Official MetaStock Blog

Friday, February 7, 2014

TechniTrader Weekly Stock Discussion for MetaStock: “Technical vs Fundamental Support Levels”

MetaStock® SPRS Series - Week 157 – February 7, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

One of the most wonderful aspects of studying charts and learning to read them properly is that the technical trader has the viewpoint of all the traders both professional and retail, who are employing technical patterns for their buying or selling decisions. In addition, anyone who is able to interpret and understand chart analysis also is able to see what the fundamentalists are doing. Fundamentalists who do not use technical analysis have many blind spots in their analysis which can be problematic.

There is a distinct difference between how price reacts to fundamental support, and how price behaves at technical support levels. By understanding whether fundamentalists created the support level or if technical traders created that support level, the chartist can easily and quickly know who controls price and how price is most likely to behave at those levels and in the near term.

This is a particularly important skill to develop for downtrending markets. Identifying the difference between fundamental support levels and technical support levels will help a trader prepare for buy-to-cover price action, buy-on-the-dip price, bargain hunters moving in and disrupting sell short patterns, as well as the all important reversal patterns that are critical to recognize for both closing sell short positions and for entering stocks before they blast out of severely oversold conditions.

Many technical traders make the mistake of assuming that all support levels are driven by technical patterns and fail to consider the fundamentalist dominance in many price areas. Simply applying Fibonacci, Gann, regression, speed or other lines or patterns to a chart will not provide the reliability when fundamental support dominates over technical support.

Some fundamental support levels are obvious and easy to identify, such as all time highs, 52 week highs etc. Other fundamental support levels can only be identified by using indicators and price action analysis in a relational approach that reveals Dark Pool and other large lot activity. Contrary to popular myth among technical traders, support levels are not precisely distanced. Support levels can and do occur at inconsistent percentages rather than precise percentage ranges.

Often times technical traders will set up a series of levels for support, only to find these support levels do not hold up and that price often dips into these support levels during corrections or retracements. This can cause serious problems with stop losses, especially percentage style stop losses that are frequently hit due to fundamental buying or selling patterns not recognized by the technical trader. An example of such price action dropping through technical support levels is shown on the chart below.

It is very common for fundamental support to not hold at the highs of that support or precisely at the lows of that support, however technical support levels tend to be very precise.

When a technical trader recognizes the influence of fundamental buyers and sellers on price action and where these levels are developing, the trader is then able to adjust and modify their support analysis and place stop losses at appropriate levels that will not be at risk of whipsaw action which takes out many retail trader stop losses.

Learning to read charts properly involves far more than just reading a book on technical patterns or watching a webinar on various technical theories. To be an expert trader you must understand the intrinsic dynamics of the fundamentalists and the technical traders, where and why they buy, what orders they use, their share lot sizes, and how this creates support levels.

For information on Technical Analysis go to: http://goo.gl/PkzfkF

Trade wisely,

Martha Stokes CMT

Chartered Market Technician

Member of Market Technicians Association

Master Rated Technical Analyst for Decisions Unlimited, Inc.

Instructor and Developer of TechniTrader Stock Market Courses

For additional training visit http://technitrader.com

This Stock Discussion and Training Lesson is sponsored by TechniTrader.com

MetaStock® Partner

TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader and its instructors or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Monday, February 3, 2014

TechniTrader Weekly Stock Discussion for MetaStock: “Why Stock Market Corrections can be a Good Thing”

MetaStock® SPRS Series - Week 156 – January 31, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

After any big down day for the stock market, most of the retail investors and retail traders are very negative. Most of the time any kind of down day, large or small is viewed as a “bad thing” something to be upset about and worried about.

However this viewpoint is not the perspective of the professional side in many instances. To gain a proper objectivity on the polar opposite viewpoints of the retail side versus the institutional side, consider the way the retail news reported the Dow dropping versus the professional news. Retail news and retail comments were “Worst week since 2011,” “Meltdown,” and “Good riddance for that week!”

