Fibonacci Retracement Levels
May 30, 2006
The Smart Profits Report: Issue #313
Tuesday, May 30, 2006
Fibonacci Retracement Levels: Let “Leo” Calculate Your Support and Resistance
By Jim Stanton
Advisory Panelist, Mt. Vernon Research
As an investor, timing your trades is one of the hardest things to do. After all, knowing when to get in and out of a stock is the critical element to successful investing.
Simply put, when a stock with a bullish chart pattern pulls back near its support level, it’s a good opportunity to buy. When a stock with a bearish chart pattern rallies up near its resistance point, it’s a good opportunity to short it.
So, how exactly do you work out where a certain stock’s support and resistance points are, alerting you to the best time to buy and sell? There are a number of ways to do it, including moving averages, trend lines and historical support and resistance levels. But today, let’s focus on buying stocks on pullbacks, using Fibonacci retracement levels.
Profiting From Fibonacci: The “Father Of Mathematics”
In case you’re not familiar with Leonardo Fibonacci, he was a 12th century Italian mathematician, widely considered the “Father of Mathematics.” His theories form the Fibonacci trading technique, using a specific set of numbers known as the “Fibonacci sequence,” which the retracement concept is based on.
Basically, this states that markets do not simply move up and down in a straight line, but fluctuate along the way and establish certain key points. The Fibonacci sequence gives you an idea of how high and low these retracements are going to go, so you know when to buy and sell.
There are three main retracement levels that many traders use: 38.2%, 50%, and 61.8%. After a move up or down, the price will usually “retrace” from its highs and form support, or bounce off its lows and form resistance levels near those Fibonacci points. This can help you figure out the best point to buy and sell.
At times, I will use 23.6% and 76.4% Fibonacci retracement levels if the previous action has been extremely bullish or bearish. Many traders focus on the 50% retracement area, but the extent of the pullback depends on how bullish the stock has been acting.
For example, if the stock has performed strongly and has solid momentum, you may only get a pullback of 38.2% (23.6% if it’s been extremely bullish). But if the stock has experienced an extended downtrend, it could retrace 62.8% or possibly 76.45% in a “retest” of its previous lows.
Let’s see how this works in the real world…
The Fibonacci Retracing of Comcast… And Winning
In the June issue of the Xcelerated Profits Report newsletter, I recommended buying Comcast (Nasdaq: CMCSA) and used the daily and weekly charts to illustrate the use of Fibonacci retracement levels.
The first chart below is the weekly CMCSA chart, dating back from May 10, 2002 through 2004. As you can see, CMCSA bottomed out in October of 2002 and rallied, without much of a pullback, until June of 2003 when it reached $34.85. Since it was a fairly strong rally, you would not expect a sizable pullback and it retraced exactly 38.2% before making new highs in 2004.
Now, take a look at a more recent daily CMCSA chart below. It’s a completely different picture. The stock sank more than 25% between April 2005 and January 2006 when it hit a low of $25.33.
That triggered a buy signal, but since the prior action was very bearish, you can expect a deeper pull back because stocks often have to test lows before a change in trend can be validated. As you can see, CMCSA did test the low (a 76.4% retracement) before reversing and validating the new uptrend.
Charts Courtesy of Trade Navigator Software (http://www.genesisft.com)
Watch Your Fibonacci Retracement Levels!
If you want to try to reduce your risk by buying stocks on pullbacks (or shorting stocks on rallies), you have to watch each Fibonacci retracement level mentioned above for other potential signs of support.
For example, if you think the stock will have a sizable pullback (50% or more), but the 50-day moving average shows the 38.2% retracement level, then you have to watch that level carefully for signs of a reversal.
I rely on Fibonacci retracement levels in my stock analysis and have found that the more support there is surrounding any of these particular retracement levels, the higher the odds are that you’ll see a reversal from that area.
Like I said, though, you need to show some patience, but the upside is that you’ll know fairly quickly if your analysis is correct and can keep your losses relatively low - a critical aspect of any trading strategy.
Good Trading,
Jim Stanton
|
Today’s Smart Profits Cribsheet
- Ever wondered exactly what “resistance” means? Find out here in the Smart Profits Glossary.
