Monday, October 25, 2004

HRT perking up

HRT looks like it is starting to ascend from the bottom of the handle of a huge cup and handle pattern. I've posted the weekly and daily chart for HRT. HRT has a float of 2 million shares, so it can move up quite rapidly. I'm watching for a substantial increase in volume tomorrow to confirm that HRT really is headed higher.

Playing defensive right now is the name of the game, so I'm going to place a stop 3% below my purchase price if HRT starts flying up on heavy volume and I feel it is safe to buy. If I buy right then I won't have to worry about getting shaken out, but if it reverses then my capital will be protected by the stop.

Sunday, October 24, 2004

Why are we still in a confirmed rally?

There are plenty of reasons. How about the nice cup and handle that SHFL broke out from on Thursday and Friday. SHFL is ranked #22 on this week's IBD 100. GOOG took the number 1 spot on the IBD 100 this week after investors embraced the earnings report with open arms. SYNA is in the #15 spot after reporting earnings and running up huge. But the most interesting IBD 100 pick this week is TASR. Coming out of nowhere (hasn't been in the IBD 100 for months) to take the #3 spot this week, TASR is sporting a textbook cup and handle. This thing could break out in a huge way any minute now. I've got a large position in TASR and will add more during a convincing breakout. I'm no expert at assessing base stages, but my interpretation of O'Neil's base stages, TASR reset to a first stage base after it collapsed over 50% back in April. The short interest in TASR is huge but they haven't broken key support levels, so this should add fuel to the fire if it does break out. I think this is the kind of setup that O'Neil might take his cash out of the money market to get a piece of.

We aren't all in the clear though. This Friday gave us some NASTY reversals. Take a look at JUPM, YHOO, EBAY, TZOO, AIRT, and NVDA. All of these stocks looked like they had a good thing going last week and then BAM, out of nowhere huge sellers came in to liquidate into the strength.

With the election right around the corner and oil still going strong, we probably don't quite have all the ingredients in place for a sustained bull run yet. I've been taking it easy lately because of all the reversals going on right now. The market is almost unpredictable for my style of trend trading when there is so much uncertainty. We aren't really seeing an uptrend (higher highs and higher lows) or a downtrend (lower highs and lower lows) across the major indexes right now. The naz has been stuck in a remarkably tight range of about 75 points for the entire month of October and it sort of looks like it has been in an uptrend since August. But the S&P 500 and the Dow tell a different story this month. Both are clearly moving down. With the MACD indicator on the naz starting to point down, the naz may well join its peers and slide off.

TASR is my only position right now after getting stopped out of AIRT during its Friday reversal. There is a good chance that I won't trade anything except TASR until after the election.

Thursday, October 21, 2004

A new round of "Strategy Lab" starts tommorow

CNBC's Strategy Lab begins a new round tommorrow. I believe the rounds last 6 months. One thing I really like about this closed competition is that each of the 6 contestants must pick a strategy, stick with it, and provide commentary justifying the stock picks in the open portfolio.

John Markman won the previous round with a 4% gain in his $100,000 contest portfolio. The way Markman picks stocks is probably my favorite out of all of the contestants because he narrows his stock universe with a screening process that he understands, and uses technical analysis to time his buys and sells. While our market timing techniques and stock picks differ, I still feel that Markman is representing strategies like mine in the contest and doing great.

Don Luskin is a sharp guy too and fun to read. Luskin came in second last round with a 3% gain. He uses technical analysis like a black box by relying on market "Buy" and "Sell" signals from his technician friend Fred Goodman. Luskin uses a macro view of the markets by constantly monitoring political developments, currencies, bonds, and many other markets. One thing I've found that works just as well as the "Buy" and "Sell" signals Luskin has told us that Goodman has issued for the market averages is the MACD indicator. When the thick oscilator line crosses over the thin line, you have just witnessed a change in market direction. So simple! Enter the ticker "$compq" on and check out the MACD at the bottom of the chart.

I don't follow any of the contestants strategies or use any of their picks, but it is always great fun to hear commentary from people who back it up with public real-time trades. If any readers also maintain a trading blog, drop a link in the comments and I'll add it to my Bloglines list of blogs that I read regularly.

Wednesday, October 20, 2004

Looks like oil hasn't topped yet

A lot of IBD 100 energy stocks look like they may be putting in short term bottoms and set to move higher. Have a look at UPL, XTO, PXP, VLO, HYDL, and OLG. Pick your favorite poison if you are in to hedging yourself with the oil stocks. A couple of energy related stocks that I like much better are EXM and WLB, but these two need to show the kind of strength we saw today in the first set of IBD 100 energy stocks listed before I take positions in them. WLB still looks at least 2 days away from setting up off of a bottom so I won't be watching that one closely tomorrow.

