the 4 pillars of investing technicals: module 4 · that’s the advantage of a moving average. we...

Technicals: Module 4THE 4 PILLARS OF INVESTING

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The 4 Pillars of Investing | Technicals : Module 4

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Moving averages are one of the criteria I like to look at, and we’re going to learn in cash flow that we like stocks that fit certain criteria. Another measurement we can place on top of our candles are these red and blue lines here called moving averages.

What is a moving average? It is fairly easy to explain, actually. Most of you went to school and you had an average grade. We would take our test scores and we would have an average grade. You get an A on the test, your average grade is 4.0. You get another A, you still have a 4.0. You get another A, you still have a 4.0. And then something happens. Your friend calls up and you go out to have some fun. Your dog eats your homework. You don’t prepare. Maybe you had a little too much fun. Oh boy, I hope you’ve never done that.

But notice how with this F, your average drops from 4.0 to 3.0. See, you now have gone from an A average to a B average, right? And then if you do it again, this starts a bad trend. Now you’re at a C+ average. And if you end up the semester with your six test scores finishing week, now you’ve got really good grades in the beginning, really bad grades in the end, and you wind up with an average in the middle which is a C average. That’s what an average does.

What a moving average does is it helps us with what I call proximity. In other words, if I look at this guy’s report card, he’s got a 2.0, which means he’s a C student. Well, in my mind, I might think he’s just average (he’s a C student). In reality this person’s very, very smart. It looks like he might have become lazy. He obviously has some intelligence.

Maybe something happened at home. Maybe his mom has an illness, or maybe his folks have had troubles. Really, to say he’s a C student isn’t accurate. There’s something wrong here. If I’m his teacher, if all I’m looking at is his average, I might think he’s just an average kid and I might not see that there’s something dire happening here. If all I do is as his teacher is say, “There’s this gradual move here…” If I go from 4.0 to 3.0, that’s not alarming. And going from 3.0 to 2.4; he’s an average student now. But yet there might have been something here that was just tragic.

TECHNICALSMODULE 1

A transcription of

The 4 Pillars of Investing

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We want to bring some proximity to this: not how have you done, but what have you done for me lately, right? So to do that, we might use a moving average. Instead of including every score, we’re only going to include the last three scores, and that’s going to be our average. So our average will be three, and we’re going to move it. Watch this. Here’s the average. Now watch, boom. We’re going to move it.

We take the last three scores and we move this along. Now look at the difference. Now we’ve gone from a 4.0 up here to 3.0. Well, here we’ve gone from 4.0 to 2.6. Because I’m not counting this A, it brings more severity to the situation. Watch. One more test. Now he’s at 1.3. Why? Because there’s these two strong scores here that are no longer being counted because again, I’m moving my average along. It brings proximity.

I don’t care what the stock has done the last ten years. What is it doing in the last twenty days? What’s it doing in the last fifty days? Who cares what it did last year? What’s it doing in the last ten days? And so, a moving average simply takes a stock price and it does exactly what we’re doing here. This would be a three-score moving average.

If you’re taking a test every day, this would be a three-day moving average. And we can see over the last three days, he’s performed terribly. Yet up here, it doesn’t tell near the story of the proximity. Of course, he’s completely an F student at this point, where here’s a C student. Here we’re just looking at “what have you done for me lately.”

That’s how we feel about stocks. I don’t really care what the stock did ten years ago. I mean, 8-track tapes were great twenty or thirty years ago. We’re don’t care about those now. They’re not too keen.

The shorter the average (here we’re going to take two scores) look at this. Now, we’re at that C, with just one F because we’re not counting these others. The shorter the average, the faster the grade will change. The shorter the average, the faster things we pick up on. And so, we use these with stocks. Here with only two Fs, we’re already at zero. The guy was still an above average student, yet now he’s completely failing.

If a teacher takes a moving average, they’re more likely to see changes in the student’s behavior fast. This is a great thing to do in business. If you have a sales force, how has your sales been performing recently? How has your production been recently? Let’s take a moving average and see if there’s problems in production. So moving averages are a wonderful grade of performance and strength or weakness, and we use them.

