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The Relentless Pursuit of the Perfect Trade…

I have written about the Dow Jones Industrial Average before. I also made a gutsy prediction that the DJIA would hit 14,000 by February 25th, 2007 . I still stand by that forecast.

But first things first. Clearly in order for the DJIA to get that far, the first thing it has to do is break out to a new all time high. I believe this moment is rapidly approaching. In fact it may come sooner than we think. We may even see DJIA 12,000 by the end of April. I am expecting wide price volatility and ‘heated market action’ in the DJIA.

A new all time high for the DJIA is a big deal because it represents to a large degree the general publics indicator of the ‘market’. Plenty of other indices have hit new all time highs but the DJIA has lagged. Could the DJIA hitting new all time highs be the final piece of the puzzle that helps to accelrate the market going into 2007? It is possible. But I will take things a month at a time.

How to make money from the upcoming DJIA breakout?

The dow diamonds are a decent play here in my opinion. The 2007 115.75 DIA Call option seems reasonable here. It is currently priced at 5.00 .

The price structure of the DJIA chart is telling me we will see an acceleration in price. That conclusion simply comes from experience and a close look at the price action.

In my previous post I talked about Coca Cola entering a new bull market. That should help the Dow a bit with its breakout and vice versa. The structure of the DJIA and my forecasted breakout is consistent with Coca Cola breaking out as well.

HEADS UP and WAKE UP!

Exciting market action is dead ahead!

For about half a year I have been watching and observing the Coca Cola stock price. Needless to say this is a very slow moving stock and for good reason, it has 2.25 BILLION shares in the float. Definitely a beast or dog to the hot blooded trader. However, what I am about to tell you may change some of that perception.

New bull market you say? But why?

I am talking strictly from a technical perspective ( as usual). The fact is that Coca Cola stock has been in a downtrending channel for the past 7 and 1/2 years. In other words this ‘famous’ stock has been in a severe bear market for quite some time. When I see a stock or index in a bear market for that long it usually starts to get my attention. The act of any security going down persistently for this length of time slowly creates a better risk reward scenario. The better risk reward scenario really comes to fruition at the point when the accumulation stage is about finished and the new mark up can begin.

Identifying the end of bearish trends of any security can be very tricky because bottoms generally take much longer to complete than tops. So the jumpy trader is at risk of entering too soon thinking he has found bottom, only later to realize a loss or whipsaw action as price continues to base out in a channel.

I suppose from the fundamental side one can come up with all sorts of reasons why ‘Coke is dead’ and should be avoided at all costs. The move towards healthier diets and the goverment crackdown on overweight children is just one of those reasons. I still drink some type of coca cola beverage at least once a week.. Should I? Well probably not, but damn it sure does taste good :) Is it the best for my health? Well, probably not, but you only live once right? Might as well have a little enjoyment while we are all still here..

I remember reading the book, “For God, country and Coca Cola”, in my dusty old apartment at college. At the time I had a headache, was generally not feeling too well and was tired from a long day of studying. I was sitting there reading the book and learned how this company grew from a seedling to what it has become now. It was quite an interesting read. The book talked about how the first version of Coca Cola was supposed to cure headaches, make you feel better and refreshed, and give you new energy. While reading the book and drinking a couple cans my headache went away, I started to feel better and started having quite an uplifting mood! It could be that the act of reading this interesting book helped activate the change in me, but probably most of it had to do with the secret ingredients inside that can.

Coca cola still has massive branding power. Going forward let us not forget that World Cup 2006 in Germany is coming up, the worlds most watched sporting event. Coke is a sponsoring advertiser of the cup which starts in June 2006. We also have a warm summer coming up? And maybe it will be a hotter than normal summer? I don’t know, but it is possible. A very hot summer and a very hot World Cup 2006 in my mind at least can only help lift the mood of Coca Cola investors.

Of course these are all subjective opinions, not technical ones. My technical opinion does confirm my subjective ones however.

As previously mentioned, Coke has been in a long bear market. But I believe Coca Cola stock is about to break out (bullishly) of a 3 YEAR symmetrical triangle with price volatility. In order to validate this breakout I need to see (and expect it) wide price spread and sufficient volume.

Take a look at the chart:

This is such a beautiful chart is almost makes me want to cry ;) . Part of the reason for this is the longer term duration of the chart. The longer the time frame the better and the bigger the implications of its resolution! I believe the breakout and much higher price volatility is very close! A wide price bar and sufficient volume would VALIDATE a breakout from the 7 year downtrendline and launch coca cola into a NEW bull market! I expect all of the above to happen.

But when?

