Contents Series Title Page Copyright Dedication Foreword Acknowledgments Introduction Part I: Trend Theory Chapter 1: Redefining Trend Chapter 2: Classical Trend Model OBJECTIVE OF THE MODEL INPUTS MODEL DEFINITION RULES FOR THE MODEL APPLYING THE MODEL SUMMARY Chapter 3: Neoclassical Trend Model OBJECTIVE OF THE MODEL INPUTS MODEL DEFINITION RULES FOR THE MODEL SUMMARY Chapter 4: Determining Trends FUNDAMENTALS FOR THE LONG TERM SWING POINT LOGIC IDENTIFYING AND LABELING TRENDS SUMMARY Chapter 5: Qualifying Trends USING SWING POINT TESTS TREND CONTINUATION AND TRANSITIONS RETEST AND REGENERATE SUMMARY Part II: Application of Trend Theory Chapter 6: Preparing to Trade OVERVIEW OF TRADING STRATEGIES RISK VERSUS REWARD TIME FRAMES SUMMARY Chapter 7: Entering and Exiting Trades SUPPORT AND RESISTANCE PRICE ZONES, NOT LINES DEFINING ENTRY AND EXIT POINTS A TRADING EXAMPLE: COMBINING TECHNICAL EVENTS SUMMARY Chapter 8: Reversals and Price Projections PRICE REVERSALS PRICE PROJECTIONS SUMMARY Chapter 9: Time Frames TIME FRAME ANALYSIS TIME FRAME INTEGRATION ESTABLISHING A TRADING BIAS TRADE TREND MATRIX SUMMARY Chapter 10: Markets, Sectors, and the Trading Cube GENERAL MARKET MARKET SECTORS THE TRADING CUBE SUMMARY Chapter 11: Trading Qualified Trends EXAMPLE OF A QUALIFIED TREND ENTERING A TRADE EXPLOITING THE TREND EXITING THE TRADE FLIPPING TRADING POSITIONS CONCLUDING THOUGHTS Notes INTRODUCTION CHAPTER 1: REDEFINING TREND CHAPTER 2: CLASSICAL TREND MODEL CHAPTER 3: NEOCLASSICAL TREND MODEL CHAPTER 4: DETERMINING TRENDS CHAPTER 5: QUALIFYING TRENDS CHAPTER 6: PREPARING TO TRADE CHAPTER 7: ENTERING AND EXITING TRADES CHAPTER 8: REVERSALS AND PRICE PROJECTIONS CHAPTER 9: TIME FRAMES CHAPTER 10: MARKETS, SECTORS, AND THE TRADING CUBE CHAPTER 11: TRADING QUALIFIED TRENDS Glossary of Key Terms About the Author Index Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding The Wiley Trading series features books by traders who have survived the market’s ever-changing temperament and have prospered—some by reinventing systems, others by getting back to basics Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future For a list of available titles, visit our Web site at www.WileyFinance.com Copyright © 2011 by L.A Little All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 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and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762–2974, outside the United States at (317) 572–3993 or fax (317) 572–4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data Little, L.A Trend qualification and trading: techniques to identify the best trends to trade / L.A Little p cm.—(Wiley trading series) Includes bibliographical references and index ISBN 978–0–470–88966–4 (cloth); ISBN 978–1–118–05657–8 (ebk); ISBN 978–1–118–05658–5 (ebk); ISBN 978–1–118–05658–5 (ebk) Stock price forecasting I Title HG4637.L58 2011 332.63′222—dc22 2010049530 locking in gains scaling support and resistance time frame integration Exxon Mobil Corporation F Fade traders Fibonacci ratios Financial Select Sector SPDR ETF-Intermediate Term (XLF-IT) Financial Select Sector SPDR ETF-Long Term (XLF-LT) Financial Select Sector SPDR ETF-LT (XLF-LT) fixed time frames Flash Crash Flipping trading positions Follow-on buying Fundamental traders G Gann, W D Gap anchor bars Gartley, H M General market General trend Google H Hamilton, William P Head and shoulders pattern High-volume anchor bars High volume reversals nature of volume off the bottom volume off the top Horizontal channels Horizontal support and resistance I Identically priced swing points Inputs: classical trend model neoclassical trend model Insider information Intel Corporation Interactive Brokers Group, Inc intermediate-term time frame ideal Trade Trend Matrix setup integrating Investools.com iShares Barclays 20-Year Treasury Bond Fund ETF (TLT) iShares Dow Jones US Home Construction ETF (ITB) iShares Dow Jones US Real Estate ETF (IYR) Island gap J Jones, Edward Jouflas, Leslie K Kemet Corporation Keynes, John Maynard L Labeling: swing points trends Lagging indicators Large stock operators Long run, trend determination Long-term investors Long-term time frame ideal Trade Trend Matrix setup integrating M Magee, John Magnets See Price magnets Mark-down phase Market sectors Mark-up phase Measuring gap Microsoft Corporation Minor trends Models: nature of trading Momentum Monsanto Company Monsanto Corporation Moving average convergence divergence (MACD) Moving averages Multiple trends (movements), classical trend model N National Association of Securities Dealers Automated Quotation System (NASDAQ) Neoclassical trend model ambivalent trends classical trend model versus confirmed trends inputs model definition objective rules suspect trends swing points time frames volume News, impact on prices New York Stock Exchange (NYSE) Noble Corporation Noise O O’Brien, Tom O’Neil, William J Over-and-under reversal pattern P Panic sell-offs Paying up PEG ratios Pesavento, Larry Ponzi schemes Potential swing points Powershares QQQQ Trust Series Price magnets high-volume high magnet high-volume low magnet Price projections AB = CD pattern implications of scale trading magnets Price reversals bear bullish defined high volume Trading