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Umbrella and Inverted Umbrella Candlesticks

noreply@blogger.com (NobleTrading) — Fri, 20 Nov 2009 14:03:00 +0000

Both umbrella and inverted umbrella are candlesticks indicating high decision in the market; and are often interpreted as reversal patterns. Both are single candlestick patterns having a long shadow. Umbrella candlestick is a doji having a long lower shadow (thus resembles an umbrella) and inverted umbrella candlestick is a doji having a long upper shadow.

Requirements of umbrella and inverted umbrella candlestick patterns:

The real body of the candlestick should be very small, preferably just a horizontal line.
For umbrella formation, there should be a very long lower shadow and no upper shadow.
For inverted umbrella formation, there should be a very long upper shadow and no lower shadow.

Umbrella candlestick forms when the sellers dominate the day to drive the price to low levels but the buyers fight back to close the day at or very close to the opening price, which is also the highest price of the day. Inverted umbrella forms when buyers dominate the day but sellers fight back to close at the opening price, which is also the lowest price of the day.

Both umbrella and inverted umbrella are considered bullish reversal patterns when they are formed at the end of a significant downtrend or after a very long bearish candlestick. Both are considered bearish reversal patterns when formed at the end of a significant uptrend or after a very long bullish candlestick. They are also important reversal indicators when formed in a support or resistance level. With both umbrella and inverted umbrella, traders should always look for confirmation of trend change.

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Ultimate Oscillator - Trading Indicator

noreply@blogger.com (NobleTrading) — Thu, 19 Nov 2009 13:33:00 +0000

Ultimate oscillator is a useful technical indicator developed by Larry Williams and first described in 1985. It was developed to avoid the false signals generated by many indicators when used in different time periods. This oscillator represents a stock's price action during three different time frames. Ultimate oscillator is a weighted average of three oscillators representing short, intermediate, and long term market cycles or the 7, 14 and 28 periods. The shorter periods are included within the longer period; that is, the 28 period time-frame comprises the 14 and 7 period. Thus shorter periods get more weightage.

Ultimate oscillator is a range bound oscillator, having values ranging from 0 to 100. Like relative strength indicator or RSI, values below 30 are considered oversold and values above 70 are considered overbought. The center line of 50 is often used to find trend changes.

Traders can generate buy and sell signals using ultimate oscillator indicator. Remember, the oscillator offers much better results when used with other indicators.

Buy signals are generated when positive divergence of the oscillator and price occurs; and sell signals are generated when negative divergence occurs.
Buy signals are also generated when the oscillator falls below 30 and then rises back above previous high during the bullish divergence.
Similarly sell signals are generated when the oscillator rises above and then falls back below previous low during the bearish divergence.
Traders should close long positions when the oscillator rises above 70 or when the oscillator rises above 50 and then falls below 45.
Traders should close short positions when the oscillator falls below 30.

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What is ETF Liquidation?

noreply@blogger.com (NobleTrading) — Wed, 18 Nov 2009 13:56:00 +0000

ETF liquidation is simply the shutting down of an Exchange Traded Fund. The fund stops trading on listed markets at a point of time, the holdings are then liquidated to pay money to the investors holding the shares. The recent trend of ETF liquidation started in early 2008 and has resulted in the shrinking of the entire ETF market.

Most ETF liquidations occur because of the fact that they are not profitable to the company which created them. This low profitability can be due to many reasons.

Lack of investor interest.
Lack of liquidity and very low trading volume.
Lack of sufficient funds (low total asset value) which makes it difficult to manage the fund at low profit margins.
Other reasons like tracking a narrow sector/index, high expense ratio, high competition, tracking error, overall market trend.

When an exchange traded fund undergoes liquidation, it informs the market it is listed in and the investors about the day on which the trade will cease. Trader shareholders have two options, they can either sell the shares before the last trade date or hold the shares for receiving the money from the fund manager after the underlying shares are sold. The liquidation distribution amount is calculated based on the net asset value (NAV) of the ETF.

If the ETFs are held in a taxable account, then the liquidation can create a tax amount. The investors may have to pay the capital gain taxes, either at long-term capital gains rate or short-term ordinary income tax rate.

