Interview with Toni Turner

Below is my extended interview with best-selling author and trader Toni Turner, who gave me a few insights into the current market environment. She is the author of A Beginner’s Guide to Day Trading OnlineA Beginner’s Guide to Short-term Trading(2nd Edition), and Short-term trading in the New Stock Market, to name a few.

Q. What stocks do you study?

Turner: When I’m watching market action, I go through the nine sectors of the S&P 500. I always keep an eye out for sector movement and key industry groups like telecommunications and transportation. I watch these closely as well as the three major indices, which I also watch on weekly and monthly charts, as well as intraday. Often you see patterns on the long term charts that you can’t see intraday.

Q. Do you have a favorite indicator?

Turner: One indicator I use is Average True Range (ATR), which I use on the major indices. When the ATR starts to rise, and when the candlesticks get wider and wider, it means there is more concern and indecision. This year, much of the volatility started with the rebellion in Egypt and went through the spring months. Even though the market was rising, each weekly candle was getting wider and wider. That means the bulls can push the market higher, but the bears can also push it lower.

Q: Don’t traders like volatility?

Turner: We do like volatility but when it turns on a dime, you have to question how you can maintain a bullish or bearish bias. You want volatility, but you want the kind of volatility that makes sense. Currently, all it takes is one phone call between Sarkozy and other world leaders and the market can make a U-turn. My strategy is to establish the boss du jour. During all trading time periods, there is always a boss du jour. There is something that is leading the market; of course, in the case of the U.S. dollar, it might push the market in an inverse direction.

Q: What about right now?

Turner: You always want to identify the boss or whatever market or instrument is leading our financial markets. Right now the euro is the boss du jour. It is having a rough time. On most days, if the euro heads south, the market is going down. I have seen times when oil is the leader, and often it’s the S&P 500 or Dow futures. When there is this much uncertainty in the market, it creates a tremendous amount of volatility, and it’s difficult to play. It’s total uncertainty. It’s a headline-driven market, not driven by fundamentals based on a sound economy. It isn’t sound.

Q: What do you see on the chart?

Turner: Basic technical analysis teaches you how to identify confusion, which we identify by calling it congestion on a chart. Congestion on a chart, especially on a daily chart, is a series of stops and starts, and gap ups and downs. Right now we are witnessing the kind of congestion on stocks that are normally docile. For example, consumer and utility stocks such as Procter and Gamble, Wal-Mart, and Phillip Morris are acting like a kangaroo on speed. Normally, many of these defensive sectors are a yawn. Now, though, some of the most orderly value stocks are rising and falling like growth stocks, which make you wonder what is going on.

Q. Have you seen this before?

Turner: For many stocks, I can’t relate their current disorderly patterns to any recent period in history, possibly with the exception of 2008. Even in usual docile utility stocks, you can see mass confusion.

Q. What advice would you give to investors?

Turner: If you are an investor that is bottom picking, don’t buy an overpriced growth stock with bad fundamentals. I know that hedge funds are waiting to sell them short if there is a market downturn. Check the fundamentals like the P/E ratio, debt ratios, and earnings. If we get another downturn and you’re in a high-flying stock that was bid-up by traders, the hedge funds will come in and short the heck out of it. You might want to look at value stocks rather than growth stocks because value stocks don’t get as hammered as growth stocks in a downturn.

Q. What patterns do you see on a chart?

Turner: Right now in many stocks, I see a bear flag pattern formed of wide candles and big gaps. It tells me that traders are totally confused. The long, wide volatile candles on the S&P is also indicating there is no agreement since the first part of August as to where the market should go. It’s indecision. Perhaps experienced day traders might fare well in this market environment — if you pick the right stocks and catch an upswing or downswing. Experienced traders can make profits, but for most traders, standing aside is the best idea. Again, I think this headline-driven market is difficult for most people.

Q. Any final advice?

Turner: Out of all this chaos comes order. If you’re wise and don’t try to outsmart the market, and stay in cash right now, you’ll have money to trade when the market starts to go your way again.

Note: You can read more about Toni Turner at her website, http://bit.ly/Tseud

This stock market chart can light your portfolio

MIAMI, Fla. (MarketWatch) — Many new traders and investors often feel intimidated by stock market charts. All those squiggly lines and colors moving in different directions can be confusing. With experience, however, it begins to make sense.

Many who dismiss charts as voodoo may not appreciate what charts do: they help to gauge the psychology of the stock market in real-time.

If you believe the markets are influenced by emotion, then you’ll find charts useful. As economist John Keynes said: “There is nothing so disastrous as a rational investment policy in an irrational world.” And nothing is as irrational as human emotion.

When you pull up a chart of a stock or index, you can display the information in three formats: line, bar, or candlestick. The default format on most charting software is candlesticks because it provides so much information.

“Candlesticks have a major advantage because they let you quickly analyze market psychology,” said Steve Nison, president of Candlecharts.com and author of “Japanese Candlestick Charting Techniques.” He was the first to introduce candlesticks from Japan to the West. “We can use that information to quickly determine if the bulls or bears are in control, or if the market is at a point of indecision, or tipping point.”

Even institutions who rely on fundamental analysis to make investment decisions use candlesticks to help time when to enter or exit a position. Nison points out that you should not use candlesticks in isolation, but in conjunction with whatever technical or fundamental system you currently use.

