` Gary Investing Blog: June 2012

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Friday, June 29, 2012

My Notes on 2 leading indicators (LIs)


Conference Board Leading Economic Index (LEI) 
Announcement: Last business of each month, reporting previous month data
It consists of ten leading indicators which can forecast the coming 3-6 months economy.

The ten components of The Conference Board Leading Economic Index® for the U.S. include:
1. Average weekly hours, manufacturing
2. Average weekly initial claims for unemployment insurance
3. Manufacturers’ new orders, consumer goods and materials
4. ISM Index of New Orders
5. Manufacturers' new orders, nondefense capital goods excluding aircraft orders
6. Building permits, new private housing units
7. Stock prices, S&P500
8. Leading Credit Index™
9. Interest rate spread, 10-year Treasury bonds less federal funds
10. Average consumer expectations for business conditions from Michigan Consumer Expectation

Diffusion index is the percentage of component index advancing.

When LEI has fallen for more than 3 months, investors should increase proportion of U.S. bonds

Law of 3-D: Duration, Diffusion, Depth
If LEI rises above 1-2% (depth) for longer than 6 months (duration) contributed by more than half of the component indexes (diffusion), a bottoming should be formed and economic growth should pick up in the coming months

Because stock markets tells us economic prosperity around 6 months in advance and leading indicator forecasts the coming 3-6 months. We can tell stock market’s top and bottom by reading LEI.

OECD composite leading indicators (CLIs) and Business Tendency Surveys
Announcement: the middle Monday of each month, reporting data of 2 months prior
It consists of 224 indicators from 29 countries such as the U.S., Germany, France, Japan and other developed countries, taking 5-10 most important indexes from each countries.
OECD member countries’ GDP constitutes two third (2/3) of the world’s GDP.
Above 100: Economies are growing or in recovery period
Below 100: Economies are slowing down or in recession

OECD Business Tendency Surveys shows OECD member-country-corporate confidence and expectation on future economies
OECD Consumer Opinion Surveys: similar to above

OECD CLIs has been highly accurate in predicting a top or bottom when the index turns around.

Friday, June 1, 2012

Continuation Pattern

UNDER CONSTRUCTION

Flags

Pennant

Symmetrical Triangle = just a large pennant taking several weeks to form
Base Height of the Triangle extending to the breakout point, we can get the target price.
or
Making a parallel line

Ascending Triangle

Rectangle/Box - strong support and resistant level

Diamond - it could be continuation or reversal. There is little agreement on it.



Reversal Pattern:

Rising Wedge - may mistaken with channel at first with decreasing volume along the formation of pattern

Head and Shoulders

Island Reversal


Some thoughts on Trading Discipline


  1. Write down your decision and rational or keep a diary so that you can recognize mistakes and adjust according to your weakness
  2. Keep a checklist of what you need to review before initiating a position
  3. Find ONE key reason that make you buy or sell. Too many reasons will lead to difficulties in identifying mistakes and correct yourself
  4. Review charts of your positions daily, including weekly charts occasionally
  5. Allow breath for confirmation. I could be either by % or absolute number or several intra-day candlesticks
  6. Be patient. There are thousands of stocks and chances out there. Rushing in to catch the train would lead you exposing to significant downside risk due to correction/pullback coming. 
  7. Accept mistakes. No one trades without a losing stake but the game is about controlling and minimizing risks.
  8. Don't trade without stop, even it is necessary to be far away. Small mistakes are acceptable but big mistakes are not.
  9. Don't expect too much, e.g. investing in a 10-fold stock.
  10. Watch for the unexpected e.g. political issues, financial news
  11. Don't follow too many indicators, especially constantly changing which indicators you are looking at. This will lead to bias as you are digging for information favoring trading ideas in your mind. Therefore, keep your rules simple and consistent.

The Importance of Trend and Volume

Trend is the most important principle of technical analysis. Traders and investors targets to buy a security at the beginning of an uptrend at a low price, ride to the end of the trend and sell at a high price. However, it is not as simple as it sounds. First of all, it takes time to identify and confirm a trend. Trend can also occur over decades over minute-to-minute.

In hindsight, trends are obvious and easy to identify. 

"Uptrend" is a rising, upward-sloping trend occurs when prices reach higher peaks and higher troughs (lows). Pic 1. shows an example of an uptrend. 

Pic 1. Example of Uptrend

"Downtrend" is a declining, downward-sloping trend occurs when prices reach lower peaks and lower troughs. Pic 2. shows an example of a downtrend.

Pic 2. Example of Downtrend

Introduction to Technical Analysis

If you are new to the study of technical analysis and are reading this page, you must be wondering just what technical analysis is. Many still considers technical analysis ignorant, useless and BS. However, I have met many traders using technical analysis as their primary decision-making technique, especially forex traders.

Already, in the most basic form, technical analysis is the study of past market data, most importantly, price and volume. These information and other indicators derived is used to make trading decisions and identify entry/exit level. 

According to Robert D. Edwards and John Magee in the classic book, Technical analysis of Stock Trends, basic assumptions of technical analysis are:
  • Stock prices are determined solely by the interaction of demand and supply, causing reversal in trends which could ultimately detected in charts
  • Stock prices tend to move in trends
  • Chart patterns (history) tend to repeat themselves
Other common assumptions:
  • Supply and demand are affected by investors' emotions, particularly fear and greed
  • Prices discounts everything (any news, public and private information available)
  • Patterns are fractal
Although certain chart patterns yield to high successful rates, don't forget to control risk. Always use stop orders.

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