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NobleTrading Weekly Newsletter, November 16, 2009

noreply@blogger.com (NobleTrading) — Tue, 17 Nov 2009 14:25:00 +0000

The Week Ahead: The U.S. trade deficit expanded 18% in September the biggest one month increase in 10 years while consumer sentiment took an unexpected drop. Again markets shrugged off the news as stocks rose for the second straight week. On Monday, Ben Bernanke will speak in New York City and retail sales and business inventories are released. The PPI and Industrial Production numbers are due out on Tuesday. The CPI and housing starts data are released Wednesday. The leading indicators for October come out Thursday.

Stocks to Watch: Copa Holdings (CPA) beat Q3 earnings from a year ago despite a 7% drop in revenues as the stock reached 2 year highs. Esco Technologies (ESE), an engineering firm, also showed better numbers versus last year but fell 11% because of a poor outlook for 2010. Assured Guaranty (AGO) had its debt downgraded by Moody's, but rose 20% as J.P. Morgan issued an overweight rating on the stock. Two new issues to track: Dollar General (DG) and Rue 21 Inc. (RUE), a teen clothing retailer, both successfully traded up on Friday.

Special Note: Stocks here in the U.S. and abroad continue diverging behavior. Examples include the Dow Industrials at new 2009 high but the Dow Transports and Utilites not confirming. Nasdaq 100 Index at new high but Russell 2000 not confirming. Hang Seng Index at new high, but Shanghai Composite and Japan's Nikkei Index not confirming. London FTSE at new high but Paris CAC-40 and Frankfurt Dax Index not confirming and many others. The implications of this behavior are significant and will likely determine the direction stocks will take between now and year end. More next week.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Causes of Panic Selling

noreply@blogger.com (Daniel Pipitone) — Fri, 13 Nov 2009 13:16:00 +0000

Panic selling is characterized by frenzied selling of investments with least regard to the prices obtained. This very often results in a great decline in the price of the instrument; panic selling is spurred by anxiety and emotion, rather than by discretion.

Panic selling usually starts with a strong extended bull market. Some securities/sectors become the leaders of this bullish trend, they are extensively highlighted by the media, and they make the investors/traders feel like they will never drop in value (eg: the dot com companies of the dot com bubble period). In due time the traders will realize that the market/security is not as strong as they expected or is overvalued; and is going to fall. A bad news or under achievement info triggers the panic selling and eventually markets fall.

There are many reasons for panic selling, most of which are related to human behavior.

Fear of loss - Optimism and greed are the main human emotions driving the markets to new highs. But in higher levels, the optimism diminishes and doubts about the future arise. This leads to fear of losing money and the tendency to close off the positions as early as possible.
Fear of missing an opportunity - many times this emotion is stronger than fear of loss. Most investors want to beat all others around them, thus quick and senseless decisions are often made.
Search for leadership - Trusting a few media persons or market gurus without doing your own research can be devastating, because as they fail all (most) followers fail.
Laziness - Investors and traders often forget to do the basic trading fundamentals like proper portfolio management and risk management.

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Bearish Thrusting Candlestick Pattern

noreply@blogger.com (Daniel Pipitone) — Thu, 12 Nov 2009 13:38:00 +0000

Bearish thrusting is a bearish trend continuation candlestick pattern indicating the continuation of an existing downtrend after a bullish day. It is a two candlestick formation which closely resembles bearish in-neck pattern and bullish piercing line pattern. Bearish thrusting is a weak candlestick pattern.

Requirements of bearish thrusting candlestick pattern include,

The pattern should form in a downtrend.
The first day is a long bearish day characterized by a black or colored candlestick.
The second day is a bullish day characterized by a white or colorless candlestick which opens a gap below but closes within the real-body of the first day candlestick.
The close of second day candlestick must not exceed the mid-point of the first day candlestick; if it exceeds the same, it forms bullish piercing line pattern - a strong bullish reversal formation.

Bearish thrusting candlestick pattern is the result of a failed rally in a down market. As the second candlestick does not exceed the mid-point of first candlestick, the downtrend is expected to continue.

Bearish thrusting pattern is less reliable than bearish in-neck and on-neck formations. Confirmation of the trend continuation is required, which can be a bearish candlestick, a gap down opening or a lower close on the next trading day.

