“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.

• gmi: 6
• gmi-r: 10
• t2108: 67

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!

• gmi: 6
• gmi-r: 10
• t2108: 82

• gmi: 6
• gmi-r: 10
• t2108: 83

says it all (click on to enlarge).  After consolidating for 5 months near its all-time high, AAPL has finally broken out.  While there is no guarantee with stocks, most stocks that act this way have a long way to advance.  Look how AAPL climbed in 2007, once it broke out.  The iPad comes out next weekend and we shall see if iPad mania propels the stock. (I own it.)……..

Meanwhile, the GMI and GMI-R remain at their maximum values.  Some of my indicators have receded, though.  The Worden T2108 Indicator is now at 79%, down from 86% on Wednesday.  And only 46% of Nasdaq 100 stocks closed with their daily MACD (12/26/9) above its signal line, down from the 80′s last week.  Friday was the 26th day of the current QQQQ short term up-trend (U-26), by my definition.  During that time, the QQQQ has risen 7%, while the ultra long QQQQ ETF (QLD) has advanced almost 15% and TYH has advanced 13%.  During that same period, only 17% of the stocks on the IBD100 list published on 2/22 rose more than QLD did.  Again, I learn that it may be better to just ride the ultra index ETF’s than to try to find the few stocks that will beat it. The next time my QQQQ short term trend indicator turns down, I will probably go short QQQQ with the ultra bear ETF, QID.

• gmi: 6
• gmi-r: 10
• t2108: 79

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,

the QQQQ completed the 16th day of it short term up-trend on Friday.  Both the QQQQ and SPY index ETF’s closed above their 10 week averages for the second straight week, a sign of strength.  The only caution signs I see right now are the fact that 91% of the Nasdaq 100 stocks closed with their MACD above its signal line and the Worden T2108 indicator is now at 84%, not far from the highest levels it gets to.  So, in order not to lose my profits gained in this up-trend, I am moving my sell stops up a little.  Remember, in ancient Rome, the lions ate up all of the prophets!

Did you notice what happened to KCI last week? On March 1, I wrote that KCI looked like a bullish cup-with-handle pattern.  It’s up about 17% since then.

A reader asked me if it was dangerous trading the 3x ultra ETF’s, like TYH.  Yes it is, but only if I have too large a position and do not have a suitable stop in.  Since these ETF’s are designed to move 3x the daily move of the stocks they track, I always tiptoe into my position by buying in small amounts and averaging up.  So, I might start with buying a few shares and only add more after the ETF has moved up. I try to enter at the beginning of an up-trend, when no few typically expect the market to begin a sustained rise. It is at such times that I am most scared to go long. If I had the discipline to just buy the TYH  when my QQQQ short-term indicator turns positive, I would do quite well.  For example,  the current QQQQ up-trend began on 2/25 and QQQQ has risen by 6.2%, while TYH (the ultra 3x bullish tech ETF) has risen 15.5%.  Yes, TYH moves quickly, but I believe the actions I noted above bring  the risks down to an acceptable level for me.

• gmi: 6
• gmi-r: 10
• t2108: 84

First of all, I am interested in buying stocks again, now that the GMI has risen to 6.  Remember, I want to trade consistent with the general market trend-I must not fight the tide.  I only have an edge buying stocks when the market is in an up-trend, as shown by the GMI being at least 3.  Both Darvas and O’Neil stressed the importance of  trading consistent with the market’s trend–70-80% of stocks follow the general market’s direction.  Both tend to sit out the market in cash when the market’s trend is down.  One of the hardest things to do is to stay away from the market (at least from the long side) when the trend is down.

So, with the trend now up, I used TC2007 to sort my watch list (called stock universe) of 4,000 actively traded stocks above $5, by whether the stock traded at a new 52 week high on Friday.  I found that there were  222 new highs in my stock universe on Friday.  Next, I needed to find how many of these stocks were trading at or near their their all-time highs, defined as the highest price they have traded at in the past 10 years.  To do this, I set my chart to show monthly prices and space barred through each stock.  For each stock that was trading at or within a few $$ of the highest price it had traded at during the past 10 years, I flagged the stock by pressing the “F” key .  I then created a new watch list and copied the 32 flagged symbols into it.   I next unflagged the stocks in this new watch list and selected my watch list tab that includes selected fundamental and technical information, including quarterly and yearly earnings changes, PE, last closing price divided by close a year ago, % change in revenue last quarter, and P/S (price to sales) ratio (see  table below).

