Mail Bag

An archive of my responses to members questions, comments and suggestions.

Trading On Earnings Reports

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 0

Question:

Do you follow all the stocks every day that post earnings or just the ones that are good companies?  I can see what you mean by waiting until after the report to buy or not. Sometimes it is a good idea to buy before the report though.  How does one really know?  What service do you use to know what companies are going to report for that day?  Yahoo lists some and so does MSN. I have been watching www.earningswhispers.com some.

My Response:

I typically just follow the stocks that I’m tracking in the database, and will watch very closely a few of the very best companies that are near a breakout or within buyable range because maybe the earnings provides the catalyst to break out as we saw with LQDT.  I don’t think it’s ever a good idea to buy ahead of earnings, but there are times when I’ll hold a stock through earnings (sometimes if the company is larger and has proven itself over time – ie. Google or News Corp)
 
You won’t ever know what a company is going to report but the whisper number (which earningswhispers.com) provides is a much more accurate number than what the analyst estimates are and is the number that a stock often trades off of.  If a company beats the analyst estimates number but misses the whisper number, you’ll often see the stock sell.
 
It’s generally a good idea to avoid trading off earnings altogether.  Why worry if a company is going to beat the whisper and guide higher for next quarter?  Here is a copy of a post I made at the blog a couple years ago regarding earnings:
 
"The greater the degree of uncertainty, the greater your risk in holding a position in a stock. All stocks are uncertainties, but there is no moment of greater uncertainty than that of an earnings report. It’s the time when the company reports on how well it is doing now and how well it expects to do in the future. Often times, other major announcements are made as well. It can be a time of extreme volatility, especially with small cap, high growth stocks. Sure, the upside potential can be great, but there are too many things that can go wrong, which could cause the stock to plummet. Remember, the name of the game is preservation of capital. You can always repurchase the stock once the coast is clear.

A company may report below analyst estimates, or the whisper number (earnings that the company is rumored to report, often leaked by an insider). There are times when a company will beat the analyst estimate, but not the whisper number and sell off.

They may release negative news about the company, the industry, or reveal a less than optimistic outlook for the future.

"Buy the rumor, sell the news". Often times a stock will rise ahead of expected good earnings, only to sell off once the great earnings are released. "

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Searching for Multiple Stocks

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 0

Question:

Is it – or could it be – possible to do a search on more than one stock in the breakout tracker?  I often have several (OK, many) stocks that I want to check on and I have to punch in their tickers one by one.  I would like to input all of them in to the search box instead of only one at a t ime. 

My Response:

I’m sure this is possible – appreciate your suggestion.. its  a good one and I will add this to to my list of things to do.

UPDATE: it’s been added and will be available soon when the new site is released.

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The Bullish Pennant (triangle) Formation

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 1

 

Question:

What is a pennant pattern?  I thought that a flat base was your favorite chart?

My Response:

I should have said one of my favorites.. flat bases are right up there too. I dont go into these patterns in the tutorial..I’ve been meaning to add them.  In the meantime have a looks at these pages:

The pennant formation is characterized by a large volume spike in price over a few days followed by consolidation where price converges and volume diminishes often resulting in a breakout in the direction of the previous trend.  A picture will provide a much better explanation.  I’ve found a few useful links below that describe this formation.  You’ll also want to take a look at any of the past Stock Watch reports that I’ve sent you.  I usually highlight a couple of these formations in those reports.

Here’s one example from a Stock Watch report back in November:

http://www.trending123.com/patterns/bullish_pennant.htm

http://www.baresearch.com/education/technical_analysis/chart_patterns/continuation/bullish_pennants.php

http://wmt.bloggingstocks.com/bloggers/larry-schutts/

(this post looks at one stock, SPRT that I also like very much.. waiting for a break out move with volume – this pattern also illustrates a great looking pennant formation)

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Add Type of Base to Breakout Tracker?

