Start Throwing Longs Overboard

It's been a long time. I have no excuses. Now on with it :-).

The consensus everywhere that this market has to go up because of QE2 (quantitative easing) by the Fed is starting to chip away at my better reasoning. QE2 makes perfect sense to anyone from a mechanics perspective, of course. The more dollars are in circulation, the less each dollar is worth, and therefore, the more it costs to buy virtually anything, including stocks. And if the Fed gets what they really seem to want (getting inflation higher than the real risk-free interest rate--the rate on a short-term CD, for example), then all the money in CDs, money market accounts, and other "risk free" instruments will come out of those instruments and chase "risk-on" returns with higher returns.

Everyone is cheering on the market while the retail investor remains distrustful and is hanging onto the greater portion of their cash. As a result, the inflows to this market are being almost solely controlled by people who understand and are interested in economics and hear about what the Fed is doing all the time. Therefore, the concentration of people trading this Fed effect of showering the market with free money is very high compared to what it would be historically. This is likely a Wall Street and not a Main Street rally, to sound cliche.

Shorter term (next month or so, at least), by what I have seen over the past two days, I think you'd be a bit crazy to be just leaving lots of long positions out there and riding the wave up. In fact, I sold Brookfield Asset Management (BAM) and Intersil Corp (ISIL) this morning for 6% and 13% gains respectively, and I have an order in to sell Warner Chilcott (WCRX) tomorrow morning for what appears to now be a 15% gain. Why am I lightening up in the midst of the euphoria? Well, a good reason to lighten up happens whenever you start getting euphoric, and as you can see, I've got some pretty good gains on the table now. Whenever I start to smile at the sight of my daily positions, it's time for me to start dumping. But let's look at evidence I'm seeing in the charts.

The daily chart of the Wilshire 5,000 ($WLSH) is starting to throw off some compelling, but not yet fully baked arguments. The Relative Strength Index (RSI) is above the overbought threshold of 70. I'm not seeing divergence yet (see prior blogs) which is when I usually start dumping stuff, but given the run-up we've seen, I'd like to lighten up going into this. Another week or two of this type of action, and we will get divergence on the RSI, and then those gains all go away. Again, I'm lightening up a bit here and there, not all at once. Look at the stochastics as well. The way stochastics tend to work is that you want them to diverge once, dip below the overbought line, diverge again, and then dip below the overbought line once more. Look at how the stochastics have not kept pace with the price line, but not only that--they have already dipped below once, and are levelling off in the face of some very steep price increases. So the momentum indicators are starting to deaden, and pulling off a few positions as the days go by would be prudent.

Now let's take a look at a completely different animal, the VXX ETF, which tracks the short-term futures of the volatility index for the S&P 500. Look at how the index drops steeply beginning last week after having already taken quite a ride downward since the short European debt scare. Now I want to draw your attention to the volume bars over the past couple of weeks, and particularly yesterday (10/11). Yesterday had quite a price decline, relatively speaking, on the highest volume day in 3 months. What does this mean? Well the price on this index tracks the amount of "insurance" traders and investors are buying on their positions out there. You buy insurance when you think bad things might happen or when you have a just-in-case attitude. You can even look at how fast the decline in the Accumulation/Distribution line has accelerated to see that everyone is firmly buying into the Fed as the market's savior and that basically nothing bad can happen. People are throwing their insurance overboard faster than I've seen in a very long time.

Now what does that mean? Logically, everyone barely has a safety net out there to protect from downside losses. Now consider that the S&P is only marginally positive for the year (5%), and put yourself in the shoes of a money manager who is nearing year-end. If you see a couple of sharp sequential daily declines before January 1st, which happens in most quarters at some point or another, these money managers will dump all of their positions just to ensure that they stay positive for the year. Now I'm not saying this will happen for sure, but the way things are going, the odds are good. I don't think anyone anticipates we'll continue now until 2011 as hot as we have been recently. Markets just don't go up that way.

