Online Trading Blog

The Week Ahead: The markets continued a four week slide, but began to rebound from a low point reached after the employment report was digested showing a still deeply damaged job market. Tech stocks led the way off the low. A relatively quiet reporting period could provide a respite for stocks. Watch Tuesday's Wholesale Trade Inventories, Thursday's Retail Sales and Business Inventories, and Friday's University of Michigan's Consumer Sentiment reading.

Stocks to Watch: Auto parts makers were weak compared to the indexes after American Axle & Manufacturing (AXL) provided a disappointing outlook for the year in their Q4 earnings release. TRW Automotive (TRW), Dana Holding (DAN), and Arvinmeritor (ARM) all fell in sympathy. Airgas (ARG) soared to nearly an all time high after a $60 cash tender offer by rival Air Products (APD) which correspondingly dropped. Key earnings reports come from Disney (DIS), Coca Cola (KO), and Pepsi (PEP) later this week.

Special Note: If a near term rebound is starting, then an upside resistance target would be an internal long term trend line on the Dow Industrials that was broken in 2008 at the 9600 level. A steep sell off occurred after to the March '09 low of 6670. The 10 1/2 month rebound retested this line now at the 10,400 level for this year. Having brief success pushing through this resistance in early January, the DOW has once again smashed through this line on increasing volume. An upward push to retest this resistance line (similar to the retest in October '08) would be normal before the bear trend resumed.

Market commentary provided by Barry Ward, registered principal, NobleTrading.com, Inc.

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Dogs of the Dow investing strategy tries to beat normal market returns via a passive investing strategy that takes only a little time. Although it is regarded as a contrarian investing strategy where investors move against the market, it is not like that always. A Dogs of the Dow investor simply invests equal amounts of money in 10 Dow Johns Industrial Average stocks having the highest dividend yield at the start of a year.

The Dogs of the Dow strategy holds that the high dividend ratio of a stock indicates that the stock is cheap (oversold), and the faith of the company management on the company's future performance. Thus investing in them holds a dual benefit: the above average price increases once the market realizes the true potential of the stock, and relatively high dividend yield. With dogs, there is no need of extensive market understanding or technical analysis. The steps involved in the strategy are,

• After the market close of the last day of the year, 10 stocks with the highest dividend yield are identified from 30 DJIA stocks. Now there are many sites/resources which provide this list.
• The investor invests equal amounts of money in each stock.
• At the start of the next year the same process is repeated.
• Selling of old stocks and buying new, investors can sell off those stocks that are out of the Dogs list and buy those that have got into the list.
• The investor should sell-off the stocks they are holding after one year and one day; thus he can qualify for long-term capital gain tax benefits.

Now there are some variations of the Dogs of the Dow strategy available for getting certain custom benefits. Besides, it is not mandatory to readjust the portfolio on the first day of each year.

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Ladder top is a bearish trend-reversal pattern indicating the reversal of an existing uptrend. It is a five candlestick pattern which is less popular than bullish ladder bottom pattern and is somewhat similar to bearish deliberation candlestick pattern. Bearish ladder top is a moderately reliable pattern.


The requirements of bearish ladder top pattern include,

• The pattern should form at the top of a strong uptrend.
• The first three days are bullish days noticeable with long white/colorless candlesticks that close above the previous ones. This formation is similar to three white soldiers pattern which is bullish and formed at the bottom of a downtrend.
• The fourth day is also bullish with a small real-body candlestick with a long lower shadow; it is a hanging man candlestick.
• The fifth day is a bearish day, noticeable with a long bearish (dark or colored) candlestick which opens below the real-body of the fourth day candlestick.

Ladder top candlestick formation occurs when bulls lose control over the markets. The bullish candlestick on the first three days indicates that the bulls are controlling the market but the hanging man candlestick creates doubts on their minds. Traders start to sell-off their positions but the increased buying activity at the end of the day helps to close the day on a new high. The bearish candlestick on the fifth day indicates that the bears are taking control of the market and a new downtrend is beginning.

With ladder top candlestick pattern, trades should wait till the price crosses the low of the fifth candlestick.

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Linear regression curve is a useful indicator created on the basis of linear regression. It is a curve line that best fits the prices of a time period. In short it can be considered as small linear regression trendlines with hidden ends that are connected to one another at their center portions or can be taken as a moving average of linear regression trendlines. For a better understanding, also read linear regression channels.


Linear regression curve gives the fair value of the stock or other security. This can be used to easily identify long-term and short term price trends, and price deviations. With linear regression curve, traders can use custom time periods to get custom signals. Traders can also generate trading signals.

