Market Timing Pro

Trading Trends For Profits

In the financial markets, a trend is generally understood to be the current market direction. Markets can be trending higher, trending lower, or trending sideways.

But defining a trend so that it can be profitably traded is something else entirely.

Many would say the U.S. Dollar is currently in a long-term bearish trend. But at the same time, the Nasdaq Composite Index and S&P 500 Index have been in a severe correction, though both are rallying hard this week. So trends can obviously exist for one sector while another is going in the opposite direction, or no direction at all.

Just saying that a trend consists of "rising" prices, or "declining" prices is not enough. Every day is different. A trend must be clearly defined in order to be profitably traded.

And what about time frame? Are we talking about a trend on a 5-minute bar chart where it could last an hour? Or is it of longer duration: days, weeks, or even years? If you are a mutual fund trader, trend lasting less than several months will be almost impossible to profitably trade.

It is easy to determine trends on an historical chart. Looking at trends that have already occurred. Developing a trading strategy that will keep you on the right side of future trends is needed to profit from trend trading (market timing).

Note that we do not say market timers can "predict" the future. We are not of the crystal ball camp that many say dooms market timers to failure. We say that trends tend to last for periods of time that make them tradable. So identifying trends, and jumping on board, is the key to profitable market timing.

Successful market timers know and use several facts about trends that give them an edge in trading them:

1.  While financial markets may spend time in consolidation (sideways trends), they are more often moving up or down for sustained periods of time.

2.  A timing strategy that defines trends can be used to take advantage of continued momentum in the market place.

3.  Trends tend to go higher, or lower, than most investors expect. So correctly identifying and trading a trend can be very profitable.

"Market timers usually make the majority of their profits in only one or two trades a year. If you don't take every trade, you will likely miss the one that makes most of your profits."

4. Profitable trends occur only once or twice a year. The rest of the time the markets trend sideways.

Because tradable trends only occur once or twice a year, market timers must be prepared to sometimes wait months before catching that one highly profitable trend.

  a. To be consistently successful over time, market timers must have clear rules telling them when to enter, and when to exit.

  b. When in a sideways trend, market timers may have multiple trades that result in small losses, or small gains. These small losses and gains "must" be accepted because timers "must" trade every identified trend change. There is no way to know "ahead of time" which trend will be the highly profitable one.

  c. Market timers usually make the majority of their profits in only one or two trades a year. If you don't take every trade, you will likely miss the one that makes most of your profits.

  d. When the markets are in a bullish or bearish trend, trading position changes may not occur for months at a time as the trend progresses. Exiting early to lock in profits can cost you dearly. The trend must be allowed to play out without making unnecessary trades because of volatile short-term conditions.

  e. A profitable trading strategy will "not" allow a market timer to miss that trade!

Correctly identifying and trading financial market trends with mutual funds, ETF's and even carefully selected stocks, is doable, profitable, and with a well-tested trading strategy, can achieve results far above "buy-and-hold" investing.

Market timing, when following a well thought out trading strategy, is actually "less" risky than a buy and hold approach.

The active investing style used in FibTimer's market timing strategies (identifying and trading trends) prevents huge losses in the inevitable bear markets (or any large decline that is of substantial duration).

If bearish strategies are used in the timing strategy, declining markets actually add to profits.

Market timers, when following a well defined and tested timing strategy that identifies market trends, will consistently beat the market over any fair time frame.

Is It Really Over?

November 30, 2007

The Nasdaq Composite Index (COMPQ) dropped some 11% in only three weeks. The Nasdaq 100 Index (NDX) comprised of the largest technology companies in the world, managed to complete an 11% decline in only four trading days. The S&P 500 Index (SPX) took longer, about six weeks, to shed 10%, though it seemed much faster while it was happening.

The question is… is that it? Is the bad news that caused investors worldwide to toss away 10-11% of the hard earned gains in share prices, all behind us? Is the sub-prime mortgage crisis history? Are inflationary concerns that have gold at 27 year highs of $800 an ounce, oil futures at close to $100 a barrel, and the Federal Reserve making conciliatory statements to try and calm the markets, all of little concern now?

Though there are bullish indicators such as Wednesday’s breadth explosion with greater than 9 to 1 up/down NYSE volume, not to mention over 300 Dow points added to the plus side. Gold is looking a bit toppy (a possible bearish double top forming?) and bonds are looking at yields below 4% for the 10-year note. Not exactly an inflationary yield by any means.

