Weekly Wonders

Jul 24, 2007: 7:25 PM CST

I promised more weekly uptrends to study in the last post and here are a few examples:

Warnaco Group – WRNC – is exhibiting a “two-step” move and is currently beginning a potential sell swing lower (aka – not time to buy now… study the chart only):

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Blue Coat Systems – BCSI -  Notice the absolute strength of the price move from $12.50 all the way to $55 with only two pullbacks for entry.  In runaway trend environments, you really don’t get the normal or nice pullback to a moving average that calls for proper entry points.  It is thus best to think of entry targets as ‘zones’ and confirmation points rather than exact perfect pullbacks.  Alternatively, you could use a shorter term moving average for entry (I use the 20 period MA).  We are also coming up on a potential pullback/sell wave for BCSI:

bcsi-w.png

 Dresser-Rand Inc – DRC – We had a long consolidation period following this IPO and have had a runaway move since price made a low at $19.  Price reached $42 less than a year later, doubling in value.  Following March, there was absolutely no moving average entry pullback on the weekly chart.

drc-w.png

What is the point of posting ‘picture perfect’ charts?  If you study what’s happened, you can identify similarities that may lead to knowledge to capture some of these moves as they are unfolding right now.  Hint – technical analysis alone is NOT sufficient to allow you to capture moves like this consistently.  You need to look behind the charts to the sector (and relative strength of the stock) and fundamentals (best done on the fly with stock scanners you have found produce good results).

Technical analysis does not work in a vacuum – price does not move magically because a chart pattern or price movement ‘looks’ good.  People don’t pour money into a stock with a ‘great’ pattern.  The major funds do not risk billions of dollars exclusively because of something they see on a chart – they look much deeper at a company before putting capital to work.

Price and volume action alone cannot tell you how far a stock is likely to move – few things can.  It still all comes down to odds and probability and perception.  Fundamental or sector analysis is like a wind that drives the odds in your favor when you see certain chart patterns.  In fact, it may be best to start with a fundamentally sound watchlist and then act when you see a compelling pattern.

Do not trade in a vacuum – there are so many factors that move price.  Put the odds solidly in your favor.  This means more than “there seems to be support at a moving average and the RSI is below 30 and the ADX indicates a high value, indicating a trend is present … etc”.  Begin with a “Top-Down” approach to put the odds in your favor and once you find good candidates, hold on to them to let them run for as long as possible!

It may take only two to three major winning trades to make your whole year – thus, keep a few slots in your portfolio open for long-term position trades.  Remember, trades held longer than a year receive more favorable tax treatment, adding to your bottom line.

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Solid Weekly Uptrends

Jul 23, 2007: 11:34 PM CST

I tend to get caught up on the daily charts and play for smaller targets and this is a bane of mine and – I suspect – many short-term traders as well.  When you position yourself on daily charts for swing candidates, you may play for $5 or $10 per swing with respective stops of $3 or $5 per position.

Realize that your parameters and chart analysis can be very similar for the weekly charts – however – a major difference is that your price targets (and stops) increase immensely.  Now, you may play for $20 to $30 (or more) per “swing” position with stops being upwards of $10 away from entry.

Give the following charts consideration and examine only the structure of the uptrend and realize how the daily charts can throw you off of the powerful move underway in the stock price.  Remember, in a strongly trending environment, it is best to use moving averages over oscillating indicators, which is what I have done on the charts:

(charts are randomly selected and filtered for visual uptrends for educational purposes)

Apple – AAPL is exhibiting a ‘monster’ uptrend and ‘nosebleed’ recent highs.  The 20 period moving average has so far supported any pullbacks.

