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Wednesday, April 28, 2010

Double Top Chart Pattern

Double top is a popular reversal chart pattern indicating the end of an uptrend and the start of a downtrend. As the name suggests, the pattern is identified when the price forms two peaks of (almost) the same height. Double top formation is also known as 'M - pattern' and is usually easy to find.


The requirements of double top chart pattern include:
  • The pattern should form at the top of an extended uptrend.
  • The price should form two peaks of almost identical height; and the peaks should be separated by a distinct trough. The lowest point of this trough is known as reaction low or confirmation point.
  • The volume should decline as the pattern forms; but the formations of peaks are associated with increase in trading volume. Usually the first top formation has more volume than the second one.
  • The pattern is confirmed when the price crosses below the reaction low after forming second top. Volume tends to expand on this price breakout.
Double top chart pattern is a clear indication of the uptrend weakening. The prices are at overbought levels at the first peak and tend to fall from there. This fall or some other fundamental or news factors trigger the price to move up to form the second peak. But the price does not move much beyond the first peak and will fall from there after testing this resistance level.

Traders should short only after confirmation of trend reversal. The immediate price target is derived by subtracting the vertical distance from the reaction low to the first peak, from the breakout point.

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Tuesday, April 27, 2010

Stock Market Weekly Update, April 26, 2010

The Week Ahead: As the tax incentive deadline for home purchases approaches April 30, new home sales rose by 22% in March. A Consumer Confidence report due out Tuesday may show another rise from the March levels. The FOMC meeting on interest rates begins on Tuesday with its decision arriving Wednesday afternoon. Look for the jobless claims number on Thursday. Friday brings multiple reports including the GDP for Q1, the Employment Cost Index, and the University of Michigan's Consumer Sentiment Index.

Stocks to Watch: Schlumberger Ltd. (SLB) earnings for Q1 were lower than a year ago but beat estimates as the stock rose to a 52 week high. Xerox Corp. (XRX) boosted 2010 guidance as its stock rose 8% to a one and half year high. Coal stocks were on the move with higher energy prices. Watch Alpha Natural Resources (ANR), Patriot Coal (PCX), and Peabody Energy (BTU) which received an analyst upgrade. Insurance giant Travelers (TRV) fell 1% on heavy volume as did Microsoft (MSFT) after earnings call.

Special Note: In addition to the overbought readings mentioned last week, the rise in stocks since the February 5 low has been accompanied with lagging upside momentum the whole time and waning NYSE volume on a ten day basis. Furthermore, key company insiders have seen their selling of stock shares rise to a level of over 4 times the rate of which they are buying. Evidence continues to suggest the market is building toward an important top possibly later in the second quarter.

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Monday, April 26, 2010

Concept of Currency Cross Triangulation

In the global Forex market, the exchange rate of currencies depends on one another. Currency cross triangulation involves using a third currency to find the conversion rate and/or to convert two different currencies. Usually this third currency used is a standard currency like US Dollar or Euro; this interim currency is known as triangulation currency.

Currency cross triangulation is needed by major companies, governments, investors, and exporters to transact currencies; especially if they are transacting two non standard currencies. This triangulation process effectively eliminates the need of buying and selling an interim currency. Here is the example. Before the introduction of currency cross triangulation, for an effective conversion of CHF (Swiss Franc) to GBP (British Pound), a company needed to sell CHF to buy USD (US Dollar) and then sell USD to buy GBP. But now they can just use the USD/CHF and GBP/USD exchange rate to find the exchange rate of GPB/CHF.

As evident from the above example, one can find the price of one currency pair by crossing two standard pairs that involve a third currency; the formula is AAA/BBB * CCC/AAA = CCC/BBB. This is especially important because of the fact that many spot currency cross pairs are not traded against each other in the inter-bank market. Often, there can be some small price disparities in cross triangulation which can give rise to opportunities of triangular forex arbitrage, which usually last for a very short time.

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Friday, April 23, 2010

1-2-3 Reversal Chart Pattern Trading

1-2-3 chart pattern is a trend reversal chart pattern indicating the reversal of an existing trend. The formation usually occurs at the end of a strong trend. 1-2-3 pattern occurs frequently in trending markets and is considered very reliable. There are bullish and bearish variations for this pattern.


1-2-3 formation starts from a big price movement in the direction of an existing trend to form a highest-high/lowest-low (point 1), then the price reverses for a correction (point 2), then again turns back to retest the support/resistance (point 3) and finally the price reverses and breaks through to start a new trend. The point 3 should not reach or exceed the point 1 level; if it reaches 1, then the pattern is not considered a valid one.

