I was reading another post on a forum and came across another interesting topic. The guy making the post responded to my piece on the TICKS and said this:

“One big problem with technical analysis and the use of indicators is that it confuses causes and effects. The move of the NASDAQ is the cause, the movement of the indicator is the effect. The NASDAQ doesn’t fall because the indicator says so. The indicator says so because the NASDAQ has fallen (please note the past tense). Nature works in a very predictable way: you cannot manage the effect (investing based on the indicators) without first managing the cause (figuring out why the NASDAQ moves in a certain way).”

Here is how I answered this person:
You are correct that technical analysis is the effect but I am not trying to get in at the bottom or out at the top. I catch the trend and technical analysis will always give you the underlying trend and that is where my money is made.

Using the indicators (lagging or not), I always know the trend and will place my trades with that trend. I am not always right but I use several position sizing strategies to hold my risk to a minimum which allows me to capitalize on my winning trades and cut the losers quickly.

By trading with the trends, I could care less what the “true” cause is for the movement (that is a waste of time). All I need to know is the direction the market is moving in. Nature may be predictable but the market is not so knowing the cause is useless because causes are always priced into a market in advance. I buy the trend and look for the cause in the news in the following days, weeks or even months. In my opinion, causes are old news by the time they become known!

Too many times, I see people think too deeply into the market and always miss the move because they need to know the reason why the market is moving. I don’t care why it is moving, I only care to know if and when it is moving so I can get in or out of my positions. As I said above, I will look for the “cause” or reason when it hits the headlines in the future!

Piranha

I was reading through Trader Mike’s blog Wednesday night and came across a very interesting indicator that can be studied on a chart. In his post, Review of “Mastering the Trade” by John Carter, I was reminded about an indicator I have seen on several occasions but have never taken the time to research because I am not a day trader (yet).

Before going further; have you ever been in a situation where you see or hear something once but pay no attention, see it a second time and possibly take a deeper look but then see it a third time and really jump into the concept. I first heard about the indicator TICK or $TICK on stockcharts.com when reading through SFO magazine. I don’t remember the author’s name but I will assume it was John Carter and will take a look later this morning as I save every edition of SFO. The second time I saw TICK was during my 4th of July vacation while reading Martin Schwartz’s Pit Bull as he explained how the indicator is a must for his system. Schwartz said exactly what John Carter’s article states about the levels of TICK so I must assume that many great traders use this indicator. Wednesday was the third time I came across this indicator and the second time in one month so it must be something that my subconscious wants me to look into further (yes, I believe in the subconscious and the idea that the proper tools are presented to a student when they are ready for them). I hope that doesn’t scare anyone away but read Napoleon Hill or watch The Secret and you will understand where I am coming from.

What is a TICK?
The TICKS ($TICK for NYSE or $TICKQ for NASDAQ) summarize the number of stocks on the NYSE that are increasing in price versus those that are decreasing in price from the previous price quote.

Anyway, after reading the blog post and then re-reading John Carter’s article, I started to play with the chart and overlay market information. What was really interesting was the $TICKQ which represents the NASDAQ and how it predicted the top in the market today. While doing my research tonight, I realized that the NASDAQ peaked just before noon (approximately 11:45am) and then headed down for the day. This happened at the exact same time that the $TICKQ reached an intraday high above +800 and then reversed during the 5-minute candlestick. The actual candlestick closed below +600 for the timeframe and then quickly dropped by 50% over the next five minutes which should have told day traders that the market was turning down with heavy selling pressure.

Looking at the chart posted in the blog entry, you can see how the purple line (representing the price of the NASDAQ) topped at the peak of the $TICKQ and then went south for the remainder of the afternoon. The indicator attempted to cross above +500 a few times during the afternoon but was quickly turned sideways or in the opposite direction, confirming the weakness and selling pressure. By 2:30, the indicator was staring to violate -600 and the NASDAQ was reaching intraday lows as most stocks were starting to turn from green to red on my computer screen.