Professional comments were “The markets had been overbought and need to correct,” “Pricing had been speculative for some time,” and “A correction will provide better pricing.” Clearly the two sides of the market view corrections completely differently. The professional side accepts that corrections are necessary and even good things when viewed in terms of the viability, sustainability, and duration of a Bull Market.

As you can see in the weekly view of the Dow 30 below, whenever the Angle of Ascent™ exceeds the long term sustainable angle of ascent, the market needs to correct in order for the long term trend to continue upward. If the angle of ascent becomes too steep too quickly the correction will be deeper. If the angle remains stable without excessive price speculation, then corrections are shallower. At the end of the year 2011, a deeper correction was necessary due to the shallower correction in 2010. In 2012 plenty of speculative buying occurred that moved the market upward at an ever steepening angle of ascent, with more shallow corrections.

The steeper the angle is, then the higher the risk of a deeper correction. When the angle becomes extremely steep as was the case for NASDAQ in 2000, than a massive bear market becomes inevitable.

What most technical traders forget is that the over 80% of the market participants who buy stocks are fundamentalists. They control price most of the time. Their buying and selling dominates charts and sets many levels of support and resistance. The Dark Pool giant lot investors are predominantly long term investors, and not day traders. That is something most retail traders often forget. Their goal is to buy stocks that are undervalued based on fundamental research their firms do independently of anything the retail crowd has access to. By the time earnings season is underway, Dark Pools are usually sitting on the sidelines.

Fundamentalists create their own resistance levels during speculative market action. The Dark Pool giant lot investors are unwilling to pay more than what they perceive is fundamentally a correct price to pay for that stock. That fundamental principle dictates for retail and professional chartists where they are most likely to see a cessation of giant and large lot buying. It also defines how and where the speculative emotional buying of smaller lots instigates a correction or a topping formation.

By understanding the underlying dominant force of the fundamentalists, technical traders can more easily determine when a true correction will be the beginning of a bear market or when a correction is merely a short term event. Certainly the retail news will always find some reason to explain the correction, however all corrections start first with the giant and large lot investors halting their buying for that stock, index, or market. Without their buying activity, smaller lot buyers with their smaller capital bases will be unable to sustain the runs.

The advantage retail technical traders have is the ability to see the angle of ascent rising too steeply indicating speculative smaller lot buyers, instead of giant lot buyers who do not ever create speculative runs. Dark Pool giant lot investors are wise and do not buy into speculative runs, instead they start selling into speculative runs.

For more information on Technical Analysis go to: http://goo.gl/PkzfkF

Trade wisely,

Martha Stokes CMT

“Angle of Ascent” is a proprietary trademark of Martha Stokes CMT and is available only at technitrader.com

http://technitrader.com

Chartered Market Technician

Member of Market Technicians Association

Master Rated Technical Analyst for Decisions Unlimited, Inc.

Instructor and Developer of TechniTrader Stock Market Courses

For additional training visit http://technitrader.com

This Stock Discussion and Training Lesson is sponsored by TechniTrader.com

MetaStock® Partner

TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Friday, January 31, 2014

Correlation: The Unsung Indicator

One of the real undiscovered jewels in MetaStock is the correlation analysis tools. In a nutshell, correlation analysis lets you see how closely two instruments move together. For example, two stocks that move together in lockstep by the same magnitude will have a high correlation coefficient. A value of +1 means a perfect positive correlation exists between the two stocks. A value of -1 is a perfect negative correlation. Generally speaking, values above 0.7 indicate strong positive correlation and values below -0.7 indicate strong negative correlation.

Correlation analysis is used by long-term investors wanting to diversify a portfolio. In general, investors will seek asset pairs that are negatively correlated such as Gold and the US Dollar Index. Short-term traders use correlation analysis to do what is called pairs trading sometimes referred to as convergence trading. For example two highly correlated stocks are monitored for a temporary divergence where the spread widens with correlation turning negative. Traders will put on positions that profit when the two stocks converge back to normal positive correlation ranges.

