All The Kings Horses

April 10, 2002

Articles

Volume 4

KING’S WATCH

King’s Watch Steve Nison Interview: Light from the East

All The King’s Horses by KingCAMBO

Options with Options: The Covered Call The Quiver: e-Waves Part 3 POS.X Index

In fact, if you look at what Livermore himself said, he warned about staying away from situations just like the one we’re in now:

Trading Earnings

Join us live in our Trader Forum. www.kingcambo.com Technical Analysis Workshops: Steve Nison’s Favorite Candle

Market Structures

A

nd all the King’s men – could not get Jesse Livermore interested in this market again. We would not be able to raise his ghost, his memory, his relatives, or any of his kindred spirits. Spring 2002, is so boring his ghost would likely see more opportunity and action (selling time share units in Pascal County, Florida) than fun and trading on Wall Street.

“In a narrow market [...] there is no sense in trying to anticipate what the next big movement is going to be - up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction.” - from REMINISCENCES OF A STOCK OPERATOR

In the first issue of this magazine, I spoke a bit about time cycles – W. D. Gann’s “Cycle of 60”. Gann, who was a contemporary of Livermore’s, felt that was the most important of all time cycles, though he never seems to have said straight out why or where he got it from. In his writings, he meant the cycle of 60 years is FIRST in importance. What he said got me to wondering, though: Could there be an interpretation of the Cycle of 60 that has more

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TRENDTIMES immediacy and usefulness to short-term traders? Could the “cycle” of 60 be broken down into days instead of years? Could it even be broken down into minutes? As it happens, two years ago, before I had these particular flights of fancy, I sat down with my team of crack coders and created KingCAMBO’s Flux Capacitor in an attempt to try to predict market movements in TIME, based on Fibonacci numerical sequences. Let me stress from the start, that this pursuit was for FUN first, not to make any scientific claims. On the other hand, I have been following this thing for two years now and as whacked as it sounds, 92% of the time it really works. What I actually did when I first invented the Flux Capacitor was quite similar to the basics of Gann’s cycle theories. Since then, I’ve taken advantage of some of Gann’s thinking and done some fine-tuning of the Flux Capacitor. Follow my thinking here. Gann felt, for whatever reasons, that the number 60 fit into a scheme of what he called “natural law.” And whoever created the hour (60 minutes), the minute (60 seconds), longitude and latitude (also measured in terms of minutes and seconds of 60 units), and perhaps even the 360 degrees in a circle (6 x 60) must have thought the same thing. So what can we do with this fact? First, let’s take the cycle of 60 and divide it into meaningful components the way Gann himself might have done: • • • • • • •

45 30 22.5 15 11.25 7.5 3.75

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TRENDTIMES Now let’s add those same numbers to 60: • • • • • • •

63.75 67.50 71.25 75 82.50 90 105

Now that we have these numbers, how can we use them for trading? This is easy. We find the lowest market-structure low (MSL) or the highest market-structure high (MSH) in recent trading and we mark that as our reference point. This is where the acclaimed FLUX CAPACITOR comes in. Let me dazzle you with sheer genius here. Let’s take the time and place of a significant market structure:

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TRENDTIMES

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TRENDTIMES OK. Let’s bring up a daily chart for the COMPX and pick a starting date. There is a major top, a MSH on May 22, 2001. Let’s not nit pick on the exact minute for now. But check it out: 1. 2. 3.

Check your charts, when did that first down wave end? May 30th. Who knew? The Flux Capacitor knew. The wave of selling that preceded last September’s major low started on August 2nd 2001. Look at the Flux. Where did last year’s all time low come in? 9/21/01.

This is eerie, is it not? The FLUX CAPACITOR, which is simply a tool for measuring NATURAL time cycles, had this date. It had no way of knowing that a bunch of maniacs seeking a free pass to Allah and 77 virgins would strap themselves in to flying missiles and take down the heart of our financial district. Was the September 21st low a result of the tragedy or was it a basis of natural law?

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TRENDTIMES Let’s look at another read:

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TRENDTIMES So far, the high on the Dow for this current year is March 19, 2002. Those that are faithful followers of the good KingCAMBO know full well about my mighty bear campaign that exploded in my face. You also know the reason why I had March 19th as my target date don’t you? It was 180 days – Cycle Of 60 – from the September low, that’s why. All right, use the above Flux Capacitor projections to try to find CIT (change in trend) dates for the balance of this year. One such date happens to be tomorrow, April 11th. Note how the last date makes a complete year? Why is that? It is 360 degrees of a full circle isn’t it? So, it’s a complete cycle. Paid members to our trading forum can access our Flux Capacitor in three ways: · For Swing Trade calculations: https://www.kingcambo.com/members/flux/swingflux.vi · For intra- day Gann based pivot calculations: https://www.kingcambo.com/members/flux/masterflux.vi · For intra-day calculations based purely on Fibonacci time pivots our original Flux Capacitor is still up at: https://www.kingcambo.com/members/flux/ One final thought on the Swing trade CIT dates. I do not promise exact hits all that often. However, you will find many instances where you get a CIT within one or two, or at most three days from a projection. My feeling on this: it is because time waits on no man, and it certainly doesn’t wait for markets to open or excuse markets for taking holidays and weekends off. Time follows its own natural law. Do you remember this scene from the film “Back to the Future”? Doc: “The problem is, you never know where lightning is going to strike twice.” McFly: “Oh yeah? Well we do now...” With that in mind, I sat down with my team of massive coders and created KingCAMBO’s Flux Capacitor to try and solve the space-time continuum question.

KingCAMBO’s Trend Times © 2002 King Cambo Ltd. All rights reserved.

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TRENDTIMES Play with the Flux Capacitor and have some fun with it. It works on stocks, options, and futures – as well as the indexes. Pick what you believe to be a major date and just put that in as the reference date. The Flux Capacitor will do the rest for you. We have a great issue for you this time, with good stuff from Steve Nison and our regular staff contributors. So let’s get on with it now as I leave you with “A Light From The East”… by our resident favorite trader – Romeman. Happy Trading! KingCAMBO

KingCAMBO’s Trend Times © 2002 King Cambo Ltd. All rights reserved.

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Articles

Light from the East:

King’s Watch

Discovering Japanese Candlesticks

Steve Nison Interview: Light from the East

by Romeman

Options with Options: The Covered Call The Quiver: e-Waves Part 3

He spoke with Kingcambo.com’s Romeman, who opened the interview with a question from the room’s MC, Steady Eddie.

POS.X Index Trading Earnings

Eddie says he wants to retire and he would like to know where the market is going to close in 30 days.

Join us live in our Trader Forum. www.kingcambo.com Technical Analysis Workshops: Steve Nison’s Favorite Candle

Market Structures

Steve Nison, the leading authority on applying Japanese candlestick charting to Western markets, is the author of the books Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East and Beyond Candlesticks: New Japanese Charting Techniques Revealed.

Well, there’s very few hard and fast rules in technical analysis, but there’s one absolute 100 percent rule: There’s excellent support at zero. I think the Nasdaq made a major low in September. There was a confluence of technical signals back in September that signaled a major bottom. I think there were five or six indicators that I had at the highs at around 5150 and I had about four or five indicators – a combination of Western technicals and candle charts – at the lows in September. These include a hammer and an island bottom, a successful test of the 1998 lows. So I think we did put a major bottom in place. I’m going to be doing an article for Trend Times, called “Steve’s Favorite Candle Charting Signal.” My favorite

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TRENDTIMES signal is a window and the window is the same as a gap in Western technicals. The Japanese will call it a falling window if the market gaps down or a rising window if the market gaps up. We had a few falling windows in the Nasdaq composite. And what happens is the falling window becomes resistance. So, for example, we had a falling window between March 19 and 20. That’s where the rally stopped during the week of March 22, right at the window’s resistance and that’s where the rally stopped early this week [the week of April 1]. We had a strong rally on April 1. The high of the rally was 1865 and the window’s resistance was in a zone between 1873 and 1861. The fact we have a falling window did turn the short term, intermediate term, down. But I would expect the mid- and late February lows to hold. So short term, a little negative. Longer term, I think we’re not going to see the September lows again. Let’s go back to the beginning. You’re credited with introduced Japanese candlesticks to the West. How did a guy from New York learn about this method of charting? I used to work at E. F. Hutton before they were taken over by Shearson. There was a broker working down the hall from me in New York. She was a Japanese broker. She would have these chart books sent to her from Japan, because she would talk about the Nikkei stocks for Japanese clients. We talked from time to time and I saw the chart books and that piqued my curiosity. This was a charting method that was around for over 100 years and nobody knew about it in the West! [In] their equivalent of our Wall Street Journal, their charts are in candles and I couldn’t believe there was nothing in the West about this. There was a little book I came across in English, maybe had about 10 pages on it, but that was about it. I found a translator, an American who understood technical analysis, who was going to Japan and I told him, “Buy every book you could on candle charts!” And I had about a dozen books translated. When I started to do the research, I could understand why nothing else was done about it here, because it took about two or three years of research! I was lucky, because the job I had at that time was working in a research department. They saw the value-added

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TRENDTIMES of this for trading, so they didn’t mind I did this. I did it mainly at home, but I continued the research at work.

