The market continued its downward spiral heading into lunch today with no end to the selling in sight. That is until an impressive and surprising end of the day rally that saw the Dow reverse nearly 200 points with increasing buying volume. In fact, all of the major indices staged major reversals off their lows on greater volume than the day before. Why is this significant? Major reversal days like we saw today can often be seen at the bottom of corrections. However, we are by no means out of the woods. It’s a step in the right direction towards another rally in the market, but what needs to happen from here is a confirmation in the next few days by seeing another big up day with heavy buying volume. A confirmation day would be a signal that institutions are again in the buying mood and an indication to you to watch the action of leading stocks as they break out of sound bases (read more about sound bases in the tutorial at my website for self investors, SelfInvestors.com). A slew of successful breakouts following a confirmation of a new rally would provide further indication that the rally is for real and that the institutions are once again hungry for new purchases. It will be interesting to see how this will play out. Be patient, create those watch lists and stay tuned! (click the chart for a larger image)
If you’d like to receive my daily report which details the health of the overall market and pinpoints where the strength is, you can sign up here. You may also learn about gauging the health of the the market in the tutorial here.
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, CANSLIM style 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.
Here are a few recent examples:
AU Optronics (AUO) recently reported blowout earnings on April 27 and has been plummeting ever since. While the weakness in the market is to blame for some of the selling, it’s a classic case of buy on the rumor and sell on the news. Investors sent the stock soaring nearly 100% since the last earnings report, expecting the company to continue to report great earnings.
Tumbleweed Communications (TMWD) is a fast growing provider of spam, virus and fraud protection software that reported less than stellar results on April 27th and promptly sold off. It’s down more than 60%.
You see it in awful new shows like ‘The Swan’ and ‘Extreme Makeover’. You see it in the booming popularity of Botox injections and its substitutes. You see it in the latest Atkins and South Beach low carb diet craze. People will go to great lengths and spend inordinate amounts to look good and feel good. This is certainly reflected in the rising share prices of the companies that cater to these needs.
Companies like Mannatech (MTEX), Reliv (RELV), Natural Alternatives (NAII), Nutraceutical (NUTR), NBTY Inc. (NTY), USANA Health Science (USNA), & Natures Sunshine (NATR) are experiencing record sales on booming demand for their nutritional supplements for everything from weight loss to athletic performance to women’s health. Companies that sell skin care and beauty aids are also doing very well. Helen of Troy (HELE), Inter Parfums (IPAR), Nu Skin (NUS) and Avon (AVP) are companies to watch in this area.
Cosmetic surgery and non invasive procedures are growing rapidly as well, helped by TV shows like the two mentioned above. Inamed Corporation (IMDC) is sure to benefit from this as a major provider of breast reconstruction, obesity solutions and non invasive surgery (they just got FDA approval for their answer to Botox – Hylaform). Laserscope (LSCP), a company that specializes in laser systems for removal of wrinkles, acne, sun damage, leg viens and hair is growing rapidly as well.
As always, any stocks listed in a post are not buy or sell recommendations, but suggestions for further research by you. Many of the stocks listed above are far extended from a reasonable buy point.
This is the first in what will be a series of posts highlighting stocks that have failed from bullish patterns and will be categorized under “When Good Charts Go Bad”. It’s important to study the chart patterns that fail so that we can avoid purchasing the stock or get out before getting burned. Today’s look is at a bullish symmetrical triangle formation that formed after a successful breakout from a flat base several weeks earlier. Often cited as a continuation pattern, the triangle formation presents a brief pause after a significant run up, before breaking out to additional gains. (as always, click the image below for a larger view)
In this particular case, Team Inc. caught my attention as a well formed triangle formation and I watched it closely for a break above the upper portion of the triangle with heavy volume. It never happened. Eventually, the stock broke below the support level of the lower portion of the triangle with heavy selling volume. However, no loss occurred because no buy signal was presented. This is a great example of why it is important to look for a breakout above resistance with large buying volume. Without the wind at your back, your chances at success will diminish significantly.
The market has jerked investors around pretty good for the last couple weeks as interest rate, China slowdown and Iraq fears all weigh on investors minds. For months, many have said all we need for another leg to the bull market is a pick up in jobs and continued positive economic numbers. Well, positive reports continued pouring in on the jobs front, the corporate earnings front and the economy. However, they were a bit too good, fueling speculation that interest rates would rise sooner rather than later.
It all leads to an extremely erratic and as some would argue, irrational market. One in which it is difficult to make money in as sustained trends remain nonexistent. One of the most important aspects of the CANSLIM method of investing is to invest long only in a confirmed bull market. 75% percent of stocks move with the market. If you insist on investing long under the current market conditions, your chances of losing increase dramatically. How do you gauge the health of the market? By checking price/volume action of the three major indices and the action of leading stocks. The market is contstantly undergoing “tests” at major support and resistance levels. If you are unfamiliar with support and resistance levels it is critical that you at least have a basic understanding of these important areas on a stock chart because they are “test” areas that reveal to you clues about the health of the market. By looking at the chart of the Nasdaq it is clear that investing right now is not a wise decision. In the coming days, the Nasdaq faces a big test at a major support level (see the chart below).
Notice the first blue arrow points to the 200 day moving average, which is a major level of support. In fact, in March the Nasdaq was able to bounce off this line of support and rallied for several days. Well, here we are once again at this level of support. Will we get a bounce again? Today was a good start, but notice the lack of buying conviction evidenced by the lack of volume today on the nice move up. If a drop below the 200 day moving average should take place, the last line of support is around 1900 (blue line) where previous support and resistance has been found over the last sever months. A drop below signals major trouble ahead and probably an end to any sustained bull market from that point on.
