The Gold ETF (GLD)

The Gold ETF closed down 7 cents at 118.23.   GLD seems to be in never, never land right now.  In order to restart another major move higher it would have to go through 121.45 for a short cycle move and there would be resistance at the longer cycle Price objective at 119.62.  The first price objective for this move higher would be 126.81.  For the move down to restart price would have to go through 117.28 and then the first price objective for the move down would be 115.35.   Downside pressure is about to be applied on this chart if price remains unchanged or is down on the close tomorrow.   The August gold future (GCQ0) has been in a tight trading range for the past  nine days and could be a break in either direction soon.  At this point being in cash could be the best alternative until a direction is clarified.  If you are either long or short gold at this time I would look to hedge the position.   When this breaks out in either direction the volatility could be extreme with a rush to buy or with panic sells.  So as they say on many packages, “handle with care”.

Technical Analysis versus Fundamental Analysis 02-12-10

Which is more important technical or fundamental analysis?  That is more of an individual preference and one that deals with beliefs and trading style.  A scalper would not find fundamental analysis very useful for intra-day trading and one planning for long-term financial security would not look first to technical analysis.  I feel that they both would be wrong.  I believe that one needs both tools to be successful.  If you are a scalper you would want to trade the strongest stocks, indexes, ETFs, or commodities as price moves higher and just the opposite as prices move lower. 

I have read from traders that say that they are pure price traders.  If one uses a bar chart or an indicator they are not pure price traders.  The only truly pure price trader is one who uses Point and Figure charts to trade.  I knew traders on the floor that used 20 minute point and figure charts to trade by.  They used 1/8, 1/4 and 1/2 point squares in a three box reversal system.  They did use trend lines along with the count. 

I don’t know of any trader that has the time to read all the financial data produced by all the companies to come up with the fundamental data needed to fully analyze a company or series of companies and have time to trade.  The other thing is how many of us really understand what all those numbers mean with all the foot notes.  I took economics, accounting and finance in college along with many math courses and I would be at a loss going over this material.  Also how much of it is really true as shown by fraudulent books produce by so many now defunct companies.   There are many programs and websites that will produce their fundamental analysis of a company.  What I feel is important and what they might feel is important might be entirely different.  I read where Buffett wants to see and return of 25% on equity before he would consider a stock investment.  Is this really necessary for a stock price to rise?  Think about this.  In a growing economy beg debt is good because it shows that you are growing and leveraging for greater growth.  Under slow economic times big debt is bad because how will you be able to pay the interest on the or the debt itself when it is due.  So different economic conditions call for different fundamental criteria. 

There is no one right way and no one wrong way.  I will continue with this at a later date.

Education- Picking a Stock to Trade.

What to Trade

 How do you pick a stock to trade?   What do you use as criteria in your selection process?  There was a book that I read years ago about how the Swiss bankers made billions of dollars.  It was a quick read and it boiled down to knowing the economic cycles.  When is it time to own certain investment products and when is the time to sell them.  The cycles went from growth, to inflation, to recession/depression, and then growth again.  Under each condition different sectors do well.   I think with a little common sense one can figure out what does well under each situation and I don’t have to dwell on that subject.

I trade using technical indicators and price to determine entry, exit and stops.  Let us take the condition of an inflationary spiral.   One would want to be in hard assets and out of fixed income securities.  Under these conditions one would look to buy the precious metals, real estate, commodities, and be out of bonds that have a fixed interest rate.   Now here comes the big question.  How does one select the stock that would be best to trade or invest in, if you are a long term holder of an investment or investments? 

I use a program called Power Investor.  You can get information at www.powerinvestor.com.   I have no financial interest and receive nothing for mentioning their site. 

With the program you can select a sector and it will download the stocks in that sector.   It has a list of various financial criteria that will allow you to create a selection process for selecting a stock.  You can select based upon cash flow, years of consecutive earnings growth, and almost any other method you can think of for the manipulation of financial data.  There is one thing that you have to be aware of and that is to be sure that the financial data is current.  Sometimes I will find that some data is missing.  I will email them and within 24 hours the information is provided.  That is if it available.

With oil stocks and oil service stocks moving with the price of oil there is price action both up and down in this sector.  In the case of rising oil prices you would want to long stocks in this sector and if prices are falling you would want to be short stocks in this sector.  The question is what stock to long on a move higher and which one would be best to short on a move down.  Look at this analysis and it should tell you which one you would want tobe long and which one you would want to be short.

Both of these companies look excellent, but one is under valued and the other is over valued.   Your trading is done by the system you use and the selectioon process hightens your ability to succeed.

Education: A Look at The Markets

The one thing that most people who are involved with the stock and futures markets don’t understand is that they are partaking in the greater fool theory game.  There is absolutely no benefit to owning a stock other than the fact that one might either derive a dividend or that you are able to sell your position at a higher price than you bought it at.   There are those that buy stocks several days before the ex-dividend date and then sell the stock after the that date.  The same with shorting stocks.  You hope to be able to buy the stock at a price that is lower than the price you sold it at.

What determines the value of a stock.  Is it cash flow?  Is it return on assets? Is it book value?  Is it an earnings report?  Or is it just what one or two analysts say it is worth?  There can be two companies with the exact financial makeup and they are selling at far different prices.  The reason.  One is followed by several analysts and other for some reason goes un-noticed. 

 The owners, no matter how large their position, have little to say about the running of the company or the companies policies.  You can look at some of the largest stock holders like the California Teachers Association or even Warren Buffet.  Earnings estimates are rarely correct so there is usually volatility on the day of their announcement.  Better than expected earnings does not necessarily mean that the stock will rise or a bad earnings report does not always mean that a stock will fall in price.  There is the old adage  “buy the rumor and sell the news” that seems to work well.

The Markets can be analysed the same as most mystery novels.  Follow the money.  That is basically what technical analysis does.  I will discuss the uses and differences between technical analysis and fundamental analysis in a later post.

Education Intro

I thought that I would start with some educational posts before giving my thoughts on the various markets.  I received requests for analysis on various indexes and futures.  I think that it will be best if I start out with how I work and what I am looking for in intra-day trades, short-term trades and longer term trades.  I will also discuss some options strategies for various market conditions. 

This should help those reading the blog to better understand what I am trying to relay and give a little better insight into my thought process.  I will begin with this part of the blog tomorrow.