Market in strong up-trend; Beware the bearish media pundits; Gold’s “sudden” decline


All of my indicators remain positive. Most important, the QQQ has now closed back above its 10 week average price, after closing below it last week.   It is amazing to me how many of the media pundits are saying the market is too high when the SPY and DIA have just broken through their green line tops to all-time highs.   When a stock or index does this, it often is followed by a multi-month rise.   While a rise is not guaranteed, the index or stock should   stay above its green line level.   If it fails, like GLD (see example below) and AAPL did a while ago, then I would expect a major reversal of the-up trend.   The critical key is to not anticipate a change in trend, but to react after the signal is evident.   Such is the goal of the trend-follower. Take a look at these weekly Guppy charts of DIA and SPY.   They both have the RWB (red, white and blue) rocket pattern.



Even the QQQ is in an RWB up-trend, although it is far below its green line top, around 119, reached in March, 2000. QQQguppy04122013

If these RWB patterns fail and the GMI flashes a sell signal, then I would reassess the market trend.   For now, I must assume that the up-trend will continue. I am therefore using TC2000 to scan for promising stocks. I ran my scan that looks for a daily new high that also has technical strength and recent good earnings increases. Here is the list of 7 stocks that came up based on Friday’s action.Newhighscan04122013 Interestingly, two are in the same sub-industry, SFLY and LNKD, which I own.   The blue flag on the left indicates that LNKD and WOR have shown up in one of my IBD stock watch-lists.   A glance at the monthly charts for these stocks shows me   that WY and SFLY are close to breaking though their green line tops to an all-time high.   The other five stocks have broken above their green line tops in the past few months.   Thus, all of these stocks are worthy of my subsequent review for possible purchase.   No one knows which of these stocks, if any, will rocket higher.   The key is to approach every purchase as if it will fail, and to have a ready exit strategy that will minimize losses. One successful trader I read has said that one could probably trade profitably by picking stocks by trial and error, as long as one quickly abandoned the losing positions with a small loss.   As he did, I use technical analysis instead of trial and error. The Wall Street maxim, cut your losses and let your profits run, is still sage advice. The GMI stats appear below.


By the way, gold tumbled last week.   If you take a look at this monthly chart of the gold ETF, GLD, you will see that this decline should have come as no surprise.   GLD has been below its 30 week average (weekly chart not shown) and in a Weinstein Stage 4 decline since February and its green lie break-out last July has failed and GLD has established a new green line top. I trust that none of my students would have been holding GLD, thinking it was a bargain as it fell. I suggest that the time to buy a stock or ETF is when it first breaks above a green line top to an all-time high, a sign of major strength. That is how the great Nicolas Darvas made a fortune. You can find his book listed to the lower right of this site. It is the first book that I assign to my college students.


By the way, the link to my free December TC2000 Houston webinar   appears to the right of this blog page and will provide you with an extensive introduction to my university class and trading strategies. I welcome your comments, please.

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An excerpt from my trading diary from the 90’s; Market at critical juncture? IBD declares new up-trend; ASPS and QCOR


“It continually amuses me how people call into these radio commentators and ask them for their advice about when to buy and sell, when all have shown an inability to predict these major declines.   Each day these sages offer new advice and wipe the slate clean from their past failures.   Perhaps we need a system of rating their past performance for listeners–but then no one might survive such scrutiny!   So far, these persons are telling the public to hang on because the market always comes back, in the long run.   But as many have said, we are all dead in the long run.   Noah, how long can you tread water?

 I am pleased that I have been able to avoid this decline.   If you ignore all of the media and opinions and merely look at what the market is doing, you can easily see the trend of the moment.   All of this interpretation gets in the ways.   Just watch the averages (stocks, bonds, interest rates)   and their trend lines.

