Today’s action gave us yet another “Trend Day,” but it wasn’t your typical trend day for the broader market.  Let’s look at the charts and see what we can learn from the price action.

DIA 5-min chart:

Why was today’s action atypical of a trend day in the indexes?  We lacked a large (or significant) opening gap this morning.  That’s not much of a big deal, but with a gap, we could have had more indication today’s action would indeed ‘fully trend.’

We did have range contraction in the indexes yesterday, and a slight ’spinning top’ candle formed in the Dow, but that’s often not enough to give full confidence odds favor a trend day - I like to see a doji or price being at some sort of resistance or support, and intraday prices have consolidated.  Trend days can be violent range expansion moves out of equilibrium.

Nevertheless, today’s action will be classified a trend day, but when you noticed this and defined it as such (and began applying appropriate techniques) was up to you.

One thing that was remarkable about today’s action was that of the “Slow Creep” nature of prices.  There really weren’t many “swing oscillations” in price, and price slowly ebbed (or drained) its way lower, preventing clean entries and retracement swings.  As a ’swing’ intraday trader, I need these to confirm entries - however, the moment I feel odds have shifted enough to classify the day as a trend day, I generally will establish a core position (small) and hold it into the close.  If it is to be a true trend day, initial trade location will not be important, as we expect price to close on the lows of the day.

The blue circled area was your highest probability ’scalp’ trade of the day, and could have been the position to enter the core trade, but I still would not have expected a trend to unfold at that point.  The moving averages held as resistance, and the averages formed the “most bearish orientation possible,” lending credence to the developing ‘trend day’ hypothesis.

From that point on, sellers quietly, behind the scenes, dominated the buyers until there was a retracement up (two bars) and then a sustained sell-off into the close.  It’s these ‘creeping trends’ that plague both sides of the market:  Sellers cannot find ideal trade location (retracements) to unload (or get short), and buyers keep thinking “well, this must be the bottom.”  Despite the cleanliness of the chart above, the day’s action was difficult to trade because we always like to enter ‘fade’ trades or clean retracements.

Ford Motor Company (F) reported its largest quarterly loss ever:  more than $8 billion.  As expected, the stock was punished by investors in what is deemed a ‘classic’ trend day structure.  Let’s learn from it.

Ford Motor Company (F):

That’s more like it!  The day began with a large (relative) opening gap (greater than 2%) and then provided a counterswing entry, and then flatlined until selling momentum increased after 1:00.  Although price did not close on the lows of the day, it wasn’t far above them.  Volume, not surprisingly, was high today.

Study today’s price action in the indexes and in your favorite stocks for lessons on trend days and appropriate risk management and trading tactics.

Gold prices corrected sharply this week, breaking an upward swing and ‘breakout trade’ pathway, falling just shy of its estimated $1,000 target from the recent triangle breakout pattern.

Gold prices (per ounce) daily:

There are certainly a couple of ways to draw this triangle (is it ascending?  does the trendline start at the March $1,000 high? etc), but the fact is that price did violate the upper boundary and was surging on its way to a fulfilled ‘break-out trade’ mode.  Recent stock market strength among other factors contributed to this recent - somewhat unexpectedly ‘violent’ - downswing.

Gold prices did form a ‘flat divergence’ with the most recent upswing, meaning that this development was not absolutely a surprise.  Flat divergences occur when price makes a clearer higher swing high, yet the momentum oscillator makes an almost identical swing peak (fails to confirm the higher high).  These divergence patterns are not as strong as true negative divergences, but they are warning flags indeed.

The semi-shooting star pattern (candle) at the peak didn’t add to the bullish camp’s argument.

This is a lesson that we need to constantly follow price action for continued signs of strength or of emerging signs of weakness, and not let our overarching bias, trade position, or analysis blind us to up-to-the-minute observations and occurrences in price behaviors.

Right now, the structure seems to favor support about the $910 to $920 area - $910 corresponds with the prior break-out zone (which has already been tested, but subsequent tests may be more likely to fail) and $920 corresponds with the 50 day EMA ($923.43 to be exact).  A break beneath $910 per ounce would set-up a ‘magnet trade’ to the $880 - $890 per share level.

Price faces a critical juncture in the next few days which we need to watch very closely.

The MoneyChimp website offers a simple inflation calculator and brief description of the Federal Reserve’s role in combating inflation - the site is worth a look as well.

Inflation is the hidden burden that decreases buying power over time; as such, it’s important to know what the current rate of inflation is and how it will affect your long-term portfolio and investments.

