Saturday, June 30, 2007

Will Stocks Enter the "Death Zone" in 2007?

Could the stock market begin a bear market decline in 2007?

A 20 minute video by James Flanagan that I just got my hands on,
does a great job at explaining why the legendary trader W.D. Gann
would say that the odds favor 2007 being an extra-ordinary year
for the stock market.

Watch the video here or click the title link above: http://www.gannglobal.com/v/sp05?img=158&kbid=1495

After seeing the video, I emailed James and asked him for a
couple of important points on this unique video. Here they are:

Gann did many types of study, but his most essential work
was historical analysis. And the decennial (10 year) patterns he
observed led him to label the 7th year of the decade, "The Death Zone."

Before and after Gann's death, the stock market has demonstrated an
unexplainable tendency to experience a decline in the 7th year of
the decade. And in some cases, the magnitude declines have been
labeled all out "crashes."

Our aging bull market in stocks now ranks as the 5th longest in the
entire history of trading dating back to 1886.

This has occurred at a time when the price of the S&P 500 is
trading to within 1% of the all-time high reach in the year 2000.

Given these dynamics, once a final top is in place, what kind of
initial decline should we experience?

Keep your stops as tight as you can or implement your mental stops when hit.

Good weekend, good investing and trading!

Friday, June 29, 2007

Technical Analysis and or Fundamental Analysis?

It seems like one of the most common questions we get, especially from those new to trading (or investing, for that matter), is something along the lines of "Which is better? Technical analysis or fundamental analysis?" There's no perfect answer to that question, just like there is no perfect technical system, nor perfect fundamental criteria. In fact, the best answer may simply be "It depends on what works for your style of trading". Today we'll take a look at how you can combine the two techniques, and have the best of both worlds.

To establish the framework, let's explain the basic philosophies of the two schools of thought. To make money in stocks, you want to buy low and sell high. Technical analysis is designed to spot price change patterns that can point out possible highs and possible lows. Fundamental analysts also want to buy low and sell high, but they look for stocks that will likely move higher due to improved earnings, revenues, and profitability. Simple enough?

Traditionally, an investor would define himself or herself as either a fundamental or technical trader, and trade accordingly. But that may be a mistake in today's investing environment, since both methods have unique drawbacks. Fortunately, the drawbacks of one method can be largely cancelled out by the other method. Let's explain.

A purely technical trader looks for price breakouts, then takes a position in the same direction as the trend. By the very nature of his method, though, the reason for the breakout is not considered. Does that matter? Certainly. Stocks only move higher when the demand for those shares increases. But if demand for shares can increase without reason, then demand can also drop without reason. That, of course, pulls share price down and the technical trader may end up giving back his or her profits. A technical trader who realized that a price move occurred without any reason may have also foreseen that the price move was not sustainable.

On the other hand, strong fundamentals don't guarantee a return of any size to a shareholder. Remember, you only make money on a stock if the per-share price increases. The thing is, prices are set by the supply and demand for those shares - not the company's performance. In that case, the technical trader would have an edge by only getting into stocks that were actually headed higher because there wee more buyers than sellers.

But what if you applied both techniques? A trader who finally saw share prices break above key resistance after a company posted improved earnings would know two important things. First, share prices are actually moving higher, and second, the improved fundamentals will attract other investors, making that rally sustainable.

The point is, while many people have always been told that the two methods are at odds with each other, they're really not - both are tools used in our goal of buying low and selling high. When used in conjunction, they actually enhance the effectiveness of each other. For you technical traders, before your next trade, ask yourself if the company's fundamentals will attract buyers who aren't watching the same technical chart you are. For you fundamental investors, before your next trade, take a look at a chart and see if the shares are actually going to go higher. While you may have to search a little longer to find stocks with strong technicals as well as strong fundamentals, you'll have a definite edge.

Click the Technical Analysis and or Fundamental Analysis title link above to review technical and fundamental trading systems.

Have a great friday and even better weekend!

Wednesday, June 27, 2007

Acquisition Target Characteristics

Though slightly off our beaten path, and despite my hesitation to follow the crowd, we can't escape that M&A has been the buzz lately. Is there something we should be doing as investors to that end? Not that I'm a huge fan of relying on a buyout to make some money on my stocks, but if I can pick a handful of names and even just a couple of them are acquired, I'll take a nice 20% to 30% premium on my shares. My worst case scenario...I own some good companies that don't get bought out, but are still great values.

With that in mind, below are my top criteria for spotting potential buyout candidates. Just keep in mind that there may be as much 'off the books' data to incorporate as there is within the company's numbers.

Potential Acquisition Target Characteristics

Cash Heavy – It's a little insulting when you think about, but companies with cash on their books look attractive to private equity groups and bigger fish, because that cash may be used to help finance the leverages buyout in the fist place.

Lots of Inside Ownership – If a company's management stands to gain significantly from being bought out (i.e. their shares are bought at a premium), there may be a significant amount of 'help' from the top to facilitate an acquisition.

Low P/E – Enough said.

No debt – What good is a leveraged buyout to an acquirer if purchasing the company is going to make the buyer even more over-extended?

Priced at or near liquidation/book value – OK, 'at or near' is all relative…stocks typically trade well beyond that level. But, to the extent that it's reasonable, the company should be priced in a way where its tangible (break-up) value is obvious, and is feasible to a potential buyer.

Mediocre results – Really? Yeah, that's really the ultimate goal here...for a buyer to bring out the maximum value that a company couldn't on their own. Maybe a lack of capital, know-how, or size is preventing a smaller company from firing on all cylinders. If a buyer can take something just good and make it great, they're willing to pay a premium for the right to do so.

That's not necessarily all, but the list might get you started on your search.

Admittedly, I was (and am) worried that the mania behind M&A and LBO's could be a sign that the top is near...froth isn't always a good thing. But, what I've noticed so far is that the market hasn't lost its head over M&A activity. Yeah, there's a lot of chatter, but I haven't heard of everybody assuming all stocks are potential acquisitions. So far, the fishing for LBO targets has been methodical. If it stays that way, then maybe the market won't get so red hot that it melts down. On the contrary, I think it may be good for stocks that there are so many value plays being uncovered.

Now, I know what you're thinking – what's a technical analyst even doing talking about finding buyout targets. Hey, money is money. But of you really must know, I think the charts are just as capable of finding buyout candidates as the fundamentals are.

Click the "Acquisition Target Characteristics" title link above to receive a free trial for a service that provides rumors of potential mergers acquisitions and leveraged buyouts.

Good day and good trading!

Monday, June 25, 2007

Trade System Development

System Development – What are You Really Thinking?

by Dr. Van Tharp

Over the years there has been a consistent flow of phone calls and emails to our office about the same thing, namely: "I want to build my own trading system – where do I start?" Of course, we always give the same answer, which is: It is imperative to start with yourself. Who are you? What are your objectives and what are you wanting to achieve?

