Market Timing Pro

Investor or Trader... Which Are You?

Most market participants consider themselves to be "investors." But if you look at a list of the really big winners on Wall Street, you will see that most of those who make big profits, list themselves as "traders."

By "big profits" we mean doing better than the S&P 500 Index or Nasdaq 100 Index by a substantial margin over any three-year period.

Investors

"Investors" put their money into stocks, real estate, etc., under the assumption that over time, the underlying investment will increase in value, and the investment will be profitable.

Typically, investors do not have a plan for what to do if the investment decreases in value. They hold onto the investment in hopes it will bounce back and again become a winner.

Investors anticipate declining markets with fear and anxiety, but unfortunately, they usually do not plan ahead of time how they will respond to them. When faced with a declining (bear) market, they hold their positions and continue to lose.

We all know investors. In many cases it was us before we realized how dangerous buy-and-hold investing could be to our savings.

Investors often have some knowledge of trading. But that knowledge is tainted by how it is all too often described in the financial press. "Trading" is risky, dangerous, foolish, bad, involves a great deal of work, etc. On the other hand "investing" is good, reliable and safe.

"2000-2002 Nasdaq Bear market - It will take a 250% gain to make up the losses in Nasdaq investments"

Investors had a taste of what "buy-and-hold" can do to their capital in the 2000-2002 bear market. But many do not realize just how far in the hole that bear market put them. The S&P 500 declined 50% and the Nasdaq declined 80%. How easy is it for the markets to regain those losses?

It takes a 100% gain to make up the losses for those invested in the S&P. It takes a 250% gain to make up the losses in Nasdaq investments. When a powerful advance is measured in 20% to 30% moves, you can easily see how long it will take to regain those huge losses.

Traders

On the other hand "traders" take a proactive approach to their investing. Traders have a defined plan and invest with one goal, to put their capital into the markets and "profit."

They "trade" with a plan that tells them what to do in any situation. When to enter and when to exit. They never allow large losses.

Being a trader does not mean you must move in and out of the markets frequently. This is a common misconception. A trader simply is one who has a plan for entering and exiting. They know what to do if their trade goes against them, and they know what to do when their trade is profitable.

Some traders go short (take bearish positions) as well as long (bullish) positions. Some are unable to go short, or they find short positions to be uncomfortable. Probably the majority of traders do not ever take short positions.

But traders "do" have a plan. This is where they differ from investors.

Every Trader Needs A Trend

If you think about it, you will quickly realize every trader needs a trend to be successful.

No matter what trading method is used, whether it is pattern trading, swing trading, long term buy-and-hold investing, fundamental analysis, technical analysis, buying or selling on news events, IPOs, splits, you name it. If the stock or mutual fund does not trend in the required direction after the trade is made, you cannot be profitable.

This also applies to all asset classes. Stocks, bonds, currencies, commodities. You must have a trend to profit.

Putting Trader & Trend Together

There are two major camps when it comes to deciding what method to use to plan a trade. There are those who follow a fundamental analysis approach and those who follow a technical analysis approach.

Traders use both methods to "forecast" future market direction. If combined with an exit strategy, either can be successful, but debate has raged for 30 years over which is the most successful strategy, as well as whether either method truly "outperforms" the markets over time.

Some very astute market players have said that both fundamental and technical analysis approaches, though they can be profitable, usually are "no more profitable than an index fund."

There is a scary thought. All that work when an index fund could do as well?

"Price is always right. If prices are moving up, the markets are advancing. Down and the markets are declining."

But there is another approach that is almost never discussed. Many hugely successful traders use it though the financial press seldom mentions it. In fact, many who use it are very quiet about their successes. They do not try to publicly prove themselves right, they just trade and make money.

This approach is the use of price to determine trends. Price does not forecast and it does not predict. Price is always right. If prices are moving up, the markets are advancing. Down and the markets are declining.

At FibTimer we are "trend followers." We respond to what "is" happening instead of predicting or forecasting what might happen. We "follow" price and allow the changes in price to tell us "when" to enter or exit a position.

Using price to determine trend does not allow trend traders to enter at the exact bottom, or to exit at the exact top. In fact, trend traders do not try to forecast the market, but instead let the market tell them when to trade and in what direction.

Trend traders wait patiently for prices to tell them a trend has begun. Then they jump on board. If the trend fails, they exit quickly to control losses. Price tells them when to enter "and" when to exit. If the trend continues, trend traders have no predetermined profit goal. They stay with the trend until it reverses.

Cutting losses quickly and staying with a trend until it ends is how trend traders realize huge profits in the financial markets. The financial markets are trending "about" 80% of the time. That means trend traders are profitable 80% of the time. During the other 20% trend traders keep losses very small so that they are ready when the next trend starts.

This does not mean 80% of their trades are winners, just that they are in the plus column for that 80%. If you have three losing trades of 2% and one winning trade of 18% in a year, you finish with a 12% gain, even though most trades were losers. This fits the old saying, "cut your losses short and let your winners run."

Conclusion

Remember that "price" is determined by millions of investors and traders.

