The Most Effective Way To Review Charts

This post originally appeared on TraderPlanet.com.

Most traders use charts as part of their methodology to determine when to enter or exit trades.

We think of charts as being very objective, built on price and volume, technical data that is not open to interpretation. But no matter how much we try to convince ourselves of that, we have to understand and acknowledge that charts are ultimately a visual media, and as with everything that we use our eyes to analyze, there are ways that our perceptions can be altered.

Take for example this 5-minute chart of Cree Inc. ($CREE) from earlier this week.

In a “post-opportunity” analysis it looks like a very clear set up, one that we surely would have taken if seen in real-time.

THE ACTION

$CREE gaps ups, pulls back slightly, and then rockets up to a resistance area. Price pulls back in and forms a nice green hammer right off the 20-period exponential moving average (ema) and above the opening range high (based on the first 15 minutes that the market is open). That hammer provides a good risk/reward entry with a reasonable target of the morning pivot high.

DIFFERENT PERSPECTIVE

But let’s look at that same chart at the moment that the green hammer formed and with a little bit more back data.

Now the trade doesn’t seem so obvious. The pullback seems steeper and there is no clear reason to assume it would make it to the morning pivot high.

ANOTHER EXAMPLE

Let’s look at another example, also from earlier this week, in Coach, Inc. ($COH)

MARKET RECAP

$COH gaps up and gets rejected at a daily resistance level. Price pulls back, but then reverses and makes a strong run back to that same resistance level, pausing to print a tight inside bar, before breaking out and running to new highs.

Once again, after the opportunity that tight inside bar looks like a no-brainer, creating an optimal risk/reward entry that of course all of us would have taken if caught in real-time.

DIFFERENT VIEW

Now let’s look at the same chart but at the time of possible entry.

That chart doesn’t look so obvious. Price is extended from the 9-ema and 20-ema and it appears as if the daily resistance has stopped its progress for a second time, creating a potential intraday double top.

DEVELOP OBJECTIVE CRITERIA

These examples show how important it is to review charts not only from an end- of-day viewpoint, but from one that is contemporaneous to the time of the potential trade. It also illustrates how important it is to have objective criteria to get you in and out of positions so that you don’t get fooled by the differing perspectives charts can show depending on the time and amount of data being used.

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Insider Trading

This post originally appeared on TraderPlanet.com.

Perhaps you have heard the term “inside baseball” before. It indicates information, conversation, or an attitude about a topic that only would be relevant to “insiders.”

Like if a group of air conditioning salesmen were standing in the middle of a party discussing the merits of the Emerson 3560 Turbo Express heat exchange core and how it was revolutionizing the industry. Anyone overhearing the conversation would get the passion and the intensity, but not an understanding of the underlying subject.

IT’S LIKE TRADING

As traders we often get waaaaaayyyy inside baseball in our views of the market. We forget that there is a whole investing public out there that doesn’t know anything about MACD’s, or Fibonacci’s, support and resistance levels, reversal days, doji’s, dark cloud covers, or how to short against the box.

JUST LOOK AT APPLE

I was reminded of this by the action in AAPL the past two days.
When AAPL announced their earnings after the bell rang on Tuesday the stock was up as much as seventeen points in the after-hours session, but by the time it finally closed it was negative two points.

To me that was a very bad sign for AAPL bulls, as a stock that gives up that much of a pop, especially after a “good” earnings report, is ripe to be shorted. When the stock opened down twelve points on Wednesday morning it seems like my suspicions were confirmed. But then something strange happened.

Right from the open AAPL started to rally, showing green bar after green bar, pretty quickly erasing the gap down. I was genuinely puzzled by this as the action from the previous day’s after-hours session seemed like a very clear indicator of what traders thought of the stock. But I had forgotten about something; something “insider baseball-ish.”

THE PUBLIC

It seemed as if the buys of the gap down on AAPL were retail buyers, which in retrospect made perfect sense to me. The vast majority of retail buyers don’t pay attention to after-hours (or pre-market) sessions. For them the only time that matters for the market is the time between 9:30 a.m. and 4:00 p.m. Eastern time. That meant that the after-hours action was not a part of their AAPL strategy. It literally was a missing piece of the puzzle that they never knew existed.

When AAPL gapped down all they knew was that the company had a strong earnings call and they were getting a huge buying opportunity with a twelve point discount, so they bid it up.