Now let's look at economics. We're going into the Christmas season. Money is free out there, but Americans are delevering, and for now (as long as it lasts) their appetite for debt is minimal. So it's really hard to entice folks to spend beyond their means--something governments really shouldn't do but this country has been doing since the Ford administration. Of course, I probably don't have to mention that with tax and social policy in the balance, employers will have not much to look forward to in hiring folks. The rate of increase in price of soft commodities (food, textiles, and other stuff we buy at Target) is getting rather concerning at this point. So people are likely not going to have the most optimistic outlook on the home front this Christmas.

Earnings season is here, and those earnings look very good. That's a great thing, but the market looks forward. So let's fast forward to the end of the season for the major financials when Goldman Sachs reports on Tuesday of next week. Let's assume things continue to go the way they are (i.e., good) because there's no reason to think they won't. We get through a good swath or earnings, and then we realize that the whole season will be good. OK, once we fully realize something, it's yesterday's news, and we'll have gone up probably a good 13-15 handles on the S&P at that point. Now what? The Fed said they are going to shower the economy with free money. It's not like they can announce another quantitative easing right away. The American public is already digesting the fact that they are printing away the value of much of our long-term savings. There's only so much we'll swallow. Emerging markets are being very vigilant about keeping their growth in check (doing a masterful job, I must say). And finally, there is that fear that companies really do start spending that money on their balance sheets, which they will at some point. That's right, I said fear. 6 months ago, I was hoping for it. Now, with the Fed's attitude and interest rates at zero, corporate spending could push us into quite an inflationary spiral.

Maybe I'm biased because I hate government intervention, in general. I agree that what the Fed is doing is constructive for asset prices right now. After all, that's the whole point of it. But if I told you that I would make a country great by taking savings away from people through devaluing what they already have and lending more of it back to them at zero interest so they'll feel better about themselves, would you vote for me?

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.

How to Find Good Opportunities for Long Positions

I've been preparing for and just executed a change of domicile so was out of pocket for a while. I had a friend who reads this blog regularly ask how I find long and short opportunities for trading. I'm surprised I haven't written about it yet, so I will dedicate this blog to that topic.

Before we start, some housekeeping. Ever since the "flash crash" moment and all the volatility in the market, I have moved to a nightly model for trading. As you'll recall, before I would look at the landscape every weekend and find the best tradeable opportunity I could on a weekly basis. I've seen this movie we're in before and know that I would have gotten diced up pretty nicely operating that way, so now the mechanics behind what I do are exactly the same, but I do it on a nightly basis.

Market Direction

So, where do I start? I start by deciding whether or not I want to put on a long or short position. The way I do that is the easiest thing in the world. Compare the level of the accumulation/distribution line (A/D) with that of the day before. If it's higher than the day before then if I put on a long position. If it's lower than the day before, then I look for a short position. The only thing that would keep me from putting on a position is if I have my portfolio more than 75% invested in any one direction. If you get to the point where you are putting more than that on, I find almost inevitably that the trend is about to reverse, and you are just putting money out there to lose it. So in those cases, I'll just close the computer and go away.

Barring that, I always put a trade on. If I don't find an individual stock, which hasn't happened in a long time, I'll either buy the SPDR S&P 500 (SPY) or ProShares Short S&P 500 (SH) ETFs. That's not where the action is, but it's better than nothing.

For example, the chart for today says I should put on a long position. Notice how the A/D is pointing upward:


You can indeed pick this apart for a number of reasons, just like you can pick anything apart in trading, but I've found that:

• By limiting yourself to one trade a day or week, depending on what the rythm is, you don't overcommit yourself to your theories and passions all at once and keep yourself out of Vegas mode.
• By using the A/D as your barometer, you let the market dictate the flow of your funds based on its recent direction and volume flow. You are always timing the market without making any brash decisions at once.

Works out pretty well for me and really keeps the emotion out of it. So now I need to find a stock to go long. I, and the vast majority of folks out there, use a handfull of screens to do that. I screen on fundamentals first, and if I don't find anything there, then I screen on technicals.

