Stock Trading Stops

Quotes
Handle
EBITDA
Hammer
ADX Line
Trading Tip
Capitulation
Canada Eh?
1-2-3 Pattern
Seven Sisters
Golden Cross
The Dow Theory
Stocks to Die For
Stop Order to Buy
Limit Order to Sell
Limit Order to Buy
Government Bond
A Repeat of 2008?
MACD Divergence
Parabolic Indicator
Head and Shoulders
Stock Trading Stops
Uptrend Continuation
The January Barometer
Downtrend Continuation
Forex Trading at Its Best
Definition of a Recession
Accumulation/Distribution
Definition of a Bear Market
Kiss Your Advisor Bye-Bye
S&P 500 Widely Overvalued?
MACD Histogram Divergence

Stock Trading Stops

Investors, including Blackrock Inc. (the world’s largest asset manager), claim that ‘stock trading stops’- aka ‘stop-market orders’ – exacerbated sharp price swings August 24/15.  After reviewing the events of that day, Blackrock concluded that such orders, including other factors, contributed to losses. 

Accordingly, after traders have used these two order types for over 100 years, the venerable NYSE (a unit of the Intercontinental Exchange) will stop accepting this order type effective February 26/16 – including ‘good till cancelled orders’ – thus joining Nasdaq as two of the largest stock exchanges in the world to dismiss the necessity of these order types in an attempt to deal with the ramifications of huge intraday swings.

The NYSE cited the risk of stock trading stops during volatile trading.  A stop order triggered after a significant downward move could leave traders unhappy to see their stock recover quickly, having just seen it not only stopped out but, in some cases, stopped out at a much lower level than had been intended by the stop order.

A ‘good-till-cancelled’ order (GTC) is one that remains active till a trader cancels it, or the trade executes.  It is an order to buy or sell a security at a certain price.  Such orders to buy or sell an ETF (DVY) or stock have time constraints of 90 or 120 days, beyond which they are automatically cancelled, assuming the order is not executed within that timeframe.  If an order is not classified as GTC, it expires at the end of the trading day during which the instruction was placed.

The impact should be minimal, as only ~0.3 percent of orders on NYSE are stock trading stops.   

When the new measures take effect, all existing ‘good till cancelled orders’ and ‘stock trading stops’ on the NYSE book will be cancelled.

Stock trading stops are instructions to trade immediately, once a stock hits a pre-defined price – even if the price far exceeds the one specified on the order – much to the chagrin of inexperienced novice traders.

As soon as a stop-loss price is reached, the order is automatically converted into a market order, which is then executed at a level that could be much lower than the stop price. 

The stock is effectively sold at the next best price somebody is willing to pay for it.  It may sell at the stop level, or less – depending on where buyers are bidding for the stock.

Execution is not guaranteed, as in situations where trading in a stock is halted, or price action gaps up (or down).

Most traders usually associate a stop-loss order with a long position; however, it can also be employed for a short position, wherein short sellers place stock trading stops in the opposite direction.  In such an instance, the security would be bought, should it trade above a pre-determined price.

On August 24/15, traders had stock trading stops in place, assuming they were protected.  Wrong!  Price plummeted through these placements, and positions were automatically exercised well below the intended exit point.  Given that market liquidity is thin on big down days, stop orders get filled far below where they should.     

On that fateful day, hundreds of securities posted unusual moves.  These included shares of JP Morgan Chase & Co. and General Electric Co., which swooned by as much as 21% before recovering quickly.

Regardless of the NYSE’s decision, most major online brokerage firms will take up the slack and continue to allow good-till-canceled orders, stock trading stops and stop limit orders.  They’ll simply be sent as limit or market orders for execution, after triggering in-house.  Just to be safe, it would be prudent to check this out with the firm you use.

If you elect not to use stock trading stops, you can watch the market and your stocks by setting up ‘alerts’ on your computer or smart phone to notify you when your positions reach your target price.

(Info via Bloomberg News, as reported in The Globe and Mail, November 19/15.  Also Reuters, finance.yahoo.com, news.forexlive.com, mrtopstep.com. marketwatch.com, moneymorning.com, wallstreetexaminer.com.)

