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POTENTIAL VERSUS CONFIRMED PYRAMID

TRADING POINT
It’s important to understand the difference between a potential and a confirmed
PTP. A potential PTP will appear
yellow on your chart and will not change color until it has been confirmed. Once
the PTP has been confirmed, it
will change color to either red for a bearish downtrend or green for a bullish
uptrend. The definitions of potential
PTP and confirmed PTP follow.
Potential Pyramid Trading Point. A potential PTP may occur when prices have not yet
exceeded the
pointed peak or apex of the triangle. A number of charts in this appendix show
potential pyramids in a row;
they will appear yellow on a live color chart generated by the software. The reason
a pyramid is considered
potential is because price activity has not yet broken beyond the apex of the
triangle.
Confirmed Pyramid Trading Point. When prices exceed the pointed peak or apex of the
triangle, the
pyramid will become confirmed and will appear red or green on a live color chart
generated by the software.
The ART software will give you a voice alert (if you select this feature) only when
the PTP has been confirmed.
The value of watching your monitor to check for yellow potential PTP signals is
that you will have a heads-up that
a signal may be forming and you will have time to calculate your trade size prior
to the signal confirmation.
Important Note: If the yellow PTP signal is voided (not confirmed), it will
disappear from your chart. Another
note is that sometimes in fast-moving markets a confirmed PTP signal will appear
without warning (no yellow
potential PTP). Once you have been using the software and are comfortable with it,
this information will become
second nature and you will respond automatically to the various changing
signals.Typically, the faster the data, the more expensive it will be. The way you
determine the speed you will need is by
deciding what the time frame of your trading will be. In other words, will you be
trading on a higher time frame
and day trading or will you be trading on a lower time frame and investing?
If you plan on investing or position trading, you can make do with end-of-day data.
However, if you will be day
trading, you must have real-time lightning-speed data. Determine what your budget
allows for and what type of
trading you will be most profitable with.
In deciding where to get your data, you will need to take into account the
following factors by answering this
Q&A:
1. Q: What is your budget? Can you afford to pay for data? Do you have a current
data feed?
A: ___________________________________________________________
2. Q: Can you afford to open a brokerage account? What is the minimum dollar amount
required to open and maintain an account?
A: ___________________________________________________________
3. Q: What time frame are you trading in—real-time day trading or end-of-day
position
trading?
A: ___________________________________________________________
4. Q: Will you be paper trading or live trading?
A: ___________________________________________________________
5. Q: What broker(s) do you currently use, or what broker(s) are you interested in
using in
the future?
A: ___________________________________________________________
6. Q: Which of these brokers provide data?
A: ___________________________________________________________
7. Q: Which brokers pay for or waive your exchange fees?
A: ___________________________________________________________
8. Q: Do any of these brokers provide their own front-end charting platform? What,
if
anything, is the cost for that?
A: ___________________________________________________________
9. Q: Do these brokers plug into other front-end charting platforms?
A: ___________________________________________________________
10. Q: What market(s) have you decided to trade?
A: ___________________________________________________________
11. Q: Which symbols will you be trading and through which exchange(s)? What
brokers
carry these items?
A: ___________________________________________________________
12. Q: What trading tools and software do you currently use, and what platform do
they plug
into?
A: ___________________________________________________________
Once you have completed the preceding question-and-answer section, then you are
ready to begin your
brainstorming and research to get the best possible solution for your needs at this
place and time. For starters,
there are lots of choices at your disposal, including a number of front-end
charting platforms and data providers
that can connect you to brokers so that you can literally place trades right off
your chart. You can see in Table
6.12 a variety of data choices.
TABLE 6.12 Select a Data Feed That Matches Your NeedsHaving amassed a sizable
fortune, Roger Babson was not content to join the idle rich. Instead he
shared his business knowledge to protect investors, and invested his own wealth in
industries and
endeavors that would benefit humanity. After witnessing a dramatic stock market
crash and
financial panic in 1907, Roger Babson expanded his investment practice to include
counseling on
what to buy and sell as well as when it was wise to purchase or unload stocks.
Working with M.I.T.
Professor of Engineering George F. Swain, Roger Babson applied Isaac Newton's
theory of "actions
and reactions" to economics, originating the Babsonchart of economic indicators,
which assessed
current and predicted future business conditions. Although the Babsonchart has
since proved to be
an imperfect tool, through it Roger Babson earned the distinction of being the
first financial
forecaster to predict the stock-market crash of October, 1929, and the Great
Depression that
followed.
Roger Babson extended his interest in the public's welfare beyond investment
counseling. He
encouraged industries to develop products to improve public health and safety.
Among businesses
receiving Roger Babson's approval and financial backing were select manufacturers
of sanitary
paper towels and other hygienic products, fire alarm call boxes, fire sprinklers,
and traffic signals.
Roger Babson saw it as his duty to share his insights and experience. An avid
reader and writer, he
sought to dispense his brand of advice and wisdom beyond the readership of Babson's
Reports.
From 1910 to 1923, he commented on business and other matters as a regular
columnist for the
Saturday Evening Post. He also contributed weekly columns for the New York Times
and for the
newspapers owned by the Scripps Syndicate. Babson eventually formed his own
syndicate, the
Publishers Financial Bureau, to disseminate his writings to papers across the
United States. Over
the course of 33 years, he authored 47 books, including his autobiography, Actions
and Reactions.
