The Weekly Trader

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

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.”

The following is an interview I had with Capital Wave Forecast editor and former hedge fund manager Shah Gilani:

Q: What are the chances for a true crash?

Gilani: A potential for a crash always looms out there. Unless the Fed comes to the rescue, we could get what didn’t happen last year. Last year, a crash was staved off because of the QE2 announcements. Ironically, the market was down 256 points almost to the day last year. We’ll have to see if the Fed comes to the rescue this year. Unfortunately, we never know which card the Fed is playing. It’s like a game of Three-card Monte.

Q: What would happen if the Fed intervenes?

Gilani: The markets could take off if that happens. People might be thinking: I missed last year. It could be like hearing a starter pistol, and the train is the Fed with a handful of cash. So people would jump back in, and we could see a big pop in the market. If you’ve got the backing of the Fed, you jump in with both feet.

The market has gone up because of the monetary stimulus since February 2009. Where did that stimulus go? It didn’t go to building infrastructure. It was used to bail out the banks. The Fed gave the money to the banks so they could rebuild their balance sheets. The Fed wanted the banks to get healthy again. And where did all that short term money go? To the stock market! And to buying commodities. The Fed engineered a stock market recovery. The idea was to create confidence and improve investor sentiment.

Q: Is there a downside to QE3?

Gilani: The downside is if the Fed threw a party and no one came. The negative is if it doesn’t work.

Q: What strategies should you use?

Gilani: First, you should be nimble. Read economic data. Everyday it comes out, read it. Be quick on the trigger and get out. If the Fed makes a move, get out of that train and switch gears.

If you’re an investor, you have to be defensive. There is always time to make money and to get back in. It’s now a stock picker’s market. I want to be in stocks that have plenty of cash flow, has global reach, and supports a nice, fat dividend. I’m not looking for high flyers but stability and preservation of capital.

Q: What else should you buy?

Gilani: If you have money, apply it to strong, international companies with good dividend yields. I like Merck, Rathion, and Microsoft.

Q: Are you nervous about September and October?

Gilani: Always! Especially this September and October. If the Fed doesn’t come in soon, I’d be concerned if the economy doesn’t show better numbers, and if the global markets slow down and pull back.