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I want you to notice that these scores here change slower, and these change faster. Why? Because this one had more data in it. So which one? Let me see if I can type this here. This one right here would be a slow average, right? S for slow. This one right here would be a fast average. And if we were to chart these, we’d go from 4.0 to 2.6 to 1.3. Here, that would drop really far. That would drop immediately. That’s the advantage of a moving average.

We can see here that obviously the fast average is the blue one, isn’t it? And when the stock begins to perform well, we can see it doesn’t take long for that average to start to rise. It takes longer for the red line to rise because it’s the slower average, isn’t it? When the stock begins to drop here, what’s that? A little bit of a head and shoulder? Possibly low or high, right? When the stock begins to drop here, we see the crest in the moving average that’s fast first. We see the crest later on here.

I’ll have you notice a couple of things here. Whenever we see a fast average go above the slow one; that’s a sign of strength, isn’t it? See, the stock has to be showing strength. So we call that a golden cross often. Of course, if the fast average resides below the slow average, we call that a death cross. And notice this. When the stock is in golden cross mode, it’s going up; and when the stock is in death cross mode, it’s going down. What a wonderful tool.

I have seen people that simply have a rule that says, “Look. If I’m in a golden cross mode I’m buying, and when I’m in a death cross mode, I’m selling.” I would not try to make it that easy, actually, because you can get these things called whipsaw. We almost had a death cross here that would have been too soon. You want to be careful with an overgeneralization.

I’ve got a friend who’s an attorney, and he loves to trade; but he often wants to find a silver bullet. “Wouldn’t it be okay if I just did this alone? No fundamentals and no candles. Just did this.” He’s just trying to oversimplify. To me, that’s like saying, “Wouldn’t it be okay if I just used one key on the piano? What if I just got really good at playing one key on the piano? Bam, bam, bam, bam, bam.

No, it doesn’t work. We do play a symphony. We play all the keys. We learn all the indicators. It would be like predicting the weather with a thermometer. Wouldn’t I want Doppler radar? Wouldn’t I want the wind speed? Wouldn’t I want a barometer to measure pressure? If I have all types of data, my forecast of what is likely will be far more accurate.

I always want to say to my friend who is an attorney, wouldn’t it be nice if we just had the weatherman use a thermometer? That’s all he really needed. Wouldn’t that just be enough? We could make a forecast off the thermometer. No. We need barometers and wind speed and satellite

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and Doppler radar and all of the indicators giving measurements and data to our environment. There’s your golden cross, and there’s your death cross.

The criteria I like to see the best is this. I like to see it in this order. I like to see the stock on the top, so we’ll put S for stock. And then in this case there’s the fast average, so we’ll put that next. I like to see the fast average which would be the blue here. We’ll say FA for fast average. In fact, let’s color code this, and that will just help put it in our brain a little bit.

Let’s say this. Let’s say here’s my stock in red, and then here’s my fast average in blue, and then here’s my slow average in red. That’s the way I like to see it. The stock, then the fast average, then the slow average. And this is if I’m going low. That is if I want to be bullish.

If I’m bearish, I want just the opposite. I want the stock, and then I want the fast average, and then I want the slow average, just the opposite. There’s your death cross. There’s your golden cross. Very cool stuff. Oh, I’ve got it written right here. The price is above the fast average here. The price is up here. And of course the fast average is above the slow, and here’s just the opposite. These are wonderful criteria.

And I can combine these. What if I still haven’t passed above a moving average on this one, but I’ve just passed a moving average and it’s actually using the moving average’s support? Certainly I’m going to go with this stock as opposed to this stock. Or someone I’m training just sees two that are very similar. There is no question in my mind this is the one that I think has the greater probability. And we’ll learn why probabilities are more important when we start doing cash flow next time.

A 200-day moving average. Just a note here. Whenever you see an index or stock or anything move below a 200-day moving average, that means we’re taking the last 200 days and we plot a point. This point right here takes in the last 200 days of stock, averages it and plots a point. Next one, and it’s just like I said. Instead of doing a three or a fifty or a 100, we’re doing 200. So that’s taking in a tremendous amount of time, isn’t it? A tremendous amount of time. In fact, it’s worth going back here. It really is. This is a very slow average. It’s taking in so much, isn’t it?

When you take in that much time, and your scores are this poor, that tells you the student is in big trouble. Whenever you take that much time, it means the student is sick, right? This might be right here a little flash in the pan. One time is bad. This means we’re chronically struggling. Chronically struggling.

