Last weekend the indexes came roaring up to meet the 50 day moving average. Normally the 50 day moving average will act as resistance in a down trend which we are in and have been since mid January. The recent run up since February 5th looked like it may race straight through that 50 day resistance level. Last weekend it looked like it had a good chance of breaking through the 50 day moving average and I was hoping to be highlighting some stocks by now. Alas the 50 day MA acted as resistance again and the indexes stalled. Most indexes are now teasing the moving average as they decide the next move. The indexes have become very volatile having very large intra day movements like yesterday for example. This extreme volatility is the bulls battling the bears at this critical juncture. As the bulls try to push the index through the MA the bears step in to sell it off, this creates the very high volatility. It will get itself resolved as the bulls or bears eventually step to one side. Often as both sides become exhausted the volume diminishes and the indexes get very tight with small movements (no way of knowing if this will happen this time). In any case the ideal situation would be for this bull/bear battle to resolve itself with the index eventually breaking out to the upside or downside on heavy volume.
Until this resolves itself it would not be prudent to be buying stock until the market shows its hand. For that reason I remain on the sidelines waiting to see whether the 50 day MA will act as resistance once again and send the market down or indeed whether it will be broken to the upside.
Friday, February 26, 2010
Sunday, February 21, 2010
Cautious Optimism
Please refer to the chart below in my discussions courtesy of http://www.bigcharts.com/.
The market appears to be making some traction to the upside. We have not yet had a follow through day which increases the probability of further upside, often referred to as an odds favor outlook. However a number of events have transpired which tempts one into making one or two purchases and waiting to see how they perform before adding more.
1. On February 5th after being down big the market recovered to end the day barely changed. This is often referred to as a capitulation day as the last of the sellers pile in only to be overtaken by large buyers later in the day as people decide enough is enough. Volume wasn’t great however the intraday recovery was worth noting. See the circle on the graph.
2. Since February 5th we have had a formation of higher highs (the peaks) and higher lows (the troughs). See the straight lines on the graph.
3. The fed decided to raise the interest rate charged for inter bank loans which would normally be a big negative. The market just shrugged off this bad news and took the view that if the fed feels it is time to start tightening money then the economy must be through the worst.
4. The Dow and other indexes are all now in the process of crossing their 50 day moving averages which would usually be the resistance level. If it clears easily it is also a bullish sign to see this happen but it would be even nicer to see it happening on volume.
To conclude we have not had a follow through day so we are still in a high risk situation. However for the more adventurous readers we have had some more optimistic signs recently and dipping your toe in the water in a controlled manner at this point would be a reasonable thing to do. As long you use the money management rules previously discussed then little money can be lost.
Over the coming days as long as the market doesn’t resume its downtrend I will be highlighting some stocks for my readers to consider.
The market appears to be making some traction to the upside. We have not yet had a follow through day which increases the probability of further upside, often referred to as an odds favor outlook. However a number of events have transpired which tempts one into making one or two purchases and waiting to see how they perform before adding more.
1. On February 5th after being down big the market recovered to end the day barely changed. This is often referred to as a capitulation day as the last of the sellers pile in only to be overtaken by large buyers later in the day as people decide enough is enough. Volume wasn’t great however the intraday recovery was worth noting. See the circle on the graph.
2. Since February 5th we have had a formation of higher highs (the peaks) and higher lows (the troughs). See the straight lines on the graph.
3. The fed decided to raise the interest rate charged for inter bank loans which would normally be a big negative. The market just shrugged off this bad news and took the view that if the fed feels it is time to start tightening money then the economy must be through the worst.
4. The Dow and other indexes are all now in the process of crossing their 50 day moving averages which would usually be the resistance level. If it clears easily it is also a bullish sign to see this happen but it would be even nicer to see it happening on volume.
To conclude we have not had a follow through day so we are still in a high risk situation. However for the more adventurous readers we have had some more optimistic signs recently and dipping your toe in the water in a controlled manner at this point would be a reasonable thing to do. As long you use the money management rules previously discussed then little money can be lost.