I gather that candlesticks were first used by the Japanese rice merchants. Why do you think they leaned toward this particularly pictorial method of charting, as opposed to Western bar charts or point-and-figure charts? The Japanese traded rice futures contracts back in the late 1600s, early 1700s. And they really didn’t have candle charts then. Candle charts really started when the Japanese stock market started in 1870.

OK. Back then they were dealing with the psychology of the market. I had a book translated and in the Japanese book it says, “When all are bullish, there is cause for concern.” And that book was written in 1755! So before America was even a nation, the Japanese were trading with contrary opinion. The evolution was: They had highs and lows of the day. Then they had high, low, and close. They used to use bar charts up until 1870. And then from bar charts, they got open, high, low, and close, and then they took the step that we didn’t do in the West. They made a bar chart into a candle chart. The data are the same. It’s just the way you draw it. It was a slow evolution, but the candles really started when the Japanese stock market started in the 1870s.

What kind of reception did you get when you brought candlestick charting to the US? Were there particular challenges in getting people interested in this method of following the markets? Yes and no. I was working at Merrill Lynch’s futures research area. And futures traders are usually the first to grab onto new technical analysis tools. This was in the late ’80s and the stock market then isn’t like it is now. Stocks trade like futures now! Back then, all the volatility was in the futures market. So the futures traders were very eager to grab onto new techniques and they grabbed onto this very quickly.

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TRENDTIMES You get early turning signals with the candle charts – very, very fast reversal signals – in one, two, or three sessions. On a bar chart, you may have to wait weeks and weeks. When I started to focus more on the equities markets in the early ’90s, that was a little bit more of a challenge. But the candle charts use the same data as the bar charts. Yes, you can use a candle chart, but you can also use Western techniques. You can have moving averages in the candle chart. You can have trend lines in the candle chart. Essentially anything you can do with a bar chart you can do with a candle chart, so you’re not giving up anything. The major advantage is you’re going to get reversal signals. So I approached it from that angle and that’s the way I strongly encourage traders to look at it. Use what they’re very comfortable with now and just add the extra dimension of candle charts to their analysis. When I did it that way – “use this in addition to,” rather than “use this instead of” – it really took off. When the stock market became much more volatile and got day traders involved, swing traders, and when all the on-line charting services started to have candle charts, the interest just geometrically, exponentially exploded.

In the second part of this exclusive Trend Times interview, Steve Nison will reveal the unique value of candlestick charting, how institutions use candlesticks, the single-best time-period chart to look at to get the major trend in stocks, and what is the best indicator to use to confirm candlestick patterns. Don’t miss it!

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Articles King’s Watch Steve Nison Interview: Light from the East

Why You Have Options with Options or Options 101: The Covered Call

Options with Options: The Covered Call

by Sally8

The Quiver: e-Waves Part 3

“You will hear people tell you that most options (about 80%) expire worthless, but what they don’t tell you is that there are ways to make money by letting an option expire worthless! Many people I know use options strategies for income only and they want those options to expire worthless. ”

POS.X Index Trading Earnings

Join us live in our Trader Forum. www.kingcambo.com Technical Analysis Workshops: Steve Nison’s Favorite Candle

Market Structures

In my first article I said:

I use this strategy almost every month in my trading account to get extra income. I use it in my IRA to get income and lower the price of the common that I am holding. What this does is reduce the cost basis of the common. I waited until now to write about this strategy because this is the season that usually makes me the most money in covered calls. The Stock Traders Almanac shows us that since 1950 the months of May through October are the worst performing months of the year. In 51 years, the Dow gained 1299.03 points in these months, and 9235.81 points from November though April. I want the stocks I own and write to stay the same or go down some, because I want to keep the stock, so these are the best months for this play. If I lose the stock, it is no big deal. I still made money.

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TRENDTIMES Writing a Covered Call option reduces your stock investing risk because the option premium received, in effect, lowers the cost of the stock. The Chicago Board Options Exchange says that, “Covered Call writing is not only the safest of all option strategies, it is also safer than purchasing and selling stocks only.” Covered call writing provides you with a way to compound your money each month rather than each year. Many covered call writers earn between 10% and 25% on their money each month, providing a good income stream on their investments. Instead of buying a stock and waiting for it to move, investors are able to buy a stock and take their profit “up front,” and actually profit should the stock price not move or even fall slightly. When writing a covered call, you buy a stock and agree to sell it to someone at a given price (strike price). In return for this agreement, you are paid a premium (option price). Writing a covered call consists of selling an option call while simultaneously owning the underlying stock. You buy a stock and then agree to sell the stock to someone else at a specified price (strike price). In return for this, you receive a premium (option price). For example, you purchase 100 shares of XYZ for $50 a share and then sell a $50 call for $4 per share or a total of $400. This concept may seem confusing right now, but read on and it will become clearer. Here’s the math: 100 shares are purchased for $50 per share, for a total of $5,000. You then sell the option and receive back $400 (100 shares x $4 per share). The immediate return on this investment is 8.0% (Return = Income/Investment). Covered Call — A covered call consists of the sale of a call while simultaneously owning the underlying stock. A call is an option contract which gives the owner the right, but not the obligation, to buy the agreed upon number of contracts (blocks of 100 shares) at a strike price, on or before the strike date. Buy-Write — It involves buying the stock and selling the call in the same transaction. It is a conservative approach, as some people like to buy a stock and hope it goes up so they can get a better deal on the selling of the call. However, that process would backfire if the stock drops, and then the seller gets less money on the premium.

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TRENDTIMES The Basic Concept The basic concept of covered call writing is very simple. However, for the person who is unfamiliar with this process it can be confusing at first. A friend told me about writing covered calls and for a couple of days I was skeptical. The light bulb went off, and I have been using this technique ever since. WRITING A COVERED CALL CONSISTS OF THE SALE OF AN OPTION CALL WHILE SIMULTANEOUSLY OWNING THE UNDERLYING STOCK. Below is a chart showing different covered call transactions: EXAMPLE STOCK

STOCK PRICE

OPTION PRICE

STRIKE PRICE

RETURN IF NOT CALLED

RETURN IF CALLED

1 - ABC

25

2.5

25

10.00%

10.00%

2 - DEF

24

2

25

8.33%

12.50%

3 - GHI

26

3

25

11.54%

7.69%

4 - JKL

50

4

50

8.00%

8.00%

5 - MNO

48

3.5

50

7.29%

11.46%

6 - PQR

52

6

50

11.54%

7.69%

In Example 1, we bought 100 shares of ABC for $25 a share, for a total of $2500 (100 x $25). Then, we sold the $25 call for $2.50 a share, for a total of $250 (100 x $2.50). If the stock price stays at $25 or higher, we will be “called out” and make $250. IMPORTANT: Selling a call means that you have agreed to sell someone

