Friday, January 2, 2009


The rally today was nice. It's even better if you add in the past two days. There's a lot of reason to be bullish just by looking at a chart. After spending nearly a month inside a trading range, the SPX finally broke out from 920 resistance and it did so without a problem, even on a low volume day. I would give it a few days for the market to restore "normal" volume levels.

Next week, I would wait for a pullback before getting serious on the longs. Why? Because it's at the pullback where the market tests it's strength. It also gets rid of the weak hands. If the market breaks down, then you have nothing to worry weren't in it. Likewise, if you missed the move the past few days, the market will give a second chance for entry at the pullback.

The targets for the pullback would be at 920, and/or wherever the 20-day MA ends up meeting the market, and finally, at the 50-day MA (if it gets to that point). Did you notice the 20-day/50-day MA crossover? It's lagging confirmation for a short-term bullish move. In addition, the market's neutral range narrowed the bollinger bands that is setting up a squeeze. Watch the upper band expand.

Take a look at the steepness of the 3-day uptrend on the 30-day chart. The purple area shows the likely consolidation area. Many people want to see the market go up, up, and away! However, consolidation marked with down days are necessary and a part of the trending process. The rally continues until the trend changes.

Almost everything did very well today, except for the REITs. If they can't participate on a +3% day in the market, then they have problems (maybe people realize that many REITs will get crushed this year). On an interesting note, retailers did very well today, which is confusing with what I just said about commercial RE. Many retailers must fail before REITs fail because store closures cut into the REITs NOI and the ability for them to fulfill their debt service.

Yesterday, I briefly mentioned 12 indicators, so I'll describe what they are and how to use them below the usual charts. This is a bear market rally so don't expect this uptrend to continue forever. Many indicators say that the market is overbought, but remember that the market can stay overbought or oversold for extended periods of time. Trade with the trend and keep an open mind as we cautiously climb this Wall of Worry.

SPX 30-day

SPX 6-month

REITs stood like like a sore thumb.

12 Common Technical Indicators

1) Relative Strength Index (RSI) - The RSI is a momentum oscillator that shows overbought/oversold conditions. Typically, if a stock falls below 30, it is oversold. If a stock rises above 70, it is overbought. In addition, a stock rising above 30 is bullish and a fall from 70 is bearish.

2) Moving Average Convergence/Divergence (MACD) - The MACD is a centered oscillator that measures the difference between the 12-day and 26-day exponential MA's (EMA). A 9-day EMA is used as a "trigger". The best way to use the MACD is to look for divergences between the indicator and the price. If the market is dropping, but the MACD is rising, there's a high probability that the market will reverse soon.

3) Commodity Channel Index (CCI) - The CCI was created for commodities, but it used for everything now. It is a cyclical indicator. The primary purpose of the CCI, for myself, is to confirm reversals. A move above +100 indicates overbought and a move below -100 indicates oversold. Just like MACD, a divergence can give additional clues to a pending reversal.

4) TRIX - The TRIX is a momentum oscillator that measures the rate-of-change of closing prices of a stock. For longer time periods, if the TRIX moves above o, it confirms a uptrend and a move below 0 confirms a downtrend. TRIX crossovers also give buy/sell signals. If the TRIX crosses over the signal line (the 9-day MA in red), it is a buy. If the signal line crosses over the TRIX, it a sell.

5) Force Index - The Force Index was created by Alexander Elder, the author of Trading for a Living, and it is used to determine if the trend is getting stronger or weaker. It is a price/volume oscillator. Buy signals are generated when the Force Index crosses above 0 and sell signals are generated when it crosses below 0. A sideways movement shows a possible trend change.

6) Slow Stochastics - The Slow STO is a momentum oscillator that indicates overbought and oversold levels. Typically, anything below 20 is oversold and anything over 80 is overbought. I'm not writing out the calculations for the %K (black line) and the %D (red line), but just know that if the %K crosses over the %D, it is bullish and if the %D crosses over the %K, it is bearish.

7) On Balance Volume (OBV) - I've mentioned that volume precedes price action several times. The OBV was created with that in mind. It basically adds volume when the price is up and subtracts volume when the price is down. This creates the line. A OBV line that is heading up means that there is more volume on up days. The opposite is true for down days. With many other indicators, a divergence between price and the OBV may signal a pending reversal.

8) Money Flow Index (MFI) - The MFI is a RSI that is more volume-weighted that shows positive or negative money flow. Just like other indicators, it can measure overbought (80)/oversold(20) levels. If the MFI is trending down, but the price is higher, the stock may reverse. The opposite is also true.