Stock Trading Stops
(Stop-Loss Order)

This order type is used to buy or sell a stock, when the price of the stock reaches a specific price, which is known as the stop price.  The order becomes a market order when that price is hit.  A buy-stop order is entered at a stop price above the current market price.  (Wikipedia)

Limit Order to Sell

This is an order to buy or sell a stock at a specific price or better.  A buy limit order will only execute at the limit price or lower, and a sell limit order will only execute at the limit price or higher.  There is no guarantee that a limit order will execute.  (SEC.gov)

Limit Order to Buy

With such an order, investors and traders specify the price that they want to pay for a security, such as a stock.  By using such an order, the investor or trader will pay only that price or better (i.e., or less) in buying the security.  (Investopedia)

Stop Order to Buy

With this order, only when the security you are buying or selling reaches your specified price point (stop price) will your trade will be executed.  Your stop order then becomes a market order, and is filled, once the security reaches this price.  (Investopedia)

Forex Trading at Its Best

Tallinex Forex Trading

You can catch up to my presentation on the forex in my second blog.  You don’t have to worry about any changes to the future of stock trading stops with the forex, obviously.  Not only that but, unlike the stock market, it is always liquid – 24 hours a day, six days a week. 

Please join me at Tallinex Forex Trading – where you will enjoy up to 1:1000 leverage.  That’s correct.  You read it right.  At Tallinex, you can trade currencies faster, easier and better on any of their platforms.  And, you can always get help from me.  I have 15 years experience with the forex – so, I know that market intimately. 

Check out what Tallinex Forex Trading has to offer:

  1. MT4 software
  2. ECN spreads – raw
  3. Signals which are free
  4. Tablet and mobile apps
  5. Accounts managed for you

If all of these features amaze you, that wouldn’t surprise me in the least.  It just doesn’t get any better.  Catch the forex wave at Tallinex Forex Trading, where your FX trading will soar to new heights.  You can trade around the clock six days a week to your heart’s content.  Sorry, no trading on Saturdays.  Time to catch your breath.

If you need help, or have any questions, just get a hold of me here.  I would be elated to hear from you. 

Again, give it a go at Tallinex Forex Trading.  You have nothing to lose and everything to gain.  Just look at the features below:

Picture of the 11 features offered by the Tallinex broker for forex trading(Please consult the disclaimer at the disclaimer link on the TradingSmarts site.)

If you want to know what a stock trading stop limit is, please check out the Stock Trading Stops section of this post. 

Trading Tip

Thanks to Josh Brown of CNBC fame for this, and congrats to him for winning the Top Trader award for 2015 afforded him by CNBC.  It was presented to him by Scott Wapner, the host of the Halftime Report, January 4/16.

As in life, he says that you need a plan for your trading, and execute it accordingly, keeping your emotions in your hip pocket.  If you achieve a percentage gain that you had forecast, sell the stock for the gain.  If it breaks down through the 200 EMA, the trend indicator, dump it fast quick.  Don’t own falling knives.  Be a rules-based trader.  Forget who the president of the company is.  It doesn’t matter who he is.  As a momentum/technical trader, fundamentals have no place in your play book, except perhaps for P/E.

Josh offered up this formula for trading success, when he was prompted by Scott for his take-away from his trading activity last year.

Full transparency here… I am guilty of not adhering to his advice.  You want to believe I am onto his ideas here like a pit bull on a pork chop (my favourite line – suits me to a tee).

Momentum Stocks

These are the ones that show the biggest gains in the past six-to-twelve months.

Stocks to Die For

NB:  These are not recommendations – just stocks that I am high on, based on fundamental and technical analysis.  You should do your own checking before doing any trading in them.  In some cases, I own the stocks I report on in my blog posts.

PLUS ePlus Inc. (NASDAQ):  This is a Virginia-based information technology firm with a market cap of $700-million.  It is a favourite of the growth strategy that is based on the teachings of James O’Shaughnessy, the quantitative investing guru.  The company is consistent with this approach, in that ePlus racked up increased earnings per share each year of the past half-decade.  In addition, it has a 12-month relative strength of 87 (translation:  strong momentum).  This means that the underlying security has out-performed most other stocks over the past year.  It also has good value – 0.6 price-to-sales ratio.

(Source:  John Reese in The Globe and Mail, January 7/16 – John is CEO of Validea.com and Validea Capital, and portfolio manager for the National Bank Consensus funds.) 

CA:PBH – Premium Brands Holdings Corp. (TOR):  Premium Brands owns a broad range of leading differentiated food distribution and specialty food manufacturing businesses with operations throughout Canada and the U.S. – Alberta, British Columbia, Manitoba, Ontario, Quebec, Saskatchewan, Nevada and Washington State.  The Company services its family of brands and businesses and over 22,000 customers.

