This Market is Tough To Buy

Since the "flash crash" on May 6, the market has had a difficult time gaining any traction. Its first rebound from that fall was a fairly obvious dead cat bounce, which I shorted as it approached the 50 day moving average. Sure enough, it fell after that and I covered pretty quickly.

My mind-set has been fairly negative since. I just haven't been able to accept that the market can climb back into the saddle and head for new highs after that terrible down day May 6. I continue to keep this mentality until the market shows otherwise - that's trading.

Consequently, I bought the market (options in SPY are my favorite vehicles of late) on June 8 after an upside reversal. While the market finished down the next day, it continued higher after that, and I promptly sold my positions. When the market is having a difficult time, it moves fast in both directions, so taking reasonable gains fairly quickly is prudent.

My strategy has been to let the market rally back up to the 50 day moving average or resistance level close to that area and then turnaround and short again. Because I was trading the SPY, I never kissed the 50 day. If I had traded NASDAQ or DOW vehicles I might have had a chance to get in.

I really thought the market might have rallied more than it did recently and didn't expect to truck to new recent lows quite like it has. Sticking to the plan and not just diving in wrecklessly is the best way to grow and preserve cash.

I wish I was in this week's downtrend as I have not felt the market is ready for a full blown rally at this point, but because I let it play out (i.e., look for rally to resistance level that never happened), I stayed out and made some money along the way.
What now? If you don't have a position in the market itself, the indexes, it's a good idea to not get in to one until we have some clarity on a short term direction. The market seems to be saying it will play at these lows or go lower, but it isn't offering a reasonably entry, from my perspective, at this point. A rally to certain levels would, and I'll revisit this in the near future (maybe I'll do some posts while on vacation in Laughlin/Lake Havasu nexxt week).

As far as IBD style break out stocks go, hold your fire. If you have any positions that are not currently profitable, get out. If you have profit in any stock, only hang on if you feel very strongly that it will hang tough and stay profitable as the market works out a new near term bottom. However, I'd be inclined to be out of all break out positions right now and just let the market do its thing.

There will be some good swing trades in the near term that aren't IBD style break outs that I'll look at. Gold seems to be hanging on and wanting to go higher. I still have positions in that as well as silver. One could argue that silver is etching out a cup with handle while gold is already in a steady uptrend after breaking out from a cup with handle.  I'm keeping a watchful eye on both, especially since I felt silver had cleared resistance recently (see one of the posts below) and was ready to go higher, only to see it revisit this resistance level.

One quick thought - if you are good at short selling, it's possible we start seeing some IBD style shorts set up. These are tricky, and I confess I haven't mastered the art of shorting stocks using Bill O'Niel's approach, as laid out in "How to Make Money Selling Stocks Short". It's a good read, but finding short candidates is challenging that meet O'Niel's critearia.

Essentially, stocks he likes to short in the book set up in head and shoulder patterns. The shorting opportunities come when the stock rallies back above the 50 day moving average on try 2 or later and then falls back down through teh 50 day, preferably on volume (after creating the left shoulder and head and rebounding from a fall from the head, and carving out the right shoulder). There are a lot of details to this approach, but if we are in for a sustained downtrend, start looking for shorts.

Have You Developed a Watch List?

If you have a watch list, it may be wisest to keep it as that: a watch list to draw from if this market shows more strength. So far so good, however. Just remember the market is beholden to news and is coming off the bottom of a nasty down move. We could simply be in what turns out to be another little rally in a bigger bear market. We haven't hit bear market levels, but it isn't that far away.

As a stock trader, despite the mixed signals of this market, it is always worth taking a shot at a trade which is setting up if you think there is a chance of a rally working out.

The way to play it is to test the market with a pilot position and see how it works out. If this market rally is for real, there will be plenty of time to find solid stocks readying for a break out.

My watch list so far includes the following stocks:

AVGO - Already broke out, but within buy range
LULU - Broke out but pulled back today in heightened volume. Great story to this one.
ULTA - Broke out of odd, choppy boxy base, but I think Nicolas Darvus would like this one...
CSTR - Intruiging one, watch for rebound off 50 day moving average (only 9% ROE)
ROST - Cup with handle (lowish sales)
URBN - Cup with handle
WYNN - Cup (sales 23% most recent quarter, would like to see more)
CLR - High handle forming?
SKX - Broke out of cup, but only heightened volume - high handle forming?
LZ - Cup forming
TPX - Cup forming. One of my favorites so far despite choppy pattern.
ALTR - Cup forming
NFX - Cup forming, but prior uptrend a little soft
MFB - Cup forming, good group, could use some volume for a vote of confidence
VLTR - Cup forming, hot group
VRX - Cup forming, been a hot stock in a currently cold group

This watch list is just a starting point. I will be vetting each stock and waiting to see which ones break out on solid volume. It's possible I move in on LULU or AVGO as my pilot position. I will let the market develop some more as I dip a toe in.

Update on Swing Positions

I felt it necessary to follow up with my earlier postings Monday about my positions.

SPY: sold all positions at the end of Tuesday's move, not because I think this rally is over, but mostly because my options were June options. I may pick up some more SPY July options Wednesday if the market pulls back some.

SLV: sold all positions today for essentially no gain and no loss. I actually didn't mind SLV's move today and might have held if I had July options. But again, I had June options and decided it was wise to take a scratch trade with only two days left to pull the trigger. If SLV breaks above $18.35 (not the actual price of silver), I may pick up some July calls with a stop below the $17.86 or so price level. This $18.35 level (green arrow pointing at it on the image below) offers some resistance and could be a decent little break out play (no, not quite like IBD, but similar and only for a little move higher) with a good probability of working out.

GLD: sold some positions, again because they were June options. I do have some July options that I'm holding. Made decent percentage gains on the June options. I still have a couple June options in the GLD that I may unload tomorrow and perhaps buy some more GLD July options soon.

I'm not a gold bug, I don't store gold bars in a secret hole in the ground in my backyard, and no I don't think a Book of Eli style apocolypse is coming or that a depression is on the way like some gold fanatics think. Yet it is difficult to argue with the uptrend in gold when you look at its chart. It is currently trading above its December 2009 highs after digging out a large six month cup base.  I have posted the GLD chart again here and you can see for yourself. You can see the upward posture with a quick glance even if you are brand new to investing. So how do you play uptrends? Don't chase, but rather buy when it makes sense, like a pullback to the trend channel or off a bounce to a short term moving average like the 8 EMA or 21 EMA. IT's possible we get a pullback to the 50 day moving average and still be in an uptrend. Or you could even play a break out to new highs, but don't expect gold to act quite like a stock would when breaking out. Keep a close eye on it and stick with reasonable stops. I will risk 50% on an option (I generally buy in the money options with deltas of 70, something I learned from another trader) with the idea that I'm aiming for at least 100% gain or more. But that 50% stop can come fast, and a disciplined investor will stick with those stops no matter what. On the chart I've posted for GLD, the yellow line is the 8 EMA, the blue is the 21 EMA and the red is the 50 day moving average. The white is the 200 day. This is generally the same color scheme for all charts I post from http://www.freestockcharts.com/ a great resource.

USO: still holding my options. USO looks like it wants to go higher. USO, or oil really, is following along with the stock market, so my game plan is to hang on for  a bit.

New positions: none yet, but I am looking for IBD style break out stocks, as these offer the most powerful moves. Will update soon.