It is entirely possible that the big move will happen as we go into the end of March (end of this quarter) and begin April (begin of next quarter). End of quarter and beginning of next quarter window dressing should help the cause of this breakout.

Money to be made in Coca Cola?

I think the best way to make money on the new bull market in Coca Cola is through a longer term call option. the January 2007 , 50 Call option on Coca Cola seems reasonable. Right now it is trading at .30 to .35 With the expected increase in volatility, I think we could see at least another 30 cents premium added to this call from the upcoming expected volatility.

I believe this is an outstanding opportunity in Coca Cola and as of this posting rate it with pretty high confidence. Aside from the option trading opportunity, long term investors worldwide should be alerted to this stock as a potential buy and hold for slow and steady gains in the year ahead.

I still think a huge move is coming for the Dow Jones Industrial Average. Not a one day wonder, but more like a steady sloping upward trend.

There are a huge number of buy stops just above 11,000 , that once activated will send the market a lot higher than most people probably believe at the moment.

The chart of the Dow since 2000 is quite compelling. The structure looks supportive of this type of move. But here is the kicker, although we will see very large numbers on the Dow (12,000, 13,000, 14,000, 15,000 ….) I suspect by the time we get there inflation will be worse than it is now. So the large numbers may be deceiving.

Anyway, here is an interesting link I found from Barton. He writes and charts about the Dow, Nasdaq and S&P. Needless to say I agree in good part with some of his arguments.

Barton’s Asian Stock Market Charts

I just wanted to say a few words about the general broad market (Dow, Nasdaq and S&P). I will keep it short, but felt it was important to mention for the simple reason that knowing the primary direction of the TIDE in my experience is very important for the individual trades and individual stocks. If you have the TIDE on your side then there are much better odds that the individual trades or setups will work out. Yes or course it is always a trader’s market and there is always a trade somewhere, but it does not hurt to have the 800 pound gorilla (broad market) as your body guard.

I have been following the S&P 500 closely during the last few months and all the other major indices. Anyway the bottom line is that all of the indices are OUTSTANDINGLY BULLISH! Even now as we are at the 52 week highs, I see bullish breakouts in the indices and powerful sustained trends UP in the major averages.

The reason why I am mentioning this is now is because if I have good knowledge about where the broad market is going then it raises my confidence level on individual trades, especially during broad market breakout periods! And even more so during statistically bullish seasonal week of Thanksgiving!

Perhaps you know this already so then it is just a double mention in your mind. But I cannot overemphasize enough how important movement in the broad market averages is to individual trades.

In my experience, there are occasionally sweet spots in the market. These occur when you have new 52 week high BREAKOUTS in the major indices. What the breakout to new 52 week highs in the broad markets does is start to light the fuel of a speculative frenzy. It is a time of excitment and relief all at the same time. The OTC BB market starts cooking as well. The Dow Jones Industrial Average has been trading in a sideways trading range for 2 FULL YEARS! This is an enormous amount of cause and I believe the breakout we are not witnessing will give us a good sustained run at a bare minimum right into the end of this year.

So we have the TIDE on our side.

Ok, so we have the backdrop for a speculative frenzy…

I cannot make you believe we are going to enter a very bullish upswing in the broad averages.. everyone has a different opinion. My only point is that knowing we are going to have a very bullish upswing in the broad market averages can add to your confidence in some of the individual trades I am about to mention here.

I am going to post a chart here which should give you a rock solid dose of long term thinking. Ponder for a moment your long term opinion on the market.. do you have one? Bearish, Bullish or in between? It goes without saying that a fairly confident long term forecast can help so many of your trading decisions between now and the end point of your forecast…

But a long term forecast is extremely difficult to gauge with accuracy for the same reason that a long term forecast of weather patterns is just as difficult… However, I do believe that the market is easier to forecast on a long term basis than the weather :) .

The chart at the below link is one I made of the Dow Jones Industrial Average.

CHART

Note that the Dow Jones Industrial Average has been up until TODAY in a sideways basing pattern with 2 FULL YEARS of CAUSE. We also have a large symmetrical triangle pattern that is nearing the apex.

The inset chart is the 8.6 global business cycle model. This cycle model has over time made some STUNNING forecasts. Notably, many of these stunning forecasts were in existence decades before they even happened!

Note in the chart the 1998.55 peak forecast… which you probably remember as being the beginning of the asian currency crisis. That peak, July 20th, 1998 was an astounding forecast. It was perhaps one of the most famous and precise forecasts of the 8.6 year cycle model. The next most famous one was the precise forecast of the 1987 peak and crash.

The chart I have drawn shows the the cycle model also accurately predicted the major low of the bear market in 2002.85.

