MetaStock U looks at ways to incorporate fundamentals into your technical analysis

MetaStock SPRS Series - Week 53 - TechniTrader® Stock Discussion for MetaStock Users: XLNX - January 30, 2012
By: Martha Stokes C.M.T.

One of the things I try to teach my students is to realize that the technical side of analysis is simply the graphical view of what is going on with the fundamentals of a company. Institutions dominate the market and account for an estimated 70-90% of shares traded each day. What the institutions decide to buy or sell matters. It is therefore; always important to know the institutional ownership percentage of a stock to help you interpret the charts better.

Here is an example:

XLNX is in the electronics industry under the semi-conductor sector. It has about 98% institutional ownership right now. That means only 2% of the outstanding shares are owned by small lot investors or retail traders. This data is fundamental, some of the most important fundamental information, that is easily added to your technical analysis and increases your understanding and ability to interpret the price action without needing a degree in accounting or being a CPA. These are basic fundamentals that you should pay attention to.


Chart 1

There are 20-25 major institutions (mutual funds, hedge funds, and pension funds) that influence stock price action greatly. Although there are over 16,000 funds of various sizes and type, these top institutions are the ones that truly matter because all of the other funds chase the big funds.

TechniTrader® indicators are designed to expose when the giant funds are moving in quietly because these funds are using Dark Pools, Icebergs, and other quiet accumulation buying methods for their trades.

When a stock such as XLNX has more than 80-85% institutional ownership, this will affect how price behaves.

Knowing ahead of placing any trade what that percentage is at that time, can help you determine what price and volume action to check for to determine who is buying and who is selling.

Generally if the institutions own most of the outstanding shares, then some fund will be selling in order for buying to occur.

When a giant fund starts selling out at a fundamental resistance level, the selling can tip the price action to the downside. This is what happened on XNLX as it ran into the high of 2011. Funds started selling even as buyers came in on the good news. The exhaustion volume pattern warns that this was not only large lot institutions but also High Frequency Traders trading this stock on the millisecond scale during that day.

Other fundamentals that can be particularly useful to short term traders are:

1. Yearly highs pose fundamental as well as technical resistance levels, giving these highs extra resistance clout, especially in weaker market conditions. Many stocks that have very high institutional ownership can experience more severe corrections due to giant funds rotating out or selling off at least some of their holdings at yearly highs. Knowing this fact can help you mark these resistance levels to alert you to the higher risk of deeper retracements or corrections.
2. All-time highs are major fundamental resistance levels, especially if those years were big bear market years. XLNX’s all-time high was around 92. Currently this is not a factor, and it is actually a plus for XLNX because there is plenty of room for the stock to move up.

Stocks sometimes have very high institutional ownership percentages and still are great swing and momentum trades. The trick is to be aware of the giant funds and the risk of their profit-taking areas.

Retail traders tend to not use anything but technical analysis and although you can certainly trade with just technicals, if you incorporate a few of the simple fundamentals mentioned above in your chart analysis, you will find that you have a better understanding of what is going on behind the price and volume action.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and 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.

Bollinger Bands in a Platform Market Condition

MetaStock SPRS Series - Week 52 - TechniTrader® Stock Discussion for MetaStock Users: FFIV - Bollinger Bands in a Platform Market Condition - January 23, 2012
By: Martha Stokes C.M.T.

There is no doubt about it: sideways price action gives most traders headaches, weaker picks, and disappointing results. Learning to use the proper indicators during sideways markets is key to having strong profits in a sideways market.

Most traders lack good Spatial Pattern Recognition Skills and therefore, are at an extreme disadvantage in the platform market, which is a tighter sideways pattern than a trading range but not as tight as a consolidation. The platform often confuses traders and many try to swing trade platforms with whipsaw results.

The markets have shifted now as expected, to a platform market condition. You can see the rise in numbers of stocks that explorations pull up from the RSI, Consolidation, and Bottoming scans, which shows the shift from the Trading Range Market Condition to the Platform Condition.

Platform Building Markets are conservative markets where there are only a few of the 9 levels of market participants actively investing or trading the markets. These are periods when speculation is less and value-oriented investing rises.

For Technical Traders, this can be a big plus as it makes it easier to ride position style trades for several weeks yielding significantly higher gains than either daytrading or swing trading styles.

Position trading a platform market requires a modification to the indicators you should use. Momentum style indicators will give false signals and create plenty of whipsaw trades that can erode your capital as well as your confidence.

Instead, choose indicators that are suited for the dominant patterns of the platform markets.

One such indicator is Bollinger Bands.

Bollinger Bands are very popular and can be an additional tool to make stock pick selection faster, easier, and far more reliable, especially in a platform building market.

Prior to breakout moves from platforms, the price action tends to compress. Bollinger Bands can help you see these compressions before price runs or gaps out of the platform. By seeing these patterns early, both position traders and swing traders can enter before price moves.

FFIV has an excellent compression pattern.

Without Bollinger Bands, this compression is harder for most traders to see. By applying the Bollinger Bands and using TTVA, we can see that the stock is heading for a breakout pattern. This is a challenge of the recent highs of early 2011 spring.


