II Sentiment Sept 8, 2009

Investors Intelligence B/B bull readings 40-60 are generally constructive.  Above 60 is excessive and below 45 is very negative.  Readings below 40 are extreme, below 30 should give confidence that most heavy selling is complete.  These general rules have held – look at the charts!

Canadian Market View

I use these indexes and ETFs to take a snapshot of the current market behaviour.  Mostly stockcharts.com proprietary db symbols (non-etfs).  The CAD market is heavily weighted towards minerals and mining corporations and financials, you’re not gonna find a lot of health care/consumer disc/etc companies here so don’t look to the TSX for market direction.  Watch the US markets.  Updates to come.

ETFs are a cheap and tradable way to play sectors nearly directly.  2x (and 3x!) also give traders opportunities to ‘gamble’ but they’re also highly leveraged double edged swords.  You should learn how they’re calculated before dumping cash into them as they’ll tear your face off in an hour if you’re on the losing side of the trade.

TSX Broad Market Indexes:

$TSX – S&P/TSX Capped Composite Index

$CDNX – Venture Composite

$SPTGD – S&P/TSX Global Gold Index

$SPTGM – S&P/TSX Global Mining Index

TSX Capped Indexes

$SPT60C – S&P/TSX 60 Capped Index

$SPTEQ – S&P/TSX Capped Equity Index

$SPTCD – S&P/TSX Capped Consumer Discretionary Index

$SPTCS – S&P/TSX Capped Consumer Staples Index

$SPTMN – S&P/TSX Capped Diversified Metals & Mining Index

$SPTEN – S&P/TSX Capped Energy Index

$SPTFS – S&P/TSX Capped Financials Index

$SPTHC – S&P/TSX Capped Health Care Index

$SPTIN – S&P/TSX Capped Industrials Index

$SPTTK – S&P/TSX Capped Information Technology Index

$SPTMT – S&P/TSX Capped Materials Index

$SPTRE – S&P/TSX Capped Real Estate Index

$SPTTS – S&P/TSX Capped Telecommunication Services Index

$SPTUT – S&P/TSX Capped Utilities Index

$RTEN – S&P/TSX Capped Energy Trust Index

$RTRE – S&P/TSX Capped REIT Index

ETFs

HAX.TO – Horizons AlphaPro Managed S&P/TSX 60 ETFTSE

HED.TO – Horizons BetaPro S&P/TSX Capped Energy Bear Plus ETFTSE

HEU.TO – Horizons BetaPro S&P/TSX Capped Energy Bull Plus ETFTSE

HFD.TO – Horizons BetaPro S&P/TSX Capped Financials Bear Plus ETFTSE

HFU.TO – Horizons BetaPro S&P/TSX Capped Financials Bull Plus ETFTSE

HGD.TO – Horizons BetaPro S&P/TSX Global Gold Bear Plus ETFTSE

HGU.TO – Horizons BetaPro S&P/TSX Global Gold Bull Plus ETFTSE

HIE.TO – Horizons BetaPro S&P TSX Capped Energy Inverse ETFTSE

HIF.TO – Horizons BetaPro S&P TSX Capped Financials Inverse ETFTSE

HIG.TO – Horizons BetaPro S&P TSX Global Gold Inverse ETFTSE

HIX.TO – Horizons BetaPro S&P TSX 60 Inverse ETFTSE

HMD.TO – Horizons BetaPro S&P/TSX Global Mining Bear Plus ETFTSE

HMU.TO – Horizons BetaPro S&P/TSX Global Mining Bull Plus ETFTSE

HXD.TO – Horizons BetaPro S&P/TSX 60 Bear PlusTSE

HXU.TO – Horizons BetaPro S&P/TSX 60 Bull PlusTSE

XCS.TO – iShares CDN S&P/TSX SmallCap Index FundTSE

XEG.TO – iShares CDN S&P/TSX Capped Energy Index FundTSE

XFN.TO – iShares CDN S&P/TSX Capped Financials Index FundTSE

XGD.TO – iShares CDN S&P/TSX Global Gold Index FundTSE

XIC.TO – iShares CDN S&P/TSX Capped Composite Index FundTSE

XIT.TO – iShares CDN S&P/TSX Capped Information Technology Index FundTSE

XIU.TO – iShares CDN S&P/TSX 60 Index FundTSE

XMA.TO – iShares CDN S&P/TSX Capped Materials Index FundTSE

XMD.TO – iShares CDN S&P/TSX Completion Index FundTSE

XRE.TO – iShares CDN S&P/TSX Capped REIT Index FundTSE

XTR.TO – iShares CDN S&P/TSX Capped Income Trust Index Fund

TSX Broad Market Indexes:

