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Robert Edwards
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Contrarian daytrading technician who specializes in locating high probability short term trades while predicting price movement directions with over 85% accuracy. Most of my trading involves either extremely short term micro scalping of stocks or commodities (using 1 minute bar charts), or swing... More
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  • The Dow Has Fallen 6 Days In A Row -- Should I Be Bullish?

    Basic Probability Theory

    Each day there is a (coin flip heads or tails), 50% chance the Dow Jones Industrial Average will close up, and 50% chance it will close down. Well, today the Dow has closed down for 6 days in a row, a very rare occurrence. To calculate the odds of such an event, just take 1 divided by 2 raised to the 6th power (1 / 2X2X2X2X2X2 chance) which is 1 chance in 64. To get another down day tomorrow to make seven down days in a row, the odds are 1 / 2^7 or (1 chance out of 128).

    It would seem logical that if the Dow trades down early tomorrow, I should buy stocks with the anticipation we will get an up close. However, each coin flip is independent with no memory of the previous flips. It is just as likely we close down for a 7th day tomorrow, as break the string by closing up. I can only lament the fact the Dow has come up tails 6 times and the chance of heads (an up day) tomorrow is still just 1 out of 2 (50%). Probability theory would dictate that I cannot base my future buy and sell decisions on the immediate past. The story should end there, right? Wrong!

    Research Shows That You Want To Buy After 3 to 7 Consecutive Down Days

    Larry Connors back in January 2007, wrote a very interesting article that you can find on the internet here. According to research performed by TradingMarkets, if you see where a stock is trading a week following 3 to 7 consecutive up days, the stock is usually down. The more consecutive up days, the more negative the returns one week out. This reversion to the mean logic makes a lot of sense.

    However, when it comes to buying a stock that has fallen for 6 consecutive days (like the Dow just did), one can expect for the stock to be trading 0.82% higher a week from now. If Friday is also a down day, making 7 down days in a row, then the one-week expected gain is 1.06%.

    It will be fun to watch and see how the Dow performs tomorrow to see if we indeed get 7 down days in a row, or we finally get that up close. In any case, I will be long the December Dow Futures contract (YMZ4) to take advantage of a short-term relief rally that should occur next week.

    The Crude Conundrum

    One thing that did occur today was November Crude Oil (CLX4) finally traded below $80 early in the day, but reversed hard to the upside, hitting $85 before falling back to close in the mid $82s. If $80 was taken out, everyone was sure crude oil was doomed to drop to $75, $60, or $40. It was almost assured then that we would go the opposite way when the dreaded $80 support level was breached. Art Cashin on CNBC mentioned on Wednesday that weak crude prices were depressing stock traders, spelling weak demand, and economic doom around the world. Shale oil plays which is supporting our economic growth, needs crude oil to trade above $80 to remain economically viable.

    The last couple days, traders were getting very short November Crude Oil when it traded just above $82, and making lots of money as Crude Oil fell back towards $80. As it came out of the hole today, I said to myself, I should put a buy stop just above $82.50 because if we should pop on up, the shorts who shorted between $82 and $82.50, would have to cover. I didn't trade it, but as predicted, when crude oil hit $82.50, it almost immediately exploded another $2.50 to the $85 level, before falling back to the mid $82s. Now, there will be a lot of support in Crude Oil around $82 as the big boys don't want to let any bears out of their short contracts at a profit, by falling back under $82. From the $82 launching pad, it will be fun to see how far Crude Oil can rally, which could help support the stock market. Weak Crude Oil prices have been blamed for the weakness seen in stocks, looking at decreasing world demand. The demand is unchanged but in fact it is the supply that is burdensome and knocking down prices. But right now traders are looking at weak crude prices as bearish for stocks, when in fact weak crude prices is bullish for stocks. For now, since it is working, I will forget normal logic and look at higher Crude prices as bullish for stocks and lower prices as bearish.

    As long as Crude Oil stays above $82, then I will be bullish stocks. But as soon as Crude Oil again breaks under $82, then it will be time to go short crude oil with $80 likely being taken out soon thereafter. That would also be the signal to abandon any long Dow Jones futures position as the correction is over and both Crude Oil and stocks are probably again heading lower.

    Disclaimer:

    The thoughts and opinions in this article, along with all stock talk posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

    Tags: DIA
    Oct 16 7:17 PM | Link | 2 Comments
  • Time To Start Following The Triple Leveraged Stock Market ETFs: SPXL & TNA

    The Stock market is very oversold right now, on a short-term basis. They have pounded the markets relentlessly the last few days, thanks to Ebola and other fears. But that could soon change. Patti Domm on the CNBC website, just wrote an excellent article explaining how we might be close to a bottom, click here.