Bullish 1-2-3 chart pattern or 1-2-3 buy pattern forms at the end of an existing downtrend. The price first falls, then starts reversing, but falls again to form point 3 and then reverses and breaks free to form a new uptrend. Bearish 1 2 3 pattern or 1-2-3 sell pattern forms at the end of an existing uptrend. The price first forms a highest high, then starts falling but rises from point 3 and then reverses and breaks free to form a new downtrend.

1-2-3 chart pattern is easy to trade and supports both short-term and long-term trading. The breakout is confirmed when the price breaks the range created in between point 1 and 2. Traders can enter trades when breakout is confirmed.

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Monday, April 19, 2010

Stock Market Weekly Update, April 19, 2010

The Week Ahead: The fraud charges leveled against Goldman Sachs by the SEC has added a new level of uncertainty for markets in terms of the next shoe to drop in the financial sector and where this will lead to next. First quarter reports by major companies such as IBM, Citigroup, Apple Computer, Microsoft, Wells Fargo, Boeing, Amazon, and Yahoo will be under a microscope. Noteworthy reports include: Leading Indicators on Monday. The Producer Price Index, Jobless Claims, and Existing Home Sales on Thursday. Durable Goods and New Home Sales on Friday.

Stocks to Watch: Goldman Sachs (GS) shares imploded by 13% on ten times normal volume. General Electric beat estimates for their Q1 earnings, but were still lower than year ago levels. Strength in its investment banking business helped Bank of America (BAC) beat Q1 estimates as the company also set aside less money for bad loans. Google (GOOG) failed to impress investors in its Q1 report as the stock fell to 3 week lows. Boston Scientific (BSX) got the FDA approval it needed to restart sales of its implantable defibrillator devices in the U.S.

Special Note: Some interesting overbought readings were recorded for the stock market not the least of which is the 30 day NYSE TRIN at levels not seen since spring of 2007. Another is the ten day average of the CBOE put/call ratio which at .46 is its lowest level in 10 years. The Volatility Index or VIX reached its lowest close since October 2007 at 16.14. Finally the Daily Sentiment Index hit an extreme at 92% bulls. These measures serve as a reminder of the higher than normal risk one assumes when entering stocks in general near term.

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Thursday, April 15, 2010

How to Avoid Overtrading

Overtrading is a 'must avoid' trading practice, yet it is practiced by a high percentage of traders trading stocks, currency pairs, futures and so on. It is not that much a hard-to-overcome habit; one just needs a sound plan and dedicated implementation. Here are some tips to avoid overtrading:
  • Create a trading plan and stick to it. The plan should address what to trade, when to trade and how to trade.
  • Create a small list. Rather than trading each and everything, create a small list of fundamentally/technically evaluated stocks and search for opportunities. Keep the list short, and periodically update the list.
  • Do some research. Before entering a trade, make sure there is a chance of profitability. Use the most convenient tools/indicators to evaluate each opportunity. In short, never go blind.
  • Don't make your money flow too complex. Keep your risk to low levels, ideally below 2% of your capital, and limit the number of your open positions.
  • Be patient and consistent. No market can make you rich overnight and no single trade can make you a successful trader. The rule of thumb is 'the predator should be more patient than the prey'.
  • Evaluate regularly. Ideally at the end of the day evaluate your trades and decisions. Evaluate how well you implemented the plan or answer why you deviated from the plan.

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Wednesday, April 14, 2010

Murrey Math Lines Trading

Murrey math lines (MML) is a relatively new trading indicator showing supports and resistances, and helps in finding trends and trend changes. The indicator was developed by T. Henning Murrey and has some similarity to Fibonacci retracement and pivot points. MML was created based on the observations of Gann studies and is a simple way to implement Gann.


Murrey math lines comprise 9 equidistant lines which run parallel to one another. MM lines from the bottom are at the levels 0/8, 1/8, 2/8, 3/8, 4/8, 5/8, 6/8, 7/8 and 8/8. 0/8 is the oversold line and 8/8 the overbought line; these are the hardest lines to cross and around 75% of the time, the crossing triggers price reversal. The range between 3/8 and 5/8 is the normal trading range and price tends to consolidate at these levels before falling (3/8 line) or rising (5/8) beyond this trading range.

Like Fibonacci retracements, when the price is between two lines, the upper line is considered as resistance and lower line is considered as support. When the price rises above 5/8 and touches 6/8, it has a tendency to reverse to retest the 5/8 level before heading high. The same is also applicable to downtrends; the price tends to reverse to retest the 3/8 level before heading down.

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