$TSX – S&P/TSX Composite Index
$CDNX – Venture Composite
$SPTGD – S&P/TSX Global Gold Index
$SPTGM – S&P/TSX Global Mining Index

TSX Capped Indexes

$SPT60C – S&P/TSX 60 Index
$SPTEQ – Equity Index
$SPTCD – Consumer Discretionary Index
$SPTCS – Consumer Staples Index
$SPTMN – Diversified Metals & Mining Index
$SPTEN – Energy Index
$SPTFS – Financials Index
$SPTHC – Health Care Index
$SPTIN – Industrials Index
$SPTTK – Information Technology Index
$SPTMT – Materials Index
$SPTRE – Real Estate Index
$SPTTS – Telecommunication Services Index
$SPTUT – Utilities Index
$RTEN - Energy Trust Index
$RTRE – REIT Index

Horizon BetaPro ETFs (H**)

HAX.TO – Horizons AlphaPro Managed S&P/TSX 60
HED.TO – HBP Energy Bear PlusHEU.TO – HBP Energy Bull Plus
HFD.TO – HBP Financials Bear Plus
HFU.TO – HBP Financials Bull Plus
HGD.TO – HBP Global Gold Bear Plus
HGU.TO – HBP Global Gold Bull Plus
HIE.TO – HBP Energy Inverse
HIF.TO – HBP Financials Inverse
HIG.TO – HBP Global Gold Inverse
HIX.TO – HBP 60 Inverse
HMD.TO – HBP Global Mining Bear Plus
HMU.TO – HBP Global Mining Bull Plus
HXD.TO – HBP 60 Bear Plus
HXU.TO – HBP 60 Bull Plus

iShares ETFs (X**)

XCS.TO – iShares SmallCap Index Fund
XEG.TO – iShares Energy Index Fund
XFN.TO – iShares Financials Index Fund
XGD.TO – iShares Global Gold Index Fund
XIC.TO – iShares Composite Index Fund
XIT.TO – iShares Information Technology Index Fund
XIU.TO – iShares 60 Index Fund
XMA.TO – iShares Materials Index Fund
XMD.TO – iShares Completion Index Fund
XRE.TO – iShares REIT Index Fund

Channel Pattern

Channel Patterns are typically consolidation or continuation price patterns moving between parallel lines of support and resistance (main trendline and supplementary channel line).  Because they are continuation patterns, it is important to note the prior trend that brought price into the channel because it can be a tell as to the high probability breaks.  Trade with the trend.

• Prices tend to trend less than ½ of the time
• 2 or more touches on the trendline and channel line gives confidence on validity of channel

Price Breaks

Channel Patterns eventually break out of the consolidation zone.  In other words they don’t consolidate forever.  Breaking up through resistance or down through support is not known until after the fact but there are clues to likely scenarios.

Volume is very important to watch in these patterns, especially on breakouts.  Breakouts should be confirmed by volume expansion.

• Price break through resistance is likely if
  • volume expands when price rises and contracts when prices
  • prices stop falling to the support line
  • resistance becomes support on confirmed break
• Price break through support is likely if
  • volume expands when price falls and contracts when prices rise
  • prices stop rising to the resistance line
  • support becomes resistance on confirmed break
• Price breaks should be confirmed by volume expansion

Trading Strategies

The channel pattern can emerge during various time periods and depending on your trading timeline, various strategies can be applied.

• Buy at support, sell at resistance – stop set beneath support
• Sell at resistance, buy at support – stop set above resistance
• Buy or sell at breakout – stop set below new support or above new resistance depending on (break type)

Sometime in the future I’ll write a post about buying breakouts (and selling breakdowns) with risk minimization in mind.

Horizontal Channel Pattern

The Horizontal Channel pattern indicates that bulls and bears are exerting relatively equal force against each other and that neither side is gaining any ground.  When this occurs you get a purely sideways range-bound consolidation pattern shown below.  The prior trend is relevant because it indicates which direction the break is likely to be.

• Bulls and bears exert equal force against each other resulting in strictly sideways consolidation
• Little to no discernible tilt.  Prior trend is significant (below points)
• Price breaks up more likely if prior trend was up.  Price breaks down more likely if prior trend was down.

Descending Channel

The Descending Channel pattern is typically seen during downtrends and is very similar in nature to the horizontal variety.  In the descending pattern there is a downward price tilt and price is consolidating between the resistance trendline and the supporting channel line.  The “buying at support” strategy carries slightly more risk because you’d be buying against the underlying trend – which is clearly downward.  This pattern indicates short-term downward pressure.

