All posts by Tate Dwinnell

State of the Stock Market

Send Those Bears Into Hibernation

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The following is a portion of the free report I send out to subsribers of SelfInvestors.com. What I’ll do is post portions of the report during critical moments for the market, but eventually would like to post the entire report here once I get the technical kinks worked out – stay tuned! If you’d like to receive the entire report every evening you may sign up here

I mentioned in last night’s report that some good news could really send this market.. and good news we got! The big drop in crude on an unexpected rise in inventories as well as some decent economic data put traders in a buying mood ahead of elections. For the second straight day, volume surged higher than the day before creating an unprecedented two straight days of accumulation! The last time that happened was exactly one month ago. Today’s action was a major boost to a tired market in danger of rolling over, but key resistance remains before an all out rally can be declared. The end of the elections could just be the final catalyst to send the bears into hibernation for good!

Let’s take another look at the major indices to get an idea of where we’ve been and where we need to be. We’ll start with the Nasdaq which is comprised of the majority of CANSLIM style stocks. Clearly, today was a big step in the right direction as the Nasdaq surged above resistance of the 200 day moving average. However, another large hurdle remains in the form of the downward trend line. If the Nasdaq can get above this line and find support there once it does, that would be a MAJOR accomplishment.

The S&P battled two major areas of resistance today (the 50 and 200 day moving averages) and came out on top… of both resistance levels. While this is impressive action, it too has yet to overcome the downward trend line.

The Dow, a conglomerate of large, blue chip, slow growers has clearly lagged the rest of the market this year and remains submerged below all major resistance levels. These levels include "psychological" resistance of Dow 10,000, the 50 day moving average, the 200 day moving average and the downward trend line.

SECTOR REPORT: The Quiet Ascension of the Brokers & Dealers

Much of the attention lately has focused on technology (especially Google!), but behind the scenes, Brokers and Dealers are staging a nice advance as well. As the index works its way up the right side of its base, notice the good support at the 50 day moving average and then the surge above resistance of the 200 day moving average today.

Taking a look at the Breakout Tracker (a premium service I provide at SelfInvestors.com), there are currently 7 stocks listed in this sector (that make up the Asset Management and Investment Brokerage industries). Six out of 7 have broken out to gains with an average gain of 10% (two are still in a buyable range).

Industry Spotlight: Security Software
In today’s world, combining security and technology means big business and the Software Security industry is beginning to catch fire. Take a look at companies like Symantec (SYMC), Aladdin Knowledge Systems (ALDN), RSAS Security (RSAS), Blue Coat Systems – insider buying (BCSI), Safenet (SFNT), Internet Security Solutions (ISSX) & Tumbleweed Communication (TMWD). These are the leaders in the software security arena.

Stocks

TASR Review

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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.

Stocks

Same Chart, Same Result: Predictable Price/Volume Patterns

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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?

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Characteristics of a Well Formed Base

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**A stock that sinks less severely during a market correction is outperforming its peers and is a sign of strength. It may be one of the first out of the gate as the market begins to rally.

**An upward price reversal at the bottom of the base with heavy volume indicating major support by institutions (this process may happen over the course of a few days and can be seen in a weekly chart).

**A long base, giving it a greater chance of a sustained breakout

**Volume dry up (decreasing selling volume) at the bottom of the base and in the handle

**Low volatility in the base and handle. An occasional shakeout is fine, but you want to see at least a few weeks of tight, quiet price action indicating a lack of speculators and a load of steady long term shareholders. A stock with a wide and loose base indicates that is in the public eye too much and calls attention to itself. Remember that stocks tend to shoot up to new highs when most people aren’t paying attention.

**A high volume gap up on the right side

**A handle that slopes downward (5-15%) with declining volume and tight price ranges. This handle should form in the upper half of the base (applicable to cup and double bottom bases).

**Volume on the breakout day at least 50% (I like a volume surge of at least 100%) higher than the average and trading volume for that week higher than the previous week. (NOTE: Average volume on the breakout may be OK as long as the volume on days following the breakout begins to increase as institutions begin to build their positions in the stock.

