Category: MarketClub Techniques, Tips & Talk

Tips and trick from traders on how to become a better trader.

Traders Toolbox: Reversals

Posted on by The INO.com Team

Reversals In my opinion, one of the most misused and abused terms in technical analysis is the reversal or key reversal. I often get calls from both new and experienced traders who are excited about a market because it has just posted a "key reversal." While the action these traders point to often marks a reversal day, such a day (week or month) by itself actually has little significance. There is research which indicates single period reversals mark a turn only about 50% of the time. Which gives about the same odds of indicating a turn using a coin flip.

In my studies, I use a set of rules which help me ferret out reversals which have a much higher probability of marking a turn. Before going any further, I want to clarify the term reversal when used in technical analysis. A reversal does not mean a market will necessarily reverse a trend. A reversal is a formation which may mark a top or a bottom. However, a top or bottom only signals the preceding trend has come to an end. In other words, a top will indicate an uptrend has come to an end. It does not indicate whether the new trend will be down or sideways.

Now, on to the rules. There are six rules which I use to identify a valid reversal. To clarify these rules, I have provided an example of the pattern which I watch for to mark a reversal in the circle on the weekly T- bond chart. I am listing the six rules to identify a reversal high; for a reversal low, simply reverse the parameters where warranted.

To mark a reversal high, first, the market must make a new high for the last six to eight weeks. Second, the market must close lower than the previous day's (or week's) close. Third, the market must reverse the previous day's (or week's) action. To clarify rule three, the day or week preceding the reversal must have posted a positive close. Fourth, the market must post follow through action the next day (or week). Again, to clarify, the market must close lower on the day (or week) following the reversal. Fifth, the reversal must be accompanied by moderate to high volume. And, finally, the reversal must occur in a terminal (critical) area.

Rules one through four deal with the pattern which the market must trace out and are basically self-explanatory. Rule five insures the reversal is not marked on a low-volume day (or week) such as is common in a holiday period. And rule six essentially means the market must be in an area of price or time where a turn could be expected to occur.

Notice the weekly T-bonds chart and the numerous turns which were marked by the valid reversal pattern. If you examine the chart closely, you will notice there are a number of reversal weeks which did not see followthrough action which failed to turn the market. However, it is rare to find a reversal which saw followthrough action that failed to mark a significant turn.

Traders Toolbox: Bottoming behavior

Posted on by The INO.com Team

Markets which have been in a persistent downtrend often exhibit a common pattern as the end of the decline is approached. The pattern is to post a sharp rally followed by one final decline to new lows.

Sharp rallies formed recently in both pork bellies and gold. Following the rallies, both markets plummeted to new lows. However, once new lows were made, the declines stalled. The failure to sustain the break on the move to new lows indicated the selling was effectively exhausted and potential bottoms had formed. A similar pattern marked the low in soybeans prior to the 1983 bull market.

The logic behind this type of bottoming action is that the persistence of the downtrend has finally forced the bulls out of the market. As the last longs are liquidated, the burden of keeping the down-move going falls totally on the shoulders of the bears to keep pressure on. Any faltering of the bears to keep the pressure on can lead to a sharp short-covering rally as the sellers "all" turn buyers.

Any hint of bullish news accompanying the short covering rally will tend to entice the emotional bulls back into the market. Then, as the bullishness diminishes, the sellers try to reassert themselves. Often a push to new lows occurs and the stops of the early bulls are triggered. The stops provide additional short-term selling pressure. When this subsides and the bears find no more selling entering the market, they head for cover in a more orderly fashion.

A relatively gentle up-move starts as the market searches for the levels which will entice sellers back into the market. From there, the burden of proof falls on the market to determine if the bulls are now the strong hands or if the bears can regain their control.

"Saturday Seminars"- Simpler Is Simply Better — Getting Down and Dirty in the Real World - Part 1

Posted on by lindsay

Stewart shares his simple approach to finding a confluence of price, time and pattern that offers low-risk entries and solid stop placements. He shows how to extract the most meaningful portions from many of today’s leading technical disciplines. These techniques are applicable across a broad spectrum of time frames and markets, but this workshop concentrates on day- and swing-trading methods used in the financial and metal markets.

Stewart shows you how to identify Wyckoff price/volume patterns and behaviors and how to combine these patterns with simple Elliott patterns, Fibonacci objectives and retracements, and volume and open interest analysis to arrive at a solid and tradable market opinion.

Additionally, he shows how he combines basic oscillator patterns with daily/weekly range projections and support/resistance risk points to identify low-risk trading opportunities, placing special emphasis on Wyckoff analysis of accumulation and distribution.

Stewart Taylor began his trading career sixteen years ago by trading basic patterns and breakout strategies. These simple strategies evolved into complex day-trading strategies utilizing Elliott Wave and intraday cycles. Stewart’s trading style has come full circle, and he is now a leading proponent of the “simple is simply better” approach. Stewart developed his analytic abilities as an institutional broker serving the fixed income community with Brittenum & Associates, Refco, Vining Sparks Securities, Shearson Lehman, American Express, and Prudential Securities. In 1992, Stewart formed Taylor Consulting, Inc., and began publishing his market letter, The Taylor Fixed-Income Outlook.