 By the way, we just passed the anniversary of   the inception of this diary.   Happy Anniversary!”                           (Written by Dr. Wish, July 1996)


I wrote the above as part of a trading diary that provides my observations on the market and life during the great tech bull market of the late   90’s.   In reviewing it this weekend I was struck by the difficulty I had as I struggled to learn how to trade.   Even though I multiplied my IRA many fold over this time period, it was a very difficult journey.   Don’t let anyone tell you it was so easy to make money in that great bull market–it was not, at least for me. I wrote in real-time about all of the psychological demons that sabotaged my effectiveness.   The sentiment in the quote above was a large part of the reason I chose to start teaching a university course on the market and this blog.   I saw so many adults lose their hard earned savings by listening to the “buy and hold” urgings of the media pundits.   I wrote the trading diary ultimately to teach my sons about the market, but like many offspring, they appear uninterested in learning from their dad’s experiences. One day I might publish this diary for others who might seek to benefit from my musings.   Any interest???

I believe we are at a critical   juncture in the market.   There are many signs of strength and given the fear and bearishness all around us, I would not be surprised to see Mr./Ms. Market rally.   Indeed, one more strong day will turn my QQQ short term trend indicator up, after 44 straight days of a down-trend.   And as of Monday, IBD has now declared a new market up-trend. I have already closed out my short positions.   Based on next week’s action I will start adding QLD or QID slowly, consistent with the prevailing trend. If an up-trend begins, I will not weigh in heavily until the 5th day.   Most new trends that last 5 days can go on considerably longer.

87% of the Nasdaq 100 stocks closed Friday with their MACD above its signal line, a sign of short term strength. The T2108 indicator is at 39%, in neutral territory. There were 125 new 52 week highs and only 84 new lows on Friday, another sign of strength. If we have a strong day on Monday, the GMI will be back above 3 for the first time since May 2.   Two consecutive days with the GMI above 3 would turn the GMI signal to buy. One reason we might see a rally is the coming end of the second quarter and the anticipation for the release of earnings. End of quarter window dressing is suspected at the end of each quarter as mutual funds are believed to buy up the recent winners and “dress-up” their portfolios for their quarterly reports to investors. (The quarterly reports conveniently do not specify when and at what price portfolio holdings were acquired.) I will therefore focus on the strongest stocks if the market strengthens.

Speaking of strong stocks, I have been writing about ASPS for some time.   Last week it broke to a new all-time high, as this monthly chart illustrates. (I have a position in ASPS.)

The green lines show the tops of multi-month bases.   ASPS has just broken above a 4 month base.   People often tell me that they want a stock that will climb higher but will not buy a stock that is at an all-time high!   They really should look at monthly charts of great stocks.   How many times do they hit all-time highs on the way up?   The key to findings winners is to look on the new high list each day as a starting point.   Then look at their monthly, weekly and daily chart patterns to weed out the weaker stocks.   Then go to IBD and do a stock check-up.   At least this is what I teach my students to do.   And then, by all means, after purchase, designate an exact   price to sell out if the stock fails to act as anticipated. By the way, ASPS also came up independently in my TC 2000 scan modeled after the trading strategy of the great Nicolas Darvas. His book, to the lower right, is the first one I assign to my students. It is a great introduction to the stock market and the many misleading myths about the market.

QCOR also came up in my Darvas scan, It has a similar break above the top of a multi-month base, as this monthly chart illustrates.   If the market continues to rise, I am watching both stocks closely for a possible entry or to add more. (Click on charts to enlarge.)

Other stocks that came up in my Darvas Scan are:   ULTA and SIX and ALXN.




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Nicolas Darvas, on the value of studying one’s trading losses; RWB stocks, COST, RVBD


I am reprinting below some of my writings from a few years ago in order to give my new students some understanding of my approach to the market.

“it is utterly useless for us on the outside, who buy and sell comparatively small blocks of stock, to conjecture about what “they” are doing.   We cannot know what the insiders intend to do, but we can see their orders on the tape when they execute them.   That is why my plea is for everyone of us to have no mere opinions of his own, but to allow the actions of the market to tell him what is passing.”

(Humphrey B. Neill, Tape Reading & Market Tactics, 1931, New York: B.C. Forbes Publishing Company; 14th printing, 2003, Vermont: Fraser Publishing Company)

When Nicolas Darvas was interviewed by Time Magazine in the early 60’s and it came out that he made almost 2 million dollars in the market in 18 months (while he was dancing around the world!), he noted that he read and reread Neill’s book (along with Gerald Loeb’s).   Neill’s book has been reprinted many times and I happened to find it on the shelf of my local Barnes and Noble store.   Neill dedicates his book, “to my losses, with a deep appreciation for the experience and knowledge which each loss has brought me.”

