Technical analysis and stock charts with Tim Knight
The charts, the whole charts, and nothing but the charts.
That is the unequivocal effect of reading the weblog of Tim Knight, founder of Prophet Financial Systems and currently senior vice president of technology at Investools, the company that purchased Prophet.net in 2005. Knight, whose Prophet charts have long been a favorite of this writer, is a chartists' chartist. And while his blog allows much of his personality to show through -- as the best blogs do -- TraderTim.blogspot.com is remarkably "about business" when it comes to the charting of the markets.
You won't find a lot of references to the ephemera of the Internet at TraderTim. Perhaps because of Knight's long experience in the world of Internet technology, his blog comes across as far less gawk-eyed at some of the "neat things" and cool links you can stumble across while traversing the ever-expanding e-universe.
There's nothing wrong with a financial blog talking a little sports, or an investment blog digressing into a conversation about American Idol, or a trading blog posting a series of observations about best-selling books on the Iraqi occupation. But while such blogs arguably represent the "Starbucks" approach to so-called expert blogging, in which the main event (coffee) is accompanied by an increasing number of warm-up acts and side attractions (gourmet drinks that are more milkshake than coffee, fancy sandwiches, hip CDs, and specialty teas), blogs like TraderTim remind me more of the "beer ‘n' peanuts" vendor at the ballpark hiking the vertical miles from the box seats to the bleachers all game long. He knows what you are there for, and while an orange mocha Frappuccino is no crime, it is not what you're looking for when you come to watch the game.
And in the same way, TraderTim is all about the game. Knight admits without hesitation that he is as close to a Kodiak as you can be when it comes to market bears, noting in his "About Me" capsule that in addition to having been a trader since 1987, for the most part he occupies himself with trading and managing "bearish options positions."
While that might be a turnoff to many who visit trading blogs for insight and inspiration (and, not infrequently, validation of their own market analysis and superstitions), I find that sort of candor more than refreshing. I'm far less concerned about the bias of a given author than I am about an author having a bias and refusing to clue me in on it. What is especially interesting about Knight's tendency to give the bears the benefit of the doubt and, perhaps, to hold the bulls to a somewhat higher standard is the fact that he is a self-described "dyed-in-the-wool technician." Because of this, even his most cherished bearish sentiments have to stand up to the rigors of his technical analysis. And if you don't think those internal conflicts make for interesting reading (and self-reflection, for who among us is not without a bullish or bearish bias from time to time?), then you obviously haven't spent enough time at TraderTim.blogspot.com.
On top of that, you get charts. Lots and lots of charts. And in what I consider to be a refreshing change of pace from most of the technical analysis work we see on the Internet and in print, these charts are largely devoid of the sort of technical indicators that too often distract speculators from the trading task at hand. Trendlines, support & resistance, trend channels, classic chart patterns like triangles, head & shoulders tops and bottoms, the occasional Fibonacci retracement or candlestick interpretation ... and that's pretty much it.
Even though anyone even vaguely familiar with Prophet.net knows that traders using those charts have access to as many different technical indicators as I have ever seen compiled in a single platform, Knight -- as far as the charts at his blog are concerned -- leaves little room for "indicator-envy." His straightforward, almost old-school approach to charting not only would likely bring a smile to the faces of classic chartists like Robert Edwards and John Magee (of Technical Analysis Of Stock Trends fame), but also serves as a reminder to all those would-be, still-are, and used-to-do traders who've been tempted to believe that their long-sought-after trading fortunes were only a few optimized indicators away.
Like some of the technicians whose work I've come to admire most -- traders like Gary Smith (formerly of TheStreet.com) and Gary Kaltbaum (of Investor's Edge) who can do more with a price chart and a straightedge than most technicians can with a database full of backtested parameters -- Knight's blog implicitly invites the trader or speculator to try his or her hand at playing it straight, without indicators, to see the forest for the trees.
Beyond being a chartist, Knight is also most certainly a trader. Most of his posts on trading are more personal and anecdotal than analytical; where the chart analysis is often clinical and educational, his remarks on trading seem to serve more as markers or testaments to his analysis rather than as primers for those still learning to cut losing positions off quickly and to let winning positions have room to run.
