I have not met any trader who has not once in their trading career used the strategy called averaging down. It is when you add to your position at a better price than the original thereby making your average entry better. It sounds smart, as if the stock was a good buy at 20 it must be a great buy at 15. It also compliments the old saying; buy low, sell high. There is just one thing; adding to losing trades is a one way ticket to failure! By adding to losing trades means you will ALWAYS add to all the losers and only some of the winners. The best winning trades are the ones that take off immediately and you will not be able to add to these trades. So the averaging down system sounds smart on the surface but the truth could not be any further from that.

When adding to the position it should only be done when the trade is profitable. This means you will catch those strong winners and avoid those bad trades that go against you immediately after entering. Furthermore when adding only to winners, you will already have open profit making it mentally easier to trail the trade. The final thing that makes the most sense is that when you add only to winners is that you are so far proven correct in your assumption of the market direction. As trading is about odds and the edge, does it not makes sense to add when the odds are stacking up in your favor?

It is very rare that I find any useful comments on CNBC.com from a “pro” or “strategist” but it does happen from time to time! The problem is CNBC.com publishes what sells and not necessary what is useful for the reader which is of course not only CNBC’s fault but also the readers fault. Many traders look for excitement in trading and are therefore drawn towards, for example, doom and gloom headlines. The thing is, successful traders don’t care where the market is heading in the future, they only care that they read the current market correctly. Dow might be heading for 5000 or 15000 in 2013 but what happens right now is more important as traders cannot afford unlimited drawdown. What would happen to the trader if on the way down to 5000 Dow climbs 20% which then gives the trader a margin call? The trader would lose all his/her money and therefore not be able to profit on the prediction of the Dow hitting 5000.

This brings me back to the article on CNBC.com which is more useful than initially thought as Charles Carlson says in an interview that the Dow has made a series of lower highs and lower lows and that if we break support we could see further selling. The full article can be found on: http://www.cnbc.com/id/38865332. Many readers might find his “prediction” to be too loose but the truth is that this is how trading works. Let us just analyze what he said; He looks at price action and sees that the Dow has made lower highs and lower lows. This is the definition of a downtrend and when a market/stock in a downtrend takes out previous support it confirms the downtrend and thereby sells off further. Now nothing is 100 % sure but when the market is in a downtrend and takes out previous support the odds favor a sell off. Charles Carlson looks at current market action and supply/demand which are key elements in trading making this article a hidden gem on CNBC.com.

There have been a few quiet weeks as the market has been range bound, not able or willing to make up its mind so we continue to see the market rally, only to drop again. We also see the market dropping then see it rally again therefore this type of market is a market that traders should refrain from trading in.

A good trader knows that there are times where he has to sit and wait, just like a cheetah stalking and watching a herd of animals before deciding that it is time to attack. This quiet market does not mean we do not analyse the market or keep up to date on macroeconomic events as we still read blogs, news, newsletters and so forth to get a feel of the sentiment among traders and investors so we can determine if the market is about to change dramatically and what we are seeing currently is that traders and investors are anxious to put some money into play. It is often around these times that the inexperienced traders lose money as they force trades on.

This is because the market obviously cannot feel whether traders are anxious to trade so therefore can’t just deliver when traders want it to. The market does not care what traders want. This is where the inexperienced traders simply do not have the patience to wait for the market to hand over the trades so they force the trades on. Do not make it difficult for yourself; wait for the market to make its mind up! By using the cheetah analogy again we can see how this compares; the cheetah has two choices, attack the herd hoping to catch a prey or the cheetah can wait till it spots the weak animal in the herd and thereby increasing the odds for a successful hunt. Let us wait until the market shows us the”weak animal” so we can increase the odds for a profitable trade.

Sites like Stock-Market-Strategy.com are seeing their members asking for trades and sadly enough many of these sites give in to the pressure and make some calls only to see their call turn into a loss. This only frustrates the members even more. Here at Stock-Market-Strategy we do not call trades simply because our members ask for it. We are not in this business to make our members happy by calling many trades. In fact it is quite the opposite as we are here to call trades that make our members money! We only call trades that we personally take in our trading account.

