I think at this point I am stating the obvious that the follow through day has failed. As much as stocks are looking cheap it would be suicide to buy while we remain in a downtrend with all indexes under their 50 day moving averages which are falling as well. The tendency is to want those stocks that appear as real bargains but you have to remember they have taken big falls for a reason.
When this market does eventually bottom we won’t be buying the stocks that look cheap, we want the stocks that have held up and remain near their highs. The best thing about a bear market is that it is very easy to identify strength. Look for the stocks that have fallen the least and add them to your future buy list. I have such a list and every so often a few fall off from that list. When the market does indicate a turn I will be ready to buy from that list and will continue buying all the way up.
Be thankful if you bought after the follow through day that you only spent a very small amount of money on a probing position and even then you only had a 10% loss maximum. If the follow through day had been successful you would now be pouring money into those early positions as they continue to rise. At this stage keep your money safe and wait for another follow through day. We are seeing lots of distribution days currently so be thankful you are in cash as you listen to your buddies saying they picked up real bargains only to see them go lower.
Wednesday, June 30, 2010
Saturday, June 26, 2010
Follow Through Day at Risk
The follow through day we saw in my last blog is now under pressure. If the market doesn’t turn up quickly then the follow through day will have failed. Distribution days have occurred since that follow through day which is not a good sign. Readers may have taken a small probing position (important part of money management as discussed in previous blogs) and have been unable to add to their positions to date. You may even have been stopped out. I would suggest not talking new positions at this point unless the follow through day shows it is going to succeed. Remember the mantra every bull market starts with a follow through day but not every follow through day leads to a bull market. In fact only 75% of follow through days are successful (still very good odds).
Today I thought it appropriate to have some fun. I hesitated to use this example since people will say it’s easy in hindsight. Please please be aware I am not or have not recommended the following stock I just wish to use it as an example of money management and yes it is in hindsight. It is VERY important to start with small positions then build them up (probing positions). If the stock market turns down at the start you then lose very little. If it turns down later when you are accumulating much larger positions you have choices on how to proceed but with good money management cannot lose. Please read on.
Suppose you bought LCUT one year ago at point 1 with one unit of money. Remember a unit is a very small amount that leaves you comfortable if you lose 10% of it. Now after that initial purchase at point 1 you place a 10% stop loss in case it fails. Note as it rises you buy more stock at point 2, a second unit. By the way these numbers are not sequential I am using them to show how many units you own. So at point 2 you own two units. After the second purchase you raise your stop to the average buying price to break even if you are stopped out, now you cannot lose. At point 3 you make another single unit purchase so now you own 3 units. This time the break even point (average buy price) will not have moved up as much. Its like if you own 100 units and you buy 1 then your average price isn’t affected much. However the stock price is now moving further up away from your average price so you are less likely to be stopped out.
Notice after every consolidation as the stock breaks out to the upside I buy another unit and another and another. At point 6 we own 6 units and the stock consolidates then at point 8 it breaks out and jumps up again. Notice I bought 2 units since we already own 6 units I buy 2 and call it point 8 since I own 8 units. If I own 6 and start buying 2 units at a time I am not affecting my average buying price by much so it still doesn’t move up close to being stopped out.
I now keep buying 2 units at a time until I own 20 units. During this fast ramp up I could easily have increased my buy size to 3 or 4 units at a time and still not have brought up my average buy price by much. Now not long after point 20 where I own 20 units with an average buy price much lower things are starting to look not so good. The stock gets hit with some high volume selling so I sell half my holding and at point 10 I now only own 10 units. I have just locked in a very nice profit, my average cost and stop sell point is till very much lower. Now if the main indexes are doing badly and you have a strong stock you will generally find strong companies start moving sideways, they resist any sell off. In fact at point 12 you have bought another 2 units and the upside climb has resumed after a long sideways consolidation. The stock did not break any lower or go up for a while so you sit tight. When it broke out to the upside on volume you started adding to those 10 units again. You now own 12 units and look like your about to go to 14 or 15 units. This is how you stay with the leaders even in down markets.
Imagine if you owned a few companies this way. The stocks that move sideways you can start selling off a little and moving that cash into the companies that are climbing.
Today I thought it appropriate to have some fun. I hesitated to use this example since people will say it’s easy in hindsight. Please please be aware I am not or have not recommended the following stock I just wish to use it as an example of money management and yes it is in hindsight. It is VERY important to start with small positions then build them up (probing positions). If the stock market turns down at the start you then lose very little. If it turns down later when you are accumulating much larger positions you have choices on how to proceed but with good money management cannot lose. Please read on.
