Moving Averages Broken

Moving averages of the major indexes were broken to the downside 10 days ago leading to big selling. The selling has only increased as we head lower. Currently we are seeing major distribution as concern increases over government debt. World markets are all heading down as concern increases about another possible recession. Don’t try and guess just follow the averages.

Readers should all be in cash and awaiting the next follow through day. Follow through days are important since they help avoid getting sucked in on the very next big up day. Remember the biggest up days happen in down trends so don’t get sucked in.  The time to buy is when we see a high volume up day at least 4 days off the low followed by consolidation before another up day. That is the follow through day and don’t buy until you see that.

Ignore the pundits that say stocks are cheap, stay on the side lines and be glad to be in cash.

Follow Through Day – HRC HEI PLCM HLF

A follow through day occurred on June 21st just four days off a low. This was a weak follow through day but none the less a valid trigger. A follow through day tells us “odds favor” buying of stocks at this point in time. Of course follow through days are not fool proof as I have said it just gives us an odds favor point in time to buy. Since that day we have also had three accumulation days with no distribution days with a successful test of the 50 day moving average. See the graph below of QQQ a proxy for the Nasdaq courtesy of www.bigcharts.com

It is not prudent to wait and be sure because then you lose the best opportunities. A preferred approach is to use the money management techniques and risk control we have already discussed. Start initial purchases of very small positions and add to them if the market cooperates and continues its upward move. Remember it can turn back down even with these positive signs and this is the reason you have to start small and raise your stops to break even as soon possible. Once in that position you can continue adding to that stock and also initiate new positions in other companies. If this all fails we get stopped out at break even and wait for the next follow through signal.

Here are a few stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks.  Rather the idea is to teach stock selection with low risk advice. You can also catch me on Twitter for more regular updates and YouTube for some educational videos. See links at upper left.

HRC - $47.33

HEI - $55.93

PLCM - $64.90

HLF - $57.85

Rules of Engagement

The stock indexes have now broken down as they tumble through the support of the 50 day moving average.Many sectors have been breaking down even before the indexes started tumbling. In particular pay careful attention the financial stocks since they entered their own bear market even before the indexes started down. The chart of the S&P 500 below tells the story in a very clear format as indexes fall below the 50 day moving average which is now also starting to turn down.

Graph courtesy of http://www.bigcharts.com/

 

The rules of engagement going forward should be as follows…..

1.   Continue maintaining a list of great companies with fantastic earnings and revenue increases that are not falling with the general market. These stocks should remain close to their old highs and hence show strength. These will be the first stocks to move higher when the indexes turn up again. It’s human nature to buy the big fallers in a down turn thinking you are buying a bargain but these companies are falling for a reason, don’t get caught.

2.   Watch for a follow through day before commencement of buying. Indexes tend to get their strongest up days in a down trending market. This will sucker in unsuspecting investors before the next down draft. Just look at last Thursday’s strong up day before we went down again. What you need to see is a strong up day on volume followed by some quiet sideways action or slight pull back. Then around the 4^th to 12^th day from the recent low you get another strong up day on volume, this is the follow through day. This puts odds in your favor of being successful but of course it still does not guarantee success.

3.   After the follow through day take very small positions in companies that begin moving up from their recent consolidations. Make sure you place a sell stop so if the follow through day fails you don’t get hurt too much. As these stocks break out they will move up and consolidate again.

4.   As we move up, out of each of the consolidations you can continue to add to these positions.

5.   Money management is of paramount importance. Every time you add to your positions calculate your new break even point so you can never be in a losing position.

6.   Start selling when the stock falls below the 50 day moving average on volume.

Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice.

Sideways Action

Dow Jones index and most other indexes have all been trading sideways for 3-4 months depending on the index.  A 16 week wait can drive people crazy and this is not the time to be buying stock. We have to wait and see the next move of the markets. Interest rates continue to stay low indicating weakness in the economy.  Indeed GDP is not robust as can be found in the latest figures. Post recession the unemployment rate is still stubbornly high. None of these actions should be occurring in a post recession environment suggesting we need to be careful.  The chart below shows the action as discussed courtesy of www.bigcharts.com

All that can be done here is to continue keeping a list of stocks with great earnings and revenue that hold well regardless of a weak market. When the market does turn up this list of stocks will be the first to take off and we should be ready for it. My suggestion is update your lists once and week and wait for that follow through day in the market before buying. We have no idea when we break this sideways action or whether it will be to the upside or downside. Don’t follow the forecasters unless you want to get broke. Yes the economy is weak but the stock market has a habit of turning up when things look their bleakest. Remain on the sidelines and wait for a breakout to the upside. Of course a break to the downside means we have even longer to wait.