The next major peak is forecast to be 2007.15 or February 25th, 2007. Simple trendline analysis predicts about 14,000 target on the Dow Jones Industrial Average by this date.

Mark this date on your calendar! February 25th, 2007 !

An extraordinary run is coming that will take the Dow to new all time highs!

Peace.

Thomas

The S & P 500 powered down with volume today.. Quite heavy volume too. A test of 1163 is starting to look like a very good possibility now and would at least open up the possiblity of that reverse head and shoulders pattern setup I mentioned in an earlier posting.

After looking more carefully at this index it appears that a sell signal was triggered on June 22nd 2005. The high for that day was 1219.59 which tested the high for the 17th of June which was 1219.55. Not only did the 22nd price bar test the June 17th price bar, it also finished with a close below the 17th price bar and on dramatically lighter volume.

The volume for the 22nd of June 2005 was 1.38 billion and the volume for the 17th of June was somewhere near 2.5 billion. The June 17th volume was skewed by quadruple witching.. so I am a bit perplexed as how to make a judgement on whether I can make a valid volume comparison given the quadruple witching skew. Either way it looks like a comfortable sell signal to me.

The other thing going on with the S & P as you may have heard me mention several times on other indices is a potential bearish monthly MACD cross coming up on this index. We do not have a negative or bearish crossover yet, but it is starting to look like this is the way it wants to go..

So as of this writing the bias to me is definitely bearish with the next possiblity and analysis being a run for and test of 1163. It will be interesting to see how the volume comparison is at that time and whether it means more selling or a bounce and reverse head and shoulders pattern.

For the S & P to avoid a bearish monthly MACD crossover, it is going to have to pull a rabit out of the hat going into the end of this year.

Thomas

P.S. An interesting side analysis here is the way this could play into the gold market. SOMETIMES the gold market moves inverse to a bearishly moving broad market as a hedge. An extra bearish broad market could further support some of the bullish gold clues I alluded to in my previous post on the Gold Market.

We are about to see some fireworks in the Gold market in July August and September and likely October, November and December as well. Gold during the last 6 to 9 months has been an absolute SLEEPER in terms of price action. Small price ranges, slow price movement and BORING price action.

But behind the scenes what this means is that the gold market is getting ready to lead us into super high volatility, or fireworks if you will. The lackluster action is explained by the fact that we have had during the last 2 price quarters a double inside quarter. This is huge news because it is a big clue for future volatility.

The gold market has been deceptively quiet so as not to warn anyone about what it wants to do next. This quiet, slow and boring price action was precisely the creation of a double inside quarter shown in the link in the previous paragraph.

I would like to be able to tell you in which direction the gold market will break next. The weight of the evidence seems to suggest that it will be upwards. However there is more confirmation needed.

I have created a series of articles on the gold market available over at the sister site to stock and commodity trading called ‘Gold and Silver Forum’.

Here is a list of the articles you may find interesting on the gold market:

1970 Gold Bull versus 2001 Gold Bull

The 1970 Gold Market Bearish Pause

The ultimate gold swing trading range

The ultimate Gold chart and most important chart of 2005!

Alert! Double Inside Quarter on Quarterly Gold Price Chart

Where will Gold go now?

Peace.

Thomas

I am still open to the possibility of a reverse head and shoulders pattern being created on the S & P 500 index.

Today we declined on big volume from the highs and makes me think my previous article of ’summer doldrums’ could be kicking into effect thereby delaying the big upwards breakout in the S & P 500.

The fact is that July and August can be horrible months to trade and a horrible time to get real momentum and adequate volume upwards in the market. Let’s face it, a lot of the big money is at the beach and body surfing on cape cod!

So here in this chart I just drew a brief sketch of a different possibility, a reverse head and shoulders pattern that could be in process right now. Further confirmation is needed however and the first sign will be a return to 1170 on the S & P to complete the creation of the right shoulder of this reverse head and shoulders pattern.

I am not saying that this WILL be a reverse head and shoulders pattern. Just open to the possibility of it being one given the probabilities of slow low volume lethargic summer trading…

Time will tell as they say.

I am still viewing this as an overall consolidation before break out to new highs down the road. This is the preferred scenario analysis for now.

Will update if new developments warrant on the S & P 500.

Out.

Tom

Whether you are a beginning trader just starting to get the feel for the business and making your first trade, or an experienced pro unfazed by anything the market throws at you, chances are that you are still susceptible to the emotional highs and lows of your day to day or month to month trading matters.

It is probably ok to have those emotional high’s and lows hit your brain when you have positions in the markets. But just be sure that your experience and overall knowledge and discipline is strong enough to override any possible emotional or euphoric effects of a great trade (or a bad losing trade).