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 0

Question:

I was thinking on your website that it might be a good idea to be able to sort stocks based on what kind of a base that it is in. Like a cup with handle, a flat base, a double bottom base, etc.  You said that you like flat bases the best.
My Response:

It’s very difficult to come up with the algorithms to recognize those patterns accurately.  I personally feel that there is no substitute for the ‘ol human eyeball 🙂 Combining the DI scores with the % from breakout and % from moving averages will give you a very good quick picture of the bullishness/bearishness of the chart.  Using this info can cut through the clutter and give you a list of 10 – 15 stocks to focus on.  Check the charts of those stocks real quick to narrow it down further, set your real time alerts and you’re all set!

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Demand Indicators in the Stocks Breakout Tracker – Focus On “Hot Stocks” List First

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 0

 

Question:

What is the highest possible score in the Breakout Tracker for the Demand Indicators (DI 20/40)?  What is a good score?

My Response:

The scores can really be limitless in either direction.  A stock that drops $20/share with very heavy volume could concievably have a DI score of less than -1000.  In the opposite direction, a stock that soars on earnings or news could approach 1000.  Of course DI scores this low or high are rare.  Of course the higher the score the better, which indicates greater demand.   To answer your question, I’d say that most of the DI scores are going to be in the zero to 100 range and that  a stock with a Demand Indicator score that is above 25 is very good.  However, you really want to use these scores in conjunction with the other information in the database.   Where is the stock in relation to support levels at the moving averages?  Where is the stock in relation to its pivot point?  Maybe the stock has a great demand score but is way too extended past a proper buy point.  The key is locating stocks showing big demand that are near support levels and/or within a buyable range from the pivot (break out) point.  The Breakout Tracker makes this process incredibly easy for you.  One screen that does this well is the "Hot Stocks" screen in the members area.  This is a list of stocks at or near a breakout and/or within 5% of the 50 day moving average that are showing great demand.  The list is sort so that the highest ranking stocks (according to fundamentals and technicals) are listed at the top, making it very easy to see the absolute best candidates the market has to offer right now.  The "Hot Stocks" screen is the list that I always go to first for buy candidates.

Important Note: A DI Score close to zero isn’t necessarily bad.  What it can indicate is that neither buyers nor sellers are in control and that there is a tug o war going on, which often results in a flat base formation.

This great question was asked on 1/24/2007 but as I post this (on March 30th, 2007) the top 10 list of Hot Stocks are:

1. Guess? (GES)
2. Garmin (GRMN)
3. Credicorp (BAP)
4. Zumiez (ZUMZ)
5. Vocus (VOCS)
6. Vimpel Communications (VIP)
7. NYMEX Holdings (NMX)
8. Smith & Wesson (SWHC)
9. FalconStor Software (FALC)
10. HealthSpring (HS)

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I Got a Flyer in the Mail, the Stock Looks Good. Your Thoughts?

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 1

 

Question:

I got a flyer in the mail yesterday about ETLY:BB. What do you think of it?  It was from James L. Rapholz’s, "Economic Advice" newsletter.  Just wanted to know what you thought of it.

My Response:

Take that flyer or print out of any email promoting a stock and immediately use it for starting a fire (preferably in the fire place) or send it to the recycle bin.  These kinds of promotions are almost always pump and dump schemes.

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Member Q & A: IPO’s, Institutional Demand, How Long to Hold a Stock, Dealing With the Frustrations of Trading

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 3

A couple days ago I received a few questions from a member and I thought my answers to these questions would be of benefit to a few more.  This is something I’ll be doing more of from now on and once the new website is released I’ll be creating a section where past member emails and my answers will be archived for review. 

Q:  I got your email on DIVX, but I can’t find it listed anywhere on your site.  Could you tell me what I’m overlooking?