Occasionally this answer is followed by groans of frustration, because although people are asking where to start, they invariably already have pre-conceived notions about what they want to hear and what developing a trading system means to them, especially the people who are looking for specific answers such as the ideal entry signal, the most effective set-up, the ultimate position size or some of the “secrets” that Dr. Tharp knows.

And we find that it is often these preconceived notions that stop people from seeing and hearing what they actually need to know to create a consistent and profitable trading system that fits them.

Van’s books (especially Trade Your Way to Financial Freedom) give traders the tools and details that they are craving; however, usually, when this question pops up, it’s because people want to know what to do next, and we find that they always seem to go for the systems development and position sizing products first, and completely disregard the “Who are you?” questions and their importance.

Therefore the following is a brief interview with Van so that I can touch on biases and hopefully show you that your current “thinking” will invariably affect the development of the system that you are creating anyway. So wouldn’t it just seem logical to gain an understanding of what your biases and subconscious thinking patterns are before you build a system? Then you can find out whether they will have (or are having) a positive or negative influence on your system development.

We find that many people completely throw out systems that they have spent years on when they finally take the time to do the psychological work, simply because they start to think completely differently about their trading; and ultimately they become more successful (and less stressed).

So let’s look at what Van espouses on this:

Q: Many people trade stocks, options, futures and forex with technically savvy and ingenious systems, yet they still fail to make consistent profits. So what is the main cause of this “underachievement?” Is it really about the system?

A: In my opinion, most people have many psychological biases against doing well, and those biases block them from success. These biases function in system development, system execution and in the psychology of trading and investing. I’ve discovered that many people who cannot pull the trigger really don’t have a system. If you talked to them you might think that they have a very sophisticated system, but they don’t.

Most people put all of their emphasis on indicators and entry, which have very little to do with making money in trading.

Q: Where do these biases come from?

A: We all have a limited capacity for processing information (about 7 chunks), yet we are faced with tremendous amounts of information coming at us every day (i.e., terabytes). As a result, we’ve developed many shortcuts to make the information processing in our brains simpler, but these shortcuts also tend to bias us to do most of the wrong things.

Q: What are some examples of trading biases that can affect someone who is developing a system?

A: Although there are many, two of the biggies are the need for control and the need to be right. Obviously, there appears to be a survival function to both of these, and both of these “needs” produce biases that have traders looking in the wrong direction.

For example, because people have spent many years in a school system where they need to get “right answers” so as to not fail, these same intelligent people go into trading looking to get an “A,” which is the equivalent to them wanting to create a trading system that will give them a high probability of being right, which doesn’t necessarily equate to making money. Let’s say you are right 80% of the time and win $1 each time you win, but each loss costs you $10 the other 20% of the time. You will lose a lot of money that way! However, the reverse is true for creating a great system! You can lose $1 80% of the time (e.g. lose $80) but you win $10 20% of the time ($200).

We also want to be in control of the process. People think that they are in control of the financial markets based on when they get in it. They may say, "I’m not getting in until the market does X,Y and Z." However, that has nothing to do with making money. (Note from Melita: notice what you’re thinking when you’re reading this…)

Making money has to do with cutting your losses short and letting your profits run – and that’s all about exits

Q: So Van, what’s your conclusion?

A:The effect of combining these two biases is really a disaster for the average investor and for many long term players in the industry. It is extremely difficult, if not impossible, to systematize your trading properly to take advantage of high win/low loss exits when you habitually (and often subconsciously) practice these biases and get preoccupied with entries (control) and making money 80% of the time (being right).

There you have it. So for anyone out there who is trading a system, building a system, thinking of building a system or maybe already has a system that isn’t quite working up to par, maybe it’s time to take a look at your thinking and some of the biases that could be affecting your trading.

Without a doubt the most effective way to do this is to work through Van’s Peak Performance Home Study program before you even start your system development. But for those of you who just won’t stop or can’t stop or are adamant that you must be building and working on your system, then I strongly encourage you to work through the Peak home study program simultaneously. I guarantee that it will make an enormous difference in your life if you are willing to learn from it (and I’m even making it easier for you to purchase it this month – see below)

And if any of you are having the following thoughts:

"This doesn't relate to me..."

"I don’t believe in this psychology stuff…"

"This isn’t relevant to computerized trading…"

"They’re just trying to sell more products…"

"I don’t have time to do this…"

Then perhaps you may want to consider looking back at paragraph three of this article about pre-conceived notions, seeing what you want to see and hearing what you want to hear because these could be the thoughts (and many more hidden ones…) that could ultimately make you or break you as a trader.

We have only touched on two biases in this article that can affect your trading and rest assured, there are many more. This is just the tip of the iceberg.

Click the Trade system Development title link above to learn more and register for Van Tharps free trading game.

Good day and good trading!

Friday, June 22, 2007

MTPredictor & Ninja Trader

Being that its friday, and Aloha Friday as we say in Hawaii, I want to share with you about some effective trading systems we use, so you can research and try out over the weekend.

There are many different effective trading systems around. This combination of MTPredictor & Ninja Trader we use with great success. We are all about taking positions in stocks, options, futures, and forex when the financial instrument is showing a low risk and high reward trading opportunity. We don't accept anything less than a 3:1 reward risk ratio ourselves. This system has given us 5:1 to 10:1 reward to risk, and we've seen some go down as high as 15:1 within days to weeks, which is very quantum or exponential in terms of return.

This trading platform combination comes with a free 30 day trial. The weekend is perfect to take enough time to setup and become familiar with the platforms to be ready to trade on monday.

I encourage you to investigate this system, and many others as well to see what works and feels most comfortable for you. Its about knowing who you are in the market, trading within yourself in the market, and using quality market tools. Once you've tried this system, we'll think you'll agree this trading system combination are excellent market tools to trade and win in the long term.

Have an Aloha Friday and a great weekend. Shaka & Aloha!

High Reward Low Risk Trading Software
MTPredictor Trading Software
High Reward Low Risk Trading
10% Discount For Invest2Success.com Users

MTPredictor Trading Software that finds, evaluates and manages high reward low risk trade setups in stocks, forex, futures, options, indexes, currencies and commodities. For margin leverage trading accounts, the software comes with an automatic money management function to correctly position size and not over leverage.



Ninja Trader MTPredictor
MTPredictor Now Compatible with Ninja Trader
Ninja Trader accepts Multiple Data Feeds and has Advanced Trade Management Features. Ninja Trader is Free of charge for all of their supported brokerage and market data vendor providers.