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TRENDTIMES YOUR shares of a stock at a particular price. If the stock price on the strike date (third Friday of each month) is greater than the strike price, you will sell your shares. This whole process is handled automatically by both full service and online brokers. In Example 2, we bought 100 shares of DEF for $24 a share, for a total of $2400 (100 x $24). Then, we sold the $25 call for $2 a share, for a total of $200 (100 x $2). If the stock price stays at $25 or higher, we will be “called out” and make $300. Note here that we sold the stock for more than what we paid for it, therefore we made an extra $100 on the transaction ((25-24) x 100). In Example 3, we bought 100 shares of GHI for $26 a share, for a total of $2600 (100 x $26). Then, we sold the $25 call for $3 a share, for a total of $300 (100 x $3). If the stock price stays at $25 or higher, we will be “called out.” Note here that we sold the stock for less than what we paid for it, therefore we “lose” $100 on the sale of the stock and profit $200 on the overall transaction. In Example 4, we bought 100 shares of JKL for $50 a share for a total of $5000 (100 x $50). Then, we sold the $50 call for $4 a share, for a total of $400 (100 x $4). If the stock price stays at $50 or higher, we will be “called out” and make $400. In Example 5, we bought 100 shares of MNO for $48 a share, for a total of $4800 (100 x $48). Then, we sold the $50 call for $3.5 a share, for a total of $350 (100 x $3.5). If the stock price stays at $50 or higher, we will be “called out” and make $550. Note here that we sold the stock for more than what we paid for it, therefore we made an extra $200 on the transaction ((50-48) x 100). In Example 6, we bought 100 shares of PQR for $52 a share, for a total of $5200 (100 x $52). Then, we sold the $50 call for $6 a share, for a total of $600 (100 x $6). If the stock price stays at $50 or higher, we will be “called out.” Note here that we sold the stock for less than what we paid for it, therefore we “lose” $200 on the sale of the stock and profit $400 on the overall transaction. If you are still confused, keep reading.

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TRENDTIMES The Simplified Covered Call Process Here is the step by step covered call writing process: 1.

Select the stock on which you want to write a covered call. Buy the stock. If you already own it, you are halfway there.

2.

Sell the option contract. You must have permission from your broker to sell options, but approval is almost certainly guaranteed.

3.

Wait until the expiration date. Nothing else is required from you at this point. On the expiration date you may or may not be called out. Generally, if the closing price of the stock on the strike date is higher than the strike price, you will be called out. If the stock price is lower than the strike price you will not be called out, and you will still own the stock.

The Benefits of Covered Call Writing

1.

Provides a way for you to make money on a stock even if the stock falls or does not move. Since you are receiving a premium “up front,” the stock price can fall slightly and you can still profit. Always look at the chart to see if your stock is a good candidate.

2.

Provides cash flow. You can see an income stream from your trans actions since the premium is “paid” into your account almost instantly.

3.

Provides you a way to potentially compound your money each month rather than each year. Compounding your money is where the real gains take place.

4.

Provides you a way to lower the price you have already paid for stock. If you have purchased a stock and watched the price fall, you can write a covered call and receive a premium. This premium has essentially lowered the price you have paid for the stock.

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TRENDTIMES The secret to successful covered call writing is to invest in good stocks and focus on consistency, not on high returns. You will see high returns when your investments grow over a period of time. That’s why I use this strategy in my IRA.

The Risks of Covered Call Writing

1.

Stock price falls sharply. If the underlying stock falls sharply, you may end up with an unprofitable transaction. One technique to minimize this risk is buying your calls back.

2.

Investing “short term.” Investing in the market with short-term transactions involves risk. The market has a tendency to be choppy in the short-term. You should only invest in stock that you believe in and are willing to hold for the long-term.

3.

Stock price moves up sharply. Although this is not really a risk of losing money, it is a risk of giving up “potential” profit. For example, you may buy a stock for $20, sell a $20 call for $2, and make 10% on your money. However, before the strike date, the stock moves up to $30. You have now profited 10%, but had you just held the stock you would have profited 50%. This recently happened to me with PG. I initially bought the stock at $75 and sold an $80 call. PG started soaring and one look at the chart told me to buy my calls back. I then entered long calls and profited nicely.

Calculating Your Return Many people get confused when it comes to calculating gains and losses on their covered call plays. Calculating your “true” return is important not just for investment purposes, but also for tax purposes. The following should help explain how to calculate returns on simple, as well as complex transactions. To calculate the gain or loss, the formula is FINAL SALE PRICE – BASIS. “Final Sale Price” is the price at which you actually sold the stock. Basis is your breakeven point or your actual cost of the stock. Basis is important for calculations, as transac-

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TRENDTIMES tions become more complicated. Here Are Some Simple Transaction Examples: At The Money 1. 2. 3.

You purchased 1000 shares of ABC Corp. at $50 a share and sold a $50 call for $5. Your basis (breakeven point) is now $45 ($50-$5). You are called out on the strike day and sell the stock for $50. Your gain is $5 ($50-$45) per share or $5000 ($5x1000 shares). Your percentage gain on the transaction is 10% ($5,000/$50,000).

In The Money

1. 2. 3.

You purchased 1000 shares of ABC Corp. at $52 a share and sold a $50 call for $6. Your basis (breakeven point) is now $46 ($52-$6). You are called out on the strike day and sell the stock for $50. Your gain is $4 ($50-$46) per share or $4000 ($4x1000 shares). Your percentage gain on the transaction is 7.69% ($4,000/$52,000).

Out Of The Money

1. 2. 3.

You purchased 1000 shares of ABC Corp. at $48 a share and sold a $50 call for $4. Your basis (breakeven point) is now $44 ($48-$4). You are called out on the strike day and sell the stock for $50. Your gain is $6 ($50-$44) per share or $6000 ($6x1000 shares). Your percentage gain on the transaction is 12.5% ($6,000/$48,000).

How To Get Started Writing Covered Calls In order to get started, you need to obtain permission from your broker. Since writing a covered call means that you already own the stock you have agreed to sell, everyone should be able to obtain permission from their broker to trade covered

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TRENDTIMES calls. I have not heard of anyone having problems getting permission, so if you do run into any problems, I suggest that you look for a different broker or make sure that your broker has a clear understanding of what you are trying to do. After you receive permission you are ready to begin.

KingCAMBO’s Trend Times © 2002 King Cambo Ltd. All rights reserved.

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Speaking The King’s English by Holly

KingCAMBO’s Trend Times © 2002 King Cambo Ltd. All rights reserved.

Articles

The Quiver:

King’s Watch

eWaves, part 3 of 3: Increasing the Odds

Steve Nison Interview: Light from the East

by Enthios

Options with Options: The Covered Call The Quiver: e-Waves Part 3 POS.X Index Trading Earnings

In the previous installments of this series, you have learned how to use Fibonacci to gauge retracements between the inflection points of a MSH and MSL. You have also learned how to use Fibonacci to predict W3 and W5 expansions from the Seed (W1). You know that the most important Fibonacci ratios are 0.236, 0.382, 0.5, 0.682, 1.382, 1.618, 2.618 and 4.236. You know that a retracement of 0.50 is “ideal”, that the target ratio of 1.682 is “often” the best target for a W3, and that 2.618 is “often” the target for a W5. If you use these ratios consistently, you can trade profitably. But you can increase the odds greatly by combining methods. The premise is simple: Use multiple methods to come up with multiple targets. Then see where these targets coincide, to create a combined target zone.

Join us live in our Trader Forum. www.kingcambo.com Technical Analysis Workshops: Steve Nison’s Favorite Candle

Market Structures

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TRENDTIMES Figure 1: Combining Methods

Figure 1 shows how I combine the retracement pivots from a previous range, with the Seed Wave targets of the next, to fine-tune the exit target of W3. I know that prices will pivot at the 0.382, 0.50 and 0.618 retracements from a prior trading range. The pivots shown along line (d) are calculated from the prior major trading range (a)-(b). After the Seed is created, I then draw the Fibonacci expansion targets off that original seed. The downward targets from the seed wave (b)-(c) are shown along line (e). The combined target zone is where the pivots and targets from these two sets of lines coincide, in this example between the 50% pivot and the 161.8% target. The reason this works, relates back to Fibonacci’s discovery about the growth pat-

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TRENDTIMES terns of rabbits. The mathematics of the sequence – 1,2,3,5,8, etc. - explain the growth rate in the general terms. But the market is dynamic; it is made up of not just one set of waves moving in a given direction, but of sets within sets. Any up wave series could be contained within a larger down wave series, which in turn could be contained within an even larger up wave series. And so it makes sense to incorporate all the “information” from those other, greater wave impulses, to whatever extent possible. Short of producing a complicated algorithm that can automatically take all these into consideration and spit out the ideal end target, this method of combining pivots and targets works well. Now I’ll show you two more methods of measuring recent wave impulses. You can be add these to further strengthen the probability of the combined target zone.