I am encouraged by all the green I saw today on my "Free fall" list from yesterday's journal. While most of this was just oversold bouncing, at least people are buying. If they keep buying, guess what happens ;-)

A few random picks from my watch list tomorrow:

HRS - The chart vaguely resembles JPM at the beginning of October. If HRS cannot make a positive reversal tommorow, I think it is a good short. Look at the huge volume expansion starting Tuesday when HRS pulled a negative reversal and continued down today. I haven't bothered to look, this is just conjecture, but I'm going to guess that HRS will report earnings sometime during the next two weeks and a few big hands are unloading ahead of the report.

TZOO - TZOO had a positive reversal today, bringing it to the kind of sweet spot I'm looking for to enter a position on strength the following day. If you get TZOO at the open tommorow, make sure you see about 200,000 shares traded on a price runup of at least 3% from today's close in the first 10 minutes. Anything less and you are probably being lured by sirens =)

I'm sure most of the readers (if I have any!) have picked up on the fact that almost every stock I talk about here is either currently an IBD 100 stock, or has been at some point in the recent past. A few of the exceptions to this are mostly low-floaters that have perked up. My experiences with this weekly index (the IBD 100) leads me to be confident in Investor's Business Daily's ability to screen stocks that are in timely industry groups, trending higher, fairly liquid, making money, and volatile enough for opportunity.

You know the top of the housing market is near when

1990's model Honda Accords and Toyota Camries have "We buy homes for cash!" stickers all over them. How about buying a modern car for cash? It seems like I see at least one of these ridiculous car and drivers a day lately. They are always on the cell phone when I look in the car too. Is it just me, or have a lot more people figured out that it is much easier to talk on the cell phone and read the newspaper on the way to work with the cruise control on about 15 miles under the speedlimit? The worst is when you get two of these drivers next to each other on the highway. Pathetic.

Tuesday, October 19, 2004

I smell a rat and here is why

I went through a lot of charts of the stocks I follow regularly and was shocked at how many stocks are in free-fall right now. I don't usually pay much attention to stocks that aren't near an entry point, but tommorow I want to watch these stocks to see if they all continue to fall tomorrow. Note the diversity of sectors represented. Here is a list:

IST (Steel)
STLD (Steel)
PCU (Copper)
PD (Copper)
TZOO (Internet)
UCI (Insurance)
UPL (Energy)
WLB (Energy)
TOPT (Transport)
WLDA (Transport)
DDN (Transport)
ESMC (Medical)
WOOF (Medical)
IDXX (Medical)
AVD (Chemical)
CFC (Financial)

I don't like crying bear, but the MACD on the naz still shows that we are in a down-trend. Today's negative reversal may have sealed the deal, but there is no way to know what will happen tomorrow until tomorrow. Here are a couple of stocks from my watch list for tomorrow that may start a new trend one way or another soon:

EXM Currently consolidating, may break up or down.
HAR, HDWR Both showing some signs of distribution on the chart.

Lots of churning going on lately...

If I was a day-trader, I would have been tickled pink at all the profits I would have made with my perfectly executed plan for CAAS this morning. But I am in for the big swings so I never take profits on the first day of a trade, and am vulnerable to my biggest losses on the first day because of the way I trail stops.

After about an hour or so in, CAAS reversed, stopped me out and then churned for the rest of the day. I'll be watching this one from the sidelines until a sound base has time to form. Looking back, I am happy about how well everything went according to plan at the open today. It is much easier to trade elaborate plans like that than it is to wing it =)

I took a buy signal on TASR today when it remained above the resistance at $40. There was definetely a lot of churning going on though because the stock barely closed above resistance, and not even close to the top of its intra-day range. It will be interesting to see if it falls back into its base or not this week. Doing so would stop me out, but that is ok because it would be very bearish action and I wouldn't want to stick around to see where it goes after that.

I'm wary about the market right now because the magnitude of the volatility of the stocks I've been watching is getting ridiculous, and the predictability has gone down a lot just in the past few days. Reversals have been increasing in frequency in both directions. Watch the stocks on the "Where the big money is flowing" list on the front page of over a couple of days and you will see what I'm talking about. Just imagine the entire market pulling a PCU, UCI or MRK =/ If the dollar collapses, oil just keeps going higher, and a strategic attack this election season and we could see it happen. Be careful guys and gals! In the meantime, I'm doing what I do when I get cold: trading less and studying more.