IMPORTANT REMINDER

There was no short setup for AAPL at the open so I didn’t have any skin in the game, but, it was a very good reminder that no matter how much we think we know about the markets, scenarios, scripts, and story lines of what a stock should do are subjective. It also reminded me that there are other participants in the market besides those of us who live, eat, and breathe by each tick, and that their dollars can be equally as powerful, if not more so, than us “insiders” from time to time.

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This Stock Could Go Up 1200%

This post originally appeared on TraderPlanet.com.

Everybody is looking to find a stock that they can get a big return on. Well, what if I told you that I know of one that could potentially yield you a “twelve-bagger?”

That’s right–this stock could go up as much as 1200% from its current price.
This company seems to have all the right stuff, earning twice as much profit per dollar as the U.S. average for other companies in its field. Its product is considered the highest quality and is more desirable than its competitors.

THE BLOOMBERG STORY

This company is massively undervalued, and it not just me that thinks this. In fact I am basing this on the comments of industry experts quoted in Bloomberg no less.

Timothy Parker, who oversees $8.5 billion in stock at T. Rowe Price Group says in the article that the company’s product is “the bees knees” and Bloomberg itself says that based on similar median earning on other buyout deals in the same space, this company’s stock could fetch as much as $192.00 a share.

Here’s more from the Bloomberg article:

“It’s really an obvious takeout candidate, especially after the CEO resigned,” said Eric Green, a Philadelphia-based fund manager at Penn Capital Management, which oversees $6.5 billion….

While J. Christopher Haberlin, an analyst at Davenport, estimates the company may fetch between $185 and $215 a share, David Beard, an analyst at Iberia Capital Partners LLC, pegs a takeover at about $160 a share.

(it) was also one of more than 40 companies that Bloomberg identified in March that met the acquisition criteria Warren Buffett listed in his annual letter to shareholders. Buffett typically prefers “simple” businesses with pretax profit exceeding $75 million, “consistent” earning power, and “good” returns on equity while employing little or no debt, according to his report to Berkshire Hathaway Inc. (BRK/A) shareholders.

“Now is a good time to sell the company because of the near-record prices for met coal, strong global demand and constricted global supply,” said Davenport’s Haberlin, who’s based in Richmond, Virginia. “The assets have more value now than ever.”

The company should sell because it “now lacks the strong leadership needed,” which is “weighing on the share price,” Audley Capital, which owns 900,000 shares, or about 1.5 percent of the company, said in a July 17 letter to the board.

Walter Energy could fetch $240 a share in a takeover, based on the 2012 earnings multiple that Peabody Energy Corp. ($BTU) and ArcelorMittal are offering for Macarthur Coal Ltd. ($MCC), the letter said. That would be double Walter Energy’s closing price of $119.64 yesterday.

Wow…..So many experts with so much solid fundamental information on Walter Engergy ($WLT). I mean Bloomberg wouldn’t print this if these guys didn’t know what they were talking about, right?

CHARTS DON’T LIE

Here is a current chart of $WLT.

LundApril18.png

This chart starts on July 1, 2011, the day the Bloomberg article from which the above info was taken was published, when $WLT was trading at $121.00 per share. Today it is $19.00 per share.

DO YOUR OWN WORK

I have pounded to the table for years now on how you cannot rely on “experts” and you cannot use fundamental data or “stories” to trade and invest in the markets. Fundamentals are not objective and “experts” usually have an agenda. This example in $WLT, and there are hundreds of others like it, shows you why, in order to be a successful in the markets, you need to do your own work, focus on the technicals, and just tune all this other junk out.

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Stop Me If You’ve Heard This, A Trader Walks Into A Party….

This post originally appeared on TraderPlanet.com.

The setting is a cocktail party– this one in a loft apartment in the heart of Manhattan. However it could be in a house high up in the hills of Hollywood or in the suburbs of Chicago–the dynamic is the same and the cast of characters, with minor variations, is standard.

Guests mill about, forming temporary cells of small talk, and not unlike dogs smelling each other for the first time at the park, nose around to find out what the professions of their semi-drunk soiree companions are. Once discovered, each has their moment in the sun to impress.

The doctor talks of the patients he sees and the lives he saves while guests try not to look bored. Yawns and glances at watches are on tap when the real estate agent talks of his big sale. The lawyer, the scientist, the fireman and cop all suffer similar fates–nobody is really that interested in what they do or have to say.

And then the trader is discovered.

Unless there is an astronaut, movie star, or Head of State in attendance, the announcement that you are a “trader” will always elicit the most interest from the crowd. Unfortunately, it is not always the type of interest you would wish for.