- Timing your purchases using Fibonacci retracements can be a powerful way to invest. For example, I recently used this method to recommend both underlying Comcast shares and January $20 calls (VPKAD) to Xcelerated Profits Report readers in the June issue. And just two weeks ago, they were able to cash out of the Comcast calls for a 32% gain. If you’d like to find out more about becoming a member and put yourself in position to claim profits like this for yourself.
Related Articles:
- Breakout & Resistance: How to Anticipate and Profit From These Twin Concepts
- Technical Analysis: Two Simple Tools for Spotting a Technical Trend
- Technical Indicators: How to Overcome the “Evil Twins of Trading”
Ethanol Investments
May 26, 2006
The Smart Profits Report: Issue #312
Friday, May 26, 2006
Ethanol Investments: Two Ways To Profit from the Shift Towards Ethanol
By Karim Rahemtulla
Chairman, Mt. Vernon Research
With Memorial Day upon us, there’s a good chance you’ll be packing up the car and heading off for a few days’ vacation this weekend.
But as Americans whiz down the highway, they’ll be doing so knowing that the national average price for a gallon of gasoline is $2.88 - 75 cents higher than this time a year ago.
But is help on the way? By now, you might have heard about how ethanol could change the future of our energy situation. It’s something the government is promoting heavily, for several reasons:
- It makes the U.S. a little less dependent on Middle East oil and inches us closer to energy self-reliance.
- It’s less polluting than gasoline - not by much, but every little but helps.
- The technology to run cars on ethanol already exists.
Look at Brazil, for example. General Motors and other manufacturers are already making cars for Brazilians that can use any combination of ethanol and gasoline.
So, why aren’t we doing it in America?
The problem is that there are not enough ethanol stations here to pump out pure ethanol. But as gas stations add new ethanol pumps, this will change.
So, I’m going to give you two ethanol investments to think about…
A Pair of Ethanol Investments
The first is Archer-Daniels Midland (NYSE: ADM). My Covered Call members recently took a position in this company when it pulled back - and watched it then set new 52-week highs.
Using a covered call strategy basically allows you to own a company well below current levels. If you want to play ADM, then consider doing the same in order to reduce your cost. At current levels, shares are pretty fairly valued (not expensive, but not cheap either).
Another company for you to look out for is Pacific Ethanol, Inc. (NASDAQ: PEIX).
However, this one is currently trading at mind-boggling levels, thanks largely to Microsoft owner Bill Gates buying a huge chunk of it a couple of months ago (when the price wasn’t so mind-boggling).
Take a look at the recent closing prices for PEIX:
May 11: $42.39 (having hit new 52-week high of $44.50 that day)
May 12: $42.00
May 15: $37.88
May 16: $36.65
May 17: $32.86
May 18: $29.90
May 19: $29.57
May 22: $25.57
May 23: $29.89
May 24: $30.23
That’s some heavy fluctuation! And all in just 10 trading days.
What you’ve got here is the “Gates Factor” at work. He paid about $84 million for just under 25% of Pacific Ethanol. That valued the company at about $10 to $12 per share. But shares now trade around $30.20, down sharply from a 52-week high of $44.50 as recently as May 11.
My advice: Wait for a pullback of around 40% to 50%. This is what it will take for the “Gates Factor” to wear off and for shares to be more reasonably priced in the high teens to low $20s.
Ethanol vs. Oil Investments: Don’t Do It
There are other ethanol-based plays, too. For example, you could buy some of the major oil companies who are thinking of branching out and setting up ethanol service stations.
But that would mean you own oil, too. And if you read the Smart Profits Report Oil Forum last Friday, you’ll know that I’m not fond of oil at its current price. In fact, I have been short on oil using LEAP options for a couple of months now. And while oil hasn’t moved down enough to make me too much yet, with a year and a half to go on my options, I feel pretty comfortable.
But what if ethanol doesn’t take off and you’re stuck with a stock you don’t really want? Well, that’s where ADM in particular is a good bet. It’s a diversified company that could make big bucks from ethanol on the coming months and years - but it relies on more than the ethanol business for its profits.
