I know I’ve said all this before but paying attention to the commentary of the newspapers, the magazines and the talking heads on CNBC is enough to well.. make your head spin.  Recession talk is bantered about amidst the back drop of Jim Cramer exclaiming Dow 14500 by the end of the year.  A few weeks ago IBD hinted that a recession is unlikely based on one jobs report against a back drop of CEO’s from major corporations sounding the alarm of potential economic weakness, further housing deterioration, etc.  The contradictions of opinions and background noise can and will keep you from your goal of making money in the market.  Only technical analysis of the market can keep you focused on how strong or weak the market really is.  Anyone who dismisses technical analysis as irrelevant should, in my opinion not be making decisions to invest their own money let alone money for their clients.  The big myth on Wall Street is that you can’t time the market.  No, you won’t always get in at the bottom and out at the top but with sound technical analysis you will capture the bulk of the move a high percentage of the time. 

Why does technical analysis work?  The reason is simple supply and demand.  Spikes in price and volume reveal the demand (or lackthereof) in stocks from the big fellas (institutions like banks, mutual funds, pension funds, etc) Since 60 – 70% of the move in the mark is the result of their trading it pays to follow their moves. .. and those moves show up in the charts!  A major focus of the blog is to analyze the charts for you to help eliminate all the noise that’s out there.  Over the past few weeks I’ve been recommending to my readers to be cautious and to begin locking in profits so a move like we had on Friday should not have been all that painful.

October 1st
"…. it’s clear that institutions didn’t do a whole of participating in today’s rally.  It seemed to be more of a case of the retail side fearing missing the next move up and some short covering.  Considering that the market is being led by commodities (no, Gold shouldn’t lead the way in a bull market) along with overbought conditions quite frankly I’m becoming skeptical of this rally.  I’m continuing to play it with small long positions and added a couple more today but I’ll be vigilant about looking for more warning signs and even more vigilant about protecting my profits."

October 7th
"…until the institutional money starts pouring in, this market rise remains a house of cards.  Notice how as the Dow pushes to record highs, but volume behind the move recedes.  The market looks tired up here and at the very least needs to take a breather and spend some time sideways.  At worst, this is the end of the road and marks a double top…

October 9th
"With the Nasdaq nearing some resistance at the upper level of a wide channel, the market may be soon be looking for excuses to take profits.  Now may be a good time to find excuses to take profits of your own."

October 11th
"I think tomorrow’s action will be fairly important.  Will retail sales and PPI data on the agenda for tomorrow, will it send the the market into another tailspin and confirm the selling of today?  It’s anyone’s guess but as I’ve been saying for several days now it’s best to remain cautious up here."

October 16th
"The bottom line is that all indications point to further deterioration in the coming weeks.  Preserve that capital and consider locking in profits quicker."

I highlight my remarks on the market  over the past couple weeks not to prove I was right but rather to serve as a reminder that simple technical analysis can provide you with the skills to time the market to a certain degree.  The deterioration over the past  several days had been forecasted well before with the divergence between and volume and finally with the high volume reversal on October 11th and finally a break of key trendlines on October 16th. 

Where do we go from here?  Down is the obvious answer.  With the degree of selling momentum we had on Friday, there will be further deterioration.  Now some of the volume on Friday can be attributed to options expiration so it wasn’t as severe as it appeared at first glance but I think we have another 2% down to go before we begin bouncing.  However, based on the action over the past few weeks I think it will be very difficult to take out those October highs before the end of the year. 

::: Model Portfolio Update :::

Despite all the controversy over Taser’s stun gun, the action in the chart continues to paint a bullish picture and today’s action would indicate another significant price surge is in the works as the stock is breaking out of a symmetrical triangle formation with heavy volume.  The pattern of big buying followed by decreasing sell volume that began in March (see past posts on TASR for a closer look by clicking CANSLIM Stocks to the left) continues and indicates good demand for the stock.  (click image for larger display)

After the recent 2 for 1 stock split (which was the third in the last year), the increase in the supply of shares can create significant pressure in the stock price if the increase in supply isn’t tempered by a subsequent pick up in demand.  A company will split its stock to decrease the price, which in theory makes it more attractive to the average investor.  But it also makes it easier for institutions to initiate new positions or add to their current holdings.  A small float (supply of shares not held by insiders available for trading) may squeeze out institutions that would like to initiate a position or add to an existing one.  So, if the demand is there, the increase in supply can be beneficial.  Based on today’s action, that appears to be the case.

