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The
Perfect SuperBowl |
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Finally- the perfect SuperBowl. Congratulations
to the New England Patriots. New England sports fans are a little too fat
these days between the Patriots and the Red Sox.
It was the perfect Superbowl for
several reasons. The game was great- it came down to the last few seconds
before the winner was determined. Unfortunately, someone has to lose. Philadelphia
fans who came up on the losing end got a consolation prize as their team
beat the spread. Therefore, if you bet Philly and took the points, even
though your team lost the game, you won your bet. This should help ease
the pain.
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Don't
Forget to BLOG |
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Lots of comments are starting to
come through the BLOG. You might want to revisit some of the BLOG
entries, and read the questions people are asking and the subsequent responses.
Go the the home page and check out the BLOG. At www.otcjournal.com
it just scrolls down on your screen. The most current BLOG entries
are found in the middle of the page.
I also have been getting emails on
individual stock volatility. When we have big up and down days, visit the
home page and check for at BLOG entry if you want some feedback.
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Why Charts Are
Important |
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Trading action is highly influenced
by the roughly 9000 hedge funds that are now in existence. That's a lot
of fund managers chasing a few active stocks. There are only 5000 stocks
of meaningful size, and only about 2000 of those with sufficient liquidity
to handle large order flow.
The hedge fund business is a tough.
Roughly 10% of hedge funds close down every year, and it's certainly not
getting any easier with all that competition for any kind of superior performance.
All of these hedge funds are trading
with some version of technical analysis. Fewer hedge funds trade in the
microcap environment, but they do tend to dominate the action and exacerbate
the price movements.
With 9000 hedge funds and thousands
of actively traded mutual funds out there, this is now truly the ‘Era of
the Chart.’ The Buy and Hold strategy still works over the long term for
many investors. However, if you want to actively manage your portfolio
you must pay some attention to charts and develop your own style. Personally,
I like trend lines and support/resistance analysis. However, I only use
technical analysis in situations where you have strong fundamental growth.
A mixture of the two should yield you your best result. Here's some background
information on Support/Resistance.
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Leonardo
Pisano Fibonacci- Centuries Ahead of His Time |
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Mathematical genius Leonardo Pisano,
more commonly known by his nickname "Fibonacci", was born in Pisa in 1175
AD, about 300 years ahead of his time. Fibonacci is credited with inventing
the modern numbering system that replaced Roman Numerals.
Fibonacci was very skilled at identifying
certain numbers, ratios, and sequences that appear repeatedly in nature.
Many of Fibonacci's concepts are widely used in mathematics today, which
is particularly amazing when one considers that Fibonacci worked in the
Babylonian system of mathematics which used base 60. The modern base 10
was not widely adopted for another 300 years.
His two most famous precepts: The
Fibonacci Sequence and the Golden Ratio have become an integral part of
technical analysis. The Sequence is derived from the following observations
Fibonacci made: The sum of any two adjacent numbers forms the next
higher number in the sequence; e.g. 0+1=1, 1+1=2, 1+2=3, 2+3=5, 3+5=8,
5+8=13, 8+13=21, 13+21=34, 21+34=55, 34+55= 89, 55+89=144 -- and on into
infinity. In this sequence, he also observed the following relationship
between the sequence numbers: The ratio of any number to the next higher
number is approximately .618 to 1, and to the next lower number 1.618 to
1. Between alternate numbers in the sequence, the ratio is approximately
.382, whose inverse is 2.618. These might be considered "primary"
Fibonacci ratios.
These ratios constantly repeat in
nature. For example, everything from the Egyptian Pyramids to the Washington
Monument to sunflowers to snail shells display Fibonacci Ratios.
Therefore, from here forward when
looking for good entry levels for stocks, I will be showing the Fibonacci
Ratios when trying to identify key support levels for high probability
entry levels. The two key numbers at 38.2% and 61.8%. We'll be looking
for stocks that trade in a uptrend and pullback to these two key naturally
occurring support levels. Here's a couple of recent examples:
Here's a fairly long term look at
the QQQQ's- the etf or proxy trading stock for the NASDAQ. The chart
goes back to the end of the 2000 to 2003 nasty bear market. As you can
see, the market had pretty easy going from late 2002 until early 2004.
The QQQQ's then corrected. Note the retracement was a near perfect 38.2%,
the first key Fibonacci support level which constantly recurs in nature.
Had that level given way, one would look for a rebound at the next key
support level; 61.8%.
Here's a shorter term look at the
movement of Overstock.com as measured from the summer of 2004. We
selected this chart, because astute traders who use Fibonacci ratios made
a nice score this past week in one day.
The stock had made a meteoric run
from the August low at $27.92 to a November high of $77.53.
Since peaking just prior to the Holiday shopping season, the stock has
been under pressure.
This week the stock completed a perfect
61.8% Fibonacci retracement, then bounced a full five points in one
day.
Just like any technical analysis,
the entire purpose is to simply try to tip the odds in your favor. No system
or concept is foolproof, and all theories can be blown out of the water
by external events.
However, we can incorporate a few
simple ideas into our thinking to help tip the odds in our favor. From
here forward, whenever we publish charts, look for the 38.2% and 61.8%
pullbacks as good entry levels. These ratios constantly repeat themselves
in nature, so why not look for the repeating pattern.
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