W2 Expansions So far, expansion targets have been drawn from the first seed, W1. But why not measure the strength of the retracement from that first wave, in effect the “seed retracement?” The retracement from the seed is always W2. Figure 2, a 13minute chart of the Nasdaq Futures Emini contract, shows the Fibonacci targets drawn upward, using the distance from the top of W1 (b) to the bottom of W2 (c), as the basis. This is the calculation: ((b-c) * (1.382, 1.618, 2.618)) + c Figure 3 shows the same chart, but adding the W1 seed targets that you are familiar with from Parts I and II of this series. To review, the targets are calculated as: ((b-a) * (1.382, 1.618, 2.618)) + a Again, I highlight the zone where the combined targets coincide, to create a combined target zone.

KingCAMBO’s Trend Times © 2002 King Cambo Ltd. All rights reserved.

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TRENDTIMES Figure 2: W2 Expansion targets

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TRENDTIMES Figure 3: W1 and W2 combined targets

Quantum Expansions Don’t worry, these are not related to quantum physics. Quantum expansions simply measure the size of a wave, and apply that to the size of the next wave in the same direction. Imagining taking a ruler to measure the size of one wave, then shifting that ruler over to the beginning of the next wave and “cloning” that onto the second wave. So if the size of W1, from trough to peak, is 100, then the size of W3 (the next wave in the same direction) would also be 100, as measured from its trough to its peak. Figure 4 shows an actual, though idealized, example of a quantum expansion. The amplitude of W1 is 1516 – 1463 = 53 points. Add 53 to the start of the next wave,

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TRENDTIMES 1489 + 53 = 1542. In this case, we missed by one point. The quantum size of W3 was 0.98 x the quantum size of W1. Figure 4: Simple quantum expansion

The quantum of W3 is not usually 100% of the quantum of W1, though 1.0 is a good starting point for a multiplier. W3 might be smaller, or it might be larger, than W1. So we can use the Fibonacci ratios and multipliers of 0.618. 1.0, 1.382 and 1.682 to measure the quantum of W3 against the quantum of W1, then compare that to any of our other methods – W1 expansions, W2 expansions, or previous range retracements – to come up with a combined target zone. Figure 5 shows the same chart as Figure 4, using both W1 targets and quantum expansions to create a combined target zone. At the risk of sounding repetitive, let’s

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TRENDTIMES look at the two formulas for a W1 expansion and a quantum expansion, so that you can clearly see the difference between the two. W1 expansion:

((b-a) * (1.382, 1.618, 2.618)) + c

Quantum expansion:

((b-a) * (0.382, 0.5, 1.0, 1.618, 2.618)) + c

Figure 5: W1 and Quantum expansion as combined targets

Figures 3 and 5 show combinations of only two methods. You now know four methods. I use a different color for each of my Fibonacci tools, so that I can have all four methods up on one chart to get an even clearer idea of where the Fibonacci target zones are. Unfortunately, the clearer the idea, the more your chart gets filled with lines! You can experiment to see which combination of Fibonacci targets and

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TRENDTIMES ratios work best for you, and when to use which ratios. For example, when W2 is very small or only one or two candles in length, perhaps the W2 expansion method will not yield a good combination. Likewise, if prices are not retracing from a previous major trading range, then it would not make much sense to look at prior range retracements and one of your combinations.

Multiple Quantum Expansions Just as I used one quantum expansion from W1 to help determine the target zone for W3, I also use the two consecutive quantum expansions of W1 and W3 to help determine the target of W5. Figure 6 continues from Figure 5. It shows the quantum expansions from W1 and W3, and well as the original W1 target – three methods altogether – to pinpoint a combined target zone for W5. Figure 6: Multiple quantum expansions with W1 targets for combined targets zones

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TRENDTIMES

The five waves in this eWave pattern are labeled (1), (2), (3), (4), and (5), respectively. The first set of lines (a) shows the targets from the W1 seed. As always, 1.618 (161.8%) is the notional W3 target and 2.618 (261.8%) is the notional W5 target. I say “notional” because that can change, depending upon the other combinations that we use. The second set of lines (b) represents the W3 quantum expansion taken from W1. The third set of lines (c) represents the W5 quantum expansion taken from W3. From these three sets of lines, there are two combined target zones (d) and (e). Zone (d) is made up 161.8% of the quantum expansion from W1, and 100% of the quantum expansion from W3. As you can see, on Tuesday prices gapped right up into zone (d) then moved slightly higher, proving that even the Fibonacci growth patterns are not an exact science in the chaos of the market. Or are they? The Last Laugh You may ask why combined target zone (e) in Figure 6 was not reached. It appears to be the “stronger” of the two zones, because the 261.8% target from the W1 seed, and the 161.8% target from the W1 quantum expansion, overlap exactly; they are a perfect match. If Fibonacci were an exact science, wouldn’t prices have reached that point? Figure 7 shows the last laugh:

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TRENDTIMES Figure 7: Another look at the combined target zone

Summary There are four types of Fibonacci retracements and targets that can be used to create expansions targets for waves. These are prior range retracements, W1 (seed) expansions, W2 expansions, and quantum expansions. These can be combined to create target zones to increase the probability of targeting trade exits. The four types are shown in Table 1 and refer to Figure 8:

KingCAMBO’s Trend Times © 2002 King Cambo Ltd. All rights reserved.

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TRENDTIMES Figure 8: Creating combined target zones for potential wave DE

Table 1: Summary of methods to target potential wave DE

Name

Description

Formula

Retracement pivots

Using retracements from prior major range AB

W1 Expansion targets

Using growth targets projected from the seed wave BC (W1)

W2 Expansion targets

Using growth targets projected from the retracement wave CD (W2)

((C-D) * (1.382, 1.618, 2.618, 4.236)) + D

Quantum expansion targets

Taking the quantum size of the seed wave BC (W1) and applying that to potential wave DE (W3)

((C-B)*(0.382, 0.618, 1.0, 1.382, 1.618, 2.618, 4.236)) + D

((A-B) * (0.286, 0.382, 0.618)) + B

Special

((C-B) * (1.382, 1.618, 2.618, 4.236))+ B

KingCAMBO’s Trend Times © 2002 King Cambo Ltd. All rights reserved.

Page 32

Articles

The POS.X 50

King’s Watch

Why are we still looking at these losers?

Steve Nison Interview: Light from the East

by Huka

Options with Options: The Covered Call The Quiver: e-Waves Part 3 POS.X Index Trading Earnings

Join us live in our Trader Forum. www.kingcambo.com Technical Analysis Workshops: Steve Nison’s Favorite Candle

Market Structures

The POS.X is a study in extremes. The index is made up of fifty former high flyers. Even in their heyday, some did not operate under a fundamentally sound business model. Some really were and are great companies. For a time, ALL of these stocks magically traded for hundreds of dollars per share. It was a high time in the city as bosses rode scooters around the office, brought the dog to work, offered employee wine tasting lunches and massage sessions after those stressful days. Then came the correction. (I used to be one of those bosses! Those were the days…) Now these little stinkers, not ready to be flushed away, trade at a mere fraction of their former prices. For this reason we disrespectfully, but, with good intentions, call them Pieces Of S***. They offer moneymaking opportunities and occasionally sophomoric entertainment at KingCambo.com.