A Real Rally This Time?

No one knows the answer to the title. However, the market has logged positive behavior and is in a rally. It's difficult to say how long or strong it will be, so just let it unfold as we go. If you see top rated stocks breaking out in higher volume, this will be an excellent sign.

If nothing else, it would be prudent to expect at least a brief, even spirited rally back up to key resistance and trend lines like the 50 day moving average. I first jumped in and bought June options one the SPY on June 6 and sold them today for a nice percentage gain. I sold because I held June options (I should have purchased July options) which expire Friday, meaning I had to make a move between today and Thursday.

Having said that, if you are a bold swing trader, a purchase on a slight pullback tomorrow may be a savy move if you are ok with short term volatility, which could present itself.

What does this mean for break out stocks, IBD style? Be cautious. If you are bold, take a small pilot position in a stock breaking out and see how it behaves. If the market improves and the stock rises on nice volume, maybe pick up a little more as long as you aren't chasing it (over 5% from buy point). I plan on doing this as soon as I zero in on a good prospect.

Be prepared for anything in this market, which means have stops in place and protect that capital. It's been a tough market and one could easily argue the path of least resistance in the long run is down. But markets have a way of fooling investors, so be open to the possibility that we could go higher. It may sound somewhat contradictory or noncommittal when reading this paragraph, but it's the reality in the market that conditions can change and you simply need to be nimble and ready to take advantage of this.

It's good to be aware of resistance and support levels, but don't prognosticate. Rather, anticipate and be a good listener and take what the market presents step by step. With stocks setting up in solid bases, know your buy point and be ready to act with conviction, and be ready to exit with as much conviction if you need to.

As IBD points out, all bull markets have started with follow through days, which we experienced today, but not all follow through days work out.

The Traders Expo Was Terrific

For those of you who didn't make it to the trading expo here in LA, it was a great show. There were many traders there offering their viewpoints on the markets, including Investor's Business Daily. There were so many opinions that it was like watching CNBC for a couple of hours. You would have heard all kinds of things, which can be a little overwhelming. When choosing an approach that works for you, stick with it and don't stray from it.

I choose to trade IBD style break outs primarily, and when the markets are not in an uptrend, I do short term swing trades based on methodologies that are in harmony with some of the ideas behind the mechanics of a break out stock (price and volume action, resistance levels, trend lines). I always cut my losses with a stop - preserving capital is the most important part of the battle. It's ok to load up on a position, as long as you keep a stop on it in case you are wrong.

One tool I ran across at the expo which I coincidentally only discovered online about a week ago is an online charting software that will allow you to view actual FREE real time data for stocks. It also allows you to view forex currency pairs and other screens. It has all kinds of indicators you can put on it and it will allow you to view your stocks in multiple time frames with multiple screens - again, all while providing FREE real time data (it can do this because it is ad supported, which I find perfectly fine as it is a clean interface).

It's called http://www.freestockcharts.com/ Check it out, you will love it.

Keep Your Watch List Sharp

Pardon the long delay in updating the blog. Being that my main vocation is running political campaigns, I was a bit busy ahead of the June primaries.

If you buy break outs in uptrends (I'll call it IBD style), you haven't missed anything.

Looking at the daily chart of the SPY below (the etf which tracks the S&P 500 index), you can see the price action of the market. IBD hasn't fired off a market rally indication yet, but the market's action shows positive behavior lately. To the naked eye, it shows some rounding bottom action. I'm not calling a near term bottom, but it could be enough constructive action to propel the markets higher for a short stint or even longer.

My personal view is the market could get a bounce higher, and who knows, it could set off a new rally. I'm doubtfull it will turn into anything meaningful just yet, but as always, let the market's action tell you what it is doing.

For this reason, I'm revising my watch list, which I'll post soon. A number of stocks in the IBD 100 list are showing potential to shoot higher if the market gives them the support needed.

While I wait for IBD style stocks to set up in bases and break out, I'm engaging in short term swing trades. I have bought call options in the gold etf, GLD, as well as silver, SLV. These are not IBD style plays, just to be clear. I'm just trading in ways I'm comfortable with (using good old fashioned price and volume action in conjunction with support and resistance areas and trend channels) while I wait on the bigger moves from break outs.

I may sell my SLV call as it doesn't show the same action as GLD. I originally liked the SLV because it plays catch up with GLD and GLD looked (and still looks) good, but it hasn't done much for me. In fact, I'm down slightly, while I'm up with GLD, so how's that with catch up.

The reason I liked gold has a fundamental background to it. Fear in the Euro primarily is the cause, and bloated budgets and high debt in governments around the world are creating tremendous uncertainty, causing gold to be a safe haven, almost alternative currency vehicle.


I also like the technical action. Looking at the daily chart, you could interprate a cup in handle that broke out on April 27. I announced this to our meetup group at the time, but even I didn't buy into it because the market was still showing upward potential and I was holding onto some stocks that had broken out.
 
 

 
After the market went into correction, gold launched into a new uptrend (with the support of the cup with handle break out) and I bought it on a pull back to its support area (near the break out level, or visually on the chart, along the bottom white trend channel line which marks the bottom of the trend's channel). You can see that it is slowly climbing higher and is hovering around its highs, similar to how good stocks that are going higher behave. When stocks or other financial instruments make new highs, they tend to want to keep doing that, and gold shows potential to do the same. I have no idea how long it will last, and that is the trick to trading: knowing when to take profits.
 
What I also like about GLD is that you can see some positive volume coming in on its recent breakout. To me, this is a nice confirmation that big money managers also like gold right now. To be clear, the GLD etf is a fund that buys gold and it alone does not cause the GLD to go higher or lower, but rather tracks gold, so it isn't as clear a supply and demand issue as it might be with a stock chart. But it is highly indicative that money is flowing into gold, and we know money is flowing into gold around the world.
 
Prior to this trade, I had shorted the market after the big break on May 6, when it rallied close to its 50 day moving average (the red trend line on the SPY chart above). I covered those positions recently, and am now long the market (again, just a short swing play for now).
 
Oil also shows potential, like the stock market, to go higher, perhaps up near $80 where it has clear resistance looking at a daily chart of it. On the below chart, I present the USO, an etf which tracks oil. The $80 crude oil level I refer to would be roughly equivalent to just above the $36 level of the USO. As with stocks, you can see where previous price action was, which now offers resistance since the current price is below that level. As a trader, it is a valid trade to attempt to make money off a move, in this case up to $36 or so on the USO (with a stop at a reasonable level if we are wrong) until it gets to an area it used to trade at often. This is resistance, and you can just see it looking at a chart. No fancy indicators are needed, although many traders use them to help time moves more precisely. Use what works for you. How did I decide to buy at these levels? Because it rebounded some off the bottom, made a recent high, pulled back and then broke out above that very short term high. Profit targets on these kinds of trades need to be tight, very much unlike IBD style stock break outs. This is a key point of difference between trading some instruments while I wait for IBD style stocks to break out and buying the actual IBD style stock break out. Upside potential on break out stocks in market uptrends is tremendous and open-ended. With short term trades, it's more defined by retracement moves and support and resistance areas.
 
 

Watch for Short Covering Rally

Sorry for not updating this post recently. Outstanding breakouts were few and far between during the previous rally, leading me to be in a hurry up and wait mode, which broke violently to a look for a place to sell quickly mode.

