Blowout earnings and upgraded guidance by Dow components Caterpillar (CAT) and Honeywell (HON) launched the market into uncharted territory at Friday's open. The Dow launch was also helped by earnings gains in American Express (AXP) and a strong move by Exxon Mobil (XOM). All four are Dow components are all four were up more than $2 with CAT clawing its way to the top with a +3.20 gain. Together those four stocks accounted for nearly +100 points of the Dow's gain.
Dow Chart - Daily
Nasdaq Chart - Daily
There were no material economic reports on Friday with the monthly Mass Layoffs the only calendar event. Layoffs rose less than expected at 1,276 events impacting 130,700 workers. This was almost exactly equal to the announced layoffs in the prior months of 1,280 events and 144,000 workers. Announced layoffs are expected to increase slightly over the next few months as the housing problem continues and high energy costs pressure manufacturers to cut costs elsewhere. However, the labor market remains tight and these cuts should be absorbed into other areas with minimal impact to the economy.
Next week's economic calendar is mostly filler with another round of regional Fed reports as well as new updates on the new and existing home sales. The two key reports for me are the Fed Beige Book on Wednesday and the GDP on Friday. The Beige Book is a report from the various Fed regions regarding business conditions in their region. The Q1 GDP report is going to be important because analysts are expecting a sharp drop to only 1.9% growth in Q1 from the last revision to Q4 showing 2.5% growth. Analysts will be keying on this GDP number to confirm their own estimates of current economic growth. A major surprise in either direction could be a market mover.
Several positive earnings surprises gave the market wings last week but that trend is not likely to continue. As of Friday slightly more than 45% of S&P-500 companies have reported with earnings growth currently setting at +6.1%. 66% of companies have beaten estimates, 18% reported inline and 16% have missed estimates. By the end of next week more than 70% of S&P companies will have reported. The expectations are for that earnings growth number to decline to something less than 5%. The early reporters are normally the strongest and the farther we get into the cycle the worse the earnings become. The earnings table below covering next week shows a cross section of sectors and leaders in those sectors. The companies with the most impact on the market could be Amazon, Microsoft, 3M, Apple, Texas Instruments and Qualcomm.
Partial Earnings Calendar for Next Week
Microsoft will be the primary focus with the company expected to give an update on Vista sales progress. Steve Jobs is reportedly circulating an email calling Vista the new Coke. This is a reference to the change in the formula for Coca Cola that nearly sent the company into financial ruin before they relented and re-released the original formula. The reluctance of many users to upgrade to Vista is increasing. Microsoft has already said they will quit selling Windows XP in Jan-2008 so the squeeze is coming. Investors want to know how the public is accepting Vista and how sales are tracking compared to estimates. Microsoft had shifted revenue into Q1 due to the delay in releasing the product and to account for the upgrade certificates manufacturers had been shipping with systems. It will be interesting to see how Microsoft accounts for copies sold and their projections for future sales.
Other earnings to watch include Amazon, Apple and Broadcom in the tech sector and 3M, UPS and Whirlpool for evidence of general economic indications. Amazon is going to be challenged after loosing Borders as a major retail partner. Margins are expected to shrink as well as revenue according to some analysts. This will be the last quarter for Apple without any impact from the coming iPhone. They may have additional expenses related to the iPhone, Mac OS X and various other products in the pipeline but not yet available for sale. Broadcom, along with TXN and QCOM will give us better insight into the fortunes of companies that feed chips into products marketed by Intel, Cisco and other major equipment manufacturers. 3M could give us indications for business and consumer activity. UPS is a direct window into business shipments and online consumer activity. Strong earnings and guidance from UPS could be very beneficial to offset a weak GDP. Whirlpool is a major products manufacturer of consumer goods. Sales of dishwashers, refrigerators and microwave ovens will tell us if the consumer is alive and well or starting to go back into hoarding mode again.
