Don't let the title fool you, chart pattern recognition is a difficult skill to learn, and even hard to master. Today's post comes to us from Amey from TheWildInvestor.com, and it's a good one! Please enjoy, comment, and enjoy the day.
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I like to keep things simple, and that definitely holds true in the world of stock trading, and since I am a pure technical analyst that makes the process even simpler. For the most part, I use screeners, such as the one inside MarketClub, to shift through possible stocks to play. Yeah, sure it works time from time, but even that is a little too much work for me. Luckily, I found a strategy that a third grader could even follow.
If you are familiar with the financial market, then you know there are tickers for individual stocks and then tickers for indexes of various markets, sectors, commodities, and so on. In continuing, a certain price of a commodity usually tends to effect related companies. A quick example of this is the relationship between the price of oil and drilling companies or the price of oil and airlines.
Basically, the change in one entity alters the outcome of another, and this is the strategy we will use.
All we need to do is find two symbols: an index (i.e. price of oil) and a stock that depends on the price of that index. With these two ticker symbols, plug them into your charting platform and see how they correlate. What happens to the stock when the price of that index goes up or down? I recommend testing a couple different time frames. If the patterns hold for a couple years, then you know you’re on the right track.
In this specific oil example, you will notice some equities that were at its peak when oil was around $140, retreated as oil hit new bottoms, and now slowly rounding out. In other words, you can clearly see the correlation between the two entities. From this particular analysis, a good conclusion is that we need oil to hit this price for the stock to hit this price.
If this is your first exposure to this type of strategy, then it may seem a little off to you; however, take a look at a couple tickers and you’d be surprised how accurate these prices move in tandem. It sort of resembles pair trading. With oil eagerly wanting to move higher, now is a great time to try and find dependent companies that have been beating up by lower prices and ready to burst higher.
Amey
TheWildInvestor.com
Is the take away that if for example oil goes up then the correlated company will follow, so the market edge is in the time lag?
Thanks, Meena
In the early 1970s I started my business career as a financial analyst and then treasurer for an oil company. I made my company more money by managing its cash and trading than the company ever made in its line of business. After I left the firm, the CFO, accountants and other officers bankrupted the company even though it held proprietary rights to the premiere technology in its sector of the industry. I relied on a variety of indicators to do my work before the invention of the personal computer, working late nights with a ten-key calculator, automatic pencil and point-and-figure charts. Forecasting the price of crude oil is challenging, as you know, but if you can find linkages to other complexes or securities, it is very useful to rely on as a leading indicator for finding breakouts and reversals. I am always interested in adding one more useful tool to my analytic toolbox. Thanks, Adam.
good article
So what's the value of finding a stock that correlates well with the price of oil? So is it that if we know the price of oil is going to go up or down, we'll know that we should buy or sell this well correlating stock?
Trust me. If you know what direction the price of oil is going, you know enough to be unbelievably wealthy already.
oil is eager?
that's a technical analysis?
It would have been nice to give an example of a company tracking an index and a company going against an index so that we can punch in those symbols into our charting app to see what Amey is talking about instead of guessing.
I don't know if a 2nd term to Bernanke is good or bad but all those who follow the financial markets know that Mr. Bernanke is more powerful than the CEO of any prominent global company. And we know what resignation and appointment of CEO does for a company's financial standing. He is the CEO of the USD and the Obama administration is trying to send a consistent message that the USD is under control. The appointment of Mr. Bernanke is a safe move. The current USD situation may not garner a lot of want to Fed chairman posing the threat of an open position for months to come.
I agree with Trade2befree's comments listed above. Trade Triangles seem to be a no brainer method to trade. It works! If sorting by sector, price, etc. could be made easier, Market Club would become more attractive for investor research.
They need more programming work to meet the investors needs...Market Club's Adam, are you listening? How about doing a survey of your members? MC has a good thing going, lets make it better.
Thanks,
Rajesh
Rajesh,
Thank you so much for your suggestions. We work hard to improve MarketClub everyday. I will pass along your comments.
I will definitely consider doing a survey for current MarketClub members. We have a lot of improvements on the way and I think you'll be very satisfied.
Best,
Lindsay Thompson
Director of New Business Development
INO.com & MarketClub
I would also appreciate seeing the name of a stock on the chart.
TY Bob
Hi Brad and Amy,
Thanks for the article.
There should be some kind of "Sector list" available on Market Club,
possibly under "trade triangle".
Also, we should be able to filter out stock by price, say don't want to see stocks below $10 or $5 etc.
I had asked to display company name on chart, is it still being considered?
One more suggestion, include volume on top, just like Open, Close, High and Low of the day.
Keep up the good work and would like to see more educational video from Adam.
Trade2befree