You know, I can tell you one thing that happened to me already several times many years ago ( I believe it was 1998). I was fortunate enough to have predicted that sharp decline with a decent amount of precision. Don’t ask me why but I chose to pick on Cisco Systems (CSCO) with a put option. Cisco was one of the strongest stocks at the time and really was not one to fall apart in a big way… until the Asian currency crisis happened. Cisco was one of the last stocks to break down during that market correction.

So anyway, as I was saying, I had a put option that was significantly out of the money and when Cisco finally broke, the volatility spiked and it got very close to being in the money. I had an enormous paper profit.

So what did I do?

I let it get to my head (the euphoria I mean).

I let my position keep running and did not close the trade. And during one of those nights I went to a luxury car dealership lusting over all the brand new shiny BMWs and Land Rovers. I drove around that dealership and felt like I was on top of the world. It was like a drug fix. But it was a big mistake.

My position was still open! and it was an option position!

Options positions are meant to be closed and closed quick with any sort of decent profit. Even if it is a long term leap option, it should be closed if it has a generous profit.

But I was euphoric, and blinded.

Running around luxury car dealerships or telling your friends and family members about all the things you are going to buy them and yourself is a very very bad mistake if your position is still open. DON”T DO IT. Trust me. It will get you into trouble and it will blind you. CLOSE your position and walk away for a few days or a week if necessary and then celebrate all you want or brag all you want. But DON’T do this if your position is still open.

Be a professional and don’t let your trading matters to get to your head.

My Father, champagne, and classical music

My Father was also guilty of letting his trading get to his head. In his case the trade was also an option position. It was a call option on Apple Computer way back when… I cannot remember the specific date. But it was a great great trade. I forget how much he committed to the trade at the start, perhaps around $5000.

As I try to recall exactly how this trade was setup… I believe Apple Computer (AAPL) at the time had nearly completed a pretty rough corrective period after a messy basing pattern. The stock was oversold and there were some good signs of volume coming into the stock. The oscillators were saying buy and the risk reward was pretty good. So my Dad had a call option on the stock. Two or three days later, there was a big press release and announcement by Bill Gates that Microsoft would continue to support and produce the Microsoft Office line of products for the Apple operating system. I think this is what the announcement was. It was so long ago that I cannot exactly recall what the big announcement was, but it was a major headliner and a vote of confidence in Apple’s business which was floundering at the time.

To make a long story short, my Dad’s account on paper was near $25,000. Needless to say he was euphoric about it and it got to his head.

So what did he do?

He invited me and my Mother out to an outdoor classic music concert that was happening that night (Beethoven). But his call option position was still open!

We sat there on the lawn, listened to that mesmerizing music and drank champagne and giggle and laughed about what a great trade he had made…

But he did not close the trade yet!

So the next day the trade turned around on him. And rightly so because the 3 or 4 day upmove was a vertical spike, and vertical spikes always do retracements because they are unsustainable in most cases.

So he ended up with still an average profit, but no where near the blowout profit he could have had, had he not let the euphoria get to his head.

No one is perfect. These types of mistakes happen to everyone surely. The key is to do your best to minimize the euphoric damage so that you can maximize your profits.

Peace!

I’m out.

The one thing I forgot to mention in my previous post regarding the S&P 500 breaking to new highs was that we cannot rule out a delay of the breakout due to ‘low volume summer trading’ ! The low volume factor was ignored however on June 17th. And it was a Friday at that! So at this point I do not know whether to ignore the factor of summer slow trading or open myself up to the possibility that it will not be a factor this time.

This does bring up a general point worth mentioning. Is it even worth trading or following the markets during the slow summer months? I suppose it depends on what you favorite flavor is. If you love to dabble in small stocks or the OTC BB market then the summer is probably definitely NOT a good time to be trading too much. The problem is that during slow summer months there can be so much whipsawing, minor ranges and lackluster volume that the only thing it really accomplishes for you if extra commission charges from your online trading firm.

But alas, there are alternatives. You could concentrate solely on trading QQQ’s or spyders on an intra-day basis and make your trades quick and light.

Anyway, the bottom line is that experience suggests to keep your trading very selective during the summer months or you are setting yourself up to be eaten for lunch!

P.S. Right now the S&P 500 is hovering like a bat right under longer term resistance… If the ’summer doldrums’ effect kicks in, the first sign will be a price break back down under the previous high volume swing mentioned previously! That could mean a bit more backing and filling will occur to weed out the weak hands before the big breakout!

P.P.S. As far as the occurence of the actual breakout, when it happens, we want to watch for long price spread and confirmed volume, then after that a low volume retest back to the new support area, but ahhhh… I am getting ahead of myself !