That is not to suggest that Knight takes his trading for granted. He notes he manages a few speculative accounts in addition to his own. And he is not above letting his readers know when he's moving from the ecstasy of cultivating a winning position to the agony of having to prune the losers. But for the most part, TraderTim points out the interesting technical setups and potential opportunities in the markets -- often using longer-term charts to keep things in an appropriately broad perspective -- and lets readers know if he's planning to take advantage of those situations. Specific entry and exit prices and rules are as often as not left to the individual trader or speculator who likes what he or she sees to determine for him- or herself.
Having a robust "comment community" is not a necessity for most blogs, financial or otherwise. Some blog readers spend more time reading and contributing to comment threads than they do attending to the article or observation being commented upon. The comment community here is varied, with serious responders sharing room with the occasional "funny guy" and the (fortunately) less-frequent troll demanding proof of the trades Knight makes (I suspect nothing less than notarized, wax-sealed brokerage statements on Italian parchment paper would suffice for some!). Of the posts thus far in September, the average comment thread has had about 57 entries -- not an insignificant number for a trading blog with daily posts -- with some posts yielding nearly double that. It's no measure of readership levels -- far more people read blogs than contribute to the comment threads -- but for those who like a more interactive environment, it is worth knowing there are other people to communicate with when you drop in to TraderTim.blogspot.com for a visit.
In his very first post back in the spring of 2005, Knight noted that the day before had been "the best day of my trading career." He talked about his put positions, his stock short positions (remember my point about the Kodiak bear?), and how even after closing out "a bunch of positions ... at great profits," he was kicking himself for leaving money on the table, for "closing out positions simply to take profits, instead of for good, technical reasons." I always find it interesting to go to the first-ever post of a blog to get a sense of where the blogger was coming from when he or she first got the blog ball rolling. And while Knight's first post was relatively modest (certainly compared to the money he talked about making the day before!), it helped set a tone that said simply, "I study charts and I trade."
If that same straightforward sentiment defines you and your work in the market, even in part, then I suggest you make TraderTim.blogspot.com a regular page of your pre- or post-market debriefing. Your inner, old-school chartist will be glad you did.--David Penn, Technical Writer
FIGURE 1: IPO HOME
For a few years back in the late 1990s, saying "IPO" around a group of anxious investors was like shouting "Pull!" at a skeet shooting range. I can still remember the gray-haired, Birkenstock-wearing, left-wing computer geek I worked for during the bubble years strutting around the office as he mentally counted the amount of money he had made just that afternoon because he had been one of the fortunate few who had received shares of VA Linux just as the company went public. VA Linux, for those who don't recall, registered what was at the time the best single-day performance in history for an initial public offering (IPO) as it rallied nearly 700% from its opening price of $30 a share to an intraday high of more than $300.
As the saying goes, that was then. About two years later, VA Linux was a shadow of its former self -- laying off 35% of its employees and announcing it was getting out of the computer hardware business that had been the company's raison d'être since its founding in the early 1990s.
For many investors, I'm sure that experiences like VA Linux during the bubble years turned them off to IPOs in the same way that the NASDAQ crash caused investors to flee the stock market. But IPOs are as old as the stock market itself (here's a bit of trivia: the first American IPO was the Bank of the United States in 1791). And it should not be surprising if many of the IPOs of the bubble years in the late 1990s suffered the same fate as many of the stocks during the bubble years.
But in the same way that the stock market recovered from the burst of the Internet bubble, so did the market for IPOs. In fact, it could be argued that in 2006, investors are more worried about missing the next MasterCard Inc., which went public in May 2006 at $39 and by late August was trading for more than $55, than they are wringing their hands over whatever money might have been lost seven-odd years ago in the collective fairy tale that was 1999.
Fortunately, today's IPO investors have a number of tools and resources available to them that were not available back in the bubble years. And perhaps chief among those tools, for those looking to profit from initial public offerings, is the website of IPO Home, developed by Renaissance Capital.