There are dozens of oil companies reporting next week led by four of the majors, XOM, COP, CVX and OXY. Oil companies are expected to report strong earnings but they have strong comparisons after the sharp drop in oil prices to $55 in January. The average price of crude in Q1-2006 was around $67 per barrel. The average price in Q1-2007 was closer to $62. This will cause comparison problems with most companies that depend on the price of oil for their profits. Service companies and drillers should not have same problems but I expect them to relate stories of slower drilling due mostly to the collapse in natural gas prices in North America. There was also some serious weather challenges in Canada that caused a halt in drilling activity several times during the winter. Most analysts expect lower profits from the energy sector to produce a drag on the overall S&P numbers.
Google posted a +69% jump in profits to beat analyst expectations by +38 cents. Google's stock price only saw a gain of +$10 on the strong report. Although several brokers raised price targets once again the general public is finding it progressively harder to get excited about Google's performance. After several years of blowout earnings nearly every Google investor expects future blowouts and anything less is seen as a disappointment. It makes no difference that they beat estimates by 38 cents if investors are hoping for a $1 beat. Whisper numbers are normally out of sight and Google has little chance of hitting them. This is the same scenario many retail favorites have faced before with the most remembered being Dell Computer. They blew away estimates every quarter for years and investors rewarded them with an ever-escalating stock price. Since it is a mathematical impossibility to keep growing a business by 50% every quarter forever investors are eventually doomed to be disappointed. Google is facing this problem sooner rather than later since their initial revenue/earnings growth after going public was off the scale. It is tough to compete with off the scale results even if you post a 69% jump in quarterly profits.
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One of the largest surprises of this quarter is the lack of subprime impact to financial earnings. Everyone warned that various companies would show substantial hits from subprime loans but the actual impact has been almost invisible. Since financials account for 21% of the S&P this was expected to be a substantial drag on earnings. The lack of an earnings implosion in the sector is actually providing an upward revision to overall Q1 estimates.
Homebuilders found themselves the recipients of a significant sentiment boost over the last week. On Tuesday the New Residential Construction headline number jumped to 1.518 million homes, an increase from the 1.506 million seen in February. This was a huge surprise with analysts expecting a sharp drop to something in the 1.42M to 1.48M range. Homebuilders saw investors race back into their stocks and a 4-day rally begin. With a couple builders reporting earnings next week that excitement could be dashed but bad news could also be ignored. Investors tend to ignore bad news once they have made up their mind. It would not be news they had not heard before and any positive guidance with those earnings would just provide additional fuel for the current rally.
April is turning into a very strong month for the major indexes. The Dow is up 15 of the last 16 days and appears on track to touch 13,000 early next week. However the indexes are trading very strangely. The major moves are coming from buy programs at the open with little follow through from traders during the day. Friday's opening gains were attributed to CAT, HON, AXP earnings but +140 points of those gains came on the opening spike. There were some extreme imbalances in volume on stocks that were not related to those earnings stories. That volume died immediately after the open and prices declined for the next four hours. The closing rally had the distinct appearance of short covering with volume increasing sharply the closer we got to the close.
Friday was also an option expiration Friday and I believe a lot of our volatility was related to that expiration. Expectations had been for a week of negative earnings and with a strong flurry of positive surprises the bears had nowhere to run with their expiring options but to the exits on Friday. This may have provided the bullish boost.
Further complicating the market analysis was the negative breadth for Tue/Wed/Thr on strong volume. We had the strong gap up on Monday and a duplicate gap on Friday. The rest of the week was lackluster. The long-term trend may be higher but it is being built on the back of buy programs at the open not steady buying by investors. Volume increased all week, which is another indication of possible expiration driven activity.
Market Internals Table
"Sell in May and go away" Everybody in the market for any length of time should already be familiar with that saying. The period from May-1st through Oct-31st is seen as normally the worst six months of the year. In theory an investor that exits in May and reenters at the end of October will do significantly better than a buy and hold investor that holds over that period. According to the Stock Traders Almanac a trader that began with $10,000 invested in the Dow-30 in 1950 and followed the sell in May, buy in November advice would have accumulated $492,000 on that initial $10,000 investment. If you had reversed the process and entered the market on May-1st and exited on Oct-31st you would have a loss of -$318 for your 56 years of investing effort. The S&P-500 would have returned $349,165 using the best six months and gains of $7,102 over the worst six months.