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Andrews' Pitchfork Trading Indicator

noreply@blogger.com (Daniel Pipitone) — Wed, 11 Nov 2009 13:08:00 +0000

Andrews' pitchfork, originally named Median Line Studies, is a well known trend indicator which primarily shows support and resistance levels of an existing trend. The indicator was developed by Dr. Alan H. Andrews and with its median and side lines it resembles the farmers' pitchfork. Andrews' pitchfork is a simple indicator which can be used to enter buy and sell signals as well as to evaluate overall market cycles and trend changes.

Andrews' pitchfork consists of three lines, a median or middle line, an upper resistance line and a lower support line. The lines are plotted to the future from an identified trend. The middle line originates from a peak or trough and passes through the midpoint of the distance between another peak and trough, from which the upper and lower lines start respectively and run parallel to the median line. Most price movements occur within the channel created by the indicator.

Andrews' pitchfork can be used to trade within the lines and outside the lines. When trading within the lines, the upper line should be taken as the resistance and lower line as the support. Sell signals can be entered when the price pulls back from the upper resistance line and buy signals entered when the price reverses from lower support levels. The price movements outside the lines are considered short-lived and trading can be done accordingly.

According to Andrews, most of the price movements (up to 80%) occur towards the median line and this constitutes the long-term trend. But if price fails to show a trend towards the median line (from either side), it indicates a change of trend in a new direction; if the price is now above median line, it is a new bullish trend and if the price is below median line, it is a new bearish trend. Many traders also use Andrews' pitchfork to forecast the size of the next trend, based on the size of the previous trend.

Note: The indicator offers better results when it is confirmed by other price and volume indicators.

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REIT Exchange Traded Funds

noreply@blogger.com (Daniel Pipitone) — Tue, 10 Nov 2009 14:18:00 +0000

REIT exchange traded funds (ETFs) are ETFs which invest in securities of Real Estate Investment Trusts (REITs). They allow the shareholders to indirectly benefit from the profit of publicly traded REITs which hold profit from residential and commercial real estate markets. REIT ETFs are gaining in popularity and they are most noted for their above average dividend yields.

Now there are a number of REIT ETFs available which track different real estate indexes; the most tracked/common indexes are the Dow Jones U.S. REIT Index and MSCI U.S. REIT Index. Here are some popular REIT ETFs.

Dow Jones Wilshire REIT ETF (RWR)
iShares Dow Jones U.S. Real Estate Index Fd (IYR)
iShares Cohen & Steers Realty Majors Index Fd (ICF)
First Trust S&P REIT Index Fd (FRI)
Vanguard REIT ETF (VNQ)

Real Estate Investment Trusts ETFs have the characteristics of both stocks and fixed income securities. Like stocks, the ETF share prices swing with news and events, and with the ups and downs of the real estate market. To qualify for corporate tax breaks at trust level, REITs should pay out most of their profits (often around 90%) to its shareholders; this offers high dividends to ETF share holders. They are also considered as good portfolio diversification tools as the real estate market does not move together with equity market. However, REIT ETFs are considered risky investments and investors should read the prospects carefully and choose the ETF best suited for them.

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Stock Trader Newsletter, November 09, 2009

noreply@blogger.com (Daniel Pipitone) — Mon, 09 Nov 2009 14:32:00 +0000

The Week Ahead: Double digit unemployment at 10.2% wasn't enough to stop stocks from rising after a previous week sell-off, but with the real unemployment rate or U-6 climbing to 17.5% can November's up start for stocks continue? More employment news comes out Monday via the Employment Trends Index for October. News flow slows ahead of Veteran's Day on Wednesday when the bond market will be closed. Then jobless claims figures arrive on Thursday and import prices on Friday.

Stocks to Watch: Sunoco Inc. (SUN) showed a Q3 loss versus a large profit a year ago because of weak demand for its fuel and chemicals with no sign of improvement in the refining market until 2010. Rosetta Stone (RST) sank to new lows after a Q4 profit drop of 12% as consumers spending on their language products suffers because of the recession. FreightCar America (RAIL) has not seen any recovery in the economy as they had no net orders for rail cars in Q3 compared to 2300 a year ago and profits dropped significantly. Insurance giant, The Travelers Company (TRV,) earned a high grade from Goldman Sachs and was upgraded to buy.

