Decision making with limited information Part1

Adopted from the Members Only site

One of the key challenge in trading a method like Episodic Pivots(EP) is, you have to base your decision on a very limited information. Plus you need to make that decision fast. Given 5 days, you can research every single thing about stock and make a decision. The problem is by that time the opportunity for low risk entry is gone.

Having access to lots of information is also not much of use unless you can form a judgment from it. If information access was everything,those with Bloomberg terminal would have minted money, but that is not the case.

Lets look at two recent stocks which were in IBD New America section last week.The articles explained the reason and factors behind the stocks recent earnings trend and future prospect.

Now both these stocks had Episodic Pivots in July/August time frames, much before these articles appeared , where they were good buys. But there was little information readily available to take the decision at that time for average investor. After reading the two articles on ANW and JRJC you know why it went up, but that information is not much of use now.

As an individual investor you are constrained by lack of resources and yet you must form a judgment based on limited information. That is the essential skill to build if you want to make lots of money in the long term. While it is difficult at first, more you do it, the better you get at it. Plus bulk of the data to make such decision is readily available on various free and paid sites. Translating the data to information and making decision is the difficult task.

The key to do this is to practice and look at all winners and see what made them winners.In second part we will look at what information helps in making the quick decision and how to develop judgment and sequential steps to follow to arrive at which EP candidate to pick and which to reject quickly. That is the key to trading the highly profitable Episodic Pivots strategy where if you get it right per trade profit can be very high, plus these stocks make these move in a very short time frames, as all of you have seen in recent weeks.

Next week on members site: Decision making with limited information Part2


Caution Time

  • The Market Monitor is signaling a correction/pullback in next 1-5 days time frame.
  • Broadening of the rally continues with over 223 stocks in breakout scan vastly outnumbering the down movers. Stocks up 25% or more has surpassed 1000 and is steadily improving since the green signal.
  • If you are following any of the momentum based system or any of the methods mentioned here, your problem in last few weeks is not lack of opportunities but too many opportunities. With so many stocks going up 25% or more in such a short period of time, it has been extremely profitable few weeks.
  • The Chinese party is cooling down, now that the grandmas in Timbuktu's have started noticing them. But fresh set of China stocks still offered good opportunities.
  • Because the rally continues to broaden, there are still fresh set of breakout which are starting out their rallies and are in buy zones.
  • If you have sound and well set methodology, you should be enjoying this market. Those who keep complaining frankly have no set method or their method are not aligned to market opportunities.


Fresh wave of buying

  • When investors are in buying mood, negative news does not deter them. 2 days of mild pause was aggressively followed by fresh wave of buying.
  • Market Monitor clearly indicates broadening of rally. Within a span of 2 weeks the stock up 25% or more in a month has zoomed from 80 to 215. Stock up 25% or more in a quarter have almost doubled.
  • This has been one of the best trading periods in last couple of months. In last 7 days since Market Monitor turned green , stocks are just flying. So you know what to do next time when Market Monitor turns green. Buying breakouts post the signal has been extremely profitable for Episodic Pivot, IBD200, Double Trouble and Virgin strategy.
  • One of the theme which has been highly profitable is China. There is abundance of stocks from China which have gone up 25% plus in few weeks in the stocks up 25% plus in few weeks. Almost all of them were signaled by the EP method. Now we are in late stage of this game . Many Chinese stocks are now reversing. Some are just one day wonder where they don't follow through.
  • A period of red hot momentum is followed by digestion phase. Market Monitor is indicating we are entering such phase now. Such high momentum phases lead to reversal in small (next 1-5 days time frame). These are part of regular corrections in market.The primary trend is still up but minor corrections possibility high.
  • For high momentum traders what it indicates need to protect open profit aggressively. New breakouts may not fly as easily as they were in early phase. Most important is protecting profit, momentum stocks correct more than market because they are high beta. It is no fun building your account up 25% plus in few weeks and then giving up bulk of that profit in few days. That is where Market Monitor helps.


Opinion on Stock and Following Methodology

Hey stockbee! I need your advice desperately. I bought cpsl yesterday right before close and this morning I got scared out on 2% loss, then after I sold it it went up to almost $11 dollars. How was supposed to know that it was going to continue going up instead of going down? If you could please give me a thorough analysis of your outlook on it..thanks so much

This is typical of the 30 to 40 emails I get daily on an ongoing basis. People want an opinion on stock. The questions start with what do you think of Gold stocks at this level, or what do you think of BIDU or do you think ISRG will run from here and so on.

