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Dow 36000 or Dow 6800

Posted on 9/29/2006

Isn't it ironic that the bears who called for Dow 6800 by end of the year are out denouncing the author of Dow 36000. Both set of people are spectacularly wrong as of now. Both set of people made outrageous predictions based on some fancy theories. A good example of the pot calling the kettle black.

The mass media loves these kind of predictions and people who make such predictions.They are a constant present on the media everyday pouting out such extreme scenarios. It is good strategy to market books, newsletters and advisory services. The oldest trick in the mass media business is to make outrageous predictions. It gets attention. Paris Hilton knows it well. More outrageous her behaviour the more she gets attention. As a trader it is much better to stay away from such wild attention grabbing predictions.


RIMM is up 20% or so today morning post earning. Last night there was lot of excitement about RIMM earning. Day traders and option traders made some killings. Now even though I trade earnings based breakout, RIMM is not the kind of stock I am excited about. In fact I think those chasing RIMM here may be in for lot of pain.

On large caps earnings is anticipated. If you see RIMM price performance since August, it had already started moving in anticipation of good earnings. So is today's earning such a big surprise. Analyst are busy raising estimates and price target but I will let this pass. It is large cap and has over 186 million shares outstanding. That makes it unlikely to make a triple digit move from here in short period.

Not every earning surprise is worth playing. Only a handful of earning surprises in any quarters have legs.

Waiting for Godot

This will go down as one of the most torturous breaking of all time high by Dow Jones Index. The market seems to be in a state of suspension in anticipation of earning season. Volatility in individual stocks should pick up as the earning season hits in full force in next couple of weeks.

The earning season and pre announcement season is a good season . It is a season of opportunity for all kinds of traders be it day traders, swing traders or long term traders. Future prospects of companies get reevaluated during this season. Those who surprise or beat sometime find a good rally for six to 8 weeks. Sometime they launch multi month, multi year rallies. Those who disappoint find the market severely punishing them . Many of them go in to multi month or multi year funk.

Earning momentum and price momentum as strategies have statistical edge and much of growth investing is about identifying such opportunities. Most people believe that market are too efficient and things like these do not work. It is very good thing that people believe in that myth. That creates opportunities for those who can understand and operationalise strategies based on earnings.

During the course of the day I will talk about how I discovered earnings based strategies and about my first trade based on it . I bought the stock on earnings day and it tripled in next two months. It was in the midst of severe bear market. So stay tuned.

TRT -Trio-Tech Int'l anatomy of a trade

Posted on 9/28/2006

TRT -Trio-Tech Int'l

Now this is a trade I just closed when it spiked up by 1.80 today. I got in to this micro cap on Friday . It had blowout earnings and gapped up, I entered the moment I saw the earnings. I alluded to this stock in my post on Friday.
Noticing some good moves in telecommunication. China related stocks are also on fire. A good earning play is up over 40 % today

Look at the earnings.
Trio-Tech Int'l TRT 6/30/06 9,500.0 61.0% 705.0 1037.1% 0.22 0.02

It had a blowout quarter. Extremely small float and completely neglected stock. That is a potential mix for a blowout move. Every earning season there are plays like this. You have to be very quick in spotting them and getting in. When they move, they really move big time.

My bread and butter play is these kind of earnings plays. The earning season is a season of opportunity and I am looking forward to finding few more plays like these. If you focus on earning season you will find completely neglected companies with great earnings and then the market discovers them and they make significant moves. Over the last 5 years this is one strategy I have mastered and fine tuned in microscopic detail. Bulk of my profit come from such earnings related breakouts.

Another way to find these kind of plays is by using one of the ideas in the book I talked about last week- How Charts Can Help You in the Stock Market by William L. Jiler. The original genesis for this idea came from one of the chapters ( Chapter 6) in the book. While working on developing a scan for it I discovered most of these stocks make these move because of earnings.

Oil stocks may not be the best shorts now

A reader has asked my opinion on shorting oil stocks after this bounce. In my opinion they may not offer a good risk reward at this stage. The ideal time to short was a quarter ago. Now many are down more than 25% from their quarter ago level. Most likely they will spend lot of time in range. Alternative energy plays, ethanol, solar energy might be a better play probably on the short side.

A Case for Inflation Targets in the United States and Japan

The American Enterprise Institute for Public Policy Research has a free monthly newsletter about Economic Policy. It always has a good macro view on the economy. Because it is monthly, it does not suffer from the problem of trying to interpret every release of economic data. As a result you get a very good perspective.

The central banks of the world’s two largest economies are both worried but hopeful about inflation. The Federal Reserve is afraid inflation will increase, but hopes it will decrease. The Bank of Japan is afraid it will decrease, but hopes it will increase. Ironically, the Bank of Japan says it would like to tighten monetary policy more, while the Fed says it would not.

Clearly, the world’s leading central banks are struggling with what is happening to prices in their respective countries, what they should say about it, and, more importantly, what they should do about it. Inflation targeting may be a desirable approach to addressing these questions.