Suppose you bought LCUT one year ago at point 1 with one unit of money. Remember a unit is a very small amount that leaves you comfortable if you lose 10% of it. Now after that initial purchase at point 1 you place a 10% stop loss in case it fails. Note as it rises you buy more stock at point 2, a second unit. By the way these numbers are not sequential I am using them to show how many units you own. So at point 2 you own two units. After the second purchase you raise your stop to the average buying price to break even if you are stopped out, now you cannot lose. At point 3 you make another single unit purchase so now you own 3 units. This time the break even point (average buy price) will not have moved up as much. Its like if you own 100 units and you buy 1 then your average price isn’t affected much. However the stock price is now moving further up away from your average price so you are less likely to be stopped out.
Notice after every consolidation as the stock breaks out to the upside I buy another unit and another and another. At point 6 we own 6 units and the stock consolidates then at point 8 it breaks out and jumps up again. Notice I bought 2 units since we already own 6 units I buy 2 and call it point 8 since I own 8 units. If I own 6 and start buying 2 units at a time I am not affecting my average buying price by much so it still doesn’t move up close to being stopped out.
I now keep buying 2 units at a time until I own 20 units. During this fast ramp up I could easily have increased my buy size to 3 or 4 units at a time and still not have brought up my average buy price by much. Now not long after point 20 where I own 20 units with an average buy price much lower things are starting to look not so good. The stock gets hit with some high volume selling so I sell half my holding and at point 10 I now only own 10 units. I have just locked in a very nice profit, my average cost and stop sell point is till very much lower. Now if the main indexes are doing badly and you have a strong stock you will generally find strong companies start moving sideways, they resist any sell off. In fact at point 12 you have bought another 2 units and the upside climb has resumed after a long sideways consolidation. The stock did not break any lower or go up for a while so you sit tight. When it broke out to the upside on volume you started adding to those 10 units again. You now own 12 units and look like your about to go to 14 or 15 units. This is how you stay with the leaders even in down markets.
Imagine if you owned a few companies this way. The stocks that move sideways you can start selling off a little and moving that cash into the companies that are climbing.
Tuesday, June 15, 2010
Follow Through Day Today - EDU CRUS SNDK CMG
Today was a “follow through day” on the Nasdaq index. The index was well up with volume higher than yesterday, not great volume but good enough to qualify. Follow through days are expected on the 4th to 12th day from a low and today was the 6th day. You can see on the chart courtesy of www.bigcharts.com how the volume is higher than yesterday with a big point gain. Also the index is making a break through of the resistance level discussed in my last blog. A follow through day indicates an “odds favor” point in time to buy.
Now remember what a follow through day is. It is a 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 then add to them and buy more stocks (don’t forget your sell stops). Here are some interesting looking stocks that may be ready to make a move. Don’t forget to make sure that earnings are not imminent.
EDU - $99.23
CRUS - $15.15
SNDK - $48.58
CMG - $152.90
Now remember what a follow through day is. It is a 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 then add to them and buy more stocks (don’t forget your sell stops). Here are some interesting looking stocks that may be ready to make a move. Don’t forget to make sure that earnings are not imminent.
EDU - $99.23
CRUS - $15.15
SNDK - $48.58
CMG - $152.90
Friday, June 11, 2010
Mixed Signals
Looks like the stock market is giving us mixed signals at this point. On a positive note the recent low is holding (see the lower horizontal line) and is acting as support. The upper line shows an area of resistance. Previous blogs talk about support and resistance so read back. If support is broken then look out below and if resistance is broken then maybe we will see an upside move. It is likely that a move through either of these lines would be accompanied by volume showing the conviction in one direction or the other. Again in the past I mentioned we get our best up days in a down trending stock market. Recently we have had some wonderful up days only to be end up as traps for the impatient investor. The problem with these up days is that there is no volume. We want to see high volume up days after which we can consider buying. For the moment wait and be patient until the stock market shows its hand.
Graph courtesy of http://www.bigcharts.com/
I have added a page “rules for trading” (see the tab) so my readers can quickly look back at some of the important rules I talk about.
Graph courtesy of http://www.bigcharts.com/
I have added a page “rules for trading” (see the tab) so my readers can quickly look back at some of the important rules I talk about.
Friday, June 4, 2010
Lottery Syndrome
Wow what can I say except be glad that you own no stocks. We continue to wait for an indication that the bottom may be sight. Let’s have a little fun and include a lesson on how to buy stocks when things improve.
It would be nice if I could find the winning stocks just like finding the winning numbers in the lottery. Well I hate to burst your bubble but I cannot and neither can anyone else. If you think this blog site will find the stocks that will make you rich overnight then stop reading right now.