The daily chart below shows such a situation between two stocks that typically have high positive correlation, Coke and Pepsi. Pairs traders would attempt to use simultaneous long and short positions to profit when the two diverge with negative correlations--such as the November-December 2010 timeframe--and subsequently revert back to positive correlation. Pairings between stocks within the same sector are often used for these trades (i.e., Walmart and Target, Exxon Mobile and Chevron, etc). Note when overlaying instruments as shown in the MetaStock chart below, it is a good idea to change the y-axis scaling for both instruments to semi-log so that the magnitude of movement is comparable.

Now look at the 1-minute chart of Coke and Pepsi below. Notice at this shorter interval over this particular time span, the periods of negative correlation are more frequent offering more short-term opportunities to exploit (i.e., around the 12:30 PM point on the 28th).

The chart below shows two instruments that are often negatively correlated, Gold and the US Dollar index. A pair like this can offer long-term investors good diversification for their portfolio.

The next chart below shows the the Dow Industrials ETF (DIA) and the S&P 500 ETF (SPY) and a 50 day correlation indicator. As expected these are very highly correlated. Trading opportunities come when the correlation temporarily weakens as in the April 2011, April 2012, and November 2013 timeframes.

Pairs trading is just one example of how the correlation analysis tools in MetaStock can help your analysis. Correlations between options and their underlying instrument are popular to track. And of course using commodity traders can use correlation with spread trading between contracts (i.e., Live Hogs and Corn).

But one thing for sure, Correlation is one of the unsung indicators. So give it a look.

Thursday, January 23, 2014

TechniTrader Weekly Stock Discussion for MetaStock: “Why Volume Indicators are more important than Price Indicators for Stock Chart Analysis”

MetaStock® SPRS Series - Week 155 – January 24, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

Books and articles written for the retail trader or investor adamantly insist that price is the most important indicator. This leads to a serious misunderstanding as to what that statement really means for stock chart analysis. Yes, price is the most important indicator as it reflects the current perceived value of that stock and its company at that particular moment in time, based on the market participant groups that are buying and selling it at that time.

However what is missing in this analysis is that there are 9 Market Participant Groups. During any period of time or “snap shot moment” of price action whether it is on the millisecond scale or a daily chart, not every Market Participant Groups is actively buying or selling. Some are simply holding the stock, OR waiting for the stock to move to a certain price point before they buy or sell.

What matters most in the automated market is which Market Participant Group or Groups are currently controlling price as you, a retail investor or retail trader are about to buy or sell that same stock. Volume at that moment tells you far more about what price is likely to do next, than any price aka candlestick pattern will reveal.

For example:

In the chart below a classic downside candlestick pattern called a “Broken Step” by itself indicates more downside action. Traders only using price and price indicators would react by moving in to sell short this stock, because everything based purely on price action points to more downside potential.

Now let’s study the chart with two powerful, easy to use and learn volume and quantity indicators. First of all, the Hybrid Volume Bar indicator clearly shows a lack of momentum energy for the downside action. If this was a dominant sell short pattern, the Hybrid Volume bars would rise above the Exponential Moving Average. The downside volume is well below the average lines.

Secondly, the Hybrid Indicator Balance Of Power BOP shows clearly that Giant and Large Lot Market Participants had been quietly accumulating this stock prior to the momentum moves up. The momentum aka volume and price action, show High Frequency Trading HFT volume patterns that are impossible to distinguish just from price.

In other words, price by itself fails to expose the following two critical aspects of this price action:

Dark Pool activity that has continued
High Frequency Trader activity that was the propulsion for the upward action

Understanding that these two powerful Market Participant Groups are controlling price in different time frames is vital information for both the retail investor and the retail trader.

The analysis of volume and quantity with price, clearly warns that this is not a stock to sell short. It is merely in a brief profit taking mode.