Thursday, June 21, 2007

Elliott Wave Principle

The Elliott Wave Principle

In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets and observed that certain patterns repeat themselves. He offered proof of his discovery by making astonishingly accurate stock market forecasts. What appears random and unrelated, Elliott said, will actually trace out a recognizable pattern once you learn what to look for. Elliott called his discovery "The Elliott Wave Principle," and its implications were huge. He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.

Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he discovered the complete body of R.N. Elliott's work in the New York Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In Elliott Wave Principle, Prechter and Frost's forecast called for a roaring bull market in the 1980s, to be followed by a record bear market. Needless to say, knowledge of the Wave Principle among private and professional investors grew dramatically in the 1980s.

When investors and traders first discover the Elliott Wave Principle, there are several reactions:

Disbelief – that markets are patterned and largely predictable by technical analysis alone.

Joyous “irrational exuberance” – at having found a “crystal ball” to foretell the future.

And finally the correct, and useful response – “Wow, here is a valuable new tool I should learn to use.”

Just like any system or structure found in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature’s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology, and the things humans create, like roads, residential subdivisions… and – as recent discoveries have confirmed – in market prices.

Natural systems, including Elliott wave patterns in market charts, “grow” through time, and their forms are defined by interruptions to that growth.

Here's what is meant by that. When your hands formed in the womb, they first looked like round paddles growing equally in all directions. Then, in the places between your fingers, cells ceased growing or died, and growth was directed to the five digits. This structured progress and regress is essential to all forms of growth. That this “punctuated growth” appears in market data is only natural – as Robert Prechter, Jr., the world's foremost Elliott wave expert and president of Elliott Wave International, says, “Everything that thrives must have setbacks.”

Elliott Wave

The first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: “impulse waves,” and “corrective waves.”

Impulse waves are composed of five sub-waves and move in the same direction as the trend of the next larger size (labeled as 1, 2, 3, 4, 5). Impulse waves are called so because they powerfully impel the market.

A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size (labeled as a, b, c). Corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any preceding impulse wave.

As the figure to the right shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose sub-waves are denoted by numbers, and the three-wave corrective phase, whose sub-waves are denoted by letters.

What R.N. Elliott set out to describe using the Elliott Wave Principle was how the market actually behaves. There are a number of specific variations on the underlying theme, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable requirements as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is necessary to understand what the markets can do, and at least as important, what it does not do.

You have only just begun to learn the power and complexity of the Elliott Wave Principle. So, don't let your Elliott wave education end here. Join Elliott Wave International's free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle and learn how to use this valuable tool in your own trading and investing.

Good day and good Elliott Wave Trading!

Home Foreclosures Hit New High

Today I want to talk about the USA real estate market. If your fortunate to not be over-leveraged in the real estate market, congratulations. You have the opportunity to take advantage of the fire sales. If you are unfortunately over-leveraged and giving some or all of your properties back to the bank my sympathy.

Chance favors the prepared. There is opportunity in disaster. Click the "Home Foreclosures Hit New High" title link above to search current foreclosures on the market right now.

A record number of homeowners entered the foreclosure process during the first quarter, topping the previous high set in the final quarter of 2006 and reflecting continued stress on the jittery housing market, according to a report released by the Mortgage Bankers Association.

The trade group's chief economist, Doug Duncan, predicted that delinquencies would likely rise, peaking later in the year. He also said rising foreclosures probably wouldn't peak until next year. "Our view is that we will probably see modest increases in delinquencies and foreclosures for the next couple of quarters," Mr. Duncan said.

Borrowers are having more trouble meeting payments as house prices flatten or decline in much of the country and as many loans that had low introductory rates reset to sharply higher ones.

Seasonally adjusted, 0.58% of loans entered the foreclosure process last quarter, compared with 0.54% in the fourth quarter of 2006 and 0.41% in last year's first quarter. The rates for the past two quarters are the highest in the survey's 37-year history. The MBA reported that the spike in foreclosures was much steeper in California, Florida, Arizona and Nevada than in other areas. Mr. Duncan said some speculators are walking away from properties in the face of falling prices and higher borrowing costs.

The percentage of loans now in the foreclosure process rose to 1.28%, up from 0.98% a year earlier. That's still well below the 1.51% recorded in the first quarter of 2002, in the wake of a brief recession.

Foreclosures were at an unusually low level at the height of the housing boom a few years ago because people who fell behind on payments generally could sell their houses for more than they owed, or could refinance into loans with easier terms. That has become far more difficult.

In a research note, economists at Goldman Sachs noted that the first-quarter data reported yesterday don't fully reflect the effects of tighter credit, which started taking hold late in the quarter. The figures also don't reflect the recent surge in interest rates, which will push up costs for borrowers with adjustable-rate mortgages. "So future reports are likely to show further deterioration, perhaps at a faster rate," the Goldman report said.

One factor likely to restrain rises in the foreclosure rate, at least in the near term, is the willingness of many loan servicers -- the firms responsible for collecting payments -- to lower interest rates or stretch out payment schedules for some borrowers who fall behind. An April report from Credit Suisse mortgage analysts in New York forecast "an impending flood of loan modifications." But these payment-lowering plans sometimes merely delay foreclosure rather than prevent it.

The MBA reported that troubles in Ohio, Michigan, Indiana, California, Florida, Nevada and Arizona weighed down the broader housing and foreclosure numbers. Job losses in the Midwest have pushed up foreclosures there, and the housing market has quickly deteriorated in the other four states.

For example, in Ohio, nearly 20% of subprime adjustable-rate mortgages were either 90 days or more past due or in foreclosure -- almost double the national average and five times the rate in Utah.

The delinquency rate on prime loans rose in the first quarter to 2.58% from 2.25% a year earlier. For subprime loans, the rate increased to 13.77% from 11.5%. Delinquency rates on prime adjustable-rate mortgages rose to 3.69% from 2.3% a year earlier. On subprime ARMs, the rate climbed to 15.75% from 12.02%.

Chance favors the prepared. There is opportunity in disaster. Click the "Home Foreclosures Hit New High" title link above to search current foreclosures on the market right now.

This article comes from the RealEstateJournal.com

Good day and good foreclosure real estate investing!

Tuesday, June 19, 2007

Forex Trading with Elliott Wave

Elliott Wave is a low risk high reward trading system. It looks for three basic chart setups that have consistently over the years provided low risk high reward trades.

When evaluating the forex market for swing trade opportunities the focus is placed on predicting directional changes or continuations for a given currency pair. For this we rely on technical analysis.

Click the Forex Trading with Elliott Wave title link above to review trading software with Elliott Wave built into it. No more manual analysis and the possible mistaken conclusions that come with it. With the software its all automatic.

