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August, 2011

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Market Trends & Cycles


by Lan H. Turner

What you REALLY Need to Know about Common Chart Patterns


by Carley Garner

Mental Fitness for Traders Series


by Norman Hallett

PitNews.com Magazine August 2011

It's long been known that market cycles and trends are the foundational building blocks for long-term success in the futures markets. It's easy to understand the seasonal or cyclical nature of a commodity; let's take corn, soybeans, or wheat as an example. Each of these commodities maintains a standard of fundamental factors that affect the price of each commodity year after year after year in a fundamentally similar fashion. Each crop has the same fundamental basis: They are planted at the same time each year. Susceptible to damage at the same time each year. Too much water Not enough water

fundamental events. To find and identify these trends and market cycles has been the success of many traders, and computer companies who have written tools to help the trader identify when exactly these trends and market cycles occur. Individuals such as Jake Bernstein, and Scott Barrie have popularized the idea of trading the seasonal nature of markets. Companies such as Moore Research and Gecko Software have created seasonal tools to help traders identify such trends and market cycles. Most of the work done in this particular area of study has always been done within the futures market for the obvious reasons mentioned above. But recently, Gecko Software has taken this technology and applied it toward the Stocks and Forex market with a tool they named TradeMiner. In this example, we're going to be using TradeMiner to identify an upcoming stock opportunity, using the fundamental seasonal trend and market cycles tools generally used in futures trading, and we're going to see if we can find and locate any applicable science behind the idea of a cyclical or seasonal cycle within

Harvested at the same time each year. Storage costs at the same time each year. Transportation costs at the same time each year.

Given these fundamental similarities, that occur year after year after year, it's common knowledge among commodity traders that markets move in cyclical trends and cycles based upon these similar

Figure 1: Yearly histogram view of winning trades, draw downs, and losing trades for stock: SCG PitNews.com Magazine August 2011

the stock market.

the fact that the stocks and Forex markets, in addition to the futures market, all have a high degree of Within TradeMiner, we're given the opportunity to seasonal trends and market cycles that we as informed select a month that we are interested in locating cycles traders can take advantage of. and trends, so in this study, we're going to use the month of September, we're going to ask TradeMiner to identify all stocks that win at least 90% of the time, showing both longs and short opportunities, that last at least five trading days, (I'm looking for a trend, not an anomaly.) but no longer than 30 trading days, (I want to make my money, then get out, I don't want to linger in the trade forever.) and the last filter I want to add is that my trade must be at least 90% accurate over the past 15 years at minimum. Given this high degree of accuracy, I'm skeptical on whether TradeMiner will return any results at all. Once I click the "Dig Now" button, to my surprise, TradeMiner retrieved 112 results. My first look into the results tab, I want to filter down and see which market had the highest degree of success, over the longest period of time. I discovered the following Stock: SCG, Scana Corp New Cycle Starts: September 15 Cycle Ends: October 3 Between those timeframes, 93% of the time, this stock closed higher on October 3, than it opened on September 15, over the past 30 years. Score: 1.78

Figure 2: Historical Trade Record for SCG - Scana Corp New

TradeMiner also has a "score" column that calculates and mathematically compares each opportunity against the other, and identifies the best opportunities on a scale from zero through five. TradeMiner then gives each opportunity a green light for the best opportunities, a yellow light for cautious opportunities, and a red light for less than optimal opportunities. This formula calculates which stocks make the most amount of money, with the least amount of risk, in the shortest amount of time. Although the stock I listed above received a red light, with a score of only 1.78, I wanted to highlight it in this article simply because of the high degree of historical accuracy it has. Other stocks in our list of 112 scored much higher on the zero to five scale, but the point of this study, and this article is to highlight

Find out more about TradeMiner at: www.TradeMiner.com

Lan Turner is the President & CEO of Gecko Software, Inc. His highly developed trading methods have been taught in live seminars at the Chicago Board of Trade, The Chicago Mercantile Exchange Education Center, as well as colleges and universities both in the US and Internationally.