A series of neutral economic indicators and war in the Middle East has put the brakes on the markets. As we look at the overall market since March 15, The NASD closed at 1,770.03 posting a loss of 98.27 points or 5.2%. The DOW is down 335.69 with a close of 10,271.64, for a loss of 3.7%. The NQ’s closed at 1389 with a 25-point or 7.6% loss. Posting even larger drops, the POS.X got whacked with only five of the fifty stocks posting gains. The index found itself sucked into the downdraft of the markets with a loss of 36.44 points, down 8.79%. The junkers at the bottom of the POS pile are: FMKT down $3.94, WEBM with a loss of $3.57 and RHAT down $2.05. So here we are again, back to and below support levels. Forty-six of the fifty stocks in the index have suffered losses in the past two weeks with WEBM taking the largest loss. ASKJ was the top gainer in the index with a

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TRENDTIMES gain of $0.99 or 72%. There is something inherently troubling about seeing the likes of ASKJ as the top gainer in any index. I guess that’s the nature of being a POS. Looking at my POS highlights from the last Trend Times article, we had fair results: NTAP had a high of $19.19 a gain of $1.00, but did not hit my target of $24.00. UCOMA is currently testing the first target, T-3 at $6.03 for a gain of $0.79. CSCO tested the first target its 200 daily moving average with a high of $17.93, a gain of $1.00. It did not even come close to my $22.00 target. Always take the cookies when the plate is passed. ELON also tested the first target price of 19.50 for a gain of $0.79 but, like the others, it fell short of my top target price of $22.00. With uncertainty in the Middle East, the markets may continue to be hampered. I don’t see any catalyst for a rise, but I’m looking forward to another roll of the bones…With this in mind, here are some stocks I am looking at: CSCO could go either way. It has broken below its 20 daily moving average of 16.68 and has support of $14.50. If CSCO breaks above $17.00, it has a shot at $18.00. ELON (I still like this one) is holding well above the 200 daily moving aver age of $18.35. The first resistance level is $19.50 with a price target of $22.00. JNPR has $10.75 support. $12.14 its 20dma is the first target and $14.75 is my top target. PMCS has daily support of 15.25 with a first target its 20dma of $16.51 and an extreme target of $19.60. WEBM has $15.90 support. $17.80 is the first target then $18.90.

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TRENDTIMES The following are the only POS.X stocks that are above their 200 daily moving averages: ASKJ DCLK ELON FMKT KANA NTAP PALM UCOMA There are several POS’s that are below their 20 and 200 daily moving averages and are approaching support levels. Here are a few of the most attractive stocks worth keeping an eye on: AMCC $7.50 CSCO $16.50 EXTR $8.85 GLW $6.50 JNPR $11.00 ONIS $5.30 PMCS $16.00 RHAT $5.00 SUNW $8.40 TMWD $3.10 Always remember, POS.X stocks move according to the rules, i.e., Moving Averages, Fibonacci Levels, gaps, etc. They can go down faster than they go up. So why are we still looking at these losers? The POS.X stocks move with greater percent changes than their less odorous brethren. Thus they give traders an amusing way to make money.

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Kin gCAMBO’ KingCAMBO’ gCAMBO’ss

TRENDTIMES POS.X Index Highs are rounded, (pennies don’t matter in thin air)

Ticker

3yr. Low

3yr. High

2/4/02

2/25/02

3/15/02

4/6/02

Change

1. AKAM

2.5

345

4

3.27

4.06

3.59

-0.47

2. AMCC

6.01

110

10.1

8.62

9.17

7.8

-1.37

3. AMZN

5.51

113

12.5

13.73

14.03

13.5

-0.53

4. ARBA

1.42

183

4.3

3.78

4.65

4.14

-0.51

5. ASKJ

0.92

190

3.14

1.14

1.38

2.37

0.99

6. AVNX

2.7

273

4.16

3.4

4.4

3.5

-0.9

7. CFLO

0.84

182

1.37

1.06

1.09

0.86

-0.23

8. CIEN

7.13

151

10.63

7.93

8.95

8.13

-0.82

9. CMGI

0.6

163

1.53

1.3

1.55

1.28

-0.27

10. CMRC

1.66

138

1.97

1.83

1.82

1.26

-0.56

11. CMTN

0.65

126

1.17

0.95

1.05

0.93

-0.12

12. CMVT

15.03

125

19.66

16.88

13.92

12.51

-1.44

13. CSCO

11.04

82

18.6

15.6

16.54

16.15

-0.39

14. DCLK

5.23

125

10

11.1

12.7

10.95

-1.75

15. DIGL

1.16

150

5.77

5.07

6.25

5.52

-0.73

16. ELON

5.38

113

18.8

16.67

17.9

18.21

0.31

17. EXTR

5.85

129

11.95

8.24

9.26

9.58

0.32

18. FDRY

5.26

212

6.93

6.1

7.27

6.44

-0.83

19. FIBR

1.5

113

3.4

2.85

2.96

2.43

-0.53

20. FMKT

6.25

370

21.62

20.94

24.7

20.76

-3.94

21. GILTF

2

181

4.11

3.95

3.78

2.76

-1.02

22. GLW

6

113

7.1

6.94

7.82

6.79

-1.03

23. HAND

1.13

100

4.6

5.15

5.16

4.03

-1.13

24. ICGE

0.34

212

1.1

0.81

0.85

0.62

-0.23

25. JDSU

4.74

153

6.63

5.38

6.1

5.58

-0.52

KingCAMBO’s Trend Times © 2002 King Cambo Ltd. All rights reserved.

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Kin gCAMBO’ KingCAMBO’ gCAMBO’ss

TRENDTIMES POS.X Index Highs are rounded, (pennies don’t matter in thin air)

Ticker

3yr. Low

3yr. High

2/4/02

2/25/02

3/15/02

4/6/02

Change

26. JNPR

8.9

244

13.94

9.9

11.42

11.42

0

27. KANA

3.5

1,755

17.04

11.78

16.79

14.95

-1.84

28. LBRT

6.37

148

7.8

6.47

6.21

5.43

-0.78

29. LNUX

0.76

320

2.22

1.73

2.15

1.38

-0.77

30. LVLT

1.89

132

2.54

2.45

3.95

3.85

-0.1

31. MUSE

2

108

9.8

8.36

8.49

8.22

-0.27

32. NTAP

1.5

153

12.57

16.7

20.18

18.35

-1.83

33. NUFO

2.1

165

3.36

2.4

3

2.9

-0.1

34. ONIS

3.5

42

5

5.29

6.22

5.66

-0.56

35. OPWV

5.15

208

6.26

5.49

6.88

5.68

-1.2

36. PALM

1.35

165

3.4

2.98

3.07

3.56

0.49

37. PCLN

1.8

165

7.46

4.27

5.05

4.58

-0.47

38. PMCS

9.37

255

21.96

16.55

16.25

16

-0.25

39. RBAK

1.17

98

4.6

3.09

3.72

2.78

-0.94

40. RHAT

2.4

151

8.22

6.15

7.06

5.01

-2.05

41. RIMM

6.84

175

24.3

21.97

27.08

25.64

-1.44

42. RMBS

4.86

127

7

5.51

8.09

7.22

-0.87

43. SCMR

3

200

4.2

3.47

4.09

3.44

-0.65

44. STOR

3.1

154

5

3.33

3.94

3.15

-0.79

45. SUNW

7.5

65

10.17

8.07

9.06

8.71

-0.35

46. TERN

2.36

143

6.32

6.17

7.02

6.8

-0.22

47. TMWD

1.17

136

4.64

3.85

3.75

3.3

-0.45

48. UCOMA

0.5

115

5.23

4.1

5.19

5.98

0.79

49. WEBM

6.13

336

22.1

16.6

19.9

16.33

-3.57

50. YHOO

8.02

250

16.25

14.46

18.74

18.17

-0.57

Total

196.09

10,062

426.52

363.83

414.66

378.22

-36.44

KingCAMBO’s Trend Times © 2002 King Cambo Ltd. All rights reserved.

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Articles

A guide to Trading Earnings

King’s Watch Steve Nison Interview: Light from the East

by SteadyEddie

Let the games begin!!! Options with Options: The Covered Call The Quiver: e-Waves Part 3 POS.X Index Trading Earnings

Join us live in our Trader Forum. www.kingcambo.com Technical Analysis Workshops: Steve Nison’s Favorite Candle

Market Structures

Earnings season is going to be kicking off this week with the likes of YHOO, RMBS, GE, DCLK, MCAF, JNPR and MERQ, just to name a few. For a complete list of all scheduled earnings reports: http://biz.yahoo.com/research/earncal/today.html If you have been on the KingCambo.com site the last couple weeks, you have been hearing me sing my hit song, “who is going to warn tonight.” As you all know, most companies have decided to save the bad news for pre-market, i.e.: PSFT and CHKP. These stocks were smacked down hard on the lower revenue numbers, and rightly so. With the “NEW” accounting rules coming into play, thanks to the Enron disaster, most stocks will have to fess up this time around and actually have to lie less… With pro forma earnings on the way out, companies will have to report what they have and not what they hope to have. This is no easy feat since most of these companies have been lying for years, and telling the truth will be detrimental to the longevity of the stocks life. Here are the guidelines that I follow when trading stocks before/after they report earnings. 1.