Price after the broken step pauses in a classic resting day pattern, for a stock in profit taking mode by High Frequency Traders and pro traders. Then it has a classic reversal pattern which is followed by a short run up, then more Dark Pool buying, and then another run upward. Selling short could have cost a retail trader a significant loss, and selling this stock would have taken a position or long term investor out of a stock that has plenty of upside potential left.

Summary:

Retail investors and retail traders often lack a complete education and the training, necessary to transform the information they have at hand into working knowledge and a trading process. Strategies are not enough information to be successful. Unfortunately most retail traders only learn strategies and are never taught the professional style processes that make pros successful, while retail traders struggle to break even at best.

Yes, price is important but without a good depth of education and knowledge on how to use volume as well, you are missing 50% of the analysis necessary to be successful in trading stocks, options, e-minis, Exchange Traded Funds ETFS, and other trading instruments.

Incorporating volume indicators is not just a necessity it is an imperative requirement for successful retail trading in our modern electronic marketplace, where 9 distinct Market Participant Groups trade.

For additional information and to view a TechniTrader video titled “Stock Indicators” go to: http://goo.gl/b3AMRr

Trade wisely,

Martha Stokes CMT

Chartered Market Technician

Member of Market Technicians Association

Master Rated Technical Analyst for Decisions Unlimited, Inc.

Instructor and Developer of TechniTrader Stock Market Courses

For additional training visit http://technitrader.com

This Stock Discussion and Training Lesson is sponsored by TechniTrader.com

MetaStock® Partner

TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Wednesday, January 22, 2014

Converting Charts and Layouts into Templates

There are times when you might need to turn your favorite layout or chart into a template. This is good just to keep as a backup in case anything were to happen to the chart or layout, but it can also be helpful when you need to take the same set of indicators, expert advisor, etc. and apply them to a new ticker symbol. The steps below outline the process for turning your chart or layout into a template, and then applying this template to a new symbol.

MetaStock Instructions

Converting a saved chart (.MWC file) or layout (.MWL file) to a template (.MWT file):

Converting

Open your saved chart or layout (typically through the File-->Open menu and selecting the appropriate File Type in the File Type drop-down then double clicking on your saved file).
Once your saved chart/layout is opened, click File-->Save As, then change the Save as type from Layout or Chart to Template. Give the template a name on the File name line and click the Save button.

Applying the template to a new symbol

Open the Power Console (P button or File-->Open Power Console).
Type in the desired symbol on the Select instrument(s) line or select the symbol from a list.
Click Next.
If you are not using a multiple timeframe template, click the Browse button, select your template, click Apply, then click Open chart (skip steps 5,6,7).
If you are using a multiple timeframe template, click Open Chart.
Right-click on the chart and choose Apply Template.
Ensure “Use Template’s Periodicity” is checked, select your template and click Apply.

Saving a single-symbol chart/layout

Click File-->Save.
Give the chart/layout a name on the File name line and click Save.

Saving a multi-symbol layout

In the lower right corner of each chart in the layout, you will have a “Choose Instrument” button. Click this button and click the “Options” tab.
Make sure the option is set to “Use Chart as Template”. You may want to checkmark “Keep Line Studies” if you have trendlines/symbols/text specific to the symbol you are changing to. Make sure “Change All charts in layout” is not checked and click back to the “Instrument” tab.
Type in the symbol you want to change the chart to and click the “Choose Instrument” button.
Repeat the above steps for each chart in the layout that you want to change.
Click File-->Save.
Give the layout a name on the File name line and click Save.

Building a Watch List Exploration

I know a lot of MetaStock users are a little frightened of the formula language. Here's a quick primer on how to build a Watch list exploration. It 's actually quite simple.

Let's say we want to create a watch list that consists of Stocks that are"

Above $5
Below $50
Traded at least 500,000 shares

To Create an Exploration, simply open up the Explorer and hit on new. It should look like this :

Under Name we would title our Exploration.