These results typically reflect a weaker second quarter and a listless market over the summer as traders take vacations. The first quarter usually benefits from end of year bonuses and holiday shopping trends. Once spring arrives investors start spending more time outdoors and away from the market. Vacations and children's spring/summer sports produce an alternative to after hours market research. The summer is seen as a time for fund managers to shuffle portfolios and get ready for the best six months period. They want to be fully invested by the end of October in order to ride the rally into spring. This means they use the second quarter to eliminate unwanted positions and plan their end of year strategy. The normal October dip gives everyone a final buying opportunity and Halloween begins the best six months of the year.
Of course the market rarely follows the script that investors are expecting. Sometimes it works like a charm and sometimes investors are cursed with performance where performance should not exist. In 2006 the Dow lost nearly 1000 points from the May-10th high of 11670 to the July 18th low of 10683. In 2005 the crash began earlier on March 7th with a nearly 1000-point decline into the lows at the end of April. In 2004 the high was made in February at 10753 with four successive declines terminating at 9708 on Oct-25th. It never works out with a picture perfect chart pattern but it does come true more often than not to make the returns and the saying worth remembering.
In researching these comments I discovered a striking comparison between our current chart pattern and one that occurred in 2001. The highs were set in February and a sharp drop on economic concerns began in late February. As earnings were announced in late April and early May the market rebounded to new highs despite fears of an approaching recession. A new high was set on May-21st just as the economic data took a negative turn. The market began a multi-month decline, which accelerated sharply in early September just before 9/11. Even without 9/11 the odds would have been very good that we would have tested the March lows as the recession appeared.
Dow Dip Feb/Mar 2001
Nobody knows what script the market will follow in 2007. Our task as investors will be to watch the indexes and see if conditions appear that could be interpreted as the beginning of a summer decline. The current market is already acting strangely despite hitting new highs. I believe caution is advised especially in light of recent economic data and the Fed's flurry of inflation fighting comments. The markets appear to be ignoring the possibility of future rate hikes rather than reacting to the almost daily Fed comments. How long they will continue to ignore the facts is anybody's guess.
The Dow is very close to 13,000 and despite the attention being focused on that number by the mainstream press it has no material relevance to the current scenario. I would be more worried by the 15 days of gains over the last 16 days of trading as a more important indicator than an arbitrary line on the chart at 13,000. The Dow has rallied +1020 points since the March 14th low. The bears are still circling and the bulls continue to trample them on every unexpected breakout. Without the shorts we would still be stuck back at 12500. Eventually the bulls will run out of steam and the current spike will end. 13,000 could become that unlucky number but that remains to be seen today.
S&P-500 Chart - Daily
S&P-500 Chart - Monthly
A more important number would be 1502-1527 on the S&P-500. This is real resistance as the 1502 closing level on Sept-7th 2000 followed by the all time closing high of 1527 on March-24th 2000. These are real resistance levels that have yet to be tested and levels that will likely hold given the current economic/earnings conditions and the length of the current rally. The S&P and the Dow are overbought and due for a rest. Where that rest will begin is likely to be just over 1500 on the S&P.
The Nasdaq managed to post a multi-year closing high at 2526 and just slightly over the 2525 close back on Feb-22nd. The Friday rebound hit a solid wall at 2525 and exactly where strong resistance was expected. With a lot of tech earnings due out next week there will be plenty of opportunity for volatility and potentially a breakout. Any break of 2525 could run into tougher resistance at 2550.
Russell 2000 Chart - Daily
NYSE Composite Chart - Daily
Dow Transport Chart - Daily
The sentiment indexes continue to be mixed. The NYSE Composite continues to push higher to new historic highs but the Russell-2000 is lagging. The Russell took a major hit on Thursday dropping back to 816 after peeking out to a new high on Tuesday at nearly 832. Several tech earnings misses knocked the props from under the Russell and it appeared fund managers were getting ready to bail. The lack of a new high retest on Friday is disconcerting in my view. Nobody wanted to hold short over the weekend given the rash of merger Monday's we have seen recently. If it were not for the expiration pressures the markets could have coasted into the close with snores on all sides.
