Welcome. The contents of this blog comprise my personal observations on the stock market from the perspective of using both fundamental and technical analysis by reviewing market data and stock charts based on the methodologies of William O'Neil of Investors Business Daily and his books, from Stan Weinstein's books, and most of all, through lessons learned over the years by listening to Gary Kaltbaum's "Investor's Edge" radio show on Business Talk Radio.

Criteria of stocks include first researching sectors to determine which are strong and which are weak using the ADX indicator (>40 = increased volatility); focusing in on a leading sector and buying leading stocks on a high volume
breakout (minimum 2x average) above a base; stock prices are higher than $25/share with daily average volume higher than 300K; positive and increasing PVT (indicating institutional ownership), positive and increasing RSI (indicating relative strength compared to other stocks in the market).

Please keep in mind that
I am by no means an expert, nor are my posts intended for anything other than to share my opinions of what stocks are doing for the purpose of getting feedback. Thus, please do your own research before taking action on what you read here. I will be adding posts on topics of interest as I learn about them.

Sunday, June 29, 2008

ADX sector scan -- Dow Jones & Gold.

As far as I understand, the ADX indicator shows market volatility (higher ADX = more volatile stock or sector; lower ADX = less volatile stock or sector). I learned some time ago that one should use the ADX to forecast stock breakouts or breakdowns, but it can also be used to indicate possibly healthy price movement in a stock (up or down.) It should also be used when scanning the sectors to find stocks. Using the 10 day, 15 minute chart is a good time frame to look at when doing scans. ADX lines that are above 40 and are above both the +/- DG lines are what we are looking for.

While scanning the sectors, most sectors seem to be uninteresting or spent, meaning that if anything was to happen, it already happened. However, three sectors show some momentum under the surface -- Gold, the Dow, and the AMEX Disk Drive Index.

First of all the Dow looks terrible. It is below pretty much every major moving average, and it has some major work to do before I would even consider buying stocks in this index. Prudently, if it broke above $11,950 (or even higher to give it some cushion for a fake-out,) I'd give it a second look. On the downside, a break below $11,250 would give me some reason to look at the stocks for further downside testing.

I have learned that shorting a stock is very difficult because it is not easy to get the timing right. Stan Weinstein teaches to just flip his risk-management teachings for bull markets to understand how to sell stocks short (or to buy puts), however William O'Neill and many others say it is much more complicated than that, and your chances of losing money on a short are much higher than when the stock is going up for the sole reason that the timing is just difficult to understand and to master. All this being said, NEVER SHORT STOCKS WITHOUT A STRICT DISCIPLINE AS TO WHEN YOU WILL SHORT AND WHEN YOU WILL COVER because if a short bounces up and you haven't already put in the 60-day GTC STOP order to the upside, you can wind up losing a lot of money fast.

As for gold stocks, it appears to me that a break above $197 on high volume would signal that it's time to start buying gold and silver. The index is above its averages, and the ADX is at 51, which suggests to me that people are ready to start buying in this sector. From a quick scan, I believe the leading stocks are GG, ABX, and PAAS when it comes to buying gold.

As for the AMEX Disk Drive Index ($DDX), this one was a tough one to understand. It appears to me that there is high volatility, and that a break below $109 might be just enough to push it over the edge (and possibly off a cliff.)

I did some analysis on the underlying stocks, and some of them have very low volatility, so I passed on considering them. Other stocks were choppy and so I didn't trust the movement. Others were too low a price, or had their RSI (relative strength) too high which means that I don't want to be shorting a strong stock. My logic is that just as one should buy the strongest of the strongest, similarly, one should sell short the weakest of the weakest, albeit the weakest with the highest volatility.

Of the remaining stocks, I found the two candidates for a short sale were EMC and SNDK. While they both are stocks under $20, we are looking for a short sale and not a purchase, so in theory the stock can go as low as zero.