IPOS FOR EVERYONE
I had a fascinating conversation with Linda Killian, portfolio manager and partner with the IPO Plus Fund, a mutual fund sponsored by Renaissance Capital that is the first to invest exclusively in initial public offerings. The website, IPO Home, is in some ways a portal to the mutual fund just as much as it is a solid resource for those investors looking to learn more about the performance of various IPOs since they were launched.
As of this writing, the fund had assets of $20 million under management, having itself been launched nearly 10 years ago in December 1997. The fund sports an impressively high double-digit annualized returns in both the most recently ended three- and five-year periods and makes money for its investors buying Ipos both on the offering as well as in the aftermarket.
Why should investors be interested in IPOs? Killian points out that "the IPO market is where new industry sectors are introduced." As such, there is analytic value -- to say nothing of the potential for capital gain -- in noting when certain sectors are starting to yield companies interested in going public, as well as when certain sectors may have become overheated based on the number of IPOs in that group. As far as this timing is concerned, she says, "the first industries out of the box tend to do best." Those companies in a given sector that go public first tend not to have "comparables" (other IPOs against which to compare) and "tend to be priced lower." Given this, Killian observes, the last initial public offerings of any given cycle tend to be overpriced and often worth avoiding.
The idea of a mutual fund based around IPOs is also straightforward. Killian says that individual investors with discount brokers such as many online brokerages will not stand much of a chance at getting IPO shares. On the other hand, a retail investor who has access to a full-service broker with experience in the IPO market will at least give the average Joe or Jane a decent shot at a piece of the IPO action.
Even then, Killian adds, if the company has not made a point of making it easy for the average investor to get their hands on shares, the public may be out of luck. One example of a company that went out of its way to make itself accessible to the investing public was Tim Horton (THI). "Tim Horton allocated 30% of their IPO shares to individual investors," Killian points out. Why? THI is a retailer, she notes, and by doing this it was presenting a certain face to investors and customers. "Tech and biotech [companies] don't do this sort of thing," she adds.
AT HOME WITH IPOS
The home page of IPO Home gives a nice overview of the information available to investors and speculators interested in initial public offerings. Sections include "IPO Breaking News," "Look Who's Talking (IPO Chat)" -- a blog based on IPOs -- a "Featured IPO" selection, "IPO Calendar" including "IPOs on Deck" and "IPO Latest Filings," "Global IPOs" -- including an "IPOs by Country" menu -- a quarterly IPO review, "IPO Latest Pricings," and "IPO Top Performers."
Across the top is a menu bar with options to browse to the four other main departments of IPO Home: IPO Newcomer, IPO Marketwatch, IPO Research, and IPO Plus Fund. The IPO Newcomer department has four areas: Learning Tools, which includes a basic guide to IPOs and a glossary; Researching IPOs, Investing in IPOs, and a directory of underwriters.
IPO Marketwatch contains the lion's share of information and resources that those interested in IPOs will be focused on. The News and Views section is devoted not only to "breaking news," but also week and year in review analyses of the IPO market. Pricings and Rankings also note both pricings of recent IPOs as well as top and bottom performers. IPO Data notes foreign IPOs, spinoffs, and tracks information on both postponed and withdrawn IPOs. A link to the underwriter's directory is also under the Marketwatch heading, as are two of the website's interactive features: IPO Interactive Chat and the IPO Interactive Poll.
The other two departments noted in the menu bar at the top of the home page are IPO Research and The IPO Fund. The IPO Research department provides links to research done by Renaissance Capital, the sponsor of IPO Home, and includes links to previously published research reports on some of the many initial public offerings that investors and speculators might be interested in. A "Featured IPO" link is present, as is a link to various investing tools such as tips on getting the most out of your IPO allocation and a corporate governance checklist.
The IPO Fund provides all of the information a prospective investor might want. This includes not only performance, top holdings, and management information, but also prospectuses, annual reports, a frequently asked questions (FAQs), and other documents necessary to begin investing with the fund. A link that will allow investors to login and access its IPO Plus Fund is also part of this section of the website.
