Overall Stock Market: S&P 500 (SPY ETF)

Let’s take a look at what the overall market has done since February of this year. I will use SPY, the ETF that tracks the S&P 500 Index.

Here is a daily chart of SPY since February:

When the corona virus panic hit, the market dropped 35% from its February high. Then it started a historic uptrend that saw prices recover and surpass the February high in early September. Since early September, SPY declined 10% before gaining 5% in the last 2 weeks.

Today, let’s focus on the concept of trend/consolidation. Another concept we should learn is support/resistance.

Let’s start with trend/consolidation.

Even during the strongest uptrend, prices don’t go straight up. From the March 23 bottom to the September 2 high, SPY gained around 63%. But even during this rocket-ship rally, prices did not go straight up. Remember, every red bar you see on the chart is a day when prices declined. You can see that there were quite a few days when prices dropped, and some periods that lasted from several days to several weeks saw prices go sideways at best or decline 5 or 10% at worst.

These periods of sideways/declining price action during a trend are called consolidations. A consolidation is when prices consolidate the gains before starting another uptrend.

Or not.

There is no rule that says an uptrend must continue. A stock can gain 50% in 3 months and crash 80% in the next week.

But, perhaps more often than not, a stock in a uptrend or downtrend will periodically “consolidate” before continuing the previous trend.

Nobody knows if the previous trend will continue.

A trader can only pick an advantageous price to enter a trade if he decides to trade. Remember that: you don’t have to trade! Sitting out is often the best thing to do. But doing nothing is difficult because traders are humans and humans are, well, greedy and impatient.

The other topic is Support and Resistance. You can see that previous areas of Support often act as areas of Resistance.

Support is a price level where prices stabilize or hold and reverse the previous trend. Or, again, continue the previous trend. But even merely pausing at a particular price level means that that level provided some “support,” and this support becomes “resistance” when days, weeks, months, or even years later prices have a difficult time or at least pause when it reaches this previous level of support.

Prices will either consolidate below the resistance level before punching through or it will be turned back and decline. Of course, prices can make another attempt to overcome resistance later.

You can be a good trader applying just these two principles: trend/consolidation and support/resistance.

The difficulty, as always, is controlling our emotions.

Periods of consolidation can last days, weeks, months, and years. Few people can stay patient and not put their money at risk until the next trend starts.

Back to SPY: since early September, has SPY been consolidating its gains and getting ready to start another uptrend?

You know the answer: I don’t know, and nobody does either

Only thing you can do is pick an advantageous spot to enter a trade—if you decide to trade.

We’ll discuss possible entry and exit points soon. Until then, take care.

Note: If you want to learn more about chart patterns in addition to reading about them in this newsletter, check out my book Trading Stocks Using Classical Chart Patterns ( available on Amazon). I’m very proud of this book as I think it is a thorough and clear introduction to chart trading. The book also discusses specific entry and exit points for dozens and dozens of chart patterns.

Disclosure: I own shares of SPY.

Disclaimer: Everything in this newsletter is for informational and entertainment purposes only and is not to be considered professional advice of any kind. All statements and opinions in this book are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Trading stocks and investing involve risk and may result in financial loss. All trading and investment decision you make are your own.

Gold: GLD

What's Gold been up to?

With every stock chart, I start with a long-term big-picture view. Here is the 10-year weekly chart of the price of gold as represented by the GLD ETF (symbol: GLD).

A “weekly” chart is a chart where each bar represents a week of time:

The price of GLD peaked in 2011, then traded sideways from 2011 to 2013 before GLD crashed through support in 2013 and hit a low in late 2015.

From 2013 to 2019, GLD formed a massive 6-year Head & Shoulders Bottom pattern. Here we see what patience means: 6 years for a classic long-term bottoming pattern to develop. Then the decisive upside breakout in June 2019.

6 years.

Of course not all patterns are massive long-term patterns such as this. But the longer the pattern, the more reliable the signals and breakouts tend to be (but of course not a guarantee).

Okay. What has the price of GLD done since the June 2019 breakout?

For that, let’s look at the daily chart of GLD (a daily chart is where every green or red bar represents a day):

Next, let’s zoom in and focus on the last 6 months:

So one interpretation of the price action is that GLD is currently testing the lower horizontal boundary of the 6-week descending triangle from which it broke down from.

If GLD surges above the boundary and stays above, then we’ll re-evaluate.

Or GLD may break down again after testing (as it is doing now) the horizontal lower boundary of the descending triangle.

Nobody knows what will happen. Anybody who tells you he or she knows what GLD will do does not know what he/she is talking about. Or is lying.

Only thing you can do is control risk.

