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Welcome to Trading Tutors Weekly Review |
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This newsletter is written on a weekly
basis to help investors understand and learn the
principles of market analysis for themselves. We don’t
provide investment advice, but we do aim to provide a
straight talking review of the market action over the
previous days with a focus on how real life analysis
techniques could be applied.
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Issue #78: 08 October 2004
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Breaking Ranks |
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Tom Scollon
Chief Editor |
Given that our local economic outlook is a pretty picture what on earth can bring clouds to our bourse.
We can still ride this market to its new highs and even though we might look for some rationale for believing it might be stopped in its tracks, that does not mean we are being pessimistic. Rather we are being precautionary and if one expects a change of direction at some point in time then there is less chance of surprises.
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I touched on two of the potential party poopers last week but there are still more. Last week I wrote about US growth and oil. It seems that a softer US growth rate has not stopped the DOW from rallying and our market following suit. US corporate announcements start this week and even though there may be some disappointments it is possible that even bad news could be perceived as good news – well at least temporarily.
There now seems to be an acceptance of oil costing over US$50 a barrel. But what about oil at US$60 a barrel? Possible, but it is more likely that we might see a fall below US$50 in the short term before a further move well beyond US$50.
The other potential downer is a glitch in the powering Chinese economy. Many would claim it is only a matter of time before the Dragon economy surpasses the Uncle Sam supremo. But along the way will we see a hard landing? GDP is surging at an annual rate of over 9%, a pace that even such a large population colossus will finding breathtaking. Investment and borrowings are soaring and at some point must slow. With growth in other parts of the world also soaring the supply of raw materials will be a dampener on the pace of growth.
The last of the critical factors in world growth is credit. We have all been spending like crazy and hocking ourselves to the hilt. With credit leveraged from our prized residential real estate growing at unprecedent rates it will take only a few points of inflation to force interest rates higher to a point where fire sales of houses could puncture the housing bubble. Rates may not rise further locally until 2005 but ultimately we will see rises because inflation will set in at some point. That is basic economics.
It could takes weeks or many months for any of these negatives to impact - it is only a matter of time before one breaks ranks.
Enjoy the ride!
Tom Scollon
Editor
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US Single Stock Futures |
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Noel Campbell
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Over time a number of articles have been written on the virtues of trading Individual Share Futures (ISF’s) here in Australia. Now with access to the US Stock market data being easier than ever here in Australia, it is timely to also discuss the virtues of trading US Single Stock Futures (SSF’s).
One of the big benefits of having access to the US Stock data is that many US Stocks, due to their value, provide much higher ranges in terms of dollar value. This increases the potential for excellent profits from your trading. Combined with SSF’s, the leverage they provide can be a potential gold mine.
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Stocks that have Single Stock Futures available are constantly changing and this list comes from internet research we have undertaken, so we cannot guarantee it is a completely comprehensive list. The stocks contained in this revised list are those available through HUBB data. The symbols indicated here are for the underlying physical stock.
Alcoa (AA)
American Express (AXP)
American International Group (AIG)
Amgen Inc (AMGN)
AMR Corp/Del (AMR)
AOL Time Warner, Inc (TWX)
Applied Materials (AMAT)
AT&T Corporation (T)
Bank Of America Corp (BAC)
Best Buy Company Inc (BBY)
Biogen Inc (BIIN)
Bristol Myers Squibb Co (BMY)
Broadcom Corp-CI A (BRCM)
Brocade Communications Sys (BRCD)
Cephalon Inc (CEPH)
Check Point Software Tech (CHKP)
ChevronTexaco Corp (CVX)
Cisco Systems, Inc (CSCO)
Citigroup, Inc (C)
Coca-Cola Company (KO)
Dell Computer Corporation (DELL)
eBay, Inc (EBAY)
EMC Corporation (EMC)
Emulex Corp (ELX)
Exxon Mobil Corporation (XOM)
Ford Motor Company (F)
General Electric Company (GE)
General Motors Corp (GM)
Genzyme Corp - Genl Division (GENZ)
Goldman Sachs Group, Inc (GS)
Halliburton Co (HAL)
Home Depot Inc (HD)
Intel Corporation (INTC)
International Business Machines (IBM) |
InVision Technologies Inc (INVN)
J.P. Morgan Chase & Co (JPM)
Johnson & Johnson (JNJ)
KLA-Tencor Corporation (KLAC)
Krispy Kreme Doughnuts Inc (KKD)
Merck & Co, Inc (MRK)
Merrill Lynch & Co, Inc (MER)
Micron Technology Inc (MU)
Microsoft Corporation (MSFT)
Motorola, Inc. (MOT)
Newmont Mining Corp Hldg Co (NEM)
Nokia Corporation ADR (NOK)
Northrop Grumman Corp (NOC)
Novellus Systems Inc (NVLS)
Oracle Corporation (ORCL)
PepsiCo Inc (PEP)
Pfizer (PFE)
Philip Morris (MO)
Procter & Gamble Co (PG)
QLogic Corp (QLGC)
QUALCOMM, Inc (QCOM)
SBC Communications Inc (SBC)
Schlumberger Ltd (SLB)
Siebel Systems, Inc (SEBL)
Sprint Corp-PCS Group (FON)
Starbucks Corp (SBUX)
Sun Microsytems (SUNW)
Symantec Corp (SYMC)
Texas Instruments Incorporated (TXN)
Tyco International Ltd (TYC)
VERITAS Software Corporation(VRTS)
Verizon Communications Inc (VZ)
Wal-Mart Stores Inc (WMT)
Xilinx Inc (XLNX) |
It would be wise to create a Quotes Page in your Software that contains these stocks to make it easier to run scans for trades. A recent trade that came up in a scan on my US SSF Quotes Page was on Oracle (ORCL) and it is an example of how the leverage SSF’s provide can yield far greater profits than trading the stock itself.