Bone up on ADM and PEIX. These are two “free” plays that are worth getting excited about at the right price. ADM also has LEAPS available for an options play.
In Additon to Ethanol… Let’s Talk Turkey on Memorial Day
As I write, I’m in Turkey - one of the world’s most vibrant emerging markets. I’m keen to catch up with some old friends and witness the development since my last visit. Nothing excites me more than going back to an emerging market after a few years. It puts it all in perspective.
For instance, when I was in China last year, the growth was noticeable and impressive compared to my visit during the handover of Hong Kong. But my visit to India showed me that China was at least a decade ahead, and India, for all of its growth, has a long way to go - and may prove the better opportunity right now.
When I first started out in this business, I traveled a lot. I wrote about emerging markets before they took off, when there were only about 100 ADRs (American Depository Receipts) trading in the U.S. Back then, the only way to buy foreign stocks then was from an overseas broker; and with no Internet, high corruption, low liquidity, a lack of adequate research, and political tension, emerging market investing was a risky proposition.
For example, I met with the Malaysian Finance Minister a few months before he was jailed on trumped-up charges. And in meetings with a former director of the Bombay Stock Exchange, he mentioned casually that it was prone to manipulation because of its small size and lack of transparency. A few months later, the BSE crashed.
The one place that I returned to over and over again, however, was Turkey. Turkey was the emerging markets investor’s dream. No research, small market, undeniably a capitalist bastion, and beautiful to boot. I made three Turkish picks, and each one was up between 50% and 100% in a matter of months. It was awesome - until we went to sell. Turns out that we were the market! Those gains fizzled to less-impressive double-digit gains.
Emerging market investing has always been dangerous. It is still fraught with a lack of transparency, currency issues, political shenanigans, and outright fraud. The only difference is that there are many more choices for investors than there were before. And thanks to the Internet, you can actually get current information about what’s really going on.
Hopefully, my Turkish trip will yield a couple of investment ideas that are still “emerging.” More later…
Good investing,
Karim Rahemtulla
|
Related Articles
- The Price of Oil: “There Is No Oil Shortage”
- Crude Oil Prices Per Barrel: Former Market Maker Reveals Where Oil Prices May Be Headed
- Commodities - How to Create Your Own ‘Mini Hedge Fund’
- Emerging Markets - Two Plays In India… With Caution
Investor Sentiment & Market Behavior
May 23, 2006
The Smart Profits Report: Issue #311
Tuesday, May 23, 2006
Investor Sentiment & Market Behavior: Seven Tips For A Profitable Downside Bias
By Steve McDonald
Advisory Panelist, Mt Vernon Research
It had to happen.
After a strong rally that saw the major indexes set multiyear highs, despite several distinctly negative conditions (geopolitical issues in Iraq, Iran and Nigeria, high gas prices, a falling dollar and a slowing housing market, among others), the run appears to be over for now.
Since the end of October 2005, the Dow alone has enjoyed a steady climb from around 10,200 to 11,125 at Monday’s close. But that’s a huge drop from a high of 11,709.09 as recently as May 10. The correction took longer than expected to occur, and the situation has given me an opportunity to think about investor sentiment and market behavior. One question that springs to mind is this:
“What is it about a drop of a few hundred points that makes investors dump positions as if the world is ending?”
Despite this frequent occurence, we always seem to react rashly, rather than act calmly. It’s because when it comes to the stock market, many of us possess an upside bias. This can cost us a lot of money, and also force us to miss out on big gains. So, here’s what we can do about it…
Making Money On the Ups And Downs
First, what’s an upside bias? It’s when you believe the market has to go up to make money. After all, it seems more natural to believe that something has to increase in value to make money.
But it’s actually harder to make money on the upside than on the downside - especially when you consider that the market is down two-thirds of the time. If you wait to profit during the upward swings, you’d better be very patient.
So, here are seven tips to help you develop an eye for the downside:
- No upside trend lasts forever, and every new high is an opportunity for a correction.
- Markets act in cycles, and most of the time they’re down.
- Good news means a stock will likely run too high and then correct.