As I looked at this information for the  32 stocks, I found the following. A little more than one half (56%) of these stocks had an earnings change during the most recent quarter of +35% or more, with 22% having had at least triple digit earnings increases.  In addition, 38% had losses the prior quarter or blank fields because they had no prior earnings with which to make a comparison.  The PE ratios ran from 0 (no earnings) to 128, with 53% having a PE above 20. One half of these 32 stocks  were trading at twice the price they were trading a year ago. 38% had revenue (sales) increases the last quarter of at least 12%. P/S (price to sales ratio) varied from 0 to 40 with half being less than 2.

I next decided to re-flag (press “F” key)  each stock that had a most recent quarterly earnings increase of at least 30% OR revenue growth of at least 12%.  I then copied the flagged symbols into a new watch list which became my final watch list of stocks at all-time highs with good recent quarterly earnings or revenue increases.  The final watch list of 22 stocks appears in the table below, with stocks sorted by their most recent quarter’s % change in earnings.  I then unflagged the symbols in this final watchlist (right click in the box to the left of a symbol and choose unflag all symbols in watch list) , and went to another watch list I maintain that contains many of the stocks that have appeared in the IBD 100 lists  or the IBD New America column during the past year, and flagged all of the symbols in that watchlist.  A list of the New America stocks over the past few months typically is published in the New America section of IBD each Friday and the list of the IBD 100 stocks is updated each weekend and is available in their website (investors.com). Thus, when I returned to my new all-time high watch list, I knew that any flagged symbol was a stock that had been an IBD 100 or New America stock, indicating that the IBD analysts thought it was a strong or promising company. Interestingly, more than two thirds (15/22, 68%–CREE was added to my IBD 100 list today,  after I produced this table.) of the stocks that met my stringent criteria had been independently selected  as an IBD 100 or New America stock! (This is why I can often begin my search for great stocks by going to my lists of the IBD 100 and New America stocks.) 

Taking a look at the surviving 22 stocks in this table (click on table to enlarge) I can make some additional observations about these stocks.  For all of the stocks with earnings increases of at least +35.7% (column 2) but one (ISRG), their PE (column 5) is less than their earnings % increase for the most recent quarter.  This means that their PEG (PE to growth ratio) was less than 1, suggesting that the stock may be in a favorable price range to  people who use this statistic as an indication of a stock’s value. For example, CREE had a recent quarterly earnings increase of +166% and a PE of 86, giving a PEG of  .52 (86/166).  The PE is high, but the earnings growth is even higher.  Even ISRG has a PEG close to 1 (56/53).  (The table is sorted by  column 2, most recent quarter’s earnings change.) Note also that P/S (column 8, the price to sales ratio, analogous to the PE, but using sales instead of earnings) for half of these stocks is less than 2, another indicator of   value, to some.  Some technicians believe that sales are a better measure of a company’s performance than earnings, which can be more erratic. Where there is no value in the table, it means that there were no earnings with which to make a comparison.  Note  that there are a few companies that have relatively high earnings and revenue increases  (ALXN, BIDU, CREE, ISRG, NFLX).  These stocks might be especially good candidates for additional analysis. (Column 7 shows % change in revenue in the most recent quarter. ) Other characteristics that I would  look at next is trends in the volume of shares traded, recent news, next earnings dates, and the types of fundamental and technical information provided in the IBD Stock Checkup screen.

While it took some time to write (and read) these instructions, be assured that once you get the feel for TC2007 you will find that you can do this analysis in a few minutes each night…….

Now, the GMI and GMI-R are back to their maximum levels.  My short term trend count for the QQQ is now U-1, the first day of the new short term up-trend.  How long will it last?  Nobody knows!  So I buy and always keep an eye on the exits.  The QQQQ and SPY have now closed above their 10 week averages and 88% of the Nasdaq 100 stocks now have their MACD above their signal line. The Worden T2108 indicator is in a neutral zone, at 53%.   I own and am watching many of the stocks posted on the right of this blog, in the Stocks I’m Watching column. I wade in slowly to my positions.  One rule I like, is to enter every trade as if it might fail so that I have an exit plan ready and am not unprepared if the stock goes against me. The key to profitable trading is to have many small losses and a few large gains.

• gmi: 6
• gmi-r: 10
• t2108: 53

is at 5 (of 6) and the GMI-R is 9 (of 10). While the long and short term trends are up, the daily stochastics (10,5,5) for the major averages are in down-trends, suggesting some weakness in the next few days. I will hold off on making any new long purchases until the stochastics turn up again.