Individual stock analysis in absence of methodology is a random guessing game. If you have a well thought out methodology, you just follow the stock that pass through that methodology. In any systemic approach or method like Episodic Pivots or IBD 200, or Double Trouble or other methods , the bulk of the thinking has been done beforehand. If the underlying logic behind the system is sound and tested, you don't have to think about individual stocks. Designing and making a method work is the real challenge in trading. If you have well thought out method and follow it regularly, profit is an outcome.

Later: Trading and window washing

Frenzied buying cools down

  • Indices are forming what technical analyst call bull flag.
  • A narrower set of stocks are leading the action as per Market Monitor.
  • A pocket of momentum stocks are dominating the action. Large cap technology has been performing well. Medical technology stocks have recently started breaking out and possibly provide future leadership. While transport is in downtrend, shipping has been doing very well.
  • The star sector so far is China. There is a frenzied buying in these names and now stocks even remotely connected to China are having 10% plus move in a day. Many of these stocks which have run up 100% plus in few weeks are now vulnerable and some already are reversing.
  • For the rally to continue once this pocket of momentum slows down, what next. Which group will take on leadership is the question. New leadership has been emerging a bit slower and that is a concern area.
  • Other concern area as per Market Monitor is for two days in row buying and selling pressure was matched.
  • Quarter end dynamics should kick in soon and some of it is already visible with a rush to dump under performers and frenzied buying in some large cap tech names.
  • There are trouble spots and signs of trouble but as of now bulls are in control and it has been extremely good time for trading . All the methods I trade have been producing some very big winners.


Profit taking hits the market

  • The buying frenzy which started with rate cut cooled a bit yesterday. Short term players were actively booking profits in many high momentum names.
  • The ratio of 131/100 breakout reflects that. While the indices have formed a consolidation area here, buying and slow broadening of rally continues.
  • While this profit taking and reversal hit some stock, a fresh set of stocks like CROX, GRMN, CHNR, ICE, etc had fresh breakout. So there are more stocks joining the action. In a healthy rally such relay race continues with fresh stocks breaking out all the time.
  • All this action has been happening against the drumbeat of negative commentary and obituaries to Goldilocks. But ultimately in the market, price action triumphs. May be the market has priced in subprime.


No shortage of buy candidates

In current conditions there is no shortage of fresh buy candidates everyday. Stocks are following through on the breakout and momentum is excellent. In such conditions breakouts are often followed by quick 10 to 20% move in few days.

Buy Signals
ALGN,Align Tech Inc (Google Yahoo Earnings Chart)
ARBA,Ariba Inc (Google Yahoo Earnings Chart)
CYNO,Cynosure Inc (Google Yahoo Earnings Chart)
CZZ,Cosan Limited Class A (Google Yahoo Earnings Chart)
DCP,DynCorp International Inc (Google Yahoo Earnings Chart)
DISCA,Discovery Holding Co Class A (Google Yahoo Earnings Chart)
DMND,Diamond Foods Inc (Google Yahoo Earnings Chart)
DSX,Diana Shipping Inc (Google Yahoo Earnings Chart)
FSLR,First Solar Inc (Google Yahoo Earnings Chart)
IHS,IHS Inc (Google Yahoo Earnings Chart)
INFN,Infinera Corporation (Google Yahoo Earnings Chart)
LXU,Lsb Industries Inc (Google Yahoo Earnings Chart)
MATK,Martek Biosciences Corp (Google Yahoo Earnings Chart)
NANX,Nanophase Technologies C (Google Yahoo Earnings Chart)
ORCL,Oracle Corporation (Google Yahoo Earnings Chart)
PRXI,Premier Exhibitions Inc (Google Yahoo Earnings Chart)
SDTH,Shengdatech Inc (Google Yahoo Earnings Chart)
SEA,Star Maritime Acquisition Corp (Google Yahoo Earnings Chart)
SIRT,Sirtris Pharmaceuticals Inc (Google Yahoo Earnings Chart)
ZVUE,Handheld Entertainment Inc (Google Yahoo Earnings Chart)