Special Note: The Dow Industrials and S&P 500 could still be poised for new highs this year as they have held their October lows, but other major indexes like the Russell 2000, Dow Transports, Dow Utilities, S&P 600 Small Caps, and the Nasdaq Composite have broken through their respective October lows. This sets up a possible inter-market bearish divergence of significance if the ladder indexes fail to achieve new high as well. Something investors should be aware of given the quick start this month and the 8 month rally in stocks.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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What is System Trading?

noreply@blogger.com (Daniel Pipitone) — Thu, 05 Nov 2009 13:32:00 +0000

System trading, also known as mechanical trading, automated trading, algorithmic trading and rule based trading, is one of the two popular trading methods; the other is discretionary trading. It is the trading practice where a trading system trades on behalf of a trader. The system makes all trading decisions with respect to the rules set by the trader and the info available at the time. System traders rely on the ability of the system to find trading opportunities and to execute trades.

Usually all the trading decisions like entry and exit points, stop-losses and position sizes are made by the system, but it is possible to override the decisions. Most trading systems come with standard trading rules, which need to be customized according to the traders' trading goals, risk tolerance and the securities/markets traded. As all trades are done automatically, traders can practice complicated trading strategies.

The first thing to note is that the system makes absolute trading decisions. A buy or sell process is triggered once all the requirements are met; and the system never trades until the minimum requirements are met.
System trading eliminates human emotions like fear and greed from influencing the trading.
As the decisions are made automatically, traders can conduct large-scale trades with complex strategies like arbitrage.
The strategy is better for short-term trading like intraday trading and swing trading; but not for long-term trading and investing.
The strategy is good for persons who want speed and accuracy in their trades; and who want to save time.
System trading is usually less flexible and adaptable than discretionary trading.
While system trading favors novice traders more than discretionary trading, the system still requires to be fine-tuned for making good profits with minimum risk/loss.

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Zig Zag Trading Indicator

noreply@blogger.com (Daniel Pipitone) — Thu, 05 Nov 2009 13:28:00 +0000

Zig Zag indicator is used by traders to reduce the "noise" in a trending security. It is very useful in finding price trends, finding support and resistance levels and in evaluating chart patterns like head and shoulders pattern, double tops and double bottoms. Actually Zig-Zag is not considered a true indicator, but as a filtering program to eliminate random price swings of a given period.

There is not an exact formula for zig zag indicator; it is a computer program which wipes out all price movements less than x percent or points. For example if you use a 5% filtering, all price movements of the stock less than 5% will be eliminated from the graph. Traders can also set the zig-zag amount in points. Thus the indicator helps the traders to better explore the market cycles and long-term chart patterns.

Zig zag trading indicator is widely used in Elliot wave analysis. The indicator is a lagging indicator and has zero predictive power. The last leg of the indicator is generated dynamically; it can change as the last leg is not set until the future price is already known. Traders should never use zig zag indicator for generating entry and exit points but for just understanding past price movements. The indicator can offer better results when used with other indicators and chart patterns.

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Bullish Concealing Baby Swallow

noreply@blogger.com (Daniel Pipitone) — Wed, 04 Nov 2009 13:35:00 +0000

Concealing baby swallow is a bullish trend-reversal candlestick pattern indicating the start of a new uptrend after a downtrend. It is a four candlestick pattern comprised of all bearish (black or colored) candlesticks. Bullish concealing baby swallow pattern is a highly reliable pattern, where trend reversal occurs because of the extreme bearishness of the trend.

The requirements of a bullish concealing baby swallow pattern include,

The market should be characterized by a significant downtrend.
The first two days are characterized by bearish marubozu candlesticks without any upper or lower shadows.
The third day is a bearish day opening below a gap and is characterized by an inverted hammer formation, the shadow of which trades into the body of the second day candlestick.
The fourth day is also a bearish marubozu day which opens a gap above the third candlestick and completely encloses the third day candlestick.

Bullish concealing baby swallow formation occurs when there is a strong bearish sentiment in the market. The bearish marubozu formations of the first two days indicate that the downtrend is strong. But the long upper shadow of the third day candlestick and gap above opening of the fourth day candlestick indicate that the trend is weakening. The fourth day also offers a perfect opportunity for shorts to cover their position. Once that's done, the trend is expected to reverse.

Bullish concealing baby swallow is a highly reliable formation; however, a bullish candlestick with a gap-up or a higher close on the next trading day is necessary for confirmation of the trend.

