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Dividend Reinvestment Plan or DRIP

noreply@blogger.com (NobleTrading) — Thu, 04 Mar 2010 13:57:00 +0000

Dividend reinvestment plan or DRIP, sometimes called DRP, is a very popular investment strategy which helps investors to gradually grow their share in a company. DRIP is an investment program run by a company for its shareholders. As the name suggests, it includes reinvesting the dividend owned to purchase more company stocks.

Dividend reinvestment plans usually work like dollar cost averaging, but have some unique features and benefits. The main beneficiaries of DRIPs are small investors who wish to benefit from the long-term performance of companies by buying-and-holding those shares. There are now many companies offering DRIPs and one can enroll oneself in a plan by buying as low as one share of the company. Many companies allow their DRIP investors to purchase stocks at discounted rate and most of these plans have very low minimum requirements.

Most dividend reinvestment plans come with two unique features.

No commission or brokerage fee: as the investor is directly dealing with the company, no brokerage fee is involved. Moreover, most companies reinvest the dividend without any fees or commissions.
Percentage share ownership: dividends are reinvested in a way that the investors can own partial stocks in addition to whole numbers. For example a $1 dividend for a $10 stock can be reinvested to own 1/10 of a share. The company keeps detailed records of share ownerships.

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Bearish Matching High Candlestick Pattern

noreply@blogger.com (NobleTrading) — Wed, 03 Mar 2010 13:07:00 +0000

Matching high is a bearish trend reversal candlestick pattern indicating the reversal of an existing uptrend. The pattern generally forms at the top of an existing downtrend; but is less popular than bullish matching low pattern. This is a two candlestick pattern composed of two bullish (white or colorless) candlesticks.

The requirements of bearish matching high candlestick pattern include,

The pattern should form in an established uptrend.
The first day is a long bullish day closing at a new high.
The second day is also a bullish day which closes at or very close to the first day's close.

Bearish matching high candlestick pattern forms when the price tends to reverse after touching a short-term resistance level. The fact that the second day is a bullish day, which closed at previous day's close, indicates that the resistance is successfully tested; now the trend can reverse as traders tend to close their open positions.

Bearish matching high is a moderately reliable candlestick pattern, which requires confirmation of trend reversal before one can take any short positions.

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What are Style ETFs?

noreply@blogger.com (NobleTrading) — Tue, 02 Mar 2010 13:02:00 +0000

Style ETFs, as the name suggests, are exchange traded funds which passively follow an investing style like growth investing style or value investing style. Rather than investing directly in growth or value stocks, they track specific style indexes like S&P, Russell or Barra style composites. Eg: Russell 2000 growth, Russell 2000 value, S&P/Barra Small Caps, etc. By following a specific style, style ETFs try to achieve some specific portfolio goals like less risk or more return rather than tracking a more broad/narrow index.

Style ETFs are very good instruments to include in an investing portfolio.

They help investors to passively explore an investing style; thus can be used to achieve some specific investing goals.
They are very good instruments for portfolio diversification.
They allow investors to test different investing strategies; and their past performance can be evaluated and compared to easily find out a most suitable investing style.
They are very good hedging tools; especially when you are dealing with a less-diversified portfolio composed of one style investments.
They are good instruments for long-term investments and take less time to screen than screening stocks they passively track.

Now there are many style ETFs available for investors, especially for US investors. They vary greatly in investing style and the index they follow. One thing to remember is, the style indexes are reconstituted periodically; once or twice a year. Thus one index can have very different stocks than the other, so does a style ETF tracking it. Thus finding the right style ETF can greatly enhance portfolio performance.

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Stock Market Weekly Update, March 1, 2010

noreply@blogger.com (NobleTrading) — Mon, 01 Mar 2010 15:04:00 +0000

The Week Ahead: Despite the strong Q4 GDP number, the economy is lagging badly in many areas not the least of which is the poorer showing in new home sales from January to February do to high unemployment and higher lending standards. Future GDP comparisons will be tough. The ISM Manufacturing Index, Personal Income, and Construction Spending reports will start the week off on Monday. Auto Sales arrive Tuesday. The Non-Mfg. Index on Wednesday will provide a peak at the service sector. Factory orders on Thursday and the Employment Report on Friday should be the most noteworthy of the week.

