The Dow Industrials clawed back another 95 points to close at 12,226.34.  Volume was above average.  The S&P 500 Index gained .56% but the Nasdaq Composite was flat, rising only .04%.  Oil closed lower and the falling dollar helped push silver higher.

AGQ, the levered silver ETF, gained another 3.58%.  URE, the levered real estate ETF, rose 4.32% to close at $59.12.  Would you believe this was a $10 ETF just two years ago?  XPP, the levered China ETF, added 2.97%.  Please click on the symbols for details.

Last week I blogged about bearish divergences, using IEO, the oil & gas exploration ETF, as an example.  Well, sometimes price could care less about a bearish divergence and it thumbs its nose at the indicator.  Take a look at what IEO did last Friday and today.  You can make the chart full-screen by clicking on it:

The oscillators made lower closes while IEO made higher closes, leading me to conclude there was a bearish divergence…but price kept making higher closes nonetheless.  You can see both Volume Zone and Price Zone Oscillators broke their their descending trend lines today.

There’s an axiom in TA that former trend lines once broken frequently act as resistance or support, when tested.  That doesn’t mean price won’t keep rising or falling, however.  The daily chart of EWJ, the Japan ETF, provides a good example of this:

Last week EWJ gapped open lower, below the rising trend line.  The next two days were both tweezer bottom (same low) and doji (open = close) candlesticks.  Today’s bar ran into the former rising trend line that halted its advance.  This doesn’t mean it won’t break through tomorrow but you can see how a former support line is now acting as resistance.

The stock market is still dancing to the tunes played by the Middle East pipers.  Historically speaking the last day and first day of the month tend to be bullish.  Today certainly was; whether tomorrow is also bullish is something we will know in the fullness of time.

The stock market ended the week on an up-note, with the Dow Industrials gaining 62 points to close at 12,130.45.  Volume was below average.  The S&P 500 Index rose 1.6% and the Nasdaq Composite was up 1.58%.  Oil prices advanced and both gold and silver were higher.  Treasuries completed their best week since May.

AGQ, the levered silver ETF, was was down big yesterday but gained 7.90% today.  USD, the levered semiconductor ETF, rose 5.90%.  URE, the levered real estate ETF, added 3.62%.  PXJ, the oil services ETF, gained 3.49%.  Please click on the symbols for details.

A question being debated in the blogosphere is whether the action the past few days is the start of a 10% – 15% correction or a smaller pullback within the rising trend.  I don’t know the answer to that question but I can tell you the bull trend has been losing strength.  The ADX indicator for the broad equity indexes like DIA (Dow Diamonds), QQQQ (Nasdaq-100) and SPY (S&P 500 Index) are all below 30 and in some case, below 20.  In a strong trend the ADX gets above 30 and stays there.

A better example of a pullback within a trend is OIH, the oil service HLDR.  The Trend Knockout (TKO) technique works well here for identifying where in the pullback to enter.  Developed by my AAPTA colleague Dave Landry, TKO’s identify strong trends from which the weak hands have already been knocked out of the market.  By placing your order above the market, you have the potential to capture profits as the trend resumes.

As always, you want to buy in the direction of the primary trend.  I recommend long trades only when the ETF is above its 200-day SMA.  Take short trades (or buy inverse ETFs) only when the ETF is below its 200-day SMA.

Here are the Buy rules for TKOs (short sales are reversed):

1.  The ETF you’re watching to buy should be in a strong trend, as defined by an ADX >= 30 and +DMI > -DMI.  You can also use rectangular bases that successfully broke out to the upside.  If you’re unfamiliar with ADX or DMI, please read my 8/7/09 blog entry for a complete description.

2. The ETF should make at least a 2-bar low.  Buy tomorrow or the next day 1 – 2 ticks above today’s high.

3. Place a protective stop below the low of the knockout bar.  If this is more than 5% away from your entry price, risk no more than 5% of the ETF’s value.

Please review the OIH chart, below.  You can make it full-screen by clicking on the chart:

As confirmation that the up-trend is strong, note that there has been only one day since late October where OIH closed below its 20-day EMA.  ETFs that are in a strong trend tend to remain above (or below, if a downtrend) this EMA.

ADX is still above 30.  The DMI+ line (light blue) has been above the DMI- line (red) since late October.  When DMI+ is above DMI- the trend is higher; when below the trend is lower.

