An Adjustment and Speaking Your Language

The Adjustment

For the first time since the start of the blog, I must come clean on a correction, reason being that I didn't go long Platinum Underwriters Holdings (PTP) like I said I would, but instead went long Conceptus, Inc. (CTPS). The reason I did this was, as I told you, the market remains overbought, and I wanted to focus mainly on technicals. Conceptus looked better technically, although the valuation was questionable. It was also resting at the 200-day moving average, which in times like these is of true importance to me. Why? It's because:

• Everyone is looking at it, so it is a collective line in the sand where big things happen.


• Because big things happen, if you end up on the right side of the trade, you can really stand to profit with the big moves that tend to happen in these moments.


• I have something tangible that I can rest my limits against (the 200-day). When I go long a stock that's sitting at the 200-day, I simply put my stop loss (the price at which I'll get out of the stock) at 4% below. I've seen 4% to really be the breaking point where if the price can't hold there, the stock is going to continue to go against me and not recover.

Let me piece apart this trade and the aftermath. There are two things that happened here that are really key to watch:

• The use of the 200-day moving average, or what we call the smoothing mechanism


• The huge spike in volume that ensued after I bought the stock, which can often be quite a tool in trading

Because I don't want to turn these postings into tomes and also because there will surely be ample opportunity to talk about smoothing mechanisms in the future, I would like to focus here on the concept of volume spikes at key levels.

Oh, by the way, this trade is over. I got stopped out at a loss after 2 days, and PTP was up almost 10% in the meantime. Go figure. Each of them looked like good trades. There was just more gamble in one than in the other. Let's see why.

The Play-by-Play

Tuesday 20-April: I bought the stock at the open, at about $19.25. The company had just released earnings the night before, and it wasn't bad, I thought. The company generally met earnings estimates and beat by a penny on earnings. There's a theme that's been developing on the street over the past 2 weeks, though, and it's been getting progressively more pronounced. Stocks are priced to perfection, and you have to knock the cover off the ball when you report. This has been a rapidly developing concept, and it really came to light for me when the stock went against me that day, settling at about $18.30. My stop was at $18.06, so I had 1% or so to play with before I got stopped out of the stock. I was already down about 5%, though. On to the next day.

Wednesday 21-April: I went into this day with optimism, not for the open as much as for the close that day. I was just about sure as I could be that the stock was going to close up that day. I'll tell you why in a second. About 5 minutes before the open, when those who reign over price set the mood for the open, I saw that the target price for the stock (between the bid and ask), which was significantly above the closing price the day before, all of a sudden was put right below my stop at $18-ish. Under these circumstances, I would have been stopped out of my position immediately with my anticipated loss and then some.

I will hardly ever take my stop off a stock. A stop is what I committed to going into the trade and it is a committment. But like a lot of other commitments, in the words of John Keynes, "When the facts change, I change my mind." I pulled my stop off because some big guy with a lot more money than yours truly was trying to run the stock in and drive it lower. I was just about positive that he/she would not have succeeded by the end of the day. OK, why?

The reason is that when I was taking a hammering the day before, the number of shares that changed hands that day was the highest number anyone had seen in almost 2 years. Look at the volume spike at the bottom of the chart. Now if you've been reading this blog, you'll say, "Hey, wait a minute, el amateuro. You always say that the 200-day is the granddad of all resistance levels, and not only did this stock plunge through it, but more people participated that day than had in two years!" All true facts, but let me tell you something.

A stock plunging through its 200-day on explosive volume is a sign of people selling the stock out with conviction and is good ammunition to convince anyone (including me) to get out of the position and think of shorting it. That happens in the vast majority of these scenarios. However, when a stock busts through a key level on more volume than has been seen in over two years, that's not conviction. That's people panicking. We're talking people putting posting their resignations on Facebook and doing a full-on header right out the window. Sell conviction--buy panic.