aapl-w.png

Atheros – ATHR – is showing a steady ‘wave’ pattern with a very strong impulse beginning in 2006 with a corresponding corrective wave down (which looked absolutely horrible on the daily charts at the time – it was a 50% correction) and then we are experiencing a steady (smooth) wave up where the 20 period moving average has predictably held price action:

athr-w.png

Holly Corporation – HOC: I really can’t add much in words – the chart speaks for itself.  Ever since testing $40, the price has moved in an extremely steady uptrend (this doesn’t look that pretty on the daily charts, though)

hoc-w.png

Exxon Mobile Corporation – XOM: I have followed Exxon for a few years now and have traded profitable positions in and out of it (including options positions).  As expected, price follows that of oil prices, which have also been on a steady uptrend over the last three years. Exxon’s weekly uptrend isn’t as attractive or steady as others I’ve  seen, but price has rallied upwards following brief corrections, and now price is at all-time highs, and has only endured two down weeks since May 2006  as price climbed from $70 to $93.

xom-w.png

Stay tuned as I highlight more weekly uptrends and stocks ‘on a roll’ that you can study.  Remember – as these charts show – rule one of the Guiding Market Principles is that “Trends have greater odds of continuation than of reversal” so it is best to build trend entry strategies to take advantage of potential movement.

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Sunday Linkfest of Importance

Jul 22, 2007: 11:40 AM CST

This week was a very active week and I am glad the weekend is upon us. Take a little time out of your Sunday evening to study up on some of the posts from the blogosphere and learn some new insights.

I’ve always tried to avoid swing trading around earnings, but have studied various approaches to the “earnings conundrum.” Stockbee offers ten concise points that are worth consideration in the post Ten Things You Must Know About Trading Earnings.

Bill at the Vix and More Blog posted an excellent resource entitled “A Baker’s Dozen of Market Indicators. In the post, he lists indicators for the General Market, Market Breadth, Market Sentiment, and Sector Strength (among others).

Kevin at Kevin’s Market Blog posts a positive analysis of the overall market by revealing the relative positioning of “commercial” traders and also notes what happens when this group of informed traders is net long the market in his post “Is the Smart Money Long or Short Stocks Now?” Click to find out.

The Tyro Trader has a very interesting post attractively titled “Everything I Learned About Trading I Learned in the Kitchen.” It is an enjoyable post comparing entrepreneur restauranteurs with a dream to new ‘entrepreneur’ traders with a dream and notes unfortunately that the failure (or attrition) rate for both teeters near 75%. In addition, he lists seven major points that are helpful to keep you from failing – I absolutely recommend this post.

Dr. Steenbarger examined insights from professional money managers in the post “Market Moods: Risk Seeking and Risk Averse Money Managers.” I liked the quote, “… for [each] firm there is the Scylla of Risk and the Charybdis of performance.” This affects us as retail traders, but it is amplified for professional money managers. Dr. Brett also shows how we can gauge market sentiment/mood and offers three places to look.

Also check Dr. Brett’s post entitled “Cracks in the Market Foundation” for insights into what may be happening ‘under the market’s hood’ regarding market strength/weakness.

Paul Castro at Vestopia posted his results regarding the Equity Curve Simulator I recently highlighted regarding expectancy in his post A Neat Online Tool. He notes something that many new traders simply cannot believe: Although 25% of Mr. Castro’s positions are winners, his strategy has a positive expectancy and makes money over the long haul. Restated, although 3 out of 4 trades end in (small) losses, the overall system is very profitable. I enjoyed his summary statement, “I feel like I am a baseball player in the batter’s box. I equate the 3 out of every 4 losing trades to fouling off pitches”. How is this possible? Read the post for more insight.

If you have a link or post you would like to recommend, or enjoyed reading, please let me know.

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Earnings Misses Result in Technical Damage

Jul 21, 2007: 6:39 AM CST

The Big News of the day was of course the missing earnings consensus estimates by Dow giant Caterpillar (CAT) and Nasdaq/S&P 500 giant Google (GOOG). These major point moves serve as a warning for those who like to speculate directly before earnings reports are released – doing so is pure speculation and lacks objective edge in trading.

Many traders – especially swing traders – prefer to be ‘flat’ or out of a position in a stock that will be releasing earnings soon – I hold this rule very seriously and live by it. I am happy to give up potential upside for the risk of potential avalanches in price movements from time to time.