ANYONE CAN DO IT

The unique thing about trading–opposed to most other “professions”–is that anyone can do it, or at least attempt it, as long as they have the money to open a brokerage account. The low barrier of entry gives “civilians” the impression that there are no unique skills or abilities that the trader possesses.

Doctors don’t have their medical expertise challenged nor are lawyers debated on points of law at cocktail parties, backyard BBQ’s, or their kids swimming lessons. Yet everybody seems to feel free to aggressively engage with the trader.

The typical interaction starts with skeptical surprise. “Oh, you trade for a living?”

Followed by an “equivalency statement.” “Well, I have a number of brokerage accounts and am pretty active in the markets myself!”

Then the “what do you think about XYZ stock” question comes up. The XYZ generally being AAPL 80% of the time. “So what do you think about AAPL? I have been buying it on every dip, you’d be crazy not to at this discount.”

Soon after the challenge statement comes in. It can take many different forms such as “I think that shorting stocks is un-American and that it should be outlawed” or “so tell me Mr. ‘Trader,’ where is the market going to be in six months?”

And it just goes downhill from there.

Some will want you to teach them to trade. Some will assert that there is no way you can be making a living from trading. Others will explain to you how the markets are one giant conspiracy, manipulated by global and extra-terrestrial forces. And still others will quiz you on every piece of terminology you use, the glazed look in their eyes indicating that they have no idea of even the basic workings of the market.

At the end of the day you open a can of worms up that is better left sealed when you announce that you trade for a living. My suggestion is to take the advice of my good friend Joe Fahmy and do what he does when his occupation is asked.

“I work in an ice cream shop,” he replies, leaving him, once the disapproving looks fade away, to enjoy his cocktail and hors d’oeuvres in peace.

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Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

Trading With Astronomy….Man

This post originally appeared on TraderPlanet.com.

When you have been involved with the markets for as long as I have, you invariably hear some very odd theories and ideas from people about when to buy and sell stocks. Wild concepts like using things called “P/E ratios” and “forward looking guidance.” I once had a guy tell he used “intrinsic value” to determine what stocks to buy. Hah….intrinsic value, that is funny. It sounds like something you would feed your unicorns at your summer home on Atlantis.

These types of traders and investors need to get in touch with reality and learn to use more normative and objective indicators for their buys and sells. Things like MACD’s, BollingerBands, and the retrograde cycles of Jupiter’s third moon Ganymede.

Astronomy…??? Is Brian really going to try and tell me that astronomy can seriously be used for trading? Well…not exactly. What I am going to tell you is that the ideas of using astronomy to time your entries and exits in the market is not as far out as you might imagine.

Oh Crap!  SELL...SELL...SELL...!!!

Oh Crap! SELL…SELL…SELL…!!!

ENTRIES AND EXITS

Think about it! We use indicators in trading not to predict what a stock will do in the future, but to give us objective criteria as to when to buy or sell an instrument. And the interesting thing is that the accuracy of the indicator is not as important in the long run as the objectivity is. Why is this? Because in any robust trading methodology we tie risk management to objective entry/exit criteria.

This is where the logical (though perhaps apocryphal) story of the “coin-toss” experiment comes in. The story goes that an experiment was conducted between actual traders and a coin, where on one side traders were able to pick and trade whatever stocks they wanted, and on the other, a coin was tossed and if it came up “heads” those same stocks the traders picked were bought long, and if the coin came up “tails” the stocks were sold short.

However the difference was that the coin-toss method had very strict risk parameters, whereas the traders could use their discretion to decide when to sell or cover a stock. Of course in the end the coin-toss method beat the traders proving that objective risk control was more important than directional accuracy. Which is why astronomy base trading is not as crazy as it sounds.

If you buy a stock based upon subjective criteria like “intrinsic value” you are just leaving yourself wide open for a disaster. Not only is there no way to tie that criteria to timing for entries and exits (read risk management) but you also have to play the game of trying to determine when “value” has changed, and if so, for the better, or the worse?

Astronomy on the other hand will provide you with objective cycles and rhythms with which you can create entry and exit rules that correspond with you risk tolerance.

BE OBJECTIVE

Look, I am not advocating that you throw your indicators out and start arbitraging S&P Index options based upon the phases of the moon, but what I am trying to do is to get you to look at what methodology you are using for your trading and ask yourself if it is really one that can give you cut and dried signal for entries and exits, or if it is too open to interpretation, and thereby exposing you to too much risk.

Make sure to check out my free eBook Trading:The Best Of The Best-Top Trading Tips For Our Times  (just click the banner below).

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Click here to “Like” the bclund Facebook page.