A:  DivX Corp (DIVX) is a recent IPO.  Since the stock has not yet formed a proper base and near a breakout, the stock won’t yet appear in the Breakout Tracker.  That being said, the hottest IPOs often run up significantly before ever forming a real base, trending higher and higher right out of the gates in a stair step pattern.  This likelihood only increases in a bull market when their is great enthusiasm for the next hot stock.   So what kind of pattern am I looking for in these situations?  Basically, what I’m looking for is a run up, a retrace/consolidation, then a break.  It may look a lot like a bullish pennant or flag formation.  Be sure to keep an eye on three new IPO’s that came to market on Friday – eHealth.com (EHTH), Acme Packet (ACME) and SAIC (SAI).  A new IPO Tracker section will be coming to the premium members area.. stay tuned for  that!

I’ve posted a report in the members area showing the charts of two recent hot IPO’s, DivX (DIVX), a recent purchase in the Model Portfolio and Mindray Medical Technologies (MR).

Q:  What methods do you use to know where the institutional money is flowing?  Either into sectors or individual stocks.

A:  Price and volume movements are used to track the footprints of institutional money flows.  Here at SelfInvestors I came up with a fairly simple formula (called the Demand Indicator or DI score) which awards points for high volume up moves and low volume selling and subtracts points for high volume selling or low volume buying over the course of 15 and 30 days.  The higher the score, the greater the demand for a stock or sector.  For example, a stock that is carving out a base with sell volume drying up at the bottom followed by a surge in buy volume in the right side and at the breakout is going to receive a very good Demand Indicator score.  Go to the Breakout Tracker when you get a chance, click the View All Stocks link near the bottom of the page, then sort the database by DI15 by clicking the column header.  This brings stocks showing the greatest demand over the last 15 days to the top.  Write down the top 15  tickers, then sort again to bring stocks showing the least demand to the top and  write down those tickers.  Compare and contrast the charts to get an idea of a very bullish chart vs. a bearish chart and how the first sign of great demand leads to further demand for a stock down the road. 

For non premium members who may be reading this report, here’s a top 15 list of stocks showing the greatest demand over the past 15 days: ELE, ININ, EZPW, BFAM, CMG, AOB, CBEY, RICK, GCOM, CTCM, BITS, KNOT, ICON, XING, PRFT

Why track institutions through price and volume movements?  It’s the institutional buys and sells that most often move a stock in a meaningful way.  When institutions initiate a new position (which will often happen in the kinds of high growth, relatively undiscovered stocks we’re interested in), remember that they can’t possibly intitiate their entire position all at one time in most cases.  For example, if a mutual fund wants to initiate a position of 500K shares in a company that only trades 250K shares a day, they are going to need to purchases in phases over the course of several days or weeks.  Once you see these initial surges in price and volume you can safely assume that there is a good chance that the trend will continue down the road, possibly from multiple institutions if the stock is liquid enough.  Basically, the goal is to hop on the back of this institutional wave of buying as early as possible.

Tracking institutional money into sectors or industries can be done through the analysis of ETFs using the same Demand Indicator scores.  Premium members may currently use the ETF Tracker on a day to day basis to see those industries and sectors showing the greatest demand by clicking on "Leading ETF’s" in the ETF Tracker.  Registered *free* members receive these top sectors/industries in the MidDay Market reports and will soon have access to the list throughout the day once the new site is finished. 

At the top are the hottest ETF’s right now:  Retail, Consumer Services, Software, Biotech and Semis.  These are the sectors I would be focusing on right now.

** If you haven’t had a chance you may like to read a report I recently wrote which highlights how I go about tracking where the money is flowing in and out of the market

Q:  How long do you typically hold a stock?  I know that it depends on a lot of variables, but if a stock is fundamentally strong isn’t it a good idea to hold it longer?  Is your approach to buy and sell stocks for a period of days, weeks, months, or longer?

A:  If I were to find some sort of average holding period for a stock it would probably be a month or so, but it really depends on a number of variables.  I have bought and sold a stock in one day and I have held on for several months (including through earnings which I don’t often do). In a strong bull market like we had in 2003 and like it appears we are having now, I might be willing to hold for longer periods.  One thing I rarely do is hold a stock through its earnings report.  It’s just one thing I do to eliminate risk of big downside moves surround earnings.