If anyone tells you that the market is different today, refer them to the successful traders from the 1929 post-crash era–Livermore, Baruch, Loeb.   Darvas, who made his fortune in the 60’s, clearly learned something from Neil’s original writings–and so have I.   (See list of books about these people to the lower right of this page.) Livermore used to say that when you have a losing trade, you were paying the tuition required by the market. As a college professor, I sometimes see students who pay tuition (more accurately, their parents pay) but are not focused on learning.   Losses can provide knowledge–but you have to study them.

Perhaps the most important thing I did a few years ago was, after a series of losing transactions, to print out their charts and write down my precise buy and sell points.   It looked like I had followed exceptionally accurate rules that flawlessly led me to buy at the top and sell at the bottom of moves!   So what did I do?   I reversed what I was doing and began to trade profitably.   Every great trader (including IBD publisher William O’Neil) urges us to study our losses.   However, most of us rarely do this important exercise in the market, or in other areas of our lives.

So, one of the major exercises that my class completes during the semester is to trade for nine weeks in a trading simulation   with a pretend $100,000 margin account.   They must keep careful records of all of their transactions and analyze them after the trading simulation ends to determine the technical mistakes behind their losses.   They then revise their rules for entering and exiting positions. We   should all review our transactions at least once per year……..

Meanwhile, the GMI and GMI-R remain at their maximum values. These two sets of indicators keep me on the right side of the market.   Most stocks follow the trend of the general market averages and it is absurd to fight the trend. There were 380 new 52 week highs on Friday in my universe of 4,000 stocks.   Buying stocks at new highs has been a good strategy lately;   79% of the stocks that hit a new high 10 days ago closed higher on Friday than they closed   10 days ago. The QQQQ (Nasdaq 100 Index) has been in a short term up-trend for 53 days.   And the longer term up-trend of the SPY (S&P 500 index ETF) and DIA (Dow 30 index ETF) has lasted for 21 weeks. The Worden T2108 indicator is at 67%, in neutral territory.   45% of the Nasdaq 100 stocks closed with their MACD above its signal line, a sign of short term strength.

It is therefore okay for me to have long (versus short) positions in this market.   My scan of the market has found a number of promising candidates.   Below is the weekly GMMA chart for COST. An RWB stock has all of its short term averages (red) above its rising longer term averages (blue).   This is a pattern of a stock in a strong up-trend. COST closed on Friday at $74.13, very close to its all-time high of $75.23. A close above $75.23 could be a sign of considerable strength for COST.   COST reports earnings on March 2nd.

Another RWB stock with a nice chart pattern is RVBD.   It looks like it bounced off of support recently and is not far from its all-time high.   If I bought RVBD, I would place a stop loss   below its 30 day average, around $34.95. The two “NA’s”on the chart indicate when IBD wrote about this company in its New America column, highlighting promising visionary companies. Next earnings for RVBD come out in April.

By the way, all of my students are required to get a student subscription to IBD and to read the newspaper daily.   IBD provides an abundance of technical and fundamental information about the types of growth stocks I buy.   Furthermore, most of my purchases come from stocks on their prior IBD 100 lists, now superseded by the IBD 50 list.   I never consistently made money trading until I started reading IBD in the 1980’s.

Introducing Red White and Blue (RWB) Stocks–The Pattern of Rockets


I identified the beginning of the new QQQQ short term up-trend on September 7th.   The GMI on that day registered   5 (of 6).   One of the lessons I learned from the great Nicolas Darvas is to use one’s own judgment and to insulate oneself from the news, media pundits and other traders.   He learned this lesson when he returned to NYC after making a lot of money trading while he danced around the world, only to find that he lost his objectivity and his ability to trade profitably   when he was in NYC around other traders.   By definition, when a new up-trend is beginning, most people will be expecting a continuation of the current down-trend or flat pattern.   In early September, when the GMI was flashing a buy signal, most people were talking about a double dip or head and shoulders top.   The key to being on the right side of the market is to observe closely what the market is doing.   I therefore fly on instrument and tune out everything else. Remember, Darvas used to get Barron’s in the mail and proceed to rip out all of the pages except the stock quotations.

