Fibonacci Trading

Trading by the charts and Fibonacci numbers is highly controversial, but the fact is that many institutions and investors take these trading tools seriously. So, if you learn to trade like the big boys, you will also profit like them whether we are in a bear market or a bull market.

Some of the common Fibonacci ratios are 50%, 38.2%, 23.6%, and 61.8%. These ratios apply to the downside as well as the upside although the stock market will not stop exactly on these numbers since there are many factors involved in the market. These ratios are a good approximate guide, though.

For example, ERX, the 3X Energy Bull ETF, fell approximately 50% from its high of $85 to its recent bottom averaging around $40 during the stock market downturn between July and September of 2011. It was useless to buy ERX while it was descending to the bottom of its range, but as soon as the bottom was established at around $40 per share, it was time to buy. In charting, bottoms are known by flat lines, bowls, and W patterns. ERX has shown a stable trading W pattern in the past few weeks.

Money can be made in bear markets by trading the multiple rallies in stocks. Since ERX involves oil, the strongest commodity on earth, it will not be held down long. For every 1% increase in the price of oil, ERX moves up 3%. This means that ERX can easily advance 20% in a few days during the rallies. It has also done this in reality by making a number of advances from around $40 to $48. You could have made 20% on each of these rallies, and at least three of these excursions have occurred at the time of this writing. You would have gained 60% on your money if you had bought near $40 and sold each time at $48. This could have been done in a mere month's time also. Imagine how much money you will make in a year's time if you can make 60% each month.

So, remember that the Fibonacci numbers apply approximately to the upside and the downside. If a good stock is down 50%, it will probably have rallies in the range of 23.6% from the bottom which you could round off to 20%. Simply buy a good stock like ERX at the bottom and add 20% to that price for your sell order. In this way you will make a fortune in the stock market.

Safe Stocks

In today's troubled stock market, it is hard to know exactly where to put your money. If you don't have the time and daring for trading, you could allocate your money in five relatively safe stocks with 20% portions in each one.

The first stock to buy would be DIA, the Dow 30 ETF. DIA is comprised of the strongest industrial stocks in the market. The Dow will eventually come back if anything does. Since we appear to be near a stock market bottom, there is not much downside in holding this position, and it will be a nice capital gain when the stock market recovers.

The next two positions involve REITs that pay a 19% annual dividend. American Capital Agency (AGNC) is one of them, and Armour Residential (ARR) is the other one. ARR also pays a portion of the dividend each month while AGNC pays quarterly. As long as interest rates remain near zero, these REITs will be able to continue paying large dividends.

The final two positions are bond funds that are currently paying around 8% annually. They both pay a portion of the dividend each month. JNK, SPDR High Yield Bonds is one of them, and RCS, Pimco Strategic Global Bonds is the other one.

So, 80% of this portfolio involves nearly immediate monetary gain through dividends, and the 20% Dow portion will probably soon be a 20% gain from the September 9 stock market bottom.

Oil Is King

Money can be made even in the terrible current stock market where we are seeing more downside than upside. The financial conditions and unemployment of the U.S. and the world will assure that the stock market has limited gains. We are basically in a bear market where there will be multiple rallies many times during the year. If you make 10 to 20% per month on these rallies, you will make more than 100% for your money each year.

ERX, Direxion's 3X Energy Bull ETF, has shown a very dependable trading range in the past six weeks. It has traded in the range of 40 to 48 (plus or minus some) a number of times during the past several weeks. If you simply buy it in the low forties and sell when it reaches 48, you can make 10-20% every week or two. This is the way to make a fortune in the stock market predictably!

Since oil is the core of ERX, you can always count on it rising from wherever the stock market might drop it. Oil is the most valuable commodity in the world, and we cannot do without it. Sure, we may have intermittent demand pullbacks, but eventually demand will be greater than the supply, and prices will go up. For every 1% oil rises, ERX rises 3%. This is why 20% gains can be made often by owning this stock. Simply sell most of your shares every time the stock reaches $48. You could also hold some shares indefinitely since ERX will most likely make it back to more than $80 per share sometime in the next six months.

Stock Market Downtrend

The Dow suddenly fell 253 points on Friday, September 2, 2011, after a terrible jobs report where it was reported that no new jobs were created in August 2011. We must have positive job creation just to stay up with population growth, and the current unemployment rate is 9.1%.