IPOS AND MARKETS
Does the analysis of the IPO markets -- or even a working knowledge of what is going on with new offerings at any given time -- hold any rewards for the non-IPO investor or speculator?
According to Linda Killian, while it may not be accurate to say that a healthy IPO market is synonymous with a healthy stock market, "generally [they] do overlap." Killian hedges, noting there is actually a relatively low correlation between the two over the short term (that is, six months). Although it may seem counterintuitive, IPO performance tends to lag in good markets and lead in bad. Why? It may be because in good markets, companies are looking to get higher-priced deals. In bad markets, companies looking to go public are simply "more interested in getting the job done" and going public. At the same time, "it is harder to get deals done in a choppy market," Killian observes, even though the ultimate prices will be better for investors.
Generally speaking, she adds, companies tend to be market-agnostic when it comes to a new issue. Companies "IPO" when they need to.
A busy IPO market does not necessarily mean a healthier or better-performing IPO market, either. At least from the perspective of an investor focusing on IPO shares in the aftermarket (meaning once the shares are publicly traded on the exchanges) or of a mutual fund like the IPO Plus fund, as long as there are recent IPOs that are still performing well, the IPO market can be seen as healthy and generally a good environment for new issues.
How does the IPO Plus Fund do its own investing in and management of new issues? Of course, much of their method lies in proprietary analysis. But an impressive amount of their thinking is available not just by way of the IPO Home website, but also by way of their book, IPOs For Everyone: The 12 Secrets Of Investing In IPOs, coauthored by Linda Killian and her partners at Renaissance Capital, Kathleen Shelton Smith and William Smith. As far as the fund is concerned, the IPO Plus Fund is guided by both valuation and fundamental analysis (50-day exponential moving averages being of little immediate value for analysis of a new offering!).
Turnover in the fund -- which will continue to hold positions in new issues for some time after they could be reasonably considered "new" -- is dictated by the "activity levels on the calendar," meaning the number of upcoming IPOs of interest to the fund management. Killian says she is wary of too much investment in any one sector and uses a "pigs at the trough" approach in which new investments will push out older, underperforming ones.
At the same time, Killian sees the IPO Plus Fund as a "multicap" fund and is not concerned about the sort of outgrowth problem that other mutual funds might have, such as small-cap funds that are forced to sell positions because a company is no longer "small cap." "IPOs can be of vastly varying sizes," she adds.
Asked what her opinion of the IPO market in 2006, Killian provides a frank analysis. "Good companies are still going public," she says. "But there is still a good deal of skepticism over valuation." She believes the IPO market is improving, but points out the "very difficult" downturn from 2001 to 2003 was reflected by a "very slow period in IPOs." Killian went so far as to suggest that "you'd have to go back to the early 1970s" for a comparable period. "What happens," she says, "is that slowly investors build confidence in new companies and begin to allow their investment time horizon to expand." And for those investors, IPO Home is as good as place as any (and probably better than most) to study and become both educated and prepared to take advantage of the new opportunities that new issues provide.--David Penn, Technical Writer
NEWS TRADERS CAN USE
A subscriber recently emailed me about trading groups. He had been trading for only a short time, with the goal of one day being a full-time trader. He explained that what he felt he needed at this point in his education was, for lack of a better term, the personal touch. He was looking for trading groups, get-togethers where dedicated, committed traders talked shop: winning trades, losing trades, setups that were working, setups that weren't, sector rotation, market sentiment...
I've gotten other email like this from other traders looking for, if not others to trade with, then at least somebody they could talk to. After all, traders can only bore their spouses or partners for so long, and while pets are always ready to listen, they are even less responsive to the rantings of the average trader than the forementioned spouses.
Unfortunately, the collapse of the stock market in 2000-01 brought down more than a fortune in ill-conceived equities. It also brought down a number of investment clubs and traders groups that sprouted like mushrooms from the fertile market soil of the late 1990s. As such, there aren't nearly as many places for aspiring traders to find each other.