Regarding EMC, I would consider a short at $14.45 with a stop (cover) at $15.25. The reason for this is that even though it is trading in a downtrend channel, there is still a base (a trading range) where it is trading.

As per SNDK, I am not so excited about a trade with this stock, I would consider a short at $18.85 with a stop (cover) at $20.60. There is a more focused trading range, but you always want to give the stocks some room to bounce and wiggle.

All in all, I wouldn't be comfortable making any sort of trade unless the ADX rose above 40. Further, I would hesitate with SNDK because average traded shares (volume) is ~297K, slightly below my threshold discipline of 300K shares.

On final review, however, I noticed that the price movement of the stocks in this sector have not been more than 70 cents in one day. I learned that a proper trade should be a healthy stock moving either up or down on high volume, but with a dollar amount of at least $1.50 to $2.00. Anything beyond that is not worth the trade or the risk. Thus, I suppose the disk drive sector so far is not yet the place investing dollars should enter.

Thursday, June 26, 2008

X: Technical analysis suggests that the stock may have trouble going higher.

Created when X was $186.88

US Steel's RSI (a measure of relative strength among other stocks) has hit a ceiling these past few days and hasn't trended above it, and the PVT seems to be guiding lower which suggests to me that institutional investors are selling shares of X, not buying more. TODAY, I don't see any reason why this stock would be a good purchase.

I would wait for a high volume breakout above $195 (actually, $196 to give some cushion for fake-outs) before buying this stock.

SHCAY: Sharp Corporation (overview)

Sharp Corporation's stock has been in bad shape since 3/17/07 when its relative strength indicators revisited its comfortable negative territory, indicating that the stock is resuming its weak status. Institutional investors noticed this mid February '08 when they started selling their positions.

While today there is some institutional ownership in Sharp, it is not enough to merit buying into the stock. Further, the stock has been trending above and below both the 50-day and 200-day moving averages, so it cannot even figure out what it wants to do.

Most recently, in June '08, the stock dropped on higher-than-usual volume below both moving averages and has stayed there since. While on a positive note, the stock did what looks like a double bottom around $15.69 and has trended up back towards the 50-day moving average, the last candlestick was the kind of formation that indicates a top has been put in, and so I don't believe it will go up much further than this.

One interesting note -- it is interesting that the last time the stock rallied, it put in the same kind of double bottom (late October '07 and mid-November '07) before rallying up, so perhaps there is a rule that when this stock forms a double bottom, it rallies a bit from there.

All this being said, I'd say STAY AWAY from this stock because it is not one to own.

RIMM: I'd like to see...

I'd like to see RIMM form a base, hit the 200-day MA, and then rally from there.

CEO: Head & Shoulders top formation indicating a top.

Created when CEO was $168.87.

After a breakout on non-impressive volume from the wide trading channel from December 2007 - April 2008, CNOOC's stock formed a sloppy Head & Shoulders topping formation which is a bearish sign for the stock. The left shoulder was in late April, the head peaked around May 20th, and the right shoulder (lower than the left) was in early June. This should indicate that the stock is no longer in a bullish pattern.

All this being said, the stock trades with high volume days, and is one of the stronger stocks in the market (the RSI is high). Further, institutional investors are actively trading this stock (most recently, they've been selling it) and they are still invested in it which is a good signal.

All this being said, this is not a stock to short, but it is a stock that has posted a few warning signs that it is not one of the stocks to be investing in.

RHHBY: Much overhead resistance, weak stock, non-impressive institutional ownership.

Created when RHHBY was $84.75.

Roche Pharmaceuticals (RHHBY) -- Since its recent high on 3/3/08 has been forming an Elliott wave A,B,C DOWN correction (e.g. 1,2,3,4,5 down, a,b,c up, resuming the coming 1,2,3,4,5 down in the coming weeks) and will break the low of 79 (and then some) before it will likely move up again.