This is just a brief post to say I'm not long in individual stocks at the moment and neither should you be. I do like gold to the upside, but watch for a pullback over the next couple of days. It's trading lower tonight already.

More importantly, and the biggest reason for this post, is to watch for a strong short covering rally. As I write this, futures are up well over 3%. The S&P500 shows close to opening around the 1150 level. Don't get excited that the market is coming back and that it's time to search for breakouts.

That violent break last week is more likely a sign of much more selling to come. Be patient and wait if you only have skill in buying long-term break outs. If you are more adventurous, there is money in day trading, but this is difficult business.

What is likely to happen is the market will rally up to key levels and trend lines, then roll back over and selling will resume. I am waiting for a rally, and it currently looks like this will happen in earnest Monday, then start shorting the market close the 8 day moving average. This approximates to an area between 1155 and 1165 on the S&P500. This is not advice, this is just me telling you what I'm looking at doing. Shorting isn't easy.

But as always, let the charts tell you what is going on. Make sure you have stops in place at appropriate levels to protect your capital in case you are wrong in your trade. This is a crazy market right now, be cautious.

Setting Up Positions

I literally haven’t done a thing in this stock market in about two weeks. That’s because the market has barely inched higher, as investors seemed to be nervous of those Dow 11,000, S&P 500 1200 and NADAQ 2500 levels.


What I have been doing, however, is keeping a close eye on my watch list, which hasn’t changed much since I last posted it.

One new stock is ISRG, which I seriously started considering two days ago and bought today. I don’t often buy a stock the day before earnings, but I felt that strongly about ISRG. I’m writing this at 2am Friday the 16th, so I may be wrong by the time the market opens.

Normally, I’d say perhaps you should consider selling a stock if you don’t have any profit in it, and almost certainly if you have a loss in it if you are coming up on an earnings report. However, if you’ve done your research, have conviction in the stock and like its break out regardless of the earnings cycle, buy it.

In the case of ISRG, it was up 4.2% from its buy point, just inside the 5% range that is ok to buy a stock off a break out. Obviously I’d prefer getting it closer to the buy point, but I missed the move Tuesday, promised myself to catch up on research yesterday (Wednesday) and perhaps buy on a slight pullback, which never happened.

Because I have been familiar with ISRG and its highly innovative da Vinci robotic surgical system for a couple of years now, I completed my research quickly after yesterday’s close and pick some up on a very tiny pullback today. When you like a stock, buy it. It was up as much as 3% after hours on news it easily beat estimates and raised guidance, then went down almost 4%, only to finish down 2% after hours. We’ll see how Friday goes.

I mentioned Jim Cramer in the post prior to this – he expects a slight market pullback Friday or in the near term, but then expects to see it cruise higher after that. I wouldn’t be surprised to see a down day Friday, which could cause ISRG to pull back itself – but keep an eye on it if it does. How does it behave? It may offer up a bargain price. We shall see.

Another stock I picked up today was BCSI. It broke out of a 5 weeks tight pattern yesterday (Wednesday) on big volume. BCSI doesn’t have huge sales growth – in fact, it comes in at only 16% in the recent quarter. For this reason, I am really just looking at this as a short term play. I thought the break out was strong enough out of a great patter that it was worth getting in to. Plus, despite the less than spectacular sales growth, the fundamentals are solid.

However, the stock ended the day down, showing something of a negative reversal on volume – but on volume that was lower than the break out volume, and the stock finished higher than the buy point. Mixed messages. I have found in a good market, stocks can cruise higher despite a mixed signals. We’ll see how strong the recent buyers’ appetite is for the two aforementioned stocks.

This means I now own ISRG, CTRP (in lieu of PCLN) and BCSI. I sold my calls in ATHR and GMCR because they were expiring. Watch GMCR as it may set up in a 3 weeks tight pattern if it moves up about 40 cents Friday. ATHR, as I mentioned below, is in buy range, and I may pick some up.

What I often do in rallies when I’m confident in the market’s action is buy 4 or 5 stocks with the intent of whittling it down to the 3 I really like. I do this by spreading my money out, then selling shares in the stocks I don’t like as much (but which still may be good) and concentrating in the stocks that start showing strong action.

Some of this pruning (or outright exiting a bad position) could happen Friday.

Finally Some Solid Action

Wednesday’s market action was perhaps the best of the rally that began on March 1, as called by the Investor’s Business Daily. Ignore the scary headlines, the problems in Greece, people burying gold bars in their back yard – look at the buying. We had a big up day Wednesday and more importantly, the stock market’s leaders surged ahead. Now that’s a great sign.

Jim Cramer essentially made this point today on Mad Money by saying go ahead and hurdle the figurative road construction signs, detour signs, etc. that are thrown up by various pundits in the media and move forward with the rally. Incidentally, he’s calling for a Dow 12,000, which seems reasonable to me.

I haven’t put up many posts because I haven’t made any moves until today. Perhaps I should have jumped Tuesday, but many of the leaders moving that day were educational stocks, which are mostly extended.

Yesterday we saw semiconductors, among others, make big moves on the quarterly earnings report of Intel, which itself broke out of a 3 weeks tight pattern. Such stocks as MRVL, ATHR, CREE and POWI, to name a few, made big moves higher on strong volume. MRVL and ATHR are actually both still in buying range.

You could argue that MRVL is 7.8% extended from its $20.93 buy point in a cup with handle, but I felt that handle was a little sideways moving, which I didn’t like. It also went almost nowhere after the initial breakout on March 23, not unlike many leading stocks (one of the negative aspects of this rally). I prefer to look at Wednesday’s move as a break out from a cup shaped patter, which seems more definitive to me. Big volume move as it clears a recent, clear high of $21.76. By that standard, it’s only 3.3% extended.

ATHR is in a slightly different boat. It had a clear break out from a cup with high handle on day two of the rally, March 2. But, like with most leaders, it essentially went nowhere fast. The day after the break out marked the recent high just before it fell to the 50 day moving average where it found support and shot higher – allowing for another purchase. By that standard, rather than being 7.2% extended from it’s $37.93 cup with high handle buy point, it’s only 3.4% extended from it’s rebound buy point of $39.24.

I may pick up some MRVL tomorrow, but I may also pick up some ATHR. Tough call as they are both in the same space (semiconductor manufacturers). ATHR shows slightly stronger fundamentals, but MRVL’s recent daily technical action is quite strong. Yet when you look at the weekly action, ATHR shows steady volume support. Thus, I may decide on ATHR in the end. One feature I very much like about ATHR is that it’s a young company. It went public in 2004 compared to 2000 for MRVL. I like young companies with hot new products showing tremendous growth.

The Rally About Nothing

This rally hasn’t been much fun. Stocks are breaking out, but then going nowhere. It’s good to see a stock break out on nice volume (except for LULU, a discussion for later), meeting all or most of your criteria for buying. What isn’t fun is then seeing that stock go nowhere. It enticed you, showed interest in moving higher, then nothing. It’s kind of like that girl (or guy) who shows interest in you, gives you her (his) number and then doesn’t call back or commit to going out, but doesn’t tell you they aren’t interested.


Often the opposite sex won’t tell you they aren’t interested, leaving you to wriggle, but the stock market, like people, does allow you to move on to greener pastures. Stocks will also tell you if they aren’t interested by dropping below their buy points. This has been rare. It’s also been difficult to just jump into a different stock.

