Fundamental reasons to trade

Do I only trade BOTs? No, but it is the only pattern I'm concerned with. Sometimes I trade for fundamental reasons. I never buy an individual stock for fundamental reasons but I do buy ETFs. Fundamental reasons I take into concideration are QE, inflation and government debt. I have a position in DXJ and YCS due to the massive government debt and new debt issuance in Japan.

I also consider the time decay in leveraged ETFs. This together with the fact that emerging markets over time perform bettern than mature markets and that markets in the long term generally trend higher makes we want to have a short position in the inversed and leveraged emerging market ETF EDZ. It is also good that the ETF is broad since global recessions are rare and generally short.

With this said fundamental trades should still be timed by BOT like patterns. Leveraged ETFs displays them regularly. It is best to be patient and look for a good entry. It's a common saying that fundamantals always looks the best at the top and I believe it to at least close to the truth. Fundamental reasons alone is not enough to enter a long position if the chart already looks toppy or vice verca enter a short position.

BOT in CoStar Group

CSGP looks toppy:


Although not as smooth as it ideally cold be on the short term:




Overall I think it is worth a small bet.

Current volatile phases in Leveraged ETFs

Leveraged ETFs are prone to BOT behavior. They often have periods of stability and then periods of volatility. Usually there are several spikes in these periods of volatility. Finding short term tops during the volatile periods can be very rewarding. Here's a few ETFs that are in volatile phases right now:

YINN





NUGT







DGLD





UCO






Another one to keep track of is JPNS (Direxion Daily Japan Bear 3X ETF) due to recent sharp falls in the Nikkei. This ETF hasnt been around long enough to have a chart with spikes but would probably look interesting if it had.

Finding the blow off top pattern

I believe the blow off top is the most reliable pattern of all stock chart patterns. The difficulty is at identifying it correctly. The details of doing this will be presented in a number of small lectures later on (because I'm on vacation and don't have access to my laptop where I've written it down). So for now lets focus on actually finding charts with this pattern at all. I have not yet found a screening tool that can filter out blow off top (BOT) patterns and nothing else. The BOT is also a relatively rare pattern, at least when it is close to ideal. Previously I relied on 52 week high filters but that did not produce very good result. Now I check the site All time high stocks and use their filter. It is still not close to perfect because it shows all time high stocks regerdless of pattern but there is a long term chart displayed for every stock where it is easy to see if the stock has a BOT. Maybe in the future I will write my own screener for this pattern.

It should be noted that all time high stocks actually are bullish if they do not display a BOT, that is why it is so important to find ideal BOT patterns.

Besides this screener I check most leveraged ETFs concistently. These ETFs ,because of their leveraged nature, have a high tendency for BOTs. The BOTs found in leveraged ETFs are in general more short term than in individual stocks but the reliability is just as good.

The blow off top in Gilead Sciences

GILD has a top with what I call an overshoot. It backs down before making a final (presumably) attempt higher.



The overshoots upper bound should be limited by the trendline from the blow off top:






Yesterday it touched that trendline and bounced back.

This is a good level to enter or add on to a short position.

The blow off top in Tyler Technologies

I intend to publish my theory of trading blow off tops (aka bubbles) in a number of small lessons. But before I get started with that I'm going to jump right in with a current chart where this pattern is happening right now.




(Due to traveling these screenshots are not edited)

The above chart is close to ideal because it is 1, Exponential and 2, Smooth (Not many jagged areas that can act as resistance.) The ticker symbol is TYL. But let's look closer at recent action:






Yesterday had high valume and a large price swing. (As can happen on tops) Three days ago the latest trendline got broken.Yesterday the trendline was reached from below. That means (in technical analysis theory) that the trendline that was giving support is now acting as resistance.

The idealness of the long term blow off pattern, breakdown of the latest trendline and the touching of the resistance line makes this stock a high probablity short opportunity. High probability trades should be played aggressively.