By using price, trend traders take advantage of the combined wisdom of millions of investors and traders to trade a successful and profitable market timing strategy.

Yes, it takes patience to be a successful trend trader. Yes, it takes discipline to follow the strategy and make the trades, which many times go against the prevailing wisdom. This is true of "all" winning market strategies.

But trend traders who use price to determine trends have been quietly "beating" the markets for many years. They will quietly continue to do so for many more.

Stock Market Rally Confirmed

February 29, 2008

The S&P 500 Index – SPX, has broken out of a bullish pennant formation this week confirming the current stock market rally. Though Thursday may have been a struggle for stocks, nevertheless, we now have a confirmed rally in place.

The Nasdaq Composite Index – COMPQ and Nasdaq 100 Index – NDX have also confirmed their rally but have done so without the fireworks displayed by the big-caps. They also have further to go on the upside before resistance is reached so we could yet see some Nasdaq fireworks ahead.

We are looking for the rally to reach SPX 1395 to SPX 1425 before we see a meaningful correction. These are the first twp resistance levels to be reached. The SPX 1395 level was almost reached in Wednesday’s trading.

Buy Signal For Radioshack Corp (NYSE: RSH)

February 28, 2008

Shares of Radioshack Corp (NYSE: RSH) rallied this week on a better than expected fourth-quarter earnings report. But that is only part of the story.

More importantly, Radioshack has broken out of an eight month long slump that took prices down 58% from their highs back in August 2007.

While those 2007 highs of $35 a share may not be seen for awhile, Radioshack has a good shot at reaching the $24 level before resistance slows down this rally. No matter how good that potential $24 price sounds, 25% above current levels, be sure to use a trailing stop for this volatile stock.

The Fibtimer.com (http://www.fibtimer.com) Stock Timing Strategy holds a position in Radioshack.

Shares of Ishares Lehman 20yr (NYSE: TLT) At Critical Support

February 27, 2008

Shares of the exchange-traded fund Ishares Lehman 20yr (NYSE: TLT) have been headed lower, along with the sell off in bond prices, since reaching new rally highs on January 23.

Back on Thursday, February 7, TLT hit critical support at its intra-day lows and reversed to the upside. Critical support is at about $90.00 to $90.50 a share. TLT has now touched critical support several additional times over the past two weeks and so far support has held.

This support level was also reached back in December 2007. Twice support held and the second time TLT rebounded and began a new rally.

Should this support fail, we could see an escalation in the declines. Watch $90.00 to $90.50 for a rebound. If we do not get it, watch out below.

The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy holds a position in the TLT.

Shares Of Ishares Latin America (NYSE: ILF) Power Ahead

February 26, 2008

Shares of the exchange-traded fund Ishares Latin America (NYSE: ILF) have been displaying a great deal of relative strength, gaining ground even while the stock market has been weak.

On Monday, February 25, Ishares Latin America pushed to within a fraction of the prior closing rally highs at $266.88, achieved back on October 31, 2007.

A close above those prior highs will forecast continued gains for the widely traded ETF over coming weeks. Of course Ishares Latin America has already made substantial gains, gaining some 30% in only the last five weeks of trading.

The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy holds a position in Ishares Latin America.

Reaping Rewards Over Time

The term "impulsive" is often used to describe people who can't wait. They can't delay; they've got to have it now. So they are willing to forgo something better that comes later in order to get something right away.

This is NOT a trait you want to have as a market timer.

If someone offered you a choice between a smaller amount of money ($100) available immediately and a larger amount ($1,000) that could be received after a specified delay (3 years), which would you take?

You would be surprised at how many would take the $100. In fact, a great deal of the buying and selling going on in the stock market every day is by those who are looking for that quick $100. Very few are thinking about the $1,000 and even fewer have a strategy to achieve it.

Why is it people engage in behaviors, the long-term consequence of which is worse for them? Why do you have that incredible chocolate cake right "now" when you're trying to lose weight, or trying to stay healthy, or trying to stay fit?

One of the reasons is that being healthy or being fit is a "delayed reward." It occurs later.

While the desire to succeed in market timing is perfectly fine, the desire for immediate profits and instant winning trades is not. It clouds the real goal. Making large profits over time. A goal few investors ever achieve.

Motivated By Immediate Rewards

The market is unlikely to hand "immediate awards" to you. Although market timing is all about being profitable, it is not about satisfying our emotional needs. Rather, it is the following of a rational plan to create wealth over time.

A winning market timer must tirelessly execute a trading strategy that will often come into conflict with the timer's emotions.

"...People are motivated by rewards and in modern society that usually means money. The more money we are offered, the harder we work."

The outcome of any one buy or sell may not produce a profit. It's quite possible that the overall outcome of a series of buys or sells may not produce a profit. It is essential that these possibilities be acknowledged.

People are motivated by rewards and in modern society that usually means money. The more money we are offered, the harder we work.

Perhaps you were attracted to market timing because of the large potential profits you would make in the future. It's natural to want to receive a reward for your hard work. But if you expect an immediate reward for your effort and it isn't forthcoming, you'll be frustrated and disappointed. And when it comes to market timing, immediate rewards aren't always there.

