T2108 and put/call ratio suggest bottom forming;12 stocks at all-time highs last week

I show my students each semester this monthly chart of T2108 going back to when Worden created it in 1986. (You can access T2108 with Worden chart analysis software.) T2108 measures the percentage of NYSE stocks that are above their simple 40 day moving average of price. The few times since 1986 when T2108 was below 10% the market was severely oversold and did not remain there long. Once, in 1987, it registered its lowest, <1%. I call T2108 the pendulum of the market, moving from extremely oversold to overbought levels. The red and green lines in this monthly chart mark these levels.

Here is a more recent weekly chart of T2108 since 2008.

A maximum of one or two weeks below 10% is the norm. On Friday, T2108 traded as low as 8.6% and closed at 14.6%. In addition, the put/call ratio closed at an extremely high 1.27, indicating that a lot of option traders were buying puts and/or insurance against a decline. This ratio is another contrarian indicator with extreme levels of bearishness usually occurring near short term bottoms. The market always bounces after readings above 1.2.

I closed out my SQQQ (3x leveraged bearish QQQ ETF) on Friday with a nice gain. I did not have the courage to follow my rule to buy the market, SPY (I never do!) on Friday  but am looking to make a small pilot buy this week. (This will be a small initial purchase and I will only add to it on the way up if the lows hold)…….

I love weak markets because only a small number of stocks hit all-time highs. Those that do amidst market carnage may turn out to include new leaders when the market turns up. Imagine a stock hitting an all-time high (ATH) last week! These are stocks worth researching and monitoring because someone is accumulating them. Each of these stocks hit an ATH on Thursday or Friday and are above a recent GLB (green line break-out, see blog glossary above):

COLM, ARRY, BLBD, VIRT, WWE, GRUB, PIRS, INST, MC, MCFT, HAE, HLG.

As an example, this weekly chart shows GRUB’s high volume move up last week after beating earnings estimates. I will look for an entry once it consolidates.

 

The GMI remains on a Red signal and indicates the need for caution. IBD now sees the market in a correction. Both the QQQ and SPY are now below their 10 week averages, a critical sign of weakness.

 

 

 

 

 

 

 

Bloody Monday open likely–In cash during this mini-decline

GMI3/6
GMI-23/8
T210838%

I am 100% in cash in my trading IRA account, having reduced holdings the past 2 weeks. I like to do most of my trading in my IRA because there are no tax issues. I can go in and out at will. I remain 100% invested in mutual funds in my pension accounts, where trading is limited.

This is not the time to panic. It is true that bloody Fridays often lead to bloody Mondays when many people decide to exit after pondering their falling balances over the weekend. These people will likely sell to the eager professionals at lower prices. The market indexes I follow have not become oversold. The put/call ratio =.97, showing that option players are not scared enough yet. When the ratio reaches 1.2 or higher we will be near a bounce. Similarly, the daily 10.4 stochastics indicator I watch for the QQQ is at  .47. The market indexes usually bounce around .20 or less. So I expect more of a decline, at least early in the day on Monday.

The chart below is a RWB monthly chart of the SPY. I want to show what the bull market tops looked like in 2000 and 2007. Note that a major decline begins with the index (indicated by the gray dotted line) closing below all of the red line shorter averages. Then the red lines turn down and converge with the blue lines.This pattern takes several months to develop. The RWB pattern (red above blue with white space between them) then dissolves and the red lines move below the blue lines (for ming the opposite BWR pattern).  A quick glance at the current market shows that the RWB pattern is intact and the index (dotted line) remains above all of the rising red lines.

Alternatively, this weekly chart of the SPY shows it to be in a Weinstein Stage II up-trend. It is rising above the rising 30 week average (red line).

I tend to exit the market in my pension accounts when the index closes below its 30 week average and the average begins to turn down. Such a decline last happened in 2016. The 30 week average for the SPY is now at 258.20. Let’s see if the SPY finds support at its 10 week average (blue dotted line), currently at 272.46. The SPY and QQQ have closed above their 10 week averages for 24 straight weeks (see table below). My long term pension money remains fully invested, for now, while my trading account is in cash.

