There is no need to be bullish unless you are a short term trader. The FTSE 100 may well climb past 5400 but early next year the trend will change, we could be near the start of a major correction.
Two markets that have helped the FTSE 100 rally from the March lows, the bank index and the dollar, are no longer behaving as expected, see chart.
The dollar has been too low for too long. Note the inverse correllation between the dollar and the FTSE 100 since march. The dollar turned down in early March and has been going down until early December. The sharp rally in the dollar should coincide with a turn down in stocks.
With regards to bank stocks, the correlation has been positive since March but take a look at the chart of the Bank index and you will note that banks made their highs in September while the FTSE 100 continued to make new highs after September. The relative strength line has been declining since August, an indication that bank stocks are no longer fuelling the FTSE 100 rally.
These events are major bearish developments but we may have to wait until January before the next bear market begins as in the short term the FTSE 100 could rally to new highs.
To learn more go to www.eyield.co.uk
Tuesday, December 22, 2009
Tuesday, December 15, 2009
Great traders are patient
In the book Market Wizards, Interviews with Top Traders, the author writes "many of the traders stressed the importance of having the patience to wait for the right trading opportunity to present itself".
I completely agree with the above statement, I have been trading for many years and I can tell you patience is one of the most important factors that lead to success. Why? Because there are many opportunities everyday but only a few trades have a high probability of success. Your task is to identify these high probability trades and be patient until they present themselves. They are the ones that will make you money.
Another situation in which patience is required is when you have a bad run. You've been winning consistently, suddenly it's no longer working, you give up. This is the wrong thing to do. Why? Because the market has the habit to trick investors into doing the wrong thing. The thing is, the market can trick you for weeks or months, making you believe that your system no longer works. In fact your system works and if you have the patience to continue trading your system, you'll be back on the winning track. It happens to every trader.
For example we have a system that makes on average 60 points per month (FTSE 100), it has produced good results consistently since May 2007 but in July it started to lose, see table.
As you can see the system lost money between July and September. Subscribers who joined in July were disappointed, many of them did not have the patience to remain loyal to the system for more than three months. The result? They quit at the wrong time, they were not patient so they will never know what they are missing. Since September the system is back on track, with gains of 125 points and the latest signal in December is already showing a profit of 80 points.
Too many people fail at trading because they do not have the patience to ride these adverse market moves which are completely normal. Temporary set backs are part of the game, you must accept them otherwise you will fail.
To learn more go to www.eyield.co.uk
I completely agree with the above statement, I have been trading for many years and I can tell you patience is one of the most important factors that lead to success. Why? Because there are many opportunities everyday but only a few trades have a high probability of success. Your task is to identify these high probability trades and be patient until they present themselves. They are the ones that will make you money.
Another situation in which patience is required is when you have a bad run. You've been winning consistently, suddenly it's no longer working, you give up. This is the wrong thing to do. Why? Because the market has the habit to trick investors into doing the wrong thing. The thing is, the market can trick you for weeks or months, making you believe that your system no longer works. In fact your system works and if you have the patience to continue trading your system, you'll be back on the winning track. It happens to every trader.
For example we have a system that makes on average 60 points per month (FTSE 100), it has produced good results consistently since May 2007 but in July it started to lose, see table.
As you can see the system lost money between July and September. Subscribers who joined in July were disappointed, many of them did not have the patience to remain loyal to the system for more than three months. The result? They quit at the wrong time, they were not patient so they will never know what they are missing. Since September the system is back on track, with gains of 125 points and the latest signal in December is already showing a profit of 80 points.
Too many people fail at trading because they do not have the patience to ride these adverse market moves which are completely normal. Temporary set backs are part of the game, you must accept them otherwise you will fail.
To learn more go to www.eyield.co.uk
Thursday, December 10, 2009
When to take profits
When an important piece of news like the US nonfarm payrolls comes in much better than expected, you would expect the market to rally strongly. The S&P 500 did rally strongly last Friday just after the open. The index made a new high at 1119 but something unusual occurred later in the session, see chart.
Note the sharp reversal after 3pm, the good news turned bearish. After making a new high prices dropped 2% by 7.30pm. This behaviour was warning of a potential trend reversal. We saw a similar example in September when the FOMC rate decision was bullish yet the market reversed.
After a long advance, good news is often used by investment managers to unload shares. If you have a long position in the S&P 500 it is always a good idea to close it on good news. On the chart, the early reversal on Friday 4 December was a bearish development. Holders of a long position in the S&P 500 who did not close it on the day had an opportunity to close it on Monday 7 December when prices bounced back.