Calculating % Change in Volume at the Breakout
There are 6.5 hours in a trading day. If a stock trades an average of 650,000 shares per day, divide this number by 6.5 to get the hourly average of shares traded. This particular stock trades on average, 100,000 shares an hour. The next day you notice it passes its pivot point at 8:30am and the volume is 350,000. Do you buy? Yes. At 8:30am, you are two hours into the trading day and the average at this time is 200,000 shares. If the volume at the breakout is 350,000 shares, that’s 75% greater than the average. It’s a sign that institutions are starting to accumulate the stock.

**Relative strength is at a 52 week high at the breakout

**Confirmation after the breakout. You should see a few high volume advances within a week or two of the breakout to confirm that institutions are building positions in the stock.

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Gauging the Herd Mentality

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Gauging the feelings of investors about the market is also important in determining the health of the market. The reason for this is fairly simple. If the majority of investors are bullish, there are few buyers left to power the market higher. There is only one place for the market to go… down, as the sellers return. If the majority is bearish, there are few sellers left to send the market down further. Bargain hunters begin to smell an opportunity. As more and more money builds on the sidelines, a positive shift in perceptions will usher in a flood of cash and lead to a new bull market.

In any sustained bull market, it’s necessary to have people concerned about the economy, interest rates or stock valuations. These people sitting on the sidelines and/or shorting stocks provide a lot of capital down the road when they are finally convinced that the bull market is for real. When they do, it’s at this time that you may have the makings of a climax top, tempting the pros to sell. You should be selling too.

The following indicators help to gauge the feelings of investors about the market (however, keep in mind that these indicators are of secondary importance). The price/volume action of the market, the action of leading stocks and interest rates are of primary importance.

Put/Call Ratio
When investors buy calls they are betting that the market will move higher. If they buy puts, they are betting that the market will move lower. If the Put-to-Call Ratio is greater than 1, more investors are betting the market will head lower. Since the majority is usually wrong, a spike up in the ratio may signal a market bottom.

Advisory Newsletters
The newsletters are generally bearish at the bottom and bullish at the top… the majority is usually wrong!

Short-Interest Ratio
Measures the total number of shares being shorted vs. the NYSE’s average daily volume. A value of 3 indicates 3 days of short interest… the larger the number, the more shares are being shorted as investors become bearish. A few spikes in the short interest during a bear market could indicate a bull is just around the corner. The crowd is usually wrong!

Public/NYSE Specialist Short Sales
Another short indicator measuring the ratio of public selling short to NYSE Specialists selling short. A spike in this ratio may indicate the bottom of the market… once again, the crowd is usually wrong!

State of the Stock Market

Where Do We Go From Here?

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Obviously, July has been ugly for the market, especially for the Nasdaq. Fear is building as negative events/outlooks continue to get priced in. But I don’t think we’ve seen the end of the selling just yet. Bottoms usually occur at major reversals (or capitulation) where panic selling becomes overdone and buyers step in. This should occur with high volume. Let’s take a step back and look at the long term chart of the Nasdaq to get an idea of where this capitulation may occur. First of all where would panic selling most likely take place? The obvious choice is when/if the Nasdaq takes out the low of this most recent correction at 1865. Where might buyers step in to put in a bottom? Again, the obvious choice would be major support of the long term trend line in green at around 1850. This long term trend line is a very important support level that will be crucial in maintaining the long term uptrend experienced over the last year and a half. In my humble opinion, I believe this scenario plays out to some degree and the uptrend continues.

State of the Stock Market

.. but it all looked so rosy

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Looking out over the horizon last Wednesday, it would have been impossible to see the cliff right in front of you. That’s because the sun was a shinin’ right in your eyes. It all looked rosy just days ago as ingredients for a nice little rally were thrown into the pot. But the recipe was ruined with the addition of earnings warnings, a surprisingly lackluster jobs report, terror warnings and the addition of corporate killer John Edwards to the Kerry ticket.

Nothing is ever certain in the market. Technical analysis using price and volume data of the major indices provides clues and a general probability as to future direction, but it is never absolute. Generally speaking, breaking through resistance and finding support are bullish signals. On the opposite side, retreating from resistance and plummeting below support are bearish signals. More often than not these signals work. When they don’t it’s critical that in order to protect your capital you act quickly and decisively.

Looking at the current state of the market, the Nasdaq is in trouble and will most likely test previous lows (setting the stage for the rare triple bottom?). Yesterday marked the 3rd day of distribution in just a weeks time. That is enough to derail any rally. The DOW and S&P still have the support of their 200 day moving averages, which is critical for the market. I’ll be watching these levels closely. CANSLIM leading stocks are not sustaining breakouts and in many cases completely breaking down (See ESCA, FILE, SNIC, BRCM, HIBB, HLEX.. and on and on). In fact leading stocks have lagged the general market for five days in a row. OUCH!!