Let's say a developer is hosting an auction of 100 houses that he got into financial trouble with and that are all in the same development with no distinguishing factors from house to house. He managed to sell one house at $200,000 last week, and most of the people in the room feel that therefore, the houses are about worth that and generally are looking for 5-10% discount on top because, after all, it's an auction. The seller is expecting to get about what he got last week for the house at $200,000. He starts the bidding at $210,000 and gets no bidders. Now he's at $200,000 and still confident. He gets to $195,000, and no bidders. He gets nervous and says that he is dropping the price to $190,000 on the next tick down, announcing it as the greatest deal anyone's going to get. Immediately, he unloads 25 houses. Tick-by-tick he gets down to $180,000 with only 10 houses left. Everyone in the room bought a house. Now, having sold so many houses and not wanting to go down anymore, he decides to hang onto the last 10 and wait to see what the open market does now. Now why would he do this? Two reasons:

• He's emboldened by how much inventory he was able to move and is now thinking that if there was that much demand in that price range, he might as well take his chances with the little inventory he has left.


• If he's smart, he'll realize that he has cleared out his buyer base for the near future, and if he wants to sell more houses, he'll just have to sell them way dirt-cheap.

In the stock market, we call this a capitulation day. This is when there is enormous volume in the direction of a trend after the trend has been going on for a long time. So what happens on these days is:

• Sellers unload a ton of inventory because they are afraid the stock will take a dive


• Because the sellers unload all their inventory, it has all changed hands. Now you have no more sellers, and only new proud owners of a stock at or around the current price.

Under these circumstances, usually there is nowhere to go but up. So in my case, what happened? Well, the stock went all the way down to $17.29 in pretty fast order. This big guy was really trying to run the stock down to the depths. With my stop off, I had no safety net on. Or did I? I was sure I did. Well, sure is a strong word. You can never be sure of anything in the market. Once you are, you're usually dead, but with all the sellers cleared out the day before, I was pretty confident standing in front of this train. I went on to continue my day job and came back to take a look about an hour later. The stock now was at its level of the close the day before. So it had leveled off and was above my stop again.

Now, as a noble trader true to his original commitments, but not to be taken as a fool, I put my stop back on. I almost handled this one brilliantly, and I really would have done nothing differently, even knowing what I know now (i.e., that the stock is up quite a bit over the last 3 trading days). But if I kept my stop off after the stock was above it, that would have just been dumb. You don't want to hang out there without a safety net for any considerable length of time. Then what happens? Well, I get stopped out for a 6% loss.

But look at how the stock found its legs and bounced to $18.63 as of the current day's close. Now would I buy it back again at this price? Not now. Reasons:

• The stock isn't appearing in the query I used originally to find it, so my original criteria for the fundamentals I am willing to invest in are no longer there.


• The 200-day is still above the price, and that is still a formidable barrier.

If I didn't have other options, however, I'd be fairly comfortable saying that this one will go higher. There's just too much support below it on that high volume day.

Trades for the Week

I'm not spending too much time on my trades for the week other than to list them:

• Sold Conceptus Inc. (CPTS) - 6% loss
• Sold Sun HealthCare Group Inc. (SUNH) - 7% loss
• Long Lender Processing Services (LPS) today

As usual, thanks so much for reading!

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All opinions expressed by the Author are solely his current opinions and do not reflect the opinions of the companies with which the Author is affiliated and may have been previously disseminated by him. The author’s opinions are based upon information he considers reliable, but the companies with which he is affiliated do not warrant its completeness or accuracy, and it should not be relied upon as such. No part of any compensation the Author may derive from this blog is related to the specific opinions he expresses.

Past performance is not indicative of future results. Neither the Author nor his affiliated companies guarantee any specific outcome or profit. You should be aware o the real risk of loss in following any strategy or investment discussed in this blog. Strategies or investments discussed may fluctuate in price or value.

