About Diversification Strategy & Sector Rotation

One well-known principle of risk management in investing that we often heard is:
“Don’t put all eggs in one basket”.

What it means is that in order to reduce risk, we should be well diversified in our investment by holding different stocks from different kinds of industries for our portfolio.

However, the question here would be, is holding different stocks from just any kind of different industries good enough to lower your investment risk or to produce satisfactory returns?

Peter Navarro in his book When the Market Moves, Will You Be Ready? offered a diversification strategy in relation to sector rotation as follow:

Traditional investor is taught that a well-diversified portfolio
includes stocks from many different at all times. In contrast, the savvy macrowave investor focuses on just a few sectors at any one time.

To the savvy macrowave investor, the traditional investor's
strategy of broad "sector allocation" is merely a recipe for very mediocre returns. This is because the traditional investor is always holding, at anyone
time, numerous weak sectors that are underperforming.

In contrast, the savvy macrowave investor looks for strong sectors to buy in an up market and weak sectors to short in a down market. That means holding only a few of best-performing sectors at a time.
Moreover, the savvy macrowave investor regularly changes sectors as the stock market moves through the
patterns of sec­tor rotation …

So, when you’re thinking to diversify your portfolio, you may want to take note of the above principle. This emphasizes the importance of understanding sector rotation.

If you’re interested to learn more about sector rotation, you can check out my previous post.

How to get some information about Sector Rotation?

The following links provide great articles on how to get info about Sector Rotation:

* Where To Get Sector Rotation by Simply Option Trading.

* Drilling Down on Sectors by Vix And More.

* Industry Strength and Weakness by Afraid To Trade.

* How To Find Strong Stocks by Afraid To Trade.

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BEARISH PENNANT PATTERN – Part 2: Important Characteristics

Go back to Part 1: Bearish Pennant Formation.

Important Characteristics of Bearish Pennant Pattern:

Shape of Bearish Pennant:
1) Flagpole:
For Bearish Pennant pattern to be more reliable, there should be a very sharp / steep price decrease (almost vertical, and may contain gaps) on heavy volume that makes the “Flagpole” part of the pattern.
Without a steep price decrease, the pattern might be less reliable and riskier.
2) Pennant:
A Pennant part of the pattern is formed when the price movement is contained within two converging lines, representing a brief consolidation after the sharp decline.
This consolidation forms a small symmetric triangle (pennant).
The slope of the Pennant is usually neutral.

Volume:
Volume should be heavy during the formation of the Flagpole part, then decreasing during the formation of the Pennant part, and the volume should spike when the price break down through the support of the ascending lower line of the Pennant.
High volume during the breakout increases the chances of continuation of the preceding trend.
Without a volume spike on the breakout, the pattern might be less reliable.

During the formation of the Pennant, if the volume remains constant or was even increasing, then the reliability of this pattern would be doubtful and might signal a trend reversal instead.

Duration:
The duration of the pattern depends on the price fluctuation during consolidation.
The greater the fluctuation, the longer a pattern will take to form.

On a daily chart, this pattern might take about 1 to 12 weeks to develop.
Ideally, this pattern should form between 1 and 4 weeks.

When the duration is between 4 and 12 weeks, the pattern might carry more risk. After 4 weeks, interest in the stock might have decreased and make it unlikely to continue in a strong downtrend.

When the duration is more than 12 weeks, it would be classified as a Symmetric Triangle pattern.

Breakout Direction:
For Bearish Pennant pattern, the breakout should happen to the downside (i.e. breakout through the ascending lower line).
However, in some rare cases, the price might break against the previous trend, and create a reverse of trend. This reversal pattern may be signaled during the Pennant formation by a significant increase in volume, instead of decreasing.

Potential Price Target:
1) Compute the height of the Flagpole.
The height of the Flagpole is the distance from the start (highest point) of the sharp price decrease to the end (lowest point) of the decrease. (See picture in Part 1).
2) Calculate the potential price target:
Subtract the result from the top the Pennant to get the Potential Price Target.