This is why I haven’t put up too many posts lately. Not much to report. Most of my watch stocks are still there. Some continue to work on bases, some bases are melting down, and others have broken out to mostly just sit there after breaking out. Only GMCR from my watch list has really moved higher, but not much (again, I’m not going to talk about LULU for now… it broke out on no volume, only to cruise higher after an earnings beat).

Keep watching, but also keep your stocks on a short leash. The market has flashed a number of sell days in a short period of time.

What I'm Watching Now

Ok, time to get down to business and look at some of the best stocks in the stock market.
Our current rally, which began March 1, as pronounced by IBD, hasn’t seen any real screamers, or “rockets” as IBD referred to them. These are stocks that break out and then go on an immediate tear, making you wish you had jumped in.

Instead, many stocks broke out, then consolidated gains by essentially going sideways in quiet trade.

While we’d prefer our stocks to take off, this has been constructive action. The market’s action the past two days is also showing us there is some serious buying going on, so hurry up and pick some good looking stocks and go with them.

I’ve said it before and it’s still the case: there aren’t dozens of great stocks in nice consolidation patterns to have to choose from. This makes sense as we are coming out of a severe recession.

If you run some stock screens or look through IBD’s IBD 100, you’ll see a number of stocks that have good ratings, but their recent sales and EPS growth is questionable. The most common problem is that sales are lagging, while EPS looks ok. Be careful: many of these stocks have great looking EPS growth because they’ve been cost-cutting and are also coming up on easy comparisons to last year.

When trolling for stocks, look for those with both solid EPS and sales growth that also have good projections. If you are deciding between two stocks with similar sales and EPS in the most recent quarter but one stock shows projections for flat EPS or negative comparisons and the other has projections for over 25% growth, go with the latter. These true growth stocks usually give you the best chance of nailing a big winner.

Here is a list of such stocks:

AIXG (double bottom with handle)
AMZN (cup with handle)
ASIA (cup with handle)
ATHR (cup with high handle, broke out, still in buy range)
CTRP (cup with high handle)
GMCR (flat base break out; slightly extended now)
MELI (cup with handle)
MRVL (cup with handle, just broke out, 1% above buy point)
PCLN (cup with high handle, broke out, still in buy range)
RUE (cup with high handle break out; slightly extended now)
The stocks above are all showing over 25% growth in their recent quarters with the normal strong fundamentals I want to see. They aren’t all perfect. For example, some don’t have the 17% return on equity (ROE) you’d like to see, but you often have to accept that not everything is perfect.

The stocks represent my favorite (not in an emotional, but rather in a rules-based way) stocks that are near buy points or are buyable right now.

Stocks that I also like but I’m not necessarily going to pull the trigger on are:

AAPL (cup base, broke out, slightly extended)
LULU (cup base, broke out on light volume, up 9%)
FIRE (cup with handle)
LFT (maybe double bottom? Needs time, may kick from list)
VIT (broke out of “V” shaped base, almost triggered 8% sell rule)

So why do I have these lists broken down this way? I run stock screens using IBD’s Daily Graphs service (Custom Screen Wizard) and come up with the top stocks from a fundamental perspective. I then go through each one, looking at their charts to see if they are anywhere near a buy point, then I check out their projections for the next two quarters.

After I have a short list of candidates, I start conducting serious, in-depth research on the ones I like best initially and move down the line.

Picking among the best is difficult, admittedly. For example, why didn’t I buy AAPL? It’s up about 6% from the buy point, looking just fine. I demurred because I just don’t see AAPL doubling in the next 90 days. No, I don’t expect this from my stock buys, but I would like this possibility. AAPL is a huge stock, it takes a lot of money to move it and it’s not exactly an undiscovered company. 903 funds own the stock. Where is the new money coming from? It will likely go higher; I just don’t think it will scream higher like other stocks could. Also, its break out was on above average volume, but not the 50% higher indicative of big money flowing. I would consider AAPL if other stocks weren’t really moving or showing signs of moving, hence it’s still on my watch list. I see utility in it.

LULU was a difficult one also. Young company, great growth, nice chart. But it broke out on average volume. None other than Bill O’Neil himself talked this stock up last week when I saw him speak. He seemed to like it (I have no idea if he personally owns it or not, he was simply talking it up), but volume didn’t come in until March 12 – 6 days after its break out, and up over 5% from the break out. Tough one. Volume hasn’t been seen since either. But it’s absolutely worth watching.

Meanwhile, the first list above has some stocks that either broke out on volume or are setting up rather nicely. And, a handful of them are young by stock market standards (these include AIXG, ATHR, CTRP, MELI and RUE). History shows stocks often make their big moves in the first 8 years of going public.

I continue to update my watch list. Every day I have looked for new ones, and as this rally progresses, I’m certain we’ll see a few more gems emerge.

The Past 7 Trading Days

I went silent for the past 7 trading days, largely because nothing was happening. A few stocks broke out and then consolidated their gains immediately. The market leaders were largely quiet, so there was not much to discuss.
And that’s good, because during that time, I had the opportunity to visit an E-Trade stock seminar held at the Renaissance Hotel in Hollywood last week. The big draw was Bill O’Neil.

O’Neil was the lead-off hitter of the event as he opened with a discussion on his CANSLIM approach to stocks. I have to say, it was pretty cool to see him in person for the first time after reading about him for years and using his approach successfully.

To see him still going at it himself, giving a morning lecture and selling his CANSLIM approach (and the IBD), was interesting. You’d think he’d be sipping exotic drinks on a tropical beach somewhere by now.

His routine was exactly the same as what I’ve heard on radio and online interviews. It’s his book boiled down to a 30 minute or so lecture, which is good: it’s consistent.

It was also interesting to see people huddle around him afterwards, asking for him to autograph a copy of his book – many of whom had never even read it.

I’ve known a lot of people who read the IBD regularly and have tried many approaches to buying stocks, but still haven’t grasped all that is involved in buying stocks on break outs. And this crowd demonstrated why. People don’t do their research. They don’t read books. They don’t have rules for buying and selling.

Ignore Noise: Look at Market Action

I’ve made it a habit to ignore the many pundits out there who throw their opinion around about where the market is going to go. Looking at the market’s recent action, what does it tell you? Stocks surged the past couple of days. Last Friday, which was a distribution day (lower in higher volume), came on quadruple witching.


This options-expiration-driven selling is not unusual and doesn’t upset the market’s general ascent. A down day here and there on volume is tolerable, so long as they don’t ad up to too many, too fast.

So when I happened to visit CNBC.com to check on a couple stocks’ EPS projections, I couldn’t help but notice a big scary article about how a few market pundits thought we were “due” for a 5% pullback or so.

The markets instead have promptly moved higher. And they are doing this despite some negative news out there. This is a classic sign of a healthy market. Healthy markets blow off the negative news and cruise higher on the good news. Bad markets do just the opposite.

As far as deciding when and how much to get in goes, let the market’s current action tell you and decide accordingly. All you can do is play probabilities because no one has a crystal ball – and this is true for anything in life: starting a business, meeting a girl/guy, planning a vacation or seeing a movie. You never know what will happen, but you can go into the venture knowing you did your homework and that you stand a good chance of seeing your decision work out positively.

I can tell you what I am doing: I’m getting in. I dipped my toe in the market with some GMCR, it worked out and I bought more. I also picked up some PCLN. These are two excellent stocks with knock-out fundamentals and terrific charts that tell us the story: big money is flowing into them.