Chart 1

By applying Bollinger Bands, we can clearly see the compression pattern over the past couple of days. Instead of a wider sideways pattern, we have a consolidation forming right at the recent tested highs of November.

The tighter the compression of the Bollinger Bands, the bigger the move.

FFIV is a watchlist stock for TechniTrader® students.


Chart 2

The weekly chart shows strong accumulation over the past couple of months since the bottom. Volume is biased to the upside. The sell down was swift and dominated by HFTs and pro trader large lot activity that evaporated very quickly as institutional investors moved in suddenly.

Let’s follow this stock over the next few days to weeks to see how it performs after this compression pattern.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and 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.

Trading with the MetaStock RMO - Jeff Gibby

Monitor JAN-FEB 12: Power User Tip

MetaStock Power User Tip

Working with the Commentary in the Expert Advisor
Contributed by Breakaway Training Solutions

Using the Commentary in the Expert Advisor can be a great educational tool. To help you get the most out of it, watch this short 3 minute video for a couple of helpful tips.

http://www.learnmetastock.com/FreeStuff/FreeVideos/eaww/ExpertAdvisor-WorkingWith.html

For more MetaStock training, make sure to visit us at www.learnmetastock.com or email us at admin@learnmetastock.com.

About Kevin Nelson

Kevin Nelson is the founder of Breakaway Training Solutions, Inc. He has spent the last 17 years becoming an expert on MetaStock software and a serious student of technical analysis while working for MetaStock. Prior to joining MetaStock in 1993, Kevin was a stockbroker for a well-known NYSE firm. In his role as Sales Manager at MetaStock, Kevin interacted extensively with MetaStock customers via phone, webinars, and public appearances. His experiences while working at MetaStock have enabled him to gain a keen understanding of the needs of technical analysts worldwide. While with MetaStock, Mr. Nelson was a featured presenter for four years. During this time, he traveled the U.S. introducing the MetaStock program to thousands of people and teaching them how to use its many features. His easy-to-understand approach is considered by many to be the best in the industry.

©Breakaway Training Solutions, Inc. 2012

Monitor JAN-FEB 12: Support Tip

Support Tip

Why are my candles colored incorrectly?
Contributed by MetaStock Support
The up and down color options in the price properties windows is not based on the same open/close relationship that governs candlesticks. Candlesticks are solid (black) if the open is more than the close and hollow (white) if the open is less than the close. The price bars are colored by the properties window as up if the current close is more than the prior close and down if the current close is less than the prior close. If you want to have candles colored differently, you will need to use an expert with different highlights setup for white and black candles.
You can do this with an Expert Advisor as follows:

1) Start MetaStock.

2) Display a candlestick chart.

3) Click "Tools" and then "Expert Advisor".



4)Click New.



5) Click the Name Tab. Type "Candlestick Color Change" into the Name Field.



6) Click the Highlights Tab. Click New.



7) Type "UP CANDLE" into the name field. Set the color to green. Type "C>O" into the condition field and click OK.



8) Click New again. Type "DOWN CANDLE" into the name field. Set the color to red. Type "C


9) Click OK and close the Expert Editor menu.



10) Now, you can attach this expert advisor to any Candlestick Chart in MetaStock. Simply right click anywhere on the chart and select Expert Advisor, then Attach.



11) Select the Candlestick Color Change Expert and click OK.



12) Your candlestick chart should display candlesticks in red and green.

Monitor JAN-FEB 12: Main Article

Mysteries of Trader Tax Status

Contributed by Jim Crimmins

Just because you call yourself a securities trader doesn’t make you one in the eyes of the Internal Revenue Service.

In fact, Uncle Sam is predisposed to consider you merely a hyperactive investor—and thus deny you a more favorable tax status—unless you meet a number of criteria that are frustratingly open to interpretation.

You read that right: the tax code contains no actual definition of trader tax status.

Instead, the IRS has issued guidelines the tax courts have expanded upon with case law, most of which denied tax appeals by traders.

What we’re left with is a blurred image, like a photograph of a trader taken from a speeding car.

According to the IRS, to qualify as a trader:

• You must seek to profit from daily market movements in the prices of securities and not from dividends, interest or capital appreciation;
• Your activity must be substantial, and
• You must carry on the activity with continuity and regularity.

To help determine if you meet these three tests, the IRS considers these qualifiers:

• Typical holding periods for securities bought and sold;
• Frequency and dollar amount of trades during the year;
• Extent to which you pursue trading to produce income for a livelihood, and
• Amount of time you devote to the activity.

Swoosh, right? What is “substantial” activity? “Continuity and regularity?” And what’s an acceptable holding period? Is a week too long? A month?

We know who investors are: They’re our hardworking neighbors who buy securities and hold them for such long-term goals as a college fund or retirement.

Traders, on the other hand, buy and sell securities solely to take advantage of short-term market changes. Your profits come from price swings, not dividends and interests. Since your holding period is brief, often a day at most—hence the term “day trader”—there’s no need to perform due diligence on the companies you trade.

Who cares how the IRS classifies you? You do!

Investors are subject to the 2% threshold for deductible investment expenses — and hence cannot write off most of their expenses—and are limited to a $3,000 capital loss deduction.

