By Daniel J. Zanger
Every year when preparing for the annual ChartPattern.com stock trading conference, I have a chance to look back on which trades worked best over the past year and what trends are emerging for the year ahead. Designed for serious traders, the conference gives attendees the opportunity to hear first-hand what I am seeing in markets, see my latest strategies and techniques as well as discover which ones have worked best. Many attendees are subscribers of The Zanger Report newsletter but the conference is open to all technical traders who are serious about making money in stocks and networking with successful traders.
This exercise gives me the luxury of looking at markets from 30,000 feet. And every year it provides some very useful ideas and insights that will help you refine and hone your trading skills whether you’re a day trader or a longer-term swing trader.
So what are the most important trading lessons we can take away from this exercise? Here are some of the factors required to become successful. This list is by no means complete but it’s a great place to start!
Know your Chart Patterns
A stock chart can speak volumes to those who know how to interpret what they are saying. I’ve written about this before but it’s worth discussing again in greater detail.
Charts represent the sum total of what those invested in the stock are thinking, feeling and doing. But like any language, learning it can’t be done in a week or a month – it takes years of study. If you’re still reading this, congratulations! Your chances of succeeding in this business are zero if hard work scares you. And don’t worry the ChartPattern.com member’s website and chatrooms are great places to get lots of help and input but more about that later.
Stocks are my buddies so it’s important I fully understand how they are feeling and acting. One big mistake many market participants make is to rely primarily on corporate and economic fundamentals. Fundamentals have their place, but don’t expect them to help you get in and out of trades. Why? By the time you realize earnings and revenues are rising for example, you’ve usually missed the most powerful part of the move. And by the time you rely on fundamentals to get you out ahead of a major correction like we saw in 2007, you’re toast.
One of the most powerful chart patterns is the Head & Shoulders. It can warn of a stock getting ready to drop, as is the case with the Head & Shoulders or Head & Shoulders top pattern (Figure 1) or at market bottoms, in the case of the Inverted Head & Shoulders pattern (Figures 2 & 3). These patterns are better known as reversal patterns but they can also be continuation patterns to show you when the primary trend is getting ready to resume. The Inverted H&S can appear at a major low but it can also be a continuation pattern. We see two good examples of this pattern in the process of forming in Figures 2 & 3.
Figure 1 – Daily chart showing an example of a bearish Head & Shoulders forming on the Standard & Poors Depository Receipt ETF (SPY) in 2006-7 that signaled the top in the market before the financial crisis hit full force. Chart by ChartPattern.com
Gold is a place where investors run when they are uncertain about the safety of paper money. As Figure 2 of the SPYDR Gold Trust exchange traded fund (GLD) shows, the price peaked in September 2011 and then dropped heavily. The Inverted H&S shows investors selling into October until a new group of buyers stepped in. But then selling resumed which drove GLD to a lower low in early January 2012 before the buyers took over again. Notice that the next flurry of selling in February and March was too weak to push gold to the January low as the stock put in a higher high before the buyers stepped in en masse again.
Looking at the pattern from a distance, we can see the major battle between bears and bulls. We can see how the mood slowly but surely shifts from bearish to bullish over the span of the pattern.
Figure 2 – Daily chart from The Zanger Report daily newsletter of the SPDR Gold Trust ETF (GLD) showing the inverted Head & Shoulder pattern and accompanying volume. Chart by ChartPattern.com
Volume is a valuable tool to help confirm chart patterns and it provides another perspective on the action. Notice that the big spikes in August 2011 as the battle raged at the peak before the bears won out. There is another spike when the left shoulder formed in late September and then volume dropped again as selling pressure lessened and the bears gave up. The next spike at the head in late December and early January shows another battle raging between bears and bulls that the bulls eventually won. Another, lower spike occurred around the bottom of the right shoulder.
The next battle comes as price rallies to complete the right shoulder at the neckline around $174 when the bears will again try to sell GLD down. If the pattern is to be successful, buyers will have to step in and volume will again spike around the neckline. Aggressive traders who recognize the pattern as it’s forming will often step in early to buy after the bottom of the right shoulder has been put in but this can be risky as stocks have a nasty habit of dropping here. Trying to anticipate each move while the pattern is incomplete is very difficult indeed. That’s why it’s essential to have tight stops. A good exit point to use is the blue trendline in Figure 2 from the bottom of the head through the bottom of the right shoulder (see blue trendline in Figure 1). If the stock drops below this line, best to exit and wait for a better setup.
We see another example of the Inverted H&S pattern in the iShares Silver Trust ETF (SLV) in Figure 3. The fact that both gold and silver are “acting” similarly and flashing the same pattern is bullish as that shows that both metals are experiencing similar investor sentiment and behavior in their search for safety.
Figure 3 – Daily chart from the Zanger Report daily showing another Inverted Head & Shoulders pattern on SLV. Chart by ChartPattern.com
Figure 4 shows another chart pattern demonstrating bullishness in the Financial Bull 3 X ETF (FAS), and that has positive implications for financial stocks. Because every 1 point move in financials translates to a 3 point move in FAS, it is much more reactive. As the chart shows, a triple bottom (dotted purple horizontal line) formed between August and December 2011. You can also see the volume spikes showing the shift in sentiment as the bears lost out and bulls started to dominate.
You can also see the bull flag pattern between $82 and $92 which represented the second buy point for ChartPattern chatroom members and readers of The Zanger Report newsletter. Flag and pennants are bullish continuation patterns that appear frequently on our market leading stocks, especially during powerful rallies.
Figure 3 – Daily chart of FAS from The Zanger Report daily showing the triple bottom chart pattern that marked the bottom in the stock and was followed by a powerful rally. Chart by ChartPattern.com
A word of caution – trading double and triple times ETFs like FAS significantly increases risk so should only be done by those with lots of experience who can afford to lose if the trade goes against you. Tight stops and quick reflexes to changing conditions are essential to staying out of trouble.