Over the coming days as long as the market doesn’t resume its downtrend I will be highlighting some stocks for my readers to consider.
Tuesday, February 16, 2010
Intra Day Volume
During most normal days there are certain times of the day that exhibit the higher volume as the action occurs. Typically you will see very high volume during the first hour or so as the market responds to the overnight news. Good or bad overnight news traders will adjust their market positions. This happens as the market opens and will tail off as the day progresses. Usually the market will enter its lull after an hour or two. Then the market makers and traders are thinking about lunch and at midday the market is typically trading its lowest volumes.
As we are within one to two hours of the close the trader is becoming aware of what companies are reporting news (and other news) after the market closes and how it will affect the next days open. Again the posturing occurs as the trader positions himself for the next day’s action. As we approach the close the volume will start ramping up again.
I am not suggesting you day trade stocks but wish to make you aware of this in your longer term stock purchases. For example if there is some good news on a stock overnight that you intend buying you might watch it moving up after the market opens and buy it perhaps an hour or two after the open. It is very common after the big gain of the first one to two hours for profit takers to step in and sell it off a little. So if you buy after the initial rise you may be a little upset to see the price fall back some. In fact it is common for stocks with good news to rise early on with good volume then fall back some on lower volume, only to rise again as we go into the close. I wish it was this easy though because a really powerful stock will go up at the open and continue rising all day, you just never know. The motto of the story is if you are interested in a stock and it has already risen up today yet it is now falling back then wait for the fall back to end and buy as it starts climbing again. This essentially gives you two good opportunities to buy a stock, soon after the open when you see it climbing or later in the day if it falls back on lower volume.
As we are within one to two hours of the close the trader is becoming aware of what companies are reporting news (and other news) after the market closes and how it will affect the next days open. Again the posturing occurs as the trader positions himself for the next day’s action. As we approach the close the volume will start ramping up again.
I am not suggesting you day trade stocks but wish to make you aware of this in your longer term stock purchases. For example if there is some good news on a stock overnight that you intend buying you might watch it moving up after the market opens and buy it perhaps an hour or two after the open. It is very common after the big gain of the first one to two hours for profit takers to step in and sell it off a little. So if you buy after the initial rise you may be a little upset to see the price fall back some. In fact it is common for stocks with good news to rise early on with good volume then fall back some on lower volume, only to rise again as we go into the close. I wish it was this easy though because a really powerful stock will go up at the open and continue rising all day, you just never know. The motto of the story is if you are interested in a stock and it has already risen up today yet it is now falling back then wait for the fall back to end and buy as it starts climbing again. This essentially gives you two good opportunities to buy a stock, soon after the open when you see it climbing or later in the day if it falls back on lower volume.
Tuesday, February 9, 2010
A Good Day…Again
Great day in the stock market today with indexes being up 1 - 1.5% depending on the index. As I have said before, we get some of the best up days in a down trend. The down trend started middle of January and we have no proof yet it has turned. We have had 4 or 5 very nice up days now in this down trend (including last Friday which was a bounce off the low) but do not be enticed to buy stock. If you buy each of those good days you would have bought 5 times only to maybe get stopped out later as the down trend continues. We are now 3 days from the low and a follow through day must occur at 4+ days but don’t forget that doesn’t guarantee the bottom is in. Remain conservative and see how this plays out.
Friday, February 5, 2010
Peaks and Troughs
The downtrend continues as the major indexes are forming a series of lower peaks and lower troughs. On the Monday and Tuesday of this week we came up from a lower trough only to form a lower peak as the Dow index turned down again. Hopefully readers didn’t get sucked back into the market on those strong up days of Monday and Tuesday. If you read my article on follow through days then you should have been waiting for the follow through day which occurs 4+ days from a recent low. The big rise on Tuesday was only day 2 from the low which should not have been bought. Subsequently the downtrend resumed and we are now making new lows again forming lower troughs…not good and on high volume again (Thursday was very high volume as the market fell). So the count for a follow through day 4+ days after a low, has been reset to zero and we can’t start counting up again until we come off the low.