(Source Ian Tam, The Globe and Mail, January 7/16)

CA:MRU – Metro Inc. (TOR):  Founded in 1947, this is a major Canadian food distributor and retailer with operations in the Canadian provinces of Ontario and Quebec – its head office being in Montreal, Quebec.  It is the third largest grocer in Canada, after Loblaws and Sobeys, with annual sales of over $11 billion.

Metro’s profit in the quarter ended December 19/15 was up 24.3 per cent over the past year.  It also benefited from its investment in Alimentation Couche-Tard Inc., one of the companies I show-casted in my last blog.  Its share of Couche-Tard’s earnings was $30.6-million versus $17.9-million the year before.

Couche-Tard, based in Montreal, operates convenience stores and gas bars under the Circle K, Couche-Tard and Mac’s banners.

CA:ESL – Enghouse Systems Ltd. (TOR)

CA:DSG – Descartes Systems Group Inc. (TOR)

CA:NFI – New Flyer Industries Inc. (TOR)

This is a notable addition to both the industrial sector in the S&P/TSX composite and the S&P/TSX composite dividend index, given that it was a top performer in 2015.

Based in Winnipeg, it is the largest motor coach and transit bus manufacturer in North America.

It acquired Motor Coach Industries (MCI) – nearly double the size of its nearest North American competitor.  This, combined with its solid reported financial results, should propel the stock to even higher heights in 2016.

As at 2014, it had approximately 48% of the North American transit bus manufacturing industry.

Effective the third quarter, 92% of its revenue was from the U.S. – the balance coming from Canada.

The company increased its annual dividend rate to 12.9% in December – the second increase in 2015.  Accordingly, it will pay its shareholders a quarterly dividend of 17.5 cents (Canadian) a share (70 cents per annum) – up from 62 cents.  This equates to an annualized yield of approximately 2.5 per cent.

The company’s stock is trading at a P/E multiple in excess of 12 times, which is approximately consistent with its historical average over three years.  That said, there is potential for consensus EBITDA to the upside, as well as increased earnings estimates, giving the stock room to advance.

Analysts are onside with this one four-to-one, with price targets from $26 to $35.  The share price more than doubled last year, following increases of 27% and 23% for the previous two years respectively.  Not too shabby.

Info via Jennifer Dowty, The Globe and Mail, January 5/16.

CLX:Clorox Co. (NYSE)

BECN:Beacon Roofing Supply Inc. (NASDAQ)

V:VISA Inc. Cl A (NYSE) – Visa has enticed a number of credit card issuers away from its competitors – like Costco, Fidelity Investments, and USAA Bank.  Back in November, Visa announced that they were acquiring Visa Europe, thereby creating one global company with significant metrics – potential earnings growth in the high teens, growing market share, and higher transaction volumes.

CPB:Campbell Soup Co. (NYSE)

SWHC:Smith & Wesson Holding Corp. (NASDAQ)

XLP:Consumer Staples Select Sector SPDR ETF (ETF)

FISV:Fiserv Inc. (NASDAQ)

PSX:Phillips 66 (NYSE)

SBUX:Starbucks Corp. (NASDAQ)

RAI:Reynolds American Inc. (NYSE)

Kiss Your Advisor Bye-Bye

According to a working paper from European researchers, based on years of client transactions at a large, unidentified Swiss bank, advisors do not help investors make better stock choices.

They found that such investors fared poorly overall compared to investors who traded on their own, given that their portfolios underperformed benchmarks, as well as those of investors who traded their own accounts.

The researchers found that advisors were more likely to recommend stocks touted by analysts at securities firms, and that such securities performed poorly.

Thanks to Daisy Maxey, as reported on The Wall Street Journal, July 25-26/15, for this.

Be sure to keep coming back to my blogs.  I will be dealing with how to pick stocks in a future episode.  You don’t want to miss that.

The January Barometer

First introduced by Yale Hirsch in 1972, this is the notion that what happens with stock market performance in January – particularly in the U.S. – stays with us for the balance of the year.  Accordingly, if the market is up in January, there is a good chance that it will continue that trajectory into December.  Conversely, if the market is down in January, you get the rest.

This correlation was effective about 70% and 90% from 1950 till 1984 respectively, with 70% in total.  However, post-1985, the predictive power on the negative side had fallen to 50%, translating into no real value at all.

(Info via Wikipedia)

If you want to know what a stock trading stop loss is, please check out the Stock Trading Stops section of this post.