The secret to making money in stocks is not what you buy but how you manage those purchases, in other words money management. We have already discussed how you must cut your losses short so that they are very small losses. The reason for this is that even if you find a great company it can still go down in a poor market or may even be considered short term over valued. A bear market will pull down even the best of companies. Once you have that purchase made and you have applied the 10% sell stop your next aim is to reduce that 10% loss, eventually to your break even point. In other words as the stock starts rising you slowly move up your stop to your purchase price so if you are stopped out you can sell at break even. Once you get to this point you can do two things. Firstly you can start adding to the stock position if it continues to rise but you must recalculate your break even point so you never end up with a loss if it goes against you. Secondly you can buy an additional stock and start again with another company.
The objective is to build a portfolio of lets say 10+ stocks. Of course you don’t know which of those 10 will be a real winner because nobody can know. If someone did know then that stock would have been bid up a long time ago even before you bought it. You should keep watch on your 10+ stocks and add to the ones that are rising. The stocks that do nothing you don’t buy or sell. You keep adding to the winner or winners building bigger positions. The not so good stocks you will be adding less to. Maybe that great stock you recently bought went up 100% and you added to it 10 times. However it has now leveled out so you stop adding to it. Maybe some other stock in your portfolio of 10+ stocks will start rising so instead you start adding to that position.
Maybe that great winner you added to starts falling a little. Careful here because all winners will fall a little on low volume as each consolidation occurs. However if you see a serious fall on volume then start selling some of that position off, maybe 25% at first followed by another 25% if it continues. If the stock turns back around to continue up you can always start buying again. Let’s assume you sold off 25% which will free up some money, you can use that money on some other stock that starts rising in your portfolio.
This has the effect of moving your money into the winners and slowly taking it out of your losers or even those stocks that are flat. You don’t have to know which stock will be a winner, just keep adding to the ones that are climbing and selling the ones that are falling.
I liken this to planting seeds in a garden, some will die away (your 10% losses) and some will grow into big oak trees. All you need is a couple of great winners to do really well and they will swamp those very small losses you take on the initial investments that die (some of the seeds).
In conclusion I have no idea which stocks will do well but I take very small positions in likely candidates taking small losses along the way. The money management will move your funds into the stocks that do well and take it away from the stocks that don’t do so well. One last point, you have to realize that even those great companies will take a set back from time to time as they get ahead of themselves. That’s when you start selling off a little and if they level out you still have a position for when they start rising again.
It would be nice if I could find the winning stocks just like finding the winning numbers in the lottery. Well I hate to burst your bubble but I cannot and neither can anyone else. If you think this blog site will find the stocks that will make you rich overnight then stop reading right now.
The secret to making money in stocks is not what you buy but how you manage those purchases, in other words money management. We have already discussed how you must cut your losses short so that they are very small losses. The reason for this is that even if you find a great company it can still go down in a poor market or may even be considered short term over valued. A bear market will pull down even the best of companies. Once you have that purchase made and you have applied the 10% sell stop your next aim is to reduce that 10% loss, eventually to your break even point. In other words as the stock starts rising you slowly move up your stop to your purchase price so if you are stopped out you can sell at break even. Once you get to this point you can do two things. Firstly you can start adding to the stock position if it continues to rise but you must recalculate your break even point so you never end up with a loss if it goes against you. Secondly you can buy an additional stock and start again with another company.
The objective is to build a portfolio of lets say 10+ stocks. Of course you don’t know which of those 10 will be a real winner because nobody can know. If someone did know then that stock would have been bid up a long time ago even before you bought it. You should keep watch on your 10+ stocks and add to the ones that are rising. The stocks that do nothing you don’t buy or sell. You keep adding to the winner or winners building bigger positions. The not so good stocks you will be adding less to. Maybe that great stock you recently bought went up 100% and you added to it 10 times. However it has now leveled out so you stop adding to it. Maybe some other stock in your portfolio of 10+ stocks will start rising so instead you start adding to that position.
Maybe that great winner you added to starts falling a little. Careful here because all winners will fall a little on low volume as each consolidation occurs. However if you see a serious fall on volume then start selling some of that position off, maybe 25% at first followed by another 25% if it continues. If the stock turns back around to continue up you can always start buying again. Let’s assume you sold off 25% which will free up some money, you can use that money on some other stock that starts rising in your portfolio.
This has the effect of moving your money into the winners and slowly taking it out of your losers or even those stocks that are flat. You don’t have to know which stock will be a winner, just keep adding to the ones that are climbing and selling the ones that are falling.
I liken this to planting seeds in a garden, some will die away (your 10% losses) and some will grow into big oak trees. All you need is a couple of great winners to do really well and they will swamp those very small losses you take on the initial investments that die (some of the seeds).
In conclusion I have no idea which stocks will do well but I take very small positions in likely candidates taking small losses along the way. The money management will move your funds into the stocks that do well and take it away from the stocks that don’t do so well. One last point, you have to realize that even those great companies will take a set back from time to time as they get ahead of themselves. That’s when you start selling off a little and if they level out you still have a position for when they start rising again.
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