In technical analysis, just as in fundamental analysis, there are lagging indicators and leading indicators. One of the most reliable tools used to predict forex market swings is Elliott Wave analysis. Elliott Wave analysis can be used to identify trends and countertrends, trend continuation or exhaustion and to evaluate the potential price targets of a trend.

You can apply Elliott Wave analysis to both long and short position swing trade set ups for your currency pairs.

Elliott Wave theory is named after Ralph Nelson Elliott, who concluded that the markets moved in a repetitive pattern of waves. He attributed this action to the mass psychology of the market.

Elliott concluded that the market’s movement was a direct result of the mass psychology of the time and that the stock market is a fractal. A fractal is an object that is similar in shape, but at different scales. A great example of a fractal in nature is a stalk of broccoli. The stalk and the individual branches look exactly the same; just the branches are smaller in scale.

Fractals just happen to form in accordance with Fibonacci ratios. Is this a coincidence?

Elliott attributes this mass psychological move to the human trait of herding. Even though Elliott’s theories were based on stock market price movements, it has been applied to evaluating Presidential approval ratings and fashion trends changes as well.

The conclusion, the market price actions are not the cause of economic growth or slow down, but the reflection of the mass psychology of investors. If the mood of the investing public is upbeat then a bull market ensues. This is counter to what most individual perceive, that because there is a bull market the mood of the investing public is upbeat.

Elliott Wave patterns follow a sequence that the markets move up in a series of 3 waves and down in a series of 2 waves. This 3 wave impulse and 2 wave corrective sequence form the foundation of the 5 Wave impulse pattern (the opposite is true in a downtrend).

The Elliott Wave Counts are as follows;

Wave 1 - Short Covering
Wave 2 - Pullback from Short Covering
Wave 3 - Major Rally Phase
Wave 4 - Institution Pause in the Rally
Wave 5 - Retail Buying

Wave 1 is usually the weakest of the impulse waves. It is a brief rally based on short covering of the bears from a previous move down. When Wave 1 is complete, the currency pair sells off, creating Wave 2.

Wave 2 ends when the market fails to make new lows. You often see dominant reversals patterns form at the end of this wave signaling the being of the rally phase or Wave 3.

Wave 3 is the longest and strongest of the impulse waves. This signals strong currency buying or selling in the direction of the trend. This trend usually starts of slowly, but tends to accelerate as it breaks to new highs above the top of Wave 1.

Like any trend, especially a strong trend a correction will occur. Traders will begin to take profits and the currency pair will retrace. This signals the beginning of Wave 4.

Again the currency pair will rally ushering in the Wave 5 rally. Wave 5 is typically supported by the retail traders and not institutional buyers (the herd) and tends to lack the momentum generated in the Wave 3 rally. This creates divergence that can be easily measured on any technical oscillator. After the currency pair breaks to new highs above the previous Wave 3 high, the rally loses steam and changes trend.

This trend change can result in either a new 5 Wave impulse pattern or a corrective in nature.

Now that we know what the Elliott Wave analysis is, how would a currency trade using this analysis look like, just as an example?

Look to Wave 5 as the most reliably tradable impulse wave. The trade sets up as follows. Look for the Elliott Oscillator to pull back between 90% and 140% of the Wave 3 high on a daily chart. This pullback should correspond to a 38%-62% Fibonacci retracement from the Wave 2 extension. This signal is the strongest when the Fibonacci retracement is between 38% - 50%.

Like any technical analysis tool you never want to employ an indicator as a stand alone analysis tool. A trigger and a confirming indicator are required as well.

Look for a trigger in candle patterns, such as Harami, Tweezers or Harami cross. There are a variety of software packages on the market that perform Elliott Wave counts and have other entry signal indicators as well.

Draw a regression channel on the Wave 4 retracement and look for a break above or below the channel as confirmation to enter the trade.

Place stops at the high of the Wave 1 advance, just below the 38% Fibonacci retracement level or where your individual trading plan dictates. Trail your stops once the currency pair has advanced past the Wave 3 high. Look for reversal candle patterns like doji, hammers, shooting stars or hanging mans for signals that the wave is about to end or stall. A typical price target is 127% retracement of the Wave 4 low.

This is just a glimpse of how Elliott Wave analysis can be deployed to enhance your forex swing trade evaluations. Look more into the Elliott Wave theory and other strategies as tools for increasing your forex swing trade opportunities.

Click the Forex Trading with Elliott Wave title link above to review trading software with Elliott Wave built into it. No more manual analysis and the possible mistaken conclusions that come with it. With the software its all automatic.

Good day and good trading!

Monday, June 18, 2007

Low Cost Trading Platform

Today I want to share with you about a very affordable high quality trading platform called Track 'n Trade. We have been trialing the software and have found it has many nice features at a very low price compared to other platforms with similar features.

Track 'n Trade offers the best lowest cost solution for tracking, charting and back testing the Futures, Forex, and Stock Markets. Along with its trading tools, the trading platform also provides the following.

All charting software, plug-ins, expansion packs and data services come with a 30-day, no risk, use it for free trial period.

Unique Trading Systems: Trade systems composed of the Bulls 'n Bears, Red Light, Green Light, and Blue Light Trading Systems. One low price covers licensing for all three platforms of Futures, Stocks & Forex.

Market Simulators: Practice in the past to profit in the future. Both High Finance and Track 'n Trade Pro have historical trade simulation and accounting modules. Don't risk any money of your own until you gain the confidence that comes with practice. Its as real as it gets in electronic paper trading.

Free In House Technical Support: Call us to ask any technical question and talk directly to a skilled technician to help solve any issue.

Training: Each TracknTrade product includes multimedia educational training videos that actually show you how to use each tool.

Live Continuing Education: Track 'n Trade Software provides exciting online live classes for you to attend and learn more about trading Futures, FX, & Stocks.

Track 'n Trade Pro
Track 'n Trade Pro Real-Time Trading Software

Stocks Futures Forex Charts Quotes & News
Lowest Cost Highest Quality Trading Platform on the Market Today
Download a Free 30 Day Trial
of Track 'n Trade Pro developed to give traders the ability to chart and analyze multiple contracts while maintaining their account balance and trade log. Traders find a much higher degree of success when using Track 'n Trades Fibonacci & Elliott Wave Tools. The Elliott Wave and Fibonacci Tools combo are awesome for trend cycle forecasting. The rich features include Buy/Sell Signals, Technical Analysis, Tools, Customizable Indicators, Unique Market Calculators, 25 Years of Historical Data, Global Current Chart Settings, Marking & Notation Tools, Easy to Use Chart Scaling, Candlesticks, and Expandable with Plug-Ins.



Good day and good trading!

Saturday, June 16, 2007

S&P 500 Forecast

This weekend, I'm sharing with you a new video that reveals a forecasting method that may be new to you. And if you're familiar with W.D. Gann, you probably have not seen his methods applied this way. Its a video forecast of the S&P 500.

