Saturday, August 17, 2002

THE ALMIGHTY TREND: predictability

IBM, which was mentioned along with GE in my last column as two

big boys looking healthier, had a terrific day on Friday. As I look at IBMs
chart and figure out what to do next Im reminded of why its better to
trade an IBM chart which looks like its started a trendas opposed to 98%
of the other charts out there. Its because of predictability.
You see, with predictability you can utilize another key element of
tradinganticipation. Anticipation allows the hard working trader to
shrewdly enter a trade before the crowd.
Some people might say, Well, isnt a stock in a trading range pre-
dictable, too? True enough, except that a trading range stock is missing a
component of a trending stockemotion. Theres not as much fear and
greed in a trading range stock. By its very sideways movement it is demon-
strating a lack of conviction by buyers and sellers. The stock could just as
easily collapse or breakout.
Trending stocks have more emotion and are therefore more predict-
able. They dont retrace too much because investors and traders fear miss-
ing a good entry and subsequent profits. And, if an investor or trader is
trapped on the wrong side of a trade and losing money each retracement is
a chance to minimize their loss. They fear the stock will revert to its trend
and again run away from them.
Human emotions are fairly predictable. This fact allows a savvy
trader to trade by anticipation instead of reaction. Anticipate where the los-
ers want to get out because theyre relieved the stock just came back
enough to mitigate their losses somewhat. And, also anticipate where the
money making opportunists need to jump back in and buy (sell short) or
re-buy (re-sell short) to make more money. Often these key areas of buy-
ing and selling are well defined, well observed zones of support and resis-
tance. Profit makers want to enter and losers want to exit at these points.
This tracking of human emotions in trending stocks is the basis for a
set-up which Linda Bradford Raschke calls The Holy Grail in the classic
trading book, Street Smarts co-written with Larry Connors. In a brief, a
trend is identified when the 14 period ADX goes from lingering under 30
(non-trending) to finally moving sharply up through the 30 level (trending).
The trader looks to buy as price comes to the 20 period moving average
and then reverts to the trend and takes out the high (or low for shorting) of
the previous price bar. An aggressive trader could anticipate even further
and on an intraday basis watch for buying (or selling) to come in at that 20
moving average level and enter if they see support (or resistance for selling
short) forming. A tight stop-loss could be employed.
Anticipate the fear and greed. Dont react to it.
- Bob Lord
 In this strong trend the big move comes after price re-
traces to its 20 MA and the circled fear zone where there
are likely some buyers who are losers and want to get out.

On this move down the ADX is

clearly above 30 indicating a strong The ADX
trenddown. It consolidates to the goes
8MA and moves down. even
higher
the trend
The ADX is below 30 in is intact.
CEFT indicating a period of
no trend.

Note that the ADX falls below 30 on the pullback, yet isnt doesnt
negate that the push up indicated a trend type move. Price then
retraces to its 20 MA near the circled area zone of likely trapped
short sellers who need to cover to mitigate losses. Piling in are
opportunists looking to make money on the next move up.

The downtrend loses its steam in GE as

indicated by the weakening ADX. Then, the
push up in price moves the ADX above 30
indicating a trend movenow up.
 There is now fear in the large red circle for IBM. Fear from short
sellers who are out of the money and want to cover at a better
price. Plus, fear of missing a good run up (greed) from oppor-
tunistic buyers who want to catch the first pullback. The 20MA is
now just above 70. Id anticipate the buyers to come in just at
the tops of the highs within the circled area74.50. This would
equate to the 8MA area this time.

Now, IBMs ADX has moved from below 30 to

a sharp move up above 30. The price move is
indicative of a trend.

On the 15 minute chart you can see the general area to

where buyers will be hopes it comes down. However,
that 200MA roughly equals an 8MA on the daily. By the
time price pulls back the 200MA will be around 75.
The new high for ICOS matches a new
high in the ADX indicating that the new
trend is still in place. It seems poised to
take out the gap to the left.

The spike.

Intraday we see that the V bottom is

formed on the right side by what is called a
spike and ledge. This is normally a bullish
formation. A buy above the blue line would
be the typical play. The spike is roughly 3
points and wed expect the move up to
match that and carry 3 points up.
FOR NEXT DAYS TRADING:

Long: ICOS looks good. In the days ahead look for IBM, LLTC and WMT on pullbacks. All had moves that
pushed their ADX from below to above 30. If youre interested in breakouts watch NEWP. Its ADX is so
low that it suggests quiet consolidation that precedes a breakout ...or a breakdown, but it looks a bit
more like a constructive basing pattern to me. Lows on the price bar are starting to get higher (demand)
and the semis are starting to get some buyers.

Short: BA is coming into a fear zone where buyers will be anxious to bail out of positions and mitigate losses.
JBLU is having a difficult time staying up and could be in for more of a spiral down. Of course, this
sector (airllines) has been taking it on the chin with UAL and US Airways talking of bankruptcy.

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