Next week should be key for direction. Well over 500 companies will report
earnings as well as a dozen economic reports as the month comes to a close. By
Thursday we will know for sure how the earnings are going to play out for the
quarter. 75% of the S&P will have reported and all the guesswork will be behind
us. Sadly all the excitement and expectations about the earnings cycle will also
be over. The remaining 25% of reporters will drag out over the next six weeks
and with Dell,
Cisco and HPQ the only sporadic highlights in mid May. By next
weekend we could be looking at an entirely different market. The sheer number of
on air analysts calling for investors to buy the current breakout should give
everyone a cause for concern.
Abercrombie - ANF - cls: 83.51 chg: +2.43 stop: 79.85
Why We Like It:
BUY CALL MAY 80.00 ANF-EP open interest=6666 current ask $5.00
BUY CALL AUG 85.00 ANF-HQ open interest=2787 current ask $5.50
Picked on April 22 at $ 83.51
FedEx - FDX - cls: 109.03 change: +1.73 stop: 106.85
Why We Like It:
BUY CALL MAY 105 FDX-EA open interest= 899 current ask $5.40
BUY CALL JUL 110 FDX-GB open interest=1105 current ask $5.20
Picked on April xx at $ xx.xx <-- see TRIGGER
Holly Corp. - HOC - cls: 62.30 chg: +1.01 stop: 59.49
Why We Like It:
BUY CALL MAY 60.00 HOC-EL open interest= 380 current ask $3.80
BUY CALL JUN 60.00 HOC-FL open interest=2322 current ask $4.70
Picked on April 22 at $ 62.30
Jones Lang Lasalle - JLL - cls: 109.69 chg: +2.29 stop: 106.75
Why We Like It:
BUY CALL MAY 105 JLL-EA open interest= 11 current ask $7.40
Picked on April xx at $ xx.xx <-- see TRIGGER
Nucor - NUE - cls: 67.69 change: +1.06 stop: 63.99
Why We Like It:
BUY CALL JUL 65.00 NUE-GM open interest=5672 current ask $6.60
Picked on April xx at $ xx.xx <-- see TRIGGER
Intl.Bus.Mach. - IBM - cls: 94.58 chg: +0.29 stop: 96.06
Why We Like It:
BUY PUT MAY 95.00 IBM-QS open interest=19997 current ask $1.80
BUY PUT JUL 95.00 IBM-SS open interest=16011 current ask $2.85
Picked on April xx at $ xx.xx <-- see TRIGGER
Chicago Merc.Exc. - CME - cls: 555.89 chg: +2.04 stop: n/a
Why We Like It:
BUY CALL MAY $580 CNM-EV open interest= 664 current ask $6.70
Our plan is to sell if either option rises to $18.50 or more.
Picked on April 22 at $555.89
Lockheed Martin - LMT - cls: 95.40 change: -0.23 stop: n/a
Why We Like It:
BUY CALL MAY $100 LMT-ET open interest=1884 current ask $0.90
Picked on April 22 at $ 95.40
Advance Auto Parts - AAP - cls: 40.80 chg: +0.71 stop: 38.59*new*
A widespread market rally on Friday helped AAP post a 1.77% gain and set a new ten-month closing high. The move looks pretty bullish now that AAP has cleared congestion in the $39.50-40.50 region. Traders might want to jump in now or on a dip back towards $40.50. Our target is the $44.50-45.00 range. We do not want to hold over the mid-May earnings report. FYI: The P&F chart points to a $48 target. Please note that we're raising the stop loss to $38.59, just under the simple 50-dma.