    Everyone keeps talking about whether or not the Dow and S&P will make a 10% correction, or if we can rally from here with only a 6 or 7% correction. We can take a look at both of these possibilities using triple leveraged ETFs. I googled "leveraged stock market ETFs and found this page here. I would probably not want to trade an ETF with the volume less than 1 million shares per day, and would stick with the large volume funds on this list. That means that the triple leveraged Dow Jones ETF (NYSEARCA:UDOW) should not be traded. Instead, if I was looking for large cap stock exposure, I would trade SPXL. For small cap exposure, TNA is the ticket. We can now take a look at both of these charts starting with the weekly chart of SPXL.

    (click to enlarge)

    The triple leveraged Direxion Bull S&P 500 ETF (NYSEARCA:SPXL) has been in a solid uptrend for the past three years, as shown on the weekly chart above. But recently SPXL has topped out at $83.59 and has fallen for the past 4 weeks. For the past 3 years, corrections have lasted about 4 to 6 weeks, so it is likely SPXL will bottom within the next couple weeks and head higher. This is only the third time that the correction has been severe enough to hit the 50 week moving average "blue" line on the chart. The last time this occurred was back in November 2012. If the S&P corrects 10%, then the SPXL could fall 30% from the recent high of $83.59, which would take us down to around $58.50. There is support at $60 from April 2014, shown on the chart. Thus it would appear that the bottom should occur within the next 10 to 12% drop from here. This might be a good time to begin buying SPXL on dips and selling out on rallies, with the intention to buy more aggressively if we approach the $60 level. We can now look at the weekly chart of the triple leveraged bull small cap fund (NYSEARCA:TNA):

    (click to enlarge)

    The small caps chart is not nearly as bullish looking as the SPXL. In this chart, one will see that we have broken far below the 50 week moving average and are shooting for the 200 week moving average below. The April/May 2014 support levels have been taken out long ago. Instead of bottoming after 4-6 weeks, the TNA tends to fall for 8 to 10 weeks before bottoming. We are now on the 7th week, and so far, we are slightly higher for the week after just two days. Support looks solid around $50 which was last seen in August/September of 2013. Because the TNA has already made lower highs and lower lows a couple times already, and appears to be in a downtrend, I prefer trading SPXL and will begin buying into SPXL on dips. I will end with a daily chart of SPXL:

    (click to enlarge)

    As we start trading today, we are starting out the day, down over 100 points in the Dow Jones Industrial average. If we don't recover today, the SPXL will suffer a five day down draft. It is rare for the SPXL or the Dow Jones Industrial Average to fall more than 4 or 5 days in a row without having a corrective rally. I would anticipate that by the end of this week, we will be trading higher than we are at present.

    Disclaimer:

    The thoughts and opinions in this article, along with all stock talk posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

    Tags: SPXL, TNA
    Oct 15 8:12 AM | Link | 2 Comments
  • Cheaper Energy, Gold Price Stable, Possible QE4...Should Make One Bullish Gold/Miners

    Cheaper Energy Should Reduce Mining Costs Of Production

    Crude Oil is indeed crashing in here. Today Crude Oil plunged 5%, click here. OPEC is worried about giving up market share, and Saudi Arabia as swing producer does not mind oil prices falling to the high $70s or lower. In my last article, I was looking for a bounce in Crude Oil as it was oversold. However, I was wrong, like some other traders, click here. I thought $70 would hold as support in the triple leveraged energy stock ETF (NYSEARCA:ERX) but today that support gave way. At this point there is no bottom in sight.

    With crude oil prices dropping, this is very bullish for gold mining companies as it will help reduce mining costs and contribute directly to the bottom line. I do not believe that the gold mining stocks have yet factored in the windfall of lower energy prices.

    Gold Prices Are Stable

    (click to enlarge)

    Thanks to Jim Wyckoff for the above chart, located at kitco.com. December Gold needs to trade above the $1242 resistance level and then shoot for the 50 day moving average sitting around $1255. That would establish a bottom. However, gold might then retest the lows but should find support at $1217, $1200, $1181 and if that fails, an ultimate bottom in the $1135 to $1150 area looks as the worst case scenario.

    For downtrodden gold bulls who need some encouragement, here is a video by Peter Hug and Jim Wyckoff of kitco.com, click here.

    Fed Governors Are Debating Possible QE4

    I heard on CNBC that a couple Fed Governors the last couple days have come out to say they are open to possible QE4 if necessary. This would be extremely bullish for gold and it is amazing that the gold market has not rallied on this news.

    I will finish with a daily chart of the Major Gold Miner ETF (NYSEARCA:GDX):

    (click to enlarge)

    The daily chart of GDX shows that we have been going sideways after making a 6 year new low on October 8th, taking out the old support level of $20.18 by 7 cents. Lower prices were soundly rejected on that day and the market has since been consolidating. The path of least resistance is higher. Although the gold metal could retest the $1200 or $1180 level, there is no reason for the miners to retest their lows. The gold miners have factored in all the bearishness they need to, and it is time for the miners to begin rallying and to outperform the metal. The outperformance of the miners over the metal is the confirmation the bulls need to know we have bottomed.

    Disclaimer:

    The thoughts and opinions in this article, along with all stock talk posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

    Oct 14 6:41 PM | Link | 2 Comments
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