Be happy that if you are in cash and the market is down 5-8% then you are beating the indexes by 5-8%. Also your powder is dry ready for the upturn when it comes. During these sell offs nobody can know where the bottom is and it sure feels good to be in cash.
Be happy that if you are in cash and the market is down 5-8% then you are beating the indexes by 5-8%. Also your powder is dry ready for the upturn when it comes. During these sell offs nobody can know where the bottom is and it sure feels good to be in cash.
Wednesday, February 3, 2010
Anatomy of a Win
As I have said in the past money management is much more important than stock selection. If you can buy enough stocks (with good fundamentals, price breakouts and good volume) you should find at least the occasional winner. Let’s examine how money management can offset your losers with your winners.
A previous great stock (just an example) is NTRI. See the graph below courtesy of http://www.bigcharts.com/.
Lets assume we saw the high volume breakout at beginning of October and bought in the pull back (quiet period) at $17 per share and bought $100 worth of stock. You followed up with subsequent purchases at $18, $19, $22, $25 and $26 during each of those quiet periods after further climbs on volume. By the way the investor recalculates the new stop sell point after each purchase to make sure if the stop is hit then you sell out at zero overall loss. Of course you can raise the stop even higher to ensure you keep some profit. Ultimately the stock has high volume selling at the beginning of January and you sell half at $30 per share followed by the remainder at $28 per share as it continues down on high volume (the rest is history as the selling continues). Notice you don’t sell at the top $33 because you don’t know it’s the top until it has happened. You can never buy at the bottom or sell at the top. Try and sell at the top and it may continue rising. Look how many times we saw a new high during the period of this example.
The total profit is $282 and 28:1 is the ratio of the profit made to the initial risk of $10. Remember the original purchase was for 6 shares at $17 with a 10% (or less) stop price to guard against loss. As we buy more stock we ensure our new stop is a break even stop so maximum risk is $10 going to $0. Since we have a final profit of $282 then the reward versus risk is 28:1 (282/10). In summary after the initial purchase of $10 risk we are always in profit on later purchases and so risk is gone and we end up with a proportionally larger gain.
The ratio 28:1 means that for every 28 stocks we buy we are looking for 1 winner to break even. Of course you want to do much better than that and you also have to take commissions into account. However I am using a seed value of $100 and if the investor uses a larger seed then commissions can be considered negligible. Another way to look at this is that if you have $282 of profit you could go out and buy 28 more stocks each with $10 of risk and still have an overall risk of zero to your total portfolio. Think about it, as each stock in your portfolio becomes more profitable then you can buy more new positions at a faster and faster rate (in fact exponentially if you so choose). To conclude when the market turns up you can get into many positions at a very fast rate starting out with that tiny $10 of risk on your first position. If the market turns back down you step aside and make another new initial purchase at a later date.
A previous great stock (just an example) is NTRI. See the graph below courtesy of http://www.bigcharts.com/.
Lets assume we saw the high volume breakout at beginning of October and bought in the pull back (quiet period) at $17 per share and bought $100 worth of stock. You followed up with subsequent purchases at $18, $19, $22, $25 and $26 during each of those quiet periods after further climbs on volume. By the way the investor recalculates the new stop sell point after each purchase to make sure if the stop is hit then you sell out at zero overall loss. Of course you can raise the stop even higher to ensure you keep some profit. Ultimately the stock has high volume selling at the beginning of January and you sell half at $30 per share followed by the remainder at $28 per share as it continues down on high volume (the rest is history as the selling continues). Notice you don’t sell at the top $33 because you don’t know it’s the top until it has happened. You can never buy at the bottom or sell at the top. Try and sell at the top and it may continue rising. Look how many times we saw a new high during the period of this example.
The total profit is $282 and 28:1 is the ratio of the profit made to the initial risk of $10. Remember the original purchase was for 6 shares at $17 with a 10% (or less) stop price to guard against loss. As we buy more stock we ensure our new stop is a break even stop so maximum risk is $10 going to $0. Since we have a final profit of $282 then the reward versus risk is 28:1 (282/10). In summary after the initial purchase of $10 risk we are always in profit on later purchases and so risk is gone and we end up with a proportionally larger gain.
