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Posts Tagged ‘technical analysis’

DJIA Chart: Classic ‘Head and Shoulders’

Posted by Larry Doyle on August 11th, 2011 9:01 AM |

Recent market volatility is clearly unnerving.

I believe the volatility is exacerbated by the general decline in broad based participation in the markets over the last few years. Additionally, the growth in derivatives, both within the equity and fixed income markets, has served to accentuate the swings.

I described these swings and the accompanying spike in volatility as the equivalent of an Adult Swim Only a few days ago when I wrote, What Caused the Market Meltdown?.

What are the implications for a market in which there is a lack of broad based participation?

To an ever increasing extent, professional traders study the charts and perform technical analysis to determine likely levels of support and resistance.

On that note, let’s navigate and review a chart of the Dow Jones Industrial Average which takes us back 5 years and provides a fabulous view of the recent cliff dive along our market landscape. (more…)

Reason to Be Concerned About the Market

Posted by Larry Doyle on July 6th, 2011 8:12 AM |

It is a well known fact that an increasing percentage of daily trading volume in the equity markets is driven by high frequency traders. Whether you think that is a good or bad development is currently irrelevant. It is a reality.

That reality has clearly changed the nature of investing and assessing the markets.

How does one invest with a long term horizon when so much of the market is driven by short term traders? Very carefully.

Long term investing requires a solid understanding of fundamental analysis. In the midst of that endeavor, though, investors might want to have an appreciation for technical analysis, which can be utilized across an array of time segments but is very often applied for shorter time periods. (more…)

“You’re Playing with Sharks”

Posted by Larry Doyle on July 22nd, 2010 6:20 AM |

Is it safe to go in the water? In other words, is it safe to play in the markets under the current construct? Do small retail investors truly stand a chance against the ‘big boys’ on Wall Street running high powered algorithmic trading programs and assorted other high frequency trading mechanisms? Are fundamental traders being thrown around amidst the ‘high waves’ and ‘strong surf’ pounding the shore?

No doubt, the scene on Wall Street has changed dramatically over the years. The onslaught of high frequency trading complete with a wide array of ‘bait and tackle’ such as flash orders, dark pools, naked access, co-location, and much more make it extremely challenging — if not downright daunting — for those who believe they can navigate these waters with simple ‘rod and reel.’ (more…)

Why High Frequency Program Trading Smells

Posted by Larry Doyle on July 14th, 2009 2:24 PM |

Who does not want the American dream?

Get a decent job, save a few bucks, make some reasonable investments, and try to get ahead. As part of that process, there is a premise that our government officials and market regulators will keep the playing field level.

Why are an increasing number of investors in our country questioning the integrity of our markets? The perception that the playing field is not necessarily level.

Is the field level? Is that perception actually a reality?

I commend Joe Saluzzi of Themis Trading for exposing a few weeks back the questionable integrity of  ‘high frequency program trading.’  The nature of the trading involved in these high frequency programs is consistent with my feeling that the equity markets are following technical analysis to a much greater extent than fundamental valuations.

I commend Joe and his colleagues at Themis again today for highlighting an example of the effect of high frequency program trading on their ability to execute equity transactions on their customers’ behalf. From the Themis website today, Real Life HFT Hijinks Example:

I am trading a small cap stock for a customer today (I leave out the ticker for anonymity purposes). It has traded 4,300 shares so far today. I have 75,000 shares to buy.

The scenario: 100 shares offered at $11.16, and 400 shares offered at $11.17. I place an order to buy 1,000 shares at 11.17.  You would think that I should get at least 500 shares executed (100 at $11.16 and 400 at $11.17). Sigh. I get none. As soon as I hit enter, those offers vanish. No trades on tape even. The HFT players offering the stock have convinced the market centers (ECN’s, Exchanges,  and ATS’s) to cater to them and “show” them my order before they have to execute, thereby giving them the split-second option to back away from their offers without honoring them.