The greater the degree of uncertainty, the greater your risk in holding a position in a stock. All stocks are uncertainties, but there is no moment of greater uncertainty than that of an earnings report. It’s the time when the company reports on how well it is doing now and how well it expects to do in the future. Often times, other major announcements are made as well. It can be a time of extreme volatility, especially with small cap, high growth stocks. Sure, the upside potential can be great, but there are too many things that can go wrong, which could cause the stock to plummet. Remember, the name of the game is preservation of capital. You can always repurchase the stock once the coast is clear.  A company may report below analyst estimates, or the whisper number (earnings that the company is rumored to report, often leaked by an insider). There are times when a company will beat the analyst estimate, but not the whisper number and sell off.   They may release negative news about the company, the industry, or reveal a less than optimistic outlook for the future. "Buy the rumor, sell the news". Often times a stock will rise ahead of expected good earnings, only to sell off once the great earnings are released.

Is it a good idea to hold a stock longer if the stock has great fundamentals?  It really depends… on the charts.  The charts will tell you when to get out.  Whether you are more of a short term trader looking to lock in a quick profit (something I have been leaning more towards recently) by focusing more on the intraday and daily charts or looking for a longer hold and focusing more on the daily and weekly charts, high volume selling and a breach of support levels on those time frames will let you know when it’s time to get out.  One thing to caution against is falling in love with a company and "riding it out".  The market always looks well into the future by several months and it’s the charts that often forecast bad news down the road.  Remember, someone always knows something.  Whether it be insiders or the detailed research of the institutions.  By the time  the company is reporting earning and sales not consistent with the great results of the past, you may find that the stock is already down 30, 40, 50%. 

Knowing when to sell is the most difficult part of trading because there are so many variables involved, not to mention elements of fear of and greed.  Many experts say to have an idea of where to sell before you purchase the stock in order to take out the emotion of trading.. have a game plan and make it as mechanical as possible.  I don’t believe in using a mechanical approach to investing because the market itself is not mechanical and predictable.  While I do use support lines and price and volume movements to dictate when to get out, I absolutely don’t use profit targets and stop losses.  For example, some strategies advise cutting your loss at 8% no matter what.  I prefer greater flexibility.  Sometimes I’ll cut my loss at 1%, other times I may let a stock ride out a bit longer and take a loss more than 10%.  It really depends on what the market is doing and the relationship of price/volume and support/resistance.

Q:  I get frustrated at buying a stock then just see it stall out or fall.  I look for a stock that is fundamentally strong, in a good industry/sector, good ROE, growing sales and earnings, low debt, good management ownership and in a breakout pattern or bouncing off the 50 day moving average.  Where should I concentrate my efforts on your website and just what should I look for in a company that would make it attractive to big buyers?

A:  Yes, trading stocks can be quite humbling at times can’t it!  There will be times when you follow all the rules and trade the best companies in the best industries at just the right time, yet the stock fails to meet your expectations.  It may even happen a few times in a row.  The bottom line is that this business is far from easy and nothing is certain, but by by sticking to the best companies and buying at the right time you give yourself the best PROBABILITY of success over the long haul.  Be prepared to go on streaks where nothing is working, but don’t let it get you down.  Learn from any mistakes and move on with confidence.  Also be prepared to experience streaks where everything you touch turns to gold, but don’t let it get to your head and start making mistakes.

The second part of your question asks about how to best use the Self Investors service to locate the best opportunities.  You should take a top down approach to investing – always know what the overall market is doing.  Are we in a bull market, a bear market, chopping sideways?  Next, focus on those industries/sectors that are leading the market (see 2nd question above), then trade leading stocks in those industries/sectors at the right time.

This is all easier said than done and would require a tremendous amount of time on your part to keep track of all this information from week to week.  That is the reason for creating SelfInvestors.com.. to save you a ton of research time.  The Breakout Watch screen is a list of the best breakout stocks updated nearly daily, with the best opportunities right at the top (ranked according to fundamental and technical analysis).  The Play the 50 Day screen is a table of stocks near the 50 Day moving average which is a great tool for finding stocks that have previously broken out and returned to support (providing you with another point).  The Hot Stocks screen combines these two tables, but takes it a step further by filtering so that only stocks showing the greatest demand are listed.  This is where I typically start my research. 