The Internet has picked up a great deal of the slack, with message-boards and chatrooms making a comeback in recent years. But one source of trading camaraderie I don't think enough aspiring traders have considered is trader radio. Trader radio comes in a variety of forms, but the most worthwhile includes premarket commentary, a running session analysis -- preferably by or including a daytrader who makes real trades during the session -- a postmarket breakdown and wrapup, and financial market or economic news during or after the close.
I've found trader radio helpful both in making market decisions as well as helping keep me in the right frame of mind when trying to understand why the market is behaving the way it does. Trader radio also tends to be very technical-friendly. While not completely eschewing fundamentals, trader radio tends to be far more focused on how fundamentals -- like the release of the Federal Reserve Board's Beige Book -- will affect the market rather than the specific analysis or attitudes expressed in those fundamentals. There's a nice variety in trader radio -- from the more news-oriented to the more trader-oriented versions -- and if you are a trader and haven't had the opportunity to check out what's going on, then consider this the first step in your introductory journey.
AND NOTHING BUT THE SQUAWK
There's a lot to like about Traders Audio. A service of A-Live Quotes, Inc., out of Chicago, Traders Audio provides premarket commentary from traders like Hubert Senters of TradetheMarket, Denise K. Shull of TradersTalk, and Robin Dayne, "The Trader's Coach." Traders Audio also provides a newsletter free to anyone who visits the website or takes them up on one of their three-day free trial offers. But the main thing Trader Audio provides is live audio direct from the trading pits, or squawk, as traders call it.
If you think getting real-time data is hot, you should try listening to live audio from the pits. With the pace and passion of an old-time auction -- or a high-stakes horse race -- the squawk provides a blow-by-blow accounting of what is happening in the pit. Bid and ask, volume, whether big money is involved, supporting their positions, reversing their positions or sitting on the sidelines... all this is standard fare for the squawk during every market session from open to close. Even the sound of the crowd of traders behind the squawk can be informative, especially when the trading goes from relatively quiet to relatively crazy.
As such, a squawk service is an incredible addition to real-time data for daytraders in stocks, futures, or forex markets. Even for swing traders, holding positions for a few days at most, squawk services like what Traders Audio provides can be a valuable tool to help traders better understand how market news is affecting the markets on a moment-to-moment basis, or how big institutional traders are positioning themselves for a widely anticipated economic event or release.
As of this writing, Traders Audio provides seven different squawk feeds. There are two Standard & Poor's 500 pit broadcasts live from the floor of the Chicago Mercantile Exchange (CME), one with commentary and another that is just the pure, raw roar of the pits. Imagine having a VU meter on the side of your trading screen. That's what the pit-background S&P 500 CME feed is like.
Traders Audio also provides a Traders News Beat feed to subscribe to if you are looking for up-to-the-second news, economics reports, and releases as well as key Fed announcements. Whether or not you are a pure technical trader who cares for nothing but price and volume, having this kind of information streaming into your trading room can only help improve confidence as you listen to the news fall in line behind the positions you've taken in the market.
For professional speculators, institutional traders, and money managers interested in the fixed-income market, Traders Audio provides a live feed from the Chicago Board of Trade's Treasury futures pits where you can follow the action of the 30-year bond and 10-year note, including both the sound of the pit as well as real-time market analysis. This is also a feed that stock traders might be interested in. Given the focus on interest rates -- either as a way of gaming the fortunes of the home mortgage market or to gauge the likelihood of inflation -- a strong sense of how interest rate futures are trading on any given day can be a valuable resource for traders and speculators across the board.
Two of the newer feeds are live from New York: the NYMEX crude oil feed and natural gas feed. Direct from the New York Mercantile Exchange, these feeds provide the same sort of market coverage that Traders Audio's S&P 500 does. Hear bid and ask information as it happens and keep track of what the big money is doing by way of these energy squawks over at NYMEX oil and natural gas.
