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$APPA BarChart Trader's Cheat Sheet
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Inflationary Relationships
The intermarket relationships depend on the forces of inflation or deflation. In a "normal" inflationary environment, stocks and bonds are positively correlated. This means they both move in the same direction. The world was in an inflationary environment from the 1970's to the late 1990's. These are the key intermarket relationships in a inflationary environment:
A POSITIVE relationship between bonds and stocks
An INVERSE relationship between interest rates and stocks
Bonds usually change direction ahead of stocks
An INVERSE relationship between commodities and bonds
A POSITIVE relationship between commodities and interest rates
A POSITIVE relationship between stocks and commodities
Commodities usually change direction after stocks
An INVERSE relationship between the US Dollar and commodities
POSITIVE: When one goes up, the other goes up also. INVERSE: When one goes up, the other goes down. Interest rates move up when bonds move down
In an inflationary environment, stocks react positively to falling interest rates (rising bond prices). Low interest rates stimulate economic activity and boost corporate profits. As interest rates fall and the economy strengthens, demand for commodities increases and commodity prices rise. Keep in mind that an "inflationary environment" does not mean runaway inflation. It simply means that the inflationary forces are stronger than the deflationary forces.
Central Bank: Central banks play a key role in the currency markets because of their power over monetary policy. They have a direct influence over money supply, which in turn affects demand and price of the currency. Through the use of different policies, central banks can try to manipulate the markets so that they can keep their currency at specific levels. Some countries and their central banks try to peg their currency to that of another currency or basket of currencies (for example, China to the U.S.).
The central bank can participate in the forex market by buying and selling their currency at the spot market in order to keep it from changing too much. Another motivation for central banks is to keep the local currency at a specific price in order to make their local economy more attractive for international trade. If a country’s currency appreciates too quickly, it could actually make it less appealing to importers.
Remember that many transactions have to use the local currency. Thus, if currency that is needed rises too quickly, it effectively makes goods more expensive to foreigners, which in turn, hurts trade. To counter this, the central bank may intervene in the market by selling its currency and buying up other major currencies. This in effect, weakens the local currency so as to make it more appealing to foreign importers.
While the exact value of what percentage such central bank transactions take up isn’t known, take note that because these are the banks of national governments, such interventions can have a much larger impact on the market than any single commercial bank.
Daily Candlestick Chart for CMRZF
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$XSNX BarChart Trader's Cheat Sheet
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What is More Important than Why
In his book, The Psychology of Technical Analysis, Tony Plummer paraphrases Oscar Wilde by stating:
Daily Candlestick Chart for SMXMF
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Carry Trade: The Carry Trade is a trading strategy where investors/traders sell or borrow assets (such as currencies) with lower yielding interest rates to fund or buy higher yielding assets.
In the Foreign exchange, interest is debited or credit from a trader's account everyday on open positions.
The most popular Carry Trade in recent history has been to sell Japanese Yen and buy higher yielding currencies such as the Australian Dollar, New Zealand Dollar, and British Pound.
For example, if you buy the AUD/JPY, then you sell Japanese Yen (which yields 0.00% a year)and buy an equivalent amount of Australian Dollars (which yields 3.50% a year) simultaneously. So, for as long as you hold that position you would pay 0.00% interest a year for borrowing Japanese Yen, and receive 3.50% a year for holding Australian Dollars.
The interest rate differential of that position is 3.50 (3.50% - 0.00%). So you would receive approximately 3.50% a year on the value of the position, depending on the margin interest charged by the broker and on exchange rate volatility.
$STVF BarChart Trader's Cheat Sheet
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Daily Candlestick Chart for FRZT
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$FLXT BarChart Trader's Cheat Sheet
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Price Scaling
There are two methods for displaying the price scale along the y-axis: arithmetic and logarithmic. An arithmetic scale displays 10 points (or dollars) as the same vertical distance no matter what the price level. Each unit of measure is the same throughout the entire scale. If a stock advances from 10 to 80 over a 6-month period, the move from 10 to 20 will appear to be the same distance as the move from 70 to 80. Even though this move is the same in absolute terms, it is not the same in percentage terms.