The Dow Theory

Airlines, railways and trucking stocks generally succumb to a weakening economy before the other sectors.  They act as ‘the canary in the coal mine’ for all U.S. companies, according to the Dow Theory.  Coincidentally, as at January 19/16, these transportation stocks have been falling, along with economist estimates for 2016 U.S. gross domestic product growth.  (Attribution:  Scott Barlow in The Globe and Mail, January 19/16)

Capitulation

The name comes from a military term meaning surrender.

According to Scott Minerd, who oversees US$240-billion for Guggenheim Partners LLC, it takes ‘wholesale panic’ in order for a market to turn.  He says you see a massive surge in volatility, as everybody rushes for the exits en masse – trying desperately to close their positions, thereby pushing prices down.

Investors/traders sell their equities to abandon the market, thereby forfeiting previous gains. Panic selling is in evidence, combined with sharp declines and high volume.  This is indicative of true capitulation.

After the process of capitulation, the feeling is that it’s time to go bargain hunting.  It is thought that all players who wanted to escape the market for whatever reason, including margin calls, have already done so.  Translation:  capitulation could be thought of as bottoming out.  (Info via Investopedia)

According to John Shmuel, The Globe and Mail, January 27/16 the sell-off we witnessed during the month of January doesn’t have the appearance of panic selling, wherein investors are of a mind that a financial crisis or recession is imminent.

There have been many comparisons of the recent plunge in the S&P500 early on in January to 1928 – suggesting that we got off to the worst start to any year since then.  Perhaps so but, guess what – the S&P 500 closed that year up 32 per cent.

Thursday, January 7/16 saw market carnage with the panellists on CNBC’s Fast Money in unison siding with the bearish outlook for the market.  This left me perplexed, as these guys and gals are normally an upbeat bunch.   

Anyhow, Friday, January 8/16 saw a solid payrolls report, indicative of a strengthening U.S. economy.

Definition of a Recession

Two consecutive quarters of negative growth.

Definition of a Bear Market

A 20% or more slide from its previous high.

S&P 500 Widely Overvalued?

Not according to John Reese (attribution above under the ePlus company).  He says that is unlikely, when you take into consideration the S&P 500’s trailing 12-month P/E and price-to-sales ratios of about 22 and 1.7, respectively, which are far from astronomical.

It is reasonable to think that U.S. equities are not far off from a buying opportunity.  The market weakness we have witnessed of late is adjusting expensive valuation levels in a number of cases.  Further, there is no evidence of a severe U.S. economic slowdown in the offing.  (Scott Barlow, The Globe and Mail, January 8/16.

Thank goodness for that, after witnessing the Dow notching its worst start to the year going all the way back to 1897, and the S&P 500 suffering its worst five-day opening to the year going back to 1929.  The S&P 500 index has retreated 11 per cent since its high last year.

Wall Street strategists continue to be bullish going into 2016.  According to the median of 14 estimates compiled by Bloomberg, the S&P 500 will rise approximately 7.6 per cent to 2,200 by the end of the year.

That said, David Kostin, the chief U.S. equity strategist at the Goldman Sachs Group, who tied for the most accurate forecast in 2015, has a slightly more conservative take on this, saying that the benchmark gauge will only nudge up by 2.7 per cent to 2,100 by year’s end.  He gives lofty stock valuations as his reason.  Trading at 17.4 times expected earnings, this puts the S&P 500 above the measure’s average of 14.9 times. 

(Info via Bloomberg News, as reported in The Globe and Mail, January 5/16.)

A Repeat of 2008?

Not bloody likely.  According toTobias Levkovich, chief U.S. equity strategist t Citi, the Senior Loan Officers’ survey on lending standards is a key difference between now and then.  By the end of 2007, it had tanked.  In contrast, that survey has only retreated slightly in recent months.

High-yield bond prices crashed in 2008 – almost every company being affected.  However, in the past year, rising yields have been confined mostly to energy companies.

Further, investors were bullishly giddy early on in 2008, whereas sentiment today is near rock bottom – much like it was during a good part of 2015 – indicative of investors not being as complacent now.

(Info via John Shmuel, Financial Post, January 20/16.)

Canada eh?

In a research note, Brian Belski, chief investment strategist at BMO Capital Markets Corp., forecasts that the S&P/TSX will outperform the U.S. for the first time since 2010.  He makes this claim on the basis of the leverage from any recovery in commodity prices and emerging markets.

Seven Sisters

(Wikipedia):  Businessman Enrico Matei coined this term in the 1950s.  At the time, he was head of the Italian state oil company Eni.  It was meant to give a name to the seven oil companies which formed the ‘Consortium for Iran’ cartel.  From the mid-1940s to the 1970s, it dominated the global petroleum industry.