Return to Breakout Level:
After the breakout occurs, the price may sometimes return to breakout level for an immediate test of this resistance level. (Remember, the previous support level has now become resistance level).
However, if the price closes above this resistance level, the pattern could be considered invalid.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Posts:
* A Chance to Learn from World Class Trading Experts For FREE You Should Not Miss
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

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BEARISH PENNANT PATTERN – Part 1: Formation

Like Bearish Flag pattern, Bearish Pennant is a short term bearish continuation pattern that occurs during a downtrend, indicating a pause / small consolidation before continuing its downward moves.
This pattern normally appears following a sharp price decrease on high volume.

The Formation of Bearish Pennant Pattern





Bearish Pennant pattern is usually preceded by a very steep (almost vertical) decrease in price on heavy volume. This steep price decrease makes the “Flagpole” of the pattern.
The sharp decline in price may occur due to negative market sentiments toward unfavorable events / developments, such as negative earning surprises, downward guidance, fraud / court cases, etc.

After the sharp decrease, the price movement is then contained within two converging lines (wide in the beginning and narrowing as the pattern develops), forming a small symmetric triangle / “Pennant” shape, on decreasing volume.
The slope of the Pennant is usually neutral.
This pennant represents a brief pause / consolidation in the midst of a downtrend before resuming its downward movement.

The completion of the pattern occurs when prices break to the downside through the support level (i.e. lower ascending line) of the Pennant with a spike in volume. This would mark the resumption of the original downtrend.

The Psychology Behind Bearish Pennant Pattern
A Bearish Pennant pattern takes place because prices seldom decline sharply in a straight line for an extended period. Hence, during a sharp price movement, prices will typically take brief pause periods to "catch their breath" before continuing their move.

During the 1st stage of the Bearish Pennant pattern (Flagpole part), as a result of negative market reactions toward some unfavorable events / developments (e.g. negative earnings surprises, downward guidance, etc.), prices keep on dropping sharply as nervous sellers and new short sellers who were caught-up in the euphoria at that moment, are willing to sell at even lower prices.

As the prices drop, some early sellers who have sold short the stock at higher levels would begin to cover their short position. In addition, some investors might also start bargain-hunting. At this point, the 2nd stage of the Bearish Pennant pattern begins (i.e. the Pennant part).
At first, most of the stocks bought by the early sellers were easily absorbed by nervous new sellers, since the news and market sentiments are still very negative. Nevertheless, as time passes, the selling pressures subside and prices begin to consolidate on a decreasing volume.

After some time, new negative news come out. As a result, the price begin to collapse again and break out through the lower line of the Pennant with a surge in volume, as new sellers now overwhelm those bargain hunting.
In the following days, there might be some more unfavorable news / comments or less optimistic earnings forecast coming, leading the prices to drop even lower.

To be continued to Part 2: Important Characteristics of Bearish Flag pattern.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Posts:
* Learning Candlestick Charts
* Understanding Implied Volatility (IV)
* Option Greeks

Read More

BULLISH PENNANT PATTERN – Part 2: Important Characteristics

Go back to Part 1: Bullish Pennant Formation.

Important Characteristics of Bullish Pennant Pattern

Shape of Bullish Pennant:
1) Flagpole:
For Bullish Pennant pattern to be more reliable, there should be a very sharp / steep price increase (almost vertical, and may contain gaps) on heavy volume that makes the “Flagpole” part of the pattern.
Without a steep price increase, the pattern might be less reliable and riskier.
2) Pennant:
A Pennant part of the pattern is formed when the price movement is contained within two converging lines (i.e. decreasing upper line and rising lower line), representing a brief consolidation after the sharp increase.
This consolidation forms a small symmetric triangle (Pennant).
The slope of the Pennant is usually neutral.

Volume:
Volume should be heavy during the formation of the Flagpole part, then decreasing during the formation of the Pennant part, and the volume should spike when the price break out through the resistance of the decreasing upper line of the Pennant.
High volume during the breakout increases the chances of continuation of the preceding trend.
Without a volume spike on the breakout, the pattern might be less reliable.

During the formation of the Pennant, if the volume remains constant or was even increasing, then the reliability of this pattern would be doubtful and might signal a trend reversal instead.

Duration:
The duration of the pattern depends on the price fluctuation during consolidation.
The greater the fluctuation, the longer a pattern will take to form.