Technically speaking, the stock has been a relatively weak stock (low RSI) since it decided to start gapping down on 4/7/08. A week later, it fell below both the 50-day moving average AND the 200-day average which is a negative for the stock. It tried a breakout on 6/1/08, but failed and broke below the moving averages again. This is another sign of weakness in the stock. Lastly, institutional investors haven't really budged since the beginning of June which means that they do not have a belief whether the stock will be going up or down and so they are in a holding pattern.

In short, the stock needs some major work before it should even be considered a buy.

CPE: Callon Petroleum Company (overview)

Callon Petroleum Company (CPE), another of the oil stocks, has been on an uptrend since what appears to be a "hammer" formation on 7/21/03 (as seen on the weekly 5-year chart), but with weakness by waivering above and below the 50-day and 200-day moving averages until September 2007, when it corrected and took off from there.

The stock has been trending up since September '07 in a two-steps-forward, one-step-back fashion, correcting as needed. The institutional investors have also thought this was a good stock, and they have been increasing their holdings (albeit slowly) in the stock. Additionally, the RSI (relative strength index) has been steadily increasing since September, when it crossed into positive territory placing CPE among the healthy stocks in the market (and possibly a future leader), even though the price is only in the mid-20's and not in the hundreds such as other monsters in the group.

Technically, the stock has some work to do before it becomes a sound investment. Currently, the 50-day moving average is at $17.18, which means that the stock would need to at least pull back to that level or base [move sideways] in a tight trading range until the moving average catches up with the stock BEFORE one should even consider investing in this stock.

BRY: Berry Petroleum Company (overview)

Berry Petroleum Company (BRY), another of the oil stocks, has been on an uptrend since what appears to be a "hammer" formation on 1/23/08 (although some would argue that the "hammer" as early as 8/16/07 was the start of the bullish move).

The stock has been trending up since January in a very tight channel which is a good sign for the stock. The institutional investors have also thought this was a good stock, and they have been increasing their holdings (albeit slowly) in the stock. Additionally, the RSI (relative strength index) has been steadily increasing AND has recently crossed into positive territory placing BRY among the healthy stocks in the market (and possibly a future leader), even though the price is only in the high 50's and not in the hundreds such as other monsters in the group.

Technically, although the stock broke above the channel formation on 6/23/08 (which means that it is oversold and is a sell signal), it doesn't have that far down to correct before the stock is back in great shape. Currently, the 50-day moving average is at $54.41, which means that if the stock pulls back to this area and bases, a breakout from this area on high volume would be a very good thing for the stock.

PENN: Stock has broken the averages and is in a downtrend.

Created when PENN was $34.14.

PENN has broken support at $39, and is below both the 50-day and the 200-day moving averages which is a bearish sign.

While institutional investors are still heavily invested in the stock, they are slowly selling off which is having a negative effect on the stock.

Further, the Relative Strength Index (RSI) which compares the stock to others has been decreasing which means that the stock is no longer a leader, but has become a weaker stock.

CPNO: "Hammer" candlestick pattern found with this chart.

Created when CPNO was $34.09

Did you notice that on the 1-year DAILY graph, every time Copano Energy, L.L.C.'s stock throws us a "hammer" candlestick (e.g. 8/6/07, 10/3/07, 1/22/08, and most recently, 6/26/08 (TODAY)), the stock rallies up 3-4 points, then fizzles out and goes lower?

This most recent hammer might suggest a short-term move up to $37.50 before its next leg down.

JRCC: James River Coal Company (overview)

James River Coal Company (JRCC), another of the coal stocks in a hot bull market, has been a stock to watch since late March, 2008. Since then, it has been steadily increasing in health in comparison to the other stocks in the market, and as of early June, 2008, the big money crowd (institutional investors) has joined into the game and has started buying shares.

Technically, the stock has some work to do before it becomes a sound investment. Currently, the 50-day moving average is at $37.19 (far below its current level), which means that the stock would need to at least pull back to that level or base [move sideways] in a tight trading range until the moving average catches up with the stock BEFORE one should even consider investing in this stock.