Each of the bars I marked as TKO bars with the blue up arrow made a two-day low.  The entry is the next day, 1 – 2 ticks above today’s high.  So for the first TKO bar on February 22nd, the entry on February 23rd would have been 1 – 2 ticks above the 22nd high of 165.33.  That obviously didn’t happen on February 23rd.

The next TKO bar was yesterday and the high was 162.17.  The entry was today 1 – 2 ticks above that high.  Today’s high was 163 so an entry would have been filled.  The protective sell stop should be placed a few ticks below the Knockout bar low, which was 157.26.  Since that’s just above the 20-day EMA and the EMA has been such strong support, I’d place the stop a few ticks below the EMA.  The EMA is at 156.96 so a stop at, let’s say, 156.75 is about a 3% loss.  You could wait for a close below the EMA as confirmation but that risks magnifying the loss.

Right now the markets are dancing to the tune of the Middle East’s song.  Whether that tune changes over the next few days is something we will know in the fullness of time.

Enjoy your weekend.

The stock market turned in a mixed bag today, with the Dow Industrials losing 37 points to close at 12,068.50 while the S&P 500 Index lost .10% and the Nasdaq Composite gained .55%.   Continued turmoil in the Middle East sent Treasury yields lower again while gold closed unchanged and silver was down slightly.  Oil finished lower.

Silver lost some of its shine today so ZSL, the levered inverse silver ETF, rose 8.99%.  Oil slipped and SCO, the levered short crude oil, gained 5.33%.  USD, the levered semiconductor ETF, added 2.10%.  Please click on the symbols for details.

While I’m a believer in technical indicators, my mainstay is still the simplest and in many ways most powerful TA tool there is – a pair of “Mark I Eyeballs” that look for chart patterns and divergences.  By Divergence I mean price going one way and a technical indicator going the other way.

A good example is the daily chart of SIL.  Please click to make it full-screen:

When the ADX is low (below 25 and preferably, below 20), I use non-trending indicators like the stochastic oscillator or Relative Strength Indicator (RSI) to determine the future direction the ETF is likely to take.  The chart above uses the stochastic.  While ordinarily attributed to George Lane, the oscillator was originated by a group of futures traders in Chicago (of which Lane was a member), and first described in 1957. The stochastic is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods.  It follows the speed or the momentum of price.  I use an eight period range.

There are two methods for calculating the stochastic oscillator: Fast and Slow.  I prefer to use the Slow method because it is less choppy.  If you haven’t used the stochastic much I recommend experimenting with both versions.

The chart shows that between February 8th and February 22nd, the ADX was very low, less than 20 the entire time.  Price kept making higher highs and higher closes but the stochastic oscillator made a lower high, signaling a bearish divergence.  Yesterday’s price bar was a harami (inside day) and today’s price was lower.  Today’s close was right on a rising trendline (not shown) and it will be interesting to see if the stochastic makes a lower low in the next day or two.

The second example of a divergence is in IEO, the oil and gas exploration ETF:

This is a chart of the Volume Zone Oscillator (VZO) and Price Zone Oscillator (PZO) developed by Walid Khalil.  The May and June 2011 issues of Technical Analysis of Stocks & Commodities magazine will be publishing the article I co-authored with Walid on the oscillators.

You can clearly see how in the past few days IEO was making higher highs while both VZO and PZO made lower highs.  The oscillators have made lower lows but price has not, so today’s downside move could turn out to be just an interruption of the uptrend rather than a downside reversal.

Looking for divergences (which can be bearish or bearish) becomes second nature once you look at enough charts.  The nice feature is they usually give you enough warning to get you in before price advances too high (bullish divergence) or declines too far, if at all (bearish divergence.  Just remember that price is the ultimate arbiter – wait for it to confirm a breakout or breakdown before placing the trade.

The stock market continues to lose ground, with the Dow Industrials falling another 107 points to close at 12,105.78.  The S&P 500 Index dropped .61% and the Nasdaq Composite shed 1.21%.  Oil, gold and silver all were higher.  The U.S. Dollar continues to drop on talk that Europe is close to raising rates.  And speaking of rates, Treasury bond yields were relatively unchanged.