Included in the cartel were Anglo-Persian Oil Company (now BP), Gulf Oil, Royal Dutch Shell, Standard Oil Company of California (now Chevron), Standard Oil Company of New Jersey (Esso/Exxon), Standard Oil Company of New York (Socony – now part of Exxon Mobil), and Texaco (later merged with Chevron).

The ‘Seven Sisters’ controlled about 85 per cent of the world’s petroleum reserves prior to the oil crisis of 1973.  But, due to the ever-increasing clout of the OPEC cartel and state-owned oil companies in emerging markets in recent decades, the dominance of these companies and their successors has declined.

 

Handle

Taking the last trading price for Starbucks as at January 12/16 at 2 pm ET of $59.09, the handle is $59, whereas the actual quoted trading price is $59.09.  You can see that the handle is the part of that price to the left of the decimal point.  As to foreign exchange markets, the handle is that part of the price quote that shows in both the bid and the offer for the currency.  (Investopedia)

If you want to learn what is a stop order in stock trading, please check out the Stock Trading Stops section of this post.

Government Bond

This is a bond, similarly referred to as ‘sovereign bond,’ that is issued by a national government.  It generally comes with a promise to make periodic interest payments, and to pay back the face value upon maturity.  Usually, the country’s own currency dictates the denomination of such bonds.  (Wikipedia)

EBITDA

Courtesy Wikipedia, this is an accounting measure calculated by using a company’s net earnings, before amortization, depreciation, interest expenses and taxes are subtracted.  This is seen as a proxy for the company’s cash flow and its current operating profitability – that is, how much profit the company makes with its present assets and the products it produces and sells from its operations.

EBITDA is not a financial measure per se.  It is used to assess the performance of a company, and to compare the profitability amongst different companies by eliminating the component parts of EBITDA.

However, EBITDA is a financial measure when it comes to cash flow from operations used in mergers and acquisitions of businesses in the middle market and small businesses.  Buyers can compare the performance of one business to another as a result of adjustments being made to EBITDA to normalize the measurement.  

A negative EBITDA denotes a company with fundamental problems related to cash flow and profitability.  Conversely, a positive EBITDA is not necessarily synonymous with a company generating cash – the reason being that EBITDA does not take into account fluctuations in working capital (as is needed to grow a business), capital expenditures (to replace assets that have broken down), interest and taxes. 

The exclusion of capital expenditures is not supported by all analysts – their claim being that such expenditures are required to preserve the asset base, thereby facilitating the profitability of the company.

‘EBITDA margin’ is defined as ‘EBITDA divided by total revenue’ (or, ‘total output’ – ‘output’ differing ‘revenue’ by changes in inventory).

Accumulation/Distribution

(Courtesy MetaStock.com – Steven B. Achelis):  In watching Jim Cramer December 28/15 on CNBC, I heard him talk about technical indicators, including this one.  I got pretty excited about it, as I had heard of it before, but never paid much attention to it.  He sure got my attention.  Had I taken it more seriously in the past, I would have bailed on the stock JetBlue (JBLU), which I had purchased recently.  I will show you why on a stock chart coming up below. 

This is a momentum indicator that relates changes in price and volume.  It suggests that a movement in price is all the more significant, if it is accompanied by more volume.

This indicator is similar to the better known On Balance Volume indicator.  Both indicators try to interpret price movement by associating volume with price.

An up-move of Accumulation/Distribution denotes that the underlying security is being accumulated, given that most of the volume is attributable to upward price action.  Conversely, a down-move of the indicator is indicative of the security being distributed – this because a significant portion of the volume is associate with a downward move in price.

Divergence between this indicator and price signals that a change in direction for price is in the offing.  In this case, price invariably follows the indicator in kind.  An example of this would be if the indicator is in an upward trajectory, and price is going the other way, it’s a foregone conclusion that price will soon be heading up.  

Example:

The following chart shows JetBlue and its Accumulation/Distribution:

Screen shot of Jet Blue showing bearish negative divergence on Accum/Dist and MACD indictors.

Chart Via StockCharts

You will notice, as at early December/15, price had been advancing, but both the Accumulation/Distribution indicator and the MACD indicator had been falling.  I had already bought into this stock earlier on but, like a dummy, I failed to notice the divergence on MACD.  Nor did I see the divergence on Accumulation/Distribution, as I wasn’t paying attention to it – having just heard Jim Cramer talk about it.  I knew about it before, but didn’t acknowledge it.  Now that it has my attention, I am onto it like a pit bull on a pork chop.