- Let charts guide you. They show when a stock has run too far.
- Keep a log of when your positions rise and fall (you’ll have more downs than ups).
- If you find yourself marveling at how high a stock or a sector is, buy a put, or short it. Seven times out of 10, you’ll be right.
- The investing herd is rarely right.
The market gives you great tools for capitalizing on the downside. Here are two that are just as easy to use as buying a stock or a call…
PUTS: Calls are options that make money when the underlying stock goes up; puts make money when a stock goes down. You buy them the same way, and sell them the same way. They involve no more risk than a call and are priced similarly. They just make money more often.
SHORTS: Shorting is when you sell something you don’t own. You borrow a stock from someone you’ll never meet, sell it, buy it back low and return it when it goes down in price.
Watching Market Behavior & Using Puts
Here’s a great example of how puts can be so profitable. Take a look at the Energy Select SPDR (AMEX: XLE) two-year chart below. It’s made up of most of the big oil companies.
Pay particular attention to the volume on the lower part of the chart. Nobody wanted it at $30 or $35. But as this oil sector play steadily climbed, investors crawled out of the woodwork to buy it. And by the time it got to around $59, the whole world was in it!
While the chart looks impressive, it’s the perfect play for a put or a short, as you can see from the five-day chart below:
This is a ride many investors have taken too often. They wait for an investment to go up until they’re convinced it’s good. Then they ride it down.
Ignoring The Herd & Investor Sentiment
I recommended XLE puts about one week before the correction, and the volume tells me there were a lot of rookies out there who totally missed what was coming after the run it experienced.
As I said earlier, learn to ignore what the herd is doing, develop a critical eye, look for charts like the two-year for XLE and use puts and shorts to make money. Let the herd stay stuck in upside bias while you make money on their mistakes.
Good Trading,
Steve
|
Today’s Smart Profits Cribsheet
- Fancy a quick 10% profit in three days? That’s exactly what subscribers to the Xcelerated Profits Report did by playing both the upside and downside of Tektronix (NYSE: TEK) in the most recent issue. Find out how you enjoy a whole year’s worth of profitable investment recommendations for about the same cost as filling your car with gas.
- As always, check out the Smart Profits Glossary for definitions of words like “put options” or “volume” found in today’s article as well as close to 200 other option terms.
- Make sure to take a look at Smart Profits #310, The Price of Oil, an article by all of our experts at Mt. Vernon Research and their take on where oil is going and what you can do to profit from it.
Related Articles:
- Short Selling: Beating the Government by Going Short
- Reading Volume to Find 20% Gains…in 20 Minutes
- Position Sizing: The Most Powerful Investment Concept
The Price of Oil
May 19, 2006
Special Edition: The Smart Profits Report Oil Forum
The Smart Profits Report: Issue #310
Friday, May 19, 2006
The Price of Oil: “There Is No Oil Shortage”
by Karim Rahemtulla
Chairman, Mt. Vernon Research
With oil prices rising, remember that oil is a self-limiting commodity in the long term. That means it has to compete with demand… and demand is a result of a healthy consumer.
But right now, consumers across the world are enduring the early phases of an upward inflationary spiral. Prices are going up for everything but staples. That means less disposable income.
Consumers do not have an endless supply of money, and when this comes home to roost, demand will begin to fall and we could enter a period of stagflation (high inflation and higher interest rates). That would spell recession for the U.S., and a slowdown for the rest of the world.
Pointing Towards The West
Many people point to the “new growth” of China and India. And while China is a factor, it will only remain that way if the U.S. is healthy enough to buy Chinese goods. However, India is a non-factor when it comes to production or consumption, as it’s still more than a decade behind China.
High oil prices will cause a slowdown in the U.S., hence the China play will be less attractive. Less oil demand from the U.S. and China will lead to a lower price for oil.
The second reason for lower oil prices is actually higher oil prices. As you’ll see in Steve McDonald’s notes below, higher prices will force a speedier search for alternative and more efficient energy sources.
This “substitution” is a basic law of economics: When prices rise above equilibrium, the market searches for substitutes. The worst thing for oil producers is competition from alternative energy, and those fears are hitting home.