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What are BRIC ETFs?

noreply@blogger.com (Daniel Pipitone) — Tue, 03 Nov 2009 13:43:00 +0000

BRIC ETFs are exchange traded funds which invest in stocks associated with BRIC nations, which are Brazil, Russia, India and China. These are countries which are considered as the leaders of emerging economies because of steady and fast economic (GDP) growth in the past and are constantly exploring their high levels of natural/human resources. BRIC ETFs allow investors to passively benefit from this growth.

BRIC ETFs are excellent ways to diversify the investment portfolio. They are also believed to offer better returns than ETFs tracking NYSE and S&P; or American and European markets as a whole. Different BRIC ETFs may have different weightage for different countries; for example Claymore BRIC ETF (EEF) has the following allocation proportions - Brazil 46%, Russia 5%, India 13% and China 36%. Apart from tracking the securities traded in BRIC exchanges, many BRIC ETFs also track stocks of BRIC countries traded in American and European markets.

Many investors consider BRIC ETFs as an alternative way to profit when the dollar and US economy are weak. BRIC ETFs usually have higher expense ratios than traditional ETFs. They are also considered risky as the political climate of these nations can change drastically. The recent recession, which hit these economies too, has also raised some concerns over these economies. The decoupling theory of emerging markets, which stated these economies will grow independently, has also proved wrong so far.

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NobleTrading Weekly Stock Update

noreply@blogger.com (Daniel Pipitone) — Mon, 02 Nov 2009 14:53:00 +0000

The Week Ahead: Investors were spooked by a falling consumer confidence number while personal income and spending data showed the biggest drop in 10 months. The data continues to flow starting Monday with pending home sales and construction spending. Auto sales arrive Tuesday as the FOMC begins a two day meeting on interest rate policy. The FOMC decision will be announced Wednesday afternoon. Third quarter productivity and jobless claims data are announced Thursday which precedes Friday's all important Employment Report.

Stocks to Watch: Zale Corp. (ZLC) after showing a much larger Q4 loss versus a year ago is undergoing an SEC probe of their accounting practices. Manitowoc Company (MTW) beat earnings estimates for Q3 despite being substantially lower than last year, and Standard & Poors kept a strong buy on the stock. Stanley Inc. (SXE), an IT services firm beat Q2 estimates and year ago levels in their earnings report as the stock pushed back above a declining 200 day moving average. Microstrategy (MSTR) handily beat estimates for Q3 as the stock vaulted to an 18 month high.

Special Note: The S&P 500's decline in October halted seven straight up months as the broad based index tests its October low. Several indexes registered bearish outside down weeks including the Dow Transports, Russell 2000, and S&P 600 Small Cap Indexes where higher highs and lower lows were made than the previous week and closed lower. This candlestick bar pattern is quite often associated with major reversals in stocks and can be considered a precursor for a larger decline than the 9% drop in July despite a 65% rise since the March low in the S&P.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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What is October Effect?

noreply@blogger.com (Daniel Pipitone) — Fri, 30 Oct 2009 13:59:00 +0000

October effect is the belief that the market tends to decline in the month of October. Today this is considered only as a psychological expectation of traders rather than an actual phenomenon. Statistics over the years shows that October is just like any other month. An opposite phenomenon is observed in the month of January known as January Effect, which is more common and is related to tax paying.

The month of October makes many traders and investors nervous as many serious market declines occurred in the month of October. The 1907 panic, 1929 Wall Street crash which preceded the great depression, black Monday and crash of 1987 and the recent 2008 credit crisis occurred in October. Moreover, it is the month of the last earnings season of a year, so prices are expected to fluctuate in either direction.

Statistics of the last 30 years shows that on an average, October is not the worst month of the year, it is September. In the late 90s and early 2000, October was the most profitable month of the year. In 1946, 1957, 1960, 1966, 1974, 1987, 1990, 2001, and 2002 October was also the month which ended some of the major bear markets. One reason for this is, as the phenomenon is widely known and expected, traders are prepared to exploit any decline/sell-off.

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In Neck and On Neck Candlestick Patterns

noreply@blogger.com (Daniel Pipitone) — Thu, 29 Oct 2009 13:58:00 +0000

Both In Neck and On Neck are bearish trend continuation candlestick patterns indicating a continuation of an existing bearish trend, after a bullish day. Both are two candlestick formations, comprising a long bearish and (preferably) a short bullish candlestick.