Long Fundamental Screens

When I screen for fundamentals, I am looking at various aspects of the financials of the company. I also use Finviz.com for all my screens. The basic service is free and does just fine. You can build these screens on your own in no time. Here they are:

For All Screens

1. Average Volume > 100K - You want your stocks to trade at least at this daily rate or you could get stuck in them or have to get out at a bad price because there is no one offering at the price you want when you want to sell them.
2. Price > $5 - Stocks priced below this level generally fly around and are of lower quality. You get what you pay for. For people just starting out may want to set this threshold to $10 or $15 for added safety, but your selection of positions to trade is lower.

I start with the two criteria above and then add the below to form the other screens.

30% Growth in Uptrend

1. Price/Free Cash Flow <15>EPS Growth Over 30% - This is the first place that hedge funds and money managers look to find their high flyers. Anything above 30% is considered the hot thing out there, and that's where you want to be.
2. 50-Day Simple Moving Average Price Above SMA50 - If the price is above the 50-day moving average, and the 50-day moving average is above the 200-day moving average, then the stock is generally moving from the lower left to the upper right, and you want that. In other words, it's generally in an uptrend.
3. 200-Day Simple Moving Average SMA200 below SMA50 - See criterion #3.

IBD

This screen is kind of modeled around the criteria Investors Business Daily uses to screen their stocks, but unless you buy their publication and/or their screening products, you won't match it exactly. The way I do it is good enough for me, though.

1. EPS Growth this Year >25%
2. EPS Growth Next Year >25%
3. EPS Growth Qtr over Qtr >25%
4. Sales Growth Qtr over Qtr >25%
5. Return on Equity Over +15% - They use a threshold of 17%, but this is the closest you can get on FinViz.

So really what you are doing above is trying to get 25% growth over various time scales and dimensions. This will yield another list of generally high flyers.

Below, I have a couple of technical screens, and we have to cover the various motivations for using them and how they are used in another post because it will require many words to do so. By the way, I run these screens on the StockCharts.com Scan Engine.

Extremely High Volume

1. Volume 0 Days Ago >= SMA Vol. 50 0 Days Ago x 7 - To translate the geek (not Greek) here, you're basically looking for a stock that on the current day, had at least 7 times the shares changing hands than the average over the past 50 days.

When this many shares have changed hands, usually, either the company:

1. Had a huge earnings surprise or news event
2. Reached a key technical level, and the bulls and bears fought it out all day
3. Was acquired or a deal fell apart

Items 1 and 2 will often signal a near-term change in direction, mostly item 2. Item 3 is not a tradeable event for me. Item 2 can be very lucrative. Item 1, sometimes.

Weekly Cross 30 RSI

1. RSI 14 0 Weeks ago >= RSI 14 1 Week ago
2. RSI 14 1 Week ago <= Constant = 30
3. Acc/Dist 0 Weeks ago >= Acc/Dist 5 Weeks Ago
4. RSI 14 0 Weeks ago >= Constant = 30

All this mumbo jumbo gets you a stock that:

• Moved out of oversold (30) territory in the last week, and
• Has an A/D line that signals accumulation of shares over the last 5 weeks

And voila! From those lists, you go look at the charts and find the best stock to buy on that day. Of course now you have to read the charts, which is a whole different animal altogether, but at least you know where the fertile ground is now.

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.

A Trading Technique for High Volatility Markets and Entered Orbitz Short

Needless to say, the market is not for the timid right now. I am about 35% invested right now with all of it short. I haven't been able to be confident in entering any long positions recently. However, there are ways that you can capitalize significantly in these markets that run in certain directions very quickly if you are willing to absorb the risk of being whipsawed around.

