07.04.08
Posted in Trading Updates at 1:05 pm EST by Marc A.
The ability to read stock charts can help a lot in making sound investment decisions as it not only gives a snapshot of a stock past performance, but also helps predict the future direction. In this article, we summarize the most reliable chart patterns used by investment professionals.
The most reliable bullish chart patterns:
- Cup with Handle: The cup is in the shape of a ‘U’ and the handle has a slight downward drift. The right-hand side of the pattern should have a low trading volume. It can be as short as seven weeks and as long as one year. As the stock comes back up to test the old highs, Investors who bought at or near the old high will start selling the stock to break even. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend for four days to four weeks, then it takes off and takes out the old highs.
- Double Bottom: This pattern describes the drop of a stock, a rebound, another drop to the same level as the original drop, and finally another rebound that goes higher than the previous highs.
- Pennant: It is formed when there is a large movement in a stock, followed by a consolidation period with converging trendlines, followed by a breakout movement in the same direction as the initial large movement.
- Inverse Head & Shoulders: This happens when the price falls to a trough and then rises again. The price falls below the former trough and then rises again. Finally, the price falls again, but not as far as the second trough. Once the final trough is made, the price heads upward toward the resistance found near the top of the previous troughs. The first and third trough are considered shoulders, and the second peak forms the head.
The most reliable bearish chart patterns:
- Head & Shoulders: This happens when the stock rises to a peak and subsequently declines, then the price rises above the former peak and again declines, and finally, rises again but not to the second peak and declines once more. The first and third peaks are shoulders, and the second peak forms the head.
- Double Top: This pattern describes the rise of a stock, a drop, another rise to the same level as the original rise, and finally another drop. The double top looks like the letter ‘M’. The twice touched high is considered a resistance level.
- Rounded Top: A rounded top, which looks like an inverse ‘U’, may form at the end of an extended upward trend and indicates a reversal in the long-term price movement. The initial upwards trend becomes exhausted as the demand for the stock dries up. The reversal to the downward slope of the rounding top indicates that demand has tapered off and a surplus supply is present, basically there are more sellers than buyers.
- Pennant: It is formed when there is a large movement in a stock, followed by a consolidation period with converging trendlines, followed by a breakout movement in the same direction as the initial large movement.
In our Investment Newsletter, we follow these guidelines and more to give you the best investment tips and help you choose what stocks to buy and most importantly when to buy. Our stock picks usually belong to the best performing sectors but could also include some short recommendations.
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04.30.08
Posted in Trading Updates at 3:32 pm EST by Trader_01
The Stock market pulled back after the Fed cut rates by 25 basis points. The Dow Jones was still holding to a 20 points gain while the Nasdaq was lower by 15 points, 30 min before the close. In the morning, the Dow was higher by as much as 170 points. Gold prices shot up as the US Dollar weakened agaist the Euro. However, Gold prices have been down sharply in the last few days.
Read our daily commentary in our stock market newsletter.
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04.28.08
Posted in Economy at 2:48 pm EST by Marc A.
Since the market correction started in November 2007, Tech stocks have been hit really hard as investors sold everything they own, the good and the bad. The Nasdaq composite was down about 25% when it hit bottom a month ago, while the S&P 500 was down about 20%. If you look at the market leaders before the correction, GOOG and AAPL were both down more than 40% from their October highs.
The reason behind selling tech stocks was that the financial crisis will lead to slower IT spending by the Banks and Brokers, and a consumer led recession will result in slower tech sales. Six months later, those same big tech companies reported earnings for the first quarter and they easily beat wall street expectations. So why were analysts estimates so low for the tech sector?
In GOOG case, revenues for the first quarter were 42% higher than a year ago, and they beat analysts earnings expectations by 7%. It turned out that the data on paid clicks that all analysts base their numbers on was seriously flawed and they all blamed their bad estimates on the firm that provides these statistics. As for AAPL, revenues were also around 43% higher, and earnings beat expectations by 8.4%. It was the incredible number of Mac computers sold that boosted AAPL revenues. Analysts realized that even during a recession people are willing to spend some money to get AAPL’s cool products. Both companies also benefited from strong international sales.
Even if you look at other big cap tech names like IBM or AMZN, they reported very strong numbers that nobody on the street was expecting. Some of them even guided higher for the remainder of the year. But can these growth rates be maintained in the foreseeable future? Well, if with all the problems that hit the US economy in the first three month of the year they can report such numbers, it is highly unlikely that things will slow down in the second half when it is seasonally the best time for tech companies to sell their products. In addition, the US economy is now supposed to be getting better with all the Fed and Government bailout plans.
In addition to looking at the fundamentals, we also like to check the Technicals. Both GOOG and AAPL broke out from sound bases and are now back above their 50-day moving average.
GOOG broke out and gapped higher on strong volume the day after releasing its earnings report. Its relative strength is making new highs already. This is very bullish for the stock going forward. You can also look at the QQQQ chart which tracks the Nasdaq 100 index to get a more general picture. It bottomed at around $41 in March and is now trading at $47, around 15% higher. RSI is also making new highs.
Given both strong fundamentals and technicals, we believe that the Tech sector will outperform the overall markets for the remainder of the year and will be leading the markets higher going forward. If you would like to take advantage of these moves without being exposed to only one specific stock, you can invest in the QQQQ (Nasdaq 100) ETF, or if you can handle more risk you can buy QLD. With the recent run up of all the stocks mentioned here, you might want to wait for a pullback before investing your money.