Stocks to Watch: Bancorpsouth (BXS), a regional bank, fell 13.74% after it delayed its annual report do to the review of asset quality measurements and setting aside $35 million for bad loans. Deckers (DECK) footwear beat estimates handily as sales and profits margins rose propelling the stock to 52 week highs. Nuvasive (NUVA), a medical device maker, shot up 35% on word that Aetna insurance will cover its final surgery procedure, but Rockwell Medical (RMTI) collapsed 27% after disappointing results for its experimental anemia drug.

Special Note: The Mutual Fund Cash to Asset Ratio of 3.6% at year end 2009 has reached the second lowest level since the data for this series began tracking it in the 1960's. As some may be aware, readings this low notoriously accompany major tops in stocks nearby. The last reading near this level was in July 2007 when the ratio reached its lowest 3.4% three months before the big top. It's an important contrary statistic to keep in mind as it is showing extreme bullish sentiment among fund managers with little wiggle room to meet redemptions.

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Channel Stuffing - Painted Fundamentals

noreply@blogger.com (NobleTrading) — Fri, 26 Feb 2010 13:49:00 +0000

Channel stuffing, also known as trade loading, is an illegal business practice used by companies to blow up their sales and earnings figures. It is the ponzi practice of sending more products through its distribution channel than the distributors/retailers can sell. When the products are shipped from the company, they may be considered as sold and may be used to boost the figures.

Companies can do channel stuffing for various reasons like,

Painting the fundamentals like sales and earnings figures; to get better stock prices and media attention.
To meet up with competitors' (or its own previous) performances or targets.
To highlight/paint its performance over a specific channel like international trades or a specific product.
Poor sales force management can also be a cause; trying to meet-up the long-term target in a short-term.

Channel stuffing can be regarded as a short-term practice with long-term consequences.

As more products are shipped, the distributors tend to return the unsold ones or stop giving further orders; thus the future figures get worse.
Creating more products for channel stuffing can demand factory overtimes, and returning unsold products or lack of orders can result in factory shutdowns.
The fundamentals can become less and less attractive and can adversely affect stock prices.
The marketing and selling of products become more and more complex and unmanageable.

Many companies regardless of their size have been identified and criticized for their channel stuffing activities. In the U.S., the Securities and Exchange Commission has litigated some companies for these activities.

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Bullish Matching Low Candlestick Pattern

noreply@blogger.com (NobleTrading) — Thu, 25 Feb 2010 13:31:00 +0000

Matching low is a bullish trend reversal candlestick pattern showing the reversal of an existing downtrend. The pattern usually forms at the end of strong downtrends and somewhat resembles bullish ladder bottom pattern. This is a two candlestick pattern formed of two bearish (black or colored) candlesticks.

The requirements of a bullish matching low candlestick pattern include,

The pattern should be formed in an established downtrend.
The first day is a long bearish day closing at a new low.
The second day is also a bearish day where price closes at or is very close to the first day's closing price.

Bullish matching low candlestick pattern occurs when prices tend to bounce back after touching a short-term support level. The first day candlestick shows that the downtrend is still strong. On the second day the prices open above previous close, but close at previous close. This indicates that the support level has been successfully tested and it is now time for the shorts to cover their position. On the next trading day, the price can reverse to form an uptrend.

Matching low is a moderately reliable candlestick formation. Traders can enter trades after the confirmation of trend-reversal, which can be a bullish candlestick, gap above opening or higher close on the next trading day.

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Treynor Ratio or Reward-to-Volatility Ratio

noreply@blogger.com (NobleTrading) — Wed, 24 Feb 2010 13:39:00 +0000

Treynor ratio, also known as Treynor Index and Reward to Volatility ratio, is used to measure the return for risk taken. The ratio was developed by Jack L. Treynor, hence the name. Treynor ratio is similar to Sharpe ratio; the difference is that it uses the beta or the volatility factor to evaluate the returns rather than the standard deviation of portfolio returns.

Reward to volatility ratio is calculated by subtracting the average risk free portfolio return from the average portfolio return and then dividing the result by beta value of the portfolio.