Keeping inflation low and stable is the primary goal of the world’s central banks. Virtually all have been strongly influenced by the “Great Moderation” whereby low and stable inflation rates have been associated with higher rates of growth and better overall economic performance. The basic reason for this association is the fact that high and volatile inflation rates are disruptive and empirically linked to poorer economic performance.

Amaranth is amongst top 10 queries on Google

The top ten queries on Google are always dominated by celebrities and sports figures.Scantily clad females have the highest probability of making it to this list. So it is a surprise to find a hedge fund making it to this list. Hedge funds have gone mainstream. Too bad there is no hedge fund ETF!

Gaining Search Queries: Week Ending September 25, 2006
1. elin nordegren
2. ryder cup
3. deal or no deal
4. america's next top model
5. tmx elmo

6. Kari Ann Peniche
7. grey's anatomy
8. talk like a pirate day
9. rachael ray
10. amaranth

Furious sector rotation

Sometime reading the market is tricky. One of the prominent feature of the current market in last few weeks is the furious sector rotation. Money has flowed out of sectors like commodities and energy in to retail, restaurants, technology and software. Every day a new sector is attracting attention. In recent weeks the transport and biotechnology are finding a bid. Lot of money flow is concentrated in the large cap. Many stocks after breaking out have just hung on to gains but not gone in to rally modes.

Now this kind of scenario creates a bit of dilemma. Large caps lead in the later part of the bull move. But at the same time speculative sectors like biotechnology and technology are also attracting buying. So the message of the market is mixed. It possibly points to a protracted sideways move.

A range bound market presents special challenge as many breakouts do not go very far off either on upside or downside. Such challenging markets are the playground for certain kind of strategies. While we would like to have a market making a strong move in either direction, one has to adopt to the given condition.

I continue to find opportunities on both long and short side, but many of them are giving lesser profit than what I like to get. Over the years I have learned that these kind of market environment are cyclical and bad times are followed by good times. Such market environment is when you need good risk management strategy. I am using time stops on lot of my positions in this environment. So if a stock is not making an expected move in a desired time frame, I am out of it. I am also aggressively moving stops to protect profits.

Note: Some of you have requested that Friday is not a good day for the chat on "developing a good market feel". So I am planning to re-schedule the online chat sometime next week. If you are interested please send an email and I will let you know about the time and other details.

Bulls may get ambushed once quarter ends

Posted on 9/27/2006
Over the years I have learned to be wary of strength after 8-12 weeks move. For short term tactical swing trades it always helps to have your strategy aligned with the anticipated market direction. Mid July is when many of the stocks stabilised after a brief and vicious correction. Since then the DOW, S&P and NASDAQ have creeped higher. Along the way there were many good opportunities for trades lasting months to weeks.

It always helps to buy on negative sentiments. In July the sentiment was extreme. Now many of the thesis's on which the July correction precipitated have proven not to be necessarily true. Now there is a gradual realisation that things are not as bad as proclaimed by the bears predicting doom.

The home builders is a classic tale of how you should discount news and look at the tape to make your decision. Everyday the bears come with more dire predictions for home building stocks, but the stocks have not budged and in fact rallied. A clear lesson in how trader should think differently from TV pundits, analyst, and newsletter writers. That is the kind of case study one should write down in a trading journal for future reference. You will find same things repeating in other sectors again during your trading lifetime.

The energy sector offers another good lesson on how to think like a contrarian and trader. This time it is on a bullish side. There was not even one analyst who was predicting a drop in oil prices a quarter ago. Now they are falling over each other to explain why oil is down.

Now we are at an interesting juncture. There is the quarter end, there is an upcoming earning season and there is the last quarter of year with the tax related issues for many institutional investors as well as individual traders. Analysing them correctly is the key to anticipating the likely market direction. Many times the quarter end strength is deceptive. Somewhere waiting is an ambush. So I have trimmed my positions and will start positioning for shorts sometime soon. At the same time I am willing to go long some selective earnings/momentum plays.

Whether you are a Macro trader or a micro trader, developing a skill in anticipating the possible market direction can pay rich dividends. Many of you have asked how to develop the skill of anticipating the market direction. I have replied to many of these emails. I am planning to schedule a online chat sometime on Friday with some of those who sent emails. If you are interested please send an email and I will let you know about the time and other details.

Don't trade based on this analysis. This might be completely wrong.

Market ripe for a fall

Posted on 9/26/2006
The party is over. Too much divergences, small caps are lagging big time. Market is creeping higher, no major thrusts or second set of breakouts or follow ups in stock. I am using current strength to liquidate. The quarter end mark up might be good time to move to cash. Not finding anything exciting now, milked all the opportunities in last 4-6 weeks. Positioning slowly in to low risk shorts. We might be headed for a major correction post the quarter end period.

Earnings revision point to trouble ahead

Zacks earnings trends are in recent weeks giving hints of weekness. To profit from this kind of analysis you need to get in to specific sector likely to top out or breakdown. I have around 30 stocks which I am watching for poosible low risk short entries. So even if the market tumbles I want to be ready for the move. Ultimately piccking the right stocks can give you better return on short side also.