Investments or strategies mentioned in this blog may not be suitable for you, and you should make our own independent decision regarding them. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You should strongly consider seeking advice from your own investment adviser.

Pure Platinum Gains and Closing Out the Mistake

Well, there's lots of ground to cover this week in that I executed four transactions. I closed two long positions for a 25% and 15% gain and had to face the music on my trading mistake in, buying to cover for an 8% loss. Then, there's my usual buy for the week.

In my view, the market was helped (in that it realy needs a correction) by the Goldman debacle on Friday, but if it doesn't correct more, it will be showing overbought if it resumes going up the way it was last week and the week before. So this pullback so far was a one-day event so far, and I am still very cautious with the positions, really trying to buy things hugging moving averages so that if they fail to stay above them, I can exit immediately.

Before we get to my purchase for the week, I'd like to go over the rationale for closing three positions. For Jeffries (15% gain with a one week holding period) and Republic Airways Holdings (25% with a 7 week holding period) it was the simple fact that the Relative Strength Index (RSI) on the daily chart was over 70 (overbought). Again, I'm still very cautious here with my longs. With Rackspace Hosting, Inc. (8% loss over a two week holding period), I just had that coming to me. Again, I entered this trade wrong and should never have been in it to begin with. I should have done what I always do on mistakes (i.e., turn tail and run). So, when I saw that the Accumulation/Distribution Line (A/D) broke its downtrend on the weekly chart. I had to get out. The interesting thing is that the day I got out, the stock showed an extremely high volume day (which often can signal a change in direction), so I might be shorting this one again if it pierces the 200-day moving average downward, but I just couldn't hold onto it anymore as it was going against me, and it looked like the big boys were getting excited about holding it.

Let's move on to the purchase of the week. I am buying Platinum Underwriters Holdings (PTP).

Valuation and Fundamentals (Courtesy of Yahoo! Finance)

Operating margins are nearly double that of the industry average. The Price/Earnings Ratio (P/E) is about half of the industry average. The Price to Earnings Growth (PEG) ratio is lower than the industry average and below 1, which is very healthy. Price to Sales (P/S) is less important to me, but admittedly, it doesn't look that healthy.

Technical Analysis - Weekly

Right off the bat, let's say that I wish I had something a bit better to invest in this week, but my screens are not showing anything approaching perfection. This one's pretty good, but I am a bit tenuous about the fact that we still have to see if this stock will bounce off its 40-day moving average (which approximates the 200-day). If it had already bounced and was off to the races again, I'd be a heck of a lot more comfortable.

On to the rest of the analysis, you can see that there has already been divergence in the Relative Strength Index (RSI), but that has already pulled back to the 50 level, which means to me that that divergence has just about resolved itself. I do like the fact that the price is at a key support level while it is about to run into the 40-week moving average. Incidentally, there is another even stronger support level at about the 35 level, so if the stock fails temporarily at the 40-week, it has another stop at 35. Finally, the 10-week and 40-week moving averages are in an uptrend, which signals the stock is in a good, robust uptrend.

Stochastics are telling me nothing either way. The stock price relative to the Wilshire 5,000 index has been lagging the broad market. I don't generally like that except for the fact that stocks with run-ups need to consolidate every once in a while, and that's what this one has been doing since August of last year.

The best part of the story is the A/D line. I do like the fact that it has been steady and recently has been outperforming the price action a bit. So this shows that the big institutions are getting in here and starting to buy as the 40-week moving average nears.

Technical Analysis - Daily

The RSI has been in neither overbought or oversold territory over the life of this chart, so that is a pretty meaningless indicator in this case. Both the 50-day and 200-day moving averages are in an uptrend. Stochastics don't say much. Again, the stock has been underperforming the market, but the stock has been consolidating. The thing of beauty is the A/D line. Look at the solid uptrend as the price has recently declined. This gives one faith that the institutions are stepping in here and buying as the price nears the 200-day moving average and its various support levels we saw on the weekly chart.