To learn more go to www.eyield.co.uk
Note the sharp reversal after 3pm, the good news turned bearish. After making a new high prices dropped 2% by 7.30pm. This behaviour was warning of a potential trend reversal. We saw a similar example in September when the FOMC rate decision was bullish yet the market reversed.
After a long advance, good news is often used by investment managers to unload shares. If you have a long position in the S&P 500 it is always a good idea to close it on good news. On the chart, the early reversal on Friday 4 December was a bearish development. Holders of a long position in the S&P 500 who did not close it on the day had an opportunity to close it on Monday 7 December when prices bounced back.
To learn more go to www.eyield.co.uk
Thursday, December 3, 2009
Compass is overbought
Shares in Compass Group surged to new highs following a recent trading statement. Prices have rallied to a level that could proved to be a strong resistance, see chart.
On the long term chart (weekly) note the RSI line at the bottom of the chart. The Relative Strength Index (RSI) is a popular oscillator. It is a momentum indicator used to identify oversold/overbought conditions. When the RSI rises above 70 the stock is overbought, when it drops below 30 the stock is oversold.
In the last few years the RSI has been accurate at finding tops/bottoms. It fell to 30 in October 2008, that was an early warning that the stock's decline was about to end. Today the RSI has risen to 74 which is above the limit of 70 as it did in May 2007. In 2007 it was signalling an imminent top, today we have the same message, Compass' rally is nearing an end.
According to the indicator, the stock is overbought. When a stock is overbought it tends to pull back until the RSI returns to the middle of its range. This is a strong possibility as the breakout in October this year was a long term breakout. In a long term breakout very often prices will pull back to the breakout point before resuming their advance.
To learn more go to www.eyield.co.uk
On the long term chart (weekly) note the RSI line at the bottom of the chart. The Relative Strength Index (RSI) is a popular oscillator. It is a momentum indicator used to identify oversold/overbought conditions. When the RSI rises above 70 the stock is overbought, when it drops below 30 the stock is oversold.
In the last few years the RSI has been accurate at finding tops/bottoms. It fell to 30 in October 2008, that was an early warning that the stock's decline was about to end. Today the RSI has risen to 74 which is above the limit of 70 as it did in May 2007. In 2007 it was signalling an imminent top, today we have the same message, Compass' rally is nearing an end.
According to the indicator, the stock is overbought. When a stock is overbought it tends to pull back until the RSI returns to the middle of its range. This is a strong possibility as the breakout in October this year was a long term breakout. In a long term breakout very often prices will pull back to the breakout point before resuming their advance.
To learn more go to www.eyield.co.uk
Wednesday, December 2, 2009
A complete Elliott wave cycle
The stock market moves up in five waves and corrects in three waves. That's the basic tenets. There are many variations but in general the stock market follows this basic pattern. Take a look at the chart.
Here we have a perfect example of five up, three down. The FTSE 100 moved up in five waves [(i),(ii),(iii),(iv),(v)] during the first half of November. A common feature is for the third wave to extend in five waves as shown on the chart. Inside wave (iii) are five waves [i,ii,iii,iv,v]. Very often the fourth wave will be sideways. On the FTSE 100 chart note that wave (iv) is sideways (triangle).
Once five waves up are complete the market should correct in three waves. The FTSE 100 did correct in three waves. The first wave is a zigzag [(a),(b),(c)] ending at 5225, the second wave is the rally to 5375 [wave (x)] and the third wave is the last zigzag [(a),(b),(c)] ending near 5100. The entire correction is called a double zigzag.
This simple observation last Thursday led me to conclude that the FTSE 100 would rally. That was a good call, thanks to the clear Elliott wave pattern.
To learn more go to www.eyield.co.uk
Here we have a perfect example of five up, three down. The FTSE 100 moved up in five waves [(i),(ii),(iii),(iv),(v)] during the first half of November. A common feature is for the third wave to extend in five waves as shown on the chart. Inside wave (iii) are five waves [i,ii,iii,iv,v]. Very often the fourth wave will be sideways. On the FTSE 100 chart note that wave (iv) is sideways (triangle).
Once five waves up are complete the market should correct in three waves. The FTSE 100 did correct in three waves. The first wave is a zigzag [(a),(b),(c)] ending at 5225, the second wave is the rally to 5375 [wave (x)] and the third wave is the last zigzag [(a),(b),(c)] ending near 5100. The entire correction is called a double zigzag.
This simple observation last Thursday led me to conclude that the FTSE 100 would rally. That was a good call, thanks to the clear Elliott wave pattern.
To learn more go to www.eyield.co.uk
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