BUY CALL MAY 35.00 AAP-EG open interest=1000 current ask $6.20
Picked on April 11 at $ 40.05
Apple Inc. - AAPL - cls: 90.97 chg: +0.70 stop: 89.45
AAPL spent last week consolidating along support near the $90.00 level and its rising 50-dma. Hopefully after a week of rest the stock will see some pre-earnings excitement. The company is due to report earnings on April 25th after the market's close. We are planning to exit at the closing bell on Wednesday to avoid holding over the earnings announcement. More aggressive traders who want to hold positions into the iPhone launch may want to hold over the announcement. We're not suggesting it. However, there were some bullish comments recently suggesting this is our last chance to own it near $90 and that the stock was ready to take off. We'd like to think so and will certainly be re-evaluating a new entry point after we see the dust settle from the earnings report on Wednesday. Currently the P&F chart points to a $123 target. Our target has been the $97.50-100.00 range. We are adjusting our target to $96.50-97.00 given the March highs near $96.80. We're not suggesting new positions although more aggressive traders will want to reconsider if shares rebound from here.
Picked on March 19 at $ 91.01
Boeing - BA - close: 93.29 change: +0.30 stop: 89.85 *new*
BA was a bit of a disappointment on Friday. The rest of the market was in rally mode but BA lost most of its early morning gains. Shares have struggled to build on Wednesday's bullish breakout. The company is due to report earnings on April 25th before the market's open. That doesn't give us a lot of time so we're not suggesting new positions. We will plan to exit at the closing bell on Tuesday to avoid holding over earnings. Please note that we're adjusting the stop loss to $89.85. Our target is the $97.50-100.00 range.
Picked on April 18 at $ 92.35
Cigna - CI - close: 152.27 chg: +2.24 stop: 144.95
The market's big rally on Friday was a huge help to CI. The stock rebounded and actually recouped all of Thursday's declines and more. Shares are getting closer to our target in the $154.50-155.00 range. If you plan to aim higher you might want to use Friday's rebound as a new entry point - just consider using a tighter stop loss. We do not want to hold over CI's earnings report in early May.
Picked on April 05 at $147.75
Core Labs - CLB - cls: 85.50 chg: +0.72 stop: 83.99 *new*
Traders continued to buy the dip above $84.00 and CLB managed a 0.8% gain after a late-day rebound on Friday. Unfortunately, the stock is still looking a little weak and we've run out of time. CLB is due to report earnings after the closing bell on Monday, April 23rd. We plan to exit on Monday at the close to avoid holding over the report. Please note that we're adjusting the stop loss to $83.99.
Picked on April 08 at $ 87.25
Chicago Merc.Exc. - CME - cls: 555.89 chg: +2.04 stop: 544.75
We have bad news. It looks like investors are going to wait for CME's upcoming earnings report before they place any new bets. This left shares trading in a relatively tight range (for CME) on Friday. The stock definitely under performed the broader market. We are not suggesting new call positions. However, given this sideways consolidation and the upcoming report on Tuesday. We are going to launch a new high-risk, speculative strangle play on CME. Look for it below in the strangles section of the newsletter. We plan to exit ahead of the April 24th earnings report.
Picked on April 16 at $557.50
ConocoPhillips - COP - cls: 71.25 chg: +1.97 stop: 68.75 *new*
Wow! What a difference a day can make. A rebound in markets overseas and a bounce in crude oil helped power a strong rally for oil stocks. Rival oil stocks XOM and CVX made it to new all-time highs. Shares of COP spiked at the open and kept climbing to set a new three-month high. COP looks poised for more gains on Monday. More conservative traders may want to consider locking in some gains soon (or now). We plan to exit on Tuesday at the closing bell to avoid holding over COP's earnings report on Wednesday morning. Please note that we're raising our stop loss to $68.75, just under last week's low.
Picked on March 20 at $ 66.31
HESS Corp. - HES - cls: 57.56 chg: +1.40 stop: 55.45*new*
The widespread bounce in the markets and the oil sector helped HES rally 2.5%. Volume came in above average on the gain, which is bullish. Unfortunately, we're almost out of time. Earnings are due out on Wednesday morning so we plan to exit on Tuesday at the closing bell. Please note we're adjusting the stop loss to $55.45, just under last week's low. FYI: The weekly chart appears to have a wide, bullish channel. We'll keep an eye on HES post-earnings for any new entry points.