Except for the energy complex and precious metals, Bear ETFs were the winners again today.  UCO, the levered crude oil ETF, ran up 7.57%.  SSG, the levered short semiconductor ETF, gained 3.94%.  AGQ, the levered silver ETF, rose 3.16%.  Please click on the symbols for details.

Money tends to flow to safety in turbulent times and the past few days it has flowed into Treasury bonds.  Supply and demand shows us that when money flows into bonds, rates go down and bond prices go up.  TLT, the 20+ Year Treasury Bond ETF, goes down when rates go up and vice versa.

Back in mid-October TLT set up a bearish bow-tie crossover.  You may recall my discussion on Dave Landry’s bow-tie crossover from previous blog entries; if not, please use the Search box on this page to find it.  Don’t forget to put a hyphen between “bow” and “tie” when searching.

For the first time since the end of November, all three moving averages used in the bow-tie are heading higher.  Please review the chart below, which you can make full-screen by clicking on it:

Today’s marks the highest close for TLT above the 30-day EMA since the bearish crossover.  On the one hand, this could be signaling a trend change underway, to be followed by an upside bow-tie crossover.  On the other hand, TLT was more or less unchanged today despite the equity markets being down so much.  Is this a divergence indicating the stock market may stop declining, at least for now?  That remains to be seen.

Although the stock market has made a nasty two-day sell-off, this needs to be kept in perspective.  Markets don’t move in one direction forever.  But what if the past two days is a precursor to a deeper pullback?

One technique I like to use to identify trend reversals is the Bongo indicator on weekly charts.  Developed by a team of High Growth Stock Investor users, the Bongo describes a relationship between three Wells Wilder’s Relative Strength Indicators and a 9 period moving average. When the short term RSI (8-Period) is above the medium term RSI (14-Period) and the medium term RSI is also above the long term RSI (19-Period), and the closing price is above the 9-period SMA, then the Bongo Daily is “Yes”. If the inverse is true, it is “No”. “Yes” has bullish implications while “No” has bearish implications.

The weekly Bongo works the same way as the daily but the reading is taken following the last close of the week, rather than the end of each day. The weekly indicator has intermediate term implications usually lasting weeks if not longer. Divergences between daily and weekly Bongo can be an indication of a potential price reversal.

The best time to buy is the day (Bongo Daily) or Monday (Bongo Weekly) following a Bongo crossover from “False” to “True,” i.e., yesterday (or last week) the RSI’s were not lined up in the proper order or the closing price was below the 9-period SMA, and today (or Friday, if Bongo weekly), the RSI’s are in the proper order and the close is above the 9-period SMA.  Backtesting showed somewhat better results taking Bongo Weekly signals than Daily signals but in a strongly trending market, the Daily signal will get you in and out sooner.

In its original form, the Bongo ribbon displays either Green (be long) or Red (be in cash or short).  I use an alternative version that displays Green, Yellow, and Red in the ribbon.  Yellow means the current trend is still intact but the conditions exist for a trend change.

The weekly charts below illustrate the Weekly Bongo ribbon and the three RSI lines on SPY (S&P 500) and QQQQ (Nasdaq-100):

For the most part since 2009 the weekly Bongo has been Green, although there was a Red period from May – August 2010 when the SPY pulled back.

The Qubes weekly Bongo ribbon was Red over the same time period but there is now one distinction: this week’s bar is Green/Yellow on the SPY but flipped directly from Green to Red on the Qubes.  It isn’t Friday yet so this week’s ribbon bar can change color again.  Regardless, both SPY and QQQQ have pulled back to their 9-week SMA and a close below hasn’t occurred since the end of August.

The Bongo indicator doesn’t predict future direction but it does a pretty good job of telling you when there’s a trend change.  I recommend you experiment with the Bongo and see if you find it as useful as I do.

It came as no surprise that the stock market sold off today.  Pundits have been predicting for several weeks the rally was extended and events in the Middle East have telegraphed anything but stability in the oil markets.  What caught me a little by surprise was the extent of today’s sell-off; it’s not like what’s happening in Bahrain and Libya came as a complete shock to the western world.  But as a wise man (wiseguy?) once said – it’s always something.

The Dow tumbled 178 points after falling more than 200 points, to close at 12,212.79.  The S&P 500 Index lost 2.05% and the Nasdaq Composite fell 2.74%.  Soaring oil prices smacked the Dow Transports hard and that average fell 3.83%.  Treasury yields plummeted in a flight to safety and oil, not surprisingly, was up again.