PitNews.com Magazine August 2011

What You REALLY Need to Know about Common Chart Patterns


By Carley Garner
Whether you favor watching business news television, reading the Wall Street Journal or skimming popular trading websites and forums, you are likely to be inundated with references to several common price patterns. Among those most talked about are price gaps, a head and shoulders formation, key reversals and 1-2-3 tops and bottoms. The purpose of this article isn't to prove to you that each of these patterns are valid and legitimate means of predicting price, but I strongly believe one of the most important ingredients in the recipe of successful trading is simple; know thy enemy. As a trader you are literally competing with all other market participants and unfortunately, in finance, it is a "dog eat dog" world. If you don't have an idea of what your opponent is thinking, and how they might react in certain circumstances, how will you ever be able to predict price movement? After all, commodity prices are the net result of the combined opinions, reactions, and emotions of each individual trader. Each and every one of you are sharing the same access to the same fundamental information and technical tools, but the one thing you have that others don't is what is between your ears! Price Gaps A price gap occurs when there is a significant difference in the closing price of the previous session relative to the following opening price of the next session. Gaps can be either up or down and are simply coined as a "gap up" or a "gap down", or you might even hear "gap higher" or gap lower". Although this type of price action does occur in the futures markets today, it is much less common that it used to be. This is because most futures contracts trade virtually 24-hours per day during the week and therefore, there simply isn't enough time between trading sessions to justify a large price move. However, there are exceptions such as during earnings seasons in which many of the reports occur just after the close of stock index futures at 3:15 Central time and the reopen of trade at 3:30. It might only be 15 minutes of down time, but if a bellwether firm such as Alcoa reports an earnings per share figure dramatically off the mark, it is possible to see equally dramatic price gaps on the open of trade.

Figure 1: Theory suggests 80% of gaps are filled, some traders "fade" the gap by trading in the opposite direction and others wait for the gap to be filled before entering in the direction of the initial gap move.

PitNews.com Magazine August 2011

Also, all of the futures markets close on Friday afternoon or evening (depending on the contract and exchange) and don't reopen for trade until Sunday afternoon or evening. During the two day hiatus, it is possible that domestic or international political events have developed, a natural disaster has occurred, or some other event that will potentially influence pricing. Accordingly, gaps higher or lower from the Friday close are somewhat frequent. The common belief is that most (the figure 80% is often used) gaps are "filled". Filling a gap simply means the price of the futures contract retraced to the price seen at the close of the day before the gap. You might also here this referred to as closing the gap.

The head and shoulders chart formation is, perhaps, the most talked about and well known. However, this is exactly why it is likely one of the least reliable. If most speculators are expecting the same outcome, it generally doesn't happen. Thus, the downfall of using the head and shoulders formation is that it is extremely easy to identify and tends to attract many novice traders. Don't forget, most traders lose money! Nevertheless, you will run across this theory time and time again, so it is worthy of noting. The head and shoulders formation involves a rally peak, followed by another rally, in which new highs are forged, and then a final attempt a rally that falls short of the previous high. As the name implies, the formation looks similar to a "head and shoulders". Because commodities tend to be range bound markets Some technical analysts anticipate a precipitous drop rather than bull or bear, in the long-run, I'd have to in price should the futures price fall below the agree that most gaps are filled. Of course, like neckline of the formation. The neckline, is simply a anything in speculative trading, timing is everything. trend line drawn along each of the shoulder valleys. The market sometimes fills a gap within days but other Because markets can go down, just as easily as they times it takes weeks or months. One thing is certain, go up, head and shoulders patters also have an inverse. for a gap to occur there has to be an overwhelming The theory is the same, but the head is a trough shift in market bias and more often than not you instead of a peak. probably don't want to fight the move too aggressively. In fact, some traders view a gap that has just been Key Reversal filled as an opportunity to enter the market in the A key reversal is a volatile trading session in which a direction of the gap. market makes a dramatic move in the direction of the trend but reverses to close against the grain beyond Head and Shoulders the previous day's close. Key reversals can occur after a sharp rally or substantial decline but are most associated with market tops. Many technical analysts expect a key reversal to be the beginning of a new trend. Specifically, a key reversal occurs when an inclining market makes a new high (often a price gap on the open of the day session) but finishes the session below the previous day's low. Similarly, a key reversal in a bear market is believed to occur when a market moves forcefully lower to post new lows but settles the day higher than the previous day's close. Although simple and seemingly predictable, I have found this to be one of the most reliable charting patterns, and there are a few rationales to support the theory. For instance, bull markets can only end once all (or most) of the buyers are already in. Once this occurs, the buying dries up and those looking to protect profits often tighten stop loss orders. Should these standing sell stop orders be elected, the market will be overcome with pressure as longs exit positions. Also, bull markets tend to attract a considerable amount of contrarian interest. In other words, the higher a market moves the more aggressive traders

Figure 2: A traditional signal produced by a head and shoulders pattern occurs on a break of the neckline, but traders might have more luck anticipating such a move early (failure of the right shoulder).