I am hanging onto JetBlue, because its price action has fulfilled a downtrend continuation pattern, which you will see later on in this blog.  That’s the beauty of knowing how to read where price is going.  It leaves clues.  It empowers traders like you and I to take control of the markets, enabling us to take comfort in knowing what price’s next move is.  In this case, it stopped in its tracks, just as soon as that pattern was in place.  It’s like poetry in motion.  Hence, no need to sell my position.  As I just said, you will see what I am talking about later on.

Further examples of the Accum/Dist indicator in action…

For stock RAI below, you will notice price advancing, all the while the Accum/Dist indicator remained flat.  Bottom line, the trend for accumulating this stock was sideways, with no oomph.  Accordingly, I sold and took my profit.  After all, this is about making money, and not falling in love with a company.  I want my money to work for me.  I don’t want it to mould, while a stock takes forever to gain some traction.   

I highlighted what I am talking about by drawing a line over top of price action and similarly over top of the indicator.  Given the divergence between the two lines, I surmised that price had peaked, and had no further upside potential – at least for now.

Screen shot of Reynolds American showing bearish negative divergence on Accum/Dist indicator.

Chart Via StockCharts.com

Another one… have a look at the chart for SBUX below.  You will see that price had been tanking, but the Accum-Dist indicator moved sideways at the same level.  This time, I drew my lines underneath price action and the indicator.  This translated into positive divergence on that indicator to price – meaning that upward price action was expected.  This notion was further substantiated by the hammer candle, which is a price exhaustion/rejection formation.

With the indicator turning up, price starting to advance, and MACD heading up towards the water line, having cut up through its trigger line, I looked for an entry point, and got in at 61.42.

Screen shot of Starbucks showing hammer and bullish positive divergence on Accum/Dist indicator.

Chart Via StockCharts.com

If you want to learn about the stock trading terms stop limit, please check out the Stock Trading Stops section of this post. 

ADX Line
Average Directional Index

Referencing what I said about my decision to sell RAI in my dissertation above (points to Further examples of the Accum/Dist indicator in action… above), there is further evidence that my decision to sell that stock was the right one below.  As you will see in the upcoming commentary on ADX, low readings indicate a weak trend, and that’s exactly what we have here with RAI. 

Now, I’m not saying that this is a bad stock to own.  It is a momentum stock and, as such, has long-term growth potential.  But, I am a trader at heart, and I want to take my profit now when I see it – not later.  That is not to say I won’t re-enter on price weakness when that occurs.  I will get back in, and look for another profit-taking opportunity.  There is nothing wrong with putting money in the bank.

Screen shot of Reynolds American showing weak ADX reading and inverted hammer or shooting star.

Chart Via StockCharts.com

Who could have guessed?

Screen shot of Reynolds American showing swoon in price after inverted hammer or shooting star.

Chart Via StockCharts.com

This indicator measures the strength of the current trend in place, be it up or down, and be it strong or weak – as evidenced by high readings indicating a strong trend and low readings indicating a weak trend.

A low reading is synonymous with the development of a trading range.  Stocks with such readings should be avoided.  Stocks with high readings should be favoured.

ADX at between 0 and 25 indicates that the stock is in a trading range, and is probably just meandering sideways (translation:  traders chopping wood).  Such stocks should be avoided like the plague.

ADX above 25 denotes the beginning of a trend.  Big up- or down-moves tend to happen right around this number.

ADX above 30 is indicative of a stock in a strong trend.  Such stocks you want to trade.  These are the stocks that you want to be trading!

ADX above 50 doesn’t happen that often but, when it does, you can expect an end to the trend and the beginning of another trading range.

The rising and falling of the ADX indicator should not be of concern.  A stock rising for an extended period of time, all the while ADX is falling, indicates that the trend is losing steam.  Ideally, ADX is rising.

Regardless of what we see with ADX, we should remind ourselves that price is the number one indicator.  It leaves clues as to where it is going.  Some traders switch from one indicator to another, hoping to find one that agrees with their perspective on price action.  Their charts get so cluttered with indicators that they fail to pay attention to what price is telling them.

ADX is good at identifying stocks that are in trading ranges, leaving those that are strongly trending either up or down.

ADX should not be viewed as either a buy signal or a sell signal.  It merely sheds light on where price is in the trend.  Low readings signify a trading range or the beginning of a trend. Extremely high readings are consistent with the trend nearing the end.