Cube reversal configurations trading isolated signals versus combination of signals two-bar Price-to-earnings ratio (PE) Price zones Primary time frame Primary trends Profit margins Program trading systems Projections See Price projections PSPH (potential swing point high) PSPL (potential swing point low) Q Qualified trends entering trades example of R Rally Randgold Corporation Rectangle pattern Red flags Relative strength Replacing suspect trend Research in Motion, Ltd Reset Resistance angular support for defined determining downtrend gaps and high-volume anchor bar horizontal identifying Resistance zones Retest and regenerate sequence accumulation phase backing and filling distribution phase failure mark-down phase market logic of ebb and flow mark-up phase multiple tests on single bar replacing suspect trends subsequent test of newly created swing point suspect bullish reaffirmation area suspect swing point break Retrace Return on assets (ROA) Reversals See Price reversals Reward-to-risk Rhea, Robert Risk versus reward Rubicon Mineral Rural/Metro Corporation Russell 2000 S Scale trading Scaling Secondary time frame Secondary trends Securities and Exchange Commission (SEC) Short-term time frame ideal Trade Trend Matrix setup integrating Sideways trend ambivalent confirmed continuation creating creation without swing point test horizontal price in defining in long-term time frame suspect transitions Signals, trading isolated versus combination of signals Slope SPDR AMEX Financial Select Index (XLF) SPDR S&P 500 ETF (SPY) SPDR S&P 500 ETF-Intermediate Term (SPY-IT) SPDR S&P 500 ETF-LT (SPY-LT) SPDR S&P 500 ETF-Short Term (SPY-ST) SPH (actualized swing point high) SPL (actualized swing point low) Sprint Corporation Stacked swing points Standardized time frames Support angular support for defined determining gaps and high-volume anchor bar horizontal identifying reality versus Support zones Suspect trend bearish bullish defined replacing sideways Swing point(s) actual anchor bars and breakouts cluster formations identically priced identifying information contained in in intermediate-term time frame labeling nature of potential retest and regenerate sequence stacked testing in trend determination unidirectional validity across time frames Swing point high (SPH) Swing point low (SPL) Swing traders T Technical analysis Technical Analysis of Stock Trends} (Edwards and Magee) Technical traders Time frame integration intermediate-term time frame long-term time frame nature of short-term time frame three time frames trading bias Time frames choosing classical trend model duration effect of time in trading effect of trading floors fixed integrating (see time frame integration) nature of neoclassical trend model single versus multiple standardized sufficient number of bars time frame analysis Trade Trend Matrix trading bias trend determination varying bar widths TLT (iShares Barclays 20-Year Treasury Bond Fund ETF) Trade Trend Matrix ideal setups useful states Trading bias: defined establishing risk portion in time frame integration Trading Cube Trading Cube Apple, Inc example configurations current trend state divergences generic example interpreting Microsoft example reversal configurations strongly trending bull market trading bias trading ranges Trading floor: defined effect on time frame Trading models Trading plan Trading strategies entering trades entry and exit points exiting trades for qualified trends retrace/reset versus breakout retrace versus momentum scale trading strength/weakness indicators time frame in trader types use in trading Trading systems program trend-based Ttransitions: bearish trend bullish trend rules for transitioning between trends sideways trend Trend(s): bearish (see Bearish trend) bullish (see Bullish trend) changes in as cyclical smorgasbord defining determining (see Trend determination) in field of technical analysis importance of as primary technical tool of traders trend creation versus trend qualification true underlying Trend-based trading systems Trend determination fundamentals for long term identifying trends labeling trends swing point logic Trend direction Trend exploitation ebb and flow in locking in gains Trending higher Trend lines Trend qualification classical trend model neoclassical trend model sideways trend swing point tests trend continuation and transitions trend creation versus Trend theory application (see Application of trend theory) classical model equality/quality of trends neoclassical model trend determination trend qualification True trend “Turtle Trading” system Two-bar reversals defined over-and-under reversal pattern under-and-over reversal pattern with volume expansion U Under-and-over reversal pattern Underlying trend Unidirectional price points United Natural Gas Fund Uptrend (bull market) classical trend model research on uptrend lines Uptrending channels V Visa Volume: anchor bar confirmed bullish trend high volume reversals magnets neoclassical trend model two-bar reversals with volume expansion W Wal-Mart Stores Washouts Wells Fargo Wells Fargo-Intermediate Term (WFC-IT) Wells Fargo-Long Term (WFC-LT) Western Refining, Inc Wide-price-spread anchor bars X XLK Technology SPDR ETF Z Zone: channel price resistance support