Continuing our recent series of posts on stocks and spread betting stocks, in particular the S&P 500, we eventually got the breakout that we had been looking for. As we had indicated may be the case yesterday, due to both the long term trend and the steady progression higher over the past few sessions from support, the S&P 500 broke out of the range to the upside, with the S&P 500 clearing resistance at 1101.5 and closing at 1109.2 on the September contract.

This recent sideways action went on for 18 sessions before the breakout occurred and the close above the intervening high between to the 2 lows of that range means that the double bottom is confirmed. In addition, the close is also above the high of the shooting star pattern from previous day’s session. The shooting star is a reversal pattern and a close above it means that it is no longer valid. Therefore, things in the short term are looking better than they have been of late and we may get a continuation higher from here.

The question now is how far can this move continue? As we wrote yesterday, one way of getting an idea of the potential move is to take the height of the immediately preceding lateral trading range and add it to the breakout level. Doing this can give us an indication as to how far the breakout may go and where the market may end up. In this instance the range is around 65 points, so we can look for a continuation higher possibly to around 1165. There is some resistance at around 1142 that may come in to play prior to that target. There is also resistance from a falling window around the 1142 to 1151 area.

It remains to be seen as to whether we get sufficient strength in this market for it to generate a buy signal and we will look to the action over the next few sessions and in particular the weekly closing prices before initiating any position. The LS Trader financial spread betting system has specific rules that dictate when and where we enter any position and it takes more than just patterns to enter a trade.

Good trading

Phil Seaton

PS. You can find out more about the LS Trader financial spread betting system and how we combine financial spread betting with our trend following system by clicking here. The system comes with a 30 day no questions asked money back guarantee

Continuing on from our post last week on spread betting stocks where we talked about the current lateral trading ranges that the stock markets are in and in particular the S&P 500 (the real stock market), today we look at what has been happening in the S&P 500 and what may happen next. There are a number of technical factors in play in this market which may have a considerable bearing on where the markets go next and this information should assist you in making your decisions as to how you are going to be spread betting stocks and in particular the S&P 500 over the coming days.

In the S&P 500 (September contract), the trading range is still between 1034.80 and 1100. This range has now held good for the last 17 sessions and has not been outside of it since the 19^th May on the basis of closing prices.

Over the past few sessions we have seen a rise from support up towards the top of the range at 1100 (the intra day high yesterday was 1101.5 but the market failed to close above that level). From the highs of the day yesterday, which were right on the resistance that we have been talking about in recent posts, sellers returned and we got a shooting star pattern confirming resistance. For those not familiar with shooting stars they are a bearish candlestick pattern and more relevant when they confirm a recent resistance level as they have in this case. This shooting star will be valid until the market closes above the high of the shooting star at 1101.5.

As we have said before there have been a few attempted rallies which have taken the market up towards the top of the range, only for the market to reverse and go back to the bottom of the range where buyers have each time come in. This has lead to the sideways action. The longer that this sideways action continues the larger the eventual breakout is likely to be.

Just to clarify, as some commentators are erroneously stating that we have a double bottom on the S&P 500 that that is not the case. For a double bottom to be confirmed the high between the 2 lows has to be taken out and as yet this has not happened. If the market closes above the high between the 2 lows then this will also be bullish.

Therefore, the levels to watch are still 1034.8 to the downside and 1101.5 to the upside. When we have a lateral range like this we can use the height of the range and add it to the breakout level to give us an indication of how far the initial breakout is likely to go. In this instance the range is around 65 points, so we can set upside targets to around 1165 and downside targets to around the 970 area, although there are other support and resistance levels that may come in to play prior to those targets should we eventually get a breakout. It’s wise to wait for a breakout confirmation before making any spread betting decisions.