The GMI and GMI2 have both weakened considerably. Two consecutive days with the GMI less than 3 turns its signal to Red. IBD now sees the “uptrend under pressure.”

Why buying stocks over $100 is more profitable

GMI6/6
GMI-27/8
T210868%

This may be the most unique post I have written in a long time. I cannot recall any of the many traders I admire stressing this topic. Over my 50+ years trading I have noticed that I have had more success trading expensive stocks. To understand this idea, we must first dispense with the myth that all that is important in comparing trades is percentage change. I recall that Jesse Livermore, the great trader, once said that he focused on gaining points (dollars) not the percentage he gained or lost on a position. I could not locate Livermore’s exact quote again. The closest quote on this topic I could identify today was one by the great trader and associate of Livermore, Richard Wyckoff:

“If you are trading in 100 share lots, your stock must move your way one point to make $100 profit. Which class of stocks are most likely to move a point? Answer: The higher priced issues. Looking over the records we find that a stock selling around $150 will average 2 1/2 points fluctuations a day, while one selling at 50 will average only one point. Consequently,  you have 2 1/2 times more action in the higher priced stock.”

William ONeil has written that it may be a good idea to take profits on a position that has gained 20%. However, a 20% move in a $20 stock is $4, while a 20% gain in a $100 stock is $20. I have found that if I want to make a pilot buy and pyramid or average up into a full position, it is easier for me to do so in a stock that is rising 20 points than one that gains 4 points, even though the percentage moves are identical. I find that the psychological impact of these two trades on me is different.

As an example, if I buy 100 shares of a $300 stock, like BA (cost=$30,000), I can exit with a small loss of two or three points ($300) if the stock immediately moves against me. If I put the same amount of money in a $30 stock (if one focuses on comparing percentage gain, one has to put the same amount of money in each of the positions being compared), I would be buying 1,000 shares of the $30 stock ($30,000) and losing $1000 for every point that it fell. In reality, I would typically buy only 100 shares of the cheaper stock, thereby reducing my possible risk and profits, at least initially to $100 per point. I am therefore more comfortable managing the trade for an expensive stock.

So does Wyckoff’s observation that expensive stocks gain more points still hold today? Here is a list of the top 20 gainers the past 30 trading days among 4865 US stocks in TC2000. The column C30 shows the closing price of each stock 30 days ago and the next column (C-C30) shows the total dollars gained by the stock last Friday since 30 days before. All of these stocks gained more than $54 in the past 30 days. It is clear that 85% (17/20) of these large point gainers were priced at $100 or more 30 days ago,  before this gain occurred. The 3 exceptions were less but not cheap: SAGE (89.79), MDGL (46.30) and WINS (82.94). The third column shows the expected next earnings date, an important piece of information for me to always be aware of. No matter when I have repeated this analysis the findings tell the same story. In fact, 95% of the next 20 top gainers the last 30 days (not shown) were over $100, 30 days ago. The same relationship occurs for ETFs.

My conclusions:

If I plan to buy a stock or options, I will have a better chance of having a large dollar gain if I focus on stocks that meet my purchase set-up criteria and are expensive, at least $100 or more. I love to use this strategy with call options, which usually cover 100 shares,  because if my timing is correct, the stock and the option could gain many points.

There are a number of reasons why I like expensive stocks:

  1. They are trading over $100 probably because big money/institutions bid them up;
  2. They are probably harder (more expensive) to manipulate/whipsaw than cheap stocks;
  3. I have time to accumulate a posiiton in stages as it rises;
  4. There is a smaller universe of stocks over $100 to monitor;
  5. I typically can make more money when I am right;

All of the above, of course, assumes that I have excellent rules for quickly exiting a losing position, because high priced stocks can drop many points more quickly. By the way, this strategy is antithetical to most inexperienced traders’ dreams of buying cheap stocks that will rocket to the moon…..

The GMI remains at 6 (of 6).

 

My honors seminar on technical analysis for undergraduates begins this week. I am looking forward to sharing all of these ideas with a new class of brilliant students.