The requirements of In Neck and On Neck candlestick patterns include:

The pattern should form in a significant downtrend.
The first day is a long bearish day comprising a long black or colored candlestick.
The second day is a bullish day where prices open a gap below the first day's closing.
For In Neck pattern: the second day candlestick closes at or just (barely) above the first day's closing. If the candlestick closes way above the first day's closing, it forms Bullish Piercing Line pattern, a reliable bullish reversal formation.
For On Neck pattern: the second day candlestick closes below the first day's closing. The candlestick needs to be short; if it is long, it may form Bullish Meeting Lines pattern.

Both In Neck and On Neck candlestick formations occur commonly in downtrends and are considered undeveloped versions of bullish piercing line pattern. As bulls are failing to close trades distinctly above the first day's close, the downtrend is expected to continue, at least for a short term.

Both In Neck and On Neck are moderately reliable candlestick patterns. The bearishness of the formation increases with increase in length of the first day bearish candlestick. Confirmation of trend continuation is recommended.

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QStick Momentum Indicator

noreply@blogger.com (Daniel Pipitone) — Wed, 28 Oct 2009 13:13:00 +0000

QStick or Q-Stick is a momentum indicator developed by Tushar Chande. It is a simple indicator used to identify the trends over a period of time. QStick indicator shows the numerical value of a trend. It is calculated by taking the moving average of the difference between opening and closing prices for a period.

With QStick momentum indicator, values below zero indicate that the trend has a bearish bias, which increases with increase in negative values. Values above zero indicate that the trend has a bullish bias. Crossings of the zero level are used to identify trend changes. Traders may also use a short-term moving average of the indicator as a trigger line.

QStick is an easy to trade momentum indicator, trading signals can be generated in many ways.

Crossovers: Buy signals are generated when the indicator crosses zero line from below and sell signals are generated when indicator crosses zero line from above.
Extreme Values: Buy signals are generated when the indicator is in extreme low levels but turning up and sell signals are generated when the indicator is in extreme high levels but turning down.
Divergences: Buy signals are generated when the indicator is moving up but price is moving down and sell signals are generated when the indicator is moving down but price is moving up.

Like any other momentum indicator, QStick also offers better results when used in conjunction with other indicators.

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Trading Agriculture ETFs

noreply@blogger.com (Daniel Pipitone) — Tue, 27 Oct 2009 14:37:00 +0000

Agriculture Exchange Traded Funds or ETFs are ETFs that enable traders to profit from ever-changing agriculture commodity prices. They are becoming increasingly popular and are growing in number. Investing in agriculture ETFs is considered a good way of diversifying the portfolio as agriculture commodity prices often move independent of stocks and exchange indexes.

Now there is a variety of agriculture ETFs available for trading.

Some of them track single agriculture commodities such as wheat, soybean, cotton, coffee and sugar.
Some track a particular type of commodity such as grains, soft commodities, etc.
Livestock ETFs.
Normal and leverage ETFs.
ETFs which track specific agricultural indexes and ETFs which track futures price of specific commodities.
ETFs which give same weightage to all commodities they track and ETFs which give more weightage to specific commodities.

Like the agricultural commodities, supply and demand is the main factor which controls the price of agricultural ETFs. The long-term and near-term predictions & news affect the price. Agricultural ETFs are good for all those traders who want to profit from changing commodity prices but do not want to trade the commodities directly. They are also good option for traders who want to hedge their portfolio, want to diversify the portfolio, and who trade futures & options on these commodities.

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Trading Entry and Exit Points

noreply@blogger.com (Daniel Pipitone) — Mon, 26 Oct 2009 14:53:00 +0000

Market timing is all about finding the right points to enter a trade at the start of a trend, namely, entry points; and the right points to exit the trade at the end of the trend with maximum profit, namely, exit points. Entry and exit points are important in all forms of trading, but are most important in short-term trading, when traders want to capitalize on a relatively small price movement.