(Courtesy Swing-Trade-Stocks.com/ADX-indicator.html)

Golden Cross

This is one of my favourites.  It is a moving average cross-over, which involves the 50 EMA (exponential moving average) cutting up through the 200 EMA.  I like the exponential moving average over the simple moving average, in that it addresses more recent price action.

The Golden Cross won’t get you in at the bottom or the top, but at least it tells you that momentum is changing to the upside.

Thanks to Investopedia for this.

Here is an example of a Golden Cross – the blue 50 EMA breaking above the red 200 EMA.  You can see what transpired after the cross.

Screen shot of Extendicare showing bullish Golden Cross of 50 EMA cutting up through the 200 EMA.

Chart Via StockCharts.com

If you want to know what a stock market stop is, please check out the Stock Trading Stops section of this post. 

Head and Shoulders

In the chart below, you will notice price advancing to form a ‘Head and Shoulders’ pattern, which is a topping-out formation.  You can see where I have marked the head, left shoulder and right shoulder.  You can also see where I have drawn the collar line and subsequent price measurement.

The expectation is that price will fall to between the 21.5 and 21.0 price levels.  Well, who could have guessed?  Have a look at the chart that follows, and you will notice that price did, in fact, achieve that level almost to the penny.  Surprise!  Surprise! 

Screen shot of Yadkin Financial showing bearish Head and Shoulders pattern.

Chart Via StockCharts.com

Who Could Have Guessed?

Screen shot of Yadkin Financial showing swoon in price after bearish Head and Shoulders pattern.

Chart Via StockCharts.com

Downtrend Continuation

I have doctored up the chart below to show the three aspects of a Downtrend Continuation Pattern – Leg 1, Price Equilibrium or Consolidation (translation:  traders chopping wood) and Leg 2, with an ultimate price target of $20.  Leg 2 is usually the same distance as Leg 1.  Well, as you can see in the next chart following that price did indeed subsequently respect that level – finding support there.  No big surprise.

Screen shot of Jet Blue showing bearish Downtrend Continuation Pattern.

Chart Via StockCharts.com

Who Could Have Guessed?

Screen shot of Jet Blue showing result of bearish Downtrend Continuation Pattern.

Chart Via StockCharts.com

If you want to know what a stop limit order is, please check out the Stock Trading Stops section of this post.

Hammer

A hammer, depicted below, is a price exhaustion or rejection candle reversal formation that is usually accompanied by high volume.  When you see such an event, you should be on the lookout for complementary signal(s) that would lead you to believe that this is a good buying opportunity, after price starts to advance upwards. 

In this case (XLY SPDR), you can see that my favourite indicator MACD is about to issue a buy signal.  When it does, whereby it punches up through its trigger line, that would be the time to consider pulling the trigger on a buy.

As discussed earlier on in this blog post, price declining at the same time ADX is rising signifies that price is about the turn the corner – up in this case – validating the hammer and presaging the MACD signal.

(Full disclosure:  I already own XLY.)

Screen shot of XLY SPDR ETF showing bullish hammer candle reversal formation.

Chart Via StockCharts.com

Ditto…

Screen shot of Kinaxis showing bullish hammer candle reversal formation.

Chart Via StockCharts.com

Ditto…

Screen shot of XLP SPDR ETF showing bullish hammer candle reversal formation.

Chart Via StockCharts.com

1-2-3 Pattern

This is a bottoming or topping formation, and is very powerful – as you can see in the following charts.  It is pretty obvious where the 1, 2 and 3 points are.  The best way to engineer an entry point in this situation is to buy on a break of the number 2 point through the use of a buy stop.  That way, you are forcing the market to take you into the trade just above that level.

I have even included a price measurement on the first chart, which entails measuring from the number 3 point up to the number 2 point, and projecting that distance upwards.  There you have the distance price could travel, once the number 2 point has been broken.  Remember, technical analysis is about probabilities.  It is not an exact science.

The slight positive divergence on the MACD histogram to price presaged the formation of the 1-2-3 bottom on the first chart down.

Of course, in the fourth chart down below, I have included an example of a 1-2-3 top.  Everything I have just said works in the exact reverse.

Screen shot of Jet Blue showing bullish 1-2-3 bottoming formation and price projection.

Chart Via StockCharts.com

Ditto…

Screen shot of NVIDIA showing bullish 1-2-3 bottoming formation.

Chart Via StockCharts.com

Ditto…

Screen shot of Smith & Wesson showing bullish 1-2-3 bottoming formation.

Chart Via StockCharts.com

Ditto…

Screen shot of Beacon Roofing Supply showing bearish 1-2-3 topping formation with price projection.

