Parabolic Patterns

$SPX - Rising Wedge

2010-01-21T19:38:00.000-08:00

Here I have a daily chart of the S&P 500. The S&P broke out of a rising wedge today and the Dow Industrials broke its trendline on the weekly chart. My January 19th post talked about the $DJI testing its trendline on the weekly chart. Today and yesterday are a good indication that the Dow Industrials will continue its momentum to the downside.

The Dow declined 122 points the 20th and 213 points today. Moreover, I also discussed in my post on January 15th that the measurement target for the S&P 500 was 1,172. This was for an upward breakout of an inverted head and shoulders. So far the high is 1,150 for the S&P. This is pretty close to the measurement target and doesn't have to be exact. I would expect now that a minor correction take place. A 10% retracement would be healthy for the market after its steady climb.

$DJI: Trendline on the Weekly Chart Remaining Intact

2010-01-19T20:45:00.000-08:00

Since the March bottom, the $DJI has held its up-sloping trendline quite well. The trendline is drawn from the low of the head, to the bottom of the right shoulder, in the inverted head and shoulders on the weekly chart. I'm watching this rising resistance closely in that the trendline doesn't get penetrated . If the trendline is broken, this should allow for a minor correction. The rally today came after testing resistance helping to move the $DJI higher over 100 points.

Ford Weekly Chart : Inverted Head and Shoulders

2010-01-18T21:19:00.000-08:00

Ford is another stock on my watchlist. Ford has a beta of 2.79 and had a 1,102% gain from its November 2008 low. So far this year, I've made two trades and I'm looking for another stock to get into soon. I was looking at Ford to pull back to its neckline for a full retrace, however, it seems that may not be a possibility at the moment. Ford punctured its neckline on December 15, 2009. It did build a small consolidated base after breaking the neckline. Then, it punctured its 10.37 pivot point allowing for a breakaway gap on volume above the 30-day sma.

Ford tends to build rectangle tops and form base-on-base patterns. The two prior rectangle tops lasted between 2.5-4 months. Ford might try to pull back and consolidate so it can build another rectangle top. If this is the case, and Ford tries another base-on-base formation, this would allow for another opportunity to take a long position.

AIB - Daily Chart : Head-and-Shoulders Top

2010-01-17T21:32:00.000-08:00

AIB's neckline appears to be a little more slanted than IRE's. IRE's neckline is pretty close to 180 degrees. My post on January 10th shows IRE coming up to its 200-day simple moving average similar to that of AIB illustrated below. I still think both AIB and IRE will puncture their neckline and continue their move down. However, that is not to say the pattern can become invalid as I mentioned earlier. AIB did have a 1,347% percent gain from March 2009 to September 2009. IRE, on the other hand, had a more volatile move of about 3000%.

SANM-Monthly Chart: Early Stage Flat Base

2010-01-16T21:51:00.000-08:00

SANM appears its forming a flat base at the moment. It also looks like it may be trying to form an inverted head and shoulders. The neckline of the head and shoulders should be around 15.96. This is the high of the bar on September 01, 2008. If the trendline drawn from 2005-2010 is penetrated, SANM can form an early stage base-on-base pattern. This will allow for it to build more bases similar to its lead-in phase during '94 through '98.

S & P 500 : Measurement Target

2010-01-15T18:52:00.000-08:00

B + ((NL-HL) * 74%) 957.23 + ((956.23-666.79) * 74%) This calculation is for measuring a target price for an upward breakout of a head and shoulders bottom. The calculation comes out to be 1,171.42 for the estimated target price after puncturing the neckline July 23, 2009 in the S & P 500. This indicates there should be a secondary move coming soon. In other words, there should be a correction coming that I would estimate would be only a 10% retracement. The highest bar for the S & P 500 was 1,163.23 before declining 9.7% after breaking through the neckline of a head and shoulders in 2003. The highest bar is 1,150.41 for this year thus far.

I have the S & P illustrated below. It may soon exhibit a 1-2-3 trend reversal on the weekly chart. Now that the trendline has broken, it should now recycle back. Afterwards, the market should continue moving higher allowing for #3 in the 1-2-3 trend reversal. This would be a reversal in that the trendline from the prior peak of 2007 and the peak of May had remained intact and now the primary trend is shifting. If the S & P recycles back to its trendline on the weekly chart, this would result in a 9.5% correction.

FITB and CENX Charts : First and Second Trade of 2010

2010-01-14T13:30:00.000-08:00

I sold 1000 shares of FITB today. Certainly, it can continue higher from where I sold it at 11.92. It might continue higher to the top of the bar September 15, 2008. This is illustrated in the weekly chart. CENX had a breakaway gap on January 12. This stock should retrace down to the $12 area. This will form another base-on-base formation.