Remember this blog site is not a newsletter that promotes stock tips or penny stocks. Rather the idea is to teach stock selection with low risk advice. 

New Dow Breakout – TRLG BKE MSM TIBX

Dow breaks out to a new high on volume as the uptrend continues. This gives us reason to add to our positions and even continue to take on more new positions. Readers paying attention to money management rules are only using profits to start new positions so any small losses in these positions will come from profits already made.  Remember the strategy has to be risking the house money on new positions rather than your own money. As long as we risk profits we are never in a position to be concerned about losses. Tight stops on new purchases will take a small part of those profits if you are stopped out but if successful the new positions will only add to profits given you an even bigger buffer for new positions.  The chart below shows the action as discussed courtesy of www.bigcharts.com

The pessimists amongst us will follow the bad news and give a hundred reasons not to invest. We only look at price and volume. Remember markets bottom when news is dire and top when news is fantastic. That’s the way of the market since is a forward looking model. Review the what, when and how I have mentioned many times in the past and continue investing as long as the market tells us to.

Here are a few stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks.  Rather the idea is to teach stock selection with low risk advice. You can also catch me on Twitter for more regular updates and YouTube for some educational videos. See links at upper left.

TRLG – $26.6

BKE – $44.34

MSM – $71.63

TIBX – $29.77

What, When and How Revisited – ISRG BBBY DMND MERC

The up trend we are seeing continues giving us opportunities to buy. It could end tomorrow, it could end next month, we don’t know and neither does anybody else. All you can do is buy the up trends of a stock market and protect against loss.  I think it’s a good idea to do a quick review of what to buy, when to buy and how to buy again.

What to buy :- Maintain a list of stocks currently under consolidation (sideways action), close to new highs with great earnings and revenues. Such stocks being close to new highs have resisted any downward pressure and are now consolidating recent gains before their next move up.

When to buy :- As these stocks start moving out of their consolidation phase preferably on large volume it is time to consider buying such stocks. This means the recent gains have been fully consolidated and digested and the market is now ready to move these stocks higher again.

How to buy :- Start with a very small purchase that won’t keep you awake it night just in case the breakout fails. As these stocks move up you can continue adding to them. Also remember that previous purchases from earlier breakouts you are already adding to on a regular basis.

Here are a few stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks.  Rather the idea is to teach stock selection with low risk advice. You can also catch me on Twitter for more regular updates and YouTube for some educational videos. See links at upper left.

ISRG – $367.67

BBBY – $53.82

DMND – $61.61

MERC – $14.62

Follow Through Day – TDSC SWI LULU CTCT

March 24th was a weak “follow through day” on the NASDAQ index. The index was well up with volume higher than the previous day. Follow through days are expected on the 4^th to 12^th day from a low and 24^th was within that criteria. It was weak but valid so we have to honor it and act since it presents an odds favor chance of making money in stocks.

Remember what a follow through day is. It is simply a point in time that says “odds favor” a rise in the market and “may” be a good time to buy. Follow through days can fail but they usually indicate a gain of unknown price and duration. Not much help you might think but remember ALL bull markets begin with a follow through day but not all follow through days lead to a bull market. As I have said before the stock market is an art not a science. All we can hope to do is find “odds favor” conditions such as now.

Remember start buying small and wait to see if your picks are successful. If they are successful then add to them and buy more stocks, don’t forget your sell stops and as always money management is key.

Here are a few stocks performing well and looking ready to move higher if the stock market holds up. Make sure as always that earnings are not imminent for any new purchases. Remember this blog site is not a newsletter that promotes stock tips or penny stocks.  Rather the idea is to teach stock selection with low risk advice. You can also catch me on Twitter for more regular updates and YouTube for some educational videos. See links at upper left.

TDSC - $55.05

SWI - $24.13

LULU - $89.13

CTCT - $35.37