Bottom Sectors

MG317,Sporting Goods (Google  Yahoo  Earnings  Chart
MG328,Office Supplies (Google  Yahoo  Earnings  Chart
MG333,Recreational Vehicles (Google  Yahoo  Earnings  Chart
MG414,Regional-Southeast Banks (Google  Yahoo  Earnings  Chart
MG421,Investment Brokerage-National (Google  Yahoo  Earnings  Chart
MG425,Credit Services (Google  Yahoo  Earnings  Chart
MG434,Surety & Title Insurance (Google  Yahoo  Earnings  Chart
MG448,Mortgage Investment (Google  Yahoo  Earnings  Chart
MG525,Hospitals (Google  Yahoo  Earnings  Chart
MG528,Medical Practitionersi (Google  Yahoo  Earnings  Chart
MG631,Residential Construction (Google  Yahoo  Earnings  Chart
MG633,Lumber / Wood Production (Google  Yahoo  Earnings  Chart
MG634,Cement (Google  Yahoo  Earnings  Chart
MG721,Advertising Agencies (Google  Yahoo  Earnings  Chart
MG722,Marketing Services (Google  Yahoo  Earnings  Chart
MG729,Publishing-Books (Google  Yahoo  Earnings  Chart
MG731,Department Stores (Google  Yahoo  Earnings  Chart
MG737,Home Furnishing Stores (Google  Yahoo  Earnings  Chart
MG738,Auto Parts Stores (Google  Yahoo  Earnings  Chart
MG742,Toy & Hobby Stores (Google  Yahoo  Earnings  Chart
MG746,Specialty Retail - Other (Google  Yahoo  Earnings  Chart
MG752,Building Materials Wholesale (Google  Yahoo  Earnings  Chart
MG775,Trucking (Google  Yahoo  Earnings  Chart
MG843,Processing Systems & Products (Google  Yahoo  Earnings  Chart

Top Sectors

Technology and commodities are two clear themes in this top sector list.

MG113,Agricultural Chemicals (Google  Yahoo  Earnings  Chart
MG124,Oil & Gas Drilling & Explorat (Google  Yahoo  Earnings  Chart
MG125,Oil & Gas Equip & Services (Google  Yahoo  Earnings  Chart
MG130,-Metals & Mining- (Google  Yahoo  Earnings  Chart
MG131,Steel & Iron (Google  Yahoo  Earnings  Chart
MG132,Copper (Google  Yahoo  Earnings  Chart
MG133,Aluminum (Google  Yahoo  Earnings  Chart
MG134,Industrial Metals & Minerals (Google  Yahoo  Earnings  Chart
MG135,Gold (Google  Yahoo  Earnings  Chart
MG137,Nonmetallic Mineral Mining (Google  Yahoo  Earnings  Chart
MG342,Farm Products (Google  Yahoo  Earnings  Chart
MG517,Diagnostic Substances (Google  Yahoo  Earnings  Chart
MG627,Metal Fabrication (Google  Yahoo  Earnings  Chart
MG628,Industrial Electrical Equipmen (Google  Yahoo  Earnings  Chart
MG636,Heavy Construction (Google  Yahoo  Earnings  Chart
MG712,Resorts & Casinos (Google  Yahoo  Earnings  Chart
MG739,Catalog & Mail Order Houses (Google  Yahoo  Earnings  Chart
MG768,Technical Services (Google  Yahoo  Earnings  Chart
MG812,Personal Computers (Google  Yahoo  Earnings  Chart
MG815,Networking & Comm Dev (Google  Yahoo  Earnings  Chart
MG838,Scientific & Technical Instr (Google  Yahoo  Earnings  Chart
MG847,Diversified Communication Serv (Google  Yahoo  Earnings  Chart
MG851,Internet Service Providers (Google  Yahoo  Earnings  Chart
MG852,Internet Information Providers (Google  Yahoo  Earnings  Chart


How to improve IBD200

From the Members Only site

The central principle behind the IBD 200 strategy is equity selection. An in depth understanding of that helps you understand why it works and how to make it work better.

The IBD 200 is basically top 4% stocks ranked by Composite Rating. Or in other words they have 96 plus composite rating.

Now lets look at component of composite ratings. There are two component to it financial related and price related.

Financial related

sales growth
pretax and after-tax profit margins
return on equity

Price Related

Relative Strength
Industry Rel Strength
Stocks price relative to its 5 week high (IBD takes those within 15%)
Accumulation Distribution

Now if you look at these factors closely highest weight is to Relative Strength. You will see even a 65 EPS rated stock in IBD 200 but if you look at Relative Strength ratings it will never be less than 90. Plus Industry Relative weight is again a derivative of Individual stocks relative strength.

So the most important attribute of the IBD 200 stocks which make them work is relative strength.