• gmi: 5
• gmi-r: 9
• t2108: 48

values.  With all of my indicators showing an up-trend, I must trade consistent with it.  For those who are still looking for possible growth stocks, I ran my “Darvas” scan that detects stocks near all-time highs with good last quarter earnings.  If I were looking for winners I would begin by researching the stocks on this list:  SXCI,DISCA,ROST,ARO,DLTR,LZ,GYMB,RKT,SWM,PEGA,EMS,NEU,WES,CBD,SCL,FFH………

• gmi: 6
• gmi-r: 10
• t2108: 89

And the more sensitive GMI-R is at 6 (of 10).  The recent weakness in tech stocks is evident in that only 16% of the Nasdaq 100 stocks now have their MACD above their signal lines.  And the Worden T2108 Indicator is down to 60%, in neutral territory.  But the QQQQ has been above its 10 week average for 14 weeks, and the SPY for 13 weeks.  To me, this is a real up-trend that I can ride.  So, I will accumulate QLD , the Ultra long QQQQ ETF, that strives to move 2x the QQQQ.  I might also nibble at TYH, a 3x bull tech stocks ETF…

In terms of individual stocks, I like the way HMSY and SYNA behaved last week and I own some of each.  I ran this weekend my “Darvas Scan” for stocks that I think have the fundamental and technical characteristics that the great trader Nicolas Darvas wrote about.  Among the stocks I identified are:  STEC, VIT, SYNA, HMSY, ARST, SXCI, BWY, NPK, PEGA.  My strategy is to make a pilot buy, place a sell stop at a technical point where I think I am proved wrong, and to add to my position only if the stock rises from my first purchase.  The idea is to take many small losses when I am wrong and to concentrate my money only  in a stock which is moving up as I anticipated.  I only buy growth stocks this way when the general market trend appears to be turning up, as now…………

• gmi: 4
• gmi-r: 6
• t2108: 60

The more that I analyze the market, the more I become convinced that I should rely on the longer term weekly trends to determine the market trend (see discussion of the Guppy chart below).  The QQQQ has been above its critical 10 week average for 11 weeks and the SPY for 10 weeks. But I have told you that I am a chicken, and would rather go to cash at the first sign of weakness and re-enter the market later, after the dust has cleared.  I actually have other, personal reasons, for why I am unwilling to enter the market right now.  I cannot trade successfully when I am stressed by other concerns. The only stock I own is ASIA, with a close stop loss. 

I probably could trade more profitably if I just follow my GMI and go long when it is 4 or above, like now. The GMI is back to 4 (of 6)  and the more sensitive GMI-R is 8 (of 10).  With only 22 stocks in my universe of 4,000 stocks trading at 52 week highs on Friday, it will be a long time before all of the components in the GMI turn positive. Five of the 22 new highs were on the IBD100  lists I track:  STAR, NTES, SNDA, SXCI and RVSN. Of note, 50% of the Nasdaq 100 stocks now have a MACD indicator above its signal line.  The MACD measures several moving averages and is very sensitive to changes in trend. When the MACD crosses above its signal line, the stock is gaining technical strength. The Worden T2108 indicator is now back to 82%, a high level at which the market can remain for months without turning down.

I am presenting a new “Guppy” chart of the weekly QQQQ trends.  I learned about Mr. Guppy’s charts from his book , listed to the lower right of my blog.  This Guppy weekly chart plots multiple moving averages, here 12, and bull moves show up with the shorter averages (black)  consistently above the longer term averages (red), with plenty of white space separating them.

This weekly chart of the QQQQ clearly shows the character of the tech market since 2005.  The decline that began in late 2007 has bottomed out and the shorter term averages are moving up through the longer term averages.  In addition, and most significant, the longer term averages (red) have stopped declining, and some are beginning to curve around.  While I feel safest to be long when the shorter averages are all above the rising longer term averages, I believe that it is now prudent for me to wade slowly  back into this market with my most conservative money.  Note that I am willing to do so because I am also willing to get out again if the shorter term averages turn down again.

I am a trend following swing trader, trying to catch the multi-month up-swings like those that occurred in 2005 and 2006-2007.  The key to success for me is to be out of the market (and lose little $$) when the black lines are below the red lines.  If we could all ignore everything the media pundits and others are saying and focus only on what the market trend is showing us, we could retire with  fat accounts and far fewer emotional swings.  Remember, Nicolas Darvas had to dance around the world far from Wall Street, to trade his way to riches. Let me know if you agree.

• gmi: 4
• gmi-r: 8
• t2108: 82