Monday, October 18, 2004

Plans straight from the war room -- uncensored

Different kind of post tonite. I'll cut straight to the chase. I had a bad trading day today and when that happens, my intensity goes straight through the roof. I'm not messing around with trying to follow a dozen stocks tomorrow like I usually tend to do. My watch list is only two stock for tomorrow: CAAS and WLDA. Both are low-floaters that have tiny windows of opportunity for traders like me to enter a position.

CAAS did a curious thing today. It gapped down this morning, but there was no volume to it. Price and volume steadily rose all day until the final crescendo at the close where we saw 6 digit volume in a 10 minute block for the first time all day. The price swings of this stock have been wild so I cannot afford to mess this up. For me to enter this stock, I need to get in when it makes a new high at $12.65. CAAS closed at $12.10 and finished after hours trading at $12.38. If everything works out perfectly, the stock will open at around $12.10 and trade all the way up to $12.66 in the first few minutes. I want to see volume greater than 75,000 in the first 5 minutes, and nothing but upward price moves. If CAAS gaps up over $13, then I will have to wait for a better entry point. If it starts trading up incredibly fast at the open with what looks like heavy volume, my chances are worse, but I will put the buy order in ASAP. I will set my downside stop at 4% since this stock is way extended, and re-evaluate throughout the day whether my stop needs to be moved up or not. Probably the only way I will stay in this stock is if it goes up and stays up tomorrow. So to re-cap:

CAAS plan A (first 5 minutes of trading day)

1) The volume within the first 5 minutes is > 75,000
2) The price is between $12.66 and $13 and heading higher.
3) Stop will be placed approximetely 4% below my purchase price (about $0.50).

CAAS plan B (gap up)

1) Gauge the volume to see if it will likely be above 1 million shares in the day.
2) PATIENTLY wait for a breakout from a consolidation above $12.65 during the trading day.
3) Buy if the current 10-minute bar is on track for a six-digit volume during the breakout. Place stop slightly below the consolidation area.

WLDA looks like it may be forming a bottom so what I am looking for is a confirmation of a change in the trend. The most compeling scenario for me would be a close above $6.00 a share at the top of the intra-day price range on at least 4 million volume. To be on track for this, it must trade at least a half a million shares in the first hour of trading. I'll need to see six digit volume in the first 10 minute bar tomorrow if I am going to get in near the open. WLDA went into an intra-day consolidation at the top of the range today with a high of $5.68, so I'd like to enter a position on a breakout above that intra-day high. It looks like there might be some resistance around $6.10 where it gapped down from a few days ago, and again at $6.50 so those prices might give a second chance for entering WLDA.
Again, I'd like my downside stop about 4% below my entry point because I don't want to take any chances with this risky stock. It is either going straight up, or I am out.

WLDA plan A

1) Six digits of volume in the first 10 minutes
2) Share price above $5.68

WLDA plan B

1)The volume has been heavy enough throughout the day to reach around 4 million by close.
2) WLDA consolidates around $6.10 or $6.50.
3) Buy off of a 10-minute 6 digit volume breakout from one of the above listed consolidations.

Monday blues

Being net short going into a day where the naz goes up over 1% is like taking a cold shower! I covered all my shorts and also stopped out of my only long coming into Monday: TZOO. With oil thrashing around like it is, the market won't pick a clear direction. Being a directional trader, I am having a difficult time this past couple of weeks. However, if the market can rally from where it is right now, it would be very bullish because we would be seeing higher highs and higher lows. We may have a shot at breaking out above this trading range that the market has been in since the beginning of the year if this happens. There is all kinds of bad news coming out every day, so it is hard to believe that a big rally is possible, but this negative environment makes a rally all the more bullish. Listen to the tape =)

TASR tried to gap up this morning and I bought in with a stop just under the low for the day (top of the gap). When TASR couldn't break $40, it cruised back down into its base to close, stopping me out for a small loss. I get to watch earnings from the sidelines this time ^^

AIRT gave another buying opportunity this morning and I took it, but the price advance tapered off quickly after I got in and remained flat for the rest of the day. AIRT is my only position right now.

CAAS ran up like crazy in the last 30 minutes of the day and I didn't even notice it because it was down over 10% all day =/ If it looks strong at the open tomorrow I may put on a long position.

