Since I’ve been traveling through France stocks have been on fire. Nice to know that things are going well back home.
Check out this cool graphic that NatGeo put together:
Source:
Expert technical analysis of financial markets by JC Parets
by JC
Since I’ve been traveling through France stocks have been on fire. Nice to know that things are going well back home.
Check out this cool graphic that NatGeo put together:
Source:
by JC
Brian Shannon does a great job breaking down this market using multiple timeframes. I love the comparisons between the market and 4th of July Firework displays:
I’ve been watching Brian’s videos for years. Make sure that Alphatrends.net is part of your rotation. Don’t forget to check out his book. Hands down one of the best on technical analysis that I’ve ever read.
by JC
My buddy Josh Brown, known to most of you as the @reformedbroker, asked me to put up a guest post on his blog last week while he finished up his book. What I did was talk a little bit about why it is that I look at charts in the first place. I get asked the question so frequently, that I figured it was time to lay down the logic.
Here is the post in it’s entirety over at TheReformedBroker:
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Welcome to Guest Post Week here at TRB. JC Parets was a pitcher on Fairfield University’s Division I baseball team and is now a Chartered Market Technician (CMT). The competitive drive and discipline required to play ball at that level has clearly informed his trading, he is an absolute monster. I am fortunate to have worked with JC for a number of years and even more fortunate to call him my friend. His stuff can be found each day at his blog All Star Charts. Here he is explaining why he uses charts at all, the logic is unassailable. – JB
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My good friend Josh asked me to put together a guest post this week while he finishes up his book. I thought that I would take this opportunity to talk a little bit about why it is that I look at charts and why the technical approach is my go-to move when analyzing any security.
First of all, that last statement makes a point in itself, “analyzing any security”. As a technician, I don’t claim to be an expert in any particular area of the market or any specific sector. In other words, I’ll look at shares of Microsoft ($MSFT) or Intel ($INTC) the same way that I look at Copper ($HG_F) or Gold ($GC_F). I’ll look at the Euro/Yen Cross ($EURJPY) the same way that I will analyze long term Treasury Bonds. Not only can I look at all of these markets independently, but the intermarket work that we do, tying in all of these asset classes together, I feel, really gives me an advantage over market participants that choose to ignore such valuable information.
Legendary Technician John Magee once said that “when you enter the stock market you are going into a competitive field in which your evaluations and opinions will be matched up against some of the sharpest and toughest minds in the business. You are in a highly specialized industry where there are many different sectors, all of which are under intense study by men whose economic survival depends upon their best judgment”.
Knowing that going in, wouldn’t you want every advantage possible? If there are currency crosses out there that are highly correlated with the equities that you’re trading, wouldn’t you want to know about it?
There were two ways that I was taught to approach the trader’s problem of what and when: Technical Analysis, which refers to the study of the action of the market itself as opposed to Fundamental Analysis, which studies the goods in which the market deals. We, as technicians, focus our attention on price because that’s the only thing that’s going to pays us, nothing else.
Price action reflects shifts in supply and demand. If Demand exceeds supply, prices should rise. If supply exceeds demand, prices should fall. This action is the basis of all economic and fundamental forecasting. We can then turn this statement around to arrive at the conclusion that if prices are rising, for whatever the reason, demand must exceed supply and the fundamentals must be bullish. If prices fall, the fundamentals must be bearish. What we’re doing as technicians is indirectly studying fundamentals.
Think about it, if the price of a stock is the result of buying and selling forces, then it represents the “true value” at any given moment. It doesn’t make any sense to me to try to compare the market value of a stock with the “book value” or with the “Price to Earnings” ratio. There are too many other factors that may also affect the value, and some of these cannot easily be expressed in simple ratios.
I’m sure there are plenty of “reasons” why markets go up or down. I just don’t think that knowing what those reasons are is necessary to the forecasting process. Fundamental guys study the cause of market movements; we choose to focus on the effect. All known facts, estimates, surmises, and the hopes and fears of all interested parties are integrated in this effect (price). The Fundamentalist always has to know why, but why doesn’t pay us. More importantly, from a risk management perspective, I cannot imagine how difficult it must be to manage risk if you’re not using price action as a guide.
Hypothetically, a fundamental analyst does his math and puts a fair value of a stock at let’s say $15 and the stock is currently at $12 – it’s a buy right? So you purchase 10,000 shares at $12 and a week later the stock goes down to $10. No news, nothing has changed with the company, but now you’re down over 16%. Without any significant news events or company altering announcements your opinion of the stock has not changed. Do you buy more at $10? Do you put good money after bad? Regardless of your decision, you’re not selling right? The Stock is worth $15? Ok so 2 more weeks go buy and the stock has deteriorated further down to $8. Now what? You’re down 33% in a stock that you thought was worth $15. Where is the risk management? When do you know you’re wrong? Do you buy more at this point? Do you sell? What if the stocks goes even lower? These are all questions that I wonder to myself when I see this sort of analysis.