The total number of 2006 earnings revisions over the past month stands at 1,042, which is markedly down from the 2,702 reported four weeks ago. Over the last four weeks, there were 460 upward revisions and 582 downward. This makes for a total revisions ratio of 0.79, a clear red flag. Three weeks ago the ratio was 1.35 and has since declined every week until finally dropping below one during the last two weeks. If this ratio persists as the third quarter earnings season gets underway, and total revisions start to pick up, it will be very serious indeed. The strong forecasted earnings growth is perhaps the single most important piece of evidence pointing to a strong economy in 2007. The low revisions ratio is the canary in the coal mine indicating that this pillar is perhaps not as strong as previously thought.

However, the overall earnings picture still remains quite strong, regardless of how you measure it, double digit growth is still expected for both this year and next.

Oil down 23%

At market top there is always a tendency to believe in wild projections. If you read the newspapers or listened to analyst just a few weeks ago, there was no way oil was going to go down. The oil was headed to USD 100 was firm belief. No one was willing to listen to a possibility of different scenario.

As regular readers know, I have been bearish on oil and oil stocks for over a quarter now and repeated that call several times. Keeping a close watch on how commodities trend and how the trends in commodities end can help you a lot. The commodity market behaves differently from stock market and the participants behaviour is different. Everyday I keep a close watch on commodity markets and sometime it helps in analysing the stock markets.

Oil's rapid fall reflects a range of factors. Geo-political tensions have eased as both George Bush and Iran's president Mahmoud Ahmadinejad back off from recent posturing. "Talks are much better than threats and confrontation," Mr Ahmadinejad told the Washington Post.

Weather worries have receded, too. Last year, Hurricanes Katrina and Rita wreaked havoc in the Gulf of Mexico and the market was priced for a repeat performance this year. So far, the winds have steered clear of the rigs.

As the timing of the two most recent corrections suggest, there is also a seasonal factor at work. The period between the American summer "driving season" and the Northern hemisphere winter is a time for building reserves. As the Department of Energy indicated last week, stockpiles are full to bursting.

"The markets will be unable to ignore all this crude and product sloshing around the world. There's not one iota of bullish news out there," said one American trader.

Demand is easing too, as the US economy starts to slow on the back of a weakening housing market and the Chinese rein in their runaway economy. The final reason is the growing influence of financial investors. The rapidity in the pull-back since August reflects the weight of speculative money shifting from long to short.

In part, that has been triggered by the oil price crashing through technical support three weeks ago. According to John Noyce, a technical analyst at Citigroup, when the oil price dived through its 55-week moving average, it set up a target of $55 a barrel. Failure to consolidate there could send oil down to the 200-week average, expected to be about $50 by the year end.

Tony Dolphin, director of strategy at Henderson Global Investors, says: "The two most important effects of lower oil prices, if they are sustained, will be to boost spending power in non-oil producing countries and help lower inflation expectations."

End of month and end of quarter

Posted on 9/25/2006
The end of month and end of quarter dynamics should keep the market in bullish mood for sometime. Over eager shorts are learning a lesson in why profits on the short side should be booked fast. Last week there was a lot of chatter about this or that stock is breaking support. Today many of those stocks have rallied violently.

If you look at the sector trends it is apparent where bulk of the selling at quarter end is concentrated. Yesterday there was a news item about how Fidelity has lost more money than Amaranth in Energy sector. The sector trends are also showing clearly where large amount of buying is concentrated in anticipation of good moves ahead.

Individual stocks continue to offer some good opportunities and as I said on Friday, the rush to write obituaries about market is premature. It is currently a stock pickers market. There are number of good breakouts like DJO, KNOT, CROX, TWX,etc.

Good Christmas for retail

If you have been watching the retailers, it is crystal clear that the upcoming Christmas shopping season is going to be a good season. Every single retail group is witnessing excellent accumulation. If you are looking for opportunities on long side keep a close eye on retail group.

Some retailers are breaking out after multi-month consolidation. Many retail stocks are just starting out their rallies and excellent opportunity for low risk entry exists in many of them. If the consumers are about to fall off the wagon why are retail stocks rallying.

Market on pause

  • The market continue to correct after a multi week rally. Nothing seems to be as bad as the bearish commentary suggests. Some markets are poised to take out their high.

  • The oil prices continue to drop. Gold is being taken to the cleaners. Commodities bull market is dead and unlikely to find bid for many months.

  • The housing stocks continue to defy the sky is falling analysis of the bears. If you read some of the blogs/ commentators on housing, it seems like every home owner has panicked and is selling his house. It a crisis of untold proportion. Run, run, run for your life. Sell your house today, if it is not selling just keep lowering the price. Now ask yourself, is that what is happening in your community. The so called experts on housing crash have no idea of consumer behaviour and how markets for high ticket items work. Houses are not stocks that because prices are falling people will sell. If the bearish commentators are willing to sell house at discount, I am a willing buyer.