A logarithmic scale measures price movements in percentage terms. An advance from 10 to 20 would represent an increase of 100%. An advance from 20 to 40 would also be 100%, as would an advance from 40 to 80. All three of these advances would appear as the same vertical distance on a logarithmic scale. Most charting programs refer to the logarithmic scale as a semi-log scale, because the time axis is still displayed arithmetically.
The chart above uses the 4th-Quarter performance of VeriSign to illustrate the difference in scaling. On the semi-log scale, the distance between 50 and 100 is the same as the distance between 100 and 200. However, on the arithmetic scale, the distance between 100 and 200 is significantly greater than the distance between 50 and 100.
Key points on the benefits of arithmetic and semi-log scales:
• Arithmetic scales are useful when the price range is confined within a relatively tight range.
• Arithmetic scales are useful for short-term charts and trading. Price movements (particularly for stocks) are shown in absolute dollar terms and reflect movements dollar for dollar.
• Semi-log scales are useful when the price has moved significantly, be it over a short or extended time frame
• Trend lines tend to match lows better on semi-log scales.
• Semi-log scales are useful for long-term charts to gauge the percentage movements over a long period of time. Large movements are put into perspective.
• Stocks and many other securities are judged in relative terms through the use of ratios such as PE, Price/Revenues and Price/Book. With this in mind, it also makes sense to analyze price movements in percentage terms.
Daily Candlestick Chart for RDUFF
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$GELV BarChart Trader's Cheat Sheet
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Ascending Triangle: An Ascending Triangle is a price action formation signal based on continuation pattern theory.
Continuation patterns also include symmetrical triangles, descending triangles, wedges, flags, rectangles and pennants and are essentially technical patterns that are expected to lead to the continuation of an existing trend. Continuation patterns are considered a powerful trading tool as they usually result in extremely low risk trading opportunities and spectacular returns.
An ascending triangle demonstrated within a chart pattern is recognized as having a bullish position and occurs as a result of price highs and price lows that have begun to converge so that they, in effect, form a point. If a line is drawn above and below the pattern the top line will appear straight whilst the bottom will slope upwards at an angle.
Ascending triangles are considered to be at their most reliable when occurring during an uptrend, and a buy order should be placed on a break above the upper resistance area of the triangle. If however, the pattern is proved to be false, or if the ascending triangle pattern should fail, then it is advisable to sell when the market breaks out and below the triangle.
Long-term Trends as a Strength of Fundamental Analysis
Fundamental analysis is good for long-term investments based on very long-term trends. The ability to identify and predict long-term economic, demographic, technological or consumer trends can benefit patient investors who pick the right industry groups or companies.
Daily Candlestick Chart for BMPI
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Detrended Price Oscillator: The Detrended Price Oscillator (DPO), as the name indicates, is a technical analysis tool designed to give information about the price of an asset without taking into account existing price trends. The logic behind this is that detrended prices can help traders to understand the buying and selling pressure in a market based on short-term fluctuations in the price of an asset, without taking into account larger upswings or downswings in price.
The Detrended Price Oscillator can be calculated by declaring a period of time that could be said to indicate a trend in price (for example, if prices steadily increase over a twenty-day period, then one could take "20" as the period of time that indicates a trend.) Divide this period by two and add one to arrive at a number n. Then take the moving average of an asset's price n days before the period in question, and subtract this from the asset's closing price for that period. The resulting number is the period's DPO. This calculation method ensures that although short-term price trends are included in a DPO chart, longer-term trends are excluded.
