean (NGV vehicles emit up to 95 percent less pollution than gasoline or diesel vehicles); less expensive than petroleum and hydrogen; and safe (lighter-than-air compressed natural gas is nontoxic and disperses quickly, and has a higher ignition temperature than gasoline and diesel fuel, which reduces the chances of accidental ignition).”
–www. Boonespickens.com

There isn't a pure trading vehicle for the Natural Gas Commodity, these ETFs are the closest thing available:
Natural Gas Industry: $FCG
Natural Gas Commodities futures: $UNG
Oil and Natural Gas exploration and production: $XOP
Oil and Natural Gas equipment and services: $PXJ


@stockaddict

The Power of Technical Analysis; A Case in Point Study of the S&P500 Chart.

Technical analysis is a graph of the psychology of the market and should be part of every trader and investor’s arsenal if they don’t want to become road kill on Wall Street. It is a guide to the future empowered by the past and based on human psychology.

Case in point is the SPY500 starting back in 2004 in mid-bubble times. Note that there are other Technical factors contributing to the success of the patterns, such as the 50MA crossing above the 200MA in mid 2004, then below it towards the second half of 2008 and a few others.

(double click on the image to enlarge)

Pattern 1 (orange): This is the key pattern here, The Bump-and-Run-Reversal pattern, BARR (formerly and aptly known as the Bump-and-Run-Formation - BARF) started forming with a speculation phase in the mid 2006 when the market psychology was euphoric and gave a new meaning to irrational exuberance. This pattern was at disbelief at the key breaking levels, but finally succumbed to it. The psychology behind it is valid. Pattern 2 below is also part of the BARR pattern indicating the end of the speculation phase.

Pattern 2 (orange/white/blue): The double top (white) or a Head and Shoulders (blue) topping patterns depending on where you draw the line. Both are bearish topping patterns and both break at around the same level and measure to the same target. This is a sub–pattern that is part of the BARR pattern above, which takes a long time to develop in this time-frame.

Pattern 3 (blue): The typical Head and Shoulders pattern at an angle.

Pattern 4 (yellow): unveiling as we speak, the reverse head and shoulders topping pattern on the weekly time frame. Will it clear the key gap resistance and move to reach its target of ~1200? bounce down from the ~1080 resistance, Or will it stall and create another pattern that will reveal itself with time? (All of the above are possible on different time frames) Plan for all scenarios, and remember that being out of the market at times is also a plan to follow.

You can read more about the actual psychology that forms these patterns in any good technical analysis book. And you can be sure you will see this chart in the next book about The Crash of 2008, in the technical analysis section, maybe my own.

Of course hindsight is 20/20 and it’s easy to talk about these patterns of the past when they have already been drawn, but hindsight is what gives us the confidence in these patterns, especially in the longer time frames, enough confidence for that above than 50% probability we all seek in our trading. So when I see a pattern emerging I create my thesis around it, and trade it, while being cautious around the key levels where I typically look at other indicators to gauge the pulse of the market.

Swing and day traders are in the business of predicting the next move to make money, and technical analysis is the key tool for that.

@Stockaddict

It's a Matter of Time..

Time is a key piece of the puzzle in technical analysis. A lot of the chart analysis you see on the stocktwits stream are for a specific time frame, usually that of the chartist, and not necessarily yours. So before you jump into that trade, check the time-frame of the chart and see if it agrees with yours.

If you are a day trader then you’re looking at the price action down to the minute and don’t care what will happen tomorrow. If you are a swing trader, then you’re looking at the 15/60 minute charts to confirm your thesis and time your entry, but mainly focused on the last few days up to a few weeks of that stock’s action, and perhaps pan out to see where they fit in the big picture. If you are a longer term trader then many weeks, months and years is your target, and you are really focused on the fundamentals and the economic environment at that level, and technical analysis becomes an auxiliary tool and not your main focus.

Due to the time frame differences a lot of people will have conflicting views of the same financial instument, and be both correct. So always clarify your time frame before you make up your mind.

Finally, thanks to all those who chart and take charting requests, I know that the time and effort put into that is significant and the education by example provided to others is much appreciated.

Peace and profits to all.
Stockaddict