Through MoneyChimp’s “Inflation Calculator,” you can Input your Current Principle (money now), Years to grow the investment, Growth rate (don’t get carried away here… 7% - 10% on average is more than reasonable), and finally the inflation rate (which is close to 3% per year) - with all these inputs, the calculator will tell you the Future Value of your investment, as well as what the Buying Power is in today’s dollars.

In addition to playing out different scenarios with your finances, you can view a slider tab of historical annual inflation rates.

For example, from 1970 - 1980, the annual rate of inflation was 8%.

From 2000 - 2008, the annual rate was 2.7%.

For 2007, the rate was 4.1%.  I am almost certain the rate of inflation for 2008 will be close to, if not greater than that number.

Finally, the page gives you a little background detail on exactly what inflation is and how the Federal Reserve measures it and tries to combat it.

Hint:  It has to do with Housing, Apparel, Medical Care and other expenses, and separates Food and Energy into a separate category for study.

See what interesting results you can find as you deepen your knowlede of long-term investing.

Are great traders born, or can they learn the skills?  Is it Nature (in-born) or Nurture (learned)?  INO TV has released a video of Russell Sands, an original famed “Turtle Trader” discuss his experience as a turtle and his thoughts on the matter.

Entitled “I am a Turtle,” Sands discusses what he learned and provides his perspective on the long-standing debate.

In the early 80s, two men were in a debate about how great traders are made. Is it nature or nurture? Are great traders born with a natural intuition for economics, human psychology and self-discipline, or are great traders a product of intense education and practice? Out of this question emerged an experimental trading group called the “Turtles“. These individuals, with little to no trading experience (hand-selected from a newspaper advertisement) were put through a vigorous training in trend following by famed traders Richard Dennis and Bill Eckhardt.

Out of this experimental group, Russell Sands was one of the first trainees. In this INO TV presentation, “I Am A Turtle,” Sands shares the lessons and methodologies that his professional trainers taught him.

The video is free, as are other videos from INO.com TV, but it does require quick registration.  I am a huge proponent and member of the INO.com Educational Video Service, and I strongly recommend you become a member as well - it’s only $99 for a full year of access ($49 for a quarter) to over 500 video presentations by dozens upon dozens of wonderful trading instructors across a wide variety of topics - well worth the small fee.  All videos are on-demand at your convenience.

Stay tuned to INO TV for their next set of complimentary seminars. I’ll keep you posted.

(PS - I am doing my blogging this week from sunny Orlando, Florida just outside the Disney Theme Park studios - it’s a working vacation!)

There’s so much to be said about Apple’s (AAPL) intraday performance today.  From the 10% gap down to a rally to close the day off just over 2%, Apple traders were in for an amazing ride.  Let’s look at the intraday and daily chart to see where this leaves us.

AAPL 5-min:

The bulls truly turned a bad situation around in a hurry.  I watched Apple fall after earnings were released yesterday and I figured we’d have a bad gap opening and I suspected there would be at least a 50% retracement of that gap.  I didn’t expect an almost full gap recovery situation!  I tip my hat to the bulls for finding deep value in the price plunge.

Apple reported record June earnings and Q2 profit over 30% greater than Q1, yet most of this was already priced into the stock, and traders punished Apple for lowered guidance in earnings ahead.  These kinds of situations are enough to make your head spin and give you extreme frustration as a newer trader.

“But they had record profits!  Why did their stock go down so much?!?”

To make your head spin even further, Wachovia Bank (WB) reported over $8 billion in losses in Q2, that it will be slashing its dividend, and that it will be laying off over 10,000 workers and it would be almost lunacy to think their stock ended the day well.  But it did.  Wachovia ended the day 27% higher - but these points are for another discussion.

With Apple, usually the best strategy to employ after a gap is to attempt at least initally to trade against the gap, playing for a partial or full fill.  I don’t like to fade equity gaps greater than 2%, but you just never know what will happen so it’s often best to employ a consistent strategy, even if you do so with a smaller than normal position.

Anyway, as the day developed, price initially found resistance via the 20 period EMA which was then broken (and turned into support) before finding resistance at the 50 period EMA, and once it was broken to the upside as well, the ’skies cleared’ and opportunities opened up vastly to the upside with renewed confidence.  I listed the “Highest Probability” trade as being the retest of the confluence of support coming from the 20 and 50 period EMA converging - it was a low risk, high reward situation that paid dividends for aggressive traders.

So where does this leave us on the daily chart?