  • If you are ready, one of the best season for finding good trades on both long and short side is around the corner- The earnings season. More about it later.

Contrarian analysis concludes that the path of least resistance for stocks is upward

Posted on 9/24/2006
Mark Hulbert is editor of The Hulbert Financial Digest says market is headed higher.

MANY investment newsletters have been fretting about the stock market — and that suggests that the market will rise.
At least that’s the conclusion you would reach if you followed the market-timing theory that is known as contrarian analysis.

Let the bears double down during this correction.

Other than concluding that the market is likely to rise, contrarian analysis does not try to forecast the size of the rally, or how long it might last. But the analysis does focus attention on what is likely to signal the eventual end of a rally: a sharp rise in optimism and, even more tellingly, bullishness that is stubbornly held even as the market starts to decline.

Neither of these early warning signals prevails today. So, for now at least, contrarian analysis concludes that the path of least resistance for stocks is upward.

Dr. Doom turns bullish on U.S. large-cap stocks

Posted on 9/23/2006
Marrc Faber the author of Tomorrow's Gold: Asia's Age of Discovery is now bullish on US large caps and technology stocks. He has an excellent credential as a conrtarian. So you know where the market is headed. Listen to commentators outside of USA, they have better perspective than the US based analyst. Often too close a proximity creates lack of perspective.

Famed contrarian investor Marc Faber, better known by his self-appointed nickname "Dr Doom," has temporarily shed his preference for emerging-market stocks for two out-of-favor asset classes: large-cap U.S. industrial and technology shares.
The main reason for his upbeat view: the U.S. consumer may be more resilient in the face of a slowing U.S. housing market than widely thought.
While housing prices may be easing around the country, Faber says there's little evidence a catastrophic drop in home values is imminent. Abundant liquidity and a Bernanke-led Federal Reserve that appears inclined to cut interest rates if the housing market were to dip more than 10% bodes for "a slowing and not a collapse" in the housing market, says Faber.
Faber, author of the Gloom, Boom & Doom Report who gained notoriety for his market insight after he turned bearish on Asian assets before the Asian financial crisis in 1997, said there are plenty reason consumers can ramp up their discretionary spending, considering homeowners haven't slowed their pace of borrowing against home equity, employment is high, wage inflation is picking up and falling commodity prices are taking the heat off retail prices.
"If the price of oil and other commodities declines for a while, it leads to something like a tax cut for the consumer," Faber said, speaking at a recent Hong Kong conference.
Chart of $SPX
"Whereas I am very negative in the long run, and I believe that the U.S. economic imbalances are not sustainable, for the next few months the investment community is too negative on the U.S. economy which is more likely to surprise to the upside than the downside."

Watching some longs

At some stage in next couple of days a bounce will again take the market higher. Many of the over eager bears may again learn a lesson in the mysteries of markets mechanism. There is a bearish fantasy of crashes and rapid moment down, but in reality that happens very rarely. More common phenomenon is market goes down, thickens at next level, bounces and the cycle continues.

Sometime it helps paying attention to stocks showing extraordinary momentum at such times or stocks just beginning a fresh moves. Many time it is an indicator of sector rotation. I am nibbling at some small positions in some stocks. You get a much better entry during downturns sometime. Some of the stocks I am watching or nibbling at are LFC, UAHC, LFG, BIOV, BITS, CRM, FRNT,AUXL, QDEL, etc.

Free stock trades

This will be interesting concept. The brokerage commission is trending down for many years. This should shake up the industry if it takes off. But I have my doubts whether this will succeed. Most people base their decision on stock brokers on number of factors besides the price of trade. Reliability is the key. So lets wait and see.

Morten Lund, the guy who was the earliest backers of Skype is at it again. He has financed Zecco, a start-up that will allow consumers to trade stocks for zero commissions, versus $10 to $20 that many online brokers charge today. Other investors in the company include former Dutch Coca Cola CEO Pier Baarsma and Soren Kenner former chairman of McCann Erickson MRM Europe

CEO Jeroen Veth, a 37 year old entrepreneur and former Merrill Lynch Vice President is heading up the company and contends that most of the old school online brokers spend too heavily on marketing and thus have to charge higher prices. Lund and crew believe that the actual trade costs about $2 and if they can lower the cost of marketing to near zero, they can offer zero commission trading. They will make money with what else - advertising.

Markets under pressure

Markets will continue to be under pressure. I am expecting a nasty correction before the market again stabilises. Not all stocks and all sectors will be equally impacted by the correction.

Finding short candidate is never an easy exercise, but if you anticipate correctly probably there are some good short set ups. The problem with shorts always is availability and high volatility. It is easy to find short opportunities for few dollar kind of move, but if you are looking for 10 dollar plus kind of moves then it requires lot of patience and systematic approach.