If you look at the chart you can see that we are still range bound (1) telling us that neither the bulls or the bears have won. It also tells us that there is no trend and thereby telling us we cannot trade. Here at Stock-Market-Strategy we always go with the trend and it is this rule that keeps us out of this chop as there is no trend. The chart also shows us bullish divergence. The first is when the market made lower lows (2) but there were fewer stocks making new 250 days low on NYSE. This tells us that the market is dropping while the stocks are holding up. The other divergence (3) is when the market almost hit previous high early August and sold off. Here we see that advance decline is showing us that there are more advancing stocks cumulative at this high than prior high. This means that the stocks itself are stronger than the market. We are also seeing more stocks making new 250 days high that at prior high. This indicates that the stocks are stronger than the market.

Click image for full size

What does this mean then? Well it tells us that the market breadth indicators are bullish which of course makes us believe that the market will go up but this does not mean we can go long because we still need price action to confirm the uptrend. We need things to be in alignment. Price cannot break previous high which is bearish but market breath indicators are bullish. These are mixed signals and here at Stock Market Strategy we have a saying “when in doubt – stay out”!

We often read and hear interviews in the news where some guy predicts Dow will go to, for example, 5000 or 15000. These predictions are often based on looking at a macro economy such as GDP, unemployment rates, interest rate and so on. Other predictions are based on computer programs which run a lot of mathematical calculations. If predicting where the market is heading was that easy we would see a lot more successful traders than what we are seeing today.

What people cannot or will not realize is that trading is simply a numbers game. It is about having an edge by looking at some patterns that over a series of trades gives a positive outcome. These patterns could be what happens around news of specific significance or it could be more technical such as chart patterns; triangles, flags and so on. It is then up to the trader to follow his or her plan and take every trade accordingly. By trading this way the trader is acting on current events and using the supply/demand to take money of the market as supply/demand is the only thing that moves the market. It is not news or predictions but traders/investors that move the market. News etc is what makes the traders/investors either buy or sell. So the trader should look for patterns that give him/her an idea whether supply or demand is in excess.

Today I read an article on CNBC.com where a strategist called Charles Nenner predicts Dow will hit 5000. Original article can be found on this link: http://www.cnbc.com/id/38826988. He not only predicts that Dow will hit 5000 but he also gives a time frame which is 2 – 2.5 years. Nenner uses cycles in order to predict moves and dates. Here at Stock-Market-Strategy we  believe in cycles. The stock market, real estate market and commodities all move in cycles. Nothing goes up forever and we will always see bull and bear markets. But this is as far as we go when it comes to cycles. We do not use them to predict market moves as there is no rule saying that a cycle has to be a certain length, making it impossible to predict moves without a big margin of error.

At Stock-Market-Strategy we are well aware that the stock market is made up of other traders which means that the market moves based on those other trader’s actions. These actions partly arrive from emotions and belief about the market; things that are impossible to predict, even with cycles. So, the bottom line is, we cannot predict what other people or traders will do in the future so we cannot predict what the market will do. Yes you can make lucky guesses once in a while but that is not trading. Trading is about consistency, about making more money on the winners then the losers.

At Stock-Market-Strategy we analyze the charts and wait for actions. Then we react on those actions. We have a saying at Stock-Market-Strategy: “Don’t act, react!”. This way we react on current market instead of trying to predict future moves.

What do you think? Do you think you should rely on cycles or do you prefer to use the market to predict your next trade?

Since our last update we have been waiting for some significant price action so we could identify some trading opportunities. We identified that we were seeing what we consider a Head and Shoulder chart pattern which is a bearish pattern. Despite us saying that this is a bearish signal we did not recommend that this was the time to go short because the market was oversold and due for a rally which has now taken place. Due to the lack of follow through to the downside we will be sitting on our hands waiting for further evidence.

When we turned bullish in June after taking out resistance we also experienced a lack of follow through. In both of these situations, the lack of follow through is the markets way of telling us to stay on the sidelines. The market has not made up its mind and we cannot force the market to give us the right market conditions to enter.

Its during these times that new traders over trade as the market gives them no follow through signals and thereby making the trader reverse his positions too frequently. We call this the chop zone where undisciplined and anxious traders get chopped into pieces. This is the time when newbie traders manage to lose all prior profit they made during good market conditions.

Professional traders always experience loses but they are better at assessing choppy market conditions so they cut the amount of trades, thereby limiting their losses. We use disciplined money management profiles which helps us stay focused on the end game (bottom line).

