11/21/2009 That's how to spot a top

There you have it! Great looking setup don't you agree? All kinds of "analysts" could say all kinds of things about WHY the CL market dropped... 'The oversold dollar rallied pushing commodities lower' or 'The fundamentals and crude stockpiles don't support the price'

I took the same exact chart from earlier this week but just changed the colors of the lines. I wanted to take the red line off of it too because I was only using that line to make an example and I didn't want people to get confused. Honestly, if you used either line you made money, its just that you would have been in the red at first.

The long white line outlines the clear support and its a classic looking top. I am making this post for my reference as much as yours. I like to save these charts and go over them from time to time. It keeps you sharp, and so does writing a blog. The blog also makes me feel accountable for my results. If you are struggling as a trader, SERIOUSLY you should have a blog or journal at least. ESPECIALLY this is your only stream of income. I assume most of you got a little "side hustle" going on though ;)

Thanks for reading hope you made money!

-Nate

11/18/2009 Drawing Trendlines

Good Evening Traders,

First, my apologies for the lack of updates. I have been doing a lot of work recently and haven't been able to devote much time to the blog. I expect this to be the case going forward as the holidays are quickly approaching. I wanted to devote a post to something I use extensively in my trading. Trend lines. An old saying in the market is "The trend is your friend". Read on to see how I use trend lines in my trading.

First, all traders should know what a trend is. Simply said its the general direction of price movements over a given time frame. Identifying trends and riding them is a surefire way to bank some cash in the markets. BUT IF YOU WANT TO MAKE SOME SERIOUS SCRATCH IN THIS GAME YOU NEED TO IDENTIFY WHEN A TREND HAS CHANGED OR IS ABOUT TO CHANGE. There are easily 1,000,000 ways (and about as many technical indicators) to spot the end of a trend but one of the simplest and time tested ways remains drawing a trend line.

You would think that this would be pretty straightforward, but I see so many traders posting charts on chart.ly with the most bizarre looking trend lines on them. I noticed that people have a tendency to draw a trend line that suits their thesis on the market they are trading. Everyone loves to be right and poor traders always try to rationalize staying in a losing trade any way they can. What's important is having a straightforward system that guarantees you draw a consistent line every time you analyze a trend. Markets are a little like golf in this way, consistency is key!

I learned how to draw a trend line from Victor Sperandeo. No, I don't know Vic personally, although I wish I did! I just bought his book Methods Of A Wall St. Master a couple of years ago. Its a great read and has paid for itself numerous times over. Victor draws his trend lines "FROM THE LOWEST LOW POINT TO THE HIGHEST MINOR LOW POINT PRECEDING THE HIGHEST HIGH SO THE LINE DOES NOT PASS THROUGH PRICES IN BETWEEN THE TWO LOW POINTS." The key is that the line does not pass between prices in between the low points. Lets look at the chart to illustrate this better.




Notice the line goes from the lowest low to the lowest low preceding the high WITHOUT PASSING THROUGH PRICES. Here is how NOT TO DRAW THE TREND LINE




Now this line IS (generally) a "trend line". It does go with the trend, but what makes it wrong is that it passes through prices in two different spots and TOTALLY IGNORES THAT SWING LOW BEFORE THE HIGHEST HIGH. If you were the trader who drew this line you would probably be saying something like "It broke the trend and now is back-testing it. The market is sure ripe for a short!" Now you may be right, but did you draw that line to fit your thesis, or are there certain criteria you looked for first? Do you constantly repeat the same formula every time you draw on a chart? If I gave you any old chart would you draw the same trend line? Are your rules simple and easy enough for anyone to apply? If the answer to any of those questions is "NO" then you are doing something wrong. And likely losing money too.

Here is another good example on CL futures




Once you learn how to properly draw a trend line noticing changes in trends becomes much easier. Same thing goes with staying in a trade. Lets see how that crude chart turned out...




See how I "manufactured" a trade using the red line? It's easy to do that when you REALLY BELIEVE the market is overbought and all your $1900 dollar indicators are screaming short. Meanwhile you wouldn't have gotten too far in that trade. At best you reached your profit target on one or two contracts.

One more thing to remember is TIME FRAME. This method of drawing a trend line, like all market observations, needs to be taken in the context of the bigger picture. I want to look at that same crude chart one more time on a longer time frame. The key here is the white line I added.




Is a change in trend occurring in crude? Depends on how you look at it. In the near term though...It certainly looks like it.