Chart 1 contains the recent daily bar chart for ORCL, highlighting the trading plans entry and exit prices.
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Chart 1
click chart for more detail
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Let’s say you have an account of $20,000 and therefore are prepared to risk no more than 10% of your capital. Your maximum risk is $2,000. Entry for this trade was at $11.29 with the stop loss placed at $10.92. This gives a risk of $0.37 per share. Meaning the maximum number of stock to buy is calculated using $2,000/$0.37 = 5405 shares. The problem here is that 5405 shares at $11.29 each would require an outlay of $61,022! Therefore your return and risk is limited by the amount of stock you can control. You could only buy a maximum of 1,771 ORCL with $20,000 ($20,000 / $11.29)
One SSF contract in the US controls a parcel of 100 shares. We could round the number of stock to buy for this trade down to 5000 shares and replace with 50 SSF contracts. The margin requirements for an SSF in the US is 20% of the total position value. 5000 ORCL shares would be worth $56,450 (5000 x $11.29). Therefore the margin requirements for this position is $11,290 (20% of $56,450). Remember margin is not your risk. Margin is the exchange’s security requirement to take the trade. We limit our risk to under $2,000 through the use of stops.
The trade made it to 100% and profits were taken at $12.15, yielding a profit of $0.86 ($12.15 - $11.29). On outright stock you made a maximum profit of $1,523 (1,771 x $0.86). Taking the same trade using SSF would have yielded a profit of approximately $4,300 (5000 x $0.86). That is a just over a 280% better return than using the stock alone. That should be sure to strike up some interest in the virtues of learning more about trading SSF.
Until next week......
Noel Campbell
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WMR – Keeping On A Good Thing |
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Aaron Lynch |
WMR has been a good news story with solid moves from September this year. You may recall in the Trading Tutors edition #74 that I noted strong support at $4.80 and the potential for a price breakout on the upside. The close price at this time is $5.49 and showing some good signs of continuing the move.
Being a predominately technical analyst it is rare that a fundamental thought dictates a trade for me. However, in saying this I will never ignore information in the market especially if it is supporting my technical view. Looking at WMR there is little wonder that it is in a strong moving sector and just glancing at WMR’s website their core business revolves around “the discovery, development, production, processing and marketing of minerals, metals and chemicals.”
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Most traders would be aware of the bullish move in the material sector and in particular the movement of base metals pricing. The fundamentals have been very strong in this area. If following all the available fundamental information is a little tiresome, a quick glance at the materials sector chart should convince you of the move at hand. The index since May this year has been extremely bullish and is sitting just under 6300 points, compared to the low in March 2003 of just under 4000 points, the growth has been over 50% in the space of 18 months.
For your reference there is some Contract for Difference providers that allow you to trade Stock Indices for the different sectors. The Materials Sector, XMJ, is one of those.
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Chart 1
click chart for more detail
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Taking a closer look at WMR, all looks favourable for a continued bullish movement in price. The price action is currently above the 25% Gann retracement level and there has been a strong ABC long entry signalled in recent times.
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Chart 2
click chart for more detail
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When looking at the current ABC trade, price is the main function for deciding where to exit the trade. Adding a basic time filter as well can help provide proportion to the trade and assist in rating the strength of the trade.
The chart below is WMR with a 1 day swing overlay over the top. The first legitimate ABC entry was in mid September, however, there is an advanced price technique that we could have used to enter the trade on the confirmation of the first higher swing bottom. Using the multiple contract system would have yielded a fantastic return already with further potential as a number of contracts would still be in the market.
