Market consolidating...What's next?

After months of the S&P 500 forming the same pattern of rising to a trendline, then falling, then rising again, we now have the markets trading sideways for the past several weeks.

Long Term Secular Bear and Bull Markets

Here is a chart of the Dow Jones Industrial Average going back to 1900. See any patterns emerging here?

Fed Statement causes volatile trading session

Is the S&P 500 in an upwardly trending channel?

When looking at a chart of the S&P 500 since July, when another major leg up in the market had started, it looks like the market is simply in an upwardly trending channel. However, when you look at the S&P 500 since the march lows, the pattern that emerges is an ascending wedge with a break to the downside.

So, the question is, how long do you hold onto a particular pattern before trying to identify another pattern forming? True to form the bearish ascending wedge seen since the march lows did have the markets turn negative, and we had a 5% correction, but now it looks as if the uptrend is still intact.

This uptrend might be tested with the initial unemployment claims tomorrow, and the non-farm payrolls report on friday.

Technical Chart Patterns

Here we see Boise Inc. (BZ) in an upwardly trending channel, which hit resistance at $5.60 and then reversed. The reversal was not entirely negative, however, as it formed a falling wedge, which is actually a bullish pattern.

Sure enough, the falling wedge broke to the upside, after which there was sideways consolidation. Yesterday Boise reported good earnings as well as a successful debt restructuring program.

Investors get whiplash as they are tossed about

With the stock market having an inverse correlation with the dollar, every time the dollar moves upward the stock market plummets. Volatility is spiking quite dramatically.

Has Coldwater Creek (CWTR) finally found support?

Coldwater Creek (CWTR) may finally be finding support after falling over 30%. The bulls were caught in an ascending wedge that broke viciously to the downside. There have been a lot of stocks showing that pattern lately.

Coldwater Creek's net profit(loss) has been improving the last two quarters, but their sales revenue has still been declining. They are going to report earnings at the end of this month. It will be interesting to see if they can swing to positive earnings per share.

It's all just a shell game

So tell me how this works. The Federal Reserve loans money to banks at near 0%, and then instead of lending it out the banks are buying US Treasury Notes? So how is this NOT monetizing the national debt? The Treasury gets it's money from the banks who got it for free from the Federal Reserve. Doesn't sound too much different than the Fed purchasing $300 billion of Treasury Debt.

But oh well; all's well that ends well. :) We're experiencing Deflation anyways, right?

My humble trading setup

Here is a picture of where I do my trading. I've found it handy to have two computers, one for email and news stories, and the other one to do my trading with. The monitor in the middle is for watching CNBC to keep updated with what's happening on the floor of the NYSE.

Bearish pattern in S&P 500

The S&P 500 has been forming a bearish Ascending Wedge pattern and it has broken to the downside. Possible support levels could be 1025 and 980. A correction could be healthy for the markets, as many critics have been crying that the market is overvalued.

A correction down to 1025 along with some consolidation should give the fundamentals time to catch up to the technicals.

A worldwide maelstrom of cutthroats

The stock market can be a worldwide maelstrom of cutthroats who will cut you off at the knees without the slightest hesitation. Right now the general public's perception of the stock market seems to be that it's too risky and that you'll lose money. That is probably correct.

Unless a person is willing to do their own research and analysis, they can get burned big time in the stock market. If your broker makes money every time that you buy or sell stock, regardless of whether you made a profit or not, then don't expect your broker to keep you from making a bad investment decision.

During the 15 year bull market that started in the early 1980's and went until the late 1990's, it seemed that the stock market just went up and up. That's because we were in a secular bull market. Now we've had the dot com bubble and the housing market bubble, and we're probably in the beginning of another bubble forming. All just part of a larger secular bear market.

If a person invested money ten years ago in the stock market their stocks are worth the same amount today. But with interest rates near zero what is the average American supposed to do today? It's either the volatile stock market or the flatline savings accounts. Yes my savings account with Wells Fargo is FDIC insured, but it only pays .1%. CD's used to yield 5% or more and are now yielding 1%.

Average Americans think that professional money managers can get them a better return for their money, but that won't be a "sure thing" until we transition to a secular bull market. Until then, enjoy the ride up and get out before the bubble bursts again. Just trying to be optimistic.

Favorites

My favorite blogs:

• Slope of Hope with Tim Knight - http://www.slopeofhope.com
• Afraid to Trade by Corey Rosenbloom - http://blog.afraidtotrade.com
• Fund My Mutual Fund by Trader Mark - http://www.fundmymutualfund.com
• CARPE DIEM by Dr. Mark J. Perry - http://mjperry.blogspot.com

My favorite financial web sites:

• Bloomberg.com
• Smartmoney.com
• Google Finance
• Yahoo Finance

Operating Systems that I run:

• Windows XP
• Windows Vista
• FreeBSD Unix
• OpenSolaris Unix
  
• Ubuntu Linux
• Zenwalk Linux

Baby Steps

Like Bill Murray in "What about Bob?", I've been taking Baby Steps in learning how to trade.

First I started out by opening up an account with Sharebuilder and using their automatic investment plan to buy dividend paying Blue Chips. From there I went on to do some real time trades, still only buying dividend paying stocks, but this time I started buying some small caps that payed dividends.

After a while I realized that it didn't matter if a stock paid a dividend or not as long as I could make a nice profit on the trade. I then got approved for a margin account with Sharebuilder and started learning how to manage my buying power.

From there I went on to read a book about options and got approved for level 1 and level 2 options trading with Sharebuilder. I am of the opinion that Sharebuilder is a great way for the beginner investor/trader to get started and learn the ropes. When I feel that I'm an advanced and knowledgeable trader then I'm going to switch to ThinkOrSwim. I've already started using their desktop software, mainly so that I can use Prophet Charts.

Having some good charting software to use is essential in becoming a good trader. There are trends and patterns that are easily visible if you can use a few basic tools like drawing a trendline or drawing lines of support and resistance. At first I had tried using freestockcharts.com, and it is okay to learn some basic charting techniques, but I like the feel of Prophet Charts much better.

Learning to trade

That ascending wedge that I got caught in with Boise Inc. (BZ) seems to be setting up a bullish cup and handle pattern. We'll see what happens this week.

There is quite a bit to learn when trading. Some traders use Technical Analysis exclusively, others are more geared to Fundamental Analysis. My style seems to be gravitating towards a combination of the two. If a companies fundamentals look promising, and there seems to be a good entry point on the stock's price chart, I'll go ahead and make the trade.

I'm learning that you have to know when to get in, as well as when to get out, of every trade.

Avoid this Bull Trap

When learning how to trade, you sometimes make some blunders. I was looking at the funadamentals of Boise Inc. (BZ), and they looked good.

The technicals of BZ, however, deteriorated in a hurry. I got caught in an ascending wedge, a bearish pattern that breaks to the downside.

Boise had a long ways to fall (24% in 8 trading days), before it (hopefully) found support.

Were almost there

If the S&P 500 crosses up above it's bear market trendline then I think that we can safely say that were back in a new bull market.

However, I still feel like we will be in a cyclical bull within a secular bear. As much as I would like to be optomistic about the long term economy and stock market, I feel that four or five years from now we'll be in an even deeper hole than the one we're in now.