Easing Into Position During Market Uncertainty

June 24, 2004 Tate Dwinnell Leave a comment

Question:

I notice that all your recent buys have been taken with a half position. Is this standard procedure for you is are you doing it because of the uncertain and volatile market? For adding on to a rising buy, some people advocate adding on 50% of the original buy with the next buy at 25% of the original and so on. Does this make sense to you?

My Response:

Not standard procedure, but procedure in an uncertain market. Much of that uncertainty was removed with the breakout of yesterday. Any positions opened at this point will be full positions. Please keep in mind that there are great stocks that won’t be purchased for the SelfInvestors.com.. i simply just don’t have the time to cover them all. I try to pick a couple here and there to give members an idea of real world, real time implementation of how a portfolio is run.

State of the Stock Market

Here We Go!

June 23, 2004 Tate Dwinnell Leave a comment

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.

Mail Bag

I Can’t Watch the Market During the Trading Day, How Can I Avoid Missing Opportunities?

June 23, 2004 Tate Dwinnell Leave a comment

Question:

My job prohibits me from any other role than being an end-of-the-day trader. Consequently, I often miss buy points when a stock explodes past the appropriate buy range (pivot + 5%). In a strong bull market I can stretch my buy window to +10%. In this sideways market, however, I am wondering if I should put a buy stop near promising prospects even though I understand that I cannot possibly predict which ones will blow and which ones will continue to consolidate. A buy stop with a Good-Till-Cancel might ameliorate this dilemma somewhat. Of course, I could also wait for a pullback but with this market many good breakouts are falling back below the pivot. Do you have any thoughts on this? This question becomes more interesting as I am watching EASI being absent from my portfolio.

My Response:

Another member was asking me about this recently. I’m going to copy here how I replied to him, then I’ll add some more comments.

2. If you have a cell phone that allows you to receive emails, you can
receive these alerts as they happen and put in a call to your broker or make
an online trade at a break in work or on your lunch break provided the stock
is still within the 5% range.

3. Another strategy is avoiding the initial breakout altogether and waiting
for a pullback to the buy point range (half of all stocks will come back the
buy point before resuming their advance). If you take a look at the
Breakouts area , all of the previous breakouts are listed. There are some
good buys there (i have not had time to rank those yet, but plan to do so
soon). Companies like Robert Half (RHI), Kensey (KNSY) I believe are still
in a "buyable range" which is 5% from the breakpoint. Also, if you take a
look at the recent additions to the portfolio, all are still in a buyable
range. However, it’s important to buy as close to the pivot as possible.

The reason for implementing the ranking system is to keep investors focused
on the very best breakouts with just seconds a day… there are a ton of
stocks out there and it only makes since to hold 5-10 at a time, so why not
own the best. Since your capital is limited I would focus on only the best,
which are generally stocks purchased for this portfolio. I am also
considering adding a risk rank for each breakout stock to give investors
another tool for buying what’s best for their circumstances. If there is
anything else you’d like to see in this area, please let me know.

I would never recommend chasing a stock that is 10% past it’s pivot point.

The only time this is a good idea is when a breakout stock returns to the 50 DMA

and bounces (ok, to add shares here). But this strategy requires you to watch

the stock carefully in real time, so it doesn’t suit your situation very well.

Here’s a strategy that I would use. For the absolute best candidates, you may want
to try the buy stop method. The only problem I see with this is that your order will get filled far
away from the buy stop, especially if the stock is really running. So, you’ll want to put in a limit.

The other strategy is to keep an eye on past breakouts with the Breakout Tracker. Which stocks

are highest ranked in all categories. Do a sort by overall rating, then check the gain from breakout.. is it
within 5% of breakout? Is it pulling back on light volume? Is it finding support at key areas?

If so, pull the trigger provided the market is cooperating. As far as EASI goes, the stock will undoubtedly pull
back to an acceptable buy range, so keep an eye on it.

Hope this helps.. let me know if you have further questions.

Stocks

Screening for Best Stocks

June 22, 2004 Tate Dwinnell 4 Comments

Wow, time flies. I haven’t posted here in awhile.