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Whenever something falls below this 200-day moving average, we know that we have some pretty big problems. Just a little note right here that I think is interesting to see is this can often act to support resistance. We’re following just to talk about this in the market here, since we’re here.

We achieve a new high right here, right? And things change right here. So we liked it. We said yes, we want to buy. We said yes right here, we want to buy. We said yes, right here we want to buy. That’s probably not as good a line as I’d like to draw. I like to make this as straight as I can to really get it to show you how this works.

So we get a yes here. We get a yes here. We get a yes and it’s bouncing off its average here, so you have bounce, bounce. And then it fails here and it fails here. I would not be surprised, at all, to see 1,280 as an interesting place in the S&P right here, 1,280 being a very difficult place to break. When we broke it, boy, we broke it with a vengeance right here. Another thing you might notice is if I draw this, what does that look like? A bit of a head and shoulders pattern, I would say. Just a little bit of one. There you go.

Just to give you an idea. Whenever we’re below the moving average, a bit of a double top here. A bit of a kiss goodbye. I just can’t get over how unbelievably frequently that the support will turn into the resistance here. It just happens so often.

Anyway, we’re below our moving average, and especially with the meltdown in 2008, we were already in a fragile market situation. Again, a lot of people, they make the rule. They’re not going to be in something if it’s below its 200-day, and it’s got to be above its 200-day. That’s a little slow. We’d like to get in. We don’t want to miss this 200-300 points here or 150 points. This gives you a sense of that 200-day moving average.

Here’s a five-year chart of it. Again, we’re above the line here for the most part. We’re way below the line here. Again, above the line. This is why you get a little whipsaw. It’s not as reliable here. But again, if a person made a rule—when I’m above it I’m in; when I’m below it I’m out. When I’m above it, I’m in; when I’m below it, I’m out—some people do that. I don’t recommend that as the most efficient way. I will tell you: criteria. When something is below its 200-day moving average, I’m not impressed.

Hopefully this will be short-lived like this. I don’t know. It’s looking like it’s dropping well. But we may bounce back. We’ll see. We’ll see where it goes. Lower swing highs. Lower swing lows. Lower swing highs. Lower swing lows. Lower swing highs. Very lower swing lows. Lower swing highs. Lower swing lows. Finally recover. Again, I like to trade with the trend, and you’ll learn more about this as we go along.

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One of the reasons I want to take you through a moving average was to preface the introduction of the MACD. MACD is a very basic indicator. The beginner level, I would say. It’s one that many people are introduced to early. It’s a little bit slower. A little bit of a lagging indicator.

It was developed by a technical analyst named Dr. Gerald Appel, a PhD type level guy, I do believe. I never met Gerald myself, but Dr. Appel received a lot of accolades for the MACD. And what he did is he took the concept of the moving average, and he put it in a fairly robust formula. It’s a function. And he called it the “Moving Average Convergence Divergence.”

Now, that’s a fancy word. That’s a mouthful. Makes us sound smarter than we are. But it’s based on a concept of moving averages, and not too perfect ones, like the golden cross and the death cross here that we talked about. He speeds them up a little bit. It’s still a bit of a lagging indicator, but it helps us with momentum.

Converge means come together, so we watch when the point lines come together. Diverge, I think, means go apart. So we’re really looking at points on the lines, again, where they cross; where they converge and diverge. Now there’s histograms we’re going to do later on in more advanced classes. There’s all types of stuff that will become easy. But with a basic class, let’s just start right here.

What is likely to happen? That’s our fundamentals. We see our sovereign fundamentals. We think that what’s likely to happen is some inflation with the quantitative easing. Well, when is it likely to happen? Well, we look at the sovereign technicals, and we’re looking at a dollar crash. And we saw our head and shoulders here.

We saw the second shoulder develop around August-September of 2010. That is when I started taking interest in the falling dollar. When people think the dollar’s falling—they’re losing value—what do they want? They want something that retains value: gold or silver.

We come here to a chart of the SLV. This is a weekly chart, just watching it once a week. And we’re going to start here in that period. We’ve got August, September, October, November, December, January, February, March, April, May, June, July. So we’re going to look at a pretty good chunk of time right here. I want you to remember. We use the sovereign to say, “Are we going to have a dollar crash? Is the dollar going to lose value? If so, is silver going to take off?”