As technically driven as I am, sometimes I’ll look at fundamentals out of sheer curiosity and interest. A perfect example is $AAPL vs $RIMM. What a successful pairs trade that has been for years. I love apple products, always have, but I think blackberrys are horrible devices in comparison and Research in Motion is a company in a dangerous position. But it doesn’t matter what I think, price tells the story.
I’m not trying to put down any other form of analysis. In fact, I have the utmost respect for a ton of traders and analysts that focus their attention on fundamentals. Some of them even use both. They do great work and whatever it takes for them to get the job done, then more power to them. We have very busy days and this crazy market doesn’t give us too much time to think. So I’ve chosen to keep my life simple and focus all of my attention on the only thing that matters, the only thing that is going to pay us, and that is price.
I would just like to reiterate that I would still buy a stock where technically I agreed but disagreed on the fundamental premise. But never ever ever under any circumstances would I buy a stock that I liked fundamentally where technically it just offered too much risk for the potential reward. So if that’s the case, and I recognize it, then why wouldn’t I just look at the charts?
Sources:
Technical Analysis of the Financial Markets – John Murphy
Technical Analysis of Stock Trends – Edwards and Magee
Technical Analysis Explained – Martin Pring
Cartoon on Chartists (Alpha Global Investors)
by JC
This week I’m with the wife visiting different parts of France. After being lucky enough to spend the 4th of July in Normandy (how cool is that?), we are currently in Bordeaux tasting some of the best wine this planet has to offer. I’m extremely fortunate to have this opportunity. Check out what I woke up to this morning:
Here’s some of the best of what I’ve been reading:
$EURUSD, $EURCHF Chart Watch 7/6/2011 Symmetrical Triangles & Descending Channels (DistressedVolatility)
RBC Captial Technician, Robert Sluymer, Expects a More Sustained Rally as Q2 Earnings Season Gets Underway (BusinessTimes)
Have to Give the Bull Market the Benefit of the Doubt via Kevin Lane (ReformedBroker)
The Other P/E – Tobias Levkovitch’s Panic/Euphoria Model (BusinessInsider)
The ECRI Weekly Leading Index: 10 Consecutive Weeks of Slowing Growth (dshort)
Muni Bonds – Top Fixed Income Performer in Q2 Ignoring Meredith Whitney (WSJ)
Bubbleicious Chinese Construction Charts via SocGen (Ritholtz)
Dow Industrials Remain Well Below 2007 High (StockCharts)
New Highs in Consumer Discretionary Sector (Bespoke)
by JC
The Dow Jones Transportation Average made a new bull market closing high on Friday. Jack Schannep, who runs TheDowTheory.com newsletter, likes what he’s seeing, “The Transports often lead the market, notice they bottomed on June 10th before the Industrials and S&P on the 15th”.
Amazing how things change in just a couple of weeks. In mid-June, the gloom and doomers were leading the headlines. Bearish Sentiment was making new highs and bulls were no where to be found. The Dow Jones Industrial Average is now just 1.8% away from making a new bull market high.
This is typical of bull markets: Wipe out the weak hands and go on to make new highs frustrating those who are not participating to the upside. What we want to do is keep an eye on the leaders that brought us here. $AMZN is a name that we have been talking about here for a while. It too is sitting at all time record highs. $AAPL, America’s favorite stock is something that I am looking at closely. How it behaves at this critical level will tell us a lot about the strength of this market going forward. Take a look at the chart and you’ll see that it’s currently running into key resistance from a downtrend line that goes back to the February highs.
It’s a short week, but an important one. Be smart and manage risk.
Source:
by JC
Talk about Independence Day!
The Dow added nearly 650 points this week gaining 5.4 percent. This marks the best week for stocks since the Bull Market began in March of 2009. Meanwhile the Bond Market got destroyed. The 10-year note had its worst week since August 2009. Yields jumped 33 basis points to end the week at just a hair under 3.20%.
Here is this week’s performance (broken down into 10-minute time frames) of the $IEF, representing US Treasuries and the $DJIA, representing US Stocks:
Sources:
Bond Market’s Worst Week in 2 Years (WSJ)
Stocks Close Huge Week With Rally: Dow up 168 (Yahoo! Finance)
by JC
I had to put this chart up. No comment is necessary…..
Sweet trade Rupe
Source:
Chart of the Day: The Fall of MySpace (Silicon Alley Insider)
by JC
Its been one hell of a week if you’re long stocks, but now its now 4th of July Weekend. Historically volume dries up big time, especially the Friday before the holiday. Performance wise, the numbers are mixed but leaning a little towards the bears camp. From the Stock Traders Almanac:
Trading on the day before and after the Independence Day holiday is often lackluster. Volume tends to decline on either side of the holiday as vacations begin early and finish late. Since 1980, DJIA, S&P 500, NASDAQ, and Russell 2000 have recorded average losses on the day before and the day after. In 2011, the first trading day of July is also the day before. A bullish bias on July 1 could mitigate the otherwise bearish day before tendencies, but it also offer traders an opportunity to lock in profits from the last four sessions before heading out on a long weekend.
Source:
Independence Day Trading: Bearish Day Before and After (StockTradersAlmanac)