9) Rate-of-Change (ROC) - The ROC is a momentum oscillator that simply measures day-to-day (or period-to-period) change, therefore it is one of the more "choppier" ones. If the ROC moves above 0, it is a buy signal, and if it drops below 0, then it's time to sell. Any divergences between the ROC and price should be paid attention.

10) Williams %R (W%R) - The W%R is similar to the Stochastics and it shows overbought/oversold levels. A reading below -80 is oversold and a reading above -20 is overbought.

11) Accumulation/Distribution (A/D Line) - The A/D line is similar to the MFI and OBV, but the calculations are different (you can look it up yourself). The best use for A/D line is to confirma move or identify a divergence.

12) Average Directional Index (ADX) - The ADX confirms the strength of a trend. The +D1 is the positive directional indicator (green) that measures upside force, the -D1 is the negative directional indicator (red) that measures downside force, and the ADX is the black line. The +D1 and -D1 are self-explanantory and the ADX is most useful when a divergence can be identify over a longer period of time.

Don't forget to try the Free Trend Analysis. It's FREE, so give it a shot!


I usually don't cover much on technical indicators because I don't need them every day. I like to take a look at them once every 2 weeks or so just to see what all of these indicators are trying to tell me.

There are not perfect and they are not "sure things". The purpose of these indicators is to confirm price/volume action and their significance should not exceed those of the basics (price, volume, candles, moving averages, sup/res, etc.). What I like to find when analyzing indicators are divergences among them. Just as volume sometimes creates a divergence with price, so do technical indicators with the broad market.

There are many indicators, but here are twelve that are commonly used:

1) RSI (Relative Strength Index)
2) MACD (MA Convergence/Divergence)
3) CCI (Commodity Channel Index)
5) Force Index
6) Slow STO (Slow Stochastics)
7) OBV (On Balance Volume)
8) MFI (Money Flow Index)
9) ROC (Rate of Change)
10) WM%R (Williams %R)
11) A/D Line (Accumulation/Distribution)
12) ADX (Average Directional Index)

Don't forget to try the Free Trend Analysis. It's FREE, so give it a shot!

Wednesday, December 31, 2008


Happy New Year!

This year was the year that defined “smart money” and “dumb money”. There was very little “in between”. This year was also a year full of the unexpected. Complete shockers. Who would have known that all of this stuff would happen?

The only way to trade was to expect the worst…even when we didn’t know how bad it could get. I remember pulling all-niters on Sundays in October, just because I knew something would happen! I’m sure many others had sleepless nights.

I am also sure that many people who have their money managed by a mutual fund or a shitty hedge fund may want to re-think where they invest. The biggest investment should be in yourself through education. You are the master of your money. I met my target of reading over 100 books this year. I read 113. What’s your target for 2009?

The fact is, I turned 24 just last month and I made north of 265%, my best year ever. I made a killing in CWST to cap off the year (just ask my students). I have an I.Q. of about 120, so I’m not a genius, I am just an average person. In fact, I failed Calculus I the first time I took it. The point is, anyone with the right mindset can become a successful trader – yes, even in the worst crisis of our generation.

I am glad that I finally stepped up to the plate to create this blog for the many readers who did want to learn about technical analysis, chart reading, and short-term trading. Going into 2009, I will make my best effort in presenting the technical picture of the market on a daily basis. I take pleasure in doing what I do best.

Below are the usual charts but also my predictions for 2009:

SPX 10-day

SPX 40-day

SPX 4-month

VIX 4-month

The S&P 500 will re-test the 750 lows in the first half of 2009, and we will close below 700 by the end of 2009. This bear market will not end in 2009.

Crude oil will stay below $75/barrel for all of 2009.

Gold will break out above $1100/oz.

The VIX will hit 100 for the first time ever.

Posted unemployment will hit 10.5%. Total Unemployment (U-6) will hit 20%. The Employment Diffusion Index will hit the teens.

Commercial real estate values will drop 30-40%. Land development, office space, warehouses, shopping malls, hotels, and resorts will do the worst. Large multi-family properties will do the “best” because they will house all the folks who will lose their homes.

20% of retailers will file for Chapter 11 bankruptcy.

The bailout money will run out and the Fed/Treasury will request an additional package…and be denied. This debate will drag on for weeks and weeks.

Numerous local municipalities and/or states will go bankrupt. Many states will be unable to pay out full unemployment benefits.

The U.S. will be involved in another war.

A major terrorist attack, economic/financial, and/or political crisis will hit the U.S.

Martial law will be declared and FEMA’s Executive Orders 10990-11921 will be activated by the President. Military units will be deployed on the streets of America. The UN will continue to ship large numbers of military vehicles to the US mostly via Port of Beaumont, TX. There will be a massive build up of military equipment.