You can access it immediately by clicking the "S&P 500 Forecast" title link above or below:

S&P 500 Forecast

This 20 minute video "pulls the curtains" on a revealing historical analysis of the S&P 500 using the methods of W.D. Gann.

Many traders and analysts try follow Gann's techniques. But, most of them lack the most important tools to replicate his most successful methods.

W.D. Gann was a student of history.

He consulted history on a regular basis during his trading career. And the study of history is the main part of his work that is most OVERLOOKED by "Gann Experts." In fact, his most highly valued secret, which he revealed in his $30k trading course was
the Master Time Factor. This was Gann's observation of cyclical patterns in the markets, especially, 10, 20, 30, 60, and 90 year cycles (obviously a result of deep historical study).

In this new video you will see the historical record as Gann would have, using technology he did not have. You'll see the comparisons of the bull markets of yesterday, with the bull market of today.

This type of analysis requires a database of daily stock market prices back to 1928. In this video, you'll get to see a glimpse into that database, and an important forecast for the Stock Market that could have a profound bearing on the direction of the Stock Market in 2007.

Here's the video link again:
S&P 500 Forecast

It runs about 20 minutes, so it will take a few moments, maybe minutes to load, depending on your connection speed.

Have a good weekend!

Thursday, June 14, 2007

Trade System Development

Trade system development is easier than you may think. It's a very important part of success in trading. A leader in trade system development is Dr. Van Tharp. Click the Trade System Development title link above to review his famous book, "Trade Your Way To Financial Freedom". Van Tharp explains how to develop a trading system thats right for you.

Systems development with the use of computers is very important. It helps us prove to ourselves that certain methods work and others do not. It is better to find out if your strategies have worked consistently in the past rather than just randomly hope that they will work in the present. Below are some tips to keep your systems development strong and effective.

1. Use logic first - The first thing to do is to observe the markets and the movements of individual stocks. Do you notice recurring patterns? When you think of stock market logic, is there something you think will work yet you have not tested it? Test it. Also, periodicals and industry websites such as Tradingmarkets.com, Yahoo finance, thestreet.com and many other trading sites can offer unique ideas to test. If someone brings up an interesting point about trading, test the validity of their claims.

2. Test Objectively - It's okay to hope that you will find a good strategy, but it's not okay to hope too much. If you do, you will jump to conclusions too quickly. Also, forget about your favorite indicators. Don't have favorite indicators. Just have indicators that test well and ones that don't test well. That way if your "favorite" no longer tests well, you won't be married to that indicator.

3. Form test lists - First of all, you want to test long periods in the stock market (from 2-10 years). It would be good to have 2 bull markets, 2 bears, and a sideways market. In the 20th century, there were 33 down years and 66 up years for the SPX. With that in mind, you could test multi-year periods when there were 2 years for every down year. For example 2002, 2003, and 2004 where there were 2 years up and one down. Although we don't expect there to be 66 up years in this century, we base our testing on some sort of logic. For it would not make since to assume that there would be 66 down years this century, unless you have some strong logic to back it up. Also, you'll need to put together random lists of stocks to test your strategies on. I recommend lists of 30 stocks. That is enough to have statistically significant results. Test those lists of 30 stocks over those same time periods you plan on using. Then look at net profit, percentage profitable and other factors you deem important and compare the results using different systems and indicators. You can answer the age old question - "which indicators are most effective?" You can also throw away the indicators that don't work.

4. Decide on pertinent data - We've already mentioned net profit and percentage profitable as relevant measurements of the strength of various systems. There are other important factors such as win to loss ratio, standard deviation and max drawdown. I use these and so should you. Also, be on the lookout for other factors, such as a smooth equity curves in tests and stay away from strategies that never trade or trade too much. Also remember this: Don't use biased data. You see, many traders in the late 90's and early in the 21st century used the data from just the 90's to back test. Do you think those same strategies worked will in the last few years? No, they haven't. The market has been different since 2000 and we must test all sorts of markets so that your system does not depend on particular market conditions to survive.

5. Be sure that the data is good - When you form lists of stocks and start testing, be sure to properly label each list. I use Excel and then I am sure to label each stock list properly. Also, I encounter bad data all of time. I see unusually low numbers mostly or zeroes where they don't belong and can see quickly that the data is bad.

6. Test simple indicators first - Before you start testing the strategies that require the stars to line up for entries, test the simplest indicators first. For example, avoid testing a stochastics, RSI, ADX, volume combo at first. You should just test ADX first and then decide if it is effective and then later you can test ADX in combination with other indicators to form a strategy. Don't try to be unique. Just try to make money. That's the purpose of trading. Use these tips and make money!

Good day and good trading!

Tuesday, June 12, 2007

Winning Traders

Winners share certain beliefs and behaviors. Read on for specific actions that you can take to increase your odds of success in trading and investing.

Click the "Winning Traders" title link above to review Dr. Van Tharps famous book on trading belief and behavior called "Trade Your Way to Financial Freedom".

Check to see if you possess the traits and beliefs of winning traders, including:

1. My trading objectives are perfectly clear, and I truly believe I will achieve these goals. If you have the belief that you will win, you increase your chances of trading to win. In order to have this level of conviction, you must have a thoroughly-tested plan. You also must have a clear vision of how you will proceed with your plan to reach your goal. The more detailed you can visualize your goals being achieved, the more you will strengthen your internal belief and confidence that you will reach your goals.

2. I have created a plan to achieve my trading goals. I'm sure you've heard the saying "I didn't plan to fail; I failed to plan." Without a plan, your results will tend to be mixed and uninspiring. Commit to writing down your trading plan, and make sure you can answer the questions found in a recent TrendWatch on creating your trading plan.

3. I prepare my plan before the trading day starts. If you don't have a plan of action once the trading bell rings, you are moving from the proactive mentality into a reactive approach. I contend that the more reactive you become, the more you will get in late to market moves and dramatically diminish your reward-to-risk ratio. I prepare after the close for the next day's trading, seeking to stay proactive and a step ahead of the rest of the crowd.

4. I regularly monitor my trading results to measure my progress toward my goals. Trading results tend to follow a zig-zag approach similar to how a plane is guided to its destination. At periodic steps along the way, if a pilot is off course, they will set a new course towards the target. This is called course correction. Once you have defined your trading target, your periodic evaluation should lead you to assess what is taking you off course and encourage you to make the necessary corrections to get you back on target.

5. I quickly discard negative emotions that can hurt my trading results. When you lose, you want to learn from the experience, then put it behind you. You cannot afford to dwell on a loss once the trade is complete. You have to have total focus on the new moment and forget about the past, save for the time you allocate to evaluating past trades (which should be done outside market hours).

