Monday, May 31, 2010

Monday Market Alert

Not too much action on Europe today, Germany up a little bit, Spain down, France, Holland and Swiss market practically unchanged. However, it looks like the Chinese market is slipping out of the current 20% correction. EMA50 managed to climb above EMA100 on 30 minutes chart, which is the buying signal for me. I am now waiting for a confirmation of the trend change coming from the two EMAs crossing on 60 minutes charts. Five day simple moving average is not declining anymore but we need to see it raising soon. On daily chart I am seeing a breakout above a declining trend line. A new uptrend line is forming, there is already a higher low and I can also see two higher highs (cyan arrows). Long term players should be very cautious since overall Chinese market remains in the bear market, the index is now 6% bellow a declining SMA200 (very bearish) but a savvy investor can take advantage of what it looks to be an upcoming rally at least on short and intermediary time frames.

Keep an eye on coal, materials and steel stocks, WLT, CLF, AKS, that already gave the buy signal or X that looks very close to give one. Aluminium stocks are also very close to give a buy signal, look at CENX, AA.

Let's wait for tomorrow and the rest of the week to see if we are getting a buy signal on SPX. We need a 25-30 points rally for this to happen.

P.S. After a passionate discussion with my friends on Market Watch board I added another FXI chart, on 60 minutes time frame because I wanted to go further back. I did adjusted EMAs to 25 and 50. Since the beginning on March until today I've got one buy signal at the end of February, a sell signal on April 19 and another buy signal today. I've got a false sell signal in between, the system is not perfect and I get occasionally whipsawed but overall I think my timing method is pretty good.


Friday, May 28, 2010

Stock Market Update, May 28

No follow up from yesterday's 35 points rebound. S&P bounced into SMA200 (cyan arrow) then gave up 14 points by the end of the day. However, technically speaking, there were no big changes since yesterday. Usually, 14 point is a pretty big drop but not in situations like this with a huge volatility. As my friend Paul noticed the other day such volatility usually accompanies changes into market direction either in favor of the bulls or in favor of the bears. I think there is a pretty decent chance that we are going to see another rally towards the previous peak, 1,220 or even above but we need to be very, very cautions since this is for the first time since the start of the one year rally when we are bellow SMA200, meaning the long term trend is rather bearish than bullish at this time. As I mentioned yesterday we still have an rising SMA200 so we don't really need to panic that S&P is going to slip back into the bear market. Plus other filters I am using such as EMA50 crossing EMA100 on daily chart didn't not happen yet (ellipse).

The above analysis is only for the sake of the argument because the truth is I am a momentum trader and I don't really care what the long term trend is, I am just trying to capitalize on any decent move up or down. The key of making money in the market is to never be a perma-bull or a perma-bear. Money can be made on any direction if one knows how to read the charts. My goal here is to help you do the same thing, capitalize on medium term trends, either up or down. Saying that let's see how S&P looks on 30 minutes charts. We still don't have a buy signal because EMA50 did not cross EMA100 from bellow. Plus the price is still bellow a descending 5 days moving average (SMA240) so is too early to call an official end of this correction. Compare this with WLT chart from yesterday's post to notice the difference.

I've been asked why am I using these EMAs, why not EMA25 and EMA50? The answer to this is that ... I am a scientist and what a scientist do is to have a starting point, a starting set of conditions then try to optimize these conditions. From practice I found these values to work the best. These EMAs make me go long or short soon enough to capitalize on most of the big moves but they also don't make me jump in too soon or make me sell too soon. If I use EMA25 and EMA50 cross this will make me buying at a better price than EMA50 crossing EMA100 but there will be more false buying/selling signals. For example EMA25 already crossed EMA50 on S&P yesterday but this also happened when market jumped from 1115 to 1170 which was a false buying signal. Using EMA100 crossing EMA200 as a buy/sell signal it's even safer but you are ending buying a little bit too late and also selling a little bit too late. Again, from experience, I don't think it's worth going for the last pair of EMAs since once EMA50 does cross EMA100 pretty much is a done deal, market goes in that direction for a good amount of time. I must admit I am watching all three pair of EMAs. When EMA25 crosses EMA50 I am getting ready to buy or to sell, when EMA 50 crosses EMA100 I do buy or sell then I use EMA100 crossing EMA200 as a confirmation that the trend is for real. I added SMA240 as an additional filter after watching many of Brian Shanon's videos, a professional trader from which I learned a lot.

P.S. 1) One of the adds on the right side of the blog says that a huge market crash will start on May 31st, 2010. Now that's how you know things are going really bad, when market is going to crash on a day Wall Street is closed. LOL!