The entry and exit points should match traders' trading style, market/security volatility, anticipated price movement, trading goals, margin, position size, etc.
The trader should be clear about the nature of the trend that he can capitalize with his setup - his trading skill, risk tolerance, money flow, trading system, etc.
There are a variety of tools available for finding entry points; traders can use indicators, chart patterns, candlestick patterns and fundamentals to find an opportunity.
Traders should use more than one tool to confirm the opportunity. It is good to use the tool(s) one is most comfortable with to find the entry points and use others to confirm it. It is also better to use different kinds of tools, rather than the same one.
Perhaps finding exit points is more difficult than finding entry points. There are some indicators which predict reversals, support and resistance levels; and trend strengths can be good tools for finding them.

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ETF Sponsors and Creation Units

noreply@blogger.com (Daniel Pipitone) — Fri, 23 Oct 2009 13:47:00 +0000

ETF sponsors are financial firms that create and manage exchange traded funds. Now there are a number of ETF sponsors offering different types of ETFs that track different products and markets; examples include iShares, PowerShares, State Street, etc.

ETF sponsors create ETFs by creating an underlying index which is passively managed. This underlying index can be of stocks, currencies, derivatives, bonds, commodities, etc. Institutional investors help them in creating the initial underlying index by delivering them the stocks or derivatives needed for that. In exchange they receive creation units from ETF sponsors. The institutional investors can then market the shares of the creation units they are holding to retail investors in open markets or centralized exchanges.

Creation Units

Creation units are ETF shares which are considered as units of ETFs. Creation units can vary with the ETF provider and with ETF; usually a creation unit can contain 25,000 to 600,000 ETF shares; and units containing 100,000 shares are most common. It is the creation units that give liquidity as they are the small units of an ETF which is available for intraday trading. ETF sponsors also make necessary changes to the ETF portfolio with time, to best mimic the tracking index. They exchange old securities with the creation unit holders to get new securities.

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Cup and Handle Formation

noreply@blogger.com (Daniel Pipitone) — Thu, 22 Oct 2009 13:27:00 +0000

Cup and Handle formation, or the Cup with Handle formation, is a bullish continuation chart pattern. The formation was discovered by William O'Neil and introduced in his 1988 book 'How to make Money in Stock'. Cup and handle formation is very popular among investors, and that is one reason for the success of the pattern; because traders buy in high volumes creating the bullish breakout at the end of the formation.

The requirements of cup and handle formation include,

The pattern should form after a not too mature (2 or 3 months old) strong bullish trend. The pattern weakens when formed after matured uptrends, as the upside potential is low.
The pattern must have two components, the U-shaped Cup and a handle. The handle must always follow the cup.
The cup is like a semi-circle and is formed as a result of (steady) price decline followed by flattening of trend and then a (steady) price increase.
The handle is a downtrend after the formation of the cup.
The end of the handle formation is marked by increased buying volume resulting in a sharp upside breakout.

The shape and duration of the cup formation is important. V-shaped cups, formed because of sharp decrease and then sharp increase of the price, are not considered valid. The more rounded the formation, the better reliable it is. The cup formation lasts for a few weeks or months; the ideal one extends from 2 to 6 months. The depth of the cup should be below 30 to 50 percentage of the prior trend; depths above 65% are considered less reliable. In an ideal cup formation, both sides have equal highs. The handle formation lasts 1 to 4 weeks and the depth should be below 30% of the cup formation.

Many traders enter the trade when the breakout after handle formation crosses the descending trendline (drawn connecting the highs of the handle). Many other traders wait till the breakout crosses the two peaks of the cup formation. With cup and handle formation the confirmation of breakout, in the form of sharp increase in trading volume, is essential.

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Chande Momentum Oscillator or CMO

noreply@blogger.com (Daniel Pipitone) — Wed, 21 Oct 2009 13:37:00 +0000

Chande momentum oscillator or CMO developed by Tushar Chande shows the momentum of the underlying security. CMO is similar to Relative Strength Indicator, Rate of Change indicator and Stochastic Oscillator but differs from them in many ways. It uses the data of both up days and down days, uses no smoothing of data and does not hide any short-term movements; but like other oscillators it is ranged between +100 and -100.

Chande momentum oscillator is the difference between the sum of all gains and the sum of all losses for a period divided by the sum of all price movements. The formula for CMO is,

CMO = [(Su – Sd) / (Su + Sd)] x 100

Where Su is the sum of the difference between current and previous closes on up days and Sd is the sum of the difference between current and previous closes on down days.

