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

Bulls Retreat

The stock market bulls are in retreat. After weeks of big swings up and down, the bulls have thrown in the towel. How deep will it be? How long will it last? Of course nobody knows the answer to that question even when they claim they do. The chart below courtesy of www.bigcharts.com shows clearly how the major indexes have now broken the 50 day moving average decisively.

 

It is important to know that in a down trend we can get big up days to suck in the bargain hunters only to take the market lower. To combat against this we have to look for an odds favor condition, we call this a follow through day. While making up a list of stocks holding up well in this down trend we also have to watch for a follow through day. A follow through day is when we see a move up on volume four to ten days from a recent low. This does not guarantee a new uptrend has begun but puts odds in our favor that it may have. Remember no bull market starts without a follow through day but not all follow through days will guarantee a new bull market has begun.

Be Patient

The stock market continues to have wild swings as the bulls and bears fight to make headway. If the selling dries up then we are left with just the buyers to form a new trend upward. Of course if the buyers cave in that leaves the sellers to form a new trend downward. Don’t be a hero and try to guess the outcome, you do not need to. Simply wait for a trend to re-establish itself before committing new dollars. With the bulls and bears battling it out then we are bound to see the big swings we are currently seeing.

While you wait maintain a list of companies that are resisting any sell offs. These companies will be moving sideways and will most likely be the first to break out to the upside when the stock market re-asserts itself. Is that tomorrow, next week, next month? Only a fool knows the answer to that question, wait for the confirmation.

Middle East Turmoil

Eyes are on countries such as Egypt and Libya to name just two. Stock investors are rightly concerned about the events they see unfolding. Concern over fuel prices are extreme as people see the price of a barrel of oil continue to rise. As I have stressed many times markets bottom when news is bad and we must be ready to pounce if buying on volume resumes.

As the graph below shows courtesy of www.bigcharts.com we had a high volume sell off which is certainly not good news. However note that major indexes are still above the all important 50 day moving average.

The investor at this point should watch carefully for the indexes to hold above that moving average and continue to maintain a list of stocks that are consolidating during this market down turn. Stocks that can consolidate will be the first to rise if the stock market strengthens. Try and maintain a list of stocks that have moved up and are now moving sideways rather than breaking down. If the down trend continues do not buy but continue to add to this list as you find more stocks holding up. Remove from your list the stocks that break down.

Indexes March Onward – ADS AVT CMG DECK

For most of this year the gains have been slow and grudging however the indexes continue to march forward and stay above their 50 moving average. As I have been previously mentioned we have no choice but to follow the indexes as long as they continue to move up.

Personal opinion suggested the markets were risky however my recent stock picks have all moved up, some significantly. It just goes to that personal opinion should never influence your stock purchasing strategy. Always look at price and volume and ignore the news and forecasts. As long as the indexes stay above their respective 50 day moving averages then you need to be on the lookout for new positions as well as topping up on the positions you already have. My readers were taken out of positions as we had the aggressive sell off of some of the leaders at the start of January. Many of these reasserted themselves and started moving up again. The correct decision in some of these situations was to sell out as they fell on high volume. We can never know where the sell off will end. Such stocks can always be repurchased as they form new bases and then break out again to new highs on volume. Remember capital preservation must always be priority number one.

Here are a few more 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.

ADS – $78.96

AVT – $36.97

CMG - $260.15

DECK - $90.03

More Cracks are Showing

For the last 4-6 weeks the Nasdaq has been struggling as the Dow has been making new highs. Many of the stock market leaders have been losing their leadership and many falling significantly. The market is being held up by fewer and fewer stocks even as the main indexes still hold over the all important 50 day moving average. As long as the indexes stay above this moving average there is still hope although things are looking worse by the day. In my last report I discussed how most of my readers should still be 80-90% invested. Sad to say because of the leadership stocks giving ground I would suspect that number is now closer to 30-40% as more and more sell stops get triggered.

The chart below courtesy of www.bigcharts.com shows the Nasdaq as it tops out and you can see we have two distribution days as we see much higher volume on those down days. Now is not the time to be a hero, wait for the market to stabilize even if it is still above its moving averages.

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.

Grudgingly Moving Up TER, CPHD, FTNT, AGU

The stock market is 2 weeks into 2011 and is very slowly making headway to the upside. This is not a decisive move however we must respect the trend. The Dow is still very clearly above the 50 day moving average which itself is trending up. Until we see a break on higher volume through that moving average to the downside then we must continue investing. See the chart below courtesy of http://www.bigcharts.com/.

Followers of my blog should still be approximately 80-90% invested in the market even though some of the leaders have labored and even failed. Enough stocks are still holding up to support the indexes. For this reason we should use some of our profits and add to positions or even take on new positions.

Here are a few more 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.

TER – $14.69

CPHD – $24.54

FTNT - $37.37

AGU - $93.48

Wait and See

A good jobs report yesterday failed to fire up the market. We still need to see significant volume to the upside or downside to decide on a strategy going forward. For the moment readers should continue to monitor their holdings with a view to tightening up the sell stops. Now is not a time to initiate new positions in companies until we see which way the conviction lies.

A number of my readers have been asking for more regular updates. To comment on the market on a daily basis is for day traders only, however I can understand the need for more information. For this reason I have started giving short concise comments on a more regular basis at http://twitter.com/rmhs my link is also on the left. Additionally I will continue to comment here as and when I consider necessary. I have also started adding occasional videos in youtube.com explaining some of the strategies and reviewing some of the companies highlighted here in the past.