Why I like RWB daily charts–$HRI, $OLLI and $NKTR

GMI6/6
GMI-27/8
T210870%

My RWB daily charts provide me with an extraordinary way to visualize a stock’s pattern and to choose entries and exits. You will recall that an RWB chart has 13 daily exponential moving averages plotted on a white background. The six red lines represent the shorter term averages and the six blue lines represent the longer term averages. The 13th average is a gray dotted line with an average=1 and represents each daily close.

In an advance, the dotted line, or daily closes mostly are above all of the rising red lines. The red lines are rising above the blue lines and there is a white space between them–this is an RWB (red/white and blue) up-trend. Strong stocks can remain in this pattern for weeks and even months. The key for me is to buy a RWB pattern stock when it bounces up from support. One way of defining a bounce is to find an RWB up-trend where the stock has recently closed below 5 or 6 of the rising red lines and then closes back above all of the red lines. I have created a scan that is available free to all TC2000 users in the Dr. Wish club. That scan, 12252017BounceRWBdaily, identifies all US stocks with the pattern I just described. One stock that this scan found this weekend is HRI.

Note that for most of November and December HRI was in a perfect RWB daily up-trend closing almost every day above all of the red line averages. In mid-November, HRI consolidated, evidenced by the convergence of all of the declining red lines. This is a base. The key is to buy the stock if and when it emerges up from its base. Clearly, at the end of last week, HRI started to advance again, and closed above all of the red lines after having closed recently below all of the red lines. This is the pattern that this scan searches for. In addition, note that HRI is near its highest price ever, as indicated that it is above its recent green line break-out (GLB) to an all-time high. Note on the top line of the chart that HRI’s recent quarterly earnings were up +309%. I like good fundamentals as well as technicals.

I have no idea whether HRI will keep advancing out of this base. However, the beauty of this approach is that I know in advance how to define a failed break-out. If a stock closes back below all of its red lines for 1 or 2 days, I consider the break-out to have failed and I exit.  The nice thing about this strategy is that before I purchase I can look at the value of the lowest red line (the 15 day exponential average in an up-trend) which is posted on my chart, here= 63.13. HRI closed 2.49 above this value and the difference represents the probable loss if I bought around 65.62 on Monday and had to sell just below the red lines. Thus this strategy enables me to estimate and limit my losses in advance.

My biggest problem is selling a rising stock too soon. I get scared out when it or the market zigs down and I am afraid of relinquishing my profit.  Using this buying strategy, I try to hold on until the stock closes below all of its red lines for 2 days. An analysis of my recent sales shows that this technique would have served me well and kept me in stocks that kept rising.

Some other stocks that came up on this scan are:  ATRO, SGMO, SRPT, OLLI, NKTR and ROG. Check them out! Here is OLLI:

And NKTR:

The GMI remains at 6 (of 6):

 

A strategy for decidng when to sell stocks; $GDS, $NVDA

GMI6/6
GMI-28/8
T210859%

The decision to buy a stock is relatively easy, and by setting an immediate stop, I have a good chance of being sold out of a position with a small loss if the stock I buy thinking it will rise, goes down quickly.  A major problem, however,  is knowing when to sell a stock that has advanced and shows a profit. Too many times I get shaken out of a stock because of a technical signal or more often because the entire market shows short term weakness, only to see my stock advance without me. When I later analyze my decisions, I see that I had panicked unnecessarily (I am a chicken!). I end up having small losses but I miss some large gains. In a long up-trending market like the present, this scenario has occurred often. (The maxim, cut your losses and let your profits run, is easier said than done.)

I have therefore been focusing on designing a better method to keep me in rising stocks. I had experimented with using weekly charts in a yellowband up-trend but find that the technical signal to sell, closing below the 10 week average,  could lose me a lot of the profit. I therefore have returned to using a daily RWB chart of 13 daily exponential moving averages to inform both my buy and sell decisions. I think this method is more effective.

First, you may want to review my post on the construction of daily RWB charts from December 10.  A rising stock will close above all 12 daily averages almost every day (the 13th average of 1, a dotted line, is the daily close). I would like to buy promising stocks in a strong RWB up-trend that have rested and look like they are about to resume their advance. Thus, I am looking for a stock that closed recently below all of its red lines (the 6 shorter term daily averages) and has now closed back above all 6 of them. I have designed a new TC2000 scan, described below, that identifies such stocks that I am making available in my TC2000 club, Dr. Wish.