Well, here’s our dollar starting to have problems here with this head and shoulders. Maybe we also, in this same time period, start to look at silver again, in this August to September area. So here’s silver at $17.50 and I get what’s called a bullish MACD crossover, or what they call a golden cross on a MACD.

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I’m not going to go through the formula. I think you understand the moving average thing. But this enhances that idea of moving averages. Dr. Joe Appel has done this little formula for us. So we have a bullish MACD crossover at $17.50. Perhaps at a point we say, “Let’s buy some. Let’s see what happens. Put it in an exit for sure.” And we have a nice run here.

Now, notice. We have the run and what do we have right here that we discussed? A doji. And we can see, look: buy, buy, buy, buy, buy, buy, buy, sell. Buy, buy, sell. Buy, sell. Buy, sell, sell. So can you also see how the candles tell a story? How we have buy, buy, buy, buy, buy, buy, sell. Buy, buy, sell. Buy, sell. Buy, sell, sell. And now people are wondering, Do I want to really buy this at all? We can see the momentum of this starting to wane. It’s starting to almost go sideways.

It isn’t like people saying, “We love silver. Now we hate it.” It kind of has a big run, and we can see the converging of this. We see the distance between these starting to drop. What this histogram really does (it’s just as well to introduce it) is shows the distance between the two lines. You’ll notice here they’re really small. Notice here, it’s getting smaller. Getting smaller.

And so, while it’s still going up, the MACD gives us a clue that it’s still headed up, but it’s starting to head at a slower pace. And we can see this starting, too. It’s kind of nice, because a true moving average still keeps going up both ways. MACD is starting to come together because it’s seeing this momentum begin to die a little bit. So, we see a doji.

If I’m in this stock, what do I do? I want to reiterate. Do I try to predict the future? Do I get crazy? Do I say, “Well, I think it’s going to go down, so I sell.” That’s what amateurs do. They feel they have to make a decision, and they feel they have to predict the future.

Well, maybe what I do is I say this. Maybe I’ll put in an exit right here. And that way I’ll have an order to sell it. So if it does actually start to go down, I sell; but if it continues, I get the money on the run. For all I know, this might continue up to $50.00 a share here. Well, if it does that, I don’t want to miss it; but if it winds up back down at $17.00, I don’t want to lose all this profit that I’ve gained.

I see the doji, and I see they’re starting to have some indecision. I see they’re not so sure. I mean, they’re pretty sure right here with the bullish candles. Maybe that’s time where I put in a little exit. Maybe put my exit level underneath the doji.

Here I get what’s called a bearish engulfing candle, which is also often a time where things begin to change at the top. But look at this. I also have this momentum really going slow now. We’re almost sideways. And I get a bearish MACD crossover.

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I’m really happy that I have this exit level here. I want to make sure this is a really a good time. If I bought the stock here at $17.50 and I put my original exit here, then I definitely would feel more comfortable in raising it. If I get popped out, it might be a good thing. It might be a good thing. So we do get popped out, and that backs off.

Now, who is to say this isn’t going to take off again? It may. It may take off again. However, if it does, I can buy it back. But what I certainly don’t want is to get back all my money. I certainly don’t want to ride it all the way back down. So I’m going to trade based on criteria. And I hope you’re seeing how I can look at these charts and these candles (dojis, bearish engulfing candles, MACD crosses) as helping me to understand not only what is likely but when things are happening here.

Now, here’s an interesting thing. It breaks above, and how many times have I drawn this? It’s just the opposite in this time. Here we had a level of what? Resistance. And once they break it, it would not be surprising now to see this act as what? Levels of support.

So now I’ve gone from saying no at $30.00 (and it really hammered on it: no, no, no, no, no, no). Now they’re saying what? Yes to $30.00. They’ve changed their mind. And what do I have down here? I have a bullish MACD crossover. I say, “Let’s buy some, and I’ll put my exit in right here, or maybe I’ll put an entry in right here.” If it takes off, I’m in, and if it backs down, I’ll have an exit there.

Again, I want you to notice I’m not just making predictions saying, “I’m in now.” I’m saying, “If this happens, I’m out. If this happens, I’m in.” And I always set it up based on the candles and let the market (or in this case the precious metal) take me in.