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04.17.08
Posted in Trading Updates at 5:14 pm EST by Trader_01
The markets finished mixed today with the Dow up a point and the Nasdaq down 8 points. Financials were strong though despite a bigger than expected loss by MER. Tech stocks were down slightly after a huge move up yesterday, mainly on profit taking. After the close GOOG easily beat expectations and the stock soared by 17%. On the commodities front, Gold and Oil were slightly lower today as the US Dollar firmed a bit against the Euro.
View our daily market comments at: www.themarketnewsletter.com
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04.11.08
Posted in Trading Updates at 3:20 pm EST by Trader_01
Stocks are deep in the red 1 hour before the closing bell on Friday. Nasdaq is leading the way lower and is down almost 60 points giving back most of the gains it had in the last few days. A surprising and dissapointing earnings report from GE is putting pressure on all sectors as the signs of a deteriorating economy spread on Wall Street. A bad consumer sentiment report also added to the market worries. The volatility index or VIX jumped by 7% today as investors get more nervous about the upcoming earnings season. On the commodity front, Gold and Oil finished only slightly lower, but related stocks were much weaker.
View our daily market comments at: www.themarketnewsletter.com
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04.09.08
Posted in Trading Updates at 3:45 pm EST by Trader_01
Stocks continued their slide on Wednesday after Oil prices hit a new record high above $112 per barrel, and the Dollar dropped sharply against the Euro. Financials, Homebuilders, and Tech stocks led the way down, but a new rally attempt was underway 30 min before the close. The markets tried to recover several times during the day and failed. Emerging markets were mostly lower today as bad U.S financial news spreads around the world.
View our daily market comments at: www.themarketnewsletter.com
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04.08.08
Posted in Trading Updates at 2:56 pm EST by Trader_01
Stocks were lower today after the Fed Minutes indicated the growing worries about the economic slowdown. Leading the declines were the Financials and Tech sectors. Homebuilders were also weak after a worse than expected Home Pending Sales report was released in the morning. On the commodities front, Gold was slightly lower today, and Oil slightly higher.
View our daily market comments at: www.themarketnewsletter.com
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04.01.08
Posted in Trading Updates at 3:08 pm EST by Trader_01
Stocks were headed for a strong close today with the Dow up 350 points with 1 hour left in the trading session. Some better economic news together with huge writedowns from some European banks triggered a huge rally. LEH which also announced a plan to raise $3B was 16% higher. The only sector that was deep in the red today was Gold and related mining stocks. Gold prices were down $33 today after a $15 drop yesterday. MOS, the Ag crop producer, was down today after an analyst predicted it will miss forecast when it reports earnings on Friday.
View our daily market comments at: www.themarketnewsletter.com
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03.30.08
Posted in Economy at 11:48 pm EST by Marc A.
Gold prices have been rising sharply over the last few months while the equity markets went into a sharp correction. Over a one year period the popular GLD (Gold ETF) is up almost 40%. Compare that to the S&P 500 or SPY which is down 10% during the same period. The main reasons for the rise were basically Inflation and the weak dollar. The explosive growth in emerging markets over the last few years has led to a huge commodities bull run and fueled global inflation, which in turn put pressure and weakened the USD against most of the major currencies. And then to make things worse, a nasty credit crisis hit Wall Street last fall due to the collapse of the mortgage subprime market. The Federal Reserve, in order to avert a complete collapse of the financial system, had to start slashing rates and add liquidity to the system. Interest rates went down from 5.25% to 3% in a few weeks. That’s when Gold prices had their steepest rise, going up 300 points since November.
So why do we think you should sell Gold and specially the mining stocks if prices are so strong?
First, if you look at the mining stocks prices compared to the gold prices, while the GLD is up 40%, the mining stocks ETF, or GDX, is up only 20% over a one year period. The reason for the underperformance is that it is getting harder and harder to extract the metal from the ground and also more expensive. The margins for mining companies are not as good as they used to be.
Second, and more importantly, the 2 main reasons behind Gold rise may not be valid anymore, at least in the short term. At the last Fed meeting, interest rates were cut by 75 basis points to 2.25%. When that happened gold prices unexpectedly collapsed 100 dollars in 3 days. The reason was that investors in the metal were disappointed and the markets were actually looking for a 100 basis points cut. The fed’s next meeting comes in April and this time traders are expecting a 50 basis point cut. However, we think it is very likely that the Fed will only cut by 25 basis points and that might disappoint investors again. Even if the Fed cuts by 50 basis points, and rates go down to 1.75%, that might be the last time we even get a cut. Very few people are expecting rates to go lower than 1.75%. The ECB, on the other hand, is expected to just start cutting rates later this year when the EU economy shows more signs of weakness. All that could stabilize the dollar in the coming months.
As for inflation, the numbers are finally starting to moderate due to the weakness in the world economies led by the US housing crisis. The PCE inflation numbers just released show inflation for the last year at 2% which is still inside the Fed’s comfort zone. Actually the Fed has been predicting inflation to moderate for some time now but no one on Wall Street really believes them.
Finally if you look closely at the GLD chart, you can see that the short term uptrend has been broken. For the first time since Gold broke out last year, it has fell through its 10-week moving average and it has done so on high volume in the last week. This surely is another sign of weakness.
Gold might still be in a long term bull market, but for all the reasons mentioned above, it is now due for a correction in the short term.
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03.27.08
Posted in Trading Updates at 3:40 pm EST by Trader_01
Stocks are headed for a lower close today after a disappointing earnings report from ORCL sent that stock sharply lower. Tech stocks were weak all day and were dragging the overall markets lower. Some of the brokerage firms were sharply lower as well after an analyst at Oppenheimer slashed its outlook on the banks.
On the other side, Oil jumped higher again today and is now close to its all time highs. Most of the oil related sectors however did not follow oil prices higher, and were still negative 20 min before the close.
View our daily market comments at: www.themarketnewsletter.com
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