-Nate

09/28/2009 Trend days can kill your account

Hello Traders,

I know its been awhile since I made a post but today seems like a great opportunity to discuss something that gave me trouble early in my trading career. The TREND DAY. Do I need to define trend day? I don't think so, its pretty self explanatory, the market just keeps trending. Simple. This kind of day can wreak havoc on indicators and account equity ! We're gonna look at the chart to see how to avoid these pit falls, but first some background...

With an absolute lack of economic news, M&A took the spot light. Abbot made a big bid for Solvay and Xerox gobbled up business process outsourcing company Affiliated Computer Services. Johnson and Johnson got in the mix too, buying up an 18% stake in hand sanitizer maker Crucell. While it is good to see companies making acquisitions, I wouldn't get too excited, this economy is still in the toilet in my opinion. BUT the market has less and less to do with the economy these days, its mostly just squiggly lines on charts, and if you treat it that way you will make way more money. I promise :)

Looking at the chart, the signal to go long occurred between 4:30 and 5:00am with the two SMI lines crossing, the particle oscillator crossing above the 0 line and the OBV panel painting a red square indicating divergence in price and volume. What's that, you were still asleep?? Traders don't sleep!! Ok, I'll admit I was asleep too...

The next entry was at 9:45am on the break to a new high. 1048 to be exact. The SMI's were already stretching to the upper range at a value of around 60 -- with 80 being over bought. Why go long? If you were looking at the bigger picture (daily) you would see a textbook bounce off the 20 day MA. And I MEAN textbook man! Good traders are always, ALWAYS, looking at the bigger picture for clues. You must understand that. The big fish don't care about 2 ES points, and its you Vs them. got it? cool.

Back to the chart. Lets say you got in at 9:45 am at 1048. By 10:11 you should be taking profits of 7 points with the SMI's red and the OBV painting diamonds left and right. The key is to recognize that this is a trend day early and make sure you are on the right side of the trade. The white box shows the SMI pegged above 40 most of the day. I'm sure any indicator I put up there will be pegged all day too. The market reached its fair value and stuck there. The particle oscillator stayed green all morning and that means NO SHORTS! By the time it crossed the 0 line again you should have been teeing off on the fourth hole and maybe on your third beer ;)

Trend days can be tough. Alot of traders that don't see the trend end up trying to bet against the market when their indicators are showing oversold/overbought conditions. If you can't trade a trend day then just don't trade. Stick to what you know. Lets say you traded 3 lots today and took profits at 4 ticks, 6 ticks and left a runner for 7 points...that's 38 ticks ($475.00!!) . Way better than any McJob I can think of.

Here are the take away's: Recognize the trend, don't fight it, and walk away when you got money in your pocket. Its really that easy.

Thanks for reading guys. All the indicators are from Big Mike's trading blog VIP section. make sure to pay him a visit and if you got a second click those Google ads over there on the right. Feel free to comment too. Later,

-Nate

09/07/2009 Market Outlook

Hello Traders,

I just want to jot down some thoughts real quick about this week's market. Friday's action was very light. The market continues to deceive gravity as well as conventional wisdom about equity valuation. The wild card remains to be the Dollar. The Almighty Buck. If it breaks 78 it seems 75 is easy. The dollar is clearly the sacrificial lamb in all this mess. So lets say that happens... well this market could easily ramp up another 2-3% as commodity speculation begins to run rampant. How much do you think people are going to love $3.50 a gallon gas and $5 a gallon milk when they are broke and unemployed? That's irrelevant though because earnings will go higher and so will the markets. Class warfare anyone? Ok, I'll kill the conspiracy talk.

I'll be back a little later with a chart and some key levels to look at.

-Nate

Good Evening Traders,

Tonight's post will be brief because the Steelers game is on! Yesterday I said I wanted to short this level, 1005. Well, things didn't quite play out the way I thought they would. The 3:30pm Ram job compliments of 85 Broad St opened up some possibilities. Lets discuss them

First off, 985 is untested. And so is 975 below that. I strongly believe we are going to test those levels. Yesterday's chart is still very much in play. I said yesterday those price levels " could take the rest of this week or even the next..."

I want to break it down on a smaller time frame though. Tomorrow we will know the employment situation in America. I expect it to be in line with the consensus or a little better, -200k-ish. Everyone who studies the markets knows this number is highly flawed. They can tweak things like the birth/death model and make up whatever numbers they want. We all know its not the numbers that matter but the reaction to them. This is bigger then Fed day IMO.