• Signals can be generated when price moves a certain percentage away from the curve. Buy signals can be generated when price moves some points below the linear regression curve and sell signals when it moves above the curve. The idea is that the price will eventually return to the curve (fair value).
• Traders can also time their trades. Buy signals can be generated in a good uptrend only when the price moves below the curve. Similarly sell signals can be generated in a downtrend when the price moves above the curve.

Like most other indicators, linear regression curve gives better results when used in conjunction with other indicators.

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Although traded like exchange traded funds, grantor trusts differ greatly from ETF in their portfolio management and performance. They offer many advantages over ETFs but also have many disadvantages; and thus are not suitable for all types of traders. For a better understanding, read Grantor Trust Exchange Traded Funds.

Advantages of Exchange Traded Grantor Trusts

1. They let you invest in specific commodities without buying futures contracts or owning the commodity.
2. They directly distribute dividends. Shareholders will receive dividends immediately after a stock in the portfolio pays dividends.
3. They have low expense ratios because there is no expense involved in rebalancing or managing the portfolio.
4. The shareholders also retain the voting rights for companies' stocks held in the basket.
5. They let you invest in specific sectors or markets for a long term without many additional expenses.
6. They are tax efficient because the portfolio is fixed. Investors can time their taxes by timing the selling of shares.

Disadvantages of Exchange Traded Grantor Trusts

1. The fixed portfolio can be a problem. As they track commodities/specific sector stocks, there is more downside risk.
2. Overtime mergers and acquisitions can make the portfolio more concentrated towards a specific stock.
3. Dividends are not reinvested, limiting the chances of maximizing the profit opportunities.
4. Many grantor trusts operate for a fixed time and have a limited life.
5. As the portfolio is fixed, they are not suitable for short-term and market timing strategies.

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The Week Ahead: Strong GDP numbers and rising consumer sentiment were not enough to prevent a 3.5% decline for the month of January. This is the markets worst month since last February and bears watching closely from here. Investors will sift through 3 reports on Monday: Construction spending, Personal Income, and the ISM Manufacturing Index. On Tuesday auto sales and pending home sales are reported while the main report on Wednesday is the ISM Non-Manufacturing Index. A productivity report and factory orders is due Thursday, but the main event is Friday's jobs report.

Stocks to Watch: Berkshire Hathaway (BRKB) rose to a new 52 week high after its historic stock split and addition to the S&P 500. Gannett CO. (GCI) the newspaper publisher reported ad revenue declining but is looking for a strong political ad season with big elections later this year and upbeat auto ad revenue as well. Arch Coal (ACI) broke down sharply on a disappointing 2010 guidance. Sandisk (SDNK) likewise broke sharply lower after its earnings report. Look for Exxon Mobile (XOM) to report Monday and Cisco (CSCO) on Wednesday.

Special Note: The three major indexes DJIA, S&P 500, and Nasdaq all broke through and closed below there 5 month moving averages on expanding volume. The volatility has clearly picked up. The 10 month moving average currently rising through 9450 on the DOW usually acts like a magnet for prices after the 5 month average is breached. Despite near term bounces, the area surrounding the mid 9000's could be the next area of support for a more substantial rally. Incidentally, foreign currencies and commodities including gold have all fallen sharply the last two months as stocks play catch up.

Market commentary provided by Barry Ward, registered principal, NobleTrading.com, Inc.

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Since their introduction, mutual funds have been a very popular investing vehicles; especially for those who do not have time, enough resources and knowledge for active trading.

Advantages of Mutual Funds

1. Diversification: a typical mutual fund invests in 50 to 300 securities and thus has reduced overall portfolio risk. Generally, this level of diversification at individual levels needs huge amounts of money.
2. Portfolio management: by investing in a good mutual fund, you are actually hiring some professional portfolio managers to look after your portfolio. They buy and sell stocks and make necessary portfolio adjustments for you.
3. Easy to handle: mutual funds are relatively easy to buy and sell. They have low minimum investments like $2,500 or $5,000 and can be traded once per day at the closing net asset value of NAV.
4. Dividend reinvestment: the income from the funds can be used to purchase more shares of the fund.

Disadvantages of Mutual Funds

1. Not suitable for active traders: The facts that they are traded once per day as per NAV and have some sales charges make them unsuitable for active trading.
2. High expense ratios: mutual funds typically have higher expense ratio than index funds and ETFs. More over the fees including in buying and selling them can make them less profitable.
3. Management issues: the performance of the fund manager greatly determines the performance of the fund. Thus unnecessary trades, wrong market timings and poor replacements can affect fund performance.
4. Taxes: the capital gains from mutual fund investments are usually subjected to taxes at individual level.

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