Some comments on my watch list for Monday

I'm wrapping up my weekend market homework and everything is progressing as I expected. Yahoo finance's headlines discuss oil trading above $55 overseas, the Japanese markets are down, and the dollar has fallen against the yen. These are all bearish items for the market, but I'm net short going into Monday after stopping out of a few long positions on Thursday and Friday =) Anytime a bunch of my positions stop out all at once, it makes me sit up and take notice because something is probably wrong.

A few internet stocks I expect will probably roll over on Monday and Tuesday are EBAY, YHOO, NILE, and SINA. It looks to me like all it would take on any of these stocks to push them over the edge for the week is a price decline of about 3% on Monday.

I think investors have a lot of reasons to be skittish right now. The insurance scandal, and collapse of the drug companies and industrial metals are affecting the entire market. Stocks are just not cheap enough to look like a sale to value buyers if the threat of a 15-40% collapse is more likely than a 10% gain over the next 6 months regardless of what the P/E's are and I think that picture is in a lot of investors' minds right now.

I'm also still watching TASR. I've heard they are reporting earnings on Tuesday so if I see heavy buying on the tape on Monday, I might buy some with a tight stop. I'm up about 13% in TZOO right now by using the same move just before they reported earnings. I've found that stocks are much more likely to already be in a short term decline before making a large gap down caused by a press release or earnings, so I'm comfortable taking this calculated risk if the buying before hand is heavy enough and there is no obvious strong-hand selling.

Sunday, October 17, 2004

UCI gave technical warnings before the insurance scandal news broke

I shorted UCI at $32.84 in a trading contest on Thursday and I wanted to discuss the trade a little here.

UCI showed 3 out of the 10 signs to watch that your stock may be topping listed on pages 106 and 107 of the 3rd edition of William J. O'Neil's book "How to Make Money In Stocks".

1. Largest daily price run-up. If a stock's price is extended for many months (it's had a significant run-up from its buy point off of a sound and proper base) and closes for the day with a larger price increase than on any previous up days since the beginning of the whole move up, watch out! This usually occurs very close to a stock's peak, or top.

UCI had just such a day on the 2nd to last trading day in September.

2. Heaviest daily volume. The ultimate top might occur on the heaviest volume day since the beginning of the advance.

UCI had its biggest volume day since the beginning of it's advance on the 4th trading day of October, and it couldn't even make a new high!

5. Signs of distribution. After a long advance, heavy daily volume without further upside price progress signals distribution. Sell your stock before unsuspecting buyers are overwhelmed.

The volume of UCI was clearly larger during the beginning of October than at any other time during UCI's advance. The well defined resistance near $36 a share makes the distribution obvious.

It is interesting that UCI was flashing all of these sell signals in early October because on Thursday, the insurance industry scandal came to the surface. It is neat to see how the technicals tell the story before it gets to the public via the news media.

I'd like to close with a recontruction of a conversation with Jesse Livermore to his sons on the stock market on page 144 of Richard Smitten's book "Jesse Livermore: World's Greatest Stock Trader":

"There were other factors as well to mark the end of a major market move. There was usually heavy volume, but the prices stalled, they did not go up and make new highs on the leading stocks. There was no strong continuation of the current move. There was a clue, a warning. At the end of a market move it is usually pure distribution, as stocks go from strong hands to weak hands, from the professionals to the public. It is deceptive to the public who view this heavy volume as the mark of a vibrant, healthy market going through a normal correction, not a top or a bottom. I was always alert to look toward volume indications as a key signal at the end of a major move, either in the entire market, or an individual stock."

Saturday, October 16, 2004

CAAS the next big low-float play?

This stock many of the characteristics that I love to see. The volume has expanded to the millions, the price is now in institutional territory, the total shares outstanding is 22.58 million, but the float is only 2.5 million. Insiders own 90%! ROE is 23.88%, and diluted EPS is 0.262, which is in the green. If you look at TZOO and AIRT you will see similar numbers.

Friday, October 15, 2004

To trail the stop-loss, or not to trail the stop-loss?

The "Investor's Corner" column from today's IBD discusses O'Neil's stop-loss and buy-stop techniques. Here are my thoughts on this:

The column author discusses placing buy-stops at the pivot points defined in O'Neil's book HTMMIS: 10 cents above the high in the base. I can watch the market from my desk so I don't use buy stops, but I think they are useful as long as you can trigger a stop-loss when your buy-stop hits if you can't watch the market.