The ratio 28:1 means that for every 28 stocks we buy we are looking for 1 winner to break even. Of course you want to do much better than that and you also have to take commissions into account. However I am using a seed value of $100 and if the investor uses a larger seed then commissions can be considered negligible. Another way to look at this is that if you have $282 of profit you could go out and buy 28 more stocks each with $10 of risk and still have an overall risk of zero to your total portfolio. Think about it, as each stock in your portfolio becomes more profitable then you can buy more new positions at a faster and faster rate (in fact exponentially if you so choose). To conclude when the market turns up you can get into many positions at a very fast rate starting out with that tiny $10 of risk on your first position. If the market turns back down you step aside and make another new initial purchase at a later date.
Monday, February 1, 2010
A Good Day - Or is it?
Nice day in the stock market today with most major indexes making good gains such as the DOW up 116, NASDAQ up 23 and S&P up 15. When a market is in a down trend we often get reactions to the upside but most are not sustainable before the correction resumes. Of course one of them will be sustainable and that is the one that marks the downtrend low point as we turn back up. We cannot know when this happens until after the event. For this reason it is foolhardy to try since you would end up buying every bounce that occurs in a down trend. This could be the low or it could be just a bounce in a longer term down trend, don’t buy every bounce. This is why we have to wait for the “follow through day” which has been discussed previously. Even the follow through day can be wrong but it will at least give us an “odds favor” position. Let’s take a look at the chart of the DOW below courtesy of http://www.bigcharts.com/.
I have circled in the volume area at the bottom of the graph, the high volume red spikes. Those days are mostly down days on heavy volume with lower volume up days. This market is clearly under distribution and should NOT be bought. Even today’s nice 116 point jump is on lower volume. We need to see the conviction of a substantial up day on heavier relative volume. Making matters worse the 50 day moving average line has now been decisively broken to the down side and even the 50 day line itself is starting to turn down. If a prolonged downturn was to develop you will see the moving average act as resistance. In other words each time the DOW starts moving back up to approach the 50 day moving average it is likely to be sold off again. Of course at some point we will move across that line to the upside as a new uptrend begins and once again the 50 day moving average line would act as support as it has for the last 9 months.
Low volume bounces with the index under the moving average and the moving average turning down are not a good recipe to buy stock. Do not initiate new positions and manage the positions you still have. Tighten the stops to protect gains and maybe even buy more if they are acting well. Remember the main indexes are only important when deciding to initiate new positions. If you already own positions treat them in isolation and manage them individually. During the 2001 bear market the housing stocks made massive gains as interest rates were lowered, that’s why you need to manage each position individually once bought.
I have circled in the volume area at the bottom of the graph, the high volume red spikes. Those days are mostly down days on heavy volume with lower volume up days. This market is clearly under distribution and should NOT be bought. Even today’s nice 116 point jump is on lower volume. We need to see the conviction of a substantial up day on heavier relative volume. Making matters worse the 50 day moving average line has now been decisively broken to the down side and even the 50 day line itself is starting to turn down. If a prolonged downturn was to develop you will see the moving average act as resistance. In other words each time the DOW starts moving back up to approach the 50 day moving average it is likely to be sold off again. Of course at some point we will move across that line to the upside as a new uptrend begins and once again the 50 day moving average line would act as support as it has for the last 9 months.
Low volume bounces with the index under the moving average and the moving average turning down are not a good recipe to buy stock. Do not initiate new positions and manage the positions you still have. Tighten the stops to protect gains and maybe even buy more if they are acting well. Remember the main indexes are only important when deciding to initiate new positions. If you already own positions treat them in isolation and manage them individually. During the 2001 bear market the housing stocks made massive gains as interest rates were lowered, that’s why you need to manage each position individually once bought.
Subscribe to:
Posts (Atom)