As we wrote in our last post on spread betting the S&P 500 of the 2 breakout levels the more  critical level is the bottom of the range at 1034.80. A break here would change the long term trend to down, aligning the short and long term trends and likely giving rise to more selling. To add to the significance of this level the lows here are at the same level of the lows of the previous sell off on February 5^th, where we had a hammer pattern from which the rally began. A hammer pattern is a bullish reversal pattern and is the opposite of the shooting star, which is the bearish reversal pattern formed yesterday.

Therefore, a close below the February 5^th lows will negate the hammer pattern and also give a long term trend change to down whereas a breakout above 1101.5 will negate the shooting star and give a bullish breakout. Since the market is closer to the top of the range and the long term trend is still up for US stock indexes, the odds slightly favour an upside breakout but we’ll have to wait and see what happens.

The LS Trader financial spread betting system does not initiate trades on reversals as it is a trend following system, but instead goes for momentum plays on breakouts in the direction of the trend and sits on the sidelines through lateral trading ranges.

Good trading

Phil Seaton

PS. You can find out more about the LS Trader financial spread betting system and how we combine financial spread betting with our trend following system to beat the markets, including the stock indexes such as the S&P 500 by clicking here. The system comes with a 30 day no questions asked money back guarantee

Here is the third part of our 7 part series titled “The 7 Deadly Financial Spread Betting Mistakes”. Today we will discuss the third of the 7 financial spread betting mistakes that financial traders make:

Mistake # 3 Trading against the trend

You should never trade against the trend but should always follow the trend. There are several reasons for this. The first reason is that the price is the only instrument that takes into account all the knowledge everybody has about that particular commodity. If the price is going up then there is a reason for that. We do not need to know the reason, we only have to get on board and stay with the trend until it ends.

Conversely, if the price is going down then there is a reason for that as well. Why would we want to get on the wrong side of the prevailing trend? Traders want to be right and they want to say “I got in right at the bottom, look how smart I am”, not realising that those bottom few points that traders try to pick are the most expensive few points in history.

If you think about it, how likely is it that you are able to pick a point near a reversal in price and that the price is just going to stop and then start moving the other way? It’s not really very likely. Far more likely is that the price will continue to move in the same direction that it is already going.

The example I like to use is that counter trend trading is like jumping in front of a fast moving train and hoping that it stops right in front of you, turns around and then starts going in the opposite direction. Why not just jump on the train in the direction it’s already going and stay on board for the duration of the journey (the trend) and then get off the train (exit the trade) when the train finally reaches its destination and starts to turn back?

This is the optimum approach and affords easy risk control, because it will soon become obvious if the trend is not going to continue and you can then exit the trade with a small loss, leaving your trading capital intact and you ready to take the next good trading opportunity that comes along.

If you are counter trend trading and are looking for the top or bottom of the market and you decide for example that Gold has dropped to $850 and you are sure this is the bottom and it has to go higher (after all only a week ago it was at $900!) you buy Gold at $850 only for it to fall to $830. If it was a good buy at $850 it must be an even better buy at $850, so you decide to open a new trade at $830 (after all this is giving you an average price of $840 which must be good!). This process is known as averaging down. We’ll talk about this in part 4 of The 7 Deadly Financial Spread Betting Mistakes.

Meanwhile, Gold falls further still. Now you have a big loss on your hands and Gold stands at $820. Using the same logic as before, you borrow some money and buy more Gold at $820. Again you are wrong and Gold falls further to $790 and therefore wipes out your account. This kind of thinking is commonplace and is the cause of most people losing all their money because people buy into the myth that things return to normal. Sometimes they do but many times they do not.

The fact remains that if you were trend following, i.e. trading in the direction of the trend then you would not have been in this position in the first place as you would have exited your trade shortly after it moved against you, taking a small loss. You would also not have averaged down (added extra trades to your original position), as this would be taking trades against the trend. Therefore you would have just taken 1 small loss, instead of several large losses, and lived to fight another day.

