Tuesday, December 27, 2005

Watch list for week of 12-27-05

The list of highlights from my market homework software is big this weekend. This tells me that stocks in general have been consolidating for weeks now. Makes sense when you look at the chart of the nasdaq. A few of these stocks are already starting to turn up, which is a positive sign if you're leveraged long like I am.

I always love seeing a stock that I've been particularly interested in to pop up in this report, like DPZ this week. Here's the list:

Thursday, December 22, 2005

TASR(E) possible trend reversal?

$COMPQ late 2002, early 2003 market bottom

TASRE possible bottom

"Divergences between weekly MACD-Histogram and prices are the strongest signals in technical analysis... ALLY had managed to put in a bullish divergence of MACD-Histogram, a hugely powerful signal that is rarely seen on weekly charts." -- Dr. Alexander Elder, Come Into My Trading Room, Pages 132, 133

When I saw TASRE's chart this weekend, Dr. Elder's passage came to mind, and so did the bottoming pattern on the nasdaq's weekly chart in late 2002 and early 2003. Because of the multiple converging buy signals I put on a long position yesterday, and today it is up nicely. I wouldn't bother to post this, except for two reasons. I want to document this position for myself so I can easily refer to this possible bottom in TASRE when I want to see whether it worked out or not. The other reason is that if this really is a trend change, today's 10% gain will be a drop in the bucket. I wonder if TASR will have an echo boom similar to the nasdaq's 2003 rally?

Here's a recap of my reasons for buying TASRE:

  • I couldn't believe it when TASR became TASRE earlier this year. How the mighty had fallen, I couldn't believe it! But the reality is that TASRE helps insiders and financiers to accumulate shares cheaply. When the "E" dissapears off the end of the symbol, you can bet that the insiders will already have increased their stake and are ready to run it up. TASRE is a buy signal for me.

  • MACD-Histogram / price divergence on weekly chart.

  • TASRE made a higher low on the weekly chart and may soon make a higher high.

  • The price has already begun turning up from its higher low on the weekly chart.

  • There is visible accumulation on the daily chart over the past 3 months.

  • The nasdaq trending up on many timeframes, and at new 52 week highs.

  • There is a nice "wall of worry" to provide the uncertainty that fuels an uptrend.

Monday, December 19, 2005

Watch list for week of 12-19-05

Here are the highlights from my market homework software this weekend. These are spotty setups in my opinion and I probably won't be acting on any of them, but it will be interesting to watch how they act at these key turning points:

Thursday, December 15, 2005

Kirk Report on improving watch list research

The Kirk Report had a great article today about reviewing the biggest winning stocks each year to see where you could improve your methods for identifying and making money from them. This is something that I have also been doing more than usual lately. The description I made for this blog when I started it over a year ago is about that exact subject: "Talk about stocks that are in play, and strategies for taking $$$ out of them." I've thought about changing this description many times, but I always change my mind because this blog chronicles my quest to make audacious returns from the best stocks the market has to offer.

After reading Kirk's post, I did some personal assessment. NTRI was the best performing stock of the year according to Kirk's scan. Well, I bought it on April 7'th, and you can read about how I played it here. It is kind of embarrassing to read this post now. The first stock I bought long this year was the biggest winning stock in the market! I knew it would be very good, but I did not expect it to be the next TASR. After buying near $6 and selling for a quick gain near $12.50, I bought NTRI again months later at a much higher price when it broke out from $32, but this time I'm not selling it so easy. The reason? I've looked back on charts like AAPL, GOOG, NTRI, CERN, SNDK, and the dozens of other stocks that have been in great uptrends this year. Finding the best stocks is easy for me, but making LOTS of money from the trend is so much more difficult for a lot of complicated reasons.

My reflections lately have really hammered home the idea that betting on the resillience of uptrending stocks pays so much more than betting on rare crashes and trying to outperform even these wild uptrends by trading in and out of them. This idea by itself was not enough though, it wasn't until I visualized the expansion and resulting volatility of my trading account with positions that had tripled and quadrupled while I pyramid into them with margin that I was ready to advance from a swing trader to a trend follower with a much longer time horizon and insensitivity to the day-to-day fluctuations.