I'll buy at the open tomorrow and put a stop loss order underneath at $33.54, which is 4% below the 200-day moving average. If I didn't only trade once a week, I might have been able to pick this up at about 1 or 2% better price, but I do only trade once a week.

As usual, thanks so much for reading!

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All opinions expressed by the Author are solely his current opinions and do not reflect the opinions of the companies with which the Author is affiliated and may have been previously disseminated by him. The author’s opinions are based upon information he considers reliable, but the companies with which he is affiliated do not warrant its completeness or accuracy, and it should not be relied upon as such. No part of any compensation the Author may derive from this blog is related to the specific opinions he expresses.

Past performance is not indicative of future results. Neither the Author nor his affiliated companies guarantee any specific outcome or profit. You should be aware o the real risk of loss in following any strategy or investment discussed in this blog. Strategies or investments discussed may fluctuate in price or value.

Investments or strategies mentioned in this blog may not be suitable for you, and you should make our own independent decision regarding them. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You should strongly consider seeking advice from your own investment adviser.

Grabbing Some Georgia Gulf Corp. (GGC) and Paying for my Mistake

Well, it's been a generally good week in the portfolio. I will begin to show the composition of the entire portfolio every week once I clear it of all the positions I had before I started the blog. It would have been fantastic except for the data entry mistake I had made on RAX that I mentioned last week. That one's gone against me 10% in two weeks, which reminds me of one of my rules. Rule 1 is "The best way to deal with a mistake is not to make it in the first place." Rule 1.1 says "When you make a mistake, get out of it as soon as you realize it--end of story." Obviously, I'm not following my rule, particularly because it looked still like the people in the company are dumping shares, and so are the big fund managers. So now I wait. My exit point is when the Accumulation/Distribution (A/D) line reverses it's downtrend. You'll be sure to know if/when I get out of the position and what the result is. If that moment arrives, it will be quite ugly, no doubt.

But on to this week and better things.

Overall Market Analysis

If you go to my analysis of the broad market last week, basically, nothing's changed. Everything is still frothy. The divergence in the Relative Strength Line (RSI) for the Wilshire 5,000 Index (WLSH) is still there on the daily chart. The only difference is that The Wilshire has now entered overbought territory on the weekly RSI, which is OK on that chart because there's no divergence yet, but still would traditionally signal that we're nearing the end of the rally. Technically, we were there 2 weeks ago on the daily chart, though, so you just have to go with the flow now because the technicals are broken. The volume is still favoring the upside. Also favoring the upside is that the A/D line on the WLSH weekly chart has resumed its upward march quite robustly, which says that last week, there was a lot of buying at higher price points underlying the market, a sign of strength. And so I buy yet another stock, ignoring its fundamentals. They don't look all that great. What I said last week was that I was shifting emphasis to technicals away from fundamentals until the irrationality leaves the market. So, I buy Georgia Gulf Corp. (GGC), a chemicals and home materials manufacturing company.

Technicals - Weekly

When I'm buying stocks that have just crossed their 200-day moving average I usually like to do it when they are dipping out of a trend and then bouncing back into the trend. In this case, this one is reversing trend. It's down from (and now get ready for this) $1,337 in 2004 to a low of $7.25 in mid-2009. I must say I have rarely seen anything like it, and I didn't really notice until I started writing this up because I won't look back that far unless I'm doing a written piece on a position I enter.

The stock tried to break the 40-week MA (200-day MA) once in July/August of last year and failed. Since then, you can see all the higher volume on up-weeks. On the Relative Strength Index (RSI), you got divergence for the first time in January of 2008, and that divergence continued through July 2009, when you got a double bottom reversal. Also, look at the nice up-trend that has developed in the A/D line for the first time since, well, forever. This tells you that the major investment houses have reversed their sentiment from negative to positive.