Market makers have to honor their quotes, and even have to do so a certain percentage of the time. The HFT’s have to honor NOTHING. In fact, they can back away and even run ahead of your orders!  So much for their liquidity. Again the real danger is that fund managers assume that the markets can handle their 250,000 share small cap position, and that they can exit with a predictable minimal trade cost.

God, I hope we don’t retest.

There is nothing level about that field. This high frequency program trading is done with the blessing of the exchanges and the SEC.

It smells.

I welcome any market participants involved in high frequency program trading to make the case for the defense. Since Joe Saluzzi truly brought this issue out into the open earlier this month, I have yet to see any case, let alone a reasonable one, made in defense of this activity.

Thus, with overall liquidity in the marketplace less than what it may appear, investors should factor that into their overall risk assessment when making investment decisions in the equity and commodity markets.

Challenge your brokers and financial planners on this topic. I’d love to hear their responses. Please share this post with them. Please share their thoughts on this topic, if they are even aware of it.

I think we will all learn who is truly looking out for investors’ interests as we navigate the economic landscape.

LD

Remaining on Guard…

Posted by Larry Doyle on April 4th, 2009 10:07 AM |

I much prefer a rallying stock market, but I am not a day trader trying to catch moves for quick flips. I look for changes in economic fundamentals (incorporating both private sector and public sector inputs), assess those changes with market technicals (overbought and oversold conditions), and position myself accordingly.

The big wild card in current analysis is the impact of public sector inputs. Many of the maneuvers utilized by the Treasury and Federal Reserve have never been used prior to this economic downturn. Are they working? To what extent? What are the unintended consequences? What is the time delay from implementing a program to measuring its impact on the economy? These questions are the topics of protracted discussions by economists, bankers, analysts, and money managers around the globe. I’d also like to address them here at Sense on Cents.

My market instincts tell me that programs injecting trillions of dollars across wide swaths of the market are not without costs. These costs in the form of “crowding out“, distorted competition, changed behaviors (AIG undercutting insurance rates), moral hazards, and inflation are very real. The challenge is assessing the risks of these long term costs versus the necessity of providing sufficient capital and liquidity backstops to support the economy.  (more…)

Is The Market Overbought?

Posted by Larry Doyle on April 1st, 2009 9:55 PM |

A few weeks ago, I wrote a piece on whether the market was oversold. Allow me to re-introduce a few topics . . .

The market valuation of any asset is determined by three factors:

1. Fundamentals: measures items such as cash flow analysis, cost-benefit analysis, earnings before interest, taxes and depreciation (EBITDA)

2. Technicals: measured by regression of price movements to determine overbought and oversold conditions

3. Psychology: measured by unscientific surveys of market participants

And now the update:

1st quarter earnings are due out over the next few weeks. Most analysts and managers I follow believe these earnings will be lower than expectations and that 4th quarter 2008 earnings will be revised lower. Will companies provide guidance going forward? Many companies have refrained given the economic uncertainty. (more…)

Fibonacci Retracements

Posted by Larry Doyle on March 6th, 2009 12:40 PM |

I am going to assume that for the general public, the term Fibonacci Retracements is not part of the normal vocabulary. In helping people navigate the economic landscape, allow me to introduce you to a basic Wall Street practice utilized by many traders. Every investor can benefit from a basic understanding of this concept.

Major market indices trade based on fundamental analysis (cash flow, asset/liability, earnings ), technical analysis (price regressions), and psychology (measure of bullishness vs bearishness). Our friend Fibonacci falls into the technical analysis camp. I do not want to get overly involved in the arcane aspects of this concept, but it can be very useful in assessing market levels and market directions. (more…)

Is The Market Oversold?

Posted by Larry Doyle on February 25th, 2009 2:40 PM |

The valuation of any asset is determined by three factors:

1. Fundamentals: measures items such as cash flow analysis, cost-benefit analysis, earnings before interest, taxes and depreciation (EBITDA)

2. Technicals: measured by regression of price movements to determine overbought and oversold conditions

3. Psychology: measured by unscientific surveys of market participants

I have never seen such divergent views on expected future earnings which directly impacts any reasonable fundamental analysis. (more…)






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