Earlier this year I read Brad Koteshwar's book The Perfect Stock. Among other things, the book talks about a disciplined trend follower's trades in TASR. I highly recommend this book to anybody interested in trend following. It is another one of the great trend following fables like I talked about a couple weeks ago.

Wednesday, December 14, 2005

Cup & handle on TWX weekly chart

TWX weekly 12-14-05

I like to put on a probe position near the low of the handle when a stock makes a well defined cup and handle chart pattern like what we're seeing here on TWX's weekly chart. I've done that with TWX today. I'll add to my position if it breaks out above its upper-channel line, the one I've drawn across the top of the recent price peaks. If it breaks out, and as long as everything still looks good, there will be one last chance to add to my initial position when TWX pulls back to a 10 or 20 day simple moving average. I usually don't use all three of these buy points, but they work well as checkpoints for monitoring the stock's progress.

To review, the three buy points I use for putting on an initial position are:

1) Buying near the low in a handle or consolidation. I use intra-day charts to get the best price I can. I tend to buy slightly after the actual low.

2) Buying an upper-channel line break that appears on daily and weekly charts. I usually make these buys towards close of the day or week, but if it gaps across the line then I'll buy at the open.

3) Buying the first pullback to the 10 or 20 day simple moving average. This is my least favorite of the three, but it is important for getting aboard powerful market moves when I'm late to the party.

"So how 'bout those Pet Shop Boys?" -- Dave M.

Monday, December 12, 2005

Watch list for week of 12-12-05

The naz has broken out of its range on its weekly chart. Could this be a trap to suck in the last buyers? I don't bet that way. I'm long for the uptrend. I love how the market has a huge "wall of worry" to climb right now. The higher we climb, the louder people will scream too :D

Last Friday I initiated a position in a stock that my homework software has been alerting me to for a while, NUVA. You will see it mentioned a few times in this blog's archives over the past month. The weekly close above its upper-channel resistance line is a buy signal for me. The trade is virtually identical to one I put on a little over a month ago in LKQX. I'm still carrying the LKQX position. I hope it is obvious after looking at both of those charts why I put the trades on. Of course I'm carrying other positions too. I started buying stuff in October just like everybody else, the difference is that lately I'm net long instead of net short like I was in October.

Here are the highlights from my market homework software this weekend:

Here is a tangent for anybody who is bored or otherwise interested. I have found the most amazing radio station ever to have been conceived: RADIO NIGEL! The best part is that it is a streaming internet radio station, so it is free and available to everybody. The link for listening in can be found on the top-left corner of their page. It used to be that I just watched cartoon network all night (at my computer of course), but now I do cartoon network AND radio nigel at the same time!

Saturday, December 10, 2005

A fiery quote from Bill Cara

I thought this fiery quote from Bill Cara's coverage of the latest on Stelco captures the spirit that I approach the markets with:

So, by telling you about Stelco, I am telling you about the dishonesty that is widespread in capital markets, where the participants are politicians, judges, lawyers and accountants, management and Directors, and securities commissions, all wrapped up in self-serving affairs that do not lead to fairness in capital markets. You accept it and move on.

But you get even. You make 5 pct here, 5 pct there. When you sell, you make sure you leave the promoters holding the bag. Stocks are not your children; they are merely prices that you trade for gain. Your gains become your wealth. You are not an investor -- unless you happen to be Warren Buffett and others who get involved in the Boardrooms and the courtrooms -- you are a trader. Be proud of that. Go make money.

I doubt even the great Oliver Stone could improve that prose.

Tuesday, December 06, 2005

Chris "Piranha" on trading, and me on trend following fables

One of my trading mentors, Chris at marketstockwatch.com has addressed an important question for traders: whether it is better to ride long trends or short ones? Here is a link to his discussion.

Chris has experimented for years with both short term trading and long term trading and describes his preference, "I am looking for the big, long term moves, not the short quick gains. The big moves make you rich, not the quick little gains; they make you impatient and hesitant. Patience is the key to success if you want to make the big bucks on Wall Street." This position is familiar to people who have read my all-time favorite book, Reminiscences of a Stock Operator.