6. I am focused on the market during the trading day, and not easily distracted by non-market activities during trading hours. This can be a tough one for many traders who have many responsibilities. If this is the case, define the time you will be focused on the market and make arrangements not to be interrupted For more information on this topic of successful trading behaviors, see my book Big Trends In Trading.

Click the "Winning Traders" title link above to review Dr. Van Tharps famous book on trading belief and behavior called "Trade Your Way to Financial Freedom".

Good day and good trading!

Monday, June 11, 2007

Gann Trading

Any Gann Traders out there? We love Gann trading just as much as Elliott Wave. These trading styles and strategies have booked us some excellent low risk high reward trades over the years. Gann and Elliott were highly successful traders in the age of no computers, with their own unique systems they designed themselves based on human beings social mood of fear and greed. If your not familiar or new to Gann & Elliott trading I highly recommend you read more about them and test drive trading them either manually or with the software versions linked from our site. Still trading on fundamentals and technicals? Forget it! Psychological trading is the place to be! I'm not saying fundamental analysis and other technical indicators are useless, but after you've traded a system that provides low risk high reward trades, you'll start thinking twice about your old trading systems.

A lot of people don't think Gann or Elliott trading works, but we think that they simply don't know or won't learn how to trade them. We've got it easy cause we use software platforms with these trading strategies built into them for easy trade identification and management of the positions, but we still have to give it a good look over before committing funds to any of the low risk high reward trade setup the software platform display.

Below is a little bio on William Gann but first a quote from his famous book. Click the Gann Trading title link above to view a specialty website just on Gann Trading Techniques.

In his novel "Tunnel thru the Air" WD Gann stated...........

"Everything moves in cycles as a result of the natural law of action and reaction. By a study of the past, I have discovered what cycles repeat in the future". "It is not my aim to explain the cause of cycles, the general public is not ready for it and probably would not understand or believe it if I explained it . . . everything works according to past cycles, and that history repeats itself in the lives of men, nations and the stock and financial markets". WD Gann.

WD Gann was born on a farm some 7 miles out of Lufkin, Texas at 10.34am on 6 June 1878. He was first born of 11 children, 2 girls and 8 other boys to Sam H. Gann, and Susan R. Gann.

At 13, Gann travelled the trains selling cigars and newspapers. In so doing, he overheard many conversations on investing—he listened.
Gann wondered if it were indeed possible to predict the future. Many conversations he had overheard seemed to revolve around predicting the prices that their cotton would bring. Was it possible?

Gann moved to New York in 1903 at the age of 25 and began working at a major Wall Street Brokerage house. During the First World War, he and his family moved from Manhattan to Brooklyn. Gann reportedly predicted the November 9, 1918 abdication of the Kaiser and the end of the war.
W.D. Gann began by studying the basic principles of price patterns and philosophy on how to accumulate wealth, and keep it. After becoming successful, he wanted to know why and how markets, and numbers repeated under certain time cycles. This led to further studies of ancient geometry and astrology.This research led to Gann accumulating over 50 million dollars up until his death on the 18th June 1955.

WD Gann became the only Financial Astrologer of his time. A quote in the Journal of Commerce on the 15th January 1921 states, “His calculations are based on the Science of letters, Numbers and Astrology”. It has been said that Gann used planes to inspect crops, however this is highly unlikely as he knew in advance what the market was doing. This is proven in “Tunnel thru the air” where he forecast the exact top and price of cotton on 8th September 1927 at 24.40 (page 196), also on page 208 of “How to make profits in Commodities” for the exact time and price. He also forecast that the stock exchange would close due to panic selling on 3rd October 1931, the low was on 5th October and the market rallied from 85.51 to a high of 119.15 on 9th November 1931 as predicted in “Tunnel thru the air” on page 321 to 323. The book was published on 9th May 1927. It was possible that the planes were a tax deduction and he flew the money he made to a South American bank account.

Since his death, W.D. Gann has become something of a legend in financial circles. His capacity to make big financial gains (both on the market, the Cuban lottery and horse racing) gave him a reputation for uncanny foreknowledge of market trends. The rumour circulates even now that he would enter his numbers at the Cuban lottery on one date and fly to Cuba on the day of the selection in his private plane flown by his young female pilot to pick up his winnings without waiting for prior notification. He is said to have predicted WW1 in 1914 and the resulting panic in stocks. In March of 1918 he predicted the end of the war and the Kaiser’s abdication. He predicted improvements in business in 1921 and in November 1928 he forecasted the end of the Bull Market in stocks for September 3, 1929. He was often dead right in the 20’s and 30’s regarding the price variations in cotton and wheat. In 1935, of 98 trades in cotton, grain and rubber, 83 trades showed a profit. His percentage of profitable trades was often 90% and higher. Stories of this sort have led speculators and traders to ask just how it was that he achieved his stunning successes.

Gann was the author of numerous books on trading in which he hinted at his secret, yet upon close study of his works, the real secret eludes us. Instead, Gann himself suggests a mystical source for his methods. In one of his books. “The Magic Word,” Gann promises “health, happiness and prosperity through the magic word, Jehovah”. He treats the reader to a baffling pilgrimage through the most mystical parts of the Bible, often repeating himself and frequently asserting that, in some way (which he never makes explicit), Jehovah (which he calls “the Lost Word”) is the key to the good things in life.

Numerous hints in Gann’s writings alert the astute reader to his Masonic membership. The allusion to Jehovah as the Lost Word in the work cited above, for instance, is recognisable to Royal Arch Masons. W.D. Gann was a member of Commonwealth-Stella Lodge No. 409, Free & Accepted Masons, New York City. Yet his Masonic career is not the key to his successes on Wall Street. He was made a Mason on December 15, 1922 and “raised” a Master Mason on March 27, 1923. He “demitted”, ie. Dropped his Masonic affiliation in 1939. Gann himself was reported as saying that his “biggest discovery” was made in New York City in 1908. Whatever his secret, he discovered it long before his was a Mason.

Click the Gann Trading title link above to view a specialty website just on Gann Trading Techniques.

Good monday and good trading!

Sunday, June 10, 2007

Weekly Stock Market Outlook

NASDAQ Composite Outlook

Friday's close of 2573.54 was 32.16 points higher than Thursday's close for the NASDAQ Composite....a 1.27% gain. Not bad, but don't get too excited yet - for the week, things were still ugly. The NASDAQ closed 1.54% lower than the composites' close a week earlier, losing 40.38 points in the five past days.

We're not going to dwell too much on the NASDAQ's details here, as the key themes here are pretty much the same ones seen on the other two charts...the market is trapped somewhere between the 20 and 50 day lines, and whichever one of those breaks first is probably going to signal the next major move.