The wild card, of course, is the short-term geopolitical climate. This is the main reason that oil is at $70, not $40 or $30 - and it’s the reason oil could reach $100 or more (remember Goldman Sachs’ infamous “super spike” prediction?).
Oil: Shortage Or Surplus?
But, there is no oil shortage. In fact, we’re arguably close to a huge crude oil surplus right now, as the world oil producers are pumping a higher amount of crude today than in the past when oil was half its current price.
As oil goes, so does the exploration and production industry. Aside from taking a short position in oil futures, there is no real way to short oil in the stock market. The oil ETF is not shortable and has no option yet. However, the Energy Select Sector SPDR (AMEX: XLE) does have LEAPS options available for consideration. That way, you can take a nice, limited-risk short position that could bring you huge returns if oil prices return to “normal” levels over the next two years. If not, then your risk is limited and small.
At the end of the day, the number that bears watching the most is U.S. consumer spending. If that slows, no amount of geopolitics will keep the price of oil high. Picture tanker after tanker offloading oil at U.S. ports, with nowhere to go but into storage. It could be a frightening correction.
Good Trading,
Karim
The March To $100 A Barrel
by Steve McDonald
Advisory Panelist, Mt. Vernon Research
Whenever I consider the current mayhem in the oil markets, I can’t help but think back to 1974. Gas lines everywhere, oil prices soaring to what was then thought to be stratospheric levels, the U.S. government doing its best to convince the public that the world was running out of oil, and the feeling that maybe the joy ride of cheap oil was over.
Thirty-plus years later, we seem to have learned nothing - and done nothing - to create a more stable environment where we are not subject to the crazy politics of the Middle East. We are now even more vulnerable to the whims of some of the most unstable governments in the world than we were in the ’70s.
Every aspect of our economy, and the potential of the two largest emerging economies - China and India - is all tied to oil. Just about everything in our lives - essentials and luxury items - require oil. Oil is not optional in our culture. It is as much a necessity as electricity and fresh water.
So, the question isn’t whether oil prices will continue to go up, but how far up they will go, and how much we can stand before we do something about the spiral we are in again.
Reasons For Oil Prices To Jump
I believe oil will soon experience another quantum leap in price - to around $100 a barrel - thanks to three probable reasons:
- The most obvious reason is the geopolitical situation we find ourselves in. Despite the lessons taught in the ’70s, we have continued to rely almost exclusively on the Middle East for our imported oil.
- Unfortunately, oil is an absolute necessity. We cannot function without it. We can’t just give up oil the way we could with other products where we can make do without if the price rises too high. Although oil is not completely free of the usual supply and demand market forces, it does seem to be able to run up in price almost at will. Do you really think we should all be paying $3 a gallon for gasoline?
- Realistically, one has to consider the possibility of another major terrorist strike in America. If that attack were directed at the lifeblood of our economy - oil - it would be devastating. After all, one hurricane shut down a huge percentage of U.S. oil refining capacity for several weeks, so imagine what impact a concerted terrorist effort would have on our ability to refine, transport and deliver oil.
If oil doesn’t break the $100 mark, it will only be because the federal government will have realized the horrible position it has allowed this country to be placed in, and make energy independence a national priority. Not likely.
But you can bet that when oil rumbles close to $100 per barrel, the stakes will be high enough that all the stops will be pulled out, and you’ll see a gigantic effort to push oil alternatives. Even Big Oil’s influence in Washington won’t be able to stop it.
Alternative Fuels vs. Big Oil
Look at a couple of the most popular energy ETFs - the Energy Select Sector SPDR (AMEX: XLE) and PowerShares WilderHill Clean Energy (AMEX: PBW). The alternative fuels in PBW have enjoyed a bigger ride than the big oil companies in the XLE.
Above is a one-year comparison of the XLE (containing large oil companies) and the PBW (described as including clean energy companies, or alternatives to petroleum). The alternatives are having quite a ride!
In the short term, I expect crude prices to pull back, but then, as I said earlier, start heading up to the $100 area. So, consider short-term put options on energy-related investments, and LEAPS plays for the long run.