Amidst all the doom and gloom, there are bright spots in the market. Opportunities can be found in Oil/Gas & the metal markets (Gold, Silver & Copper). However, you may want to be careful by purchasing half positions and setting tighter stops. Good luck.. it’s a jungle out there!

State of the Stock Market

Here We Go!

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We got it all today. The price movement, the close at the high, the volume, the break through resistance, the participation of technology and leading stocks leading the way. It all led to a day of accumulation as institutions began to put money to work. It was the kind of day we have been waiting for and it signals that significant upside remains in the market. Today, it was the Nasdaq that led the way and broke through major resistance of the convergence of the downward trend line and 2,000 (a psychological level).

Over the past few weeks the Nasdaq has been getting squeezed between support of the convergence of the 50 & 200 day moving averages and resistance of the convergence of the downward trend line (in blue) and the important psychological level of 2000. It had to give eventually and today it did… to the upside! It signals the OK to become a bit more aggressive in buying leading CANSLIM stocks.

State of the Stock Market

State of the Market

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**Note: click on the day to see the report I sent to free members of SelfInvestors.com – if you would like to receive this report, you may sign up here.
It’s been a month or so since my last post regarding the strength of the overall market, so I thought it would be a good time to take a look once again. In the previous post regarding the strength of the market, I mentioned the importance of the high volume reversal at the bottom on May 12th, which often signals the end of a correction. Nearly two weeks later (May 25th) we got a confirmation day when the Nasdaq surged 2% on heavier volume than the day before. Confirmation days don’t necessarily lead to new rallies, but no new rally or bull market has started without one. A confirmation day signals it’s OK to test the waters, but not to dive in with both feet. A slew of successful breakouts from leading companies provides further evidence that the correction is over. That is exactly what we are seeing. Many leading stocks are breaking out of sound bases to big gains.

Here’s a list of the top breakouts and their percentage gain from the breakout since that confirmation day on May 25th (the number in quotes is a ranking system I use which combines a fundamentals and technical score that I come up in order to sort the best [20] from the rest [1] – I generally don’t track any stocks rated less than 13 and rarely will a stock get a 19 or 20 rating):

[17] Sanderson Farms (SAFM) – Up 14% since its May 26th breakout
[17] Gen-Probe (GPRO) – Up 13% from its May 27th breakout
[17] BEI Technologies (BEIQ) – Up 8% since its May 25th breakout
[16] Copart (CPRT) – Up 8% since its May 26th breakout
[16] Mine Safety Appliances (MSA) – Up 10% since its breakout yesterday
[16] Old Dominion Freight Lines (ODFL) – Up 8% since its May 25th breakout
[15] Possis Medical (POSS) – Up 7% since its breakout yesterday
[15] Applied Signal Tech (APSG) – Up 7% since its May 26th breakout
[15] Overseas Shipholding Group (OSG) – Up 11% since its June 1st breakout
[13] Toro (TTC) – Up 8% since its May 27th breakout

More notable breakouts from yesterday and today:
[17] Central Euro Media (CETV) – Up 4% in a breakout today
[17] Drew Industries (DW) – Up 3% from its breakout yesterday
[16] Ceradyne (CRDN) – Up 4% from its breakout yesterday

In addition to the slew of breakouts from leading stocks, the market has managed to power through several layers of resistance in the form of major moving averages, psychological resistance and a downward trend line. The only concern is the absense of vigorous institutional buying. Below is a chart of the Nasdaq from yesterday. You can see how the Nasdaq has little trouble with several resistance levels.

Notice the formation of the double bottom base in the chart? By undercutting the first bottom, the second bottom flushes the weak holders out of their positions so that a new rally can begin. You can see the first reversal on May 12th and a second reversal that occurs on May 17th to create the low of the second bottom. That’s the key. Look for reversals, preferably on high volume. Looking out from here, it’s important for the market to find support at these resistance levels on decreasing selling volume. At this point, a healthy consolidation would be welcome in preparation for a run at the highs of April. As the market continues to show strength more investors will begin to feel like they are being left out of a nice rally. Maybe then we can get some volume to this rally!