Taser is moving this morning on news that a Department of Defense study by the Human Effects Center of Excellence concluded that TASER technology is generally effective without significant risk of unintended results, but obstacles remain. For one there are rumors of large lawsuits on the horizon as a result from deaths during Taser incidents. In addition, the company can expect competition over the next few years as competitors race to produce safer, more effective products in order to capture a piece of this growing field. Finally, the company will report earnings Tuesday which could create significant volatility for the stock. Despite the risks, signifant profit potential remains in the stock. Let’s take a look again at the chart. (See past posts regarding Taser for a more detailed look at the chart)

You can see in the chart above that selling volume is once again drying up and Taser may be on the verge of a big shift to buyers. Look for a break above short term resistance at 40 with large volume as the signal for a potentially large move up, while a break below short term resistance at around 36 as a signal that the stock will need to spend more time basing. All eyes will be on the upcoming earnings report, which could be a catalyst for movement in either direction (see the post on why it’s a good idea to avoid holding a high risk stock through an earnings report).

As always, please do your own research before making any buy or sell decisions.

A couple of weeks ago I posted a chart on Taser (TASR) and pointed out that sellers were about done and it was a matter of time before buyers took control. What are the clues? The selling volume was drying up with each day and there was a decent probability that the stock would form a near symmetrical double bottom base. Taking a look at the chart, you see that the second bottom spent an almost identical amount of time forming the bottom before buyers took control with a surge in volume. Now it’s important to realize that charts won’t usually form quite this symmetrically, but if you are familiar with the shapes of the most common chart patterns and can spot volume dry up/buying surges you can often times predict future price movement. Will you alway be right? Absolutely not! It’s all about probability and using as many pieces of information in order to steer the odds of success in your direction. Here’s a current chart of Taser:

Let’s take a look at another example of predictable price movement in the chart of CALM (Cal Maine Foods). During the low card diet craze of last year, this egg producer ran up over 1000% in just months. Since late March it has been carving out a nice looking doube bottom base.

Again, notice the symmetry on either side of the middle peak of the W formation? Notice the the dry up in selling volume on both sides before buyers take control?

In both the case of TASR and CALM, you’ll notice that the formal CANSLIM pivot has not been reached… but I believe there are certain times when it’s ok to buy before the pivot: If buying before the pivot the following conditions should be met:

* Market in uptrend
* Decreasing selling volume, surging buying volume
* Support levels are near (within 10% of purchase price)
* Base has exhibited quite, predictable price action in the past (no erratic bases!)

By becoming familiar with common price patterns, you will soon be able to predict future movement and your success rate will dramatically improve. Start studying those charts … as many as you have time for! Are there unpredictable price/volume patterns? Absolutely.. there are many more unpredictable patterns than predictable patterns. Stick with predictable patterns.

Here are a couple of examples of erratic, unpredictable price patterns that should be avoided.

Would you be comfortable with your hard earned money in this stock? I know I wouldn’t!

How about this one?

It isn’t often that I post here about specific stocks, but I will try and do more of that since looking at the movements in specific stocks provides good lessons in buying and selling. Taser International (TASR), a former high flyer that has since come back to earth has carved out a very interesting chart in the last few months and provides a good look at the importance of buying VS. selling volume. The one thing that stands out to me about this chart is the dramatic difference in buying vs. selling volume. It is absolutely clear that the majority of those willing to sell have sold as the number of sellers continues to decline. Those holding the stock now are strong holders, most likely holding for the long term. Once the market turns, this is a stock that could take off once again. You can see what happened in June as sellers gave way to buyers. I realize the CANSLIM method doesn’t recommend buying a stock near the bottom, but there are times when it can be extremely profitable. What should you look for in these situations? 1. Most importantly you want to see a clear trend of decreasing selling volume. 2. You also want to see the stock hold up at a major support level (more than one is preferable – trend line + moving average). When you see a stock clearly being supported at a certain level, a drop below would indicate that the risk of further selling increases dramatically. It is your clue to get out with a very small loss. That being said, should you buy as the stock is settling in at support? If you can watch the market during the day, then no. Wait until you begin to see the shift to buying with volume. This can happen very quickly, so its best to create alerts at various price points and then check a 1 or 5 minute chart for a surge in buying. Of course many aren’t able to sit and watch a stock during the day. In that case, it may be best to buy as close to support as possible and add a stop loss a few percent below major support. (** In the case of TASR, you see the support of the 200DMA as well as previous support in the 24-26 range.) 3. Try and anticipate how much time the stock will continue basing. Do this by looking at the shape of the chart and assume it may form a near symmetrical base. ** TASR looks to be forming a double bottom base. If a well formed double bottom base is forming, it will need to spend more time basing and possibly undercut the low of the first bottom at 23.76. 4. All other CANSLIM criteria apply. – Must be a leading stock (strong earnings/sales, profit margins, ROE) – Stock a part of a leading industry – Need healthy market Taser International meets all the criteria, now we just need a health market! As always do your own research before making any buy and sell decisions.