Picked on April 15 at $ 57.87
Joy Global - JOYG - cls: 47.81 chg: +0.81 stop: 44.75
JOYG enjoyed a lot of strength on Friday morning. The stock gapped open at $48.03 and spiked to $49.32 before paring its gains and closing with a 1.7% gain for the session. The stock tagged the top edge of its short-term channel so don't be surprised to see a dip back toward the 10-dma near $46.50. We are suggesting two targets. Our conservative target is $49.85-50.00. Our aggressive target is the $52.25-55.00 range.
Picked on April 12 at $ 46.48
McKesson Corp. - MCK - cls: 60.22 chg: +0.18 stop: 57.99
MCK is trading near seven-year highs but we are a little disappointed that the stock didn't show more strength on Friday. Shares traded in a narrow 47-cent range. The close over $60.00 is still positive but our enthusiasm is cooling a bit. Readers can choose to buy calls now or look for a dip (or bounce) near $59.00 as a new entry point. Our target is the $64.00-65.00 range. FYI: The Point & Figure chart points to a $73 target. More conservative traders may want to see a new relative high (over $60.51) before initiating positions.
BUY CALL MAY 55.00 MCK-EK open interest= 812 current ask $5.80
Picked on April 19 at $ 60.15
Wynn Resorts - WYNN - cls: 102.51 chg: +0.50 stop: 97.49
The rally in WYNN on Friday was a bit under-whelming. Shares gapped open but reversed course at $103.69. The trend is still bullish and we would still consider new positions here but more conservative traders may want to tighten your stops. We plan to exit ahead of the early May earnings report. Our target is the $108.00-110.00 range. More conservative traders may want to exit early near the late February highs around $106.60. FYI: WYNN's P&F chart points to a $120 target.
BUY CALL MAY 100 UWY-ET open interest=1073 current ask $5.90
Picked on April 15 at $102.44
Allegheny Tech. - ATI - cls: 117.04 chg: +3.40 stop: 109.85
Target achieved. Positive earnings reports from RS and NUE on Thursday night helped fuel a rally in the steel stocks. Shares of ATI surged higher on Friday morning and hit an intraday high and new all-time high of $117.82. Our target was the $117.00-120.00 range. We are closing the play but more aggressive traders might want to hold out for a rise closer to $120 since ATI still looks poised for gains on Monday.
Picked on April 03 at $110.26
TEREX - TEX - close: 77.55 chg: +0.96 stop: 69.89
Target achieved. The market's early morning rally had a big affect on TEX. The stock gapped open at $78.07 and spiked to $79.00 before slipping back to close with a 1.2% gain. Our target was the $79.00-80.00 range. If you didn't exit with us consider tightening your stop loss. TEX continues to look poised for more gains on Monday.
Picked on April 15 at $ 73.95
When browsing an old copy of STOCKS AND COMMODITIES recently, I had an "Aha!" moment, an "Of Course!" moment, a slap-myself-on-the-forehead moment. In "Building Automatic Trendlines," author Giorgos E. Siligardos makes the point that perhaps not all trends can be defined by trendlines.
Note: The charts on these pages do not feature up-to-date prices.
Annotated Three-Minute Chart of CMGI:
This problem arose when I studying the bounce off last summer's low for an article on the corrective fan theory. The first trending movement rose so sharply than it was difficult to draw the first trend, or fan line, off that rise. Was the trendline valid? I had questioned its validity in that article.
As Siligardos points out in a different example in his article, no peaks and troughs exist in CMGI's early morning drop on Friday, 3/30. How does one draw a descending trendline along the peaks when there are none?
Another problem exists. Siligardos also points out the subjectivity technical analysts sometimes employ when deciding what constitutes a peak or a trough.