Any ETF with the word “inverse” or “Bear” in its name was a winner.  CZI (3x levered China Bear) – up 10.60%.  SQQQ (levered short Nasdaq-100 Index) – up 8.87%.  SMN (levered short basic materials) – up 6.95%.  It’s worth noting that all are still below both their 50-day and 200-day SMAs.  UCO, the levered crude oil ETF, rose 8.69%.  Please click on the symbols for details.

Two weeks ago I discussed a trade entry for USO, the oil ETF.  On February 7th and 8th I described the Multiple Days Down (MDD) strategy issuing a buy signal.  An initial entry was made at 36.66 and the second entry (scaled-in) the next day at 36.64, for an average price of 36.65.  The exit came Friday the 18th on the close above its 5-day SMA of 36.36, for a loss of 0.8%.  Sure wish the trade held on through today (today’s close was at 38.62) but hey – a loss of less than 1% before transaction costs is acceptable.  Not all trades are winners and of course, past performance does not guarantee future losses will be so benign!

Part of the nature of technical analysis is that many of the techniques are fractal.  “Fractal” means a pattern that is repeated at every scale, so for example, a Fibonacci price retracement analysis may be used with weekly, daily, monthly, or intraday charts.  The principles are the same regardless of the time scale.

A good example played out today.  Sharp price moves in either direction sometimes act as a setup for a gatekeeper pattern.  Developed by my AAPTA colleague Dave Landry, the Gatekeeper is a reversal pattern that looks to identify when a market, stock, or ETF has completed a “last gasp” higher or lower, a.k.a., a top or a bottom.

The Gatekeeper incorporates some of the elements of Fibonacci analysis I’ve described in previous blog entries.  While the Gatekeeper can be used for buys/bottoming action, I’ve found it more effective for short sales/topping action.  Please keep in mind that you don’t have to actually sell short when using the Gatekeeper; you can apply the technique to an ETF and buy its inverse when the short signal is triggered, e.g., track DIA for a short and buy DOG when it’s triggered.

Here are the short sale rules for the Gatekeeper:

1) The stock/market/ETF must make at least a new two-month high.

2) This should be followed by a sharp sell-off.

3) After the sell-off, the stock/market/ETF should retrace to at least 61.8% and ideally 78.6% of its sell-off.  In general, this should occur within 10 – 11 days.

4) Look to place a short entry at the low of the bar in Rule #3.

5) If filled, place a protective stop above the high of Rule #4.

6) Use your choice of profit exit.

Because the Gatekeeper relies on Fibonacci, it is fractal and it works within multiple time periods.  Below is a five-minute chart of SSO, the levered short S&P 500 Index ETF.  Please click on the chart to make it full-screen:

Using the methodology described above but substituting “bars” for “days” we see how a short entry on SSO could have been entered.  Rather than shorting SSO you could have gone long SDS, the levered short S&P 500 Index ETF.

The S&P 500 Index made a multi-month high last week (1S).  Today’s opening bell sent the index down sharply.  Ten minutes after the open SSO made a short-term bottom (2S) and it rallied over the next eight bars.  Note the candlestick at 3S – that’s a “long upper shadow” bar (a candlestick with an upper wick that has a length equal to or greater than the range of the candlestick) and its bearish.  Note too that the candlestick stopped dead on the 61.8% Fibonacci retracement level.

Now there was no way of knowing at this point whether SSO would keep moving higher.  A tick or two below the low at 3S therefore becomes your short entry price.  Once short your buy stop is a tick or two above the high (4S).  Had SSO kept rising up towards the 78.6% retracement level, the low of that higher bar would have become the new 3S.

The low at 3S is 54.07 so a short entry could have been made at 54.    You would use your choice of exit on the trade but as of today’s close you had a 2.7% gain.

Was today just a pullback within the trend, a.k.a., a Trend Knockout, or is it the start of a deeper pullback?  The global situation is very fluid so whether we keep going down or today turns out to be a buying opportunity is something we will know in the fullness of time.

The market closed on a positive note today after news spread this morning that Egyptian President Mubarak had resigned.  The Dow Industrials closed up 44 points at 12,273.26 (.36%).  The S&P 500 Index gained .55% and the Nasdaq Composite was up .68%.  The Midcap Index gained almost 1% and the Transportation Average rose 1.31%.  Oil and natural gas prices dropped.  Gold was also lower but silver was relatively unchanged.  Treasury yields fell.