In any trading situation you have to be objectionable and always have a plan as not sticking to your plan in choppy market conditions will definitely result in losses. When your mind cannot see any reason to place a trade you should be telling yourself that it is not time to trade and not thinking that forcing a trade on is the right thing to do.

This is how we see the daily chart analysis at the moment; the Head and Shoulders has been formed with very little follow through but still significant enough that it has taken out support to the left of 8 months prior price action. The price action has now rallied since the formation slightly more than would normally be expected but still not enough to have taken out the prior lower high price pivot which means it is creating lower highs and lower lows.

Staying on the sidelines at this point in a cash position means we can be objectionable about what the market is doing and not being emotional about what you want it to do if you were in the market. With this being a choppy zone we are waiting to see if price will fall lower or price will retest the prior major high before we make any further decisions.

After a few weeks of indecision from the market it has now decided to show its hand. Two days ago something significant happened. The SP-500 Broke its long term support area thereby confirming the Head & Shoulders Pattern which is prominent when looking at your daily chart.

The trades we took at the support area which were our “dipping our toe in the water trades” managed to give open profit but did not fulfil our criteria on our risk management and eventually stopping us out and the others scratched break even. Because we also saw the trend weakening going into this trade with bigger pullbacks than what we have seen in the last year we had also adjusted our entry percentage (lighter on our position) which we had previously mentioned in earlier market updates.

Where do we go from here?
We have now seen the formation of a bearish chart pattern but this is not to say that we will be going short. However, we will be giving you detailed updates on what we will be focusing on and entry levels. So, until next time we will be sitting it out and ‘sitting on hands’ ready with our cash.

If you have been following our market analysis for the last few weeks you will have noticed that we have been spot on with our overall market reversal points. So, we have not only made you money but we have also saved you money!

In April we notified you that there were some overlapping bars and you should start taking profit on February’s positions and, that if we were to see price close under the levels that we suggested, the price would likely retrace/pullback therefore meaning all bets were off, which I am pleased to say it did.

An important fact to remember is that the cash is king stage of the down move is really just a reiteration that the price is doing what we expected it to do and that being on the sidelines is better than being in the market losing money.

Following this there was a period that we told you to “sit on hands” and wait for the market to start showing some signs of strength which we highlighted in our market update video.

When we sent out our market update “setting up nicely” it was at this point where we saw buyers come into the market and that the price level at support was holding up. Selecting strong stocks is a key factor in having great gains compared to just good gains. The watchlist that we published back then showed some great stocks some of which gave 20% within 3 days of producing the watchlist whilst others didn’t even give setups.

Seeing the overlapping bars down at the support area could have been a great place to speculate and be in some nice open profit now. Like we said we dipped our toe in the water with a few stocks and have great profit on them but we are using our money management skills to make sure that the toe in the water trades are on a % level that compliments the overall market condition.

Now the base has broken out you can see that our watchlist is offering some favourable stocks which are strong against the market and within a strong sector maximising the profit potential.

This is not a signal to our followers to just enter stocks that we post as we only give live calls to paying subscribers but this watchlist does offer you the chance to analyse the stocks that we are focusing on with your own chart analysis.

We will only be offering this insight in the way that we trade and the watchlist for a limited period so if you are satisfied with the analysis we have documented, then SUBSCRIBE for more informative entry and exit strategies.

Stocks to Keep an Eye on – Watchlist

Symbol	Company	Sector
PRTS	U.S. Auto Parts Network	Auto Parts Stores
AZO	Autozone Inc	Auto Parts Stores
WSM	Williams Sonoma Inc	Home Furnishing Stores
KIRK	Kirkland's Inc	Home Furnishing Stores
PIR	Pier 1 Imports Inc	Home Furnishing Stores
TPX	Tempur-pedic Intl	Home Furnishing & Fixtures
SCSS	Select Comfort Corp	Home Furnishing & Fixtures
HOT	Starwood Hotels & Resorts	Lodging
GET	Gaylord Entertainment Co	Lodging
CAL	Continental Airlines	Major Airlines
UAUA	UAL Corp	Major Airlines
LCC	US Airways Group Inc	Major Airlines
HWD	Harry Winston Diamond Corp	Nonmetallic Mineral Mining
AHT	Ashford Hospitality	REIT - Hotel/Motel
BEE	Strategic Hotel & Resorts	REIT - Hotel/Motel
BRE	BRE Properties	REIT - Residential
EQR	Equity Residential	REIT - Residential
SUI	Sun Communities	REIT - Residential
AIV	Apartment Invest & Mgmt	REIT - Residential
SNDK	Sandisk Corp	Semiconductor-Memory Chips
ISSI	Integrated Silicon Sol	Semiconductor-Memory Chips
NETL	Netlogic Microsystems Inc	Semiconductor-Memory Chips