One of the fundamental assumptions of the DPO is that long-term price trends are composed of short-term price trends, and that only by looking at short-term trends can long-term trends be understood. By this rationale, particularly severe peaks and troughs in the DPO indicate probable reversals in the overall trend of the asset price, and traders should take appropriate positions to take advantage of these reversals in either direction.
$MRNJ BarChart Trader's Cheat Sheet
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EquiVolume Chart Introduction
Developed by Richard W. Arms Jr., EquiVolume is a price plot that incorporates volume into each period. Arms also developed the ARMS Index or TRIN indicator. EquiVolume charts looks similar to candlestick charts, but the candlesticks are replaced with EquiVolume boxes that can be square or rectangle. Classical patterns, such as triangles, wedges and double tops, still show up with the added bonus of having volume built right into the pattern. This makes it easier to verify volume for reversals, big moves, support/resistance breaks and climaxes.
Daily Candlestick Chart for IDNG
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British Industrial Production: Release Schedule: 8:30 (GMT); monthly, usually 26 working days following the reporting month's end
Revisions Schedule: Monthly revisions made to adjust for incomplete data.
Source of Report: Office for National Statistics (UK)
Web Address: http://www.statistics.gov.uk/default.asp
Address of release: http://www.statistics.gov.uk/statbase/Product.asp?vlnk=6230
$ELAY BarChart Trader's Cheat Sheet
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Daily Candlestick Chart for ATCN
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$COHO BarChart Trader's Cheat Sheet
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Daily Candlestick Chart for FOUR
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$CGMX BarChart Trader's Cheat Sheet
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Structural Factors of Irrational Exuberance
Robert Shiller identifies 12 structural factors that contributed to the unprecedented rise in stock prices from 1995 to 2000. Even after the big decline into the 2002 lows, valuations were again at relatively high levels a few years later.
1. The capitalist explosion and the ownership society encouraged stock investing. Societies built on communism and socialism opened up to capitalistic ways. Russia and China come to mind over the last 20 years. George W. Bush promoted the ownership society by advocating property and stocks for all. Corporate downsizing and the decline of labor unions prompted people to take their destiny into their own hands and spawned the entrepreneurial spirit. Corporations tied salaries to performance with stock options.
2. Cultural and political changes favor business success. There has been a significant rise in materialistic values over the year. Shiller reports that more people viewed money as important to success in the mid 90s than in the mid 70s. Society viewed successful businessmen more favorably than scientists or artists. The 1995 Republican congress proposed cutting the capital gains tax and it was cut in 1997. Further cuts were proposed soon thereafter. These tax cuts as well as the anticipation of future capital gains tax cuts provided incentives to buy stocks.
3. New information technology suggested that new era. The first cell phones appeared in the early 1980's, which is when the great bull market started. The Internet came of age in the mid 1990's and grew rapidly the next five years. Investors viewed this Internet revolution as a game changer that justified the stock market boom.
4. Monetary policy and the Greenspan put took perceived risk out of the equation. The Fed did nothing to stop the surging stock market from 1995 to 1999. Interest rates did not increase until August 1999. In addition to letting the bubble grow, the Fed indicated that it would be there to pick up the pieces should anything go wrong, just like in 1987 and 1998. Having the Fed on standby in the event of a market crash was like owning a put option.
5. The perceived effects of the baby boomer generation. There was indeed a baby boom after World War II and this boom resulted in a large number of people aged 35-55 in 2000. However, Shiller argues with data that there is no correlation between a baby boom and a surging stock market. Instead, Shiller argues that, as with the Internet, the public perceptions of the baby boom influence help inflate the stock market.
6. The 1990's surge in business media undoubtedly contributed to interest in the stock market. Not much explanation is needed here. Newspapers created big glossy business sections to attract readers. Good stories replaced hard news. Increased media exposure led to more advertising and this simply fed the public appetite for stocks. The media continues to pour it one with Mad Money debuting in 2005.