In the meantime, we'll add this...the NASDAQ (once again) had trouble at a key resistance line - two of them actually (dashed). More and more we're seeing the NASDAQ lag or struggle - not exactly a sign of aggressive investing. The volume behind those strong days has also paled relative to the kind of volume we've seen behind the selloffs.

NASDAQ Composite Chart

Click For Large Chart

S&P 500 Outlook

After gaining 16.95 points (+1.14%) on Friday, the S&P 500 ended the week at 1507.65. On a weekly basis, the large caps still collectively lost 1.87%....the SPX lost 28.7 points. So, don't assume all is necessarily well again.

A philosophical observation....you can only burn a candle at both ends for half as long. The S&P 500's March-thru-May rise was red hot, but really pushed the limits of just how far and how fast it could go. Traders paid the price last week, cooling off the rally and bringing some reality back into the picture.

OK - fine. What's next? You know, as due as we still are for a correction, you really cold make an argument that a bounce is in the works. How so? Take a look at the 50 day moving average line (purple) at 1490. The pullback was stopped dead-cold there on Thursday, and it was basically the staging ground for Friday's rally. And, you don't need us to tell you the longer-term trend has been a bullish one.

And, with the VIX's floor (lower Bollinger band) being moved to 11.7 and the VIX making a sharp reversal, it's not like there's an immediate cap there either....the VIX's close at 14.84 on Friday means there's still about three points worth of downside room to fall while stocks can continue to rise.

The counter-argument is...well, everything else.

In terms of momentum - based on MACD lines - the scenario is bearish (the lines are pointed lower). In terms of correcting the stochastic 'overbought' situation, that problem is being solved too - by a pullback. And, let's not forget the calendar. The 'sell in May' thing is behind schedule, but that just might mean it's poised to make up for lost time.

We see the key as being the 10 and 20 day moving average lines (red and blue lines). Note that they're close to a bearish crossunder....something we haven't seen since February. That crossunder could be bearish, provided it leads to a move under the 50 day line.

But, what we're really interested in seeing is resistance at the 10 and/or 20 day lines. They're both around 1515 (or will be by Monday). If they can keep the index held down for a day or so, that may be just long enough to say there's no point to stay in stocks right now....encouraging investors to keep making exits. Be sure to keep a close eye on that level early next week.

S&P 500 Chart

Click For Large Chart

Dow Jones Industrial Average

The Dow Jones Industrial Average gained 1.18% on Friday - a 157 point move that left the blue chip index at 13,424. For the week, the index still lost ground...244 points, or 1.79%.

The higher you fly, the farther you fall. The Dow verified it last week...at least partially.

Remember the ongoing checkup we were doing with how far the Dow was above its 200 day moving average line (green)? In general, we suggested anything more than 7% above or below the 200 day average was too much, and a reversal was possibly in the works. On June 4th, the Dow was 7.2% above it....a problem that had been in place for a few too many days. Now it's only 4.9% above the 200 day line. That may be enough to release the pent-up pressure, which lends itself to the 'bullish again' argument.

What we're waiting for here is much like what we're waiting for with the SPX.....what happens with the 10/20 day lines and the 50 day line at 13,117. The 20 day line (blue) at 13,447 capped the rally on Friday, but may have to fend off another attack early this coming week. The picture is actually pretty simple - a cross back above the 10 day line is likely to restart the uptrend, while a cross under the 50 day line may really start the next leg of selling. If so, a revisit to 12,600 isn't out of the question.

Dow Jones Industrial Average Chart

Click For Large Chart

Have a great week!

Saturday, June 09, 2007

Fibonacci Elliott Wave Trading Software

Fibonacci created a mathematical model for repeating things in nature in the 1600's then the Chinese found out about it and started using it in their rice trading. Ralph Elliott created an advanced Fibonacci trading model in the 1920's while trading the markets with his friend Charles Dow and called it The Elliott Wave Principle.

Fibonacci gives accurate Support and Resistance Levels and Better Profits from Each Trade. Learn how to use Fibonacci Retracement, Extension and Projection Analysis to maximize trading profits and tightly control losses. Fibonacci numbers and ratios point to specific turning points in the markets movements.

Elliott Wave is governed by man's social nature, and since he has such a nature, its expression generates forms or waves. As the forms are repetitive, they have predictive value. Ralph Elliott's goal was to create a low risk high reward trading system.

Below are three trading software platforms that incorporate these highly successful trading strategies. Precision controlled trading with trading systems that automatically identify entry, stop-loss, take profit projections on multiple time-frames, trade management, money management, and position sizing all in one package. The finest low risk high reward trading systems on the market in our opinion. Take free trial test drives for these trading platforms and supercharge your trading.

Automate Your Trading with These Trading Software Systems

Track 'n Trade Pro



Elliott Wave Trading Software



Elliott Wave Trading Software



Good day and good trading!

Friday, June 08, 2007

Misconceptions

Five popular misconceptions . . . by GetRichSlowly.com

Click the Misconceptions title link above to read the whole article.

Michael addresses these common misconceptions:

1. Saving and investing is complicated. Actually, the material is very basic. It’s simple to understand. What’s complicated are the products in which we can put our money. But if we understand how money works, we can use this knowledge to analyze the investment opportunities.

2. Investing in the stock market is like gambling. It is true that investing in the stock market carries risk. It is not, however, the same as gambling. Gambling is based on chance, and the odds are always against the player. Investing in the stock market is not a sure thing (again, it involves risk), but it is a legitimate business transaction between providers and users of capital. In the long term, the odds favor the investor.

3. It’s okay to be in debt. Debt can lead to major financial problems. Because credit card debt carries high interest rates, that debt compounds at an alarming rate. (It can double in just five years!) Michael says, “Being in debt and consuming beyond our means can lead to major financial problems.”

4. Saving and investing means financial sacrifice. It’s true that we sometimes must give up short-term gains for long-term success. But, as Michael says, the reality is that carrying credit card debt and not saving are the things that actually lead to the need to sacrifice. Saving and investing lead to financial freedom, not sacrifice. Sacrifice comes when we have problems.

5. You don’t need to know about saving and investing because you can simply ask a professional. I love Michael’s response to this. He basically repeats my mantra: do what works for you. “Everyone needs to develop their own plan. We’re all in different positions…The reality is that we all need to think about our financial plan.” We know our own financial objectives better than any advisor. If we seek financial knowledge and set our own goals, we can create our own plans for the future.

I hope that this series has been useful and informative to you. I know that much of the material was elementary to those of you who are further along the path to financial security. But it’s important for everyone to understand these concepts, and to incorporate them into their daily financial lives.

Michael Fischer spent nine years at Goldman Sachs, advising some of the largest private banks, mutual fund companies and hedge funds in the world on investment choices. Look for more episodes of Saving and Investing at Get Rich Slowly every weekday during the month of April. For more information, visit Michael’s site, Saving and Investing, or purchase his book.