For example, everyone expects to get paid on the date their paycheck is due, but have you observed what happens when a paycheck is late? Everyone is quite frustrated and some people can get very angry. People were expecting a hard earned reward but received no reward.

Unless one has the right perspective, market timing can feel that way also. One may put in an enormous effort and receive no "immediate" reward for it.

If one is "expecting" an immediate reward, it can be frustrating and disappointing when it does not appear. That is why it is important to take the proper perspective with market timing, and the proper perspective can only be based by looking at timing results over a long time frame.

The Big Picture And Laws Of Probability

It is essential for a market timer to think in terms of the big picture, and in terms of probabilities. You must realize that the outcome of any one buy or sell signal is not significant. It's the outcome over time that matters.

The more trades you make with a winning trading strategy, the more the law of averages will work in your favor, and across the series of trades, you'll be profitable.

"...Seeing the big picture, and sticking to the trading plan, are the keys to timing success."

Market conditions, as we all know, are not always conducive to our plans. This is a reality of market timing and it's necessary to prepare for it. If you are aware of this, you'll be less likely to react emotionally to losing trades, and also less likely to make bad decisions when they occur.

Seeing the big picture, and sticking to the trading plan, are the keys to timing success.

Conclusion

If you anticipate that you won't win on a specific single buy or sell signal, you will not feel disappointed when it happens.

If you acknowledge that you may not profit even during a series of buy or sell signals, you will similarly be able to deal with it, bounce back, and be ready to take the next trade.

But on the other hand, if you aren't prepared for these possibilities, you'll feel frustrated and disappointed. You may feel like giving up on timing.

Some market timers hit the jackpot and start right at the beginning of a profitable trend.

But typically, we start our market timing during difficult market conditions. When we are looking for ways to profit that we so far have not realized.

The right perspective goes a long way in coping with the inevitable hard balls that the market throws at us.

Those who stay the course reap the rewards over time.

Huge Move Ahead For S&P 500 Index - SPX and Nasdaq 100 Index - NDX

February 22, 2008

The S&P 500 Index – SPX and Nasdaq 100 Index – NDX are both forming pennant formations in the weeks after the panic lows on January 22 and 23.

Regardless of the bearish articles and TV commentators, the lows in January have all the requirements for a bottom that should be followed by a substantial advance.

But so far, that advance has been more sideways than up and as the weeks pass by, a glance at the charts shows both indexes reaching lower highs on the rallies and higher lows on the declines. Drawing a line through the highs and another through the lows leaves you with the pennant formation.

Typically, when a pennant formation is decisively broken to the upside or downside, the market continues in that direction. In this case the downside has one more support level that could stop a sell off, those January lows. The upside has little to stand in the way of a sustained advance.

Whichever way these patterns break; look for a huge move in the stock market.

Telecom HLDRS (AMEX: TTH) Nears 2006 Support Levels

February 21, 2008

Shares of the exchange-traded fund Telecom HLDRS (AMEX: TTH) took another steep dive on Wednesday, February 20, reaching levels that have not been seen since the start of the 2006 telecom rally.

The current decline started in October 2007 and has now loped some 29% off share prices. Back in May of 2006 Telecom HLDRS began a rally from correction lows at $28 a share. The current correction in Telecom HLDRS touched $28.64 intra-day during the panic lows on January 22.

Telecom stocks are again testing those panic lows and are again declining precipitously reaching $29.80 per share on February 20 before rebounding a bit and closing at $30.93.

Our current view of the entire sector is bearish, but if this test of the panic lows holds, that view could quickly change. Beware telecom stocks if Telecom HLDRS closes decisively below $30.00 a share.

The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy may hold a position in Telecom HLDRS.

Ishares Latin America (NYSE: ILF) Shares Rally

February 19, 2008

Shares of the exchange-traded fund Ishares Latin America (NYSE: ILF) have been gaining ground even on days when the stock market has languished, which has been most days of late.

On Tuesday, February 19, ILF gapped higher at the open and even though the U.S. stock market reversed and closed lower for the day, ILF closed with a gain of almost 3%. This was off the highs of the day, but nevertheless a solid gain in a very volatile stock market.

ILF closed above critical resistance last week at $244.00 a share and appears poised to make a run for its prior rally highs at the $270.00 level.

The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy holds a position in Ishares Latin America.

Biotech HOLDRS (AMEX: BBH) Traders Indecisive

February 19, 2008

Shares of the exchange-traded fund Biotech HOLDRS (AMEX: BBH) have traded in a pennant pattern since early this year.

Pennant patterns tell us that traders are indecisive and are buying and selling shares of BBH in an ever-tighter pattern that must eventually break. When it does, it will give us guidance as to the future short term, and possibly long term, direction of this widely traded ETF.

As the pennant tightens, resistance is currently at about $166.00 and support is at about $163. A decisive break of these levels will tell traders where this ETF will likely trade in coming days and weeks.

The Fibtimer.com (http://www.fibtimer.com) ETF Timing Strategy holds a position in Biotech HOLDRS.