Although his writings covered topics as diverse as business, education, health,
industry, politics,
religion, social conditions, and travel, the primary message behind each work was
that individuals
and society could and should change for the better.The Major Trend
Now finally we can get to the marquee moment, for your most
important job on Sundays is to determine whether the major trend
of the market is up or down—and at the same time you must think
about what could change your mind. With any luck, you will come
to the same conclusion for 250 weeks in a row or more, but as a
day trader it is still something you must consider and decide upon.
What makes the big trend? As equity investors, we are participating
in an auction market, and that simply means that buyers are pitted
against sellers. For the value of the market to go up, buyers need
to find a way to force sellers to hand over their inventory, which is
shares of stock. They do this by offering them an increasing amount
of money, until finally the holder hands over the shares. This is why
the starts of bull markets are characterized by such intensity. Sellers
need to be begged to hand over their shares, and buyers must
bid ever higher and more intensively to make them do it.
This battle over a limited number of shares is at the heart of the
market. In a bull trend, we start with the premise that buyers must
be more anxious to buy than the sellers are to sell. After we have
determined that this is true, then the question becomes: How muchTen Percent
Solution
Fortunately, there is one more statistical signature in Lowry’s bag
of analytical tricks to help us trade and make money from countertrend
declines amid a bull market. What you need to observe is
the percentage of NYSE stocks trading above their 10-day moving
average, as this is helpful in measuring short-term extremes of panic
behavior. According to Lowry’s, when the percentage of stocks trading
above their 10-day moving averages drops below 10 percent
amid a broadly uptrending market, this is a panic situation that cries
out for you to get your buying groove on. It often coincides with an
isolated 90 percent downside day, so there are lot of sparks flying
that might distract your attention.
A recent example emerged not long after the stock market began
to drop on February 27, 2007. The 10-day percentage indicator
dropped from a peak of 84.6 percent in February to a low of 3.7 per-Poor Timing
Method: Earnings Growth Forecasts
This may be a good time to note a timing methodology that makes
a lot of sense on the surface but doesn’t work at all, and that is trying
to time the market based on earnings growth projections. This
is because there is a real disconnect between earnings growth and
the stock market.
What gives? I know this goes against the conventional wisdom,
but hear me out. Ned Davis Research says that the disconnect
between earnings and stock results has occurred because earnings
don’t actually drive broad-market results—and never have.The same thing happened in
the spring of 2007, as you can see
on the same chart. The decline in U.S. markets started with a jolt
from the blue in late February as a result of a plunge in the Chinese
stock market and then continued into early March toward the
40-week low. The time to buy heavily into the plunge, as you can
see, was when the McClellan Oscillator fell to –200. The oscillator
ultimately fell to –300, but that’s OK. After it fell below –250
during the time frame in which you were expecting a major 40-
week cycle low, you should just have added to your new, leveraged
holdings with confidence.
Not too much later, in both cases, the market reversed, and you
were on your way to a big gain. But there was much more to both
cases than a quick profit because the vacuum created by selling led
to a tornado of bargain hunting and fevered buying. So many stocks
of all sizes and sectors were picked up so rapidly by voracious insti-
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×100The first pocket pivot is off both the 10‐day and 200‐day moving averages. The
two
days after this pocket pivot could be considered buyable as the stock is breaking
out
of a sideways consolidation/base. The two Xs that follow are both extended from the
10‐day moving average and above the buyable gap‐up day.
2. The second pocket pivot is off the 50‐day moving average after a constructive
consolidation
into the 50‐day moving average. Note how the price action does not suddenly
run into the 50‐day moving average but has a subtle rounding‐out effect.
3. Part of the third pocket pivot is cautionary since it is extended relative to
the 50‐day
moving average because the stock bounced straight up from its 50‐day moving
average.
The two Xs that follow are under the 50‐day moving average.
4. The fourth pocket pivot is up through the 50‐day moving average after a
rounding‐out
pattern is formed under the 50‐day moving average. The X that follows is extended
from the 10‐day moving average.
5. The fifth pocket pivot is a base‐breakout, so while it is extended from the 10‐
day
moving average, it is not extended relative to the overall base.
6. The sixth pocket pivot is also a base‐breakout and off the 10‐day moving
average.
The first, third, and fourth Xs that follow are extended relative to the 10‐day
moving
average. The second X that follows comes after a relatively sharp drop in the
stock,
and so it should not be bought until it closes at or above its 10‐day moving
average.
7. The seventh pocket pivot is cautionary since it is somewhat extended from the
10‐day moving average and comes after relatively choppy price action, even though
it is rounded‐out price action.The first X prior to the first pocket pivot is too
soon in the pattern, since it is just the
stock’s third day of trade since it went public. The second X occurs after a
downtrend
and closes under the 10‐day moving average. That this stock has only been trading
for a few weeks increases the risk in buying here. The first pocket pivot occurs
off
the 10‐day moving average, after the stock has had a chance to round out its basing
pattern, trading tight for three weeks. The next two Xs are extended from the 10‐
day
moving average.
2. The second pocket pivot is a buyable gap‐up, which is discussed in the next
chapter.
It occurs after a steep pullback, which is not unusual for a volatile IPO such as
this one.
3. The third pocket pivot occurs off the 50‐day moving average on the day it does
its
secondary offering. Notice in the days leading up to the third pocket pivot how the
stock got continuous support as it tested its 50‐day moving average. The next two
Xs
are extended from the 10‐day moving average. The window of opportunity to buy is
often just on the day of the pocket pivot.
4. The fourth pocket pivot retests, breaks to new highs intraday, then has a
reasonably
strong close. Such upside reversal patterns are particularly favorable. The X that
follows
is extended from the 10‐day moving average.