The NASDAQ is following the Fibonacci plan of action to a ‘T’! It retraced to the 38.2% level and then consolidated for a week as I noted and is now hitting resistance near the 50% retracement level. It wasn’t really a question of if but when the NASDAQ would reach to the 50% retracement level. The index faces a decision once again: to consolidate one more time before attempting to move to the next retracement level or pull back and gain some support near the 50-d moving average. I still suspect a pull-back to the 50-d m.a. as the index still needs to fill a gap-down in that area (see the NASDAQ daily chart provided). I will not guess what the index will do and will only trade the signals.

Looking at the daily chart of the NASDAQ, we can see that the index is now trending higher and has been since it started to retrace. Volume has been weak but that can be attributed to end of summer conditions. Volume should start to pour back into the market as September carries on and institutional investors return from vacation.

A closer look at the weekly chart will show you that the NASDAQ is now testing long term resistance just below the 2,200 level (very similar to the Fibonacci retracement level of 50%). Again, volume is weak so I am not sure if the index will have the power to overtake this area but I will watch to see if a trading range forms between 2,100 and 2,200. Look back exactly one year to see what I am taking about.

The percentage of stocks making new highs on the S&P 500 is still near four month highs so I am not concerned about any weakening of the potential individual leaders. The NH-NL ratio has been positive for the most part but not overwhelming with strength. As long as it stays positive, we don’t have too much worry about.

The Gold chart is similar to the NASDAQ retracements as I wanted to point out how the commodity is using the Fibonacci levels as support and resistance. Currently, the commodity is using the 38.2% retracement level as support as it trades in a sideways range between $600 and $650 with larger support below near the 200-d m.a. Notice how Gold reached the third retracement level and then sold off to consolidate into its current range. The move could be considered textbook to some.

Both the DOW and S&P 500 are forming cup shaped patterns with support below at their respective moving averages. I am interested to see what will happen as they approach all-time highs (if they can in the next couple of months). When they approach these highs, study the RSI chart to see if the buying is coming in with strength. As a follower of CANSLIM, I would love to see both indexes form a cup with handle pattern and then break-out with powerful volume along with individual leaders. That type of action could start a rally.

Finally, I will focus on the crude oil contracts as we can see that they are testing support near $70 with more support at the 200-d m.a. (slightly higher than $68). I would not become concerned with crude oil until it sold below the 200-d m.a. on heavy volume which could and most likely would propel stocks in the opposite direction. The combination index I have uploaded shows the relationship between crude oil and the NASDAQ and the current short term trend is higher while the longer term trend is still lower.

Enjoy and click on each chart for a larger view!
Piranha

I will start by saying that I am not a professional “day” trader but I am looking to move in that direction and will start to test out my skills with basic technical analysis setups. I figured I would start with the first setup explained in John Carter’s book, Mastering the Trade; see my post from Monday.

I am posting up four charts of stocks making new 52-week highs but have made these highs on lighter volume and with a weaker RSI. The RSI is actually making lower highs as the stock moves to higher highs which creates a bearish divergence.

Comment on my charts and give me your thoughts. I will disclose that I have already established a position in at least one stock and may establish another position today. The name of the stock is not important as I am just testing some strategies.

Click the charts to enlarge them!

Enjoy,
Piranha

The quotes below are provided by John F. Carter, master day trader; pulled directly from his new book Mastering the Trade.

This may be the best quote of all:
“The financial markets are naturally set up to take advantage of and prey upon human nature. As a result, markets initiate major intraday and swing moves with as few traders participating as possible. A trader who does not understand how this works is destined to lose money”

“The financial markets are truly the most democratic places on earth. It doesn’t matter if a trader is male or female, white or black, American or Iraqi, Republican or Democrat. It’s all based on skill.”

“A trader, once in a position, can deceive himself or herself into believing anything that helps reinforce the notion that he or she is right”

“…professional traders understand this all too well, and they set up their trade parameters to take advantage of these situations, specifically preying on the traders who haven’t figured out why they lose”

“…markets don’t move because they want to. They move because they have to.”