Chart Via StockCharts.com

 

MACD Histogram Divergence

MACD is a beautiful indicator – perhaps my favourite.  It is an indicator within an indicator.  Here you have positive divergence on the MACD histogram (the histogram waving up, with price cycling lower).  You can see what happened to price.  Up she went after the divergence.

Screen shot of Alimentation Couche-Tard showing bullish positive divergence on MACD histogram.

Chart Via StockCharts.com

Ditto…

Screen shot of Jet Blue showing bullish positive divergence on MACD histogram.

Chart Via StockCharts.com

If you want to know what a sell stop order is, please check out the Stock Trading Stops section of this post.

MACD Divergence

And, here you have positive divergence on MACD proper to price – MACD itself waving higher, with price cycling lower – the result you can see.  You will sometimes see divergence occurring on both the histogram and MACD at the same time – but not always.  You may even see divergence on the histogram forming before it does on MACD.  Or, you may just see divergence on one or the other.

Screen shot of Starbucks showing bullish positive divergence on MACD.

Chart Via StockCharts.com

Uptrend Continuation

NFI is a stock I am chasing (see commentary in the Stocks to Die For section above) – wanting to buy – but, patience is a virtue.  We’ll see if my logic holds up.

Please have a look at the two charts below, as you follow my thought process:

  1. The Accum/Dist indicator has been trending up – more of the trading volume is going to buying than selling).
  2. The ADX indicator (second chart below) has a low reading. Translation:  “Low readings signify a trading range or the beginning of a trend.  Low readings indicate a weak trend.”  I choose to interpret this as we are at the beginning of an upward move in price.
  3. MACD is neutralizing back to the waterline, which is indicative of an Uptrend Continuation pattern.
  4. MACD has not yet issued a buy signal. I would wait.
  5. The Parabolic indicator (second chart below) has not yet indicated a buy situation. Look for price to be above rising green dots.
  6. Assuming we are looking at an Uptrend Continuation pattern in the works, then Leg 1 is already in place – to be followed by Leg 2 up, once our respective indicators have flashed a buy signal.
  7. Lest we not forget that the underlying company is ‘one to die for.’

New Flyer Industries screen shot showing MACD neutralization and Uptrend Continuation Pattern.

Chart Via StockCharts.com

Screen shot of New Flyer Industries showing Parabolic indicator not yet flashing a buy signal.

Chart Via StockCharts.com

If you want to know what a stop loss order is, please check out the Stock Trading Stops section of this post.

Parabolic Indicator

Screen shot of Visa showing bullish MACD buy signal and price above the Parabolic indicator.

Chart Via StockCharts.com

Developed by J. Wells Wilder, this indicator dictates that you should sell the stock, if it is trading below the indictor.  Conversely, if the stock is above the indicator, then you should buy (or stay long).  (Info via Investopedia.)

Quotes

Yogi Berra:  “Investing is 90% mental; the rest is all about numbers.”

“Trading is all about patterns.”  Floor Trader

“Fail to plan, plan to fail.”

Pogo, the cartoon character:  “We have identified the enemy, and the enemy is us.”

“ETFs are an arbitrage experience.”

“Oil is binary.  It either goes up, or it goes down.”

“The wrong tools can only take you so far.”

“It’s not that I’m so smart, it’s just that I stay with problems longer.”  Albert Einstein

“There are no strangers here; only friends you haven’t yet met.”  William Butler Yeats

“Stocks are driven by fundamentals, not loathing and fear.  It’s time for Winnie the Pooh’s frolicking and happiness to supplant Eeyore’s groaning and moaning.”  Brian Belski

“Nobody remembers who came in second.”  Walter Hagen

In the meantime…

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HAVE FUN and ENJOY LIFE!  Remember – FAMILY comes first!

Here’s To Your Success and Quality of Life,

prbain

Peter R. Bain
PS:  Don’t let them steal your dreams!
PPS:  I will help you achieve your dreams!

About Peter R. Bain

Picture of Peter R. Bain, founder of www.TradingSmarts.com – the go-to site for all things trading.

Peter R. Bain

I am a speaker, trader, writer, aviator, car nut, Harley enthusiast but, above all else, I am here for you at TradingSmarts, which I founded some 15 years ago.

TradingSmarts is your best friend when it comes to finding anything and everything to do with trading.  Through my blog you will always find guides, news, reviews, tutorials, and much, much more.

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Peter R. Bain

I am a speaker, trader, writer,
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