“Candlesticks, which are simple to use, can help you to avoid potentially bad trades, and help you get into the big moves just as they’re starting,” Nison said.

According to Nison, the best way to use candlesticks is as the final confirmation to buy or sell. In other words, use technical or fundamental analysis to determine what to buy or sell, and confirm with candlesticks. Keep in mind that candlesticks measure the mood of the market, stock, or option, but do not give price targets.

How to use candlesticks

There are many creative ways to use candlesticks. “Let’s say you have a group of 20 stocks that are fundamentally undervalued,” Nison said. “Why not buy the stock that has a bullish candlestick? Candlesticks do not replace what you are using now, but they complement it. The right hand is helping the left hand.”

The candlestick has two main components, the real body and shadows. The real body is the rectangular portion of the candlestick, and displays the range between the opening price of the stock and its closing price. The shadows are the thin lines that jut out above or below the real body. They reflect the highs and lows of the day.

The key to unlocking the mystery of candlesticks is to understand the relationship between the open and close. “If the close is higher than the open,” Nison said, “then the real body will be white (or green). If the close is lower than the open, then the real body will be black (or red).” This is good for any time frame: five minutes, daily, or weekly.

A tall white real body means the bulls are in charge during that session. A tall black real body means the bears are in charge. One glance at a candlestick chart will immediately tell you who’s winning the battle. Read more: Candlestick charting techniques explained.

The ‘Doji’ and other patterns

One of the most popular candlestick patterns is the “doji,” which can tell you when the market is tired and losing strength. The doji is characterized by small thin lines and an equal opening and closing price. In other words, it has no real body. The cross that is formed means there is indecision between the bears and bulls. “If I see a doji,” Nison says, “I’d be nervous about buying, which can help avoid a loss. Knowing what not to do is as important as knowing what to do.”

Another common candlestick pattern is the “bearish engulfing pattern.” This is when the “black real body wraps around the white real body,” Nison said. “This means the bears are overtaking the bulls.”

When you see this pattern, it’s likely there will be a reversal, but always confirm with Western indicators before making the trade.

To avoid getting hurt by false signals, use protective stops. “If there is a bullish engulfing pattern (where a white real body wraps around a black real body),” Nison said, “you should put a stop under the pattern. Candlesticks, like any form of technical analysis, are never 100%.”

Unlike traditional indicators such as moving averages, candlesticks can give early signals.

After learning about candlesticks, it’s tempting to go out and trade based on candlestick patterns. In fact, you should learn as much as you can about candlesticks before making that first trade.

“Safety comes first,” Nison said. “Candlesticks are a tool, and the best way to use it is by getting the right education.” To continue your candlestick education, you can also visit Nison’s website: www.candlecharts.com .

Michael Sincere is the author of Start Day Trading Now (Adams Media, 2011), All About Market Indicators (McGraw-Hill, 2010), and Understanding Stocks (McGraw-Hill, 2003).

Candlestick Expert Steve Nison

I interviewed candlestick expert Steve Nison for Marketwatch.com. Here are the charts that accompany the article:

Welcome to the wonderful but wacky stock market!

Steve Nilson

 

This is an excellent illustration of the candlestick:

Anatomy of Candlestick Line

 

Study the real body to see who is in control, bulls or bears:

Who's in Control

Why traders like the doji:

Doji

 

In addition to what Nison said in the article, he made the following points:

1. “As long as you have an open, high, low, and close, you can use candlestick strategies. Many traders use candlesticks as part of daytrading, but many use them for longer term strategies. I use candlesticks with Western technicals in my own retirement portfolio. I work with many institutional firms who use fundamentals but use the timing of candlesticks to know when to enter or not. No matter what market your readers use, and no matter what time frame, they can harness the power of candlesticks.”

2. “With the increased popularity of candlesticks, there are more misconceptions. For example, we strongly educate traders not to look at candlesticks in isolation. Using candlesticks in isolation is like ‘leaning a ladder against the clouds.’ If you have a wonderful signal, it could be a poor risk-reward investment. Use candlesticks with Western technical indicators. Candlesticks are the final confirmation whether you will do the trade or not.”

3. “To avoid losing money, the quote I like from Warren Buffett is: Rule 1: Don’t lose money. Rule 2. Don’t forget Rule One. It’s not how much you make, but how much you keep that is important.”

4. “It’s not only recognizing the candlestick signal, but learning what to do about it. That’s where most investors and traders make mistakes. For example, you could have the doji that you ignore, where others I would pay attention to. Or you could have a bullish candlestick pattern but the technical indicator shows there is resistance. The risk-reward is too high, so you don’t do the trade.”

5. “An ounce of emotion is worth a pound of facts. There is nothing more irrational than human emotion.”

6. “Candlesticks give you the signal before moving averages. Moving averages are lagging indicators while candlesticks tell you what is happening right now. Readers will find that candlesticks give you the signs of potential turns well before moving averages. That is the real power of candlesticks and why so many investors and traders use them. What’s nice about candlesticks is they help you pick out the potential top or bottom in a rocky environment, especially the support and resistance.”

7. “Learn the doji signal first because it is the easiest.”

8. “To continue your free candlestick education, consider my free bi-weekly video investing and trading newsletter. All contact information is kept strictly confidential. For details go to: http://www.candlecharts.com/free-education.”