Since this is designed to "filter" out stocks that we are not interested in - we can go to the Filter Tab.

Creating basic Explorations is extremely easy. In the case of our code above here's how we would say this in MetaStock:

Above $5 = Close >5
Below $50 = Close <50
Traded at least 500,000 shares = Volume > 500000

In essence to create this exploration you would say the following in the filter tab:

close >5 and Close <50 and Volume >500000.

It will look like this when you are done:

Friday, January 17, 2014

TechniTrader Weekly Stock Discussion for MetaStock: “How to Trade Stocks Profitably in 2014 Using Stock Charts”

MetaStock® SPRS Series - Week 154 – January 17, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

Most retail investors and retail traders do not realize that they have a huge advantage over the professional side of the market. This is due to the constraints, restrictions, rules, and regulations the professional side must comply with on an ongoing basis. It is also due to the fact that 80% of the professionals still do not use Technical Analysis.

Stock Charts are the graphical representation of what the market participant groups who use fundamentals understand about that stock and its company at that time.

What retail investors and retail traders need to learn is how to interpret the stock charts with the understanding that there are 9 primary market participant groups, and each one buys the stock at a different time during the up, down or sideways price action. Over a year or longer time period different market participant groups will be highly active, or not buying the stock at all. When one or two market participant groups are heavily buying or selling a stock, this is called “controlling the stock price.” Each market participant group controls price in a specific way creating easy to identify trendline patterns. When a retail investor or retail trader can identify who is in control they will know how to trade the stock, which trading style and strategy will work best, when to enter the stock, how long to hold the stock, and when to exit the stock.

Let’s study the chart below and learn how to interpret the candlestick patterns and trend line patterns, to learn to identify who is controlling price on this stock chart.

What is very obvious immediately is how precise and consistent the sideways pattern is over time. What is also noticeable are the gaps that follow the sideways pattern.

Sideways price action that is precise means that the buyers are dominant, have a huge amount of capital reserves, buy with a controlled bracketed order that contains price in a narrow range, and eliminates momentum action and volatility. There is also an incremental pattern in the sideways action. Each sideways pattern prior to the gap or run up is nearly equal in time duration.

This is the pattern that giant lot institutions create when they use Dark Pool Alternative Trading System platforms to slowly accumulate millions of shares of stock. The more giant funds that buy the stock, the more consistent the platform pattern will be. Dark Pools are buying in incrementally over time and control price during their accumulation phase.

Once the Dark Pools have completed their buying for that price level it is obvious that High Frequency Traders HFTs automated orders trigger, driving price up. High Frequency Traders can also make mistakes as was the case in July with the attempted to sell down the stock during accumulation, as shown by the red volume spike that month. The smaller funds always chase HFT action. Often retail traders also chase HFT action too, not understanding the market participant group cycle and how it affects the trend, and trendline patterns that form over time.

The stock was under heavy accumulation at the time the HFT triggered order attempted to sell off. Since the giant funds have massive capital bases and a controlled order to buy incrementally their orders overwhelm the HFT sell short orders rapidly and the stock continues to move up many months after that attempt.

Learning to identify who is controlling price at any given time, tells the retail investor or retail trader a huge amount of information that is not available in retail news, guru recommendations, or friends and co-workers opinions about stock trading.

To be consistently successful, retail investors and retail traders must learn and understand the Market Participant Group Cycle and how that affects the stock trend over time. When you use this methodology, your success at investing and trading will improve rapidly and consistently.

Visit our TechniTrader Learning Center to learn more about Chart Training here: http://goo.gl/t60Vfh

Trade wisely,

Martha Stokes CMT

Chartered Market Technician

Member of Market Technicians Association

Master Rated Technical Analyst for Decisions Unlimited, Inc.

Instructor and Developer of TechniTrader Stock Market Courses

For additional training visit http://technitrader.com

This Stock Discussion and Training Lesson is sponsored by TechniTrader.com

MetaStock® Partner

TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.