Good Trading,
Steve
|
Related Articles:
-
Oil and Gas Investments: The Looming Tax Threat That Hurts Their Stocks
- Profiting from Crude Oil: In the Age of “Perpetual Shock”
Puts And Calls To Play Volatile Oil
May 19, 2006
Special Edition: The Smart Profits Report Oil Forum
The Smart Profits Report: Issue #310
Friday, May 19, 2006
Puts And Calls To Play Volatile Oil
by Lee Lowell
Advisory Panelist, Mt. Vernon Research
From a trader’s perspective, I certainly can’t see oil heading back down to $40 a barrel. With all the tensions in the Middle East, including the war in Iraq and Iran’s nuclear program, oil will be propped up for the intermediate future.
It’s not so much whether these tensions actually will cause a disruption in oil flow, but more the mere fact that it can cause a disruption that will keep oil prices high. Even though oil is at historically high levels, if it’s justified in the market’s eyes, then it will stay there. And remember, there are a plethora of large institutions and hedge funds invested in this market that will do all they can to protect their long positions.
Obviously, this is an extremely volatile market, with much more risk than usual. The best way to get involved is to take a small position and use limited-risk strategies. I would stay away from playing pure oil futures and use futures options instead. You can buy outright calls or puts, depending on your prediction, and use option spreads to further reduce your risk. Give yourself plenty of time if playing futures options. And remember, you can pick option expirations many months into the future.
If you want to play the energy sector via stocks, you can trade the oil ETFs, or some individual energy stocks. Once again, use option orders to limit your risk. I don’t like playing individual stocks so much, especially if you’re going to use stop loss orders. In such a volatile market, there are many occasions I’ve seen a stock gap open lower or higher than your stop-loss level and fill you with a much worse price.
Good Trading
Lee Lowell
Related Articles:
Charting Crude Oil PricesMay 19, 2006 Special Edition: The Smart Profits Report Oil Forum Charting Crude Oil Prices: Oil’s Key "Milestone": $68 A Barrel Crude oil is one of the clearest indications of the limitations of fundamental analysis. Anyone who thinks that the supply or demand of crude oil in world has changed by 10% in the last couple of weeks has a screw loose. Yet, the price of crude oil on the open market has fluctuated by that amount. Why? Don’t get me wrong. Fundamental factors are certainly influencing the price. Concerns over Iran’s nuclear ambitions, political strife in Nigeria, and fluctuating U.S. reserves have an effect, for sure. That’s part of the cause. But the effect is how people react to the news, and what they think it means for the future, based on that news. This is where technical analysis comes into play… and I think this current chart of crude oil prices gives a hint about future direction.
As you can see, oil is showing signs of short- to intermediate-term topping. It has made a series of lower highs, and this weakness has been confirmed by the MACD (an indicator that measures price momentum). The important milestone going forward is $68. A drop under $68 could signal a further correction. However, if prices can hold at that level for a few weeks, then we should see higher prices in the months to come. Long term, it’s hard not to be bullish on oil prices from both a fundamental and technical perspective. But for the near term, indications are for continued weakness or price consolidation. Good Trading, D.R. Barton Expensive Crude Here For Good "It’s different this time." - There are so many times you hear that expression when referring to certain events in the financial markets. However, 95% of the time, it turns out that it’s not different at all - no matter what the issue. But I’ve got news for you: The activity in crude oil is different this time around, and higher oil prices are here to stay. Why? Because world demand has grown exponentially, thanks to China, India, and other emerging markets and rapidly-developing countries. So, until more wells and refineries come online, or new technologies are developed, supply and demand will keep oil prices above $40. Below is a July weekly chart of crude oil prices in futures. As you can see, the 50-week moving average, the recent uptrend line, and long-term regression line all converge in the $65 area. The July contract is currently selling above $68, and if the current price correction continues, I expect that a test of the $65 area would hold.
Looking further out, there is longer-term support around $44 (50-month moving average and 200-week moving average), and if the world economy slows dramatically, that level could be tested. But that’s not likely to happen any time soon. Good Trading, Jim Stanton
|
