GMI: +5; Stay the course and watch the 10-day for the QQQQ

To my visitors: I am only one trader, not a guru, and not a financial advisor.  I am presenting my own opinions and my own experiences and people are welcome to decide for themselves what, if anything, on this site is of value to them.  Please refer to the additional comments, highlighted in red, at the end of this post.

Well, things held today with the GMI remaining at +5.  Gmi609r_1 There were only 116 new highs in my universe of 4.000 stocks, the lowest number in 11 days.  However, 70% of the Nasdaq 100 stocks rose, along with 63% of the S&P 500 stocks and 50% of the Dow 30 stocks.  The QQQQ uptrend is in its 24th trading day (U-24).  However, the QQQQ has completed its 3rd day below its 10 day moving average–an ominous sign (see dotted line on chart).  Qqqq609 A close tomorrow below 37.67 would begin to worry me.

I am therefore glad that I am holding "put insurance" (see yesterday’s post) on my most volatile positions (CME and GOOG).  Both stocks went up today.  I would not take on new positions until the QQQQ closes above its 10 day average, now at 38.12.  The QQQQ closed today at 37.95.  Sharply rising stocks, including the QQQQ index, tend to remain above their rising 10 day average.  A close below the average may not be a sell signal, but it serves as a yellow light to me.  One look at the chart above should convince you. 

I am sometimes struck by how focused my comments are exclusively on price and volume trends.  I think discussions about the Fed, world events, and other economic factors merely obfuscate the true nature of the market.  As I have written before, if a truck is bearing down on me as I cross the street, I do not care why it is coming or whether it should be happening–I must react to the action immediately to survive.

Send me your questions and feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

Using put options to limit losses on CME and GOOG; GMI back to +5

Well, I noted yesterday that we may have made a short term top.Gmi608 The GMI went back to +5 when the number of successful 10 day new highs fell below 100, to 76. There were only 136 new highs, the lowest in eight days, and 37 new lows.   Only 46% of the Nasdaq 100 stocks rose, 39% of the S&P 500 stocks, and 33% of the Dow 30 stocks.

I told you yesterday that I had raised my stops, and I got stopped out of BOOM today.   I did not want to get stopped out of GOOG and CME, and I knew that if we had a sudden decline I might get shaken out only to see the stock rebound by the end of the month. So, I bought insurance instead.

Do you call your agent and complain about the home insurance premium you paid last year, because your house did not burn down? Worse still, do you complain that you didn’t need to use your life insurance this year?   No, the insurance is there to protect you from the worst case scenario, and you do not regret buying the insurance if you did not have to use it.   Well, what if you could buy insurance against a decline in your stock.   Would you mind paying the insurance premium even if your stock did not decline?   If not, then pay attention while I tell you how you can buy insurance to protect yourself from a decline in a stock you want to hold on to.

This technique is a very conservative method for using put options to insure yourself against a loss.   A put option gives you the right to sell 100 shares of a stock at a set price (the strike price) for a set period of time. You buy and sell put options through your broker just like you trade stocks.   The only thing you need to do is complete an application for trading options in your account. My broker (Brown) even allows me to trade options in my IRA account.

So, here I am with some shares of CME, which closed today at 243.49.   I think the stock will eventually go up after this short bout of market weakness.   I could simply place a stop order in to sell the stock at a place I am comfortable with, say $230 per share.   Now, if CME trades as low as $230, I will be sold out at the market (next best price available).   Then, if CME goes back above $230 in the following days, I will kick myself for having been shaken out of the stock.

Instead of placing the stop, I go to www.finance.yahoo.com and enter the symbol CME.   I then click on options in the left column.   Up comes the June options page for CME.   But I am not interested in June options, which expire on the 3rd Friday of the month, June 17. This is because I want my option to go through the end of June.   So, I could click on the July tab to get all options that expire in July.   But since I know I am interested in a put option with a strike price of 230, I just click on the number 230 and I get a display of all options with a strike price of 230 that expire over the next few months.