This is an ETF. It’s called an exchange-traded fund. It just tracks the price of silver. About the same as an ounce. Right here we’re at $30.00 an ounce, right in there. And I’ve been trading this for a long, long time. I’ve really enjoyed this: the quantitative easing, the sovereign fundamentals. I felt like it really justified having some fun with some precious metal here.

And it gives me more confidence when I look at the news. There’s CNN reminding us that in its latest move to jumpstart this sluggish economy, the Federal Reserve announced it’s going to pump billions in the economy. The Central Bank will buy $6 billion in treasuries. A lot of people don’t understand what that means, but if you did fundamentals with me, you do. They’re going to expand the balance sheet over the next eight months which gives me confidence that over the next eight months that silver would have a lot of people behind it.

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I’m not predicting. I’m just saying what is likely. It makes sense. They’ve already purchased $2 trillion during the Great Recession of 2008-2009. Low interest rates have not really jolted the spending, they say, so what are they going to do? They’re going to pump more money in. They’re going to pump this quantitative easing in to try to stimulate this economy and buy treasuries.

Here I have another doji right after I get in, and I say, “Oh! Another doji. Well, maybe they don’t want it at $32.00 or $33.00. Maybe they don’t. What do I do?” Put in my exit level just in case it goes down. But it took off, so I didn’t need the exit. But it was there just in case. So you see, I didn’t predict. A lot of people will learn this and say, “Oh, doji means reversal.” Not always. We can have a doji midstream. But I put my exit level in and boom. Up it goes anyway. Now we’re up here at $45.00.

Do you see how that worked on the doji? Both times I put an exit level in here. Okay, it triggers. Hey, I’ll get back in. I’ve got my bullish MACD crossover. I’m breaking resistance. I can get back in. That’s no problem. I see another doji. I put in my exit level. Well, I didn’t need it this time. So I don’t need to predict the future. Oh, another doji. Move the exit level up, right? If it takes off to $50.00, great. Oh, it didn’t. So I sell right here at the beginning of the week.

Again, this is a weekly chart. This is Monday through Friday. Each candle represents one week, so each four or five is about a month here, checking it once a week. Again, it’s a good thing I sold here because what do I have? Bearish MACD crossover. Interesting stuff. You can look at silver today, and so forth.

Here’s a question. Why don’t brokers just do all this stuff for me? I think it’s a great question to ask. Well, if you’ve ever known a broker, then go ask him. Say, “How come you won’t do all this for me?” And generally, they’ll either say, “Well, you never asked me to. I thought you just wanted mutual funds.”

A great movie to go watch is called The Pursuit of Happyness with Will Smith. You find out these guys are really about assets under management. When a person gets hired at a brokerage firm or a financial firm, they’re just trying to get money. They’re like everyone else. Getting on the phone, smiling and dialing. Go watch it. Will Smith. Great actor. The Pursuit of Happyness. He’s just trying to make things happen. In fact, he’s really destitute when he gets the job as a broker. He’s sleeping in the subway with his son. Very heartwarming. Got a guy who achieves great things.

But you’re not rooting for him to trade well. You’re rooting for him to land clients in the movie, because that’s really what they’re trying to do. So you get a thousand clients. Now you’re dealing

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with a thousand different ages, a thousand different incomes, a thousand different kinds of risk, a thousand different goals … You just can’t do that with ten thousand different stocks.

I’ll just put it this way. Who cares more about your money than you? The IRS. Other than those guys, you’re probably in the driver’s seat. It’s just tough for brokers. Nobody’s going to care about your money like you do. They’re more really about the assets under management and going out and recruiting more money than being active investors. A lot of them don’t know how to do it, as well.

I hope you’re enjoying fundamental analysis. This is going well. You can tell I genuinely enjoy sharing the information, for sure.

Let’s do an action exercise. I’m going to invite you, when this session is over, to go look at some live charts. I don’t know if you have software like I do or if you just want to use the Internet and do the Google Finance thing. Eventually you will want to get some software that’s a little more high-end. You get what you pay for.

And in this particular software program, what I’ve done is it will actually read the swing highs for me and it will put a little triangle here. You see a triangle here and a green triangle here and a triangle here, and it helps me identify what we call high and low points.