FITB : My Second Trade of 2010

2010-01-13T20:44:00.000-08:00

I previously discussed Fifth Third Bank in that I was thinking of taking a position soon. Today, I took a position in Fifth Third Bank long 1,000 shares. I made this decision based on it breaking out of its base on the weekly. The pivot point was 11.20 and it also had an inverted head and shoulders on the daily. This bank might try to run up some more soon if earnings are better than anticipated. The earnings will be announced January 21. Sometimes it might even be better to consult monthly charts to find flat channels and long bases. When the stock breaks out of these it can be explosive. Thats why I use daily, weekly, and monthly charts. The longer the time period a trend comprises the more important the trend. This will allow for you to catch the primary and secondary trends without being concerned over minor flucations.

However, for day traders there is no substitute for intraday especially for scalpers. Scalpers will be in the stock for seconds to make a few pennies a share. This strategy isn't easy but Paul Rotter became pretty succesful at it. He was able to make $65-78 million a year for 10 years in a row scalping. He is the world's most succesful scalping trader. He is known as the "Eurex Flipper."

Furthermore, if Fifth Third doesn't recycle below the 11.20 pivot point, and volume continues to pick up above the 30-day sma, this will help move Fifth Third higher. Also, 2.79% of the float is short. The float is the amount of shares that are trading on the market publicily. This trade should be held as long as it can continue to break out of consolidation regions without declining below the prior base. All charts will be posted tomorrow on Fifth Third and Century Aluminum Co. I'm currently experiencing java issues and can't post any charts. I assure you this will be fixed by tomorrow. Lastly, I will discuss how the market is shaping up with market indices, including the Dow, Nasdaq, NYSE Composite, etc.

CENX : My First Trade of 2010

2010-01-12T21:42:00.000-08:00

Alcoa's earnings were announced in yesterday's after hours. The earnings were disappointing and led to broad weakness in today's markets. Alcoa reported fourth quarter earnings of $0.01 per share. This was $0.05 less than the consensus estimate of $0.06 per share. All aluminum stocks fell as a result of this and gapped down. The aluminum stocks showed a breakaway gap this morning on the daily charts. Its important to note that when trading a breakaway gap you want to take a position at the opening. This will allow for the high of that bar to become a pivot point in case the stock later tries to fill that gap. Also, this is important in that the position is not taken near the low of the bar which would be further from the pivot point.

I didn't get CENX (Centruy Aluminum Co) exactly at the open of the bar. The position was taken instead in the middle of the bar. I let the position go in that it didn't continue to decline from my entry point and close near the low. The trade resulted in a realized gain of $0.79. It was an unrealized gain of $155 after taking the short position but this was not intended for a day trade. My intentions are mainly on swing trading and position trading. The action of the stock will tell you whether or not its worth holding after the position has been taken. My rule of never paying up by more than 1% from the trendline or breakout point told me that this position had to be let go of. Of course, I may not always be able to get exactly 1% from the breakout point but it should be close to it.

XLF : Time For Financial Sector to Break Out of its Base

2010-01-11T21:16:00.000-08:00

In mid-July, earnings were better than what analysts had anticipated. The rally started picking up steam on July 15, thus a breakaway gap had formed in the DIA, SPY, and the QQQ's. A breakaway gap is one of the most reliable chart patterns. This helped build clarity on where the market was going from there.

I remember the head and shoulders top that failed in mid-July. I took a short before it had punctured the neckline and had to cover my position after the market recycled back above the neckline. The head and shoulders became invalid becoming what appears now as a simple abc correction. This correction in the $dji was roughly 9.7%. Ha! That wasn't much of a correction if comparing the right shoulder of the Dow in 2003. The right shoulder of 03' extended much lower.

Furthermore, many financial stocks benefitted from this rally in July. Some examples from mid-July to mid-August include Bank of America making roughly 40%, Citigroup 100%+, US Bank 40%, Fas (300% long financial etf) 120%+, Fifth Third Bancorp 60%+, and too many others to mention. Moreover, there shouldn't be any rotation in less volatile sectors while banks still present good valuations. Fifth Third Bancorp looks attractive for example in that Fifth Third Bancorp's earnings beat by $1.49 July 23. However, I want to caution that earnings still need to exceed analysts expectations or stay up to par. Otherwise, expect consolidation until earnings power returns. Fifth Third Bancorp missed earnings by 0.03 October 23 and had a 23% decline as a result. This allowed for the bank to return back to its pivot point from where it broke in July. F.T.B has recovered entirely from its decline and earnings will be announced January 21. I might take a position soon in Fifth Third Bank if it can close above its 11.20 pivot point without struggling. XLF, Financial SPDR etf, is showing that it wants out of its base after consolidating roughly 5 months.