If I buy such a stock, I want it to subsequently keep closing above its red lines, leading them higher. This is shown on the chart by the dotted line rising above all of the red lines. If the stock closes soon back below all of the red lines, I exit immediately. If it goes on to rise for a long time, I hold until it to closes below all of the red lines. I say close, because many stocks trade below all of the red lines intraday only to find support and close back above them. I also think it would be safer to wait for 2 consecutive closes below the red lines to sell a position that has a large profit.

Since a chart is worth a 1,000 words, let’s look at one of the stocks, GDS, which came up on my new scan this weekend. This weekly chart shows that GDS had a green line break-out (GLB) to an all-time high (ATH) in September, 2016.  I like the fact that it is a recent IPO that rested for 10 months after forming a top. The GLB came on the highest weekly volume since the IPO.

So how could one use the daily RWB strategy to trade GDS at the GLB and currently?  This daily RWB chart shows that at the time of the GLB, GDS was beginning a RWB pattern and had now closed above all of it rising red lines. Since the break-out, GDS has mainly closed above all of the red lines and only closed below all of them for the first time 3 months later in early December, after almost doubling. This is the pattern of a stock in a consistent strong up-trend. According to the RWB daily strategy, the only time for selling would have occurred when GDS closed one or two days below all of its red lines, in December. After this drop occurred, all of the red lines converged, showing lower movement and/or volatility in its closes. When the red lines converge, it is time to step back and wait for a break-out up or down–one has to wait for the move and not try to anticipate which direction the stock will go. (React, do not anticipate–by guessing in advance one will be wrong often.)

The reason GDS came up in this weekend’s scan is because the scan identifies strong stocks that recently closed below all of its red lines, has retaken them and is now in a RWB up-trend. As an example, if I were to buy GDS on Monday, I would then wait to see if it holds above the 6 red lines and continues up. If it fails the red lines quickly, I would exit with a very small loss. The red number at the top of my chart, after the word “optionable,” shows the current value of the lowest red line, currently= 19.48. So if towards the end of the day or so after purchase,  it looks like GDS will close below 19.48, I would exit with, I hope,  a small loss.

As an example, look at how this RWB daily strategy might have helped one exit the leader, NVDA, at the right time at the end of November. We will have to wait to see if this is the end of NVDA’s bull market run or just a pit stop. I might get interested when/if NVDA retakes all of its red lines and is forming a new RWB pattern again. I can set an alert in TC2000 to text me during the day when this technical signal occurs with a specific stock.

I noted that I had run a scan this weekend to find candidates showing a RWB bounce. These stocks have good technicals, have advanced a lot this year, and might be worth researching. The scan yielded 13 out of about 4900 stocks that met my scan’s criteria. The stocks are listed below, in descending order of their most recent quarterly earnings percent change. GDS has no EPS comparison yet and is at the bottom of this list.

All of these stocks are not trading above their last green line tops and would not be of interest to me. I always look at a stock’s monthly multi-year chart to see if the stock is near its all-time high, a major criterion for me. In this list the following stocks are not above their last green line tops: CREE, MRTX, RESN, ASMB and ESPR. They may continue to advance, but they also may have to get through much over-head supply from the selling of people who bought them at higher prices.

For those of you who have a TC2000 account, you may access this new free scan (12162017DailyRWBBounce)  at my club by clicking here or on the bar at the top of this blog, “TC2000 Scans and Watchlists“. The scan criteria are specified in the glossary page for this blog. I would be interested in hearing whether this scan helps your trading. By the way, I scanned a combined watchlist that contained more than just US  stocks (N=4907). You will have to create such a list yourself. The scan posted in my club uses only the US stocks list provided in TC2000 (N=4817). GDS is a company based in China and therefore does not come up in the scan of US stocks I published in my club.

Meanwhile, the general market indexes (QQQ,SPY,DIA) are in RWB up-trends and the GMI remains at 6 (of 6).