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Chart 3
click chart for more detail
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Adding the time filter is simple for the current ABC trade, measure the A to B range in time and you can see that this was 13 days, projecting this forward that gives us the 6th Oct as a date to watch for the time frame to repeat. The price action is currently around the 75% price milestone. If the market can move to the 100% price target of $5.61 on or around the 6th Oct we could say that price and time have balanced.
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Chart 4
click chart for more detail
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If the price action reaches our 100% target and the time frames balance out we may see a short term retracement. In the context of a major move, there is still some potential for solid gains, with a move to around $5.80 not out of the question.
Good Trading
Aaron Lynch
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Fibonacci On The ASX |
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Jordan Craw |
To the initiated you may be able to pass off Leonardo Pisano Fibonacci as a 15th century painter or sculptor. Though in actual fact his discoveries can be found in art, architecture and even music and will no doubt be used and admired far longer than the physical object or work of art.
Based on his studies of rabbit multiplication, Fibonacci discovered a number sequence known surprisingly as the Fibonacci sequence. The sequence is essentially created whereby each number is the sum of the two numbers before it, e.g. 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, ...
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From the sequence itself we can then take a ratio that is found in many facets of life and nature, including the human body. Over simplified this ratio can be used as a percentage to measure structures, the length of your forearm compared to your upper arm and believe it or not, market movements. These key percentages are 38.2% and 61.8%, which added together equal 1.
Fibonacci exponents swear by it and even many major trading institutions watch the 38.2% and 61.8% retracements with equal weighting to the 50 and 200 day moving averages.
The easiest way to apply Fibonacci analysis is via charting software. Fibonacci retracements are generally found and searched for manually rather than with the use of scanners or filtering systems. Like any other technical indicator, they can be subjective and so are best used in combination with a number of indicators or as an additional support tool or trigger for mechanically based systems.
A perfect recent example of Fibonacci analysis in action is The Australian Stock Exchange Limited or ASX. The chart below shows that ASX made a clear change in trend at 38.2% of its last major range of 2003 – 2004.
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ASX Limited Fibonacci Levels
click chart for more detail
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The bounce off the 38.2% then produced a gap trade as well as signaling a Bollinger band and moving average based entry all within the weeks following. For those who use these techniques and others, it may be worth your time back testing the recent run up for potential trade entries.
While I have highlighted the 38.2, the 61.8 and even to a lesser degree the 23.6%, retracements are also market stoppers in their own right. The best way to practice the application of this technique is to take a chart and just start measuring ranges. You may also wish to keep these percentages highlighted on a permanent basis for charts of markets you trade on a permanent basis to help highlight support and resistance as they trend.
Happy trading…
Jordan Craw
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Stress And Balance |
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Sinan Koray |
What is stress and how does it affect you and your trading? Stress is any emotional, physical, social, economic or mental factor that requires a response or change. It affects all your bodily functions, changing the balance and the harmony of your body’s systems. When the balances between certain chemicals in your brain are disturbed, stress arises. Fearful feelings increase brain activity, which in turn increases your heart rate, constricts your blood vessels, widens your bronchial airways and thickens your blood preparing your body for the possibility of danger. |
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A certain amount of stress can be beneficial in preparing your body to excel. If the stress is present only short term then your body and its systems have an opportunity to return to their normal functions. Recover and grow stronger. However if the stress is ongoing, if your body is constantly ready for real or perceived danger, then the reactions in your body take on a permanency that ultimately has many adverse effects. A stressed body and stressed mind lead to impaired decision making, which of course effects all aspects of your life including your trading.
There are many resources available related to reducing stress. This week we will look at developing a balance in different areas of your life. A balanced life allows your body and your mind the needed opportunity to recover and relax on a regular basis.
Intellectual habits you can develop and incorporate in your life include clear thinking, reduction of emotional burdens, independent and critical thinking, developing your thoughts and practice through education and development.
Sharing friendship and intimacy, caring for others and assisting those who benefit from your skills can further your social habits. Have breaks and holidays as you need them; balance your work and social life so that both areas are nurtured.
Emotional habits you can enhance are awareness of and responding to your emotions, experiencing more positive emotional states (see Trading Tutors Newsletter Issue #70), seeking support from family, friends or fellow traders and creating a group of like minded traders.
Spiritual habits you can focus on are looking for meaning, value and purpose in what you do.
Maintaining a pace of life within your comfort zone, having relative control over your time, balancing activity and relaxation times can fine-tune your time habits.
You can find ways to integrate exercise into your life, to balance your nutrition and to have adequate sleep enhance your physical habits.
Environment habits can be developed by creating an environment that inspires you and motivates you and is conducive to your trading (and life) goals.
Believe, achieve.
Sinan Koray
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When your mechanic maintains your car he or she goes through a checklist before doing maintenance or repairs.
Add to this list or modify it as it suits you. Then use it like a checklist to keep your body and mind in top
condition, minimising prolonged stress, putting your body in peak condition. You will see the results in your trading.
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