I admit that I don’t know much about this indicator and only started to research it today but I can already see its power and understand how it may help me with my current and future trading systems. I understand charts and this chart was amazingly accurate today so it has caught my interest. I was already interested when great traders such as Martin Schwartz consider it a must and then it is confirmed by John Carter in SFO and then one of my favorite stock bloggers in Trader Mike. I read about indicators and oscillators every day but I toss most of them aside because they have no value to me at this time with my current trading style but I knew within minutes of studying my charts today that this indicator will be added to my arsenal. As I continue to study the indicator and eventually use it with my trading, I will report back on this blog if it has helped or hindered or has done nothing at all.

Piranha

Have you ever been on a message board, forum or in a discussion where a person tells you that earning ‘X’% per month would make you the richest person alive in ‘X’ number of years. For instance, I recently read a post by a forum writer that said:

“If you ever find such an investment you should immediately reinvest all got.

Month 2 you would have $20K producing $20K a month.

By the end of your first year you’ll have over 20 millions bucks and at the end of year two you will be by far the richest man alive.”

The question posed earlier in the thread said:
“Are there any ways that could earn $10K per month consistently”

To some people, $10,000 per month is peanuts but to others, it is a large sum of money; something so inconceivable that they bark about all the reasons why making this type of money is impossible. To be honest, it’s only $120k per year; not that impressive in New Jersey anymore!

What struck me the most about this post was the fact that the responder was using such elementary thinking when answering the question. By using proper money management techniques, an investor would never risk their entire stake on one investment because it was returning a specified amount or percentage each month. If I am trading with a positive expectancy system that is averaging a return of $10,000 per month, why would I double, triple or quadruple my risk just so I could make more money. Non-investors are always thinking about the up-side potential and never worrying about the downside. Maybe the person earning $10,000 per month has formulated a system with positive expectancies and a quality position sizing technique that allows them to make this sum without risking too much of their original capital.

If the investor were to double the size of their bet or increase it even further, they run the risk of ruin on one bad transaction; therefore, becoming the richest “person” in the world in not an option by doubling-down the size of the specific bet or business strategy. It sounds to me that the person responding to this post is a roulette player that believes that doubling each bet after a loss will allow them to break even which couldn’t be further from the truth.

Be aware of the “talkers” on the web and don’t buy into everything they say because much of the crap I come across is that: “crap”! Just because someone has an investment strategy that pulls in $10,000 per month does not mean it is as simple to double up on the original investment in order to bring in $20,000 per month and then repeat the process to bring in $40,000 per month (eventually making you the richest person alive in a few years). I highly doubt the responder in this post has ever studied probabilities, risk, reward, expectancy or any other mathematical logic before giving his two cents. I will also assume that he is the type of investor (or gambler) that always has a hot tip and will bet the farm on that tip because he sees the potential of profit on the other side of the fence rather than the possible loss (risk of ruin) by risking too much.

Try out this logic: Ask 10 friends or family members which situation they would choose if given the opportunity:

1. Risk 90% of their net worth for a 5% chance of multiplying it 50 fold
   or
2. Risk 1% of their net worth for a 70% chance of doubling it.

What would you choose? And Why?

I think many of you know which number I would select based on my past blog entries and my investing style.

Steer clear of internet TALKING HEADS & SIMPLE THINKERS!

If you are interested in reading high quality material on the web, take the time to visit my blogroll and links section on each sidebar. No talking heads here!
Piranha

Image provided by: http://www.scholarnet.co.nz/flo/savings_item1.php

The NASDAQ is trading near the 50-day moving average today and has actually pushed above the down-trend line placed on my chart. If the index can follow through and close above both the moving average and the trend line, I consider this a successful week. I voted neutral on the latest Ticker Sense Blogger Sentiment Poll after voting negative the past couple of weeks (I hate to be on the fence but I am). If the NASDAQ can trade above these areas and the NH-NL ratio can continue to stay positive, I will start to get more of a positive feel for the overall health of the market.