I said above another way to gauge the strength of the market is to watch the action of leading stocks. Are they breaking out successfully from a sound base? Lately, that has not been the case. Many stocks have failed in their breakout attempts. Examples of failed breakouts can be seen in CRDN, LCAV and in my post below regarding ACH.
The #1 rule of investment success? Keeping losses small (8-10%). When you are wrong about a trade, admit you are wrong and move on. It’s as simple as that. Get over your need to be right, or it will devastate your portfolio. In fact, by keeping losses small, you only need to be right about half of the time to be considered a successful investor. Remember this fact because it’s important.
Think about it.. three consecutive 8% losses can be overcome by one 30% move in a stock. Believe me when I say that buying a successful breakout of a leading stock can yield you a 30% gain in just a couple of weeks if not less. However, hold onto a loser for a 50% loss and the stock would have to bounce back 100% for you to recoup your losses. Many who held onto their losses throughout the bear market of 2000 may never recoup their losses.
In a recent recommendation to my members at SelfInvestors.com, I highlighted a breakout of Aluminum Corp. of China, which had just surged to new highs on heavy volume. Within days, the stock reversed, fell back into its base and ultimately plunged below major support. A sell decision was recommended just as the stock fell below major support of the upper trend in green and the 50 day moving average in red (see the chart below). As you can see, by holding onto the stock you would have suffered a crushing loss as the stock plunged another 25% over the next couple of weeks.
Before getting into my first post, I’d like to say I’m looking forward to what I hope will be an informative and educational running dialogue for investors interested in the CANSLIM (CANSLIM is an acronym describing elements of the investing strategy)approach to investing. While I do run a website for CANSLIM investors, I like the idea of an informal arena for exchanging thoughts with other investors. For more information on this style of investing you can check out the tutorial I have set up on my web site.
When making a decision to buy or sell anything with a high cost what do you do? Well, if you’re a smart shopper, you check out that item thoroughly. For example, buying a house is the largest purchase most people will make. It pays to spend considerable time checking out the merchandise. You’ll probably look at the price of other homes in the area, the quality of schools, location of shopping and recreation, future growth, the quality of the home itself, etc. Making the decision to purchase a stock is no different, however few people take the time necessary to adequately research a stock before spending their hard earned money.
Of course there are many approaches to researching a stock, however an approach that looks at every angle is the most desirable and the CANSLIM method of investing developed by William O’neil does this very well. It’s the reason why it is one of the top investing strategies around. The key to its success is that it uses what I like to call a top – down approach. Looking at the big picture (the economy, interest rates), then the market itself (using volume and price analysis), the industry groups (where in the market the strength lies – there are always pockets of strength) and finally the stock itself (using fundamental and technical analysis). Yes, it can be a labor intensive stock picking strategy, but their are services available (including my own site), that help you invest in the highest quality stocks when the market is strong.
I just read your reports for the 3 stocks you sent me. You really have
a gift for analyzing stocks. I can’t believe how easily you analyze
them. I am so jealous. How long have you been doing this? I keep
learning and learning. Going back to my books and looking up patterns,
etc.. I am so happy owning SAFM especially after seeing what you have to
say. The insider selling was a concern to me and that is why I held out
buying for so long. I know everyone has different reasons for selling.
I read on the yahoo message board for SAFM that the company plans on
opening a new processing facility in GA. It should be announced in the
short term. It is supposed to increase production by 20%. So once that
is announce publicly it should help the stock even more.
I hope you are doing well with the site and that you are making money in
the market. I wish only good things for you. You deserve them!
thanks for the kind words! I’m relatively young.. haven’t quite reached my
30th birthday! Since I don’t have a family yet, I’m able to spend more time
learning about the market. It was during my first job out of college that I
realized I didn’t ever want to work for anyone but myself. I worked for a
fairly large corporation and wasn’t compensated for the work I put it in.. I
was just a number and wasn’t compensated by performance, but by job title.
So I left. Went back to school to get certified as a Microsoft engineer
only to have the industry collapse.. definitely a low point in my life.
While all this was going on I was studying the markets whenever I could..
and realized it was the only way I wanted to earn a living. To be able to
work anywhere in the world is very, very appealing to me! For the last five
years, I’ve spent several hours a day seven days a week studying charts,
reading books, books and magazines. I guess you could say I was fascinated
with the way the market works! I was a math and chemistry major in
college, so have always been into numbers. I studied psychology a bit too,
so the manipulation of prices based on human emotions seemed right up my
alley. I haven’t looked back. Every day I learn something new.. it never
gets old and I enjoy sharing my research with others. The website is my
outlet. None of my friends are investors or enjoy this kind of stuff, so I
need a place to get my thoughts out!!! CANSLIM.net gave me a taste of that,
but I need more of a creative outlet… hence the site. It’s been an
exciting journey and am looking forward to seeing where it leads.
My advice to you is study as many charts as you can.. you begin to see
certain volume and price patterns. You probably have an idea now of the
kind of charts I look for. Low volatility, quiet charts with decreasing
selling volume near major support areas. If it’s a flat base, all the
better. To be honest I place more emphasis on the technical side than I do
the fundamentals..probably 60/40 technical or so. Anyway, I’m done
rambling. Have a good day.
Do you have a target price technique that you use as a rule of thumb?
I don’t believe in price targets..at least those based on the fundamentals which is what analysts use to come up with price targets. The only time I’m able to guesstimate a price target are at areas of technical resistance. For example, if I purchase a stock at $10/share, but the 52 week high is at $12/share I can reasonably assume that there will some resistance in the stock there and I’d call that a short term price target. That might be an area where I take some profit. I reevaluate my position in a stock every day or two. I’ll continue to hold as long as it continues to look good.. whether that is one week or one year, it depends on the day to day action of the stock as well as the health of the overall market. I wish analysts would quit trying to give price targets.. they’re worthless!