Good day, good year, good investing and trading!

Thursday, June 07, 2007

Mergers and Acquisitions

A lot of merger and acquisition has been happening in the last month or so. Alcoa (A) was looking to buy Alcan (AL) for $27 billion, while Armor (AH) ok'd a $3.3 billion takeover by BAE Systems. News Corp. (NWS) sold their stake in Australia's Fairfax - a rival in a sense - for $300 million....news that came less than a week after we heard News Corp. was looking to buy Dow Jones & Company for $5 billion. Helen of Troy (HELE) bought Belson Products, and Citigroup (C) bought BISYS (BSG) for $1.4 billion. And these are just the major ones from the last few days....what's going on?

In a nutshell, companies are thinking it's currently better to buy growth rather than create it organically. Sometimes they're right, and sometimes not. When the competition (for more revenue or for companies to acquire) heats up and large corporations get desperate, then M&A can really take off. I don't think there's much question now that acquisitions have become more and more numerous over the last few weeks.

That in itself is no big deal. What is a big deal, however, is what frequently happens when we really start to see so many merger deals - many of which are a little overpriced. In short, it might be a bearish sign...at least for a short while.

First things first though - a little theory, to understand the downside potential.

Why would a company buy a technology, patent, customer base, etc. rather than going out and building the same on their own? The fact is, sometimes the bigger financial risk is doing something yourself.

By acquiring those kinds of assets, a large corporation doesn't have to wait for any R&D period, and they can immediately put revenue on the top line buy buying a revenue-bearing entity.

The cost? Oh yeah, there's a downside...while the top line might improve, as you know, nothing is ever free. The better the acquisition is, the more it costs - which means a little or a lot of debt can be racked up to own a revenue-bearing project. All to often, the cost of the acquisition is far greater than the sum total of what the acquisition will bear in terms of total sales.(Don't think for a minute that corporate management isn't capable of letting anxiety and pressure cloud their judgment.

In other words, M&A maybe a sign of the easy money being sought, which may also be only a short-term proposition. The 'ideal' growth scenario? Directing that M&A money into the development of your own technology, research, market cultivation, etc. By doing your own legwork, you control your own destiny - and can do things your way - without retro-fitting just to integrate a new enterprise into your fold.

The Sprint-Nextel (S) fiasco may be the poster child for this theme. The merger a couple of years ago has been disastrous for both sides of the deal, as integration of the two companies has so far been elusive. Though the problems may get worked out eventually (and the stock seems to be doing well), merging created more problems than it solved.

But, there's a much more obscure - dare I say lurking - reality hidden in too many of these acquisitions.

It always makes me wonder whenever a company or a CEO is so readily willing to be bought. Granted, is a takeover is inevitable, then you may as well jockey to do things on the best terms possible (rather than risk a hostile takeover and just accept what you're given). But still, why would a management team fight to get to the top only to hand at all over to someone else?

In a word, money. Assuming the top tier of a corporation's management team is 'in the know', it's also reasonable to assume they know their competitive status within the industry. If the better deal (financially) seems t be taking the deal offered rather than fight to control their own destiny, what does that tell you about where things are in the growth cycle? A lot of experts would argue it's a sign that the growth cycle was peaking, or had already.

Moreover, a great number of these buyout deals include a golden parachute for top management....yet another incentive to put a company's shareholders interests second to management's interests.

The litmus test may be a measure of how many deals are done that shouldn't have even done. A healthy pace of intelligent M&A deals is bullish. A healthy pace of poor M&A deals isn't exactly something that should excite shareholders. But, when an M&A deal is done when it should have been done at all, that's when market-wide worry may be merited.

And just so you know, one of the likely culprit behind all the recent M&A may be cheap (relatively) debt. When - not if - debt isn't cheap anymore, the interest in acquisitions may drop like a rock. If M&A is the only thing holding the bullishness together at the time, you may want to grab a parachute. In the meantime though, nobody seems to mind the risk. Remember, as long as the M&A interest persists, there's still bullish money to be made. The risk comes when it stops. And, the longer it persists, the bigger the risk becomes.

By the way, this kind of macro-view may take weeks or months to really materialize. And, it may take weeks or months to run its course. In other words, were not saying the market's bound to crash tomorrow - if it crashes at all. We're just saying we see a legitimate concern. If any of you have data, knowledge, or examples of using M&A as a contrarian tool.

Click the Merger and Acquisition title link above to learn more about these specific trading opportunities.

Good day and good trading!

Wednesday, June 06, 2007

Education of a Speculator

Hi, I'm back. Was on long holiday this last week. While on vacation, I was reading the book "The Education of a Speculator" by Victor Niederhoffer.

I think Victor Niederhoffer best stated the point of today's daily blog in his book "The Education of a Speculator". On the topic of conventional wisdom, Niederhoffer writes "when I hear the words 'conventional wisdom', I put my hand on my wallet". While the text is amusing, it's certainly worth understanding why this experienced commodities trader is frightened of what could be categorized as common sense.

The human mind can rationalize a lot of things. Unfortunately, being human, it can also rationalize incorrectly. For example, if you toss a coin ten times, and landed on heads all ten times in a row, what is the likelihood it would land on heads on the eleventh toss? Most 'conventional thinkers' would say that eleven heads in a row would be nearly impossible. But 'unconventional thinkers' realize that the chance of getting heads on that eleventh toss is still exactly 50/50.

Inaccurate conventional wisdom is common in trading. Two of these most common incorrect rationalizations are:

1) What goes up must come down.
2) What goes down must go up.

These axioms seem accurate on paper, don't they? But the reality is that these two statements are false as often as they are true.

What goes up may eventually come down, but if a stock is going up, it's going up for a reason. It may not be a good reason, but there's a reason nonetheless. That's why we typically recommend trading with the trend, rather than against it. That's also why we value technical analysis as highly as fundamental analysis. While a company may have outstanding fundamentals, the stock price is not set by a company's fundamentals - it's set by other investors. As a shareholder, you only make money if share prices increase. So, a 'good' company is no guarantee of a good return on your investment. Conversely, shares that 'can't go any higher' can and often do go higher, even if the company is losing money. Conventional wisdom says buy good companies, but that's the wisdom that's been drilled into our heads since the day we started investing. Perhaps we should adopt a new conventional wisdom - buy stocks that are increasing in value.

The point is, you have to realize if your trading logic is flawed or not. Conventional wisdom is largely a collection of assumptions. The problem is, these assumptions may have stuck around for years after the events and information that led to those assumptions had changed. Are you basing your logic on what you think to be true, or what you know to be true?

Click the Education of a Speculator title link above to purchase this excellent traders book.

Good day and good trading!