A very popular trading theory is buying on dips and selling rallies. This is counter trend and is a mistake. Testing this theory out over a long period of data proves that this is a losing strategy. The reason for this is that if the market falls and you are looking to buy on a dip, how do you know that this is not the start of a trend reversal? You could buy on the dip only for the market to continue to go against you. The same is true for selling rallies.

The rule here is that you must trade with the trend and therefore you must buy strength and sell weakness. Therefore you should never buy on dips or sell rallies but should wait for the momentum of the market to go your way before entering. Counter trend trading is going against the market and is best avoided.

Longevity in trading is the key as long as you have a system that has a positive expectancy, or an edge. The LS Trader system is such a trading system as it has a positive expectancy and therefore an edge. The longer you stay in the game, the more chance that edge has of coming to the fore. This leads to long term profits, which is what all traders are after.

Part 4 of the 7 deadly financial spread betting mistakes will be published here in the next few days.

Good trading

Phil Seaton

PS. If you are not already subscribed to The LS Trader system, please click here for a 30 day trial subscription. The LS trader system has been built around all the points covered in this article and avoids all the mistakes that most online traders make. You can try the system out for a full 30 days and if you are not delighted with it, simply cancel and receive a full refund of your subscription.

LS Trader Financial Spread Betting Weekly Update

This week’s financial spread betting update is now available and can be read by clicking here.

In this week’s issue we look at what happened to the markets before and after the Goldman Sachs news hit the markets and whether the sell off was really a knee jerk reaction to the news considering that the SEC’s case is actually based on just one email!

We also take a look at what happened to stock market volatility during the past week and focus on the VIX Index as well as the major commodity markets, including Gold and Crude oil. We also take a look at a fairly rare event that happened in a couple of the major forex markets last week.

This week’s update begins with:

The past week has seen stocks post new highs once again, clear significant round numbers but then sell off after the news about the SEC going after Goldman Sachs for fraud hit the markets and sent most markets lower on Friday…continue reading by clicking here

Good trading

Phil Seaton

PS. You can sign up for a risk free trial of the LS Trader financial spread betting system by clicking here. The system comes with a 30 day no questions asked money back guarantee.

Since posting the article on my blog about the bottom of the stock market a couple of days ago I have received numerous emails on the subject so I thought I would expand on it a bit and give some further thoughts.

The one big question I have and would like to put out to everybody for them to think about is why is it so important to buy the bottom of the market anyway? I believe that the reason people are looking for the bottom is ego based and not profit based. People want to be right and say “look how smart I am, I bought the bottom of the stock market”.

Instead of trying to be “right” traders should be concentrating solely on making money. The fact remains that the best traders are those with a relatively low win percentage i.e. they are wrong more often than they are right, but when they are right that make more money than they lose when they are wrong and the difference is their profit.

As I have written before, the markets trend around 40% of the time and that is about the same as the percentage of winning trades that a good trader or trading system will produce. This is roughly the percentage of winning trades that the LS Trader system produces but over time the system is well ahead of the game.

Currently the trend in the stock markets is down. The long term trend and the short term trend is down so there is no reason as far as I can see for people to be trying to fight these trends and buy this market right now.

I believe that the trend in stocks is going to be down for a while yet and I don’t see the LS Trader system giving a buy signal on stocks for the rest of 2009. That does not mean that there won’t be rallies because there will most certainly be rallies and up weeks, possibly even up months, but after all is said and done the long term trend will remain down for the foreseeable future.

In the meantime there will be countless traders trying to predict the bottom and try to buy the bottom of the market and even look for market bounces and try to buy them. My point is, rather than fight the trend and guess why not just follow the trend and go short?

Using trend following, traders don’t need to guess or predict where the bottom of the market is but simply follow the trend. When the trend reverses the trend follower simply exits the trade and waits for the next trend to develop. Trend following is reactive, not predictive.