• “Bearish Price Channel”.  Channeling with a downward tilt is slightly bearish indicating short-term weakness.
• Riskier to buy support b/c underlying main trend is bearish and you should never trade against the trend

Ascending Channel

The Ascending Channel pattern is just the opposite of the descending pattern.  There is an upward tilt and price consolidates between the supporting trendine and the resistance channel line.  The “selling at resistance” strategy carries slightly more risk because you’d be selling against the prevailing and underlying up trend.  This pattern indicates short-term bullishness.

• “Bullish Price Channel”.  Channeling with an upward tilt is slightly bullish indicating short-term strength.
• Riskier to sell resistance b/c underlying main trend is bullish and you should never trade against the trend.

Ascending Channel Example

Royal Bank (RY.TO) consolidated for quite some time in this ascending channel pattern between April and August of 2009.  The top line is the resistance line (channel line), the bottom line is the support (trendline).

Notice how parallel those lines run to one another.  There a couple of things that are worth pointing out here.

1.  Early May, there was good buying volume followed by a rising price which finally closed at resistance.  The following day it gapped open to 45.69 but failed to hold the breakout.  It was forcibly sold back down into consolidation.  When watching for breakouts in channels and consolidations it is important to see high volume in the intra-day, you also want to see a rising price outside of the trading zone.  Also set your stops accordingly, in this case a touch under resistance would have done.

2.  Mid August bulls got impatient and bought strongly through the channel correction to keep the price from falling to support.  This indicates that bullishness is increasing and it ultimately resulted in a breakout on very high volume (always confirm volume).

Watchlist Aug 24-28 2009

Watchlist for week ending Aug 28 2009.

TSX/Venture issues SMA(20) volume > 100k, price > 1.00, price < 5.00

This list contains TSX and TSX Venture exchange stocks trading with more than 100k shares/day average over 20 days priced between 1 and 5 dollars.  Stocks priced in this range can move by large amounts on a daily basis and exposes you to periodic wide price swings which can lead to significant and permanent loss.  Because of their volatility you need to be mindful of position sizing and position management.

HIGH – Immediate Priority

BNK.to – Bankers Petroleum Ltd
CLM.to – Consolidated Thompson Iron Mines
EAS.v – East Asia Minerals
EGD.v – Energold Drilling
JIN.to – Jinshan Gold mines
LMA.to – La Mancha Resources
LI.v – Lithium One
WTM.to – West Timmins Mining
ML.to – Mercator Minerals
PPY/A.v – Painted Pony Petroleum
PXX.to – Blackpearl Resources

HIGH – Developing

AVM.to – Anvil Mining
BXI.v – Bio-Extraction
CEN.v – Coastal Energy Company
KMK.v – Continental Minerals
GSC.to – Golden Star Resources
UW.v – Underworld Resources
QUC.v – Quest Uranium
SLG.v – Sterline Resources
TKO.to – Taseko Mines

DISCLAIMER: This list of issues is not a recommendation of purchase, sale or other financial transaction.  Always consult a financial professional before engaging in market activity related to the purchase and sale of investment market vehicles.

Paralysis

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss;

Overthinking is the like boiling a ham twice.  The interesting thing abour serial entrepreneurs is their high tolerance for pain.  Most people avoid doing things that are likely to result in failure which ironically is the characteristic that makes them unsuccessful in the first place.  Sure there are countless people that have hit it big but the vast majority of entrepreneurs take changes often which result in failures…often.  There are 2 traits to these types of people that help lead to their eventual success.

1. High pain tolerance
2. Optimism regardless of negative circumstance

The third implied trait that follows from these is their ability to brush off failure and move onto the next opportunity.  The average entrepreneur statistically is relatively well off compared to the general population but not as much as you might think.  They aren’t especially smart, or sophisticated or wealthy going in.  What they do have is a personality type that promotes serial risk taking.

Which brings me back to my original point.  Overthinking leads to inaction.  Inaction leads to lost opportunities.  Many times, simple action far exceeds inaction.  Putting too much thought into something leads to paralysis, there are too many things to consider, so many risks that need to be managed, too many numbers to crunch, too much research to do.  In all the time that it takes you to do these things, the opportunity may be closed.

Do enough research to form a sound opinion and manage the largest risks but do not waste time trying to understand and manage the irrelevant.

Opportunity lies at the intersection of planning and luck.

Never forget that risk runs both ways.  The choice of not doing something runs the risk of not learning, not profiting and not doing what you love.  Opportunity costs my friends.