Since the large drop on the Dow indicates that institutions are involved in the sell-off, the selling will most likely continue during Labor Day week because institutions cannot dump all their millions of shares in a single day. This presents an opportunity to gain money on the short side during the next few days.

Another reason for the downtrend to continue is that President Obama is planning a jobs creation speech for Thursday, September 8. The Speaker of the House has already announced opposition to Obama's plans. This will reopen the deep wounds suffered in Congress during the debt ceiling debate during the first part of August. So, more negative fuel will send stocks lower this next week.

The way I plan to trade this situation is to buy three stocks that rise in a bad stock market. One of them is FSG, FactorShares 2X Gold Bull/S&P 500 Bear. A second ETF is TZA, a triple small caps bear stock. A third ETF is FAZ, a triple bear for financial stocks.

Do not hold these leveraged ETFs more than a week or two because we will probably have a relief rally in stocks whenever QE3 becomes more certain or whenever big investors decide to scoop up stock bargains.

Choppy Stock Market

There seems to be no end to the bad news of the summer of 2011. We had unbelievable dangerous gridlock in Congress over such essential things as social security, Medicare, and national debt. We had the S&P credit downgrade to AA status which will make borrowing money harder for the government. Then, to top it all off, the August jobs report showed that zero jobs were created in August. We must have positive job creation just to stay ahead of population growth, and the unemployment rate is currently 9.1%.

Labor Day week will also not bring any relief. President Obama is scheduled for a Thursday job creation speech, and the Speaker of the House has already promised opposition. This impasse will reopen the deep wounds we already suffered in Congress at the start of August. How can a person get ahead in the stock market under these conditions?

The solution is to play both the long and short sides through ETFs. You must quickly take profits when you are up 10-20%, though. As fast as the stock market is revolving now, you can conceivably make 20% in something on any given week almost. If you just invest a mere $5,000 to be long or short, you can make $1,000 on that money nearly every week. If you can do this during 50 weeks in a year, you will have gained $50,000 on your $5,000 investment money. This is a ten-bagger even while it is not being done in the traditional favorite stock fashion.

On the long side, I recommend ERX, the triple energy bull ETF. It has shown a range between $39 and $48 and higher in these choppy times. As long as you can buy ERX at $39 or $40 and sell it at $48, you have a certain 20% gain. Just be sure you take profits when you are up because it won't last.

On the short side, I recommend FSG, FAZ, and TZA. FSG is a gold double long simultaneously with a double bear short on the S&P 500. FAZ is a triple financial bear ETF. TZA is a triple small cap stocks bear ETF. Just be sure you take your profits when you are up 10-20% because there are still positive forces in the stock market that will cause relief rallies on the long side.

Bull Market

When do you know it is safe to buy stocks? Bull markets primarily occur when interest is low, when housing sales are increasing, and when unemployment is dropping. We only have one of these necessary factors for a bull market in August of 2011, low interest rates.

If we did not have the low interest rates, it would be an all-out bear market instead of just a marginal bear. This is a situation where you should sell the rallies to make a small amount of money, to break even, or to take a small loss. Eventually, you will make money on leveraged ETFs like ERX if you have bought low enough.

Another bad thing about the current market is that you cannot go all-in on shorting the market either. With the Dow sitting below 11,000 we are probably at the bottom because the bad news is not really the end-of-the-world hype. So, it is a waiting game. Another question is how high can the bull rallies go in this kind of market?

The bottom line is that you cannot buy and hold growth stocks right now because they will not go anywhere of significance. Bonds and REITs seem to be the only investments that are relatively safe currently. I recommend AGNC, ARR, JNK, and RCS if you want to collect some interest money.

Best Stock To Buy

This is August 14, 2011. The Dow just went through one of the most volatile weeks of all time. It dropped more than 600 points on Monday, but it had recovered the losses by Friday.

In the meantime, ERX, Direxion's 3X Energy Bull, dropped below $40 per share at one point during the week. It had recovered to $47.89 by Friday. It is the best stock to buy right now because oil is still in great demand, and this situation will continue to exist since China and India need gas for all the cars their people are buying for the first time.

I own 148 shares of ERX in one of my stock trading accounts. That amounts to $7,088 currently invested in the stock. If ERX goes back to $85 per share, my 148 shares will be worth $12, 580. I expect the stock to reach $85 again in two months or less since the oil demand has not diminished. So, I will earn more than $5,500 in a short amount of time. Then, when the Dow falls again along with ERX, I will be a buyer again at these low levels. This is the way to win on Wall Street!