So again, if I use my rules, I’m going to start with the Standard & Poor’s index here (SPX). And I say, Where am I today? I go back and I say, Here’s a low. There’s a swing low. I go back. Okay, there’s a high. Is this low lower than this one? I’d say significantly. Is this high lower than this one? I say it is, so this is a downtrend, isn’t it?

And so once we saw this low or high—this is almost like a double top, isn’t it—we saw the market fail to push past 1,350. It just did not do it. It said no. It said no here. Pushed a little bit higher here, but it failed in this instance.

This is where things began to change. Certainly, I have a low and a higher low here. It comes up. I make it a little bit higher high, I make it a higher low. I think things are great. But the moment this computer marked this for me (it probably would have done it around here) I say, “You know what? I failed to achieve a higher high. I’m not sure I want to be bullish very much more. I’m not sure around this 1,325 point that I’m comfortable with taking bullish positions.”

I’ll tell you what. I knew that I was in a downtrend right here. Why? Because I have a lower low at this point, whether it would have gone up this point, this point, this point or clear to this point; I knew the moment it went below this level.

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See, they said yes here. Is that right? They were saying yes right here. Yes. And then right here, they failed, didn’t they, and they said no, absolutely not. And so I knew at this point that if it would have gone up here, that’s my lower low. If it would have gone up here, that’s my lower low. But either way, I knew I was in a downtrend, because I already had my lower high here, lower than this one, and that’s it.

So start determining trend on your own, and there’s a great action exercise. As you move towards proficiency, where is it going to start? It’s going to start by looking at fundamentals. It’s going to start by looking at technicals. So every day, now, you have the ability (just after this one class) to know where the trend of the market is.

Right now the direction is up, isn’t it? It’s from here to here. The direction is up, but the trend is down. And I trade with the trend. I don’t try to predict the future. I don’t worry about what’s going to happen. I know (as you’ll see in the next section) if I follow my rules, I’m going to turn out okay. I’m not too worried. There’s a great action exercise.

In fact, you know what we could if we wanted—this might be fun to do—is to hop into the Mocktrader here. Let’s pull a quote sheet off, and here is the Dow Jones. I have all types of different studies. I can put what’s called these pivots on them right here. See, it will give me the pivots of the highs and lows of how it goes. And here I see something similar. A little bit of a higher low right here. So maybe we’re getting some ground here as of today. Lower.

But I’m definitely not going to get excited until we pass 1,150. We’ve had so much volatility here. I’m going to see if the computer is really serious, and I want a higher high. But I am getting higher lows, so maybe we’ve got a little bit of recovery here. Definitely interesting to look at this double top right though, and where we went from yes to no. It’s nice to catch this.

I have some fun stuff I’ll show you about next time that I got into. We could look at the NASDAQ. It’s going to be similar. We can let it bring up the NASDAQ and the daily chart. And kind of a double bottom here, almost. Almost a double bottom. But a huge surge today, so maybe people are getting back.

A lot of news here. We want to always take technicals in stride with news. They’ve got Ben Bernanke in Jackson Hole. We’ll see what he says. That will probably affect things. Don’t try to outguess that. Again, I’ll just put in orders, if-then type orders. If he says this, then this will happen. If he says something else, the other will happen. It’s kind of fun stuff to begin to look at right there.

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There’s some action for you, to determine the trend of your own stock. Here’s Apple. Certainly Apple’s having what? Here’s a higher high than this one, and here’s a higher low than this one, so Apple is just a juggernaut here, going after things. I would be surprised, though, to see it struggle in this area, where this support right here, once it was broken…

I see a bunch of areas of support. I would not at all be surprised—I connect the bottom of those three lines right there—to see it struggle right here because you’ve got just for fun… This is why training labs are so valuable. They say yes, yes, yes. I wouldn’t be surprised to see that become known. See it back down here in the $350 anytime soon. I wouldn’t be surprised. I wouldn’t be surprised to see this as the next swing high, where we have a lower swing high. But we’ll see what it does. I could be wrong. And as you’ll see next time, it really won’t matter. It really won’t matter. We’ll show you how it’s done.

A long-term time frame. You can back it up. Look at a weekly chart. It’s a good idea to see what the weekly trend is. Also here’s the daily trend. This is the weekly trend. It’s good to get a bird’s-eye view and then compare it with your fundamentals and always use those together. These are some things you can start doing.