You just have to wonder though, how can it be over so fast? Can all the very real issues that drove stock prices lower have been solved in only a few weeks? Or are they still lurking out there, ready to bite investors after they turn greedy and lax.

If you have turned bullish, we advise keeping your finger on the sell button. Do not allow losses to accumulate just because everyone knows the correction is over. It may not be.

Nasdaq 100 ETF (NASDAQ: QQQQ) Breaks Out

November 29, 2007

Only yesterday we wrote that there appeared to be a pennant formation developing on the chart of exchange traded fund Powershares Nasdaq 100 (NASDAQ: QQQQ). On Wednesday, that pennant was broken to the upside with a 3% rally in the Q’s.

The pennant formation, inverted in this case, with the pennant bottom around the $49.20 level and with ever-lower daily highs marking the top of the pennant, has been decisively broken to the upside and it appears a bullish near-term should be expected for the Q’s.

Considering the current volatility, with daily swings in the Dow Industrials of over 100 points or more commonplace, we would not yet say an all clear has been issued for the stock market. Rather, the short term can be expected to see higher highs.

The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy currently has a position in the QQQQs.

Nasdaq 100 ETF (NASDAQ: QQQQ) Building Support Level

November 28, 2007

Shares of the exchange traded fund Powershares Nasdaq 100 (NASDAQ: QQQQ) rose Tuesday after a huge sell-off pushed shares considerably lower on Monday. There appears to be a pennant formation developing on the chart.

The Q’s hit their lows back on November 12 th, only four days after being a fraction from new rally highs. Since that date, the Q’s have not reached lower lows while the rest of the stock market, and especially the S&P 500 Index, has continued to decline in dramatic fashion.

The charts show a pennant formation, inverted in this case, with the pennant bottom around the $49.20 level and with ever-lower daily highs marking the top of the pennant. This means there will be a break of either the top or bottom lines before much longer.

If the Q’s break higher, we could see a decent rally after the substantial declines in the market to date. A break to the downside would likely spell further selling and considerably lower lows in coming weeks.

The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy currently has a position in the QQQQs.

S&P 500 SPDRs (AMEX: SPY) Break Support

November 27, 2007

Only last week we wrote, “…shares of the S&P 500 SPDRs (AMEX: SPY) reached within pennies of critical support at $141.59. The next day, the S&P 500 SPDRs rallied for a 2% gain. The support is a critical one and should it be broken on the downside, we will be looking for the S&P 500 SPDRs to reach at least their prior August lows, at $137.25.”

Without a crystal ball, no one knows what will happen tomorrow, but we would not be on the long side of the S&P 500 SPDRs right now.

A retest of the prior correction lows appears imminent. Should it fail to hold, the S&P 500 SPDRs have little support immediately below.

The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy has a position in the S&P 500 SPDRs.

S&P 500 SPDRs (AMEX: SPY) Reach Critical Support

November 26, 2007

Shares of the S&P 500 SPDRs (AMEX: SPY) have been falling dramatically over the past two months, and on Thursday, November 22nd, they reached within pennies of support at $141.59.

The next day, the S&P 500 SPDRs rallied for a 2% gain. The support was a critical one and should it be broken on the downside, we will be looking for the S&P 500 SPDRs to reach at least their prior August lows, at $137.25.

But for now, the charts say we “may” have seen a bottom. Watch for higher highs early in the week to confirm this reversal.

The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy has a position in the S&P 500 SPDRs .

Emotions And Trading

The stereotype of the perfect trader (market timer) has many of the same traits as Mr. Spock on "Star Trek." Mr. Spock looks at events logically and objectively, and follows a rational plan when creating a solution to a problem.

In some ways, Mr. Spock would appear to be the ideal trader.

He would carefully formulate a detailed trading strategy, find the market conditions that suggest his strategy will produce a profit, and then and only then, would he execute it.

But, in the end, it is important to realize that Mr. Spock is a fictional character. And even if he were real, he is a Vulcan; he isn't human.

Traders are humans, however. In addition, market participants are humans, and they don't always behave rationally. Indeed, they tend to be driven by fear, hope, and greed, and thus, forecasting market behavior has proven much more difficult than space travel.

In the real world, humans are emotional. Emotions rule everything in the markets. The decision you must make, however, is whether you are going to control your emotions in order to trade decisively and profitably, or let your emotions rule you.

Realistic And Logical

The successful market timer is realistic as well as logical.

It doesn't do you any good to become overly disappointed when have a loss or overly euphoric when you have a big gain.