Now consider the other fact, the IBD 200 stocks are not necessarily the top 200 stocks in the market rated by IBD 200. In fact if you study the top 200 stocks by just Relative strength over a period of time IBD 200 members will be between 50 to 60% of that. So if you trade top 200 stocks just by relative strength and use same rules, you would still make money.

How does it matter to you as a trader whether a stock is going up because of financial factor or it is going up for any other reason. All you are interested in is capturing part of the move from a fast moving stock.

Now if you understand and internalize this logic, you will be able to trade IBD 200 based approach more profitably. In my second post I will talk about how to trade the top relative strength stocks and why I personally no more trade IBD 200. And how you can trade IBD200 without having Investor's Business Daily.


Negative Action

Below the surface select few stocks yesterday had high volume down days. In many cases some sectors like trucking and financials there continues to be selling pressure.

Select Stocks Down on High Volume
ACIW,Aci Worldwide Inc (Google  Yahoo  Earnings  Chart
ARGN,Amerigon Inc (Google  Yahoo  Earnings  Chart
BCRX,Biocryst Pharmaceuticals (Google  Yahoo  Earnings  Chart
CBS,CBS Corp Class B (Google  Yahoo  Earnings  Chart
CC,Circuit Cty Strs Inc (Google  Yahoo  Earnings  Chart
CLC,Clarcor Inc (Google  Yahoo  Earnings  Chart
COT,Cott Corporation (Google  Yahoo  Earnings  Chart
INFY,Infosys Technologies Ads (Google  Yahoo  Earnings  Chart
ISLN,Isilon Systems Inc (Google  Yahoo  Earnings  Chart
JBHT,JB Hunt Transport Services (Google  Yahoo  Earnings  Chart
JCOM,J2 Global Communications (Google  Yahoo  Earnings  Chart
KSP,K-sea Transportation Ptnr (Google  Yahoo  Earnings  Chart
LQDT,Liquidity Services (Google  Yahoo  Earnings  Chart
MAIL,Incredimail (Google  Yahoo  Earnings  Chart
MLHR,Herman Miller Inc (Google  Yahoo  Earnings  Chart
MNRO,Monro Muffler Brake Inc (Google  Yahoo  Earnings  Chart
ODFL,Old Dominion Freight Lne (Google  Yahoo  Earnings  Chart
PGNX,Progenics Pharm Inc (Google  Yahoo  Earnings  Chart
PLCM,Polycom Inc (Google  Yahoo  Earnings  Chart
SFN,Spherion Corporation (Google  Yahoo  Earnings  Chart
SLP,Simulations Plus Inc (Google  Yahoo  Earnings  Chart
SMTS,Somanetics Corp (Google  Yahoo  Earnings  Chart
SWIR,Sierra Wireless Inc (Google  Yahoo  Earnings  Chart
VDSI,Vasco Data Security Intl (Google  Yahoo  Earnings  Chart
VSE,VeraSun Energy Corp (Google  Yahoo  Earnings  Chart

Buying Opportunities

Below the surface there were 140 bullish breakouts in my scans. There is no shortage of opportunities for long positions currently.

Some Selected Buy Signals:

APOG,Apogee Enterprises Inc (Google  Yahoo  Earnings  Chart
CAAS,China Automotive Systems Inc (Google  Yahoo  Earnings  Chart
CPSL,China Precision Steel Inc (Google  Yahoo  Earnings  Chart
EFUT,E-Future Info Tech Inc Ord (Google  Yahoo  Earnings  Chart
EXAS,Exact Sciences (Google  Yahoo  Earnings  Chart
HYGS,Hydrogenics Corporation (Google  Yahoo  Earnings  Chart
MNG,Miramar Mining Corp (Google  Yahoo  Earnings  Chart
NTCT,Netscout Systems Inc (Google  Yahoo  Earnings  Chart
OSIR,Osiris Therapeutics Inc (Google  Yahoo  Earnings  Chart
PKE,Park Electrochemical Cp (Google  Yahoo  Earnings  Chart
ROCM,Rochester Medical Corp (Google  Yahoo  Earnings  Chart
TMY,Transmeridian Exploration Inc (Google  Yahoo  Earnings  Chart
TRE,Tanzanian Royalty Exploration Corp (Google  Yahoo  Earnings  Chart

Market Monitor

  • After two days of red hot momentum, market had a rest day yesterday.
  • There is action on both side currently. There were stellar blowout moves on over 35 stocks . There were some nasty reversals also.
  • The kind of action we saw yesterday is normal action after few days of excellent momentum. Short term players take their profit, overextended stocks reverse. This sets up for further gains as earlier gains are digested.
  • Dip buyers will be active in the market and we should see further upside fueled by cash on the sideline.


