Archive for the ‘Technical Analysis’ Category

Are you a range trader or trend follower?

Thursday, April 1st, 2010

Remember, back in Explosive gold price movement ahead. But up or down?, we showed you that gold prices had been bound within a range from February 2009 to the day when the article was written (September 2009). As we showed you in the price charts, the range got progressively narrower and narrower as the months go by. That gave rise to a price formation called the ?pennant.? As we wrote in that article,

A pennant is like a spring coiled up, ready to jump [either up or down] at any moment.

Not long after we wrote that article, gold prices broke out of the range and made a record high of US$1,226.37 on 2 December 2009. Today, gold prices are range bound again.

How to buy and invest in physical gold and silver bullionIn 2005, we remembered the headline from the Australian Financial Review (AFR) screaming “gold fever” as gold prices hit US$500 for the first time in many years. As the crowd piled into gold, driving it to a then record high of over US$730 before a major correction threw it down to a low of around US$540. Then gold was range bound for about a year before making another dash to above US$1000 before the Panic of 2008 crashed it to around the US$700 level. Then it recovered, made another dash to US$1000 before being range bound again. The rest of the story you know.

Do you see a pattern? Basically, the story goes like this: range-bound, break out, dash up, correction, range-bound… rinse and repeat. You can visually see this pattern nicely in the Why gold will not make new highs or lows this year video made by our friends in Market Club (which we have an affiliate relationship with). If this pattern repeats itself, we may see gold prices becoming range bound for the rest of this year before making a record high next year.

For those who are into trading, this is a good opportunity to engage into “range trading.” The principle behind this type of trading is very simple- sell when prices reach the upper range and buy when it reaches the lower range.

For traders who engage in “trend following,” they follow a different approach. They wait for break-outs of the range and buy/sell accordingly. For example, if gold breaks out of the trading range upwards, they buy.

Is it possible to be a range trader and a trend follower at the same time? One old trader told us “No, unless you are extremely smart.” Why? When you see gold prices reach its upper range, a range trader will sell (or short sell). A trend follower, on the other hand, will buy.

What if you are trying to be both? Do you buy or sell?

Reversal of trend reversal?

Thursday, September 10th, 2009

Exactly a week ago, we were wondering whether it’s time to short stocks (see Time to short stocks in the NYSE?). We wrote,

Currently, this Point-and-Figure indicator is not officially in trend reversal status yet. But it will be soon if more stocks comes under ?Sell? signal.

Today, the Point-and-Figure indicator goes like this:

NYSE Bullish Percent indicator
NYSE Bullish Percent indicator

As you can see, the indicator has gone up by more than 1%. That is, the trend reversal has not yet happened according to the indicator. Stocks are currently very overbought and therefore, very vulnerable to a correction. But that does not necessarily mean that one is imminent.

According to the Point-and-Figure indicator, now is not the time to buy stocks. More conservative traders may not want to short stocks (yet) either.

Time to short stocks in the NYSE?

Thursday, September 3rd, 2009

In our last article, we mentioned about that gold prices are in the cusps of renewed volatility. The question is, will the volatility break gold prices out to a new record high or will it break it down to a low?

Yesterday, gold price surged US$20 with high volume of trading. Gold prices had not jumped so much for quite a while already and in the minds of many trend following traders (in the context of gold prices forming a technical pennant) this is indeed a buy signal. In the days to come, if this upward momentum is sustained, this will attract the attention of the mainstream media.

But is this the time to short stocks? Let’s take a look at this Point-and-Figure indicator:

NYSE Bullish Percent Index

This indicator tells us the percentage of stocks in the NYSE that are currently under “Buy” signals. Unlike the other index (e.g. Dow Jones & S&P), this is a very ‘democratic’ indicator in the sense that each stock is given an equal share of one ‘vote.’ It is used as a contrarian indicator to tell us when the market is in extreme bullish position or not. As the chart shows, it is current down to 77.23%, from a high of 80%. As you can see from the chart, 80% is an unprecedented high since 2001. The market is at a very high risk territory for a reversal.

Currently, this Point-and-Figure indicator is not officially in trend reversal status yet. But it will be soon if more stocks comes under “Sell” signal.

Revealed: Stock market dirty tricks?manipulated sell

Tuesday, February 27th, 2007

The stock market is a wild place where fools are often parted from their money. It is also a place where fortunes are accumulated by the wise. Besides the fool and the wise, the stock market is also a place where gamblers, speculators and punters play with their luck. It is also an ideal place for the sly to practice their bag of dirty tricks. Today, we will look at one of their dirty tricks.

Back in Crowding at the exits, we mentioned that:

One popular idea among technical analysis is the concept of a ?support level,? whereby stock prices are expected to ?rest? on and rebound from. Traders often place their ?stop-losses? on the support level, which is the price level that they will sell their stocks in order to cut their losses. As the stock price rests on some traders? stop-loss levels, it triggered their stop-loss sales of their stocks. Such sales put downward pressure on the stock price, which may result in other stop-loss levels to be breached, which in turn triggered even more stop-loss sales. The outcome is a very steep and rapid fall in stocks prices.

Such widespread use of technical analysis can present an opportunity for the well-resourced foxes. Stock prices often fluctuate within a range. The lower bound of the range is called the ?support? level and the upper bound is called the ?resistance? level. Traders using technical analysis may see any breakthrough out of these two levels as significant because such an event signals a change from the status quo. Thus, they may place their stop-loss price (the predefined price in which existing holdings of the stock will be liquidated if the stock price fall to it) below the support level.

What would these foxes do when the stock price approach the support level? As you may have guessed by now, they would sell the stock (either from their existing holdings or borrowed) in order to push down its price to below the support level. This in turn will instigate a wave of selling. The outcome is a very rapid drop in stock price that the foxes can then exploit for their benefit.