Opinionated, Passionate, Right and Wrong

All good things are refined over time.  They start small and evolve into their future forms though countless iterations of change.  And so it goes with my journal of markets and trading.  I started this site to be my record of trading and market analysis but while that is what I do, it’s not what I ultimately wanted to write about.  I love the world of finance and money.  I am opinionated, passionate, right and wrong and it is that that I will write about.  This site will remain true to its original direction but in addition I will keep current with every subject that I find interesting.  Personal finance, investments, markets, real human stuff and of course current analysis of stocks.  This is for me.

Current Sentiment Readings

Commodity Futures Trading Commission (CFTC) publishes Commitments of Traders (COT) reports weekly which tracks sentiment in the futures market for short and intermediate term price patterns.  These are their stories.

Commercials – risk transference to reduce exposure to spot market price changes, primarily price hedgers and risk managers

Non-Commercials – institutions and major investors provide majority of liquidity through outright speculation and risk management for other market positions

Source: http://www.market-harmonics.com/

BB Ratio = 2.09
Pct.Bulls = 48.3
Pct.Bears = 23.1

* Readings over 2.0 (2x bulls vs. bears) is the wall level.  Sudden reversals and/or consolidation would be healthy at these levels.  Through these numbers, traders are very optimistic.

Golden Touch Punishes Weak Hands

Market watches and traders all had their eyes on the topping pattern formation developing in the S&P500 index.  No doubt many of their trigger fingers were quivering around the sell button come early July when the final right shoulder of the H&S pattern finally developed and completed the so-called reversal, then to be believed in the quiet before the storm stages of a significant broad market breakdown.  Come July 13^th though the market quickly reversed the reversal and shot up vertical slamming those laying on the shorts and lightening their positions.

Gold finds itself in a similar situation, though slightly more confusing technically.  The past run in gold has been very strong and it now finds itself consolidating in an inverse H&S pattern.  Though H&S is typically a strong indicator of sentiment reversal, they can also form as a result of consolidations and hence continuation patterns.

Take a look at gold today.  This IS the calm before the storm.  Inverse H&S after uptrend indicates likely consolidation ending in symmetrical triangle consolidation.  Technically the H&S can consolidate forever sideways but with the symmetrical triangle boxing price action in there has to be a break soon.  The triangle closes around mid-October 2009.

This is a market that can’t find direction, neither side is willing to commit the big dollars to move it yet but that time will come.  Watch the US dollar, watch inflation indicators and watch the broader market.  On signs of growth or strength in the economy money should flow out of treasuries and the USD and give gold an extra boost.  Gold is and will be a hedge against a weakening US currency.  Gold is also now getting into typical season strength which should help at a minimum to put a bottom under weakness.

Previously the tight inverse correlation between gold the USD weakened as a result of both assets garnering attention as safe-haven areas for stored wealth.  Should the market enter another period of panic, we can reasonably expect that relationship to reassert again.

Don’t trade what you don’t know.  Wait for a direction to emerge.

Moving Averages

Moving Averages

The moving average method of trend analysis relies on the use of various moving averages to identify prevailing price trends.  Moving averages smooth the price action by averaging out the noise generated by intraday trading anomalies and small blips in price that are unlikely to have a serious effect on the underlying trends themselves.

MAs ARE TREND FOLLOWING AND THEREFORE ARE LAGGING INDICATORS.  EVENTS THAT OCCUR IN CURRENT PRICE ACTION ARE ONLY REFLECTED IN MOVING AVERAGES AFTER THEY HAPPEN.  THEY ARE NO CRYSTAL BALL.

When a moving average is moving upwards, the trend is up.  When it is moving lower, the trend is down and because noise is filtered out you can be sure that you are looking at a fundamental price movement.

Simple vs. Exponential MA

SMAs are arithmetic averages that average all of the prices over some predefined period of time.  They are nearly identical over short periods of time (20 days) to EMAs but react slower than EMAs over longer time periods.  EMAs are geometric averages over some predefined period of time and weight recent prices more heavily than distant prices.  For this reason, EMAs react faster to recent price action than SMAs do.  Traders looking for a simple trend analyzer are served well with the SMA, however, traders looking for the same trend analyzer but with a little faster of a signal are served well using the EMA.  Faster signals can however be less reliable as they signal events more often that may turn out to be nothing at all.  The EMA argument is that recent price action is more important than past price action.  It was in fact this argument that lead to the invention of the EMA.  For shorter time periods, 20 – 40 days, there is little difference between and either can be used.