Earning slow down and miss can sometime get you good short candidates if they happen at top of the range. Recent examples of these are CHS and JOYG. When a stock tops out it does not necessarily start going down immediately, most of the time it spends considerable amount of time going sideways sometimes for years before it starts sliding down.When I hear use exactly opposite of what you do for longs on shorts, I am always skeptical. It simply does not work that way.

Deflation chatter

Posted on 9/21/2006
Don't miss out on the deflation chatter, it is still below the radar. So is inflation bigger threat or deflation? The metals seems to be hinting deflation.Should be fun to watch copper stocks for a down move. Now I don't know, it might be one big conspiracy. Only grandma knows for sure.

Professor Bennet Sedacca is on fire with his recent musing as relates to the intensifying risk that a return to a disinflation-dominant macro-environment might be the end-result of the utter collapse in the US housing market.

Chasing the bull

Going by the emails I am getting, I see lot of people have started to chase this move at this stage. Some who were on sideline are becoming cautiously optimist. Some were married to the bearish hypothesis and are regretting not getting in and missing. Some were following the wrong gurus( never follow a guru even if his name is Easyguru).

I see a high risk to those late to party. The best thing is to write down the lesson learned and remember it for next time. Buy strong trends( in individual stocks)when down trends in Indexes start losing momentum. Wait for the market to set up again. It will again offer low risk entry points. Nothing changes much in the market. Same thing repeats again and again. I have seen the same gap and trap move many times.

In fact you may want to keep your list of short candidates ready, in anticipation of the next likely move.

Now my this view or hunch on market does not prevent me from taking a long positions in stocks like EVST today.

Stubborn bull

The market continues to defy the bears for the time being. It is the nature of bullish or bearish moves in the market to go further and faster than most analyst predicts.

Having a very long term view on market has its own peril. The kind of long sustained moves in one particular direction are rarity. What is more common is moves of short duration which can be anticipated with fair degree of certainity. Also the bullish drift in equities is a confirmed fact, so long focused strategies have better probability of suceeding.

I am completely congnizant of the negative factors most bearish analyst talk about. Yes there are structural problems in the economy and the economy is not perfect. Lot of these negative factors have a high probability of impacting the market. But when I see a rally coming and find stocks with high probability of making a move I am willing to act on them.

I love hedge funds!

Hedge funds are the favourite pinatas of most people. The trouble at Amaranth has everyone out in full force beating up the hedge funds. The media loves these kind of scandals. Bad news always sells in media. Soon the politicians will join in. It is such a tempting target and you can always spin it as a class struggle because hedge funds are for rich people only.

Some are blaming investors, some are blaming regulators, some are blaming the big banks, Paul Krugman will blame George Bush, some are blaming the markets. Some are even blaming the US constitution for this! Lot of this is envy. Lot of it is vicariousness. Like the way we enjoy Hollywood gossip we like hedge fund scandals.

Even before the full details of what happened have emerged the race to bit the pinatas is on. Hedge funds and hedge fund managers who can not raise capital or can not make money for their investors are out justifying their own failures or mediocre performance. Day traders and sundry other traders are offering advise to hedge funds on risk management. Newsletter writers are quickly touting magical risk management strategies.

The fact is that the pool of investable capital remains constant. The money in hedge fund would still be in market invested by someone else in some other form. Besides that the simple fact is that simply there is a need for high returns by several investors. The hedge funds are just capitalising on that need. Hedge funds exist and are prospering because the markets needs high return vehicles. Needs pre exist marketers. But it is always the marketers who get the bad reputation.

Be a contrarian. Hug a hedge fund manager today. I love hedge funds!

Euro break-up

If you have been reading newspapers outside of USA, you should have noticed the rising chatter about imminent Euro break up. Now this is the kind of macro theme most of the analyst in USA are not talking about. It will have significant impact on worldwide markets. The country most likely to benefit from such a move is USA.

The disintegration of the euro may be drawing closer. Warnings of an EMU bust-up were once confined to a handful of euro sceptic journals: they have since spread to City banks such as Morgan Stanley and HSBC, and are now moving perilously close to the EU core itself.

"Will the Eurozone Crack?" is the latest missive from the Centre for European Reform, a pro-euro think-tank with close ties to the European Commission.

"The single currency was supposed to bring Europe together, but it risks becoming a source of economic dislocation and political division," begins the report, a 59-page demolition of EMU by the centre's business chief, Simon Tilford.

"Italy is the country most likely to trigger a crisis. It is not far-fetched to imagine a scenario in which the country is forced to quit the single currency. It could easily force other members to quit the eurozone and could even precipitate the unravelling of the single market," the paper says.
The market correction/ pullback is playing out. Yahoo or no Yahoo, the market was due for a correction and so there is correction. Sometimes corrections are very scary, late bulls get butchered, shorts get over confident and then the market resumes in the intended direction.

While I watch and anticipate major Index moves, I make my money from individual stock plays. The individual stocks and sectors have a different rhythm and cycles and sometime when a correction get going a new set of of stock start their march forward or downward. So I have no hesitation in buying some stocks if they meet my criteria.