Treynor Ratio = (Rp - Rf) / Beta

Where Rp is the portfolio return and Rf is the return from a risk free investment like a US treasury bond.

Treynor ratio is also interpreted like Sharpe ratio; high values mean better return for risk taken or better portfolio performance and lower values mean just the opposite. It should be noted that Treynor ratio measures just the actual returns and does not account for any effect of active portfolio management. The ratio best works for sub-portfolios of a broader diversified portfolio. As the ratio measures the reward against systematic risk, it is not very useful for measuring returns of a less diversified portfolio with high unsystematic risk.

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Weekly Market Newsletter, February 22, 2010

noreply@blogger.com (NobleTrading) — Tue, 23 Feb 2010 13:10:00 +0000

The Week Ahead: Core inflation fell for the first time since 1982, but this did not stop the Fed from a surprise discount rate hike for banks. Fed chairman Bernanke may elaborate more about this at his semi-annual testimony to Congress beginning on Wednesday. Before that markets will watch two reports on Tuesday: The Case Shiller Home Price Index and Consumer Confidence. By Thursday the Durable Goods numbers will come out, and Friday ends the month with a modified Q4 GDP number and existing home sales figures.

Stocks to Watch: Increased enrollment for Medicaid and Medicare from an aging population helped Amerigroup (AGP) with much better than expected profits for Q4 as the stock rose 9%. Education company Apollo Group (APOL) warned quarterly results would not meet expectations because more students were not paying tuition bills. Solar stocks came under pressure when First Solar (FSLR) cast a shadow over the 2010 outlook for its business and Canadian Solar (CSIQ) warned profit margins won't be as large as predicted. Astrazeneca (AZN) faces two legal battles for product liability and defending patents for its cholesterol drug.

Special Note: The Dow Industrials are retesting the 10,400 approximate resistance level (mentioned here two weeks back) from its recent low made on February 5 at 9835. Volume as expected has consistently dried up to reach this level opposite the strong volume push when it originally broke through this level. The next week or two should decide whether the bulls or bears win this territorial battle. It appears though that the downside potential outweighs the upside potential by as much as 3 to 1 so risks should be taken accordingly.

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

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Conduit Theory of Investment

noreply@blogger.com (NobleTrading) — Mon, 22 Feb 2010 15:03:00 +0000

Conduit theory, also known as pipeline theory, is related to avoiding double taxation; taxation at both corporate and individual levels. The theory states that investment firms that pass all capital gains, dividend yields and interests on to its shareholders must not be taxed at corporate level. The shareholders are taxed only at individual levels for capital gains and income.

The idea behind conduit theory of investment is that the firms that are merely acting as conduit for passing capital gains to their shareholders should not be treated as regular companies and should not be taxed like them. A regular company is taxed for its earnings and profits at corporate level and the stock holders are also taxed for their dividend yields. The main beneficiaries of conduit theory are Real Estate Investment Trusts, mutual funds and similar regulated investment companies.

The tax benefit associated with conduit theory has its existence on IRS regulation M. The firms are exempted from tax as long as they satisfy certain federal rules. Conduit theory of investment has both proponents and opponents. Supporters of the theory believe that the theory has a good business sense and common sense; and the opposition believes that it gives investment firms an added advantage over other companies, especially other financial institutions.

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Bullish Pennant Chart Pattern

noreply@blogger.com (NobleTrading) — Fri, 19 Feb 2010 14:12:00 +0000

Bullish pennant is a bullish trend continuation chart pattern indicating the continuation of an existing uptrend after a short-term indecision in the market. The formation is very similar to bullish flag pattern but in pennant formation the consolidation after the pole is pennant or triangular shaped rather than flag shaped (being parallel). Bullish pennant pattern is also similar to symmetrical triangle formation, ascending triangle formation and falling wedge formation; the major difference is that this is a shorter term pattern.

Bullish pennant chart pattern forms when there is a consolidation phase in the existing uptrend; the trendlines converge to form a triangular shape and then breakout to continue the existing trend. The volume tends to diminish as the trend develops and the breakout is associated with a great spike in trading volume. The duration of the pattern can range from one to three weeks.