During the trading day, I use the SelfInvestors database to track stocks moving up and down with volume.  Take a look at the Today’s Market Movers list and do a sort by % Gain from BO (percentage gain from the breakout or pivot point).  Focus on stocks that are no more than 5% extended from this point.  Looking at Friday’s data I see there are 9 such stocks that meet this criteria, 4 of which were breaking out of nice looking bases: CHIC, PSEM, KNXA and EZPW.  All are nice looking opportunities and were were showing up in this screen very early in the trading day.  Another way to use this screen during the trading day is to sort by % from 50DMA (percentage from the 50 day moving average) which will allow you to easily see stocks just moving above the 50 day moving average with volume.

Rather than checking the database several times during the day, you have the opportunity to receive all of these opportunities in your email inbox by signing up for the email alerts.

That’s the service in a nutshell anyway.  As always, unlimited live chat sessions may be scheduled where I walk you through the entire service (even during the trading day if you wish). 

These were all great questions, keep them coming! 

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When to Sell Before Earnings

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 0

Question:

You said you don’t like to hold a stock through it’s earnings date.  I own DRIV with its earning date of 10-26.  How close to the earnings date would you recommend selling?  The stock just hugs its 20 day MA and I thought for sure it was ready to break below that today.  Instead it opened on the upside and as of now is still rising.  I think it has pretty much run its course and that I should get out.  It has doubled its average number of days from base to peak and exceeded its average gain for that same period. 
 
From the chart I can’t figure if the institutions are letting the price go up then dumping some shares or if they wait for the price to drop to the 20 day then buy shares.  Since the trend seems to be up I’m guessing its the latter.  Key word there is "guess".  At some point the trend is over and past trends in that stock show that it could be a sudden drop without warning.  I would rather take a small profit than none at all.

My Response:

I can’t give buy and sell recommendations on an individual basis due to SEC regulations (not to mention we all have different risk levels), but I can tell you what I’ve done.  The stock looked great until yesterday when sell volume picked up signficantly. It did briefly dip below that 20 dma this morning but bounced back and has flatlined over the past few hours.  Over the long term it is a great company and should report very good earnings, but I like to lock in profits on any weakness in any stock especially before earnings.  Might be worth holding for a few more days if it can stay above that 20dma today. In a nutshell, I almost always sell before earnings and whether that’s one day before or several days before depends on the health of that particular stocks.

A little hint about the actions of institutions – if a stock is showing big volume without price progress then they are selling into the rising stock.  If the stock hits the 20 dma and bounces with volume, then they are adding shares at that short term moving average.   Based on the current volume and price activity in this one it looks like they aren’t doing much of anything right now. 

 

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It’s Not A Bad Idea to Master the Basics First

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 0

Question:

I have a general question for you.  I am currently a student of Investools. I addition to trading various stocks options, I also want to focus on short term trades on the OEX and SPX (about 1-5 day period per trade).  Do you think that the timing system you use could be used in this arena especially the OEX? Do you think we could come up with various indicators to fine tune the entry and exits for this index using your site? 

 A little about whom I am so you know who you are emailing.  I am a pediatrician by training but currently at home raising my children.   I was introduced to trading about a year ago.  Until then I was financially illiterate, as many doctors are. I am a very quick learner and have accumulated so much knowledge this year that sometimes it astounds me how much life has changed.. I have three passions, and they are what I am wholly committed to.  These are my family, trading and eventually making a real positive change in this world.  Not only do I love to trade but also I see this as a means to give me the financial freedom to help a lot of people around the world and here who were in similar and worse situations that I have been in. 

I could totally relate to your introduction to the web site and will whole-heartedly join again.  Please let me know what you think about the OEX.  I know the warnings about options trading out there but I also know that anything is possible with the willingness to do whatever it takes. 