The fact remains that huge sums of money is and has already been lost by people in search of the bottom of the market. Just ask legendary investor Warren Buffett. Buffett attempted to call the bottom of the market months ago and was wrong in a big way, so far losing billions of dollars.

What is Buffett’s reason for buying the stock market? It seems that he has 2 main reasons:

1. He likes a bargain. He said a day or 2 ago that he likes to buy quality merchandise and knock down prices. Problem with this is that what may appear cheap today could very well be expensive tomorrow. As I have said before, there is no such thing as value in the markets as the markets are always right. Therefore, the current price on offer for any market is the right price at that particular moment in time.
2. He believes that you should be greedy when others are fearful and fearful when others are greedy. This is a popular theory and seems logical. The fact is that it is just not accurate enough as an indicator and Buffett’s experience in this example is proof positive of that.

The problem with both of these approaches is that they are both counter trend. Counter trend approaches when tested over market history show a negative expectancy as they are not statistically valid.

The question is then why does Buffett do this? Well, firstly there is an important distinction that Buffett is a long term investor, not a trader and he will therefore be taking a longer term view. He obviously also believed that when he was buying the market that we were either at or near the bottom. He was wrong.

In my opinion he is making a mistake because he has probably at best parked his money for a couple of years before it climbs above the levels that he bought at. Secondly, he is clearly very well capitalized and can afford to leave his money parked for a couple of years or so and even lose some money in the meantime until the markets recover. Other less well funded traders or investors cannot adopt the same approach.

As I have written in the previous article, the future cannot be predicted as it does not yet exist and there are way too many unknown variables, not least of which being crowd psychology and the emotions of greed and fear and therefore nobody knows either where the bottom of the market is or how long the recovery will take. If I had to give an opinion I would say that the stock markets will not make new highs for at least 5 years.

Yours for bigger winners, more often

Phil Seaton

www.PhilSeaton.co.uk  

PS. Instead of trying to predict the future, why not join the increasing number of trend followers who are making money from being short the stock markets and sign up for a 60 day trial of the LS Trader system

The questions that we at LS trader are asked most currently is where we think the stock markets are headed and where we think the bottom of the market is and what are the best spread betting strategies for today’s markets. This is a very common question these days and it seems to be on everybody’s lips these days.

My personal view is that nobody knows and regardless of what fundamental analysis or technical analysis you use, the bottom line is nobody knows. There are a huge number of very smart people who try to use all sorts of research and indicators to predict where markets are going but the fact remains that it just can’t be done consistently enough to make it a worthwhile approach.

Subscribers to LS Trader or regular readers of my blog will know that I don’t put any weight at all in fundamental analysis, nor do I think that many technical indicators have any value. Most of them when tested over historical data have no statistical validity and the reason for this is that they are predictive and are attempting to predict the future, which as of now does not exist.

Where does that leave us then? If we conclude that we can’t use technical analysis or fundamental analysis with any consistent accuracy, what do we do? Well, the fact remains that the only indicator of any value is the price. The price tells you everything about a market and represents the sum total knowledge of all market participants in that particular market. Therefore, all the different trading and spread betting strategies that are of any use will be based on and built around the price.

The price is the indicator used in trend following and quite simply, you use the price to identify trends in the markets. As of now, the trends in most markets are down, be it stocks or commodities. This is true of both the long and short term trends.

Therefore, rather than trying to predict of guess where the bottom of the market is, traders should just notice that the markets are trending down and position themselves accordingly.

At LS Trader, our spread betting system identified that the stock markets were trending down again several weeks ago and we have been short ever since. Therefore, all our current spread betting strategies for stocks will be from the short side only. How long will this downtrend last? We don’t know, nor do we need to. We just ride the trend until we get confirmation that the trend has ended at which point we exit.

Will we get out at the bottom? No, because trend following does not set profit targets and exit trades when or if such targets are hit and it does not try to predict the bottom of the market. It leaves the trades open until the market reverses a bit and then exits. This means that we must necessarily give back a portion of our profits but this is necessary to give the trend the maximum chance to continue and enable us to extract as much as possible from the trend.