Extreme pleasant and unpleasant emotions can be very distracting. If you are angry, frustrated, or worried, you won't be able to focus on sticking to the timing strategy. Your attention will be elsewhere, and those negative emotions can cause you to make incorrect, and usually costly, trading decisions.

It is essential to keep negative, or unpleasant, emotions at bay.

At the other extreme, it isn't wise to feel too elated or euphoric. Extremely pleasant emotions are usually the flip side of extremely unpleasant emotions. That is, it is usually those timers who experience extremely unpleasant emotions when faced with setbacks who also experience extremely positive, euphoric emotions when suddenly faced with a huge gain.

At moderate levels, pleasant emotions are motivating, but at the extreme, they may be associated with impulsive decisions, such as exiting a position for no good reason or abandoning risk control strategies.

Emotional By Nature

That said, it is almost impossible to be emotionless. Humans are emotional by nature. It is difficult to experience absolutely no emotion. In all likelihood, the closest we could get to an emotionally neutral state is indifference.

So what is the best way to cultivate an optimal emotional state? We know that negative emotions, such as fear, anger, and disappointment can be harmful. And we know that euphoria often leads to over confidence and timing errors.

One possibility is to cultivate emotions that are only moderately positive, emotions that aren't euphoric and prone toward over confidence.

Rather than react to setbacks with frustration or fear, one can approach the setback with a sense of realistic optimism. Losses are part of the game. There is no way around them. Market timers should focus on the goal of generating successful gains over the long term, not the daily or even weekly ups and downs of the markets.

Never underestimate the power of emotions. Extreme optimism or pessimism can interfere with your goals, but by approaching problems with a realistic sense of optimism, you will stay the course, stick to the trading strategy, and generate excellent timing profits over the years.

How Much Lower Can We Go?

November 23, 2007

The volatile ups and downs that have marked the U.S. stock market these past few weeks, with mostly downs over the past two weeks, are bring the market close to do-or-die levels.

The S&P 500 Index (SPX) has hit lower lows on a steady basis since reaching all-time highs back in early October, and is now down over 9%. A loss of 10% is considered a correction and a loss of 20% is considered a bear market.

For traders who bought into this market in early October, it may already fel like a bear market. Typically new highs bring in bullish investors that envision easy money. Just as typically, they do not sell when the market declines and are now in the uncomfortable position of having substantial losses.

Here is more bad news. The SPX closed Wednesday, November 21, right at the final support level that has a chance to stop the selling. The first two supports, at SPX 1473 and then SPX 1449, did little to halt the carnage.

Should support at SPX 1414 fail, we will be looking for a decline to “at least” the August correction lows, at the SPX 1370 level, 3.2% lower.

The charts are setting off alarms left and right. The S&P Composite Index is well below its 200-day moving average, a bearish indicator that is now acting as a strong resistance level. The Nasdaq 100 Index – NDX is still above its 200-day average, but has lost 10.4%.

The NDX has its own support level to watch. NDX 1971 is critical support for this volatile index and if it fails it will forecast a decline to at least NDX 1698 in coming days.

Ishares Russell 2000 ETF (NYSE: IWM) Reverses From Critical Support

November 21, 2007

Shares of the Ishares Russell 2000 ETF (NYSE: IWM) reached critical support in intra-day trading on Tuesday, November 20th.

This support was at $73.75 and IWM also rebounded from it twice in early August. The August rebound marked the bottom of the sharp and fast July-August stock market correction. If Tuesday’s rebound holds, we could see a rally from here.

However, now that this level has support has been hit three times, it brings into question how many times it will be the turning point for IWM. Should IWM close below $73.75 in coming days, we will be looking for substantially lower lows.

For now, we are watching for confirmation that this reversal is a true correction bottom.

Fibtimer.com (http://www.fibtimer.com) currently has a position in IWM in its ETF Timing Strategy.

Sell Off In Whole Foods Market Inc (NASDAQ: WFMI)

November 20, 2007

Shares of Whole Foods Market Inc (NASDAQ: WFMI) were finally having a nice rally this summer after enduring two years of losses. But over the past six weeks, they have given up 20% of their recent gains.

Is the rally over for shares of Whole Foods? Not so fast.

Whole Foods declined right to critical support on Monday and rebounded. Not exactly a big rebound, but still support, at about the $42.50 level, has held.

Watch for continued a rebound from these lows if it is to hold. If $42.50 is the bottom for Whole Foods, shares could see a rally to the previous highs around $53 a share. If support breaks though, the lows could reach $36.00 in short order.