The S&P 500 is forming a cup shaped pattern and has overtaken the 50-d and 200-d moving averages and has moved higher in above average volume the past three weeks. Earlier this week, we had our strongest daily NH-NL ratio in months which tells me that some institutional buying is taking place as the summer heads down the home stretch. In any event, don’t rush to buy stocks on the long side until we get a market breakout and a strong weekly confirmation with the NH-NL ratio. Another important aspect to the market possibly gaining strength will be the health among the individual market leaders. Until they can gain their footing and move higher with volume support, we can continue to be skeptics (protecting our capital).

Below are a few stocks that interest me at this time along with a couple of lists highlighting the action from Thursday’s market (similar to a typical daily screen I run each night).

Some Interesting Stocks to Watch:

• CELG – 46.95, a move above $50 is a buy signal on the P&F chart as the stock has a strong long term trend above the 200-d m.a. (since February 2005)
• GILD – 62.07, buying above the moving averages as the stocks qualifies for a possible $60-$100 run
• BOT – 127.06, a stock I profiled earlier in the year on this blog that actually corrected but is now challenging all-time highs. I am slightly skeptical of the long term move but the trend has been higher for the past couple of months (especially since it recovered the 50-d m.a. near $105 in June
• EZPW – 38.82, could this be the handle formation to the 15-week cup shaped pattern? A move to new highs is very positive especially if volume increased above average
• CMI – 119.28, up and down as buyers and seller struggle to take control of the direction of this stock. Buyers have a slight advantage at this point in time
• TWGP – 29.37, trading in a consolidation range between $26 and $32. A buy happens above $32 with a triple top breakout on the P&F chart
• AB – 66.04, the MSW Index stock continues to make the 200-d m.a. play successful as it also qualifies for a possible $60-$100 run

A Few Interesting Stocks making New Highs Thursday (8/3/06):

• OMX – 44.42, first double top breakout yesterday above $44, another will qualify above $45 as a spread point and figure breakout
• GES – 48.41, a 14% breakout above $47 this week with Thursday’s gain coming on volume 282% larger than the 50-d m.a. (50-day moving average)
• CTSH – 70.31, a solid 10% move this week to breakout above $70 on above average volume (RSI line at all-time high)
• EME – 54.26, the 200-d moving average play has now gained 22% over the past two weeks. Do not chase at this point but keep an eye open for a future consolidation

A Few Interesting Stocks within 15% of a New High (Thursday’s Market – 8/3/06):

• ANSS - 50.39, a strong rebound with support at the 200-d m.a. Volume was up over 219% yesterday, signifying institutional buying power
• NEU - 53.97, an MSW Index stock forming a nice basing pattern with a possible $60-$100 run in the future.
• GIL - 47.32, another 200-d m.a. play with solid support from institutions as volume was up more than 280% on Thursday
• PSA - 83.40, a 21-week cup shaped pattern with heavier buying over the past week or so. I prefer to see a handle form before takeoff so be careful with any entries in this area.
• PVA - 71.28, the daily chart is somewhat sloppy but the weekly chart shows support at the 200-d m.a., a support line it has held over the past couple of years
• TRMB - 49.05, reaching a new 52-week high in the early morning hours of trading on Friday (slightly extended from the major moving averages but it is gaining momentum)
• PZZA - 33.95, I don’t like their pizza but the stock is gaining support at the 200-d m.a. in the midst of an eight month consolidation. Breakout to new highs is an entry signal (above $36 on the P&F chart)

Piranha

Crude oil topped $76 earlier today as Tropical storm CHRIS (what a name) gathers strength in the Caribbean and heads towards the Gulf of Mexico and possibly the Gulf Coast. Investors fear that the storm could grow into a hurricane and possibly disrupt oil output from the rigs in the Gulf area (similar to Katrina and Rita from last year).

As an article by Simon Webb stated: “Last year’s hurricanes shut a quarter of U.S. crude and fuel output and sent oil to record highs. Around 12 percent of the U.S. Gulf of Mexico’s 1.5 million barrels per day (bpd) oil output is still offline.”

As you can see on the chart, crude oil has been trading in a range over the past couple of months with a support line near $70 and a shorter term support/resistance line near $75.

With the crisis in the Middle East and the threatening storm, oil related stocks and futures will be hot short term plays!

Piranha