Annotated 15-Minute Chart of the OEX:
There's more controversy than you might expect about the subject of the connection between trends and trendlines. For example, Clifford Pistolese might differ with my assessment that there was no uptrend during the illustrated period on the OEX. In USING TECHNICAL ANALYSIS, he describes how to determine an uptrend in prices, including all instances when the successive troughs are higher than the ones that preceded them. He goes on to add, "The locations of the intervening tops have no significance with respect to the establishment or confirmation of the uptrend." (5)
The "Chart School" Section of StockCharts.com specifies that a trendline is a "straight line that connects two or more price points and then extends into the future to act as a line of support or resistance." No requirement for corroborating higher highs in an uptrend or lower highs in a downtrend is made.
In MASTER THE MARKETS, Tom Williams asserts that, at the time the book was written, no documented scientific research verified that trendlines work. However, we all act on anecdotal evidence that they do, at least until broken. In that book, Williams cautioned that although traders might be able to draw trendlines mechanically, using the tools provided in their charting programs, they should not interpret them mechanically. Although even Williams seems to require only that successive peaks be lower in a downtrend or successive troughs be higher in an uptrend before constructing a trendline, he does appear to assert that some judgments be made about what constitutes an uptrend or downtrend.
Trendlines seem so easy, don't they? However, my attempt to draw a trendline (or fan line, for the corrective fan theory) under last summer's short, sharp first uptrend proved to me that they aren't so easy, even if I hadn't know that previously. I thought my problem lay in determining which trendline was the valid one, not whether there was one to be drawn at all. At the time I'd written the article on the corrective fan theory, I'd attempted to use RSI movements to corroborate or disprove the validity of a trendline I'd attempted to draw, a tactic that I've found helpful in other instances.
Siligardos would advise that traders classify trendlines as "potential" trendlines and "proper" ones. A proper trendline, in his classification, would require that both higher lows and at least one higher high be seen before a proper rising trendline can be drawn, and that both lower highs and at least one lower low be seen in a proper descending trendline. Otherwise, the trendline--and the trend it's attempting to classify--are only potential ones. The OEX trendline drawn above would have been a potential trendline and not a proper one under his classification. I can't quibble with that.
My "Aha!" moment had come when I had realized that perhaps the problem with finding the correct trendline hadn't been that I was placing it in the wrong place, but rather that that maybe one didn't exist on that chart. Uptrends in price can occur without a straight trendline construction being possible. Siligardos' article also reminded me to emphasize to subscribers that the fact that a trendline can be drawn doesn't verify that a price trend is in place.
My second "Aha!" moment occurred when I realized while scanning Siligardos' article that it may not be possible to draw a straight trendline defining what is clearly an uptrend, but perhaps that's because I'm working on an arithmetic chart. Aha! That was when it was time to slap myself on the forehead. Most charting services default to arithmetic charts rather than semi-logarithmic charts. On an arithmetic chart, the movements take on what are sometimes termed "parabolic" moves that curve sharply higher.
However, if such straight-up or straight-down trending movements, the so-called "parabolic" moves, are charted on a semi-logarithmic chart, straight trendlines often can be drawn! If such trendlines were then transferred to an arithmetic chart, they would show up as curves.
QCharts used to make it easy to switch from arithmetic to semi-log charts, but I haven't figured out a way to do it on my current charting program. I can't yet profit from my "Aha!" moment, but I hope that you can. When you see a move when prices are clearly trending, but you're unable to draw a trendline for the purposes of studying the movement because the move is too sharp for you to define peaks and troughs, try switching to a semi-log chart.
Conversely, if you've drawn a trendline along higher lows or lower highs, don't assume you've identified a trend in place. Make sure that you've also identified at least one higher high before you consider that rising trendline as defining an uptrend and at least one lower low before you consider a descending trendline as defining a downtrend.
If you're interested in reading further, Siligardos' article can be found in the
November 2006 issue of STOCKS & COMMODITIES. He includes code for setting up
trendlines that are defined not just by the parameters set up here but also by
specific percentage swings in prices from peaks and troughs, for those of you
who can input such code into your charting programs.
Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda
Piazza, and all other plays and content by the Option Investor staff.
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