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Saturday Seminars are just a taste of the power of INO TV. The web's only online video and audio library for trading education. So watch four videos in our free version of INO TV click here.

INO TV

Traders Toolbox: Psychology of a bottom

Posted on by The INO.com Team

As bull markets roar to a top, it is relatively easy to see the emotional or psychological signs of an impending top. Virtually every source of news will provide coverage of the seemingly endless climb towards higher levels. Greed infests the public as the inexperienced flock to get a piece of the action. Finally, when it is "impossible" for a market to decline and everyone who wants to buy is in, the top will be struck. Buyers become sellers and a downmove ensues.

To an extent, the same sort of pattern unfolds at major bottoms. However, since the events surrounding the decline are not as exciting or newsworthy as those in a bull market, the signs are harder to see. Instead of greed permeating the atmosphere, fear becomes the emotion of significance. As the news becomes per- ceived as increasingly bearish, traders who had been bullish give up. The emotional stress of margin calls and "bad" news finally forces long liquidation.

Despair, disgust and disillusionment abound among the public traders. Producers resign themselves to selling their production near current levels and, in fact, often sell future production as well. They become convinced the market is destined to move even lower. As the bearish attitude spreads, an important sign of a nearing bottom is declining open interest. This is especially true if this long liquidation of futures positions drops the open interest below recent low levels. In markets where individuals are the original holders of production, an additional sign is liquidation of cash positions.

Traders and marketers take any rally as a "gift" to sell on. Bullish fundamental conditions which may exist are discounted as the memory of the persistent downtrend remains entrenched. As a market starts up from the lows, the rallies are viewed with suspicion. Even the few who remained bullish don't trust the rebounds and often take advantage of early rallies to liquidate long positions. Setbacks from the early rallies are often sold as the participants don't want to miss the next washout to new lows. And, if enough gain this attitude, the break will not continue and traders then have to wonder why the markets won't go down on "bad" news. Eventually, their short covering triggers additional gains.

A final important component of an approaching bottom is the inability of a market to sustain a downmove on bearish news. The most common form of this action is seen when government reports are released. The bulls no longer rationalize a bearish report into a bullish one. Instead, the bulls resign themselves to additional declines. Bears move towards overconfidence and start selling the breaks as well as the rallies. Bearish reports often trigger downmovement, initially, but then additional declines fail to materialize. Moves to new lows are rejected as everyone who wants to be short already is and the longs have been liquidated, thereby leaving the markets with no one to initiate new selling. And, as at the top, but in reversed roles, the sellers become buyers.

We revisit a crude oil posting

Posted on by The INO.com Team

(First published on 7/21)

How many times have you heard that it's going to be different this time?

Do you remember the dot com bust? Well, that was supposed to be different and look what happened. Same with the housing bubble, that was supposed to be different and look how that's turning out. Both events created the illusion of madness that made everyone rich on paper for at least 20 seconds.

The fact is, it's always different "this time", that's what makes it different.

But it's different this time in crude oil, right?

Okay, I know, I have heard all the reasons why oil is up, we are running out of energy, India and China are buying, the turmoil in the Middle East, etc, etc. Let's face it the energy market is the market du jour.

But it's different this time in crude oil, right?

I have to say that it's always different and at the same time it is always the same, only the names of the players in the markets change. It's all speculation (ooh, dirty word) but the reality of the situation someone is always left holding the bag.

The irrefutable laws of the market never change:

Check out my new crude oil video after you have read the six steps.

Read on and understand why.

SIX STEPS and the IRREFUTABLE LAWS of the MARKET
What Every Investor and Trader needs to know to Succeed in the Markets.

Step 1: A move begins with the sponsors (smart traders) who have insider knowledge as it relates to a particular stock or market. This information will move a market up or down depending on the insiders' information. These buyers are smart, very smart, and recognize trading/investment opportunities very early in the markup cycle.

Step 2: Days, weeks, or sometimes months after a move has started, there is a brief mention in the electronic media (radio, cable, TV) or on one of the internet chat boards that a market has moved. The public hears for the first time and begins to get interested, but does not buy.

Step 3: A blurb of information appears in print media. The move also begins getting more exposure on blogs and internet message boards. The public starts paying a little more attention, and will buy a little bit.

Step 4: Wall Street and LaSalle Street brokers go into full hype mode and hawk the market to their customers. The public begins buying in greater volume.

Step 5: A full-blown front-page article appears about the particular stock or market in one of the major financial newspapers, magazines, or financial websites. This is often six months after the fact and after a market has shown its greatest appreciation. There is often heavy public buying, even a possible frenzy, as all media, brokers, and so-called "gurus" start to tout the market.

Step 6: As step 5 gets underway, the sponsors or smart traders begin to move out of the market and take their profits off the table.

The finale Step: The move ends, the market falls, and investors lose money.

Does any of this sound familiar to you? If it does then you know the key rules of engagement in the market. If none of this is familiar to you then learn to recognize these six step asap. Your financial life depends on it!!

Think about it.

Adam Hewison

President INO.com