EDC, the 3x levered emerging market ETF, gained 3.64% but closed well below its 50-day SMA.  FAS, the 3x levered financial bull ETF, rose 3.60%.  UBT, the levered 20+ year Treasury Bond ETF, was up 2.69% but has been in a downtrend since late August.  TAN, the solar ETF, rose 2.65% and has moved sideways since January 2010.  Please click on the symbols for details.

ECH, the Chile Index ETF, pulled back from its recent highs and bounced nicely higher today.  It retraced almost exactly 38.2% of the move between the last significant low (May 2010) and its December high.  Please click on the chart to make it full-screen:

Yesterday’s bar was a bullish engulfing bar and today’s volume was above the 50-day volume average.

A few days ago I discussed methods for getting on board a moving train, i.e., when to buy an ETF that has been in a persistent trend.  Another approach is to buy after a Trend Knockout (TKO) bar.  Developed by my AAPTA colleague Dave Landry, TKO’s identify strong trends from which the weak hands have already been knocked out of the market.  By placing your order above the market, you have the potential to capture profits as the trend resumes.

As always, you want to buy in the direction of the primary trend.  I recommend long trades only when the ETF is above its 200-day SMA.  Take short trades (or buy inverse ETFs) only when the ETF is below its 200-day SMA.

Here are the Buy rules for TKOs (short sales are reversed):

1.  The ETF you’re watching to buy should be in a strong trend, as defined by an ADX >= 30 and +DMI > -DMI.  You can also use rectangular bases that successfully broke out to the upside.  If you’re unfamiliar with ADX or DMI, please read my 8/7/09 blog entry for a complete description.

2. The ETF should make at least a 2-bar low.  Buy tomorrow or the next day 1 – 2 ticks above today’s high.

3. Place a protective stop below the low of the knockout bar.  If this is more than 5% away from your entry price, risk no more than 5% of the ETF’s value.

Please review the daily chart below of MDY, the Midcap 400 Index:

MDY formed a rectangular base for three weeks, from mid-January through early February, 2011.  It had been in a strong trend prior to the consolidation, as seen by the Average Directional Index (ADX) being above 30 from mid-December through early January.  The Directional Movement Index (DMI) shows DMI+ being above DMI-, which confirms the direction of the trend was higher.

If you look at TKO Rule #2, it calls for a 2-bar low.  Why didn’t the January 20th bar qualify, since it was a 2-bar (actually, a 5-bar) low?  Because on that day the ADX was well below 30 – it was only 23.87 – violating Rule #1.  We didn’t know on that date whether this was a trend knockout or the start of a trend reversal.  Under the TKO entry rules, January 20th was not a TKO entry day.

The January 18th and 19 highs were close to being matched on January 27th and 28th.  With the January 22 – 24 bars having similar lows, I was able to draw a rectangular base.  When you see a rectangular base, you are seeing sideways (non-trending action) so you expect the ADX to be below 30.  As long as DMI+ is above DMI-, you can presume the prior uptrend to be intact.  Rule #1 was met.

The January 28th bar was a 2-bar low so the entry would be above its high of 170.24.  The trend resumed two days later and an entry would have been made around 170.30.  Your protective stop is below the knockout bar’s low of 166.34.  This is 2.3% below the entry so a sell stop of around 166 – 166.25 would be satisfactory.  As of today’s close the trade would have gained about 3.4% in two weeks.

Not all trades work out this well, of course, and past performance is no guarantee of future results.  But don’t let a lack of mean reversion setups keep you from making money in the markets.  A good trader has many arrows in his quiver so that he or she can trade in both trending and non-trending market conditions.

I will be traveling next week so the blog will be on hiatus until Tuesday, February 22nd.

Enjoy your weekend.

Yesterday the Dow Industrials were up while the S&P 500 Index and Nasdaq Composite were down.  Today, just the opposite – the Dow closed down 10 points at 12,229.29 while the S&P 500 gained .07% and the Nasdaq was up .05%.  Oil prices were flat on speculation that President Mubarak would resign, but he chose not to do so.  Treasury yields climbed and both and gold and silver closed lower.