AAPL Daily:

The downtrend is still officially confirmed, and price is ‘officially’ beneath all three key moving averages, including the 200 period (known as the “line in the sand”) but I’m sure Apple bulls take solace in today’s action.

67 million shares transacted today - while not a record, the activity was definitely impressive.

Let’s continue to watch this stock and how its movements may affect the broader stock market.

TechnicalTrades.net offers traders an Equity Curve Generator algorithm/program for you to input parameters into the formula and randomly simulate outcomes that could be representative of your trading system.

Generally, the success or failure of a trader is due to study of the overall system they have developed personally, and diligent application of that system in the larger picture; individual trades really do not matter, especially when they become one point among hundreds of ’spots’ on an Excel Spreadsheet or some other graphical program that demonstrates equity curves or probability distributions.

There is a Catch-22 regarding evaluating your trading system: You must know a close estimate of your win/loss ratio as well as your % win (or probability of a winning trade) to evaluate your results over a long enough time frame, depending on how frequently you trade. In other words, you won’t truly know how your system performs until you gather sufficient data - trades - to generate a proper %win ratio and win/loss ratio.

One major solution to this dilemma is to run various parameters you think may be closest to your chosen system through an Equity Curve Generator algorithm. The above link provides such a simulation.

The page gives you instructions, but you need to know ( or “toy with”) the following:

1. Ave Win divided by Ave Loss (Win/Loss Ratio).
2. Win percentage

The Win/Loss ratio is derived from an average of each trade. Remember that to enter a ‘good’ trade, you should strive to make your profit target a key value larger than your downside (or protective) stop. You can set this ratio to be exactly 2:1, where your profit target will be exactly two times your stop.

In other words, if a stock trades at $50 and you believe you can get an upside target of $55, then you would place your stop at $47.50 ($2.50 less than the current entry). This is a bit mechanical, and doesn’t really test out in the real world, but it gives you an idea of how to achieve relative consistency with the win/loss ratio.

Keep in mind that most traders will tell you to strive for a 3 to 1 profit to loss goal on every trade, but sometimes this is impractical. Sometimes you may find a 1 to 1 profit to loss parameter to be acceptable, but you will need to consider the second variable - % correct - in order to evaluate this.

The Win Percentage (or “Win Rate”) tells you - on average - how many times you hit your profit target vs. your downside stop. In other words, how many times on average do you take some profit vs taking a loss due to a stop?

Don’t get over-eager - be realistic. Unless you are a position trader or investor, you’re not likely to get many 10 to 1 risk/reward ratio readings, or you might not even get many 5 to 1 (especially if you are a scalper or day-trader).

Also, be realistic in that ‘pure chance’ is a .5 % win (this translates to a 50% chance that a trade will succeed). I do not recommend you get into the simulator and type in anything above 75% unless you want to amuse yourself and see what the numbers would be like. There is too much volatility or things that you cannot predict in the market in a given position, and it is extremely difficult to sustain a high winning percentage for a long time. Realize that most professional active traders achieve in the neighborhood of 40% to 60% win ratios - let this be a sobering thought.

Visit the site and play around with these two variables (ratios).

The bottom line that you should learn from this exercise: You do not have to be perfect to make a lot of money in the markets. The key is consistently letting your average wins be larger than your average losses, among other considerations.

Have fun with this exercise!

The author of the blog “Gaming the Market” informed me that his blog has moved and I wanted to provide the link to his excellent and developing blog.

“Gaming the Market” provides excellent analysis and detailed posting on information relating to the popular topic of “gaming the market.”  So far, the author has addressed short-selling, the plunge protection team (does it exist?!), insider trading, convertible arbitrage, options & stock movement, and more.

I was particularly interested in his recent post regarding the famous “Plunge Protection Team” (entitled “Front-Running a Systemic Crash“) where he discusses a variety of opinions and analysts’ statements regarding this mysterious force that may or may not exist.

Here’s a couple of teaser quotes:

“Ever notice how official speeches to prop up the US capital markets are timed right before a massive sell off? How about those last hour rallies when the market looks really bad?”

The blog then provides the full-text of Executive Order 12631: Working Group on Financial Markets and then discusses the “Treasury’s War Room.”

In other posts, he describes the mechanics of short-selling, why ’short-interest’ is not necessarily comprised entirely of ’short-sellers,’ and later discusses the “Short-Squeeze of the Century” (hint: It was in the 1800s and was comprised of activity on a given railroad stock - interesting historical read).

Be sure and stop by and check out some of his material.  I’m looking forward to learning more.