I wanted to mention a nice little Excel add in that is useful for finding the best CANSLIM stocks. CANSLIM investors who are also IBD subsribers may be familiar with the Screen of the Day which is a list of stocks published by Investors Business Daily matching a specific set of criteria each day. The best CANSLIM stocks often show up in these screens. IBD allows you to download these screens into an Excel file, but wouldn’t it be nice to sift through all the screens to find out which stocks appear most often? This program allows you to archive the screens and then sort, sift and organize to find the best stocks. I believe there is a free trial and another free program which allows you to archive the IBD100. Anyway, every so often I’ll post some stocks here that are appearing in the screens most often. The stocks below have appeared most often in screens for institutional sponsorship, financial efficiency, high profit margins, young companies, EPS and relative strength.

Appearing in 7 out of the past 10 screens:
Aeropostale (ARO): up 14% since breaking out on May 24th
General Maritime (GMR): broke out yesterday
Overseas Shipping (OSG): up 13% since breaking out on June 1st
Shufflemaster (SHFL): pulling back to 50 day moving average
Sierra Health (SIE): trending up, up and away
Ultra Petroleum (UPL): broke out yesterday
Zimmer Holdings (ZMH): up 7% since breaking out on April 16th

Appearing in 6 out of the past 10 screens:
Coventry Health (CVH): is flat since the breakout on June 1st
Ebay (EBAY): is up 18% since breaking out on April 1st
Sanderson Farms (SAFM): up 17% since breaking out on May 26th
Tsakos Energy Navigation: broke out yesterday
Urban Outfitters (URBN): has held above the 50 day moving average for the last 15 months!

If you’d like to check out this Excel add in you can find it at excel-sheets.com

State of the Stock Market

State of the Market

June 8, 2004 Tate Dwinnell Leave a comment

**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!

Mail Bag

Best Way to Purchase Stocks

May 28, 2004 Tate Dwinnell Leave a comment

Question (from Vernon K):

I am a preimum member and since I usually work during the day I come home to find your email about purchases in the SelfInvestor.com Featured Portfolio. I would like to follow along with some of these picks, but find that many of these stocks have risen from the optimal breakout point. I could place stop buy orders with my broker for the breakout stocks that haven’t been purchased yet, but that seems like over kill and I don’t have enough captial to buy them all. Are there any recommendations that you can give so I make the purchase closer to the breakout price since I would have 1 market day delay in the purchase? How far past the breakout price is safe for purchasing? Thanks.

My Answer:

It’s a great question. There are a few things that you can do.. 1. Placing a buy stop around the pivot point is not such a bad idea. .. the only problem with this is that you don’t have the luxury of avoiding a purchase if the buying volume is not there. Being able to watch the stock move in real time is a major advantage and often times you anticipate a large move in stock by looking at the volatility around the pivot point. Unfortunately, not many have the luxury of watching these breakouts in real time. If you use the buy stop and find that the stock is not breaking out successfully, you can always sell the next day. 2. If you have a cell phone that allows you to receive emails, you can receive these alerts as they happen and put in a call to your broker or make an online trade at a break in work or on your lunch break provided the stock is still within the 5% range. 3. Another strategy is avoiding the initial breakout altogether and waiting for a pullback to the buy point range (half of all stocks will come back the buy point before resuming their advance). If you take a look at the Breakouts area , all of the previous breakouts are listed. There are some good buys there (i have not had time to rank those yet, but plan to do so soon). Companies like Robert Half (RHI), Kensey (KNSY) I believe are still in a "buyable range" which is 5% from the breakpoint. Also, if you take a look at the recent additions to the portfolio, all are still in a buyable range. However, it’s important to buy as close to the pivot as possible. The reason for implementing the ranking system is to keep investors focused on the very best breakouts with just seconds a day… there are a ton of stocks out there and it only makes since to hold 5-10 at a time, so why not own the best. Since your capital is limited I would focus on only the best, which are generally stocks purchased for this portfolio. I am also considering adding a risk rank for each breakout stock to give investors another tool for buying what’s best for their circumstances. If there is anything else you’d like to see in this area, please let me know.