Will they absolutely work out? Who knows. But I do know that given their fundamentals, their story and their technical action, they are in good company as they match up well with great stocks that have come before them. All I can do is play the probabilities, cut my losses if I’m wrong, and ride the winner(s) if I’m right.

Watch List Getting Stronger; No Real Casualties Either

The watch list I posted yesterday is holding strong with many of them quickly moving higher as if to challenge their recent highs. This is exactly what you want to see. Ideally, these stocks will rise on stronger volume, indicating the big players are snapping up shares.
Some stocks on the list are too extended. SXCI is one such stock.

Others are offering buying opportunities after having broken out. I like IBD’s method of allowing 5% room after a breakout to buy the stock – but try to buy as close to the buy point as possible. One stock that offered a chance to pick it up at a discount from its recent break out is VIT. It’s Chinese, so it has the tendency to zip one direction or the other in short order. It sits about 2.5% above its buy point after today’s pullback. However, it pulled back in heightened volume, which isn’t a positive occurrence, but then again, being a volatile Chinese stock, it could just as easily reverse and pounce higher. I’ve seen it happen many times before with Chinese stocks. Nonetheless, it’s a negative, and it only reinforces my caution since it broke out from a “V” shape base.

“V” shaped bases are less desirable because they potentially didn’t spend enough time at the consolidation’s bottom shaking weaker holders of the stock out. Consequently, when it breaks out at a higher level, it will have more of a tendency to peter out as these weak holders sell to get quick profits.

I continue to search for stocks to ad to my watch list. You never know when a stock you really like fails suddenly, leaving you in a position to recommit your capital to another top prospect.

Currently, I’m in GMCR and PCLN. Perhaps ATHR tomorrow? I liked today’s behavior, and I like the movement of the industry as a whole.

Stocks Under $10

A discussion with a friend of mine over the historic pricing of stocks prompted me to run a screen for quality stocks under $10. Usually, this is an oxymoron. I generally don’t buy stocks under $10 because they are usually garbage stocks. What I have noticed, however, is that some stocks I have bought out of consolidations rose up out of the single digit range to then form a basing pattern over $10.

After running my screen of the entire stock market, I came back with 6 stocks. I’m not going to list all of them because at least 4 of them I wouldn’t consider buying. But one did stand out as worth looking at.

Why bother? I have to admit, sometimes they shoot up quickly to over $10 where people with real money (hedge funds, mutual funds, insurance companies, etc.) start paying attention to them. But single-digit stocks tend to be highly speculative in nature, so you really have to do your homework.

The one stock I liked on the screen I ran is CHOP. I haven’t done a complete research package on it, but take a look for yourself. It’s a Chinese steel producer, so there is that potential Chinese octane. It has the highest possible 99 EPS rating and is showing strong EPS growth and strong recent sales growth.

Two major flaws I can find with it right off the bat are 1) it is estimated to make less money per share in 2010 than it did in 2009 and 2) only one major fund is listed as owning shares in it. This second aspect may have changed recently since it is a very new stock.

One thing I do like very much about stocks under $10 is that they often have small market capitalizations and fewer shares outstanding. This makes it vulnerable to price swings as it doesn’t take much money to push the price down – or up very quickly. This is a double-edged sword, however. At only $315Million market capitalization, it’s difficult for real stock market players (who control three out of four dollars invested) to push money into the stock. So for now, the smaller investor will have to do the heavy lifting if it’s to take off.

Off To the Races: My Quickly Evolving Watch List

After running several different screens for stocks and trolling for those I may have missed in screens, I’ve developed a lengthy watch list. The list does not include stocks that are extended from break outs, of which there are a few. I will later post a list of high quality stocks that are off to the races and should be followed in case they pull back to their 50 day moving average, which would offer a secondary buy point.


Many stocks have come out of the wood work with their recent earnings reports. Not too many high quality stocks were available only a few months ago. With the world economy improving, we’re seeing it in the bottom line of stock exchange listed stocks. One particular statistic that has been lacking of late is the recent sales growth number. So very few stocks exhibited 25% or higher sales growth in the most recent quarter, let alone in the past three quarters.

While still anemic, we are seeing this figure more often. In fact, all the stocks listed below except one have over 25% EPS and sales growth in the most recent quarter. The one exception is VIT, a Chinese tech outsourcing firm that grew its earnings only 21% last Q and sales 44%. However, it is projected to have 45% sales growth next Q and 40% EPS growth.

In healthy bull markets in stronger economic climates, I would certainly insist on seeing three quarters in a row of 25% EPS and sales growth year over year (and accelerating at that), but in the situation we find ourselves in, that’s a tall order. So, while I favor stocks that do have this quality, I will accept a stock that does not so long as the current quarter shows 25% EPS and sales growth or very close to it, and it must show projected EPS and sales growth over 25% for the next quarter. Typically, if I do jump in on a stock like this, I want it to have much higher than 25% growth ahead of it – I’d look first for those triple digit growers and favor them.

For now, the idea is I can accept that even some of the better companies hit a slow patch in the down economy, but the exceptional stocks should begin showing tremendous growth going forward. I favor growth: the higher the better.

Of the stocks listed below, I’ve done recent comprehensive research packages on ATHR, CTRP, FIRE, GMCR, LULU, PCLN and VIT. I focused in on these stocks because they were closer to breaking out than the others for the most part. I will next focus on MRVL, NTAP, POWI, RUE, SXCI and WCRX because they are the next closest (a couple have already broken out, so I’ll need to move fast). Keeping up with the market is a difficult challenge as it moves quickly, and I never like to buy a stock without fully investigating it.

The list below describes the type of consolidation the stocks are going through and the buy point (BP). I will only own a few stocks at a time, so whittling the choices down isn't always easy. At the moment I prefer GMCR, PCLN and ATHR, but have my doubts about ATHR, and am eyeing a few others like RUE, FIRE & DBRN.  I have brief notes on each for my quick reference, but my actual research packages are full of information and notes. The buy points of the stocks can easily change as the consolidation continues. For example, MRVL is in a cup formation, but it could also have formed a handle. If it shot above the high of the handle on over 50% volume, I’d consider buying it. The cup with handle is the most powerful formation.

I only buy a stock on a break out if the volume on the day of trading is 50% or higher than the average daily volume. LULU did not break out on 50% or higher volume, therefore, I did not pull the trigger on it. It could go on to form a high handle, but I’m doubting that at the moment.

My watch list (changes daily):
AAPL BP: $215.69 Broke Out Cup, near buy point

AMZN BP: $146.01 Basing - cup

ASIA BP: $32.55 Basing – cup. RS only 73, needs accumulation.

ATHR BP: $37.93 Broke Out Cup with high handle, near buy point. Keep an eye on: hovering for days around its buy point.

CTRP BP: $39.92 eased above, then reversed; improper action. Might remove from hot list.

DBRN BP: $26.81 Broke Out Cup, within 4% of BP.

FIRE BP: $28.10; could form handle with $27.29 BP

GMCR BP: $86.95 Broke Out Flat Base, near buy point

HITK BP: $29.99 Basing – cup. Needs accumulation; projections beyond next Q weak

LFT BP: $41.87 Basing – cup. RS line only 65 for now. Needs more accumulation. Chinese stock, smoother than many other Chinese stock charts out there.