Traders can enter trades once the breakout is confirmed. The target price should be the price equaling the height of the pole from the breakout price. Bullish pennant chart pattern is considered less reliable when there is no significant change in volume during the pattern formation, no increase in volume at breakout and if the pattern took more time to develop (more than four weeks). If the volume tends to increase during the pattern formation rather than decrease, then there is also a possibility of trend reversal.

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Jensen's Alpha Indicator

noreply@blogger.com (NobleTrading) — Thu, 18 Feb 2010 14:05:00 +0000

Jensen's Alpha, also known as Jensen's measurement, Jensen's performance index and ex-post alpha, is a measurement of abnormal return from a portfolio or security. It is named after its developer, Michael Jensen. Jensen's alpha indicator was first used in the 1970s to evaluate the performance of mutual funds in relation to a benchmark or expected performance. For a better awareness read what is Alpha Indicator.

Jensen's alpha is a modification of the traditional alpha indicator and it also considers risk free rates. The modified formula is,

Alpha p = rp - [rf + Beta p (rM - rf)]

Where Alpha p is Jensen's Alpha, rp is the average portfolio return expected, rf is the risk free rate, Beta p is the beta of the portfolio and rM is the expected market return or benchmark return.

The basic idea behind Jensen's performance index is that when measuring a portfolio performance, one should also consider the risk of the portfolio in addition to the risk. For example if two mutual funds have the same return, the one with lower risk will be the better one to invest in.

Jensen's alpha is interpreted just as the alpha indicator. Positive values indicate that the portfolio is earning excess returns than benchmark, and negative values indicate that it is earning lower than the benchmark.

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Regulated Investment Company or RIC

noreply@blogger.com (NobleTrading) — Wed, 17 Feb 2010 14:06:00 +0000

Regulated Investment Company or RIC is an investment trust that does not need to pay federal income taxes for distributing capital gains, dividends or interest. The individuals receiving the distributions are taxed. This eliminates double taxation - paying tax at both corporate and individual levels. A regulated investment company can be a mutual fund trust, a unit investment trust (UIT) or real estate investment trust (REIT).

To qualify as a regulated investment company, an investment trust should satisfy certain standards.

The company should receive at least 90% of its income from its investments - as interest, dividends and capital gains.
The company should distribute at least 90% of its income to its shareholders.
The company should have a minimum diversification of assets.
If the company also needs to avoid the 4% excise tax, it should distribute at least 98% of its income.

Regulated investment companies qualify for the tax exemption as per IRS regulation M. They can be open-ended or closed-ended; meaning the number of shares is either varying or fixed respectively. If the investment company operates in more than one country or invest the money in foreign markets, then they need to sign (multiple) agreements to prevent double taxation.

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NobleTrading Weekly Update, 16 February 2010

noreply@blogger.com (NobleTrading) — Tue, 16 Feb 2010 13:14:00 +0000

The Week Ahead: Retail sales increases in January are reason for optimism among investors but expectations for February are likely to offset the January increase as the economy struggles to gain traction. Housing Starts, Industrial Production, and Capacity Utilization reports arrive on Wednesday of a Holiday shortened week. The Producer Price Index and Leading Indicators will be Thursday's focus while the Consumer Price Index on Friday will provide clues to the inflation/deflation outlook.

Stocks to Watch: A number of food establishments benefited from increased traffic and sales revenue as Chipotle Mexican Grill (CMG), Panera Bread (PNRA), and Cheesecake Factory (CAKE) all benefited with new 52 week highs. Ingersoll-rand (IR) dropped 8% and fell to multi month lows after coming in with weaker Q4 results and a dimmed outlook. Computer Storage firm Compellant Technologies (CML) hit a 5 month low after falling 25% as analysts downgraded the stock. General Cable (BGC) came in with half the earnings forecasted and the stock promptly dropped 13% to 10 month lows.

Special Note: Worries that China raising the reserve requirements for banks to slow the growth of loan demand to head off potential bubbles may have merit. Typically these government responses are more the cause of bubbles bursting than anything else. Witness the collapse of the Nasdaq bubble as the Fed raised interest rates in 2000 here in the U.S. More importantly though China and Hong Kong have been leading other markets around the world in up and down trends with the current trend reversal being no different as the Shanghai Composite and Hang Seng Index rolled over last August and November respectively.