There is always a large debate about whether to be “in” or “out” before earnings, and it depends on your perspective and trading goals – regardless, you must address this point (unless you are a pure day trader). Whatever you decide, do it consistently, and don’t try to outguess the market.

Here are the charts of Caterpillar and Google – note the “techincal damage” on the daily charts and the similarities in price action:

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Both stocks gapped down through their rising 20 period moving averages, but ironically both stocks opened just at their 50 period moving average. Both stocks dipped just below that key zone before ‘ratcheting’ higher.

These stocks were great candidates for a “fade the gap” strategy (though both gaps were filled partially). As I mentioned last night, I figured after hours traders greatly overreacted with their ‘punishment’ of Google shares and expected price to rally upwards from the open. Both stocks exhibited this similar pattern.

From a technical standpoint, Caterpillar looks better technically, as the gap was further closed from a percentage standpoint. In addition, CAT closed solidly above its 20 period moving average, further confirming the bullish uptrend in the stock.

Use these examples as educational material for earnings plays – as to what can happen when earnings are missed, even slightly.

Also, for six reasons the general market has “fought off” bearish situations (such as the sub-prime housing crisis), visit the Fresh Trader’s post on “The Bull Market Fights to Stay Alive”. Great observations there.

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Harry Potter’s Portfolio

Jul 20, 2007: 12:05 AM CST

With the new Harry Potter Movie being released last week, and the final book in the “Potter” series being released this weekend, I thought it would be fun to take a look at the young wizard’s portfolio holdings as he grows up and (hopefully) moves to adulthood away from Hogwarts (this post contains no plot spoilers).

Recall that in the earlier novels, it is revealed that Harry is left a “large fortune” from his parents, but it is all in gold and is securely stored in “Gringott’s Bank.” Now, in our ‘muggle’ world, gold prices have been on an extremely strong uptrend, yet price seems to be consolidating relative to its large volatility move to $725. This could indicate that gold prices will remain steady throughout the remainder of the year and perhaps beyond that. The uptrend is long confirmed, and we should see higher prices eventually, but there are no guarantees.

With this being said, it is generally ill-advised to keep one’s entire portfolio in one holding – in this case, gold coins. The entire portfolio is tied to the volatility of the hard metal, and the investor may be missing opportunities elsewhere. In addition, should the price of gold plummet suddenly, the whole portfolio will decline accordingly.

Harry is just graduating, and now he will need to diversify his portfolio quite radically. I would recommend no more than 15% of his portfolio be held in gold coins – the physical commodity is subject to price fluctuations and possible theft (even magical banks can be robbed).

With his youth, I would recommend 65% or greater of his portfolio to be held in the wizarding stock market – mainly mutual funds or exchange traded funds (to get rid of the ‘management fee’ and guarantee market returns). There should be international exposure, but no more than 15% to 20% of the stock holdings should be diversified as such. I’m sure Harry will work with a great financial adviser to select which funds would be appropriate for long-term growth.

I hear that certain stocks are doing rather well in the wizarding world, and are showing great valuations and potential for future growth. Harry could certainly use some exposure to individual stocks, chosen and monitored for the next few years and adjusted as necessary. I do not recommend speculative stocks – stable stocks like Gringott’s Financial (GGF) should do just fine. Berty Bott’s Every-Flavored Beans, Corp (BEFB) has also shown long term value and is capturing a greater market share and should be a good investment (as long as there are wizarding children to eat them).

I would recommend the remaining 20% be placed in bonds that will guarantee a comfortable rate of return free from the risk of economic downturns caused by corporate scandals or fallout from Voldemort’s return.

Whatever Harry decides, he should know he will be starting adulthood in a much better position than most other ‘muggles’ who do not have the fortune he does. Because of this reality, he must not squander his wealth, but must protect it and diversify his holding to ensure he will have not only a comfortable financial life, but a comfortable retirement as well. He will need to adjust his portfolio as needed when life changes arise.

For Harry Potter fans, enjoy the movie and the final book!

(“Harry Potter” and all concepts are copyright author J.K. Rowling, Scholastic Books, and Warner Brothers Productions)

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