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.

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