Some nasty reversals

While overall action was very positive, there were some very nasty high volume reversals. In many of these cases , these stocks had a high volume breakout just a day earlier. Stock specific catalyst will start to come in play once the overall euphoric mood settles down.

Stocks down 4% or more on high volume

AIR,Aar Corp (Google  Yahoo  Earnings  Chart
AOS,A O Smith Corporation (Google  Yahoo  Earnings  Chart
ARO,Aeropostale Inc (Google  Yahoo  Earnings  Chart
ARTE,Artes Medical Inc (Google  Yahoo  Earnings  Chart
ASX,Advanced Semicondctr Ads (Google  Yahoo  Earnings  Chart
CALM,Cal-Maine Foods Inc (Google  Yahoo  Earnings  Chart
CHIP,Verichip Corporation (Google  Yahoo  Earnings  Chart
CNQ,Canadian Natural Res Ltd (Google  Yahoo  Earnings  Chart
ECLP,Eclipsys Corporation (Google  Yahoo  Earnings  Chart
EGLE,Eagle Bulk Shipping Inc (Google  Yahoo  Earnings  Chart
ETV,Eaton Vance Tax-Managed Buy-Write Opportunities Fund (Google  Yahoo  Earnings  Chart
FTO,Frontier Oil Corp (Google  Yahoo  Earnings  Chart
HNAB,Hana Biosciences Inc (Google  Yahoo  Earnings  Chart
HOV,Hovnanian Enterprises A (Google  Yahoo  Earnings  Chart
ID,L-1 Identity Solutions Inc (Google  Yahoo  Earnings  Chart
IDEV,Indevus Pharmaceuticals Inc (Google  Yahoo  Earnings  Chart
IIIN,Insteel Industries Inc (Google  Yahoo  Earnings  Chart
IMB,Indymac Bancorp Inc (Google  Yahoo  Earnings  Chart
KMX,Carmax Inc (Google  Yahoo  Earnings  Chart
MAS,Masco Corp (Google  Yahoo  Earnings  Chart
MCGC,Mcg Capital (Google  Yahoo  Earnings  Chart
NIS,Nis Group Co Ltd (Google  Yahoo  Earnings  Chart
NTRI,NutriSystem Inc (Google  Yahoo  Earnings  Chart
NZT,Telecom Cp Of New Zealnd (Google  Yahoo  Earnings  Chart
PBY,Pep Boys Manny Moe&Jack (Google  Yahoo  Earnings  Chart
PQ,Petroquest Energy Inc (Google  Yahoo  Earnings  Chart
PWAV,Powerwave Technologies (Google  Yahoo  Earnings  Chart
QI,Qimonda AG (Google  Yahoo  Earnings  Chart
RHD,R.H. Donnelley Corp (Google  Yahoo  Earnings  Chart
RNT,Aaron Rents Inc (Google  Yahoo  Earnings  Chart
SILC,Silicom Ltd (Google  Yahoo  Earnings  Chart
SIRI,Sirius Satellite Radio (Google  Yahoo  Earnings  Chart
SNDA,Shanda Interactive Ent Ltd (Google  Yahoo  Earnings  Chart
SU,Suncor Energy (Google  Yahoo  Earnings  Chart
SVN,Sun-Times Media Group (Google  Yahoo  Earnings  Chart
SYNM,Syntroleum Corporation (Google  Yahoo  Earnings  Chart
TEL,Tyco Electronics Ltd (Google  Yahoo  Earnings  Chart
THRX,Theravance Inc (Google  Yahoo  Earnings  Chart
TTG,Tutogen Medical Inc (Google  Yahoo  Earnings  Chart
UBA,Urstadt Biddle Properties (Google  Yahoo  Earnings  Chart
USU,Usec Inc (Google  Yahoo  Earnings  Chart
WINN,Winn-Dixie Stores Inc (Google  Yahoo  Earnings  Chart
WSM,Williams Sonoma Inc (Google  Yahoo  Earnings  Chart
WZEN,Webzen Inc (Google  Yahoo  Earnings  Chart
XMSR,Xm Satellite Radio Hldgs (Google  Yahoo  Earnings  Chart