On a daily chart, this pattern might take about 1 to 12 weeks to develop.
Ideally, this pattern should form between 1 and 4 weeks.

When the duration is between 4 and 12 weeks, the pattern might carry more risk. After 4 weeks, interest in the stock might have decreased and make it unlikely to continue in a strong uptrend.

When the duration is more than 12 weeks, this pattern would be classified as a Symmetric Triangle pattern.

Breakout Direction:
For Bullish Pennant, the breakout should happen to the upside (i.e. breakout through the declining upper line).

However, in some rare cases, the price might break against the previous trend, and create a reverse of trend. This reversal pattern may be signaled during the Pennant formation by a significant increase in volume, instead of decreasing.

Potential Price Target:
1) Compute the height of the Flagpole.
The height of the Flagpole is the distance from the start (lowest point) of the sharp price increase to the end (highest point) of the increase. (See picture in Part 1).
2) Calculate the potential price target:
Add the result to the bottom the Pennant to get the Potential Price Target.

Return to Breakout Level:
After the breakout occurs, the price may sometimes return to breakout level for an immediate test of this support level. (Remember, the previous resistance level has now become support level).
However, if the price closes below this support level, the pattern could be considered invalid.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Posts:
* Learn Technical Analysis from LINDA RASCHKE for FREE
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Read More

BULLISH PENNANT PATTERN – Part 1: Formation

Like Bullish Flag pattern, Bullish Pennant is also a short term bullish continuation pattern that occurs during an uptrend, indicating a pause / small consolidation before continuing the uptrend.
This pattern normally appears following a sharp price increase on high volume.

The Formation of Bullish Pennant






Bullish Pennant pattern is usually preceded by a very steep (almost vertical) increase in price on heavy volume. This steep price increase makes the “Flagpole” of the pattern.
The sharp rise in price may occur due to positive market sentiments toward favorable events / developments, such as positive earnings surprises, new product launch, etc.

After the sharp increase, the price movement is then contained within two converging lines (wide in the beginning and narrowing as the pattern develops), forming a small symmetric triangle or “Pennant” shape, on decreasing volume.
The slope of the Pennant is usually neutral.
This pennant represents a brief pause / consolidation in the midst of an uptrend before resuming its upward movement.

The completion of the pattern occurs when prices break out to the upside through the resistance level (i.e. descending upper line) of the Pennant with a spike in volume. This would mark the resumption of the original uptrend.

The Psychology Behind The Bullish Pennant Pattern
A Bullish Pennant pattern takes place because prices seldom move higher in a straight line for an extended period. During a sharp price movement, prices will typically take brief pause periods to "catch their breath" before continuing their move.

During the 1st stage of the Bullish Pennant pattern (Flagpole part), as a result of positive market reactions toward some favorable events (e.g. positive earnings surprises, upward guidance, new product launch, etc.), prices keep on soaring sharply as new buyers, who were caught-up in the euphoria at that moment, are willing to buy at even higher prices.

As the prices rises, some early buyers who have bought the stock at lower levels would begin to sell to take profits. At this point, the 2nd stage of the Bullish Pennant pattern begins (i.e. the Pennant part).
At first, most of the stocks sold by the early buyers are easily absorbed, since the news and market sentiments are still very positive. Nevertheless, as time passes, buying pressures subside and the prices start to consolidate on contracting volume.

After some time, a new positive development comes out. As a result, the price begins to move higher and break out through the upper descending line of the Pennant with a surge in volume, as new buyers now overwhelm those taking profits.
In the following days, there might be more positive news and/or “buy” recommendations coming, leading the prices to lead to escalate even higher.

Continue to Part 2: Important Characteristics of Bullish Pennant pattern.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Posts:
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Read More

I’m Back!

Hi everybody,
Although it’s a bit late, I would still like to wish you:
A VERY HAPPY NEW YEAR 2008!

I also want to thank all my valuable readers for your supports and encouragements all this while.

I just came back from a holiday and fell sick after that. Hence, I was not able to check my blog and emails.
My apologies that I still cannot catch up to response to your comments.
Hope I can manage to publish some articles and response to your comments soon.

In the meantime, take care and have a good day!

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