Support & Resistance

May 24, 2004 Tate Dwinnell 1 Comment

A key ingredient to being a successful investor is knowing at all times where levels of support and resistance are.

Resistance is the area at which price progress has halted due to a decrease in buying and an increase in selling. It often occurs at levels where investors feel the stock is overpriced, but can also occur at previous highs as investors who bought at the previous high look to sell in order to break even.

Support is the area where buyers have begun to outnumber sellers, reversing the downward trend. Support areas indicate where investors have begun to feel the the stock is a good value.

It should be noted that resistance and support levels are not absolute as stocks will often break through resistance and plummet through support. I like to think of these areas as “tests” for the strength of a stock. Stocks that bounce off support and break through resistance are showing great strength and should be considered for purchase, while stocks that retreat at resistance and plummet through support are showing weakness and should probably be sold. Support and resistance become a self fulfilling prophecy as professional traders keep tabs on these important areas and make buy and sell decisions based on the action of the stock as it reaches support and resistance. You should be doing the same!
Common areas of support and resistance are presented below.

Moving Averages
Moving averages are important support and resistance areas to keep an eye on, specifically the 50 Day Moving Average. Many times, institutions and professional traders will add shares to their position at this point. However, a drop below this important line on heavy volume can signal further selling is ahead for the stock. Other important moving averages are the 20DMA, 35DMA and the 200DMA.

Trend Lines
Trend lines are also very important support and resistance areas and can be drawn in order to see where investors may buy or sell shares

To draw trend lines, connect support points to support points and resistance points to resistance points. A positive slope indicates and upward trend (higher highs and lows) while a negative slope would indicate a downward trend (lower highs and lows). Channel trends occur when there is no slope.

Whole Numbers (psychological support and resistance)
Support and resistance can occur at round numbers because traders tend to think in these terms when making buy and sell decisions. If a stock is purchased at 7 and makes its way past 8, then 9… they may say “if it gets to 10 I will sell”. With higher priced stocks multiples of 5 become more important. These become psychological resistance levels.

You see these psychological support and resistance levels mentioned in the news or magazines often. “Dow breaks 10,000!” or “NASDAQ needs to find support at 2000”

Gauging The Strength Of Support and Resistance
Â Look at the history of the stock. Has it found support at a trend line or moving average in the past? How many times? If it has a history of showing support at a certain level, you can bet there is a good chance it will be supported there again. If it breaks the habit and is no longer supported there, look out! A deeper correction is most likely ahead.

Role Reversal
When a stock breaks support, that support line becomes resistance. Often times, a stock will break below major support and try and make its way back, only to be turned away by the new source of resistance. Why? Investors who purchased at support, only to have the stock plunge below quickly realize they made a mistake. If the stock makes its way back to the support area, they usually jump at the chance to get out without a loss. The opposite is also true. After a stock powers through resistance, that becomes a support area where traders are often willing to add shares. Investors who missed the initial move will often look to purchase if it makes its way back to the resistance area, creating support there.

Examples of Support & Resistance (click thumbnail for larger image)

Stock Charts

The Triangle Revisited

May 13, 2004 Tate Dwinnell Leave a comment

A few days ago in a post titled “The Failure of a Triangle”, I looked at the failure of a well formed triangle pattern as the market continued to slump. It’s important to point at that while these particular patterns often work, they, like all patterns, are never gauranteed. Today I thought I’d take a look at another triangle pattern that did successfully breakout. The company is SFBC Intl, Inc. and it broke through the upper portion of the triangle with good buying volume. Notice the declining volume as the triangle forms and then the explosion in price and volume on the breakout. (click the image for a larger view)

What you see here is that the triangle formation is actually a handle formation for a much larger cup base. I think it’s important to note that the cup base is not a well formed base. You like to see a smoother base with less volatilility and more time spent forming the right side of the cup. While today’s move was a good one, it may have trouble getting above 40 in the near term due to market weakness and the magnitude of the advance in such a short time.

Please note this is not a recommendation to buy or sell.. always do your own research before making a decision. Have a comment about this or other posts? I’d love to hear it.. have a good weekend!

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