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Option Millionaires was started in February 2008 to provide traders with information about option trading. Led by three career option traders, whose pseudonyms are JimmyBob, UraniumPintoBeans, and Vantillian, they started one of the most popular option trading communities on the web. Now, Option... More
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  • Despite Short Term "Recovery," The Buyers Remain On The Sidelines

    The standard-issue "I look at price only technician was likely watching Friday's price action across the major indexes and was excited for multiple breakouts about short term downtrend lines. These breakouts were confirmed by each of the indexes, including the DJIA, SPX, NASDAQ Comp., and the Russell 2000. Still, I have a queasy feeling in my stomach that the market still deserves one more whack to the downside before we can hammer out a sustainable bottom.

    Here are the recent trendline breakouts I've been mentioning. Click the chart to enlarge.

    (click to enlarge)

    But, my friends, what is going on under the surface? Despite the breakouts, it appears buyers remain on the sidelines. Take a look at my proprietary indicator below, which measures short term money flow, versus the S & P 500 Index.

    (click to enlarge)

    Now granted, the indicator is only 9 points above an oversold level, just around 40, so a final selloff could accomplish this. For now, however, it still feels too early to buy the dip, no matter the positive "feelings" regarding the market over the last several days. Careful friends.

    ~D

    Apr 20 9:42 AM | Link | Comment!
  • Elliott Wave Corrective Patterns We Should Make Ourselves Familiar With… “Flats”

    I thought it would be appropriate, since we are now in the midst of a broad market correction, to go over some of the common Elliott Wave corrective patterns. While I always say that trading solely off of Elliott Wave is a difficult, if not impossible skill to master, understanding how you can identify the specific patterns can help us grasp an understanding of how the market works.

    These patterns, with the exceptions of "triangles" are different than the traditional technical analysis patterns (head & shoulders, flags, horn bottoms, etc). Let's dive in.

    Below is a chart of the S & P 500, Take a look at the areas circled.

    (click to enlarge)

    All of the patterns circled resemble patterns called either a "flat." or "expanded flat." The general corrective pattern has three "waves" (down-up-down) before concluding. The selling, as in all corrective patterns, is most intense toward the end of the correction. Even if you don't believe in Elliott Waves, understanding that previous sentence could save you from making a lot of mistake. Anyway, here is the "flat" pattern.

    Like I said, down-up-down. That's a standard-issue "flat" pattern. The second type of "flat," the "expanded flat" is only slightly different, but tends to catch investors much more often. In this pattern, the market manages to squeak out another new high before falling.

    So down, a little more up than a normal "flat," then right back down. While all flat patterns are tricky to deal with, the expanded flat is the most difficult to trade. Why? The market makes a new high, it's a break of a prior resistance level. This pattern, from a price perspective, tells us to sell, while traditional technical analysis is yelling at us to buy. So how do we know if we are getting tricked into buying in the middle of that fake out "up" wave in between the two down ones? We need to look for divergences in other indicators.

    Repeat after me. If price is deceiving you on a chart at a specific time, it will also deceive you on an indicator, so don't use price linked indicators (momentum, RSI, stochastic). You would be much better off using a short term volume or breadth indicator instead, such as the percent of stocks above their 10-day moving average. While the market is doing its "fake out" rally, this indicator will most likely decline, telling you that the rally is internally weak.

    Okay, application time. Are we in a flat correction? Let's take a look. The chart below is of the NYSE Composite Index overlaid with the percent of stocks about their 10-day moving average.

    (click to enlarge)

    Yes, it is difficult to read, but IndexIndicators.com is one of the few sites out there that makes this indicator available to the public. Look to the right of the image. The rally has been weakening and a big divergence is evident between the late February and March highs. That means that we are most likely in the middle of an expanded flat. If that is true, then it also means we are in the second "down" wave, which, after intensifying, precedes the conclusion of the correction. So, what are we looking for in this probable last down wave? Panic, calls for a new bear market, oversold readings, etc., then it's time to buy the dip.

    (click to enlarge)

    So tell me, since Elliott Wave corrective patterns, and all Elliott Wave patterns for that matter, apply to all time frames, what kind of pattern is this?

    Mar 16 7:43 AM | Link | Comment!
  • Apple (AAPL) Potentially Targeting $500 – Should We Believe In The Breakdown?

    After regaining its "market darling" status again in late 2013, the world's largest company has lagged. Now, the chart of Apple is pointing to $500, or $35 lower, with yesterday's price action signaling the breakdown of a double top reversal pattern.

    (click to enlarge)

    Apple (NASDAQ:AAPL)

    (click to enlarge)

    So, traders and investors, is it a signal to sell in anticipation of a 7% drop? I don't think so, as the broad market continues to show few signs of gearing up for a significant correction (which could drag AAPL down by this much). Also, if we zoom out to a one year chart, Apple is still just above its uptrend support line dating to its July 2013 low. Therefore, it likely won't pay to be too negative on this stock until this support line is broken.

    (click to enlarge)Now what would make me VERY positive and actually lead me to buy some $AAPL? A pipe bottom. What's a pipe bottom? In short, it's a down day, with a large red candle, followed by an up day, with a equally as large white candle. Statistically, these patterns are one of the most reliable and often follow through with days to weeks of further gains. And, with the NASDAQ 100 futures, as of 6:55 AM EST, up over half a percent so far, a pipe bottom occurring today certainly does not sound like a pipe dream.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.

    Tags: AAPL
    Jan 10 7:08 AM | Link | 1 Comment
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