]]> http://www.stock-market-strategy.com/the-bulls-are-back-in-town-market-update-0616/608/feed/ 0 http://www.stock-market-strategy.com/setting-up-nicely-market-update-060310/590/ http://www.stock-market-strategy.com/setting-up-nicely-market-update-060310/590/#comments Thu, 03 Jun 2010 19:54:58 +0000 admin http://www.stock-market-strategy.com/?p=590 Price Action is Setting Up Nicely: Stock Market Update 06/03

Welcome to this week’s update. As you can see by the SP-500 Chart, the drop for the last few weeks is now starting to form some sideways bottoming consolidation.

If you have been following us you will know our bias is to the long side still based on the fact that the trend has come from the upside and that the pull back is in line with our trading criteria. Having said this, the last few weeks have been very volatile and have started to show signs of short term market weakness which over time could be setting up for what we describe as a Phase 3 sideways Market. This is not proven but the longer term pull back of the MA’s might suggest this is in the near future, however we still expect a retracement close to previous highs as a minimum.

As mentioned last week we dipped our toe in the water for a trade and you will be pleased to know that we are in open profit waiting for a chance to add to our positions, but at the same time being cautious with our money management in this volatile period that we are seeing.

We are now seeing some sideward’s price action but we should still not jump the gun and go charging in as we need confirmation to allow us to get the best risk to reward and not catch a falling knife. All of these signals that we have developed are part of our trading methodology to help us stay on the right side of the market and stay consistent and profitable over multiple trades like all other successful traders.

Smart money management is the key to successful trading. By being cautious when the market is being volatile and loading the boat when the market hands it to you on a plate is the way you can outsmart the market. We have a number of different criteria’s that have to be met for different entry levels of money management which we will expose you to when you become a member.

We have been quiet the last few days because we think it’s at this stage when doing chart pattern analysis is the most important time to be 120% focused. For the last 3 weeks the media has focused on how bad the markets are globally when this is not necessarily the case.

Timing Your Entry Chart 1

If you have been following our updates you will be fully aware that we called the top in April and have been stating our position in the market which is cash is king and be ready on the sidelines.

We now believe from our analysis that the time has come to open your wallet and start thinking about where you are going to place some trades. We believe this because of our technical analysis and diligent money management profiling which allows us to seek the highest opportunity stocks with the greatest risk to reward. Our analysis also tells us that the balance is moving in the favourable direction of the patient trader.

Stock Market Strategy is a paid member’s service and the official launch is around the corner. However we believe that as you have taken the time to register for our free Market Analysis Newsletter it’s only fair that we give something back by showing you a glimpse of how we profit from the market.

As mentioned above, the selloff that the market has experienced in the last 3 weeks has been quite volatile with plenty of high range bars. We have talked about, in the past, the level of support in the trend line support area which has held up on a closed basis and showed some impressive rejection. From the previous updates we can now prove that we called the top, the cash is king stage and at this moment in time we have called the rejection at the support area.

We dipped our toe in the water two days ago on three stocks we think have a great risk to reward and some nice upside potential. This was prior to the volume flush out that we saw yesterday but the stocks still held up due to their Relative Strength which meant they did not move a great deal when the market fell. These are not trades that we would necessarily recommend to our lower risk members but this will be a service that we offer in the future to members that like to speculate at points in the market where it shows strength giving greater risk to reward.

We have traded today which is prior to our full signal but it also shows great risk to reward and plenty of upside potential. We are only in the stock with half our full market position until we get 100% confirmation from the market and the stock itself, both which should come together.

Stock Market Strategy Watchlist

Here is our watch list of stocks that have the potential to give good risk to reward. Remember we are still waiting for confirmation to enter.

Disclaimer: stock-market-strategy.com are not financial advisors, and does not recommend the purchase of any stock or advice on the suitability of any trade or investment. Stock trading and investing can cause loss of capital, and you should always consult with a professional financial advisor before trading or investing.