Moving Average Span

The number of prior prices a moving average takes into account significantly changes the number of signals it generates.  A slow moving average (ie 200 days) calculates 200 previous trading days worth of price information into the current average and so it is very smooth and calm.  A fast moving average (ie 20 days) calculates only 20 previous trading days and thus reacts very strongly to the latest price action in the underlying vehicle.  Below are some common MAs

5 day – 5 trading days in a week
20 day – 20 trading days in a month
50 day – common among institutional traders
60 day – 60 trading days in a quarter
200 day – common among institutional traders
250 day – 250 trading days in a year

Periods

5 – 15 days – Very Short Term
16 – 25 days – Short Term
26 – 49 days – Minor Intermediate
50 – 100 days – Intermediate
100 – 200 days – Long Term

Plotting Moving Averages on Charts

Weekly Charts – 10, 20, 39 weeks (50, 100, 200 day equivalents)
Daily Charts – 10, 20, 50, 200 days
60 minute Charts – 65, 130, 325, 650, 1300 (10, 20, 50, 100, 200 day equivalents – x6.5 60′s in 1 day)
15 minute Charts – 130, 260, 520, 1300,  2600, 5200 (5, 10, 20, 50 100, 200 equivalents – x26 15′s in 1 day)

Multiple Moving Averages

Each different time span chosen generates a very different moving average and tells its own story.  Shorter moving averages tell the short term trend.  Intermediate term moving averages tell the intermediate term and so on.  The combination of different moving averages onto the same graph thus shows the different underlying trends simultaneously and how they are moving around each other.  If the short, intermediate and long term trend MAs are all sloping up then it is clear that the short, intermediate and long term trends are up and gives a clear indication of the actual underlying trends that exist.

MOVING AVERAGES ARE MOST USEFUL IN STRONGLY TRENDING MARKETS.  SIDEWAYS TRADING MARKETS RENDER THEM FAIRLY USELESS IN THE TIME SPAN THAT PRICE ACTION IS CHOPPING IN.

Moving Average Signals

PRICE CROSSES OVER MA.  A very common MA signal.  Bullish = price action upwards through uptrend MA.  Bearish = price action downwards through downtrend MA.

MULTIPLE MA CROSSOVER.  When a faster MA crosses over a slower MA it signals that the shorter term trend is changing tide.  Bullish = upwards through uptrend MA.  Bearish = downwards through downtrend MA.  (This signal can lag price action by a huge margin)

ALIGNMENT.  Bullish = all MAs stacked top to bottom from fastest to slowest.  Bearish = all MAs stacked top to bottom from slowest to fastest.

Charts and Examples of Moving Averages

BMO – 200/50/20 exponential MAs plotted.    20MA and 50MA sit just under price action, clear strong short and intermediate uptrend.  200MA is starting to upturn but notice how long it took before the 200MA finally turned up.  The entire early Mar – Aug 6 month rally was nearly in its 3rd month (1/2 way done) before the 200MA rolled over to the upside.  Reason – MAs are trailing and follow price action.  The huge sell-off to the left of this chart was still being calculated into the MA and pulling it down until enough of the rally was being calculated.  Also see that the 20/50/200 are bullishly stacked.

TIM – downtrend clear as day.  Bulls died here.

YRI – Gold is consolidating and so along go the gold resource companies and intermediate producers.  Choppy price action pulls MAs back and forth with no clear direction.  20/50/200 all moving sideways.  Keen eyes will pick out 20/50 trending slightly to the downside signalling short and intermediate trends are down.  Long term trend uncertain.  Trade with caution…

Trend Analysis

Stock prices are always moving in the market.  At times they trade sideways in range bound zones and sometimes they don’t seem to move at all but the vast majority of time is spent inside trends.  A trend is simply a prevailing direction of movement.  Bull markets trend upwards in price, bear markets trend downwards and so do their component stocks.  Trends have varying degrees of strength as well as angle and direction.  Some trends are very strong and tend to surge through time without taking breaks along the way.  Other trends tend to be weaker and are often side tracked or abandoned altogether.  In any case, it is important and potentially profitable to know the trend of the markets in order to maintain high confidence that you are trading on the right side of the price action.

Knowing that trends exist is not enough.  They must be identified and categorized based on their strength, direction and validity.

Time and Price Method

The time and price method of trend identification is to take two snapshots in time and compare the prices of each of those snapshots.
* Bullish = most recent price is higher than earlier price (price has increased over time).
* Bearish = most recent price is lower than earlier price (price has decreased over time).

Moving Averages Method

The moving average method relies on the use of various moving averages to identify prevailing trends.  Moving averages smooth the price action by averaging out the noise generated by intraday trading anomalies and small blips in price that are unlikely to have a serious effect on the underlying trends themselves.

Moving Averages