Scroll down to the put options.   The July 230 put option closed at $5.30 per share with a bid of $5.10 and an offer of $5.60.   That means I can buy a July 230 put on 100 shares of CME for somewhere between $510 and $560.   Usually, when I buy an option I put in a limit order in the middle of the bid/offer prices, here about $5.35 per share.   Now, this option gives me the right to tell my broker to sell my 100 shares of CME at $230/share to the person who sold me the option, anytime through the 3rd Friday in July.   (Don’t worry, you just tell the broker to execute the option and your stock is automatically sold at $230 per share.)

Now here is the good part.   From the time I bought my put (insurance) I do not have to worry about whether CME falls to zero.   I always have the right to get $230 per share.   IF CME falls to $200 and then climbs to $260 before the July expiration, I just sell my   shares at $260 and let the put option expire worthless (No one wants to execute the option to sell the stock at $230 when they can sell it in the open market for more.)   So I sell my stock at $260, but I have given up the option premium of $5.35 per share.   So my profit is reduced by the cost of the put insurance.   (Profit= sale price – purchase price-cost of option.) Now, am I going to complain that I did not need to execute the option (insurance) to sell the stock at $230 per share–I think not.

There are many variations on this theme.   I can buy more puts than I own shares and profit more if the stock declines.   I can also sell my put back if I think the stock has bottomed out and then make more profit on a subsequent rise in the stock.

So today I canceled my stop losses on GOOG and CME and bought puts as insurance.   I can now sleep easy knowing that if the stocks decline I have limited my potential losses.   And if the rally resumes, I can participate in it without having been shaken out prematurely.   Why don’t financial advisors tell more people about this important way to protect their stock investments?   Everyone is brainwashed into thinking that all uses of options are too risky for the public.   Not true.   Perhaps you should check out your options.   To read up on this and other uses of options go to the CBOE learning center.

So now I can sleep easy as the market toys with CME and GOOG.

A strange day, GMI back to +6

To my visitors: I am only one trader, not a guru, and not a financial advisor.  I am presenting my own opinions and my own experiences and people are welcome to decide for themselves what, if anything, on this site is of value to them.  Please refer to the additional comments, highlighted in red, at the end of this post.

Well, this was a strange day.  The GMI went back to +6 as the number of successful 10 day new highs rose to 105.Gmi607 There were 292 new 52 week highs and only 23 new lows in my universe of 4,000 stocks.  HOWEVER, only 27% of the Nasdaq 100 stocks rose, compared with 48% of the S&P 500 stocks and 67% of the Dow 30 stocks.  This is the exact opposite of what has been occurring.  The Nasdaq is now either leading the market down, or not following the big caps up–take your pick.  We are in day 22 of the QQQQ uptrend (U-22).

The market closed way down from its intra-day high today, a sign of weakness and maybe, a short term top.  Most important, the QQQQ closed below its 10 day average for the first time in 26 days.  The steep rise may be over–at least until the QQQQ closes above its 10 day again. A possible scenario is that this beginning of the month weakness will set us up for a roaring end of month/quarter finish.  But, just to be safe, I will move my sell stops up to prevent me from losing more of my gains.  Shld I was stopped out of my position in SHLD today when it released disappointing earnings and gapped down to end in a 13 point loss. SHLD stopped right on its 50 day average (green line).  Earlier in the week QSII and CMN had similar steep declines, which I reviewed.  I have often noticed that when we get sudden steep declines (air pockets) in winners, it often portends a weak market.  I am therefore getting a little defensive even though I am confident in the uptrend.  So I will move up my stops and take some profits if they are triggered.  I can always buy back my stocks once this weak patch is over.  To be a successful trader one must not fall in love with one’s stocks.  As William O’Neil has said, all stocks are bad unless they are going up.

I am also keeping an eye on the short term interest rate indicator.Irx607 A few weeks ago I wrote that it looked like it had stabilized, as it penetrated its 50 day average (green line).  But it resumed its rise, suggesting that speculators think more rate hikes are coming. That is never good news for the market. I guess getting smacked by SHLD today has made me a little gun shy.  I am always a chicken and run at the first sign of a weak market. Remember–preservation of one’s capital keeps you in the game to play another day.

Send me your questions and feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

GMI: +5; A profitable day

To my visitors: I am only one trader, not a guru, and not a financial advisor.  I am presenting my own opinions and my own experiences and people are welcome to decide for themselves what, if anything, on this site is of value to them.  Please refer to the additional comments, highlighted in red, at the end of this post.