Unfortunately, long-term trend following is one of those things that is much easier to say than to do, as anybody who has tried can attest. I love all the long-term trend following fables that great traders tell each other for strength. Reminiscences of a Stock Operator has plenty of them in it, one of the more memorable ones is about "old man Partridge". The entire book itself is even a trend following fable! The trenders blog linked on my blogroll had a great one a couple weeks ago, this zen story has popped into my head countless times since I read it. Ed Seykota tells a memorable one about a jademaster and student in his book The Trader's Window. Jack Schwager liked it enough to include it as a prologue to his The New Market Wizards book. Michael Covel, author of Trend Following covers all kinds of great trend following fables, which leads me to one of my own. People who know me are going to laugh at this one if I haven't already told them!

When I first opened a forex account I tried to trade the same patterns on the EUR/USD that I do in stocks. I don't do that anymore, and when I first realized it wasn't going to work, I noticed something else. I saw that when the price deviated much from its average, there was a very high percentage chance that it would revisit its average price again, and even swing past it on momentum. In fact, it would revisit almost ANY price! So I put on a small position, and when it went against me, I averaged down into it. When it kept going, I averaged down again. As the price revisited each level where I had added to it, I took some of my position back off, so that when it reached my original entry, I had the original position, only I had slightly reduced my cost basis. A little bit more movement in my direction would cause me to close the trade at a respectable profit. I would never have dared to trade stocks this way, and I knew what I was doing was wrong, but I did it anyway.

Well a couple days later, the inevitable happened, the trade didn't come back my way and my loss was snowballing. I happened to be doing some reading while I was babysitting my currency position because it was getting very late but I was stuck at the computer to finish this trade. Maybe you can guess what I was reading. I thought, "I wonder what Victor Neiderhoffer would do? He was in a jam like this in the beginning of his book The Education of a Speculator." Now, mean reversion works for some people, but when they blow their tops, it is spectacular. Victor's demise being an example discussed in Michael Covel's book. So I'm reading Victor's yen trading story while I've got this loss is snowballing out of control and I had a moment of clarity. Averaging down like I was doing is destructive behavior. John Maynard Keynes may as well have been standing right beside me with a chalk board chanting, "Markets Can Remain Irrational Longer Than You Can Remain Solvent. Write it one hundred times and think about what you've done." I was lucky to be trading small enough when that happened that my large loss in currency was smaller than an average loss in stocks for me at that time.

I guess mine wasn't much of a fable, more of a trading sin confession, but the lesson is relevant. And I wanted to be in bed an hour ago so I'm through here for now :D

P.S. I respect Victor as a trader, and I mean no disrespect with this post. Vic, you're a legend and I like your books!

60 degrees eh?

I just read an article on exit strategy from TradingMarkets.com that was linked from the yahoo finance front page. The author has a nice quote at the beginning: "Let your SLOW MOVING winners ride, and cut your TOO FAST winners and all of your losers short." Ok, I'm with you. Sounds agreeable to me. So what's this exit strategy I came here to see? Here we go:

"When a stock is moving in your direction, "let it ride" if the angle of the trend is a 60 degree slope or lower, and exit into the sharp wave on big, sharp movements in your direction that look closer to 90 degree angles."

Wow, what a completely useless strategy. Did you know that the angle you see on your chart is completely dependent on the timeframe, how many bars you are viewing, and whatever cosmetic settings your chart software is using at that time? I knew this, but I'm sure there are plenty of people who didn't know any better and might actually try this one at home!

Is the ANGLE of this thing 70 degrees or 40 degrees?

Both charts are of the same publicly traded issue on the same date, just different timeframes and number of bars. So is it a sell or a hold according to the article's supposed exit strategy? The correct answer is to use a better exit strategy.

Monday, December 05, 2005

Watch list for week of 12-5-05

Here are the highlights from this weekend's market homework software:

My favorite bases on weekly charts right now are:

One thing that worries me about stocks that are still basing is that the nasdaq has advanced about 10% in the last 8 weeks, so any stocks still basing are lagging the market and may not be the best ones to be in.