Wednesday, May 28, 2014

Wednesday's Prospects: Round 2

Fifty-four symbols survived my first round of analysis, a fairly massive pile to paw through in the second round. (See "Wednesday's Prospects" for details of the first round of analysis.)

Many symbols came to my rescue by moving back within their 20-day price channels, thereby failing confirmation, and I tossed them aside without a second thought.

My next step was to run the charts and to select out those that were in line with the direction of the breakout.

As I noted in an essay over the weekend, "A Tale of Three Charts", the markets are in a highly stereotyped period, with only two patterns, both bearish, dominating what I see on the charts.

Most the symbols that were confirmed sent bull signals occurring within the pattern I called the Corrective Hook, an uptrend with a downtrend on the end that's not so deep as to invalidate the uptrend, but is deep enough to be worth avoiding until the price moves up to a higher high.

Admittedly, there's a subjective element to this judgement, but the birthright of humankind includes an awesome pattern recognition system built into our brains, and I'm willing to employ it in for screening charts in my second-wave analysis.

Six symbols made it through the chart screening.

I next checked out the Zacks ratings -- no help there; they're all neutral.

Three of the six symbols are on the list as bear signals, all involved in precious metals. They are the companies GOLD and GG, and the gold-miners exchange-traded fund GDX, the most liquid symbol among the six. GDX and GG have options with sufficient open interest for me to work with.

The three bull signals among the six symbols are MMC, SPA and MRTN. None has options sufficientlty liquid for me to work with, so any trade would be unleveraged and unhedged.

So the choice comes down to this: Do I go bearish on gold? It's an astounding outcome, given the fact that only 11% of the 198 breakouts from Tuesday were bearish. It was a day for the bulls, but not one of especially high quality.

Which do I choose? GDX is further along that GG in its decline, both have neutral ratings from Zacks, GDX is more liquid but the options of either have a similar bid/ask spread, and GDX has higher volatility, which increases the chance for profit, and loss as well. Also, the first-round odds analysis is identical for both, as is the average yield from bull signals.

I'm inclined at this point to go with GG, because of the higher volatility, but it is possible that I'll switch to GDX once I get into the details of the charts.

In either case, I intend to post an analysis before the closing bell.

-- Tim Bovee, Portland, Oregon, May 28, 2014


My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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