7. Analysts estimates were routinely overoptimistic in the last 1990's. Shiller notes that Zachs reported sell recommendations on 9.1% of stocks in 1989 and just 1% of stocks in late 1999. Analysts were hesitant to issue sell recommendations because many firms also had investment banking ties with the company. Analysts also did not want to offend the company because they might then be cut off from earnings guidance or key information.
8. Defined-Contribution Pension Plans grew and replaced many Defined-Benefit Plans. Among other things, the decline in unions and big manufacturing industries (autos) contributed to this trend. More people also wanted control over their retirement funds. Those with Defined-Benefit Plans must make their own investment choices and this increases the exposure to stocks.
9. The number of mutual funds surged. From 1982 to 1998, the number of mutual funds grew tenfold (340 to 3513). At one point, there were more mutual funds than stocks listed on the NYSE. Mutual funds became a regular part of 401K's. Money moving into these mutual funds from 401K's and individual investors found its way into the stock market to feed the bubble. Shiller also notes that widespread advertising compounded this growth and increased public awareness to new levels.
10. Benign inflation created the illusion of wealth and prosperity. After runaway inflation in the 70's, the inflation outlook steadily improved from 1982. Shiller's research found that the public associates inflation with economic prosperity and social welfare. Such perceptions promote positive expectations for the economy and the stock market.
11. The explosion of trading volume kept the bid in the bubble. Increased interest in the stock market and a dramatic decline in commissions facilitated a surge in trading volume on the exchanges. The growth in online trading also facilitated increased interest and made it easy to trade more frequently.
12. There was an increase in gambling over the years. Government sanctioned gambling (lotteries) and commercial gambling grew in popularity over the years. Poker players became stars. Lottery jackpots were heavily promoted. Slick adverts portrayed gambling as sophisticated and increased one's propensity to take risks. Online gambling facilitated growth as well.
$SANP BarChart Trader's Cheat Sheet
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Daily Candlestick Chart for DATA
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Bank of England: The Bank of England is the central bank of the United Kingdom. Sometimes known as the 'Old Lady' of Threadneedle Street, the Bank was founded in 1694, nationalised on 1 March 1946, and gained independence in 1997. Standing at the centre of the UK's financial system, the Bank is committed to promoting and maintaining monetary and financial stability as its contribution to a healthy economy.
The Bank of England has been in place for more than three hundred years, although it wasn't nationalized until 1946. It serves a dual role as both a consumer bank and a government bank. As such, the "Old Lady of Threadneedle Street," as the Bank of England is often called, holds a primary role in the financial status of the United Kingdom.
In 1998 the bank's governing body was changed by the Bank of England Act. Now the Bank of Directors is composed of sixteen non-executive directors, two deputy governors, and the bank's governor. This has modified the bank's responsibilities; their two main purposes now include maintaining the UK's Monetary and financial stability, although it still has as many small-scale account holders as it does large corporate accounts.
In regards to the foreign exchange market, the Bank of England manages the Exchange Equalisation Account. The EEA was formed in 1932 and is the account responsible for influencing the exchange rate of the UK's gold reserves. It also holds foreign currencies and gold for trading purposes
$NYXO BarChart Trader's Cheat Sheet
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Trendlines drawn on 3-box Reversal P
Daily Candlestick Chart for HRRN
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$OCDGF BarChart Trader's Cheat Sheet
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Daily Candlestick Chart for RFMK
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Baltic Dry Index: The Baltic Dry Index covers dry bulk shipping rates, or the costs of moving raw materials by sea.
Shipping costs vary according to the type of commodity being shipped, the amount (supply and demand).
This index is managed by the Baltic Exchange in London and the data can be directly subscribed to by major financial news services as well as the Baltic Exchange.
$HPGI BarChart Trader's Cheat Sheet
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Relative Strength: The price relative is a line formed by dividing the security by a benchmark. For stocks it is usually the price of the stock divided by the S
Daily Candlestick Chart for LIGA
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