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

The Market Is Very Dangerous Here And You Should Feel Uncomfortable

This post originally appeared on TraderPlanet.com.

If you are currently trading this market, you need to ask yourself an important question…

“Do I feel lucky?”

Well, do ya punk?

Wait….sorry, that’s the wrong tagline. What I meant to say is, “Do I feel uneasy?”

Because If you don’t you could be heading for a rude awakening.

If you’ve just been watching the headlines as they constantly report record highs in the market you might wonder why anyone should feel uneasy. But this is actually a very dangerous market right now if you take a moment to think about it.

For example, if you have been trying to get short over the last few months like a number of traders I know, this market has just been continually handing you your head.

If you opened positions when this run began and then started trimming profits as the move began to get long in the teeth, you are sitting on the sidelines watching the parade go by right now. And you might be fighting the temptation to go back into the market with size, as you know that the odds of a serious pullback increase with every up day.

In fact the only status you could have right now in which you would feel at ease with would be if you had long positions that you have held for quite some time that are heavily in the green. And if that is the case, you are not trading correctly.

I know what you’re saying, “there’s no such thing as ‘correct’ trading, and if there was who are you to decide what it is?” Yeah, save your breath, I get it. What I am saying is that a rising tide lifts all boats and in markets that relentlessly go higher each day it is easy to mistakenly equate your ballooning profits with your trading skills.

Any serious risk based methodology would require you to have raised cash from your profitable long positions by now. So if you are still “all in” at this time you might want to take a closer look at your trading rules before it’s too late.

Make sure to check out my free eBook Trading:The Best Of The Best-Top Trading Tips For Our Times  (just click the banner below).

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Click here to “Like” the bclund Facebook page.

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

Be Flexible And Catch Stocks Before the Hot Money

This post originally appeared on TraderPlanet.com.

May of 1985 was tough for me.

It was the month of my high school prom and I had Debbie Olson in my sights. I had decided that she was the lucky gal who would accompany me to the dance. The day I was to extend to her this coveted invitation I put on my best clothes, threw an extra handful of Dep in my hair, and slapped on my father’s best cologne.

But I was too late. Phil LaMont had already asked her.

So how did I handle this rejection? Did I run home crying like a little girl? Did I drive my car past her house all night long to see if that jerk Phil was over there? Did I call her number ten times in a row until she answered and then hung up? Not as far as you know.

Instead I asked her sister to go. Unfortunately she already had a date. So I asked her best friend, who apparently already had a date as well. Then I asked her cousin, who although didn’t yet have a date, was restricted by her religious beliefs from dating someone with more than two vowels in their first name. I assume that because she showed up to the prom with a guy named Brad.

The point is, no matter how much you prepare for a certain scenario to play out, sometimes you have to be flexible enough to look for secondary opportunities. This concept works the same way in the markets.

YOUR WATCH LIST

Let’s say you’ve got a stock on your watch list and one day it just gaps up over your buy point. Your gut reaction may be to swear at the screen and run home crying like a little girl. But don’t. What you want to do is to look for secondary stocks related to your target stock that have not yet moved, but soon may in sympathy.

So if you are gunning for a 3D printing stock like $DDD and you miss the initial move, check out others in the same space like $SSYS or $XONE that haven’t moved yet but may be setting up. You might even look at a “cousin” type stock like $PRLB which doesn’t make 3D printers but provides related services.

And it is always a good practice when developing your daily or weekly watch list to make sure you are familiar with and know the charts of two or three “related” stocks for each of your prime targets.

These types of secondary stocks will usually not move as much, and will fade quicker that the primary stocks so you have to be nimble and limit you’re trading to the short term. But if you think ahead and somewhat out of the box you can get into these movers before the “hot money” hits and turn them for a quick profit.

Make sure to check out my free eBook Trading:The Best Of The Best-Top Trading Tips For Our Times  (just click the banner below).

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Click here to “Like” the bclund Facebook page.

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

Where The Market Is Going Next

This post originally appeared on TraderPlanet.com.

The markets have been on a tear over the last few months and although at times it seems like this relentless bull market will never stop surging higher, yesterday’s bearish engulfing bar on the SP-500 reminds us that it’s not “if” but “when” a correction will come.

So let’s step aside from all the madness: take the pause that refreshes, and see where the market is likely to go in a correction, while still maintaining its overall up trend.

SP 1
Yesterday’s bar was the ugliest since we broke out to new highs in mid-January.  That breakout area around 1475 looks like to most obvious support/re-test level.