My Response:

Trading options can be much more lucrative, but of course comes much greater risk.  I personally don’t trade options, but rather choose to use margin in order to leverage and increase my potential reward.  I want to keep it as simple as possible at all times.  Believe me, you can make a substantial amount of money not messing with options and just leveraging with margin at the right times.  Unless you are highly experienced in reading charts, I would absolutely avoid short term trading of options.
Here are my thoughts on the path to learning trading:
 
1. Learn and experience consistent success buying and selling stocks using the weekly, daily and intraday charts
2.  Once you have had success making money on the long side, begin to develop a short strategy in order to profit in a declining market as well (it actually takes some time and a shift in mind set to always be thinking about both sides of the market).  While looking for characteristics that are the opposite of long positions (such as big sell volume, taking out support levels/turning away from resistance), it will take some time to locate and initiate good shorts
3.  Begin to leverage with margin when the time is right
4. Increase profit potential with highly leveraged day trades
5. Begin exploring the use of options
 
Anu, if you really want to trade options out of the gate please paper trade for at least several months.. although paper trading does NOT give you an accurate feel for the emotions of fear and greed that come into play when trading with real money.
 
Thanks for sharing a bit about you.. I wish more members would take the time to do that!  Raising children is a tough job, but you’re in an enviable position of being able to watch the market at certain times of the day.  You can have success while trading and having a full time job, but its certainly better to be able to dedicate your time to the market from 6AM to 1PM.  Your long term goals are admirable and I will do everything I can to help you reach those goals.  Just one I ask: please be patient 🙂  I see to many people thinking they can get rich in a year.  Sure its very possible to in a roaring market to double your money in just a couple months, but there times like right now where you need to be especially patient.
 
I look forward to working with you and hearing about your progression.  I have a few members here who have been with me since day 1 and are experiencing consistent success after several years of trying to make it work.  One member was about to give up trading for good (at his wife’s and probably accountants’ advice) before becoming a member.  Last I heard he was setting personal records and making consistent money!

Member Response:

I look forward to a very long and prosperous journey together.  I think one of the key ingredients for success is surrounding oneself with quality people. I am glad to have you on this path. 

Investools is an expensive course.  However over the last 10 months I have learned and grown more then the monetary commitment I made.  Yes, options comes with many risks and rewards.  The key here is to immerse in the study.  I usually get up around 4-5 am and read and study before the markets open and during the day.  Once my children and husband are asleep I spend another 3 hours or so learning.   I have paper traded and continue to do so.  However, as you said the real challenge of a great trader is to be able to conquer oneself.  I think that is harder to do in the paper account as you can always press the reset button.  I have and continue to trade real money with the up most confidence that with time and effort we can arrive at a system that fits my personality and is profitable.  When I first started trading, the first two months I had about a 20% return a month.  However, after the May 10 Bernake meeting, the markets have been a lot harder to decipher and I have lost significantly.  I am however not daunted although I must admit there were several of those “What in the world am I doing” moments”. 

As far as the experience at Investools, it has really been incredible.  Although I must say you get out only what you put in.  I also find that in the world of trading as in medicine there seems to be a degree of competition between traders that results in a lack of “full disclosure” about techniques.  I love technical trading and am in the process of reviewing the various indicators i.e. MACD/ Stochastics, moving averages and such to see which combination works best to give reliable signals for the indexes especially the OEX and SPX.  You know, perhaps part of the love is that technical trading is so intellectually stimulating and challenging. 

I will look carefully at your recommendations. I still shake my head at amazement that you would take the time to be so through with someone you don’t really know yet.  The ideas of support and resistance, breakouts with volume, support bounce trades and price pattern recognition and candlestick formations are only some of the things I am learning.  When I look at the charts you present there seems to be a lot of similarities what you are looking for to enter a trade.  I would love to discuss these with you as the journey proceeds. 

 And, yes I will be patient. I look forward to keeping up this dialogue.   

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