And so the GMI remains at 6 (of 6) and the GMI-R at 10 (of 10).   The SPY and QQQQ have closed above their critical 10 week averages for four weeks.   The QQQQ completed the 14th day of its current short term up-trend on Friday. The Worden T2108 remains over 80%, which is near overbought levels, but it reached 89% in August, 2009. A high reading of the T2108 is not as predictive as an extremely low reading, below 10%.   82% of the Nasdaq 100 stocks had their MACD above its signal line, down from 94% last Friday. This indicator bears watching, because it is very sensitive to the short term trend. Note that buying stocks at new highs has been a promising strategy lately, with 71% of the stocks in my universe that hit a new high 10 days ago, closing higher on Friday than they did 10 days earlier (see the Wishing Wealth   Successful New High Index in this table). Most of the stocks listed on the lower right of my site have been powering ahead to new all-time highs.   I never can understand why most people who want to own a rocket, refuse to buy stocks trading at highs.   A rocket on the way to the moon has to hit many daily new highs along the way……

Speaking of rockets, I have coined the term Red White and Blue as a simple way of characterizing the weekly chart pattern of promising rocket stocks.   I derived this term from one of my students from last year (Marcus) who labeled three moving averages with these colors and wanted the red average to be above the white average, followed by the blue average.   I am applying these colors to   weekly GMMA charts a little differently, where the red lines are the shorter term averages and the blue lines are the longer term averages.   The key to a rocket stock is the presence of a white space between the rising short and long term averages.   It is this white space that shows me that the stock is likely to be a rocket. This pattern is universally applicable to rocket stocks. Below are two examples. (Click on charts to enlarge.)   In the future I will be discussing Red White and Blue (RWB) stocks.   Note that a submarine stock   is the opposite (BWR), with the shorter term averages below the longer term averages. In fact, CMI is a great example of a submarine stock that has transformed itself into a rocket.

Another RWB stock that came up in my Darvas scan is LOGM, which has been on fire since March. While I never know how long a trend will last and must always manage the risk of a change in trend, if I am going to own a stock, I want it to be RWB on a weekly chart.

Finally, IGTE shows that a stock can remain RWB for a long time. The key is to get on board and to sit tight, much as the great Jesse Livermore advised. If one has the patience to   ride a RWB stock for a year, one can calmly let his/her account grow, without excessive day trading and the accompanying stress that frequent trading creates.

I urge my students to paste copies of these stocks to their computer monitors and to compare all potential purchases to them. Accept no less!

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Going long—FFIV and other Darvas Scan stocks


Now that the GMI is 6 and many stocks are hitting new 52 week highs again, I am looking for strong stocks to buy.   As you know, I prefer to buy stocks that have already doubled in the past year and that are trading at or near their all-time highs.   I also want the stock to have appeared on the IBD New America or IBD100 list.   FFIV meets all of these criteria.   It is also a concept stock selection of my talented stock buddy, Judy.   The weekly chart has the technical characteristics I look for, although the stock is extended on a daily basis. Finally, the stock appeared on my Darvas Scan that identifies stocks that have many of the attributes he liked. Below is the monthly chart of FFIV showing that the stock has recently burst through its all-time high reached in late 1999. (Click on chart to enlarge.) I purchased a little of FFIV and will add to it if it keeps rising.   Other stocks that appeared on Wednesday night’s Darvas scan include:   OPEN, APKT, VIT, BIDU, NTAP, ARMH, HWK, GSIT and IDSA.   I own some of these.   Please do not ask me to post my Darvas Scan.   In the future I will post promising stocks that come up in my scans.