I've used the technique that follows a number of times in the past, and it really can pay off with some huge gains rather quickly and really isn't as risky as it may sound initially. The basic principle is to find a stock that has run like crazy, is way out of whack with its moving averages, and that is showing divergence on its RSI. Take Cirrus Logic, Inc. (CRUS). Last week Jim Cramer recommended it, and it shot up like a bat out of Hell. It gained about 35% in a week, and even with that, the RSI barely managed to break 70 because the prior peak was so agressive in the first place. I waited for the price to break the prior high. Once that rule was achieved, I waited for the RSI to break 70. At that point, I did the following:

• Put a short stop limit order on with the activation price the low of the prior day, which, when filled, activated


• A stop market order of the high of the prior day

When something is over 100% above its 200-day moving average and has already been in overbought territory only to get in there again and diverge, the euphoria is usually in. Everyone is blindly buying thinking that this is the new Yahoo! of 10 years ago. The stock is going to grind higher day after day after day indiscriminately and show sizable gains until a hiccup happens.

What you are trying to do here is not pick a top exactly, but rather to engage as early as possible in a pullback, which with a stock that behaves like this could be 20 or 30% in a matter of days! So when is it quite probable that the stock is going to break trend? Well, when a stock like this, that goes up 7 or 8% a day's intraday price breaks below the low of the previous day, all the euphoric margined up Coolaide drinkers are going to get spooked pretty quickly. To boot, there's a lot of attention on these stocks and the algorithms are programmed to retreat on the slightest smell of something afoul. The first waft of foulness will happen when the price breaks the low of the previous day.

So let's look at CRUS here. I happened to catch this one on the first day I put the stop limit order on. It gapped down at the open, and there was no turning back. Now the one thing you have to stomach is the risk here. Once I'm in the position, I have a basis of the gap between the price of entry for the position (in this case about $14.30) and the high from the previous day ($15.74). That's sizable (9%), and you have to be willing to risk it. You usually are OK to because as I said, 9 times out of 10, once people start seeing this stock breaking down like this after the run it's had, it's difficult for them to pony up and try to push it up higher.

Another tell for this stock was that a couple of days earlier, it had had the highest volume day in 3 years. That's a lot of buyers that burned through the stock. Really, who is left to buy? But this is an added benefit. It's not a requirement for me to get involved here.

So what do you do after you're in the position? Every night, you reset your stop loss order to be the high of the previous day. For example, tomorrow, my stop loss will be adjusted to $14.46. So the exact same price action that got you into the position gets you out, but in reverse.

You can do all of this on the long side, too. Just take everything I said above, and do it just the opposite. I'm up 3% on this in 2 days. Once this decline ends and the stock resumes its trend, which it will do (you can see by the declining volume on the two recent down days I've held it), hopefully my gain will be sizeable.

This is a side trade from my usual style. I did make my usual weekly trade. As I mentioned, I entered OWW this morning. No other trades this past week to speak of.

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.

How to Protect Yourself From What Happened on Wednesday and Other Musings

Wednesday, Wednesday. All I hear everyone talk about is what happened Wednesday. Don't get me wrong. I lost some money exiting a stop loss that I might not have otherwise, but I probably would have gotten knocked out of them the next day, anyway. However, if you listen to these pundits on TV, because of a "once in a lifetime" event, now the market is no longer safe for your average Joe, and God forbid anyone should ever use a stop loss order again!

I was originally envisioning retirees who had stuck out the market through thick-and-thin for the last 2 years only to see prints of $.01 on stocks like Accenture. That frightened me lots. Then I thought about it. What the media out there terrorizing you isn't telling you is that the prints on these stocks at these low levels lasted milliseconds. By the time the little guy's stop loss order got filled, things were almost back to normal again. I'm sure people got hurt. I got banged up a little. But if you are going to adjust your trading style for a once in a lifetime event, I don't think you have the mentality to trade or invest in the first place!

The solution to this dilemma is to maintain a basket of stocks long and short, use stop losses at key levels (my favorite being 4% below the 200-day moving average), and never invest more than 75% of your assets in any one direction (long or short). When all was said and done, I got knocked out of two positions Wednesday, but when all was said and done, at the end of the day my account was up .5%. That's because after my longs got knocked out, my shorts were there to keep working for me.