But as a trader, you write off 100% of your expenses, and if you elect the mark-to-market accounting option, you can offset all of your losses against your earned income.

Three Steps to Claim and Protect Your Trader Tax Status

Step 1: Prove beyond doubt you are a bona fide trader — that is, you “seek to profit from daily market movements.”

The best way to accomplish this is by showing a pattern of high trading volume and short holding periods. Keep your personal investments well separated from your trading business. The IRS is looking for “earnest intent;” that is, you work diligently to manage transactions, conduct strategy sessions and make frequent trades.

Step 2: Clear the “substantial activity” hurdle.

The hallmarks the feds are looking for here are “frequent, regular and continuous” trading. That means volume. One court case ruled that 330 trades a year was sufficient to warrant trader status. The feds need to know that you approach this as a business, not a hobby. Fail to convince them of that and you’re back in investor-land.

Step 3: Trade with “continuity and regularity.”

If you want trader tax treatment, it only stands to reason that you must actually be in — and remain in — the business of trading.

Here’s where the IRS is looking for a healthy flow of trades, significant dollar amounts, short holding periods — all the signs that you are at least attempting to make a living as a trader.

If you take the summer off or show other gaps in your trading, the IRS will be disinclined to grant you trader status. If you’re a newbie and flame out after nine months, while it seems unfair, the IRS has made it clear: no trader status for you.

Once you obtain trader tax status, you’re not entirely in the clear. Owing to the capricious nature of appellate rulings and the ever - evolving tax code, there are no guarantees the trader status you enjoy today might not be gone tomorrow.

One good way to secure your trader status is to trade under the umbrella of a business. That’s not only where the most lucrative tax advantages reside, but a legal entity such as a general partnership, Limited Liability Company or C corporation sends a strong message to the IRS that yours is an earnest and legitimate business enterprise worthy of trader tax status.

My recommendation is for you to maintain a day timer devoted completely to tracking the amount of time you spend each day on your trading activities. If you are audited by the IRS chances are it will be two or three years after you have filed your taxes. The day timer will service as proof of how many hours you spend each week on your trading activities.

About Jim Crimmins

Jim has become a nationally known speaker on tax strategies, entity structuring, and lifestyle change. He delivers over 30 talks a year throughout America as well as speaking in several chat rooms each month. You can learn more at TradersAccounting.com.

Price Action on WLK

MetaStock SPRS Series - Week 51 - TechniTrader® Stock Discussion for MetaStock Users: WLK - January 16, 2012
By: Martha Stokes C.M.T.

This week we are going to study the price action on WLK.

WLK has already moved up with velocity that is ending soon.

When swing and momentum traders find these stocks after they have already moved up, they often get discouraged or frustrated. But instead of getting irritated that you missed a great run, simply put the stock on a swing style watchlist and keep an eye on it for a few weeks. More often than not, stocks that ran with momentum once will do so again, once the resistance has been overcome.

I chose WLK to discuss and analyze this week because of the way it had moved.


Chart 1

On January 9th it formed a small springboard with rising volume and improving institutional indicators. Then, it moved up 3 days in a row with accelerating volume and price gains. The first 3 days of this run were velocity then on that 3rd day, the stock closed off of its high. You can see that volume formed what is called an “exhaustion pattern.” This is when volume hits the top of its chart after a fast velocity run. There tends to be profit-taking whenever this pattern forms.

Now, let’s also look at the way price ran so you can learn how to identify these patterns before they start running and get in early for the ride up.


Chart 2

The stock had formed a nice inverted modified H&S bottom with intermittent quiet accumulation. The stock also tested the highs of the bottom several times:once at the end of November with a common gap that filled easily, then again in early December with another common gap, and more gaps that filled in December.

Then, it retested the first support level out of the bottom, the highs of the neck. These held easily because sellers had lost dominance and the buy side was in control. The stock formed a short term round bottom to complete the intermediate term bottom. As it advanced on the highs of that resistance for a 4th time, the price patterns had changed.

The patterns were more consistent, volume was consistent, the candles were tightly bunched as sellers tried to sell down but lost intraday. The candles were steadily gaining toward the highs of the prior resistance and volume was building. There was plenty of energy beneath that price action.

This time, there were no false starts created by common gaps. The buying was consistent and not speculative as the run began.

The steady surge of buyers was followed by more buyers. Sellers gave way under the buying pressure.

A few things warned of the stock starting to lose steam, which required a tighter intraday stop loss to protect more profits than a regular swing style stop loss.

1. The stock closed lower in price in the 3rd day.
2. The stock’s angle of ascent was vertical and had run for 5 days.
3. A volume exhaustion pattern had formed.

With this information as a swing or momentum trader, it was time to switch to intraday support stop losses.

The final white candle overlaps due to profit-taking by some short term traders. Another tight stop loss OR a sell to close is now the choice a trader needs to make. With another exhaustion pattern on volume, and with it closing even lower than the prior day, the risk of profit-taking by large lots, which could topple the vertical angle of ascent quickly, means it is time to consider taking profits and moving on to the next momentum/velocity run.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and 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.