The GMI remains at +5 today. Gmi606_1 There were still less than 100 (68)successful 10 day new highs–each exceeding its closing price of 10 days ago when its intra-day  high set a new 52 week high.  There were 161 new highs in my universe of 4,000 stocks and 21 new lows.  About half (51%) of the Nasdaq 100 stocks rose, 54% of the S&P 500 stocks and 43% of the Dow 30 stocks.  These statistics are much better than Friday’s but far lower than those we have become accustomed to seeing during this rally.  Today marked the 21st day in the QQQQ rally (U-21).

In spite of the moderate market figures, my favorite stocks did great today with many of the stocks I have been discussing hitting new highs or rising (CME, GOOG, SHLD, NDAQ, MW, CRYP, ORCT, BOOM). 

My son started his summer basketball league this evening and I got home late.  I am very tired.  So, I guess I will sign off now.  As far as I can tell, the market remains in a firm upward trend.  I hope you are also profiting from this first real rally of 2005.

Send me your questions and feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

GMI back to +5; Some potential winners; on moving averages

To my visitors: I am only one trader, not a guru, and not a financial advisor.  I am presenting my own opinions and my own experiences and people are welcome to decide for themselves what, if anything, on this site is of value to them.  Please refer to the additional comments, highlighted in red, at the end of this post.

Friday’s decline does not alter my current strategy at all.  The GMI reflects relatively long term trends that last weeks or months, not days.  It would take a huge decline (4%) in the QQQQ, to below 36.50 to make me question this uptrend.Gmi605   The QQQQ closed Friday at  38.10.  The GMI did decline 1, to +5, because there were fewer than 100 (86) successful 10 day new highs.  There were almost no (9) successful 10 day new lows. ( See post from 4/26 for definitions of GMI components.) There were 206 new highs and only 22 new lows among my universe of 4,000 stocks.  Still, the stocks in the major indexes were weaker than they have been in weeks.  Only 14% of the Nasdaq 100 stocks rose on Friday, 26% of the S&P 500 stocks and 7% of the Dow 30 stocks.  We are in day 20 (U-20) of the QQQQ up trend……………………………………………

A lot of my current profitable holdings are stocks in triple digits (GOOG, CME, SHLD).  I wanted to share with you a realization I had in the strong market in the late 90’s.  I found that it was easier for me to trade expensive stocks profitably than cheaper stocks.  I know what you are thinking.  Price does not matter, only the percentage move is important.  But wait a minute.  Let’s assume that the typical stock moves up about 20% or so before consolidating. Twenty percent of a $10 stock is two dollars.  But I told you that I like to trade by making a small pilot buy and then buying more as a stock rises.  A two point move simply does not give me the time and confidence to accumulate a rising stock.  But a 20% move in a $100 stock is 20 points, plenty of time for me to get in as the trend develops.  Even though the percentage moves of the $10 and $100 stock are identical, the psychological impact of the rise on me is very different.  Nvr Moreover, another advantage to trading expensive stocks is that I suspect that they are less likely to be manipulated by traders than the cheapies. These in-and-out day traders just do not have the means to plunge in and out of the triple digit stocks with enough shares to influence the price or volume.  The chart patterns are therefore likely to be more reliable.  (See NVR monthly chart as an example.) Finally, the fact that a stock has experienced enough demand to raise it to triple digits is a good predictor of future demand. So, I love to buy stocks that are $80 or above.  They often sprint to $100 or more……………………………..

I ran a scan of the market for some potential rockets.  These stocks have all doubled in the past year, have good recent earnings and are near their all time highs.  They also have recent MoneyStream (a TC2005 proprietary indicator like on balance volume) values of 100%.  I think that these stocks are worthy of my consideration for future purchases:  NSI, SWN, SHLD, NDAQ, CRYP, CME and MW. (I already own some of these.)………………………………………………

The moving average is probably the most important tool in my technical arsenal.  Being a research psychologist, I conceptualize moving averages differently than your typical trader. I thought I would share some of my ideas with you. Social scientists typically collect information from a sample of persons and describe the results in terms of the average of the sample.  Thus, one might measure the IQ of each person in a class (our sample) and then add all the scores together and divide by the number of students in the class to obtain the class average.   If you came into the same classroom and I asked you to guess the IQ of a student "X" in the class and I told you the average IQ for the class was 100, you would have the most likelihood of guessing correct if you guessed that student "X’s" IQ was 100, the class average. For any sample, the best prediction of a sample member’s score is the average of the sample.