LULU BP: $33.05 Eased above buy point on average volume; improper action. Will remove from watch list unless it starts forming high handle Wednesday.

MELI BP: $55.85 Basing – cup. Base needs a lot of work.

MRVL BP: $21.86 Basing – cup. Is that a handle forming? If so, BP: $20.93 and could blast off any day.

NTAP BP: $35.09 Basing – cup. RS only 76 and consolidation needs more accumulation.

PCLN BP: $235.90 Broke Out Cup with high handle, still near buy point. Keep eye on.

POWI BP: $37.25 Broke Out Cup. Still near BP, but only 70RS rating.

RUE BP: $31.62 Broke Out Double Bottom base. Big daily swings, only 58RS rating, quite low. Brand new stock.

SXCI BP: $56.30 Broke Out Cup all in one move. Over 6% extended, but pulled out past two days, may offer chance to buy with another dip.

VIT BP: $21.93 Broke Out “V” Shaped Cup. 6.7% over BP, but has gone up 12 days in a row: could easily pull back and offer chance to buy if desired. Chinese.

WCRX BP: $29.34 Basing – cup. Prefer seeing more accumulation.

Like A Popcorn Machine

Last post addressed looking for confirmation that the current rally is sustainable and worth jumping into. Last week’s action was unclear, until Friday when we saw definitive upward movement and more quality stocks breaking out. Today, while the market was quiet, we saw more top quality stocks break out – it’s like a popcorn machine, seeing these stocks pop on their daily charts.


This kind of action should enhearten you. When many stocks form consolidations then break out above resistance levels on significant volume, it’s indicative that big money is moving into stocks. You will notice in a good uptrend that stocks of all caliber break out and move higher. Stocks don’t all have to be top rated with over 25% EPS and sales growth to break out – when you see stocks with even just good fundamentals and slightly above average numbers breaking out, like 26% EPS growth and 15% sales growth in the most recent quarter, it’s a great sign.

The best stocks, those stocks that climb the highest the fastest, will generally sport the best numbers. So while above average stocks begin breaking out all over the place, I focus in on the truly exceptional. The more growth the stock has, the better. The more unique and new the stock’s product, the better. And if it’s a young stock with these qualities, all the better still.

A list of notable breakouts will be posted shortly.

The Good, The Bad & The Ugly

I just posted before this under “Market Hesitating” that you should wait until we see some clarity. One exceedingly helpful way of looking for more clues as to the nature and health, or lack thereof, of the market is to investigate how the market’s leaders are doing.


Many pundits out there (think CNBC) may consider the big, established, well-known industry behemoths such as McDonald’s, General Electric or Microsoft are the market leaders.

Not so. Those big stocks don’t have that much upside anymore because they’ve matured. Their big growth days are behind them and stability (and dividends) are in front of them (or are they? Big leaders are also prone to failure in down markets, if our recent bear market did not remind you of that already, but that’s for a different posting).

The real market leaders that you want to key in on are the usually younger companies that have tremendous growth potential in front of them. I’ll focus in on five market leaders to give us a representation of the nature of market we are seeing right now.

These stocks are, FFIV, PCLN, GMCR, ATHR & WDC. These stocks can be known as The Good, The Bad and The Ugly. FFIV, PCLN and GMCR are The Good, while ATHR and WDC represent The Bad and The Ugly, respectively.

Let’s start with The Good. FFIV is one of the better moving stocks right now. The last three days of technical action just give me butterflies. Up each day, finishing at the top of the range and on increasing volume each day. This stock would have been a little tough to spot if you did a search since the sales only show a 15% increase in the most recent quarter, but its ratings are terrific, its balance sheet sound and its projections show great growth ahead. It deserves more research – but it’s now extended almost 9% from it’s $56.29 buy point, too far up to chase unless you get lucky with a pull-back while the market is in a rally still.

PCLN and GMCR aren’t faring so well, but can still be considered among The Good since their action post break out is acceptable, if not great. Each stock has top-notch fundamentals and have led the market this year in technical action. PCLN is acting only slightly better. It broke out on good volume, but its next two days show hesitancy, just like the stock market as a whole. GMCR broke out on nice volume, but the next day’s action, as you can see on the chart, is a pull-back in softer trade. This is OK, but not great. You really want to see a nice follow-on day after a convincing break out.

ATHR, currently the role of The Bad, broke out on nice volume, but rose, then immediately fell the next day on big volume. From a technical point of view, the movement is an engulfing action as the day’s range is more than the break out day’s – this will give some technical chart readers a heart attack. If you are buying growth stocks on break outs, it’s not enough to panic, but it really calls for serious watching. It could reverse course, as I’ve certainly seen happen before, but for now, it’s bad action and really disappointing as it is a great stock in a hot, hot, hot industry group which has led this market (other stocks in the group include CREE, SNDK & VLTR).

WDC represents The Bad. It’s just bad because rather than rising in price and approaching its recent high, it is initiating a new leg down on heavy volume (just look at its weekly chart; bad down movement last week) and its relative strength line is sagging. It could eventually shape a double bottom base, but for now, the action is uninspiring.

The stocks mentioned here are a good snapshot of the market. They show some initial positive movement, then immediate stalling, just like the overall market. This process helps confirm what we see in the bigger picture and can help guide our decisions. For now, keep an eye out. Sure, some stocks like FFIV will succeed, but it looks like the odds are slightly against that kind of immediate strong action as they are few and far between even among stock market leaders. Things can change quickly, however, so keep developing your watch list as I am.

Market Hesitating: Direction Unclear

So far the market has lived up to expectations: indecisive. I noted when the market staged a follow-through as called by the Investor’s Business Daily that there were mixed signals. True to form, so far in the 3-day old rally, we don’t very well know if we are going up or down.

You can just see it on the chart I’ve posted here. Note Monday’s action is the beginning of the rally. See how the market has behaved the past two days. On the day after the rally began, Tuesday, the market went higher, then faded and closed near session lows. This wasn’t ideal. Then on Wednesday, the market moved higher again, only to end at the bottom of its range, actually down a tick on the NASDAQ.
This kind of action is clear hesitation, which is clearly nothing. That’s just the way you have to look at it. No real reason to commit a lot of capital right now, but no reason to be scared that the market will tank. It’s just indecisive. Therefore, stay focused and let the market indicate which way it will start going and act accordingly. I still have my test option in GMCR until I see more reason to ad to the position or liquidate.

Testing the Market: An Option in GMCR

I wanted to post a few charts online today, but the service I use for my premium charts is Daily Graphs, which is provided through Investor's Business Daily, wasn't working today. This happens sometimes, unfortunately. Their product is indispensible, and the only other charting service I use is a program provided by Tradeguider, which allows investors to draw any number of trend lines and other tools on their charts. Unfortunately I'm having a technological calamity at the moment, and my Tradeguider software is locked away in a hard drive for my main trading computer, which failed.

So we move on today without charts. Try trading without a working chart program - how did they ever do it in the old days? Jesse Livermore actually hired a staff who charted quotes from the ticker tape onto a chalk board. But I digress.

Even without my charting programs, I dipped my toe in the market by purchasing an option in GMCR that was in the money. GMCR broke out of a flat base today on very strong volume. Buying a small option rather than the actual stock is sometimes my way of testing the market to decide if it is worth jumping into.