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

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What is Contrarian Investing?

noreply@blogger.com (NobleTrading) — Fri, 12 Feb 2010 14:07:00 +0000

Contrarian investing is an investing strategy that simply means going against the market. Contrarian investors go against current market views, indicators and trends to outperform the market. For example, they may sell stocks on high and buy at low even when the trends are strong. They may also prefer to buy stocks which are ignored by investors and may sell those ones which are hot favorites. The basic idea is to get into a good deal even before others realize it.

Contrarian is a strategy which can be followed in both bull market and bear market. The strategy works best when the markets are wrong; like in bubbles and bursts. The most similar strategies to contrarian investing are value investing strategy and deep value investing strategy. Like value investors, contrarian investors look for mispriced stocks using indicators like book value and P/E ratio. But contrarian investors also consider the market sentiment using indicators like volume indicators, earning forecasts, industry performances, analyst and media commentaries, etc before making decisions.

Contrarian investing involves very high risks and it demands high levels of market knowledge, intelligence, trading experience, market research and trading data. There are some contrarians who just like go against the market all the time; which can't be a good strategy as the market is right most of the time. The right strategy can be to look for opportunities where the market 'can' be wrong.

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Single Day Patterns to Look For

noreply@blogger.com (NobleTrading) — Thu, 11 Feb 2010 12:12:00 +0000

Single day patterns formed in a trading chart can be used to enter and exit trades. They can be helpful for both active traders and long-term investors. Although most single day trading patterns are considered less reliable, they can still provide a good indication of changing trends and future market movements. Moreover, every big change starts with single candlestick/day. Here are three single day chart patterns to look for.

Gap patterns: Gaps are common chart phenomena which can indicate possible trend changes. They are formed as a result of unexpected news and developments. But all gap patterns are not reliable and not good indicators. For a more detailed understanding, read different gap patterns and how to trade the gaps.

Islands of reversal patterns: Islands of reversals are a popular and reliable pattern of trend reversals. These are easy to identify and trade. Islands of reversals can be used by both active traders and investors alike. Like gap patterns, islands of reversals should be accompanied by drastic changes in trading volume.

Stars and doji candlesticks: When reviewed with respect to the trading volume and existing trend, star and doji candlesticks can offer very good insights of trend changes. These are also components of many reliable candlestick patterns. For more information, read star candlestick patterns and doji candlestick patterns.

Wide-range days: If the price range of day is amazingly wide, then that can indicate a possible trend change. Often high volatility is caused by intraday news. The direction of close, existing trend, volume and next day's openings of wide-range days can indicate future trends.

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What is Alpha Indicator?

noreply@blogger.com (NobleTrading) — Wed, 10 Feb 2010 13:24:00 +0000

Alpha is an important trading indicator which measures the performance of a fund or security or portfolio with respect to a benchmark or predicted return and to the risk taken. Simply, alpha is the difference between the actual performance and expected performance. Positive alpha means the fund/portfolio outperformed the benchmark, negative alpha means the same underperformed the benchmark and a value of zero means that it performed as expected.

Alpha = (Rp - (b * Rb))/n

Where Rp is the total portfolio/security/fund return, B is the beta value of the security, Rb is the total benchmark/expected return and n is the number of observations.

Alpha indicator is considered as a measurement indicator of the investor's or fund manager's stock/investment screening ability. Often investment models like capital asset pricing model or CAPM and Three factor model are used to calculate the expected return from a portfolio or security with respect to the risk taken; high risk investments should offer high returns. If the actual performance beats this expected value, then the fund manager or investor has added to the return. For example if CAPM estimates a 10% return from the portfolio but the actual return is 15%, then the portfolio outperformed the benchmark by 5%.

Alpha indicator is considered one among the five important technicals of a fund's performance; others include beta indicator, standard deviation, Sharpe ratio and R-squared indicator. There are some other variations of alpha indicator like Jenson alpha which is used to get custom or more accurate results.