Positive values of Chande momentum indicator show bullish trends and negative values show bearish trends. Oversold level is identified when CMO is below -50 and overbought level is identified when CMO is above +50. The 0 level is used to identify the change in momentum. With CMO, many traders use a (nine period) simple moving average to generate buy and sell signals. Buy signals are generated when the oscillator crosses above the signal line, and sell signals are generated when the oscillator crosses below the signal line.

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What is Reflation?

noreply@blogger.com (Daniel Pipitone) — Tue, 20 Oct 2009 13:47:00 +0000

Reflation is the intentional practice of a government to reverse the existing deflation. Today the word is also used widely to describe the first phase of recovery after a recession. Reflation is a complex process and involves many steps which aim at increasing a country's economical output. Usually a reflation policy includes,

Reducing (almost all types of) taxes.
Changing the money supply or injecting money to key economic sectors like infrastructure development.
Lowering interest rates.

The resultant injection of money into the economy causes rise in commodity prices and inflation. Many investors take the reflation phase as an investing opportunity. They can change their investments from low-risk low-profit instruments like treasury investments to high-risk high-profit investments like stocks. They can also take this as an opportunity to reinvest the pre-invested money. But the success of these strategies greatly depends on the trader's investing knowledge and skill in money/risk management.

Over the years, many countries and governments have implemented different reflation policies with different levels of success. Reflation policies are also implemented widely to sustain the economic boom by reducing the chances of backward growth. One thing every reflation policy does is increase the national deficit or debt. Over a long term, this increased debt tempts the policymakers to reverse the entire procedure - increase taxes and increase the interest rate - to fill the debt.

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NobleTrading Newsletter, October 19, 2009

noreply@blogger.com (Daniel Pipitone) — Mon, 19 Oct 2009 14:07:00 +0000

The Week Ahead: Markets recoiled Friday after an unexpected drop in October consumer sentiment and a reported $1.4 trillion budget deficit. In addition, Bank of America's $1 billion loss and GE's reduced bottom line versus a year ago did not help. Watch the PPI report along with the housing starts number on Tuesday. Jobless claims are due on Thursday along with September's Leading Economic Indicators from the Conference Board. Existing home sales are released on Friday.

Stocks to Watch: Apple Computer (AAPL) will release its widely anticipated quarterly results on Monday. Other significant earnings reports include Boeing (BA), Ebay (EBAY), and Wells Fargo (WFC) all released on Wednesday. Cytec Industries (CYT), a specialty chemical producer, beat estimates for Q3 by .23 and increased full year guidance for '09 as the stock regained levels last reached in October '08. Cryptologic Limited (CRYP) which develops internet gaming software sank hard after forecasting a Q3 trading loss of $3.4 million.

Special Note: Stock indexes look to complete very near term peaks in momentum as prices approach and push into strong upside resistance between 10,100 and 10,400 on the Dow Industrials, 1100-1125 on the S&P 500, and 2200-2250 on the Nasdaq. The timeframe for these moves could be from now until mid November. Another technical warning comes from the 10-day CBOE total U.S. equity/index put call ratio which has dropped to .755 near levels reached at the 2007 top.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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What is Stock Replacement Strategy?

noreply@blogger.com (Daniel Pipitone) — Fri, 16 Oct 2009 13:16:00 +0000

Stock replacement strategy, as the name suggests, is a strategy to mimic the returns of trading stocks through derivatives. The strategy aims at profiting from a stock, without directly trading the stock. In stock replacement strategy, traders use options (especially deep in-the-money options) and futures on the stock. For example, traders can buy deep in-the-money options having delta close to 1, then a $1 rise in stock price will also cause a $1 rise for the option.

Advantages of stock replacement strategy:

The strategy offers all benefits associated with trading (group of) stocks.
Reduces costs associated with opening long positions and holding them.
Offers more leverage, most money can be retained for hedging purposes.
Offers low downside risk, with options traders having the option to do or not to do, and futures positions can easily be offset.
Both simple and complex options trading strategies can be followed for getting custom results.

Disadvantages of stock replacement strategy:

Needs good trading experience and skills to master the strategy.
The strategy may fail, when the stock stays on (almost) the same price or moves sidewise with minimal volatility.
Sometimes the costs of trading options can match or exceed those of trading stocks.

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