Technical Analysis - Daily

Right off the bat, the RSI is frothy here on this stock (over 70), but there hasn't been any divergence. I do expect this one probably to go up a bit more and then pull back once. Notice how the stock broke the 200-day MA once already, reversed, and then bounced nicely. Admittedly, I would have liked to have seen more volume on the bounce. Stochastics are also showing overbought (over 80), but I don't see any divergence yet, so still good there. Generally, this one's exciting. Considering where it came from, one can only imagine where it can go. I will place a somewhat tight stop on it at 4% below the 200-day MA (or $18.53) so that I am out should this market engage in its long overdue reversal.

As usual, thanks so much for reading!

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All opinions expressed by the Author are solely his current opinions and do not reflect the opinions of the companies with which the Author is affiliated and may have been previously disseminated by him. The author’s opinions are based upon information he considers reliable, but the companies with which he is affiliated do not warrant its completeness or accuracy, and it should not be relied upon as such. No part of any compensation the Author may derive from this blog is related to the specific opinions he expresses.

Past performance is not indicative of future results. Neither the Author nor his affiliated companies guarantee any specific outcome or profit. You should be aware o the real risk of loss in following any strategy or investment discussed in this blog. Strategies or investments discussed may fluctuate in price or value.

Investments or strategies mentioned in this blog may not be suitable for you, and you should make our own independent decision regarding them. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You should strongly consider seeking advice from your own investment adviser.

Roller Skating Across Lake Michigan Juggling Two Machetes

The Broad Market

OK, folks. It's starting. The seeds of Evel Knievel trading are being planted. Now I am not a prognosticator. In fact, that kind of arrogance is dangerous. What I can tell you is that there is arrogance and undue optimism pervading this market now. You can say what you want about valuations and a record-setting earnings season coming and the dollar falling and Steve Jobs being the greatest thing that has happened to modern society since the invention of Nutella. In the end, the technicals on this market are quite stretched, maybe the most I've seen since the March bottom.

In the short-term, technicals matter. For the Wilshire 5,000 (WLSH), the Relative Strength Index (RSI) has diverged once, retreated a bit, and is now making another run at it. The vast majority of the time on a major index, one divergence, and you are done. The stochastics still look OK, but have diverged once. I usually wait for a second. Once they diverge a second time and retreat, that should mean game over. The Accumulation/Distribution (A/D) line also has spent the last 1 1/2 weeks lagging the price action on the chart. So what we have developing now is the mirror image of where we came from in March 2009 at the bottom, but if that's what it is, we're in the early stages. As usual, at the moment where everyone is throwing all logic out the window and diving in head first no matter what, the bottom got put in (admittedly, it was a bit of a long moment). So we have an equal and opposite reaction now, and we could have an equally long moment to the upside, or longer. But now we're lighting those matches to begin playing with fire. It hasn't gotten nearly bad enough to truly compare it to March 2009 yet, though. I'm seeing this action on daily charts now. When I start seeing it on monthly charts, then we might be in for a crash-like scenario. I think we are still licking our wounds to the extent that we aren't susceptible to that at the moment.

Nonetheless, for a short- to mid-term trader, going long this market is akin to trying to carry a gun safe on your back while roller skating across lake Michigan juggling two newly sharpened machetes . . . in the Spring. Or maybe you'd rather swim the Amazon wearing nothing but a chum bag and a Speedo made of razor blades. Well, mine is kind of cutting into my waist right now, so when I get back from a minor adjustment, I will explain to you why I am buying Jeffries Group Inc. (JEF) tomorrow! Geronimo!

Fundamentals

OK, I'm back. With the market the way it is right now, you have to switch strategy. If you are a beginner, the only message is to stay away. Sure, you might hate me in a month or two, but most likely, you'll thank me by then. It is very clear right now that people are chasing the market, with absolutely no regard to fundamentals, so I have to switch my thinking as well. Why would I give a darn what valuations are if I am a short- to mid-term trader and the market is completely out of whack with what is normal?

