Dirty Rotten Tricks Of Institutional Traders And How Knowing This Will Help You

Avoid Them
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institutional-traders-and-how-knowing-this-will-help-you-avoid-them

PREDATOR OR PREY?
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Follow institutional traders--here's how

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48953.cfm

August 10, 2005

August 17, 2005

20090627
VRX

CERN

HMSY

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{I} Overview of Financial Analysis -

[A] Technical Analysis:

Overall Trend: The first step is to identify the overall trend.

This can be accomplished with trend lines, moving averages or peak/trough
analysis.
As long as the price remains above its uptrend line, selected moving averages or
previous lows, the trend will be considered bullish

Support: Areas of congestion or previous lows below the current price mark support
levels.
A break below support would be considered bearish.

Resistance: Areas of congestion and previous highs above the current price mark
the resistance levels.
A break above resistance would be considered bullish.

Momentum: Momentum is usually measured with an oscillator such as MACD.

If MACD is above its 9-day EMA (exponential moving average) or positive, then
momentum will be considered bullish, or at least improving

Buying/Selling Pressure: For stocks and indices with volume figures available, an
indicator that uses volume is used to measure buying or selling pressure.
When Chaikin Money Flow (CMF) is above zero, buying pressure is dominant.
Selling pressure is dominant when it (CMF) is below zero
Relative Strength: The price relative is a line formed by dividing the security by
a benchmark.
For stocks it is usually the price of the stock divided by the S&P 500.
The plot of this line over a period of time will tell us if the stock is
outperforming (rising) or
under performing (falling) the major index

Strengths of Technical Analysis:

1. Focus on Price
2. Supply, Demand, and Price Action
In its most basic form, higher prices reflect increased demand and
lower prices reflect increased supply.
3. Support/Resistance
4. Pictorial Price History
5. Assist with Entry Point
Some analysts use fundamental analysis to decide what to buy and technical
analysis to decide when to buy.

Weaknesses of Technical Analysis:

1. Analyst Bias
2. Open to Interpretation
It should be pointed out that technical analysis is more like an art than a
science, somewhat like economics.
Is the cup half-empty or half-full? It is in the eye of the behold.
3. Too Late
4. Always Another Level
5. Trader's Remorse
A 50-day moving average may work great to identify support and resistance for
IBM,
but a 70-day moving average may work better for Yahoo.
Even though many principles of technical analysis are universal, each security
will have its own idiosyncrasi.

[B] What is Fundamental Analysis?

Fundamental analysis is the

examination of the underlying forces that
affect the well being of
the economy,
industry groups, and
companies.

To forecast future stock prices,

fundamental analysis combines
economic,
industry, and
company analysis
to derive a stock's current fair value and forecast future value

General Steps to Fundamental Evaluation

Economic Forecast:
The economy is like the tide and the various industry groups and individual
companies are like boats.
When the economy expands, most industry groups and companies benefit and grow.
When the economy declines, most sectors and companies usually suffer.
Many economists link economic expansion and contraction to the level of
interest rates. Interest rates are seen as a leading indicator for the stock
market as well.
Once a scenario for the overall economy has been developed, an investor can
break down the economy into its various industry group.
Group Selection:
If the prognosis is for an expanding economy, then certain groups are likely to
benefit more than othes.
A growth strategy might involve the purchase of
technology,
biotech,
semiconductor and
cyclical stocks.
A defensive strategy might involve the purchase of
consumer staples,
utilities and
energy-related stocks.
When stocks move, they usually move as groups; there are very few lone guns out
there.
Many times it is more important to be in the right industry than in the right
stock!
Narrow Within the Group:
Company Analysis:
Business Plan
Management
Financial Analysis

Strengths of Fundamental Analysis:

1. Long-term Trends
2. Value Spotting
3. Business Acumen
4. Knowing Who's Who
Weaknesses of Fundamental Analysis:
1. Time Constraints
2. Industry/Company Specific
3. Subjectivity
4. Analyst Bias
5. Definition of Fair Value

[C] Random Walk Theory

The basic random walk premise is that price movements are totally random.
Malkiel maintains that a buy and hold strategy is best and individuals should not
attempt to time (or beat) the market.

"The more creativity you bring to the investment process, the more rewarding it
will be.
The only way to maintain ongoing success, however, is to constantly innovate.
That's much the same in all endeavors.
The only way to continue making money, to continue growing and keeping your profit
margins healthy, is to constantly come up with new ideas."