Ok, maybe not the last one, but you get the idea. I don’t see how our bear market (in the worst crisis since the Great Depression) can last for only 2 years. The tech bear lasted for more than 2 years and that didn’t even involve a global credit crisis! Bulls should not get too comfortable in 2009. There will be disappointments.

I think this will once again be a trader’s market, rewarding those that are nimble. Join me in battle next year and let’s slay this motherfuckin’ dragon and make some serious money!

P.S. Have fun tonight and tomorrow and try not to get into a situation where YOU’LL need a bailout!


Make a lot of room please (at least 150MB+), so I don't have to re-send stuff to individual people. Attachments from e-mails that have already been sent can be saved on your computer and the e-mail can be deleted, thus freeing up space. I'll give the group one more day. The files will be sent over the span of several days/weeks. Thanks!

Tuesday, December 30, 2008


Another last-hour WTF moment…great. Just when you’re about to wrap things up, a power rally shows up busting through the door at the end of the day. I’ve been in cash the whole day (still am), so it didn’t make any difference to me. The action at the end of the day brings the SPX close to the 50% retracement level, or the halfway point between range support and range resistance located between 855 and 920.

The SPX also closed above the 50-day MA, but it must maintain itself above the 50-day by not breaking down during a consolidation period like it did mid-December. At this point, we need to see a solid breakout above 920 SPX. Keep in mind that we do have major overhead resistance.

I stepped back and looked at the 4-month chart for a while and noticed that we formed a “Pipe Bottom”. These formations don’t occur as frequently as flags or wedges, but they are highly reliable. A pipe bottom is formed when there are two large spikes right next to each other after an extended decline. In addition, the volume must be high on either one or both of the pipes.

Statistics show that bear market pipe bottoms have a 4% failure rate and an average gain (rally) of +32% which makes this a highly-reliable pattern (as we can already see). 23% of these formations have gained in excess of 50%. This is one of the few patterns that are confirmed “after the fact”, however, the point is not to say “duh”, but to get some sort of price target.

What’s interesting is that we also formed a seagull pattern. This pipe smoking seagull is about to get HIGH. Keep in mind that this is a “short-term” bullish reversal, which means that it will most likely be a temporary fix and we will test the 750 lows. It is unlikely that this is the THE bottom like many have been calling recently. However, it doesn’t hurt to partake in the rally until a good shorting opportunity presents itself.

We still need some confirmation because the holiday volume just doesn’t confirm any type of price action when more than half the players aren’t even participating.

Here are the details:

SPX 10-day

SPX 40-day

SPX 4-month

For more on the Pipe Bottom, read Bulkowski's 964-page Encyclopedia of Chart Patterns.

Don't forget to try the Free Trend Analysis. It's FREE, so give it a shot!

Monday, December 29, 2008


We are still in the range that is bound by 1) the 20-day MA @877, 2) the 30-day MA @863, 3) 855 support which doesn't seem to be cracking, and 4) the LH trend line ending at 870 (sky blue 35-day chart). All of these areas are boxing in the market within a tight and narrow range, a 'pattern' that hasn't been seen in months. However, this doesn't mean that there won't be any more volatility.

Today's action showed the strength of the 855 support level. At this point, the 50-day MA is now at the half-way point between 855 and 920. We'll have to break out of #1, #2, and #4 (above). Can any of this action be trusted? No. The holiday volume is so light that anyone with big money can actually bully around stocks all day long. We will get full participation only after New Year's.

It seems like only safe way to determine a breakout or breakdown is to wait until 3:57PM when you know for a fact that the market will close up or down +/- X, and then place your orders. What happened in the last few minutes yesterday showed that the "WTF" still lives and isn't going anywhere anytime soon. I am personally betting more toward the short side as of today).

Looking at the long-term, we could be in the eye of a Category 5 hurricane. The light winds and clear skies don't seem to bother people much because most people got the shit kicked out of them when the hurricane approached early this year. Looking at the previous reference point of the 2001-2002 crash, we may be in the eye for several months a.k.a. "dead money" for long-term investors. What will be true is that 2009 will once again be a year full of trading, instead of buying and holding. All we can do is make assumptions based on the past, unless you have a time machine.

For now, we just have to get out of this range. I wonder what the catalyst will be...

SPX 1-day

SPX 3-day

SPX 5-day

SPX 10-day

SPX 35-day

SPX 4-month

OK, first, let me sat that the market may NOT match 2002's bottoming process. Who knows what will happen. Just use this as a reference, not some kind of "sure thing".



Don't forget to try the Free Trend Analysis. It's FREE, so give it a shot!