At the same time, it appears that there is massive churning of the stock, and that the stock has been in a basing pattern since mid-June. It would be a bullish thing for the stock to break above $62.95 on high volume.

Wednesday, June 25, 2008

BP: Bad business practices may lead to a decline in stock price.

Created when BP was $68.83

Local BP gas stations are raising their prices and are offering "cash only" discounted prices at the pump. When speaking with an owner, it was explained to me that BP has been increasing their transaction costs to their gas stations essentially cheating the gas stations out of their profits. Bad business practices such as this eventually affects the underlying stock because people lose trust in the company.

DRI: With gas prices higher, spending on restaurants will likely decrease.

Created when DRI was $33.76

The economy is getting tighter with more expensive food costs, higher oil prices, higher gas prices, etc. All this means that people will have less discretionary income to spend at restaurants, such as Darden's various restaurants.

Yet, it appears as if people aren't yet giving up their restaurant visits. While driving home today, I saw lines of people waiting to be seated at a local Olive Garden restaurant. This means that there is still a demand for their services.

MON: Stock returned to its 50-day moving average.

Created when MON was $131.52

The stock returned today (6/25/08) to its 50-day moving average in a correction from it's overbought prices. While this might not be the bottom of the correction, for now, it's probably a good place to pick up extra shares.

For those of you who are more wise with the buying and selling (this is a good thing), look for the stock to create a base (e.g. a trading range), and then buy it on the breakout from the base.

NOTE: I am not 100% sure about this, but for some time, this group, the fertilizers, oils, etc. have had a major run up in price. Now that everyone knows about it, there is a possibility that the bull market for this sector may be over.

MA: Bearish Head & Shoulders topping chart pattern. Look out below.

Created when MA was $289.79

For those of you who follow charts, Mastercard has traced out a head and shoulders pattern which can mean that for the meantime, the stock has topped.

Notice the left shoulder being formed at the end of April '08, the head at the end of May, and then the right shoulder (lower than the left (as it should be) in June.

While this indicates that the chart has topped, this does not mean to short-sell or to buy puts. Short selling requires careful timing and people shouldn't jump into it without learning about it first.

BX: Blackstone is the strongest of the financials, but still in a bear market.

Blackstone is the strongest of the financial group. While the whole group is in very BAD shape, people look to this stock for leadership. When the group corrects, Blackstone will likely be the first to increase in value and to increase in price relative to the others in the group.

Friday, June 20, 2008

Welcome. An introduction to my stock trading style.

The purpose of this blog is to document the teachings that I have learned (so that I can have them in one place), and to document my findings so that you can benefit from them.

My trading style follows that of Stan Weinstein and William O'Neil. I am also a very close listener and an active participant on Gary Kaltbaum's website and frequently e-mail him with questions.

While I enjoy keeping things simple and clean when it comes to trading, I also have been influenced by the Optionetics team to use options when appropriate. I also spent a good 5-6 years learning R.N. Elliott's "Elliott Wave Theory" and Fibonacci applied to stock analysis.

I will post charts and my opinions (and my predictions, although nobody can predict the market, so any predictions should not be acted upon because they are my own idea of where things are likely to go).

Lastly, I have been doing a combination of investing and trading since 1996 (I opened my first Roth IRA in 1995), which means that I have been trading for a little over 10 years now. Keep in mind this doesn't mean that I am anything other than a novice. However, that being said, I have learned a few lessons over the years.

Currently, I have been gaining skill in reading technical charts and indicators, and while that is only 40% of the picture (fundamental analysis is the other 60%), that is where I currently am proficient at. I plan in the near future to bolster my skills in fundamental analysis, and have been reading William O'Neil's books and have been frequenting the Investors Business Daily (http://www.investors.com) web site.

All this being said, enjoy the ride.