On tonight's chart I kept the indicators nice and simple. An RSI, MACD, and some Bollinger bands. Take note of the divergence that formed on the RSI. There is now good separation on both the MACD and RSI with the prior crossing it's zero line. Also, note the strength of the histogram on MACD. Basically everything is pointing higher. I made a few marks on the chart where we could find resistance. There is a Fib level at 1009.25 to keep an eye on. Putting on a short there with a stop at 1012 seems like good risk reward to me. I will be watching the Globex session and pre-market tomorrow to see if price can get up to 1010. I honestly think this afternoon's squeeze was just buffering us for a nice 20 point decline tomorrow.

Steelers are looking sharp and I keep getting distracted! You can follow me on twitter. Please click on the ads if you like what you are reading. Have a good night everyone. Get some sleep its gonna be an early morning tomorrow.

-Nate

09/02/2009

Hello Traders,

I was very excited for Wednesday this week because I would have all morning to trade. Turns out things were very very choppy. I ended up taking a short at 11:30 from 998.50. It was just a scalp set up though and I closed it out 15 minutes later for 2 points. BORING....

The big stories today were gold and AIG. Gold was rocking, up 2.5% or so! 27 million shares of GLD traded. This is obviously because the dollar shit the bed. People are talking about bank failures again, Europe looks like trash, and don't even get me started on China. They're "stimulus" money definitely made its way into the stock market over there, driving the price up 80% this year. I read a little about China and from what I can grasp, they have overcapacity EVERYWHERE. Without us buying their crap from Target and Walmart they don't even have an economy. A correction in Chinese markets was inevitable. However, I wouldn't short it with the proverbial 10 foot pole. Why? Cause the government could step right in and start buying up the market and cut your head off in the process. They do that here in America but at least we get a little wool pulled over our eyes by first giving "bailout" money to the banks and have them bid up SPY the last 15 minutes of every Friday. Enough about all that though, I want to talk about the S&P 500

Last week, ( 08/24 to be exact) I said the top is in and went short the ES. I closed the position a few days later and never got back in. So sad. Of course we are down 30+ points from that very day (still falling in after hours as I write this). But what can you do. I don't have an account with $1 million in it (imagine that right), so I'm not going to hold leveraged S&P contracts for weeks at a time. By the way if you feel like letting me manage your futures account feel free to email me...No? ok I'll move on :)

Well, The pullback is here. All the "September sucks for equities" talk feeds on itself, so keep that in mind. I'm going to make a few predictions about where we are headed. First off, this move is almost over. IN TERMS OF PRICE, not time. It could take the rest of this week or even the next, but we aren't going much lower than 980. I honestly expect that price by Friday when the job(less) numbers come out and people start to realize the mess we are in. Then at some point next week the "everything is fine" crowd will be back, and we will fill Monday's gap, moving back up to 1001-1005. That will be a great time to get short again in my opinion. I drew out how I expect price action to look on today's chart. Am I the man with MS Paint or what!

Lets see how things play out. There are always wild cards out there. If you are trading this mess keep an eye on Gold and Oil. Also remember the 50 day moving average is closing in and all those IBD reading hotshot fund managers will be plowing into the markets when we get there. I'm sure of it. Its all just squiggly lines on charts to them. Thanks for reading

-Nate

Hello Traders,

This evenings post will be a weekly wrap up. let me preface by saying that many people don't bother using Tick charts that show this many Ticks (6765), but I do, and I find it works really well. Why the number 6765? Because it's in the Fibonacci Sequence (Its the 20th number). What's the Fibonacci Sequence? It's a sequence of numbers defined by the recurrence relation in the equation fn = fn-1 + fn-2 where n>3 or n=3. Ok? You know what..just Google it. The general idea is that the sequence appears throughout nature, (In flower pedals, rows on a pine cone, and even starfish) so it should make sense for it to appear in the markets. Now we all know that markets don't behaved in a predictable pattern, buts its a good starting point for analyzing market data. Math lesson over, lets go to the charts...

We entered the week over-bought. SMI's where pegged in the high 60's, low 70's. After the initial pullback, bulls tried to get things going again early Tuesday. The rise in price set up a nice divergence (marked with white lines) for shorts. On Wednesday, I identified 1016 as a target on a pullback as well as a possible head and shoulder's forming, that could portend much lower prices. By 10am Thursday morning price had reached the 1016 target and the dip buyers stepped in. Last night, I said look for a gap up early Friday, which we got. Price faded nicely and now SMI's are showing a bullish looking formation with short term MA's pointing higher.

Even though we ended the week essentially where we started, I think the action was positive for bulls as there isn't much good news left to cling onto. They managed to defend the higher prices well. especially the breakout level 1016. I will be checking out other charts and reading a lot of news this weekend. Also hoping my home state of Pennsylvania gets a budget passed before the G20! I will likely post Sunday night with some predictions about next weeks action. Enjoy your weekend everyone

$ Nate