Now, consider we design a sample to consist of the closing prices of a stock for the last 5 days.  We could add together all of the closes from the past 5 days and divide by 5 to get the average close for the sample of 5 days.  As in the example of IQ scores above, the sample average is the best guess of the close for any of the 5 days in the sample.   But note that the average remains the same, regardless of the order of the closing prices from the last 5 days.  For example, the average of the daily closes:  8,8,6,6,7= 8+8+6+6+7=35/5=7.  But if the 5 daily closes occurred in a different order ( for example:8,8,7,6,6 or 6,8,7,6,8) the total of the closes always adds to 35, and when divided by 5, gives the same average = 7.  So the average tells us nothing about the order of the closes in the days making up the average.

Now, social scientists know that the number of persons or cases in a sample is very important to determining the usefulness of the sample average that is computed.  If I want to estimate the average IQ in a group of 100 people, I may have more confidence if I sample 30 people than 5 people.  The average based on 5 people may be very biased and unrepresentative of the 100 people, compared to an average based on 30 of the 100 people.   (We scientists sample a small number of people because in most cases we cannot obtain measurements of all of the people–the population– we want to study.  For example, voter surveys may select 3,000 people to interview to obtain an estimate of future election results for the entire country.)

Question–how many days’ closing prices do we need, to get an  accurate summary estimate of a stock’s closes?   Do we compute an average of 5 days, or 10 days or 50 days or 200 days or more?  Most technicians compute an average of 50 or 200 days (or periods) without any justification for choosing a sample of that many days.  If anyone has seen a published rationale for why so many people choose 50 and 200 day samples to compute averages please let me know.  I can find no reason other than tradition.  I believe that it is much better to compute an average based on the number of days that produces an average that works for a particular stock, not on some arbitrary standard.

The only difference between the average and a moving average is that the moving average continually changes the sample of closes.  In a sense, we choose a new sample each day.  A moving average of 10 days consists of the last 10 days’ closes for a stock as of today.  Tomorrow, we drop from the sample the closing price from 11 days ago as we add in the current day’s close.   Thus in a moving average the order of the days is important in determining which day to drop from the sample.  But, again, the resulting average is the same regardless of the order of the days within the sample. 

Some people are bothered by the fact that all of the days in the sample count equally in the average.  They think that the closes from the more recent days should count more than the earlier days and they weight the recent days’ closes more using exponential weights or some other set of weights.  I prefer to use the simple moving average, because it works, and because I think the differential weighting of the days contradicts the whole idea that we are just computing the average of a sample of closes.  The final fact you need to know about moving averages is that the only way a moving average changes is if the new day being added to the sample is different from the day being dropped.  (If the oldest day to be dropped and the new day to be added have the same close, the sum of the closes does not change and therefore the average remains the same.)  Thus, a moving average of 10 days increases only if the current day’s close is greater than the close 11 days ago that is being dropped from the sample.  Now this is a most important point.  It means that in addition to the value of the moving average, we should pay attention to its direction.

Say stock XYZ is trading at 25 and its 30 day average of its closes is 25.  Do we want to own a stock where its current price is the same as its average price over the past 30 days?  I think not.  I would think that a rising stock should close today above its average price over the past 30 days. Second, is the moving average rising?  Remember, in order for its 30 day moving average to be rising, the close today must be higher than the close 31 days ago.  Why would I want to own a stock with a flat or declining 30 day average?  Don’t I want to own a stock that is at least closing  higher today than it closed 31 days ago?

To summarize my strategy rules:  1) One needs to pick a period for computing a moving average based on how useful the resulting average has been for tracking that stock’s prior price trends; 2) The stock should be trading above the moving average that we select; and 3) The moving average must be rising.  If you want to know more about the benefits  of using moving averages for tracking trends, see Weinstein’s classic book.  It is a simple strategy, but oh so valuable. Weinstein’s recommended moving average techniques have helped me to time most bull and bear market moves since 1995.

Did any of this description of moving averages make sense to you?  Send me your questions and feedback at silentknight@wishingwealthblog.com

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.