“After all, the money doesn’t just disappear. It simply flows into another account – an account that utilizes setups that specifically take advantage of human nature.”

“As soon as Wall Street announces a special vehicle for trading a particular market or strategy, then that market or strategy is done for.”

“Remember, the markets are set up to naturally take advantage of and prey upon human nature, moving sharply only when enough people get trapped on the wrong side of a trade.”

“In casinos, as in trading, it takes only one stupid bet to blow the whole wad”

“Casino owners know this, and this is why they sell the strategy books right there on the property, prominently displayed in their own gift shops”

“This is the biggest poker game on the planet, and the money flowing into your account isn’t appearing as if by magic. It’s coming from someone who is still learning how the markets work, and who most likely followed his or her gut and got suckered into taking the wrong side of the trade.”

“The problem is that tactics an individual uses to achieve his or her goals in everyday life do not work in trading, and in fact are one of the main reasons for failure.”

“The determination, positive thinking, and stubbornness that made people a success in one area of their life simply sets them up for slaughter in the markets”

“The markets thrive on taking the rules and ideals that govern general society, wadding them up into a ball, lighting them on fire, and then shoving them down a new trader’s throat.”

And Finally

“The only people who understand traders are other traders”

The book is full of excellent quotes such as these but it goes even deeper into how to trade like a professional and why the markets prey upon human nature. It was an excellent read and I will be going through it several more times to pick up everything I missed on the first go-around!

Piranha

I was asked this question in my recent comments after posting a NASDAQ chart with Fibonacci retracement levels:

“How do you find the fibonacci levels of a stock? Is it part of your screening tools or?

I ask as i’ve never tried to implement fibonacci analysis in my swing/day trades, however of late since i’ve been following your blog, you seem to talk quite a bit about it”

I answered the question with a quick link to a Fibonacci calculator I use and then realized that I don’t have a blog entry for understanding Fibonacci numbers. So instead of rewriting what has already been done, I have decided to point you all to a great blog entry titled How to Use Fibonacci Retracements To Trade Stocks by Craig over at the Swing Trading Guide or better know as the Taz Trader Blog

I use Fibonacci retracements for longer term outlooks for major indexes but sometimes use them for individual stocks that may be catching solid support along the 200-d moving average. The most important thing to know is that it is only a secondary indicator in my arsenal, not a front line tool.

If you look at the attached NASDAQ chart, you can see how the index has stalled near the first retracement level as I indicated last week prior to the advance. I suggested a brief consolidation before the NASDAQ looks to move towards the 50% retracement level near 2,195.

By the way, Stockcharts.com has a built-in Fibonacci tool that allows me to draw the levels within seconds. A great tool for their annotated charts!

Piranha

I posted up a chart looking at the relationship between the NASDAQ and crude oil contracts a couple months back in an entry titled “Can the NASDAQ – Crude Oil Index predict Bulls & Bears”.

The combo index highlighted the relationship of the two indexes and actually told us on a higher level when and where the market was making rallies or starting major down trends over the past 10 years. Visit the link above for a further description of the actual combo index.

As this year moves on, I have noticed that the combo index continues to reach new multi-year lows while traveling below its 200-d moving average. Recently, it started to move north but still lives beneath the moving average and long term trend-line or resistance. I am still wondering if this index is useful and if it can confirm a sustainable rally if it crosses back above the 200-d m.a. and multi-year resistance line.

While reviewing the three year chart, I noticed the spikes in October and was wondering if it will do the same this year since the action is starting to resemble previous years (post bubble burst era). Whatever the case, it will be very interesting to see many indicators move to the positive side simultaneously all confirming a possible rally towards the end of this year. The Stock Trader’s almanac states that mid-term election year lows usually peak 50% higher in the following 6-12 months. We are now in a mid-term election year and several indicators look to be hitting bottoms with an urge to move higher.

So I ask:
Will the NASDAQ be 50% higher in six to twelve month from this year’s bottom?

Only time will tell and I will not know the answer until my most important indicators give me the green light signal to buy heavy on the long side!

Piranha