This is the VIX. Volatility. Right now we’ve had a lot of volatility in the market. I brought this back to 2008 to show you how much fear there was when the subprime meltdown was going on. We’ve got an index around up here in the eighties, and now it calmed down here in 2010.

But the VIX is fierce. Also a technical indicator. It tells me how much fear is in the market. When there’s high volatility, that means there’s a lot of fear. It means people are moving and things are happening. They often call that the “fear index.” So you’ll be learning about that. This an inverse ETF called the VIX. I was fortunate to own this recently during the S&P downgrade.

Here’s the S&P 500, kind of moving along here at 1,350. And then all of a sudden some bad things happened here at the end of July and August, and we get downgraded in the S&P. I thought if we do get downgraded, that would cause some fear and some volatility, which it has. And so I went out and thought, You know what? I’m going to buy myself some inverse VIX. So go with the inverse on it.

So here’s the VIX. This is an ETF that tracks the VIX. This is the S&P 500 VIX short-term futures. And so, it’s just an ETF that mimics the VIX. So you can see as this went down, the volatility began to increase and the VIX took off. I was very fortunate to buy myself some VIX. In fact, it actually ended up that I wrote some calls on it at $39. It ended the expiration at $41, so I got called out of

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the calls that I wrote. Covered calls of course. And so, I made a nice gain on the VIX and then a little extra premium with options.

It sounds almost like I’m getting you excited to learn about the next cash flow class. Yes, that’s on purpose. It’s going to be fun.

But you can see as a technical analyst, it really helps. You see things starting to break down here. Here’s your support level, right? And as things start to break down, I’m going to know that the VIX is going to reflect that. So I’m going to buy the fear. Isn’t that weird? That’s getting paid on fear. Interesting. A lot of people lose money on fear. I said, “If there’s fear, is there a way to get paid on fear?” There is. And the more fear there is, if you’re in this, the more you’ll get paid. So, very interesting stuff. A lot of fun.

This is called the TRIN. It is sometimes called the Arms Index. It was developed by a guy named Arms. And it’s got a ratio. A ratio of one means there’s balance. So here you see it never goes below zero, right? It goes from one or above one. And if the ratio is greater than one, it means that there’s volume or money moving into declining stocks.

I see in June it was pretty calm, but we see people moving in declining stocks here. We see movement into advancing stocks if it’s less than, so that’s called the TRIN. I don’t use it a lot, but I thought I better put it in, because a lot of people do, so interesting stuff there.

What I’m trying to help you understand (let’s go bird’s-eye view) is we looked at candles. Then we looked at things like moving averages, MACDs. These are different types of technical indicators. Your fear index. Where’s volume moving into? Is it moving to advancing things or declining things?

This is called the average true range. Notice that this is going up as this is going down. Well, this isn’t going up because it’s going down. It’s going up because of volatility. You can see here that these candles are relatively narrow, right? And you see here where it’s at its lowest, they’re extremely narrow candles. As the candles start to expand in size, this starts to expand in size. Here we have volatility, big range.

So this is IBM. We see here that IBM has a doji. It’s moving a couple of dollars. Here we’re having huge moves. Several dollars in the stock. So right here this just says, “Look. The average range of this, you’re around $5.00 here.” How does this help me? It helps me with exits. You’ll notice that when I was putting things in, I put in an entry and then I put an exit underneath.

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Well, if I put it too close, I might get exited out too early before it can take off. But if I see an average true range of $5.00, I said, Okay, this is $4.00 here, so I want to make my exit at least $5.00 so it has a chance to have some wiggle room before it goes up and I don’t get exited too early. You can see how technical analysis has many applications.

Do I expect you to understand it? No. Look. Remember the magic and the power of the education continuum. You should not confuse awareness with proficiency. Nor should you expect proficiency from just being aware.

My goal in this level of classes is not to have you master the MACDs, stochastic, the average true range, the VIX, dojis, bearish engulfing candle. You’re not to master those. You simply want to become aware that they exist. That there is an average true range that you can learn about. That there are candles you can learn about. And the good news is you can learn about them.