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{II} How to Analyze Charts -

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rts
[A] What Are Charts?
A price chart is a sequence of prices plotted over a specific time frame.
 In statistical terms, charts are referred to as time series plots
On the chart, the y-axis (vertical axis) represents the price scale and
the x-axis (horizontal axis) represents the time scale.
How to Pick a Time Frame:
How Are Charts Formed?
1. Line Chart - By paying attention to only the close, intraday swings can be
ignored. Line charts are also used when open, high and low data points are not
available.
2. Bar Chart - Perhaps the most popular charting method is the bar chart. The
high, low and close are required to form the price plot for each period of a bar
chart.
The high and low are represented by the top and bottom of the
vertical bar and
the close is the short horizontal line crossing the vertical
bar.
Bar charts can also be displayed using the open, high, low and
close.
The only difference is the addition of the open price, which
is displayed as a short horizontal line extending to the left of the bar.
3. Candlestick Chart - For a candlestick chart, the open, high, low and close
are all required.
Many traders and investors believe that candlestick
charts are easy to read, especially the relationship between the open and the
close.
White (clear) candlesticks form when the close is
higher than the open and
black (solid) candlesticks form when the close is lower
than the open.
The white and black portion formed from the open and
close is called the body (white body or black body).
The lines above and below are called shadows and
represent the high and low.
4. Point & Figure Chart - Point & Figure Charts are based solely on price
movement,
and do not take time into consideration.
There is an x-axis but it does not extend evenly
across the chart.
Point & Figure charts consist of columns of X's and
O's that represent filtered price movements over time.
On a P&F chart price movements are combined into either a rising column of
X's or a falling column of O's.
If you are familiar with standard chart analysis, you can think of each
column as representing either an uptrend or a downtrend.
Each X or O occupies what is called a box on the chart.
Each chart has a setting called the Box Size that is the amount that a
stock needs to move above the top of the current column of X's (or below the
bottom of the current column of O's) before another X (or O) is added to that
column.
Each chart has a second setting called the Reversal Amount that determines
the amount that a stock needs to move in the opposite direction (down if we are in
a rising column of X's, up for a column of O's) before a reversal occurs.
Whenever this reversal threshold is crossed, a new column is started right
next to the previous one, only moving in the opposite direction.
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Traditionally, the box size is set to 1 and the reversal amount is 3.
The number on the vertical axis represents the value of the "floor" of the
box. The "ceiling" of the box is equal to the floor + the box size.
If prices move anywhere inside that range of values, the box is filled in
with an "X" or and "O".
Is it important to remember that P&F charts do not show time in a linear
fashion. Each column can represent one day, or many days, depending on the price
movement.
Because of the nature of P&F charts, support and resistance levels are
always horizontal lines and trend lines always appear at 45� angles.
Support Levels - You can spot support levels on P&F charts by looking
for a horizontal row of Os that each mark the bottom of their respective columns.
Resistance Levels - Like support levels, resistance levels are horizontal
lines on P&F charts. They mark the upper level for trading, or a price at which
sellers typically outnumber buyers. Find them by looking for a row of X's.
Upward Trend Lines -
Downward Trend Lines -
5. Price Scaling
There are two methods for displaying the price scale along the y-axis:
arithmetic and logarithmic.

[B] Support and Resistance

Support and resistance represent key junctures where the forces of supply and
demand meet.
Supply is synonymous with bearish, bears and selling.
Demand is synonymous with bullish, bulls and buying.
As demand increases, prices advance and as supply increases, prices decline.
When supply and demand are equal, prices move sideways as bulls and bears slug
it out for control.
What Is Support?
Support is the price level at which demand is thought to be strong enough to
prevent the price from declining further.
Support does not always hold and a break below support signals that the bears
have won out over the bulls.
Once support is broken, another support level will have to be established at
a lower level.
Support levels are usually below the current price, but it is not uncommon
for a security to trade at or near support.
What Is Resistance?
Resistance is the price level at which selling is thought to be strong enough
to prevent the price from rising further.
Resistance does not always hold and a break above resistance signals that the
bulls have won out over the bears.
Once resistance is broken, another resistance level will have to be
established at a higher level.
Resistance levels are usually above the current price, but it is not uncommon
for a security to trade at or near resistance.

[C]

[D]

[E]

[F]

[G]