For us here in the UK, the market that we seem to be fascinated with most is the FTSE 100. As I have written previously, this market was headed towards 3500 and that was an intermediate target that we had identified. This week 3500 was taken out and the market drifted lower, although it has been higher since. Will it go lower again? Who knows?

One thing that we can do to give us some sort of indication as to where we think the market may go is to identify key support and resistance levels on the chart. Looking at the FTSE, we can identify 3277.5 as the bottom set back on the 12^th March 2003. This was the level that the FTSE was at following the technology crash and this proved to be the bottom of that bear market.

If the market does fall again to test this level, one would expect major support and buying interest from bargain hunters. This level also represents a low set back in May 1995 and should represent major support. If this level fails then we may well see a swift decline further to around 3000. If this happens we will review things from there.

This is though as I have written above, all speculation as the future cannot be predicted and nobody can consistently call the bottom of the market except in hindsight and it’s equally possible that the lows set yesterday at 3464 (March contract) were the bottom of the market. Time will tell of course but the main point is don’t buy in to all these people trying to predict the bottom of the market because the fact remains nobody knows.

Good luck in your trading

Phil Seaton

PS. If you want a way to simplify your financial spread betting and avoid all the noise and hype in the markets you can sign up for a risk free trial of the LS Trader system here.

What the January S&P Barometer says about the stock markets this year.

The January Barometer states that as the S&P 500 goes in January, so does the rest of the year. This indicator has had only 5 significant errors in the past 58 years and has a 91.4% accuracy ratio over the same period!

The 5 times that this indicator was wrong coincided with some fairly major events.

1. In 2003, the anticipation of military action in Iraq

2. 2001 saw 2 interest rate cuts in January and of course September 11^th.

3. In 1982 we had the start of a major bull market

4. 1968 and 1966 were both affected by Vietnam

In January last year the S&P 500 was well down and we had a subsequent bear market, which we are still in. The current contract in the S&P 500 is the March contract and this opened the year at 902. It ended the month on Friday at 822, almost 9% lower for the month. This indicator suggests that the markets will also end 2009 down for the year as the bear market continues.

At the time of writing this, S&P 500 futures are further down at around 809. As I have written before, round numbers have a tendency to produce support, even it’s just from a psychological perspective, and therefore we may see some support at 800. This level is also quite visible on the chart as buyers have come in at around the 801 level several times recently.

If this level can be cleared then we may well see a move lower to around 750. Support should be seen at that level but we’ll have to review things if and when we get there.

As I have written many times before, everyone still seems focused on where they think the bottom of the market is and when they should buy. It’s quite amazing really that you rarely hear people say “the market is going down and I’m going to sell it short”. People seem to want to fight the tide instead of just go with it. This is of course why trend following works. You simply identify a trend in the markets and jump on board until the trend reverses.

As subscribers to my LS Trader financial spread betting system will know, we were short the stock markets for a big part of 2008 having first shorted the markets in January. We are again short some of the stock markets right now and will be for as long as the markets continue to trend lower. If you want to learn how to make money by shorting the stock markets you can subscribe to the LS Trader system here

There is an upward bias always in the stock markets as people buy in to the myth of buy and hold. This strategy is all well and good if you are in a multiyear bull market, but if you buy and hold through a multiyear bear market you will be in trouble. I believe this bear market has quite a way to run and I don’t see us having any buy signals in the stock markets in 2009.

All things considered it is unlikely that we will see much upside movement in stocks for the foreseeable future. There will most certainly be some bear market rallies along the way but I don’t see us having any buy indicators for stocks any time soon.

Good luck in your trading

Phil Seaton

PS. Click here to sign up for the LS Trader system. The system comes with a no quibble 60 day unconditional money back guarantee.