Rather than tie up some money in a stock, an option allows for tremendous leverage, and depending on your tolerance, without offering up too much risk. So if you use a small (by your own standards) option order that you don’t mind losing a substantial amount of, but see strong potential for upside, the option allows you to have some meaningful skin in the game, which is important for keeping your interest and focus up.

IBD suggests as a way to test the market buying a smaller portion of your regular position in a stock, such as a half or third, and if it goes higher and the market proves itself over the next several days, buy more. One problem with this approach is that in reality good stocks often just gallop away from you and your decision time is a very tight window. Buying a stock and waiting to see if it goes higher can happen over a few hours rather than a few days. Buying an option at least allows decent profits if the stock does go higher quickly when you haven’t fully committed to the market.

Assuming this position is a winner, one can then keep an eye on other stocks that are looking ready to break higher to the path of least resistance. If it’s a real rally, there will be time to find some good stocks even though oftentimes many of the best lead the way from the outset.

Market Stages Follow Through: Rally Technically Under Way

What does that mean? It’s the Investor’s Business Daily (IBD) proprietary indicator that the market is technically in an uptrend now. My instincts were that the market has shown some positive action, but has also shown some negative action, equaling a cautious view.


That’s what the IBD states in their Big Picture column on their website tonight. They note, however, that high quality stocks have broken out in the past few days on good volume, ahead of the break out. I had noticed this as well (Priceline was indicated here, which went on to form a high handle that it broke out of Monday), and I know it is not unusual for some stocks to break out ahead of or right on the day of confirmation that the market is in a rally mode.

Other prognosticators and market pundits have their own models to determining when the market is generally predisposed to go higher or lower, but I find IBD’s is quite accurate and provides a good timing mechanism for buying break-out stocks.

One interesting note, all three major US indexes have formed a cup with handle pattern. The NASDAQ moved above it’s handle’s high on volume today, while the S&P 500 moved above in lower volume and the DJIA didn’t move above its. The indexes do not act the same way as individual stocks and it is not important that they exhibit the same chart patterns we look for in a stock, but it helps explain why we are seeing so many cup with handles in individual stocks. Many stocks follow the market’s direction and their charts often reflect the overall market.

I’d have to look this up, but I recall once the IBD showed the stock market indexes forming a cup with handle break out which kicked off a previous market years ago. Just something to think about.

At any rate, I often give a market rally time to prove itself unless I am really excited by the follow-through day and previous market action. I may wait a few days or a week or so. A couple times in the past, I’ve jumped right in. Right now I’m on the fence and would like to see some more positive action. However, if I see a stock that shows really nice movement, I may dip my toe in right away.

Keep Your Powder Dry

Tuesday’s market action should have reinforced your resolve to stay out of this market until we get some confirmation that it will go higher. Because three out of four growth stocks follow the market’s direction, the odds are against you if you dare wade into a market in a correction.

The market showed a little promise recently, but it has been rejected at the 50 day moving average, a key trend line. Looks like big investors aren’t big buyers right now. Hold tight and let the market tell you what it’s going to do.

MELI Voted Off the Island?

I recently put MELI on my watch list as a stock worth keeping an eye on because of its solid fundamentals and potentially sound consolidation pattern. However, Tuesday it took a huge hit in big volume, indicating serious selling.
While it found support at its 200 day moving average and finished the day in the upper half of its range, the action should give one pause. It’s possible it could recover or form a double bottom (but you wouldn’t want it to go much further below its recent bottom), but it gets pushed off my hot list for now.

If you didn’t have a chart to look at, you could easily conclude that it’s a sound company given its results. 136% EPS growth and 47% sales growth would make any company happy, but these results missed expectations. That’s all it takes.

Additionally, MELI has felt the “Hugo Chavez” effect. Because the socialist dictator-in-the-making devalued Venezuela’s currency, it cost MELI $7 million in revenue. Ah, the joys of Latin American stocks. How many other stocks have exposure to Venezuela? Makes one wonder.

For now, MELI has been voted off the island.

Essential Reading List - Start Right Now

Read, read and read some more. This is a common trait of successful stock investors. Nicolas Darvas, who himself wrote a book How I Made $2Million in the Stock Market (and that’s two million 1959 dollars!) read over 200 books on investing.

Perhaps you can’t find the time for 200 books; that’s fine, Darvas was an overachiever. You can gain a perfectly firm foundation in stock investing with a handful of good books. All the others you read will help to keep your mind sharp and tighten your skills.

I get asked all the time what books to read, and I tell people, and have even bought people these books, and they almost never read them. Guess what? You know the answer. So at least read a core group of books and you’ll be ahead of the curve and gain an edge in the market. I’ve known plenty of professional stock brokers who haven’t read many books and who haven’t educated themselves on the different approaches out there.

My essential recommended reading list (focused on growth investing) you should tackle before investing serious money is as follows:

The Dow Theory, Robert Rhea
Reminiscences of a Stock Operator, Edwin LeFevre
The Battle for Investment Survival, Gerald Loeb
How I Made $2,000,000 in the Stock Market, Nicolas Darvas
How to Make Money in Stocks, William O’Neil

While I think you should read books on different styles of investing (value investing, technical analysis, dividend plays, etc.), I prefer investing in stocks poised for tremendous growth, and this reading list favors this approach.

The Dow Theory might be the toughest to get through as it is a bit dry and somewhat dated, which makes it a little unclear. You have to excuse, or put into historic perspective, the book’s heavy emphasis on the railroads, which were a much more significant element of the American economy over 100 years ago. Nonetheless, the book serves as a nice explanation for stock market movements from the eyes of none other than Charles Dow and a long-time editor of the Wall Street Journal, William Peter Hamilton. These two wrote numerous articles explaining how the market moved and how to interpret these moves. This work put into book form the essence of Dow’s theory, which is still fundamentally applicable today.

My favorite book on the list is Reminiscences. It is a thinly veiled account of the life of the famous stock investor, Jesse Livermore. It’s a colorful read in narrative form of Livermore’s life, sure to entertain and educate.

Gerald Loeb’s work is a good one for general stock market themes and the wisdom of investing, not so much for a specific system. Perhaps the most important piece of advice in the book is cutting your losses religiously, and the keen observation that stocks which make new highs generally continue to do so, while stocks that make new lows generally continue to do so.

Darvas’ book is a lot of fun to read. It’s a blow by blow account of a man who educated himself in becoming a truly successful investor, and who did so despite traveling the world as a professional dancer in the late 50’s without the internet, cell phones, computers or even up to the minute information (he had stock quotes wired to each hotel he’d be staying at each day).

O’Neil’s book opened the world of investing to me. If you were going to only read one book, read that one (even though my favorite read is Reminiscences). O’Neil is very much like Darvas in that he educated himself and researched heavily to develop his theories. O’Neil actually studied the exact buys of the best funds in the country to discover what they were doing. He ordered their records and found some of the best funds were purchasing shares of stocks that were hitting new highs – counterintuitive to many investors. He catalogued thousands of stock charts and poured over them, discovering a timeless movement in winning stocks. Buy his most recent book and you’ll see for yourself the actual stock charts of companies from the late 1800’s to today in there. You will be amazed at how the stock patterns repeat themselves in each bull market. It speaks for itself.

I have some of these charts (and the original stock certificates) framed on the walls in my home to remind me of these winners.