At a given time I have fewer than 25 stocks on my active buy list. Here is a small sample what I am watching currently IHR, MIG, CPY, MIGp, GEO, MEH, AEOS, SNTS, NRMX. I do not necessarily buy breakouts, most times I have buy stops on some stocks selected based on my criteria. That way I can go about doing other things while the market takes care of itself.

Are you lost in the technical analysis jungle follow up

Posted on 9/19/2006
A reader has asked why I think How Charts Can Help You in the Stock Market by William L. Jiler is better than the three of the most popular books on technical analysis:

Technical Analysis of Stock Trends by Edwards and Magee

Technical Analysis of the Financial Markets by John J Murphy

Encyclopedia of Chart Patterns by Thomas N. Bulkowski

I have read all three and can say with great amount of conviction that Jiller book is hundred times better than these three tomes. Now that is my opinion you can test it for yourself. The book is less than the cost of commission you will pay on a trade. It has 200 pages and you can finish it in few hours. It is more geared towards trading. Popularity of a book does not mean the ideas in it will be profitable.
The markets are witnessing much needed and much anticipated correction. At individual stock level there are some good opportunities. Even if the market turns negative from here, it will take some time for the momentum to play itself out before that happens. I am finding lot of ideas in my scan. Two new positions I opened today are GSTL and MFRI and I have some retail plays also on the radar.

Are you lost in the technical analysis jungle

There are hundreds of way to make money in the stock market, but the one which has the largest following is technical analysis. If you search Amazon database on investing, you will notice more books on technical analysis that any other topic. There are hundreds of newsletters dedicated to the art of technical analysis and chart reading. Most of them offer a very simple way to interpret the market and offer promises of riches.

Most traders and especially beginner traders are completely lost in the technical analysis jungle. It is difficult for them to accept any other interpretation of market. I know of people who everyday evening go through over 2000 charts or more in search of their esoteric patterns. Most beginner traders get hijacked by technical analyst and some of them are lost forever to the dark arts of technical analysis.

If you have noticed much of the Wall Street big money houses have over last 5-6 years retired or sacked their technical analyst heads. Much of the work is being now done by quantitative tools. But the cult of technical analysis continues to grow.

If you want to escape that trap look at some of the quantitative approaches to making money. Even if you have to follow technical analysis, use a quantitative method to select stocks and then apply your chart reading patterns.

Now if you want to understand technical analysis there is no shortage of books on it. I have read most of them. I can identify most of the common and some very esoteric patterns but I seldom use them in my trading. If I have to recommend only one book on technical analysis, I would recommend, How Charts Can Help You in the Stock Market by William L. Jiler. One of my very profitable quantitative scan idea is based on one of the ideas in that book.

I will also talk about a entire trading and scanning approach in my next post in the series on How to narrow the number of breakouts. It is a completely quantitative approach to trading and uses quantitative scans to find good patterns and if you trade it you might beat the best trained technician by a wide margin. But for that you will have to find your way out of the technical analysis jungle first.

Are you serious about your trading?

If you are serious about your trading and want to build an enduring edge the Stockbee Member site might help you. Members tell me they have tried lot of things before coming to my site and it has offered them the most extensive and detailed methods to swing and position trade.

It is only for those who want to develop their own self sufficient trading method. It is not a stock picking service. It is service for you to build your own scans and trading method to have your own daily pick based on your method.

Be warned it will take you time to learn to trade. Learning to trade is difficult art and unless you are willing to spend months or years to perfect your strategy and also develop your mental edge you are unlikely to succeed in this game. Unless you understand that no site, no service, and no mentoring is going to work.

Why traders come to stockbee?

The member site is one of the most recommended site for learning to trade by other traders and bloggers. You will see no advertising, no hard marketing, no promotions, no free offers, no affiliate marketing, no incentive to other bloggers to promote the site, no constant twits self promoting the site, no free trial  and no tall claims of making you instantly wealthy, and yet the site attracts new  members everyday. Members come from all walks of life and all kinds of trading size and trading styles.

You will see that many trading bloggers have been using my market timing methods, scans , stock ranking lists and chart templates. They have developed their own methods based on my methods. Many paid newsletter site recommend my site to their subscriber for learning about trading and market.

Over the years thousands of traders have been members and those who benefited from the learning talk about the site to others or talk about the methods used and that is how new members learn about the site.

What will I learn in the members site?

The members site will give you in depth understanding to develop your own trading method. The emphasis is on making you self sufficient and confident of your own trading method and style.

As a member you will learn the basics of swing trading, momentum investing, growth investing and risk management.

You will learn about Stockbee Trend Intensity Breakouts method that uses momentum based swing trading to find 3 to 5 day swing trades for 8 to 40% profit.

You will learn about Stockbee Episodic Pivots Breakout method which uses Post Earnings Announcement Drift (PEAD) to find stocks that had a game changing earnings and that are likely to rally for 3 months to 12 months.

You will learn about  Stockbee Dollar Breakout method that uses momentum, range expansion and swing trading approach to find 5 to 40 dollar moves in high priced stocks.