NEVER hold a stock into earnings unprotected.

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TRENDTIMES There’s nothing worse for a trader than getting caught in the earnings HALT. To avoid having to use the puke bucket, follow these simple rules: If you are long, make sure you buy a put if you are short make sure you have a protective call. This is called a hedge, playing both sides. This is what the big boys do, and we can do it, too. This is a strategy that can be applied when position trading and swing trading as well. Learn the strategy, and use it. 2.

The revenue number and the forward-looking guidance are what matter. Here is the scenario: Let’s take YHOO for example. YHOO is expected to report two cents per share and revenues of $161 million for the last quarter. If YHOO reports five cents and revenues of $158 million, what happens to YHOO post-market? If you guessed the stock goes down to Chinatown ™, you are right. The revenue numbers are key, and usually are very confusing to figure out at first. The first piece of info you’ll need is what revenue numbers are expected. For more information: http://whispernumber.com/wn_revenues.cfm. You’ll need a premium news service to get the actual numbers in real-time. When the stock reports, I use Dow Jones Professional Investor & Business Wire. Now there is still the conference call that follows the earnings reports. Most conference calls are at 5 pm EST. Using this scenario, YHOO just missed revenue numbers and the stock is headed down. On the conference call, however, the CEO or whoever is talking uses key words for bullishness: raising guidance, internet advertising is coming back, and so on. Bearish terms: lack of visibility, Internet advertising is not coming back anytime soon, and so forth. It is always better to listen to the whole call. These guys are sly and always slip something in at the last few minutes of the call. The following day, the analysts/CNBC will have their say - which will also add to the volatility.

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TRENDTIMES This type of uncertainty can be an account maker or an account breaker if you have an unprotected position. This is why when I choose to trade earnings reports, I always have a hedge and stick to just trading the options strangles & straddles. 3.

Sympathy plays and sector trading A sympathy play is a stock that is the same sector as the one that is reporting. Listed below are some sympathy plays stocks that move with: YHOO AOL AMZN OVER CNET

CSCO JNPR BBOX ADPT AETH

QLGC EMLX NTAP BRCD EMC

CHKP ISSX SYMC MCAF SCUR

PSFT SEBL ORCL INTU BOBJ

Those are just a few, you can find other sector plays here: http://biz.yahoo.com/p/technoconameu.html Trading earnings can be either an account maker or an account breaker literally, just ask some of the traders that decided to hold long or short unprotected positions into any one particular earnings report. Keep in mind that you may have to call them at their new job because most of the gamblers are gone. Good trading & always set your stops, SteadyEddie

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Articles King’s Watch Steve Nison Interview: Light from the East Options with Options: The Covered Call

by Steve Nison, CMT President, CANDLECHARTS.COM Steve Nison, CMT, was the very first to introduce candlestick charts to the Western World. He is acknowledged as the leading authority on candlestick charts. Steve is the author of the two internationally acclaimed and best-selling books, Japanese Candlestick Charting Techniques and Beyond Candlesticks. His books have been translated into eight languages.

The Quiver: e-Waves Part 3 POS.X Index

Steve’s work has been highlighted in financial media around the world including the Wall Street Journal, Institutional Investor, Worth Magazine, and Barron’s.

Trading Earnings

Join us live in our Trader Forum. www.kingcambo.com

As a renowned and sought after speaker, Steve has trained professionals from hundreds of financial firms from around the world (including World Bank and the Federal Reserve), on how to apply - and profit from - these methods. Steve is President of Candlecharts.com which provides premier educational products and advisory services. Their client list includes hedge funds, NASDAQ and NYSE market makers and major brokerage firms.

Technical Analysis Workshops: Steve Nison’s Favorite Candle

Market Structures

Steve Nison’s Favorite Candlestick Signal

To help you to fully harness the power of candle charting techniques, Steve Nison will be offering his first ever advanced candle seminar. Details are at www.candlecharts.com. In a few months Steve will also be giving web-based seminars. To be among the first to be alerted when these will be available please send your name, email address and telephone number to [email protected] or call us directly at 732.254.8600 or visit our site at www.candlecharts.com.

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TRENDTIMES Candle Charting Basics What are Candlestick Charts? Candle charts are Japan’s most popular, and oldest, form of technical analysis. They are older than point and figure and bar charts. Amazingly, candlestick charting techniques, used for generations in the Far East, were unknown to the West until I revealed them in my first book Japanese Candlestick Charting Techniques back in 1991 B.C. (Before Candles). So named because the lines look like candles with their wicks, Japanese candlestick charts are Japan’s most popular form of technical analysis. Candle charts are over 100 years old, and, as such, are older than Western bar charts and point and figure charts. Yet, amazingly, these charts were unknown to the Western world until recently. Candle trading techniques have now become one of the most discussed forms of technical analysis around the world. Almost every technical analysis software and real time system now has candle charts. This attests to their popularity and usefulness. The worldwide interest in candle charts continues to expand for many reasons: This article is a basic introduction to candle charting techniques. But even with the primary candle signals discussed, you will discover how candles open avenues of analysis not available anywhere else. My goal here is to provide a sense of the potential of what the candles can offer.

What are the Benefits of Candle Charts? Candle charts are easy to understand: Anyone, from the first-time chartist to the seasoned professional can easily harness the power of candle charts. This is because, as will be shown later, the same data that is required to draw the candlestick chart is the same as that needed for the bar chart (the high, low, open and close). Candlestick charting tools will give you a jump on the competition: Candle charts not only show the trend of the move, as does a bar chart, but, unlike bar charts, candle charts also show the force underpinning the move. In addition, many of the candle signals are given in a few sessions, rather than the weeks often needed for a bar

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TRENDTIMES chart signal. Thus, candle charts will help you enter and exit the market with better timing. Candlestick charting tools will help preserve capital: In this volatile environment capital preservation is just as important as capital accumulation. You will discover that the candles shine in helping you preserve capital since they often send out indications that a new high or low may not be sustained. Candle charting techniques are easily joined with Western charting tools: Because candle charts use the same data as a bar chart it means that any of the technical analyses used with bar charts (such as moving averages, trendlines, retracements, Bollinger Bands, etc.) can be employed with candle charts. However, candle charts can send signals not available with bar charts. If you are a seasoned technician, you will discover how joining Japanese candlesticks with your other technical tools can create a powerful tool for understanding the market’s health.

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TRENDTIMES Constructing the Candlestick Lines Exhibit 1: Candle Lines

The broad part of the candlestick line in Exhibit 1 is called the real body. The real body represents the range between the session’s open and close. If the close of the session is above the open then the real body is white the close of the session is lower than the open. The thin lines above and below the real body are the shadows. These are the session’s price extremes. The shadow above the real body is called the upper shadow and the peak of the upper shadow is the high of the session. The shadow under the real body is the lower shadow and the bottom of the lower shadow is

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TRENDTIMES the session’s low. Candle lines can be drawn for all time frames, from intraday to monthly charts. For example, a 60 minute candle line uses the open, high, low and close of that 60 minute period; for a daily chart it would be the open, high, low and close for the day. On a weekly chart, the candle would be based on Monday’s open, the high and low of the week and Friday’s close.

A small real body (white or black), however, indicates a period in which the bulls and bears are more in a tug of war. Such small real bodies give a warning that the market’s trend may be losing momentum. As the Japanese phrase it, the “market is losing its breath.” Notice that the candles to the right in Exhibit 1 have no real bodies. These are examples of doji (pronounced doe-gee). A doji is a candle in which the opening and close are the same. Doji represent a market that is in balance between the forces of supply and demand. The emergence of a doji in a trending market could be an indication of a market turn. If a doji follows a tall white candle the Japanese would say that this doji is “a symptom of uneasiness at a high price.” For many of you who are already familiar with candle charts, you will know that most of them are reversal signals. Patterns such as hammers, shooting stars, engulfing patterns, and so forth, ususignal that a prior trend is in the process of changing direction. One of my favorite candle patterns, however, is a continuation signal. That means that the trend before the signal should continue after the signal.