But my favorite squawk feed from Traders Audio may be the Squawk Trader feed with Mike Kuta. Not only does this feed provide a complete live broadcast from the S&P 500 pits, it includes some insightful commentary by veteran commodity trader Mike Kuta. Kuta guides listeners, lets them know of specific support and resistance areas, instances where big money is making a stand (or getting out), and clues in listeners to the specific trades he is making in the energies, currencies, Russell 2000, or S&P 500 pits. He comes across as a trader's trader, offering advice and information about how professional traders trade, such as his observation that professional traders -- counter to what I often hear -- place positions ahead of key economic reports rather than waiting and trying to board a runaway train by initiating a position after the news has hit the wires.
Elsewhere, Kuta guides traders through the "lunch time rotation" (as he puts it, "Between 11 and 11:15, we usually see a volume spike one way or the other"). Kuta uses five-, 30-, and 60-minute trend indicators as well as the average true range when making trades, as well as other factors that come to light the more you listen to his broadcast. "Squawk Trader With Mike Kuta" occasionally features a trading seminar; most recently, the seminar was themed "Gambling And Speculation" and covered topics such as negative and positive expectancy, "the vig" in gambling compared to "the vig" in trading, and the risk of ruin.
The seminar was interesting, though many of the points mentioned are likely ones that most traders and speculators have heard. What impressed me most about the seminar was how well it complemented Kuta's program and, as a result, the Trader's Audio package as a whole. It could be argued that "Squawk Trader" is a microcosm of Trader's Audio at its best and then some. In addition to the sound from the pits, you have someone reading off bids and offers and noting related events of interest. Add to this Kuta's review and analysis, plus his own trading calls. He caps it off with periodic seminars on some of the concepts you've just heard in action (some of the behind-the-scenes discussion about an especially bothersome pit clerk was fascinating). The trial period for Trader's Audio is short, but when you take it out for a spin, be careful about listening to Kuta's channel. It's so worth listening to, you might forget to check out the others.
NEED TO KNOW NEWS
Taking a different perspective on providing news and information is Need To Know News (NTKN), which focuses on breaking news likely of interest to the average trader, investor, or speculator. This includes economic reports, breaking financial news, and geopolitical reporting, as well as official government announcements from the Fed and the Treasury.
Setting up an account with NTKN was straightforward. I installed a zip file, and after entering my username and password, the program's "dialer pad" opened up. I entered my conference number and dialed in. There is a voice that guides you: press one for futures, two for equities, three for futures and equities, and four for information and news with regard to European markets.
Unlike Trader's Audio, which at its most minimal provides a stream of murmuring from the trading pits and the blaring voice of the commentator calling out bids, offers, sizes, and any atypical action in the pits, Need To Know News is more restrained. Since the network by its own admission eschews "the scripted news" of "minimal trading value," NTKN is silent more often than might be expected because of its emphasis on breaking news. The morning I listened, NTKN was reporting on an AT&T building evacuation involving injuries and hazardous materials crews. NTKN won't be in your ear unless its broadcasters catch news you haven't heard. If you are more accustomed to getting your financial news from the gabfests like those on CNBC, then the selectivity of NTKN might take getting used to. NTKN's broadcast underscores just how little of what is reported in the financial media is really "need to know."
The webpage of Need To Know News is a source of information in and of itself. Website visitors can browse economic reports such as Fed announcements, an economic preview calendar that looks forward to key data releases over the upcoming few days, and an earnings preview calendar. Links to the website's announcements page, as well as more information on European market coverage and accessing the "Washington Releases" archive are also available.
Compared to other sources of trader radio, NTKN is perhaps more modest in its offerings. This is certain compared to those "more-is-more" sources of trader news that seek to fill every nanosecond of airtime with as many (often meaningless) investment datapoints as their announcers can utter. Sometimes I can't help but wonder if the sheer volume of 15-second analyst commentaries, instant from-the-floor dispatches every few minutes and other assorted hyperactivity is designed to mask the reality that much of this information isn't news, it's just data. For most traders, working to analyze often confusing and conflicting market signals, there is only so much room in the brain for news that traders can't use. But for news that traders actually can take advantage of, Need To Know News does as discriminating a job as any.--David Penn, Technical Writer
Return to Table of Contents Originally published in the December 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine.
All rights reserved. © Copyright 2006, Technical Analysis, Inc.