With iPad debut on the horizon, AAPL shines; Tech Up-Trend Continues, but QLD beats most IBD100 stocks again


Well, we will finally see if the iPad success is already built into the stock’s price.   While a lot of pundits think that the stock is over priced, a look at the monthly chart suggests to me that the stock has just broken out of a 2 year base.   This stock may have a long way to go now that it is at an all-time high.   I concentrate my buys on stocks that are at their all-time highs because there is no overhead supply of stock from sellers who bought at higher levels who are trying to get out.   Think about it, AAPL has come back from   the major declines of 2000-2002 and 2008.   That is a display of amazing strength.   It was the great Nicolas Darvas who taught me to buy stocks at all-time highs.   The monthly chart below

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Jim Cramer on stop loss orders–terribly wrong again! KCI soars; How I trade the 3X ETF’s


I am dumbfounded!     I recently taped some of Cramer’s shows and reviewed Friday’s show this weekend.   At about 10 minutes into his show, Cramer responded to a caller who asked him about the use of stop loss orders.   Cramer ranted on about how he did not want his “home gamers” to put their orders on “automatic.”   Stop losses, he said, were okay for professional traders but not for his listeners who are part-time traders not glued to the market, and who are not robots.   I had to listen to him several times to make sure I heard what he was saying, because his advice was exactly opposite to what I think people should do.   His reason for not using stop losses was that one might get whipsawed–buy a stock at 60, put in a stop loss order to sell if it falls to 59 and then have the stock fall to 58 and be sold out, only to reverse and close back above 60. But it is precisely the part-time traders who are not watching the market every minute who need to have automatic stop-loss orders. Traders who are glued to their monitors can watch their stock closely and manually sell when they want to. It is the part-time trader who get his head handed to him when his stock plummets while he is at work or in a meeting. In 2005, I lost a lot of $$$ profits when I went to a business meeting thinking I did not have to put a stop in on a very strong stock (TASR) I was holding. That mistake cost me big–the market always exacts its tuition, and we must learn from our mistakes.

I could not disagree more with Cramer’s advice.   Before I buy a stock, I calmly decide how much I will let it fall before I think I am wrong and how much of a loss I will tolerate.   In this way, this “home gamer” who   has a full time job, does not have to be glued to the monitor like a professional trader and can go about my business knowing that if my stock falls to my sell level I am immediately and automatically sold out.   Once I have my stop loss order in place, I have taken my emotion out of the trade. If the stock falls and I have taken a small loss, I can always go back in and buy it back if it shows renewed strength–now that’s smart trading!   Every small loss bring me to my next big gain.   It was the   use of stop losses that helped the great Nicolas Darvas (see his book below) to make a fortune in the market in just 18 months. It is how one keeps his losses small.

Put this advice along side a lot of other bad Cramer advice, including calling chartists morons and recommending stocks based on fundamentals alone that were later devastated by the 2008 market decline. (I think Cramer started showing charts for a while after he found that a lot of his fundamental/value choices tanked).

So, how do I put in a stop order?   Before I buy a stock I determine at what level I will have been wrong.   Since I am buying the stock at what I believe is the right time and assuming that it is in an up-trend, I should not tolerate much of a decline below my purchase price.   The best way to enter a trade is to assume it will go wrong, so that I can calmly prepare my risk control strategy in advance.   I select a price level based on prior support, at a moving average or a recent reaction low.   As soon as my buy order is executed, I   place an order to sell my newly purchased shares on stop at my predetermined loss price.   I typically place a GTC (good til canceled order) so that I do not have to put a new stop order in every day.   A day order expires at the close each day.   Now, once the stock trades at the stop price level I put in, the broker automatically sends the order in to sell my shares at the market.   I may or may not sell the stock at the stop order price.   The order goes in line behind other market orders and gets executed in turn at the best price offered.   The greatest risk from using a stop loss order is that if the stock suddenly trades far below the stop price (as in a gap down at the open the next day) one   gets only the best price that someone is willing to pay.   A good strategy is to cancel the stop order after the stock has advanced enough and to put a new sell stop order in at a higher exit price     to ensure I do not give back all of my profit. I do not use automatic trailing stop orders because I prefer to raise the stop price manually after carefully reviewing the stock’s technicals. If I am stopped out and the stock rises again I love to buy it back at a higher price than I sold it.   Such trades often are quite profitable because during the whipsaw, as the   shares decline, they are bought by others who then hold on for a larger advance. Many large advances begin after a sudden decline…….

Meanwhile, the GMI and GMI-R remain at their maximum levels.   As the table below shows,

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