Agricultural-related ETNs did well today.  BAL, the cotton ETN, continues to make new highs on above-average volume and was up another 5.53%.  COW, the livestock ETN, rustled up a 1.92% gain.  OIH, the oil services HLDR, rose 2.32%.  Please click on the symbols for details.

The Transportation Average made a big move higher today, confirming yesterday’s breakout and IYT closed up 1.54%.  It closed well above the putative diamond top high of 92.99 on January 28th.  The QStick indicator also rose higher.  Please click on the chart below to view it full-screen:

OIH has shown to have great support at its 20-day EMA since early September.  I find crossing this EMA to be a great “canary in the coal mine”alert to changes in short-term trend direction.  The 17-day SMA also works well.  A strongly trending ETF generally will find support or resistance at these moving averages:

OIH trades in round lots only so if you want to buy it you need to purchase 100 shares, 200 shares, etc.  Non-round lot alternatives include IEZ (Dow Jones Oil Equipment Index), XES (Oil & Gas Equipment & Services ETF), and PXJ (PowerShares Dynamic Oil & Gas Services ETF).

Speaking of oil, USO hit its 5-day SMA today but closed below it, so the trade is still open.  In the Multiple Days Down (MDD) strategy the exit is a close above the 5-day SMA.

Between yesterday and today, EWT, the Taiwan Index ETF, set off buy signals on all of the Connors/Alvarez mean reversion strategies except MDD.  But be aware that today the Taipei Times highlighted a less-than-optimistic monthly sales report from Hon Hai Precision Industry, EWT’s second largest holding, and that will likely weigh on the fund’s performance.  Short-term, however, there could be an oversold bounce.

Although treasury yields have climbed dramatically since bottoming in August 2010, they seem to have run into resistance.  The weekly chart of TBF, the short 20+ year Treasury Bond ETF, has stalled at the 61.8% Fibonacci retracement level:

Retracements of that magnitude are interpreted by most technical analysts as meaning the prior trend has reversed.  A pullback from here would not be unexpected and if it occurs, technicians will be watching to see if the 50% retracement level holds.

I won’t be posting the blog next week because I’ll be out of town.  I plan on posting tomorrow.  Usually when I go out of town, all heck breaks loose in the market.  Let’s see if my track record stays intact!

The Dow Industrials made it eight gainers in a row, closing up 6 points at 12,239.89.  Neither the S&P Index nor the Nasdaq Composite followed suit, however, and were down .28% and .29%, respectively.  Oil was down big as supply rose last week so the Transportation Average made a slight gain.  Treasuries were hit by profit taking and yields dropped.  Gold and silver were flat to slightly higher.

Overseas markets took it on the chin today so EDZ, the 3x levered emerging market ETF, gained 6.68%.  BZQ, the levered short Brazil ETF, and FXP, the levered short China ETF, were up 4.95% and 4.91%, respectively.  SMN, the levered short basic materials ETF, rose 2.74%.  Please click on the symbols for details.

IYT, the Transportation Average ETF discussed the past few days in the blog, broke out to the upside today by a tick or two.  Please click on the chart below to make it full-screen:

The QStick oscillator crossed from below to above zero, which is its buy signal.  Whether it continues rising or turns into a false breakout remains to be seen.

With all the excitement about the Dow making 2 1/2 year highs, it’s easy to overlook other ETFs that offer money-making opportunities.  A technique I like to use is Jeff Cooper’s 1-2-3-4.  Jeff is an author and noted expert on short term day and swing trading techniques.  This technique is called 1-2-3-4 because it takes four days to complete.

It’s a deceptively simple system.  Begin by identifying a strongly trending ETF, one with a relative strength rank of 95 or higher.  I like to use High Growth Stock Investor for my RS ranking but you can also use Investors Business Daily or TradingMarkets.com for your ranking data.  Next, wait for the ETF to make a three-day pullback following a short-term high.  This means after making the high the ETF makes either three consecutive lower lows or a combination of lower lows and inside days.  Enter long on Day 4, 1 or 2 ticks above the Day 3 high.  You can go out an additional day or two, e.g., go long Day 5 above the Day 3 high, but if that high isn’t taken out by Day 6 you should abandon the trade.