And so on the education continuum, you first move from not knowing these things exist to where they do, and to learn a little bit about them. As you and I continue to move forward, as we work together, as I help you move forward, you’ll get to proficiency, and you’ll begin to master these things and become very confident in all of them.

So remember the continuum. That is what we want to focus on. It’s very unwise to try to move from ignorance to proficiency. It would be like taking your first piano lesson and saying, “I’m a concert pianist.” That just doesn’t happen that way.

We became aware of a lot of things today. We built our vocabulary. We learned a MACD, a doji, an uptrend, a double top, a kiss goodbye. We learned many things. And also a way to approach the market. The context of these classes is to change the way you think. Oh, I can make money when stocks go down. Hm. Interesting. Or there’s strategies I can use that Andy showed me today where I can put in an entry here. If the stock goes up, I’m never in it. If it goes sideways I’m never in it. It goes down, great. I’m shorting, and now I’m making money below that level.

So, you’re just becoming aware of some of these strategies. I’ll tell you here something that is really cool. In these classes we’ll spend two to three hours on fundamentals. We’ll spend a couple of hours on technicals. When I help you move to advanced classes, this becomes really fun where we can work over a period of several nights together on a topic.

For example, I might be able to work with people. I definitely have people I associate with that can help you. You could take a class a week on technical analysis only, and that course might last for six weeks. Or we have a class that you might have on cash flow where each night of the week you

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can work on something, practice for the week; work on something; practice for the week. We can do these over a longer period of time, where you can actually see the real market move and begin to get competent.

And then we have mentors that we can hook you up with where you can work one-on-one and really practice this and really get your skills fine-tuned. And I highly recommend getting into a market lab where once a week we do real stuff.

Again, just move along. You’re doing wonderfully well. I hope you find the information interesting and insightful, and we’ll just keep moving along the continuum. You know, this is fun. It’s illuminating and this makes us feel smart. But of course, the ultimate goal here is to get a cash flow so we can achieve our dreams together, and so we can live in abundance without having to work at jobs and things like that long-term.

Proficiency is the goal. Where does it start? By becoming aware. Basic classes, advanced classes and then moving along. So there is great stuff there. We used technical data here. We’ve gone through some of this. Software we’ll get into sometime. Keep going on that continuum.

Next time. Technical analysis we just finished. Fundamental analysis we did last time. He’s jumping up in the air for a reason. Now we get to see how this is going to work. Now this is where you start to turn the corner. Let’s draw a line right here. Let’s draw a line. Over here, we’ll call this NC. What does that stand for? No control.

Hey, I can’t control what the government fundamental analysis looks like. I can’t control Greece and Italy and Ireland and Spain and Portugal. Now France is entering that discussion. I can’t control Standard & Poor’s downgrade of the United States. I can’t control that Apple’s awesome and Blockbuster stinks. I can’t control that.

I can’t control which direction the markets go. I just watch them and monitor them. I watch for my alerts and my dojis, my double tops. I can’t control it though. Oh, NC to TC. This is no control, and this is total control. And so while I can’t choose, if I’m going to have a double top and have the thing take, I can choose whether or not I want to make money on that. I can choose whether or not I’m in a 401(k) watching the thing disintegrate over time. I can choose what I’m doing.

It is a wonderfully powerful experience when you get to this point right here. Because this stuff is information gathering. This is IG. I abbreviate because I can’t write with the mouse. This is information gathering. This is the harvest. In our next session, we get to start making money. And you are going to love this. We start taking this information of what’s likely, and then we

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start making money on it. Can things change in a heartbeat? Yes. That’s why we’re doing this one, risk management.

I hope you’re enjoying it. I hope you’re as excited as I am for this next one, because I’ll tell you what. Cash flow, we’re going to open up your mind to stuff of which you were never aware. In fact, I’ll tell you a little advertisement for next time. How about we do some Buffett strategies? Why don’t we see how Buffett sucks money right out of this market and puts it in his pocket? I’ve been copying him. Been doing what he does. It’s working. I really like it. I’m going to show it to you next time.

Great job. Congratulations. We’re halfway there. Fundamentals. Check it off. Technicals. Check it off. We’re going to do cash flow next time. Can’t wait. We’ll see you then.

END OF TECHNICALS – MODULE 4

the 4 pillars of investing technicals: module 4 · that’s the advantage of a moving average. we...

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