P.S. 2) I've been informed that people can't leave a message unless they are logged into their Gmail, AIM, OpenID accounts. This is annoying but there is nothing I can do about. I would suggest to get a Gmail account, it's free and is the best, better than yahoo or hotmail in my opinion. If you can't post a comment send me an e-mail and let me know your opinion.


Thursday, May 27, 2010

Stock Market Update, May 27, 2010

Market rebounded today with a 35 points gain after hitting a lower low yesterday at 1,067. We are just bellow SMA200 on S&P and DOW, while NASDAQ managed to climbed above SMA200.

EMA50 still has to cross EMA100 on 30 minutes chart to give a buy signal but a few individual stocks already gave the buy signal. I am talking here about WLT, AKS, CLF, LVS, TIF, COH, IPG, LXK, ILMN, THC, PNRA, TWC and many others.

EMA50 crossing EMA100 on 30 minutes chart (which roughly corresponds to EMA1 crossing EMA2 on daily chart) is a very powerful timing method for spotting intermediary term trend changes. By using this timing method you can be on the right side of the market during all this corrections and the rallies that follow them. It gives you very few false buy and sell signals (e.g. it didn't gave a buy signal when market rebounded from 1115 to 1170, red arrow). As usual you are not going to buy exactly at the bottom and sell exactly at the top but in between these two you can make a lot of money.

As you notice on WLT chart, the sell signal was around 90 when EMA50 crossed EMA100 from above and the buy signal was generated yesterday around 75. Also notice that priced climbed above SMA240 (5 days), labeled "Avg240" on the chart. I would also want to see this moving average climbing up in the next few days to be comfortable with my bet on WLT.

The same thing needs to happen to S&P to be sure that the correction is over, first EMA50 needs to cross above EMA100 then the price needs to stay above a rising 5 day moving average.


You don't have to lose money in stock market

I learned to play the stock market the hard way, by losing almost everything I have invested. I start investing at the worst time possible, in 2006 just a year before the big crash. The reason I lost so much was because I thought playing stock market was very easy, "buy low and sell high" so I didn't need to bother learning anything about. It turned out to be a big mistake, a huge one who cost me almost everything I have saved during the years. It's amazing how easy I've got sucked into doing this without giving a second thought. I am a pretty cautions type of guy, one who reads the instructions even when buying a toaster, yet I put my savings at risk without even blinking.

After burning my portfolio to the ground I start reading many books about the stock market and I realized that investing is more than buying stocks and hold them in the hope they may go higher. You need to spend a considerable amount of time in finding the right book for you, to learn about different indicators then to put what you've learned in practice. Yet learning a few basic "tricks" takes only a couple of minutes. If you buy as soon as the price moves above SMA200 (two hundred days simple moving average) and sell when it goes bellow SMA200 you are pretty much safe no matter if you are talking about 2007-2009 crash, 2000-2003 or 1929 one. A simple technical analysis trick like this not only save your portfolio from a disaster but makes you a guarantee winner no matter what. To give you some numbers, I was supposed to sell when Dow went to 13,000, re-enter the market at 8,500 and sell again a few days ago at 10,200. Some of you would say, "this is dumb, you missed the top at 14,000 and the bottom at 6,500" which is true is not a very good performance for a good trader but for a newbie is as good as one can get, and now, instead of being $80,000 short I could have an extra $20,000 in my pocket. Big difference!

Also remember that you don't know what the top and the bottom are before hand, you know them only after they already happen so the probability of selling exactly at the top and buying at the bottom is remote. However, using SMA200 as your buy and sell signals gives you a clue in real time.

Looking at 2003-2007 you may notice that market went bellow SMA200 for 4 times (red arrows) without indexes slipping into the bear market and only the 5th plunge bellow SMA200, in 2007, was the real one. So what does this mean? It means the SMA200 buy/sell signal is not perfect. If you look carefully you will notice that on those four instances you had sold and bought your stocks almost at the same price. But let say that instead of gaining 4,500 points from 8,500 in 2003 to 13,000 in 2007 you gained only 4,000 points. This is still 47% gain! This assumes you stayed long when market went above SMA200 and stayed in cash during the crash but if you went short when indexes plunged bellow SMA200 the gains would be close to 100% . What you should do is to sell when market moves bellow SMA200 no matter what because you would never know, a priori, if this plunge is going to be for real or not. I'll teach you later how to add additional filters to decrease the number of false sell signals generated by the SMA200, such as the fact that SMA200 need to point down in order to get a real sell signal, one of the reasons I don't think the current plunge is more than a correction.

This blog is not intended for people experienced in stock market or for those inexperienced but who think they are too clever to learn from somebody else. It is intended for people who just started investing in stock market or those who lost their shirt during the plunge and want to trade better from now on. Also please don't judge my English since English is not my first language judge only the content of this blog.

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