You will learn about  Stockbee Lemonade Strategy for 401k which uses market timing and momentum to invest in 401k. You will get weekly update on how I am using the strategy on our 401k to do allocation decision.

You will learn about Stockbee Market Monitor method for market timing using breadth. It allows you to avoid risky periods in market and allows you to identify market turns. It is used for 401k allocation decisions.

You will learn about Stockbee Double Trouble method to find stock with confirmed upside momentum using anchored momentum and that are likely to continue their up move.

You will learn about Stockbee Night Time is Right Time method to find news catalyst based trade ideas for short term day trade and swing trade.

You will learn about Investor's Business Daily’s IBD 200 list and how it can be used to find swing trading candidates for explosive moves.

You will learn about Telechart 2000 and how to use it effectively to scan for swing and position trade ideas and to set up your 401k strategy.

You will learn about Jesse Livermore Range Breakout, Darvas Box setup, and many other member shared methods.

You will learn how to set up your own scans, select right kind of stocks, how to set up stops, when to enter , when to exit, how much to risk, how to track your trades and all other details about trading. You will learn about developing your own methods and not relying on others for trade ideas.

The site has hundreds of videos and trading methods and variation of methods. Members help each other in developing the methods and share actively their research and finding. A collaborative spirit allows you to get input from others on your trading ideas or problems.

The site gives you opportunity to interact with some of the most successful traders and learn from them about their trading methods. It is a vibrant community with members from different background and experience willing to help each other. The emphasis is on continuous learning and up gradation of market knowledge and setup knowledge. The members range from hedge fund employees, financial advisers, active swing traders, investors and new traders.

If you are looking to develop your own trading strategy the membership site might be for you. You have to be willing to put in the effort to build your own method. There are no silver bullets offered on members site. Every method, every scan, every nuance is detailed and all possible help is offered to design your own method.

Do you have a trial?

If you are just looking for trial you are better off trying thousands of other trading site that offer free trail or one month trial and offer you promise of riches.

It is for those who are ready beyond the trial phase and ready to put serious months or years  of efforts to learn to trade on their own. It is for those who want to learn to find their own fish.

The free blog has all the details about the methods I trade and if you go through the posts highlighted in the sidebar you will learn about them.

How can I become a member?

To sign up go to and follow the sign up process. The site uses Paypal for payment processing.


Market themes

  • Markets next big theme will be upcoming earnings season. Expect many stocks to start creeping up in anticipation of good earnings.
  • Brokers/ retail seems to be the developing theme. Every single retail group is experiencing money flow.
  • Tobacco may not be injurious to your portfolio.
  • The long written off Radio sector may be gearing up for some sound action. Number of other media sectors are stirring up as well.
  • The technicians are discovering Google ( GOOG) now after 35 point rally. But they can not agree on whether it is coiling, forming quadruple top, hitting resistance, has falling wedge, or it has a cup with double handle. It is good that I am not a technician.
  • The Apple share fans think I am an idiot, part of the naked short selling conspiracy, Microsoft fan etc etc. The largest number of hate mail I have received so far for the post-Apple may be ready for a fall. The housing stocks long was the previous record.

Scan 2 year growth

In my previous post I talked about Apple and how it showed up on my short scan. If you want to set up a similar scan here is how you can set it up easily in TC2007.

C >= 3 * (MINL540 + .01)
Today's close is 3 times the minimum price in two years. The assumption is there are 270 trading days in a year. The .01 is added to avoid error in calculation if a stock has not traded for a day or traded at 0.

The additional conditions are :
1 Price>10
In reality I prefer stocks above 40 for short selling.

2 Float is above 70 million.
I prefer stocks with very high floats. When the large tankers start rolling over there are large number of holders to accentuate the move. As a general observation they have a smoother ride down.

This is the basic outline of the scan and the central idea behind it. My actual scan has few more bells and whistle and some tactical tweaks to narrow this down even further to less number of candidates. As of Friday data it showed 37 candidates. Not all of them make good shorts but there are 5 good ideas in that list which might offer good set ups if the market takes a tumble.

AAPL,Apple Computer Inc
AKAM,Akamai Technologies Inc
AMLN,Amylin Pharmaceuticals
AMR,Amr Corporation
AQNT,Aquantive Inc
ARRS,Arris Group Inc
ATI,Allegheny Technologies
BMRN,Biomarin Pharmaceuticals
BWNG,Broadwing Corp
CAL,Continental Airlines B
CBG,Cb Richard Ellis Svcs
CELG,Celgene Corp
CRM, Inc
CVA,Covanta Holding Corp
CWTR,Coldwater Creek Inc
DO,Diamond Offshre Drilling
FSL,Freescale Semiconductor Inc
FTO,Frontier Oil Corp
GLBL,Global Industries Ltd
HANS,Hansen Natural Corp
HUM,Humana Inc
JOYG,Joy Global Inc
LCC,US Airways Group Inc
MDR,Mcdermott Internat Inc
NDAQ,Nasdaq Stock Market Inc
NIHD,NII Holdings Inc
NVDA,NVIDIA Corporation
PWR,Quanta Services Inc
SBAC,Sba Communications Corp
SWN,Southwestern Energy Co
TIE,Titanium Metals Corp New
TWTC,Time Warner Telecom Inc
USG,Usg Corp
VLO,Valero Energy Corp
VRTX,Vertex Pharmaceuticals
WFR,Memc Electronic Material