So if you stay long-short, it's true that over time you might not have crazy 7% up days because you are not wholly invested one way or another. You will have fewer proud days and fewer somber days. Things will smooth out over time with less fluctuation. Not as thrilling. But with thrills come anxiety, and you will likely have the same type of return at the end of the year without all the discouraging whipsaws, especially since the beginning of '08. So invest long/short. It's the only way to fly.

I understand why markets went up quite a bit today. People were just starting to get comfortable with going short the market. Then, the EU cracks out the bazooka and shows everyone who's really boss. So a lot of people covered today. Volume was weaker than on the last two down days. It's only logical the market has to go up now. I mean, everyone thinks our bailout is working (at least on Wall Street), and it's now a foregone conclusion that the European bailout is going to work. Not so fast.

Let me ask you a question. If your neighbor's credit rating was dropping like a rock, was getting letters from the bank, and he found some poor souls to lend him almost twice as much money as the amount he was at risk of defaulting, would you be more or less confident in his financial future? Right. The markets have the warm fuzzies right now, and the up-trend in the broad market is actually still in-tact on a closing basis despite everything that happened last week. Also, we had huge volume last week, and I got completely knocked out of my remaining long positions. I can't think that I am that unique. All I have is short positions now, and I would be pretty reluctant to go out shorting more unless the market gave me some darn good reasons. A break in that uptrend would be a good start, but until then, it seems to make sense that we would resume the uptrend now. I trade the market I have, not the one I wish I had.

Another thing to point out is that the Chinese and European markets have been downtrending for months now. I don't think we can be exempt from that much longer. We are all kicking the can down the road on the credit problems and we are all still joined at the hip.

How's that for a rosey picture. Speaking of not so rosey pictures, I had quite a few remaining long positions out there that got knocked out over the past 2 weeks since my last writing. Sorry. My day job has just been hectic as all get-out.

Activity Since Last Writing

• 4/30 - PDL BioPharma - Sold 12% loss due to hitting stop loss 4% below 200-day moving average


• 5/4 - Georgia Gulf Corp - Sold 3% loss due to hitting stop loss 4% below 200-day moving average


• 5/5 - Lender Processing Services - Sold 8% loss due to hitting stop loss 4% below 200-day moving average


• 5/6 - Hudson City Bancorp Inc - Sold 5% loss due to hitting stop loss 4% below 200-day moving average

Sniffle, sniffle, tear, tear. I became short of Motorola last week and this week became short of Verizon. Analysis of the Verizon follows.

Fundamentals

A quick rundown shows this one stinks quite a bit:

• Operating margins of 18% are below the industry average of 19%


• The price/earnings ratio of 34 is over 1.5 times the industry average of 19


• The price-earnings-growth ratio still has it fairly priced compared to its competitors

The biggest fundamental drag on this stock is that it's payout ratio (the % of earnings it is paying out in dividends is 220%, and that, my friends, is wholly unsustainable. There are a lot of retirement accounts and pension funds that are invested in this stock because of its rich 7% yield. It will become drastically unattractive when they cut the dividend. By the way, I have to be out of this by the ex-dividend date of July 7, or I will have to pay out 7%. Not me!

Technicals - Weekly

On a weekly chart, this stock has broken a major trend line. It has been drastically underperforming the market since March of 09, which is when the market bottomed. And look at that horrid accumulation/distribution line! People have been dumping this stock hand over fist! So this looks like a great short on the weekly chart.

Technicals - Daily

The daily chart unfortunately shows the stock to be almost oversold. You can see the RSI is not far from the lower boundary. There is divergence in the RSI, but that's OK because the divergence hasn't happened below the lower oversold boundary (30). The stock probably needs to claw back to the 200-day moving average or so to reset for its next leg down (should that hopefully occur). It has outperformed the market recently, and the accumulation/distribution line was showing people coming in to save the stock recently, but then it rolled over again and hasn't recovered.

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.

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!

------------------------------------------------

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.