Therefore, I am switching modes from looking for great valuations and technicals to looking for valuations that are within reason and shifting emphasis more to technicals. What I am doing here is finding an opportunity where I can get into something that looks destined to go up, while at the same time having a well-defined and exact exit point for when the market falls out of bed.

Enter JEF. Operating margins are spectacular for this company compared to its peers, at about 3 times the average. That's about the extent of it fundamentally. The price/earnings ratio is about in line with the industry, and the PEG ratio, which I normally love to look at, is about twice its peers at 1.71, but still below my usual cutoff for longs, which is 2. In a nutshell, I would normally be looking at this one a tad askance from a valuation perspective, but just a tad.

Technicals - Weekly

I like the technicals from a weekly perspective in that there is a Fibonacci level about 8% below me, so if something happens overnight, I'll likely be pretty protected on the downside. Fibonacci levels are a bit hard to explain at the moment, but suffice to say that each of the blue horizontal lines on the weekly chart represent a point of major resistance and support. Take a moment to look at how the price action has bounced off these levels over the past 4 years. I really am buying this one for one key reason, however, and that lies in the daily chart.

Technicals - Daily

I buying this stock because my indicators for the week have told me to go long something (God help me), and I need a floor under the level at which I buy it very close to my purchase price. So if the bottom falls out of the market, I have a very distinct level I will get out and that's it. What's more, I need that floor to be extremely robust. A really good backstop against disaster. That's why I'm placing my order on a Monday rather than a Tuesday. I had to be very meticulous about this situation, and I couldn't find anything to buy last night.

I can't think of any better floor than the 200-day moving average, the mother of all moving averages. JEF just pierced that moving average today on fairly significant volume, meaning that buyers were rather enthusiastic about it. rather enthusiastically. Notice the thin curvy green line right under where the price is today. That's the 200-day. JEF dropped below that line last week and recovered today. So now I've got some good support underneath. I will buy this stock at the open tomorrow, and set my stop loss at 4% below the 200-day moving average, or $23.62. If it gets down that far, I'll be out about 5%, but no more. I am at a fantastic support line, and my risk is defined at a time when that is most important.

Also, look at the A/D line outperforming the general price, recently. It means that no one is panicking and heading for the exits as this stock fell below its greatest line of support. I also like that the 50-day moving average is above the 200-day, showing that this stock is in an overall uptrend (quite obvious, by the way), and this is the first time the price has tested the 200-day since the 50-day crossed the 200-day to the upside in May signaling the uptrend. Stocks often test a few times before breaking through, and the A/D line shows that buyers are in there to support it.

Sale of BZ

Right after my last entry was published, I dumped Boise (BZ) for a 9% gain because I saw RSI divergence right around the overbought level of 70, and as irrational as the market was looking, I wanted to lock in some gains. The unfortunate part is that it ran up another 10% as of now, but frankly, if you are in the business of crocodile tears, the gain you thought was not enough on your last trade will be your loss on your next trade. We're here to trade well and make decent profits, not to be exact. That type of thinking will kill you.

As usual, thanks for reading.

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All opinions expressed by the Author are solely his current opinions and do not reflect the opinions of the companies with which the Author is affiliated and may have been previously disseminated by him. The author’s opinions are based upon information he considers reliable, but the companies with which he is affiliated do not warrant its completeness or accuracy, and it should not be relied upon as such. No part of any compensation the Author may derive from this blog is related to the specific opinions he expresses.

Past performance is not indicative of future results. Neither the Author nor his affiliated companies guarantee any specific outcome or profit. You should be aware o the real risk of loss in following any strategy or investment discussed in this blog. Strategies or investments discussed may fluctuate in price or value.

Investments or strategies mentioned in this blog may not be suitable for you, and you should make our own independent decision regarding them. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You should strongly consider seeking advice from your own investment adviser.