Inverted Head & Shoulders and Triple Bottoms are just two examples of a wide variety of powerful chart patterns that traders need to learn to recognize in a millisecond on all time frames. In some ways, stock traders are like combat pilots who spend months learning to identify aircraft in a split second. When a pilot sees another aircraft at a distance, it’s essential that he or she know in an instant if its friend or foe since their life depends on it.
I spent every spare moment looking at thousands of charts in books and on the computer until I could pick out patterns in my sleep. This skill was essential in helping me parlay $11,000 into $18 million in 18 months during the Internet boom and has allowed me to continue to be successful today.
Every trader should ask themselves these three questions;
1) How important is trading success to me?
2) What am I doing now to give myself the best chances of making it?
3) Am I prepared to spend every spare hour in my spare time learning to recognize chart patterns?
Learning to recognize patterns isn’t all you’ll need to succeed but it’s a critical ingredient.
Learn the Power of Cycles
We’ve all heard of cycles. They range from the very long like the 50-60 year Kondratieff Cycle to short intraday cycles that can last as little as a few minutes. There are decennial or 10-year cycles which demonstrate similarities between years with the same number. But one of the most discussed in the financial media, especially given the proximity to an election, is the Presidential Cycle.
For example, 2012 is both a decennial cycle “2” year and year 4 of the Presidential Cycle exerting the effect on the Dow shown in Figure 4. Put them together and we see that the Dow has historically experienced major lows mid-year after which it rallied into year-end. Since the S&P500 was up 12% in Q1 and given that years in which Q1 SPX performance exceeded 9% have ended up 86% of the time according to the CBOE’s Russell Rhoads, bodes well for stocks for the rest of 2012.
But history doesn’t always repeat itself and as Figure 4 shows, the first quarter of 2012 did not perform as predicted by the election and decennial cycles. Instead of being down, the Dow was up by more than 7% by the end of Q1. And therein lies the challenge with many well-known cycles – sometimes they work and sometimes they don’t.
However, there are other powerful but intricate daily, weekly and monthly cycles that are not well-known. The key is to find the cycles that work best in the stock you are trading for your preferred time in trade whether it’s hourly, daily or weekly. These cycles that provide advance alerts about when a stock is getting ready to generate a buy signal or warn that the move is about to end, are discussed regularly in our chatrooms.
Those interested in learning more are invited to try a two-week trial membership which includes The Zanger Report newsletter and access to our members only chatrooms where you can join in on our discussion of what is working best in trading our market leading stocks which includes the cycles working best on the stocks being discussed.
Figure 4 – Charts showing long-term cycles going back 81 years for the Presidential Cycle (top chart) and 10-year seasonal cycle for years ending in “2”. The trick with cycles is first determining how well stocks are adhering to them this time around and then assigning a probability to each going forward.
Join the Right Trading Team
Trading is a tough business and it can also be a lonely one. My advice to anyone starting out, especially for those who have been struggling to make money is to find a mentor. Find someone with the technical trading experience from whom you can learn what you need to succeed. It should be someone who’s learned the business, is successful themselves and has the record to prove it. There are a lot of wannabes out there advertising their newsletters, chatrooms and services but how many have the audited stock-trading record to back it up? What sort of stock trading history can they show you? How many documented winners have they had year-to-date?
A great way to do this is to become part of a group that shares trading ideas, strategies and discusses entry and exit points during the trading day. Thanks to the Internet, it is now possible to do this, share charts and news as well as resources via an interactive chatroom. Finding tradable opportunities is a lot easier when working together as a group with someone with the experience and know-how to lead the way.
As a member of our ChartPattern.com chatrooms, you’ll start your trading day with a discussion of important events as earnings reports, economic releases, Federal Reserve announcements and market moving news. We also discuss the important technical factors influencing stocks such as buy points, what chart patterns are forming and key levels of support and resistance.
Discuss set ups on your favorite stocks with the group in the chatroom, many of whom have years of trading experience led by yours truly. We help you avoid making expensive mistakes such as letting your emotions get in the way so that you can stay on track and focus on what works best.
As a member of Chartpattern.com you’ll also have an opportunity to attend our annual conferences where I speak to members for a full day, share what stocks have made the most money, and which ones have the best potential for gain in the future. Each year I share which chart patterns have been most powerful and what patterns I’m watching and where I see the market heading in the next year.
You’ll also have an opportunity to network with other traders at the conference over lunch or during the break. Then there are those famous get-togethers over dinner or at the bar afterwards. It’s a great way to share trading ideas and strategies and make new friends in the trading world.
Do you have the right stuff to succeed in the trading business? If you are serious about trading as a business, join us at ChartPattern.com. See how The Zanger Report and ChartPattern.com chatroom can work for you. We offer a free no obligation two-week trial for new members.
About the author
Daniel J. Zanger holds the unofficial stock trading record for the largest percentage change for a personal portfolio with an audited annual return of more than 29,000%, a feat achieved by parlaying $10,775 into $18 million. A former pool contractor, the world first learned of his trading acumen in an article that appeared in Fortune Magazine in December 2000 entitled My Stocks Are Up 10,000%!” He uses indicators sparingly, relying primarily on chart patterns and volume to trade. As well as being featured in such publications as Barron’s Magazine, Forbes, Fortune, Active Trader, Trader Monthly and Traders World he has written articles for such publications as Technical Analysis of Stocks & Commodities magazine, Traders Magazine (Europe) and SFO magazine. Dan in the host of ChartPattern.com and writes The Zanger Report newsletter four times a week.