However, I don't buy at O'Neil's pivot points very often anymore because this year's fickle market won't let you get away with any mistakes, and many of the stocks that set up cute little handles are wolves in sheeps clothing. It seems that overhead resistance isn't the problem in the strong stocks right now, the problem is the underlying support. Even though a stock might set up nicely within 15% of its 52-week or all time high like in the book, odds are the stock has already run up significantly last year and so the people who bought back then are selling their shares to the newcomers who have to deal with shorter rallies and longer declines in the market averages. If you look at the 2-year chart of the nasdaq, you will see that there were just as many, if not more declines in 2003 as in 2004, but they were smaller in magnitude and didn't last as long. In 2003, time was on the side of the shareholder. Not so in 2004.

This brings me to my second criticism of the column that applies when you are trying to make O'Neil's system work in this sideways market: not trailing your stops. I keep a stop-loss on every stock that I buy or short and advance the stop every day no matter what my stock does. Think about what this does! If you buy into strength, then time is on your side! Your advancing stop will automatically kick you out of the stock when it starts to show weakness. You are only vulnerable during the first few days after your purchase except in the rare cases where a stock gaps down from an up-trend instead of trades down.

I'm not going to discuss exactly how I place my stops each day, because everyone should have their own system for this that they are comfortable with. Buy on strength, maintain your stops, and let them take you out of the stock. By doing this, you don't need to wait for handles or pivot points, you only need to see a new show of strength and give the stock enough room to account for its normal volatility during its run.

Travel Zoo's successful advertisement campaign

Congratulations Ralph Bartel! I don't think there is anybody with the money to travel who hasn't heard of Travel Zoo now. Brilliant strategy... I'm long BTW =)

Thursday, October 14, 2004

My beautiful girlfriend Crystal and I going out for a night on the town in my 3000gt-vr4.

Today's plays

I saw 3 great trades and took two of them. The one I passed on was shorting UCI. UCI has been in a 6 month long up-trend without ever wavering. I was looking at its chart last night and noticed a large expansion of volume over the last week, but a curiously well defined price ceiling around $35. UCI was getting hit with distribution and was starting to roll over. It opened today at $34.75 and closed down 12% at $30.41.

Early in the morning, nothing on my watch list was working out the way I figured it would except for PARL. PARL ran from under $10 to a peak of $16 over the last 2 weeks, trending beautifully as it did this. I noticed it was starting to droop, just like a lot of other stocks right now and put it on my watch list as a short. I got shares short this morning at $14.02. PARL closed down a little over 4% today at $13.78. I'm still holding the short because the MACD on the naz shows that we are entering a down-trend and I expect a lot of the stocks I am seeing rolling over right now are going to get hammered.

The 3rd great setup I saw today was EXM. I've been sitting on a bunch of cash for about a week now waiting for one of two stocks to confirm a new up trend: HRT or EXM. EXM is a sea transport stock, and HRT is a medical stock, so the odds are that only one of them will be a good long play at a time. Commodities won out, making EXM the play. The stock closed up 13% today, I got in after about 11% of the rise at $34.80 because of a really bad execution. Incidentally, I tried to get into HRT on Monday and got stopped right out for a tiny loss the same day. I'm guilty of jumping the gun sometimes, but using a well positioned stop keeps me out of any serious trouble: HRT lost almost 10% today! Stocks are so volatile right now because oil and the indexes are thrashing around trying to figure out which way they will go! In the mean time, stocks that are set to go up are going up in a huge way, and stocks that are set to go down are going down big. The volatility is great for making $$$ right now if you know what you are doing and are lucky enough to not get caught in a reversal.

A few stocks to watch tomorrow:

TOPT - watch on the long side

TASR - will break from its range one way or the other someday!

RIMM - just started an uptrend, but dangerous to be going long right now IMHO

FMD - looks like it is rolling over

Oil will dictate what the market does for the rest of this week, so keep your eye on that! It probably got enough kick today to bring it back into an uptrend, which makes the oil stocks tempting =)

Analysis of the effect of drawdowns

The trick is to avoid portfolio drawdowns because then you are only compounding your gains. I've been obsessed with market timing techniques for months so that I can do just that.

In the table at the bottom of this post, I have listed the montly close price of the nasdaq index for the last year, and computed its gains or losses for the month. At the bottom of the table you can see that over the last year, after compounding the monthly gains and losses, the nasdaq lost 0.6%. However, if we were able to sit out the months where the nasdaq went down, we would be up 19%.

Is it possible to sit out for most of the drawdowns without increasing risk and missing too many periods where meaningful gains could have been made? I think so. I'll be posting more ideas on this subject in the future.

Date (monthly)Close pricechange from prev (multiple)compoundedcompounded excluding drawdowns