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TRENDTIMES Exhibit 2: Rising Window

Exhibit 3: Falling Window

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TRENDTIMES Specifically, the pattern I am referring to is rising and falling windows. The window is the same as a gap in Western technicals. That is, a gap higher is called a rising window (see Exhibit 2) in candle terminology. A falling window (Exhibit 3) is the same as a gap down in Western technicals. While the terms “windows” and “gaps” are synonymous, the Japanese window, however, provides a signal and unique trading technique. Specifically, the Japanese will state “corrections stop at the window.” This means that a rising window (the whole window) should become support on any corrections. And a falling window should become resistance on any rallies. In other words, once the market gaps down, the short-term trend is pointing south. Exhibit 4: NASDAQ

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TRENDTIMES We have a classic example of a falling window in the recent action of the NASDAQ Composite. Observe the falling windows at 1 and 2. These windows became resistance on rally attempts. This chart nicely illustrates the value of candle charts as a tool to preserve capital. While the two tall white candle sessions (shown at the blue arrows) showed that the bulls had control, the window’s resistance was still in force. As such, in spite of the tall white candles, one should be cautious about entering long positions because of the window’s resistance. Indeed, one could consider selling at this window with a stop on a close above the top of the falling window.

CANDLES AND THE OVERALL TECHNICAL PICTURE Remember a basic principle: candle charting techniques are a tool and not a system. Candle charting techniques must be incorporated with other trading guidelines. For example, effective candle charting techniques requires not only an understanding of the candle patterns, but also a policy of using sound, coherent trading strategies and tactics. You should always remember basic strategic principles such as using stops, determining the risk and reward aspects of a trade, observing where a candle pattern is in relation to the overall trend, and monitoring the market’s action after a trade is placed. By understanding and using these trading principles, you will be in a position to most fully enhance the power of the candles. This is only a basic introduction to candle charts. There are many more patterns, concepts and trading techniques that must first be considered. But even with these basic concepts, you can see how the candles open new and unique doors of analysis. I view trading or investing like going into a battle. Trading requires many of the same skills needed to win a battle; there is strategy, skill, psychology, competition, strategic withdrawals, and yes, even luck. In this context, there was a famous 17th century Japanese general named Shingen. Whenever his troops went into combat they carried a banner which read, “mountain, wind, forest, fire.”

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TRENDTIMES By utilizing candle charts as a powerful weapon in your battle of trading, you will know, like General Shingen’s troops knew, when to be: as immovable as a mountain as quick as the wind as patient as the forest and when to invade like a fire

By combining candle charting techniques with your own insights you will have an unbeatable combination! May the candles enlighten your trading!

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STEVE NISON’S

CANDLE Charting Seminar New York Workshop

Workshop schedule:

MAY 25-26, 2002

“Secrets to Becoming a Samurai Trader – Steve Nison’s Most Potent Eastern and Western Trading Weapons.”

Day

Including for the very first time ever: Advanced Candle Charting Techniques. Everyone quotes the Master. Now learn personally from the Master –Steve Nison, the “Father of Candle Charts.” Steve will explain, step-by-step, how to fully exploit the incredible opportunities that candle charts present to today’s markets.

Date & Time: Saturday & Sunday May 25 and 26, 2002: 9am-4:00pm Breakfast and Lunch included Location: The Manhattan Club 200 W. 56th St. at 7th Ave (in midtown Manhattan) Note: To ensure the closest personalized attention and interaction, Day One is limited to only 25 students and Day Two to only 15 students. We expect to close out quickly, so sign up now!

Day

1

The Essentials Starts from the beginning. You will learn everything from the basics of candle chart construction to learning how to use single candle lines and the candle patterns to spot early reversal signals. Steve will also reveal how to combine his favorite candle charting signals with Western technical tools such as moving averages, Bollinger Bands, trend lines and many others.

2

Steve’s first ever Advanced Candlestick Charting workshop! Geared to those who are very knowledgeable about candle charts, or have taken Steve’s full day workshop, or seen his video workshop. In this ground breaking course, Steve presents new and powerful methods (many of which are not in his books) for trading with candle charts with maximum precision and effectiveness.

Kingcambo exclusive bonus: Mention Kingcambo.com & get two months advisory service when you sign up ( a $590 value)! More info: www.candlecharts.com

Articles

technical analysis WORKSHOP

King’s Watch

Market Structure Trading

Steve Nison Interview: Light from the East

by KingCAMBO

Options with Options: The Covered Call

Buy low, sell high. Sell high, buy low. If it’s so easy, then why isn’t everyone doing it?

The Quiver: e-Waves Part 3

In truth, it is pretty easy if you decide to take the guesswork out of it. In order to do this, you have to become adept at pattern recognition.

POS.X Index Trading Earnings

Join us live in our Trader Forum. www.kingcambo.com Technical Analysis Workshops: Steve Nison’s Favorite Candle

Market Structures

Most traders I have known over the past few years have struggled mightily with the concepts of market structure lows, market structure highs, market structure triggers, and market structure failures. I suspect there’s a reason for this: They get so caught up in the mumbo jumbo of the lingo that they fail to grasp the basic principle itself. Think of a market structure as the place in time (regardless of the length of the interval) where a current wave stops and then reverses. Market structures form in every type of instrument and in every type of time frame – in indices, like the Dow and the Nasdaq and the Sox semiconductor index; in stocks, like Juniper and Cisco and Yahoo!; and, for that matter, in the options of these underlying indices and stocks. The same is true with the futures markets and commodities. Wherever candlestick charting exists, market structures form. They also trigger, fail, perfect, or evaporate and re-form.

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TRENDTIMES A current wave of selling will end in a market structure low. From this it follows that a current wave of buying will end in a market structure high.

Finding Bottoms - Market Structure Low (MSL) A market structure low (MSL) formation consists of a three-candlestick pattern called “low, lower low, higher low” – or, as I prefer to say, “bear, bear, bull.” It doesn’t matter if we are talking about a one-minute time frame or a one-month time frame. The rule applies just the same. The following weekly chart of the QQQ is a good example of an MSL. The triple Q is a great stock - perhaps the best there is for trend trading. It lets you trade the ranges of the Nasdaq without having to learn about and to trade futures. Another reason I like the QQQ is that in trading it, I will not be subject to the same kind of violence or volatility that occurs (often without any warning) in the E-mini futures contracts of the Nasdaq or the S&P500 indices.

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TRENDTIMES

In Figure 2.1, notice the last three candles, which form a three-candlestick pattern of low, lower low, and higher low. That’s an MSL or bottom. And that’s all there is to it! For me, it is as plain as day if I think in terms of “bear, bear, bull.”

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TRENDTIMES The MSL Long Trigger OK, now that I have found an MSL or bottom, do I then scream, “Load the boat long”? Maybe, if I have no sense or feeling of the risks involved. But savvy traders know – with whatever charting system they use – that before they decide a real bottom has formed, they want to see a definite long trigger. That sudden surge that looks so exciting now may only be a temporary phenomenon. We want to try to get the real thing, so we wait for an MSL long trigger to form. An MSL long trigger happens when a succeeding candle closes above the high of the three-candlestick MSL pattern. It does not have to be a consecutive candle – and oftentimes it isn’t. But it must be a higher closing candle.

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TRENDTIMES

In Figure 2.2, you see the three-candlestick pattern of the MSL that we looked at in 2.1. At the close of the final candle on this chart, the long position is entered. The trigger formed on a close above the high of the MSL. Let me repeat: The triggering candle does not have to appear immediately after the MSL has formed. There might have been a few small candles in between. What matters is that the candle closes above the MSL itself; then it’s a long trigger.

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TRENDTIMES Finding Tops - Market Structure High (MSH) Now that I have learned about buying low, selling high would be the next good thing to know! As was the case with an MSL, the market structure high (MSL) is a three-candlestick pattern. It is called “high, higher high, lower high” – or as I prefer to say, “bull, bull, bear.”

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TRENDTIMES In Figure 2.3, which is a 60-min. intra-day chart of the QQQ, we see that a threecandlestick pattern of high, higher high, lower high has formed, creating our MSH or top. The MSH Short Trigger The MSH short trigger confirms that it is time to exit a long position – or to open a short position. Remember how the MSL trigger had to close above the MSL to trigger the long? Well now, the MSH trigger has to close below the high of the MSH to trigger the short.