PitNews.com Magazine August 2011

will want to sell it. Accordingly, in extreme rallies often end with one last extreme price move in the direction of the trend as short traders are stopped out of positions at losses or are forced out of the market due to margin troubles.

run at the highs before falling short and reversing the overall trend. Conversely, a 1-2-3 bottom occurs when the opposite pattern occurs at the end of a down-trend. In a 1-2-3 top, the 1 count represents an exhaustive move indicative of stop running for those playing against the trend and can also be attributed to latecomer trend followers. As the saying goes, once the last man buys the bull market is over. The 2 point represents the low of the first wave of correction and is the price at which those caught on the wrong side of the move have opted to begin exiting their positions at smaller losses than they were suffering from at point 1. As traders offset, they trigger a move from point 2 to point 3. Remember, those short the market have to buy a futures contract to get out and those long have to sell to exit; this can often result in a move that appears to be a resumption of the long-term trend but soon runs out of steam as the rest of the traders looking to exit the market do. This particular chart pattern attempts to signal a market reversal, but similar to all recurring patterns it doesn't come with a guarantee. Therefore, it is imperative that the pattern is confirmed with other technical and fundamental factors. Be Nimble and Realistic! It is never a good idea to assume commonly referred to price patterns will play out they way they are "supposed" to; nor is it realistic to assume pricing is random and they will never produce helpful hints at the next market move. Each of these patterns, and any other technical trading tool for that matter, should be used in conjunction with various other strategies and supporting factors. After all, if business news analysts, blogs and newspapers are openly pointing out a specific price pattern, it probably won't materialize. Trading is a zero sum game; this means that it is impossible for "everybody" to win because for every winner there is a loser. Simply put, if it seems like "everyone" has the same idea or premise you might be best off doing the opposite; trading with the masses has proven to be detrimental in many cases but knowing what they might be thinking is critical! Carley Garner is the Senior Analyst for DeCarley Trading LLC where she also works as a broker. She authors widely distributed e-newsletters; for your free subscription visit www.DeCarleyTrading.com. Her books, "A Trader's First Book on Commodities" and "Commodity Options," were published by FT Press.
**There is substantial risk of loss in trading futures and options!!

Figure 3: A key reversal gives counter-trend traders a signal to enter a market at a relatively favorable price in anticipation of a change in momentum.

1-2-3 Tops and Bottoms In its simplest form, a 1-2-3 top or bottom is simply a key reversal followed by one more attempt to resume the trend. Specifically, a 1-2-3 top is formed at the end of an up-trend and involves what we like to call a last hoorah rally, a corrective period and then one last

PitNews.com Magazine August 2011

"The Force is Within You, Luke. It's Not The Trading System"

Mental Fitness for Traders Series


By Norman Hallett, former CTA/Trader

There are only a handful of people who give a darn about supplying traders with a way to be more disciplined and focused in their trading. I'm one of them, so I think I know why there are so few of us. Heck, I'm in the business of supplying traders with a tool to help improve the mental side of the trading equation the human element. With (what I think) is such an important service, why am I out here virtually alone?

words can cut like a knife.How about paying more attention to the mental/emotional part of trading? To the trader with low self-esteem, I'd be accusing him/her of having something wrong with him/her. Being the Shepard of the mental/emotional aspect of trading is not an easy job. But it's rewarding. For those who start paying REAL ATTENTION to the mental part of trading, results can improve rapidly. They start saying, How can I improve as a trader? How can I make sure that the only variable to losing and winning is my system and not me? When was the last time you asked yourself these important questions? It's not all about changing your system; tweek, tweek, tweek. My guess is that it's about changing YOU. So, for me, I love what I do. Can anybody hear me?

A couple of reasons. My best, First, although most traders will admit that the mental part of trading is key to winning in the long-term, Norman Hallett most believe they can gut it up and just shake it off when negative emotions and behaviors rear their ugly heads. They don't need a shrink. They know what they need to do and by-cracky, they'll do what needs to be done without any help! I call this the Macho Syndrome. So, I get resistance from those that need it most, the emotionally out-of-control trader. Second, a common mindset is that the primary key to being a successful trader is hooking your wagon to a guru or trading system and then following that system to riches. The problem is that all (even great) trading systems experience draw-downs and you wind up blaming the system for losing rather than doing what is painful for some blaming yourself (for not having the courage to trade through adversity)! So here I am, preaching pain.It's not your system, it's you! To the trader withlow self-confidence, those
PitNews.com Magazine August 2011

Norman Hallett 6606 NW 66th Avenue Parkland, FL 33067 954-757-8722

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