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What is Style Drift?

noreply@blogger.com (NobleTrading) — Tue, 09 Feb 2010 13:24:00 +0000

Style drift is the divergence of an investment portfolio from its stated investment objectives. This is a common issue for many mutual funds and portfolios managed by money managers. Style drift can be intentional or unintentional. Although style drift is considered a 'bad thing'; sometimes it helps the fund to outperform others or to minimize risks through careful investments.

Most mutual fund style drifts occur when the fund manager deviates from long-term strategy to reap some short-term profits. Other causes include,

Change of investing strategies with respect to changing market conditions.
Re-allocation of portfolio asset for adjusting risk or reward.
Change of fund's management team.
Performance of similar funds, demanding portfolio adjustment to meet them.
Outperformance or underperformance of some assets in the funds holding.
Giving more freedom to the fund manager for active portfolio management.

In general, a fund manager's ability to stick with the original goal is considered a positive attitude. There are some services available to monitor the funds style, performances and asset allocation changes. Portfolio that tracks specific indexes (eg: index funds and ETFs) are often immune to style drifts because the indexes are usually very broad and transparent.

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NobleTrading Market Update, February 8, 2010

noreply@blogger.com (NobleTrading) — Mon, 08 Feb 2010 14:21:00 +0000

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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How Dogs of the Dow Works?

noreply@blogger.com (NobleTrading) — Fri, 05 Feb 2010 13:00:00 +0000

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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Bearish Ladder Top Pattern

noreply@blogger.com (NobleTrading) — Thu, 04 Feb 2010 13:08:00 +0000

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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Trading with Linear Regression Curve

noreply@blogger.com (NobleTrading) — Wed, 03 Feb 2010 13:32:00 +0000

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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Benefits of Exchange Traded Grantor Trusts

noreply@blogger.com (NobleTrading) — Tue, 02 Feb 2010 13:27:00 +0000

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

They let you invest in specific commodities without buying futures contracts or owning the commodity.
They directly distribute dividends. Shareholders will receive dividends immediately after a stock in the portfolio pays dividends.
They have low expense ratios because there is no expense involved in rebalancing or managing the portfolio.
The shareholders also retain the voting rights for companies' stocks held in the basket.
They let you invest in specific sectors or markets for a long term without many additional expenses.
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

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

NobleTrading Weekly Newsletter, February 1, 2010

noreply@blogger.com (NobleTrading) — Mon, 01 Feb 2010 14:29:00 +0000

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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Mutual Funds - Advantages and Disadvantages

noreply@blogger.com (NobleTrading) — Fri, 29 Jan 2010 15:31:00 +0000

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

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.
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.
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.
Dividend reinvestment: the income from the funds can be used to purchase more shares of the fund.

Disadvantages of Mutual Funds

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.
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.
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.
Taxes: the capital gains from mutual fund investments are usually subjected to taxes at individual level.

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Williams %R Indicator

noreply@blogger.com (NobleTrading) — Thu, 28 Jan 2010 13:46:00 +0000

Williams %R, or simply just %R, is a momentum indicator popularly used by traders to find overbought and oversold levels. The indicator is similar to the %K of Stochastic Oscillator; the difference is that %R compares close to the highest high of a period opposing the lowest low as in stochastic oscillator. The formula is,

Williams %R = [{Close(t) - High(n) } / {High(n) - Low (n) } ] * 100

Where 't' represents today and n represents the number of periods.

Unlike most other indicators, Williams %R indicator has a negative scale; the values range from 0 (highest value) to -100 (lowest value). A close nearer to the highest high period will take the indicator nearer to 0 (overbought) and a close nearer to the lowest low of the period will take the indicator nearer to -100 (oversold). The typical period is 14, but traders can adjust it to make the indicator more or less sensitive.

Generally, values ranging from 0 to -20 are considered overbought and those from -80 to -100 are considered oversold. But often overbought does not mean it's the time to sell, or oversold does not mean it's the time to buy, because in strong trends the prices can remain in one range for an extended period of time. Traders should trade in the direction of the trend. During the periods of strong uptrend, traders can buy when the indicator falls to oversold values; and during strong downtrends, traders can short when the indicator shows overbought readings. Bullish and bearish divergences are also good signals, crossing of -50 from below or above.

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