The chart below of TNA, the 3x levered small cap bull ETF, shows the 1-2-3-4 pattern from a few weeks ago:

On January 18, TNA made a multi-month high.  The next three days were all lower lows.  Place a buy order on Day 4 one to two ticks above Day 3′s high.  Since Day 4 did not make a higher high than Day 3′s high, place a buy order for Day 5 above Day 3′s high.  Day 5 didn’t take out Day 3′s high so you can go out one additional day.  Place a buy order on Day 6 above Day 3′s high – Day 6′s open was above Day 3′s high and that was where you would have bought in.

Some traders I know place the entry above the high of the previous day if it’s lower.  For example, with TNA the Day 4 high was lower than the Day 3 high so they would place Day 5′s entry order above Day 4′s high, and Day 6 above Day 5′s high.

Place your protective sell stop a tick or two below the low of the 1-2-3-4 pullback.  There was a sharp pullback two days after the entry but the low was higher than the Day 3 low so you would not have been stopped out.

It’s difficult knowing when to board the train after it’s left the station.  Pullbacks during a strong trend offer you that opportunity and 1-2-3-4 is one of several strategies that hand you a ticket.

The Dow Industrials keep powering on up, rising 71 points today to close at 12,233.15, for the seventh straight day of gains.  The S&P 500 Index rose .42% and the Nasdaq Composite added .47%.  Gold and silver were strong today but oil closed lower.  Treasury yields were significantly higher after China announced it was raising rates.

AGQ, the levered silver ETF, shined brightly today as it soared 6.61%.  ITB, the home construction ETF, added 2.51% as it continues to trace out the handle of a saucer-with-handle pattern.  Please click on the symbols for details.

USO, the oil ETF referenced in yesterday’s blog about the Multiple Days Down strategy, closed two cents lower today so additional shares were purchased, as per the aggressive version of the strategy.  The MDD strategy buys a second unit of shares if at any time prior to selling the price closes lower than the entry price.  Yesterday’s buy was at 36.66 and today’s was at 36.64, for an average price of 36.65.

President Obama is calling for a six-year, $53 billion spending plan for high-speed rail.  While there is no pure-play railroad ETF (why, I don’t know), the Dow Jones Transportation Average ETF IYT has exposure to railroad stocks…but it also owns a significant amount of non-railroad stocks.  It’s still one of the best ways to play this spending plan, should it come to pass.

The daily chart of IYT shows a potential buy signal but also a bearish chart pattern.  Please click on the chart to make it full-screen:

This chart is an updated, re-annotated version of the QStick chart I posted last week (February 2).  What I discussed last week was the bearish divergence between price and the QStick indicator.  Developed by Tushar Chande in 1994, the QStick is an indicator that signifies buying and selling pressure over a specified time period, usually eight bars.  It measures the pressure by calculating the difference between the prices at which an issue opens and closes.  A positive value indicates buying pressure and a negative value indicates selling pressure.  Buying or selling a crossover of zero is how the indicator is typically used.

In early December the QStick oscillator spiked to its highest high since August 2009.  IYT also made a new high.  But starting the next day the QStick headed lower even though price started moving sideways.  On December 20 the indicator closed below zero even though price had barely pulled back at all.  The QStick was tracking the absence of buying pressure even though IYT’s price was stable.

Going into the end of the year IYT’s price started moving higher again and while QStick headed higher, it couldn’t stay above zero for more than a day or two (yellow rectangle).  On January 19, IYT had a big down day and QStick pulled back sharply as well.  You can see the bearish divergence between the indicator (lower highs) and IYT’s price action (higher highs).

This week the QStick broke higher through its descending trendline.  Potentially bullish but QStick needs to close above zero before it’s interpreted as a buy signal.  That’s the bullish argument to the chart.

The bearish argument is the diamond top pattern that has formed over the past three weeks.  At only three weeks old it’s not a major top pattern but one worth respecting.  Diamond tops are typically found in the distribution phase of a security’s life cycle.  The past few days, IYT has traded just below its 50-day SMA (not shown on the chart).

I’m keeping a beady eye on the diamond.  They typically break to the downside – according to research done by Thomas Bulkoswki, author of Encyclopedia of Chart Patterns, this pattern broke downward 69% of the time.  Should this happen it’s likely the QStick oscillator will touch the zero line but fail to get through, much like what happened last month (yellow rectangle).

Even if President Obama’s plan comes to fruition it will be many years before the first shovel turns any dirt.  Or put another way, whether or not you see high-speed rail in your part of the country is something we will know in the fullness of time.