IRE - Weekly and Daily : Height and Width Combination - Trading Tactic Integrated with Measurement Rule

2010-01-10T18:21:00.000-08:00

In my first blog entry, I talked about Ire making about 3,000% from its March low. In this post, I want to talk a little more about Ire. Here I have a weekly chart showing Ire declining roughly 99% from its neckline. The head and shoulders illustrated, in this chart, was a reliable pattern in that it helped pinpoint the reversal. Another head and shoulders MIGHT be trying to form on the daily chart listed below. However, that is not to say we can go higher allowing for the pattern to become invalid.

Furthermore, I think that a reversal to the upside could be a possibility in mid-March, if the head and shoulders follows through on the daily. In the earlier post, I discussed the measurement rule and how it can be used to predict target prices. On the weekly chart, Ire went from its low of 0.66 before topping out at 20.18. The duration of this move was 6.5 months. From its highest high, 6.5 months can be measured out, leaving Ire at around $1 a share in late March early April. However, it can find a floor prior to exactly 6.5 months, thereafter forming what could be a big W.

$DJI - Weekly : The Measurement Rule

2010-01-09T21:50:00.000-08:00

On the chart below, the pattern illustrated is a Bump-and-Run Reversal Bottom. By using the measurement rule, it can allow you to set a target price. This can be done by either adding the height of the pattern for upward breakouts or subtracting the height for downward breakouts.

However, there is a better method. Thomas Bulkowski has provided formulas that should give more accurate measurements than adding or subtracting the height. Here is the link, http://thepatternsite.com/measure.html. For the Bump-and-Run Reversal Bottom, the highest high can be used instead of calculating a breakout, high, and low multiplied by a percentage. A Bump-and-Reversal Bottom is one of the few patterns you can take only the highest high. In this chart, the target price would be 14,198.10.

Bidu - Weekly Chart : Importance of Recognizing Continuation and Reversal Patterns

2010-01-09T17:02:00.000-08:00

The time frame used in this chart is a four-year cycle.This will allow for position traders to focus on the primary and secondary trends, while not focusing too much on the minor trends. I recommend using both a four-year chart and a 9-month chart. The 9-month will be used for the daily and 4-year for the weekly.

Brian Shannon wrote an article featured in Stocks, Futures, and Options Magazine. In this article, http://www.sfomag.com/homefeaturedetail.asp?ID=-1587695919&MonthNameID=May&YearID=2006, he explains how "multiple time frame analysis can increase the odds" of your trading success.

Investopedia explains position trader, http://www.investopedia.com/terms/p/positiontrader.asp

Furthermore, I took a short position in Bidu at 437.05. I held the position for a month and five days and exited when it recycled back above the 50-day sma on the daily. It went as low as 394.56 before recyling back above the 50-day sma. However, my exit was at 424.00 due to an extended throwback after breaking through a bearish pennant.

Moreover, its important to watch the 50-day sma in that big institutional investors and funds will look at this sma closely. They will also look at the 200-day sma and will use the averages as a means to propel the stock higher or lower.

Bidu has a beta of 2.3 and can have some pretty wild swings. When Bidu announced its last quarterly earnings, it had a drop from 439.90 to 353.03. That was 24.6% in only two days!

Big W in Nasdaq Composite

2010-01-07T20:16:00.000-08:00

A trendline drawn from the peak of the dot-com bubble, 5132.50, and the peak of 2861.51 in 2007, was recently punctured on 12/21/2009. Moreover, while puncturing the trendline, a Big W is becoming more apparent. This may allow for a parabolic market that can yield you the most returns in the shortest period of time.

A Bump-and-Run Reversal Top is shown on the chart below. This pattern has three phases. The three phases include a lead-in, bump, and run phase. Within these three phases, there will be multiple base-like formations. While forming the second half of the Big W, the Nasdaq should present these characteristics that were exhibited in the tech-bubble.

Most importantly, early stage bases will be better to trade as their risk traits aren't as high as later stage bases. William O'Neil discusses this in his book, How to Make Money in Stocks. Also, it was mentioned in his book that as much as 80% of later stage bases will fail. Later stage bases are those that appear wider and looser and aren't as tight as those in the early stage.

High Beta : An introduction to a Volatility Measurement

2010-01-06T22:44:00.000-08:00

In 2009, the market bottomed out in mid-March. Ever since, the financial sector has shown the biggest returns. In addition, securities in the financial sector had the highest beta as well. Take IRE for example, its beta is currently 4.1 and it had a 2,957% gain from its March bottom in about 7 months. This shows that the greater the beta sometimes the higher the reward. However, that is not to say there will not be a lot of risk involved.

Furthermore, Dan Zanger was able to make 29,233% in the tech bubble as a result of trading high beta tech stocks. This is the world record for the most percent in one year. You can learn more about Dan Zanger by visiting his website at http://www.chartpattern.com/. On his website, he shows the signed document where he had a professional money managing firm audit his account.

Investopedia explains beta in this link, http://www.investopedia.com/terms/b/beta.asp.