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TRENDTIMES

In Figure 2.4, the MSH three-candlestick pattern forms, and then the short position is entered on the close of the final candle on this chart, which is below the low of the MSH. That’s our trigger! Again, it helps me here to remind myself that triggers do not have to appear immediately after the MSH. There might have been a few or even a dozen small candles in between. What is critical to the trigger, when it comes, is that it closes below the MSH itself.

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TRENDTIMES Now that you know how to spot tops and bottoms – and by the way, I encourage you to take whatever time is necessary to master this charting technique if it’s new to you – wouldn’t you like to see how you can make money trading these triggers as they develop?

Trading On Market Structure Triggers Now that I am more confident about “finding the bottom” as well as acting upon it, how would I actually manage a trade? This is no secondary matter! You will find that, once you are in a trade, serious, cashthreatening questions bombard you relentlessly: “What about a stop loss? Where am I going to exit? How do I find the top?” I want to be clear about this right here: I really hate cash-threatening questions in my life. If they come up, if I have to ask myself these things, it means one thing and one thing only: Someone has my cash and it’s not me. And if I don’t protect my capital on a consistent basis, the day will come when I won’t be trading any more. This raises the importance of stop losses, of exiting a losing trade before it takes a catastrophic toll on your capital. Before I enter any trade, my first rule is to set a stop loss. When trading the MSL long trigger, my first stop loss is the MSL itself. If the trade begins to move against me, my stop-loss exit is going to be an MSL failure. An MSL failure occurs when a candle closes below the low of the MSL pattern.

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TRENDTIMES

Figure 3.1, a chart of the QQQ, the Nasdaq 100 tracking stock, shows the initial boundaries that are set prior to acting on an MSL long trigger.

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TRENDTIMES The Long of It: Trading the MSL Long Trigger Now that we have an idea of where to set our entry and exit points, let’s move on to a trading situation. Imagine that I’m following Check Point Software Technologies (CHKP) during the trading day on a three-minute chart. I spot the formation of an MSL, which is then confirmed by a long trigger. What do I do?

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TRENDTIMES Follow along with me on Figure 3.2 as I review getting into and out of this CHKP trade: 1.

The MSL has formed here at 10:27 AM, at a close of 41.55

2.

MSL failure line is marked at the low of the MSL, which is 41.38

3.

The MSL Long Trigger takes effect at 10:30 AM at a close of 41.70 - above the high of the MSL. I am now in the trade. At this point, I use a new rule: When going long, as each candle closes on an up tick, I raise the initial stop loss to the close of the preceding candle.

4.

10:33 AM candle closes at 42.15; I raise the stop loss to the preceding candle close of 41.70.

5.

10:36 AM candle closes at 42.30; I raise the stop loss to the preceding candle close of 42.15.

6.

10:39 AM candle closes at 42.85; I raise the stop loss to the preceding candle close of 42.30.

7.

The next two candles do not close higher but neither do they hit the current stop loss. This is judgment-call time. I can either lock profits (sell) or tighten my stop loss still higher.

8.

10:48 AM candle closes at 42.97; I raise the stop loss to the preceding candle close of 42.85.

9.

10:51 AM candle closes at 43.05; I raise the stop loss to the preceding candle close of 42.97.

10.

The next candle does not go higher but neither does it go low enough to hit stop. Once again it’s judgment-call time. I can lock profits (sell) or tighten the stop loss higher.

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TRENDTIMES 11.

10:57 AM candle closes at 43.55; I raise the stop loss to the preceding candle close of 42.97.

12.

11:00 AM candle closes at 43.61 on a small real body with long upper and lower shadows; this formation is known as a Spinning Top Doji. I raise the stop loss to the preceding candle close of 43.55, and since Doji candlestick formations often presage a change in direction, I become very alert here.

13.

11:03 AM candle forms a MSH at 43.09 by closing below the previous high candle at 43.61; it also closes below my trailing stop loss of 43.55. I exit the trade here at this close (or if I’m particularly aggressive in preserving my gains, during the interval in which the bear candle was forming). The key moment was the violation of the trailing stop-loss line!

The total time in this trade was 33 minutes, from the 10:30 AM MSL long trigger to the trailing stop-loss exit at 11:03 AM. The profits I could have grabbed on this particular trade would have been roughly between 1.39 and 1.85. That’s not too bad for a 30-minute swing!

The Short of It: Trading the MSH Short Trigger The first rule, and I repeat this because I constantly have to remind myself to do it, is setting a stop loss before I enter the trade. When trading the MSH short trigger, my first stop loss is the MSH itself. If the trade begins to move against me, my stop loss exit is going to be an MSH failure. The MSH fails when a candle closes above the high of the MSH pattern. To understand what I’m talking about, let’s look at another chart of the QQQ.

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TRENDTIMES

Figure 3.3 shows the initial setup prior to an MSH short trigger. Let’s again take a look at a real intra-day situation now, going from entry to exit. This time we’ll be looking at a Qualcomm (QCOM) swing trade on a daily chart. Again – I cannot not stress this enough – the time frame in which I am using these methods does not matter, what matters is the methods themselves. The methods hold whether we’re talking about a one-minute scalp or a one-week swing.

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TRENDTIMES

This happens to be a particularly outstanding example of how things can go wrong when an MSL fails. Remember that once the MSL has formed and once we get our MSL long trigger, we go long with our stop loss set at the failure of that MSL. In Figure 3.5, two previous MSLs had already failed. The fact that there are two is not important. I merely included them on this chart to illustrate the patterns. What is important is the ability to recognize the failure of any MSL.

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TRENDTIMES 1. 2. 3. 4. 5.

The first MSL forms. The second MSL forms. The MSL failure trigger line is established. An aggressive short position is opened following the greater trend. Trailing stop losses are aggressively lowered on every down tick until a new MSL forms.

In this QCOM trade, I would have gone short on the failed MSL at 60.12 and closed at 56.12 or higher, as the hammer candlestick formed an MSL. MSH Failure When a MSH or top fails, what does it mean? It means the greater trend is going higher. So short positions are stopped out and new aggressive longs can be entered.

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TRENDTIMES

In Figure 3.6, a three-minute intra-day chart of Veritas Software (VRTS), I would go long when the bull candle closes above the previous MSH. Since the “top” failed, the greater trend is still long. Just as in an MSL failure, entry is aggressive. Stop losses are raised in the direction of the trend on every up tick. 1.

MSH forms and the failure line is established

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TRENDTIMES 2.

No action is taken anywhere in the boxed area, because the MSH never gets tested.

3.

The MSH fails as this candle closes above the trigger line, which is the high of the now-failed MSH.

4.

Trailing stop losses are raised aggressively on every up tick.

5.

A new MSH forms which closes the trade signal.

The VRTS trade should have been good for between 1.50 and 1.75. It’s just another example of why they coined the old market adage: “The trend is your friend.”

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Reading List The Arms Index (Trin Index): An Introduction to Volume Analysis by Richard Arms Just reprinted. Finally, it’s updated and back in print! Get an in depth look at how volume not time - governs market price changes. Describes the Arms’ short-term trading index (TRIN), a measure of the relative strength of the volume in relation to advancing stocks against that of declines. A true trading gem.

The Encyclopedia of Technical Market Indicators by Robert Colby Most comprehensive description of technical indicators, over 110 fully detailed. Included full mathematical derivation for each along with comparative reviews by the authors to gauge the study’s reliability. Reminiscences of a Stock Operator, Seventy-Fifth Anniversary Edition by Edwin Lefevre This timeless classic has been preserved in a beautiful limited edition. Bound in leather with gold edged pages the small run of 1500 copies is a tribute to the legend of Reminiscences. Each copy is individually numbered. R. N. Elliott’s Masterworks: The Definitive Collection by R.N. Elliot Here is your chance to dive deep into the mind of the genius that created and pioneered the use of the Elliott Wave Principle. This unique collection of works includes the Wave Principle (1938), The Financial World Articles (1939), Selected Essays (1940-41) and Nature’s Law, The Secret Universe (1946) and commentary throughout from Robert Prechter. * Get these books online: http://www.kingcambo.com/bookstore

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KingCAMBO’s Trend Times magazine is published online twice monthly and features a wide variety of concepts, strategies, and thinkings of full time professional traders. This magazine is about traders teaching traders. What you will find here is a wealth of information about expanding your trading skills, as well as new approaches to trading you may not have considered. What you will not find are hot stocks to watch, strong buy recommendations and piker front-running trade recommendations.

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