If you want, you can short some GLD shares.

Shorting means you are betting that a stock will go down in price.

Shorting shares involves additional risk although it need not be financially ruinous. The key is to control risk, which includes trading money and risking an amount that you can afford to lose.

You should study on your own how to short stocks. There are plenty of resources on the Internet. You can also call your broker and ask them to explain the process to you. I was intimidated about shorting stocks, but I learned about it and now I am comfortable either going long (buying shares because I’m betting prices will go up) or going short (shorting shares because I’m betting prices will go down).

No need to rush. Take your time to learn. Only do what you are comfortable doing (and only with money that you can afford to lose). The financial markets will always be there. Take your time to learn and get comfortable. Remember, PATIENCE!

Let me offer an alternative interpretation of the current price action of GLD:

The bearish descending triangle can “morph” into a bullish descending wedge.”

A “bear” market is when prices decline.

A “bull” market is when prices increase.

Every chart pattern can fail. Every chart pattern can morph (change) into a different pattern. In fact, you should always assume that a chart pattern will either fail or change into something completely different.

And this is the way it should be.

After all, opinions differ. Not everyone uses classical charting to trade or invest. Every dollar you make in the market is a dollar someone lost. Every dollar you lose is a dollar that someone earned.

My opinion is that GLD is in a long-term bull market (prices will increase in the next several years). This doesn’t mean GLD won’t see sharp price declines. We may be in one of those declining periods now.

BUT here’s the thing. I could care less about whether my opinion is correct.

Again, nobody knows what prices will do. Chart patterns are only tools to helps us manage risk by, for example, providing particular entry and exit points that are themselves based on nothing but your opinion.

The only thing I can do is to control my risk if I decide to enter a trade.

We’ll talk more about possible specific entry points in the next newsletter. Until then, take care.

Note: If you want to learn more about chart patterns in addition to reading about them in this newsletter, check out my book Trading Stocks Using Classical Chart Patterns ( available on Amazon). I’m very proud of this book as I think it is a thorough and clear introduction to chart trading. The book discusses specific entry and exit points for dozens and dozens of chart patterns.

Disclosure: I own shares in GLD and also own shares in GDX and GDXJ, which are ETFs that own shares in various gold and precious metals mining companies. I also own shares in individual gold mining companies such as HMY, KGC, and NG.

Disclaimer: Everything in this newsletter is for informational and entertainment purposes only and is not to be considered professional advice of any kind. All statements and opinions in this book are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Trading stocks and investing involve risk and may result in financial loss. All trading and investment decision you make are your own.


How to trade stocks using chart patterns

This newsletter is about trading stocks using classical chart patterns.

Chart patterns hooked me from the first moment. So hooked was I that I wrote a book that I’m very proud of: “Trading Stocks Using Classical Chart Patterns: A Complete Tactical and Psychological Guide for Beginners and Experienced Traders".

I trade stocks based on patterns I see in stock charts. Stock charts have made these patterns for 100 years and probably since the beginning of freely traded markets.

And stocks will continue to form patterns on charts because . . . human nature doesn’t change.

The patterns are forming now as you read and as I type.

Let’s be clear: trading stocks is speculating. Speculating can be reckless and uninformed. Speculating can also be informed and control for risk. Risk cannot be eliminated. But it can be controlled to very manageable levels. Stock charts help me reduce and manage risk to make trading informed, worthwhile (financially and psychologically), and even intellectually interesting.

Years ago, I looked down on people who traded stocks. And it is unfortunately true that most people who trade stocks take too much risk and don’t know what they are doing. They are looking for a quick way to get rich (there isn’t any).

Now, having traded for nearly 10 years, I realize this: informed and prudent trading—far from requiring or benefitting from a wild gambler’s mindset—required continuous affirmation of worthy values such as patience, diligence, restraint, moving on after setbacks, controlling our ego, and recognizing that our lives are bigger than trading. It is a fine and constructive balance between focus and letting go.

I look at charts, I enter or exit a trade, and live my life while the financial market does whatever it does. If I lose money in a trade, I really don’t care all that much because the loss—even a string of losses that go on for months—are very manageable.

Remember that: you can’t control what the market does. BUT you can control your risk.

Also remember that you don’t have to prove anything to anyone (especially yourself) in the markets.

You don’t have to trade.

Thrift and living within our means are always available and effective ways to build a solid foundation.

If you choose to trade, I look forward to sharing my thoughts with you.

Disclaimer: Everything in this newsletter is for informational and entertainment purposes only and is not to be considered professional advice of any kind. All statements and opinions in this book are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Trading stocks and investing involve risk and may result in financial loss. All trading and investment decision you make are your own.

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