SP 2
However, the key to where support comes is will have to do with how fast a correction takes place.  A more rapid descent can take it back to 1475 support, but a slower, more orderly decent could take it higher up on the trend line that connect the 11/16 and 12/31 lows.

Sp-3

Finally, don’t count out the possibility that we could have an extended pullback that could take us to the longer term trendline connecting the 11/28/11 and 11/16/12 lows.  Believe it or not, that pullback could take us down anywhere from forty-five to eighty-five handles and still keep us in an overall uptrend.

Remember, even if this is the beginning of a multi-year bull run (which I think it is), the market won’t go straight up.  It will have peaks and valleys along the way, and pulling back a bit to see where it currently is, and where it is likely to go, will make your job as a trader and investor that much easier.

Why not subscribe to bclund.com for free  Via E-mail or Via RSS and follow me on StockTwits and Twitter?

What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in). Check out “The Best Of bclund” to get started.

Click here to “Like” the bclund Facebook page.

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

How To Turn $400 Into $150K

This post originally appeared on TraderPlanet.com.

A couple of weeks ago I watched a trader turn $483 dollars into over $150,000 in three days.

He was trading OTM weekly options in $NFLX going into their earnings announcement, and despite how much of an outlier event this seems at first glance, I am starting to think that there might be more to weekly options than meets the eye.

Most people are familiar with the Market Wizard series of books by Jack Schawager, which provide a rare glimpse into the world of some of the greatest traders. Although the profiles are interesting, one of the major takeaways from those books for me is how many of those traders made their initial market fortunes.

EXPLOIT INEFFICIENCIES
Not an insignificant number of them made their money trading products like options, forex, and futures when they were new and pricing inefficiencies existed, which they then exploited. That is where I think weekly options are right now.

STILL NEW
Weekly options are still relatively new and that fact combined with their extremely short life span I believe is providing a window of time where smart and aggressive traders can use them to garner outsized returns.

The irony is that most successful traders stay away from weekly options because they feel too much like a gamble. Traditional money management concepts that are used to trade equities or even longer dated monthly options don’t really work with weekly options. With those products you are trying for a 30-40% win rate and taking minimal losses on the other 60-70%. However with weekly options the win rates are more like 5-10% and you are likely losing your whole investment on the other 90-95% which are losers.

However, just a few wins in weekly options can more than make up for you losses; even if those losses are 95%+ of your trades.

BREAK IT DOWN
Though it’s more like a lottery win, just for fun let’s look at that risk/reward ratio on that $NFLX trade. It comes out to 1:310, which means you would, in theory, only need to win once out of 310 trades to break even. Yeah, crazy right?

But I have also seen a lot of 10, 20, 50, and even 100 baggers from weekly options traders as well. There is something going on with weekly options right now that I don’t think will be there in a year or two as more participants begin to use them and pricing inefficiencies disappear. I don’t know exactly what the strategy is for playing them successfully, but I am working on it, and you should probably be doing the same thing as well.

Who knows, if you figure it out in time, you may end up in a future edition of Market Wizards yourself.

Why not subscribe to bclund.com for free  Via E-mail or Via RSS and follow me on StockTwits and Twitter?

What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in). Check out “The Best Of bclund” to get started.

Click here to “Like” the bclund Facebook page.

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

Trying To Catch The Big Trend Change

This post originally appeared on TraderPlanet.com.

Trying to catch a stock when it changes trend is a tough game to play, but if you are able to time it just right, that can be when you get the biggest move.

Way back in October of last year I noted that the $FXI looked like it had bottomed and was getting ready to break out. Since then it has gone up roughly 20% and shows no signs of slowing down.

When you get a macro move like this, one that you think will last for a long time, the first thing you want to do from a trader’s perspective is look for stocks that might benefit from that move. Sometimes you will find stocks that are first movers, going lock step up with the macro move. But you also want to look at stocks that may be changing their trend in relation to that macro move and haven’t broken out yet, but are setting up nicely.

That is where I think $BIDU is right now.

$BIDU has been in a large down channel for almost a year; however it is now consolidating in the upper range of that channel just below the trendline which corresponds to the 200 day moving average (ma).

Moves that correspond with a breakout above more than one resistance factor, in this case the downtrend line and 200ma, are often more explosive and last longer than other moves.

On a breakout with good volume above the $113.50 you would look to get long BIDU with your first target level being around $134.50, which corresponds to the previous channel high. If you put a stop in at $107.50 you are setting up a 1:3.5 risk to reward trade; or even better if you choose a tighter stop.

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