Even though I am illustrating some of these ideas inTC2007, my actual scans are on my own software. I use TC2007 more as a market data source and a good programme to store my watchlists. There are certain shortcomings in most programmes. One of the problem in the scan I illustrated above is that it requires 540 days of data. Now stocks which have less than 540 days of data also have 300 plus moves. These stocks do not get reflected in this scan. My software avoids all these kind of problem, plus it is lightning fast. If you run this scan in TC2007 it takes lot of time and slows down the process.

Now this same scan you can use to find long candidates.( That is how I found AKAM and GOOG recently) As they say the trend is your friend till it bends.

Apple may be ready for a fall

Posted on 9/17/2006
Keep an eye on Apple. There was nothing new in the recent announcements.Nothing with must have or buy it now appeal. Future products are not coming in to the market today. All the good news is priced in. Apple may be set for a fall.

Now this stock came from one of my scans. The scan looks for mean reversion based on price growth in large cap and large float stocks. It basically looks at large cap stocks up over 300% in last two year. Apple is up about 500% in last two years. The other recent short signals from this scan were VLO and TXU. In my experience trading on short side is tough and comparatively lower expectancy game. Plus there is always the problem of availability of shorts. This scan has a good track record and it avoids the liquidity problem.

How to narrow the number of breakouts- Part 2

Warning: Mostly for beginners and those asking for specific picks. Most of the discussion relates to TC2007. The advanced traders might want to skip it.
The earlier discussion on this is here.
How to narrow the number of breakouts- Part 1

Investor Business Daily CANSLIM method

There are many other ways of doing this same thing. If you compare the result of the Relative Strength vs S&P scan in TC2007 to Investors Business Daily Relative Strength or RPS you will find it does not exactly match. The exact IBD formula according to them is proprietary, but in some of the early books there are lot of hints that it is a weighted average of 1/2/3/4 quarters with different weightage. Now here is a formula to get similar RPS ranking.

IBD style RPS scan:
0.4 * (C * 100 / C65) + 0.2 * (C * 100 / C130) + 0.2 * (C * 100 / C195) + 0.2 * (C * 100 / C260)

Here is what you will get with a top 2% sort. (MWRK, SWHC, IIP, AKAM, TAR, SVVS, RICK)

The Investors Business Daily CANSLIM methodology is basically a combination of Earning momentum and Price momentum at a conceptual level. There are other element to it like market direction filter but why it works is basically it buys stocks with earning and price momentum. If you want to use it you can use the IBD EPS ranking feature to reduce your universe of stocks further.

There is also a way to do a IBD kind earning+relative strength momentum scan in TC2007. ( Note: The earning data in TC2007 has certain deficiencies and it is not to best of my knowledge updated daily. There is a batch update). Here is a scan idea which you can experiment with.

Set up a Easyscan with following conditions:

1. Watchlist: All stocks
2. EPS percent change 4 th quarter back value> 25%
3. EPS percent change 3 rd quarter back value> 25%
4. EPS percent change 2 nd quarter back value>25%
5. EPS percent change latest quarter value>25%
6. IBD style RPS scan rank ( 0.4 * (C * 100 / C65) + 0.2 * (C * 100 / C130) + 0.2 * (C * 100 / C195) + 0.2 * (C * 100 / C260))>80
7. Long scan ( V >= (2 * AVGV30.1) AND C >= (C1 + .25) AND AVGC20 * AVGV20 >= 2500 )= true

Here is what you will get with this scan. (PZZA, CACB, GRC, AB, NPK). Everyone loves pizza!

The EPS ranking you see in IBD is also a weighted average of past earning growth. With some sleuthing (hint use Google) you can find out how it is calculated. Alternatively use the IBD 200 list which appears on I think Thursday. So in simple term when you see large number of breakout, narrow them down by a fundamental criteria like EPS rating. So you might decide to only look at IBD EPS rank above 80 out of the breakout you get.

Now if you believe in the IBD logic, you can take this entire approach further. Build your own earning database . Once you have that, you may not wait for a breakout, you might be able to anticipate them. You will have less than 100 stocks to watch. You will know in advance which stocks are going to be in IBD 100 list before the newspaper hits stand. Imagine tomorrows newspaper delivered today or days in advance. What else do you want with it-free fries or pizza?

In part 3 we will see another more powerful method to narrow your breakout list to just a handful. You may have to wait for it till next week as I am going to enjoy the beautiful New Jersey weather . We are having a barbecue picnic at the Mercer Park. Join in.