PCLN: A Watch Stock, But Watch the News

I focus on one of my watch list stocks today, PCLN. It has been a rock star this year as the chart below shows (IBD's Daily Graphs is a service any serious stock investor must consider subscribing to - I wouldn't invest without it). It was a great stock before the bear market, took a dive like pretty much all the stocks out there, and then regained its old form.

The number of funds owning shares has cruised higher by 22% in six months, an encouraging sign. Weekly accumulation is clear on the chart and it sports a B- in the IBD’s accumulation/distribution rating, which is just fine.

The earnings of this company are fantastic. It’s annual earnings are projected to grow 30% this year and 20% next near, just what you want to see (I like to see at least 20% in the current year). It has shown two quarters of accelerating EPS growth with a third projected for next quarter (50%), and it shows three quarters of accelerating sales with the possibility of a fourth in a row.

Technically, the chart looks nice. It had a great uptrend before forming its current cup pattern. The current consolidation shows two net weeks of accumulation and it’s break out week, last week, shows a volume spike on the weekly chart – just what you want to see. It suggests big money is flowing into the stock. It technically broke out of a cup base Thursday and has backtracked on light volume since. Because the market is in a correction, i.e., it isn’t saying it’s ready to go higher, I didn’t pull the trigger on it. It could go on to form a high handle to the current pattern, and if it does, the buy point would be $235.90.

But what do you do when a negative news story comes out about a stock you are stalking? Tuesday’s IBD has a feature article on Priceline and Expedia possibly facing headwinds in their growth. It basically says even the CEO of Priceline openly acknowledges that comparisons will become tough as we move forward, and economic conditions may not favor such future stupendous growth as we’ve seen in the past.

Investors have become quite familiar with Priceline, so expectations are great – this means it likely needs to beat earnings estimates by a very healthy margin to not continue moving higher.

So what do you do? This is part of the art of investing. I may shine it and take my chances with less uncertain stocks that still show no signs of slowing. We’ll see.

My Current Watch List

There are a number of stocks with great fundamentals setting up in consolidations right now, a great sign. As mentioned in previous postings, not long ago it was tough finding stocks with excellent fundamentals that were going through constructive basing patterns. It is encouraging to see so many more, although no where near what it was like during the height of the previous bull market.


My current watch list includes the following stocks:

ATHR
PCLN
WDC
GMCR
CTRP
HMIN
LULU
AIXG
NTAP
GIL
MELI

This list was developed from scouring all the stocks listed on the NASDAQ, the NYSE and the AMEX. I use a stock screening software provided by the Investor’s Business Daily (IBD) Daily Graphs company. I am still developing my watch list, as I am always looking for new additions to my watch lists. The general criteria for the list above was that they were in the top 20% of all stocks in terms of EPS rating, top 20% in Relative Strength rating and composite rating (a proprietary ranking methodology of IBD’s) and that they had at least 25% EPS and sales growth in the most recent earnings report. I also set a minimum for rate of return, an important component for determining the financial health of a company.

As you may infer, this list is not based on emotional attachment to an industry group or an old favorite, it was developed based on how the stocks are currently behaving. It is based on where the money is flowing. Astute thinkers and observers of economics and business practices, many stock investors forget a basic fundamental of stock investing: supply and demand. How ironic that we all are taught this basic aspect of capitalism, and in microeconomics specifically, yet most forget to apply this to the stock market – a monument to our capitalism itself!

Money flows into and out of stocks necessarily affects the current price of a stock. Therefore, another key aspect of how I develop watch lists, and which stocks I favor on my own watch lists over others, is the number of shares outstanding and whether a stock is being accumulated or being sold off. IBD offers the Accumulation/Distribution rating, a proprietary measurement that suggests whether the big players are buying the stock or not. But you can also see accumulation and distribution by just looking at a stock’s chart. That’s why I don’t like stock chart services that do not indicate this key aspect clearly (can I get a mobile phone app that shows volume!?!).

After I’ve developed a watch list, I create research packets on each stock that includes balance sheets, analyst opinions, projections, news stories, profiles of the company and other such pertinent information.

Once I’ve decided on which stocks I like best (I usually prefer the stock that shows most earnings growth), I wait until the stock breaks out when the market is in a confirmed uptrend.

Keep an eye out, the market is showing some positive action. Don’t try to predict where it goes, simply react to it once it tells you where it goes.

ATHR Setting Up in Cup Base; Fantastic Fundamentals

With the stock market’s action suggesting it wants to go higher out of this current correction, you should have an active watch list of strong stocks once the market officially begins a new uptrend. I have found the best tool for deciding when to begin buying stocks again is the Big Picture found in the Investor’s Business Daily (IBD). Their methodology for tracking uptrends and corrections is a great way to get in and out of the market safely.

One outstanding stock setting up in a cup-shaped pattern is Atheros Communications (ATHR). It could go on to form a handle to the cup, which is the most powerful of chart patterns to buy off of. But for now, the buy point to the cup is $37.44 plus $.10 which makes the buy point $37.54. I only buy a stock once I see volume surge 50% on the day it breaks above the resistance level, which in this case is $37.54.

ATHR is showing outstanding fundamentals. It has 3 quarters in a row of accelerating earnings per share (EPS) and sales growth. Projections are for 733% EPS growth next quarter and over 100% sales growth. This is absolutely what you want to see in a leading stock.

At 14% return on equity (ROE), it’s a little shy of the 17% or more I’d prefer seeing, but it’s not bad. Institutional ownership has grown in the past few quarters, a great sign, and the relative strength (RS) line is at a new high – all fantastic. To top it off, it’s a leader in its industry group, which is running strong right now.

There’s much more to say about this company, but as usual, do your own background research. I have it on my watch list and am continuing with my research as I am deciding which few stocks I’d buy if the market enters a new uptrend.

Some Big Picture Perspective

We are now taking a break after a tremendous run-up from the bottom of the housing/financial bubble bear market, which is the 4th most severe bear in at least 100 years.

Much of the bounce off the bottom of this Panic of 2008 was a re-pricing of beaten down stocks from major investors who had priced in depression-level, worst-case scenarios in companies representing all sectors of our economy.

As it became apparent that we were not headed for a depression, the big money (mutual funds, pension funds, etc.), which controls over 70% of the money in the stock market, began entering the stock market once again. Many stocks did an about-face from their harrowing slides and headed upward, creating deep “V” shaped charts.

The stock market itself, represented here by the S&P 500 chart, shows a deep “V” shape to it.

For the individual growth investor, it was essential to wait for a clear signal off the bottom of the bear that the market was ready to go higher. There were so many abrupt bounces off of false bottoms through the bear market, that one had to be exceedingly patient for the bear market to exhaust itself.

The opportunity finally came shortly after the bottom of March 2009. One serious problem was that the economy was in such bad shape, it was difficult finding quality stocks. In a healthy bull market, one has a difficult time picking between several stocks showing tremendous earnings per share and sales growth. In the after math of a bear market, one has a difficult time just finding stocks that show strong earnings per share and sales growth.

Now that we find ourselves approaching a level just below the level in the stock market marked by the Lehman Brothers collapse, the number of healthy growth companies to choose from is much better than just a few months ago. Challenging older levels seems much more reasonably with better fundamentals.

We are in a correction, which provides an opportunity for growth stocks to set up in proper basing patterns, digest gains through minor corrections and shake out weaker investors, and hopefully run higher after a break out above pivot points.

Now is the time to be searching for fundamentally strong companies setting up in constructive technical patterns. I’ll be posting such companies here over the coming days.