My Favorite Posts

Short and long term trends now up; On using weekly charts to stay in a growth stock: $NTES

@ 8:19 pm
GMI6/6
GMI-27/9
T210859%

The DIA, SPY and QQQ index ETFs are all above their 10 week averages again! Stocks are breaking out everywhere. But how to ride them to big proftis? If you are like me, you often hop on a growth stock, only to sell out prematurely on weakness that you spotted on a daily chart, and the stock continues to climb much higher without you. The great gurus I follow say that the key to making big money trading is that when the rare pick starts to really work out, stay with it until it shows genuine signs of weakening. Jesse Livermore, the consummate trader,  would often say that he hated to lose his position in a rising stock because he had sold out too quickly. In this new day of instant financial data feeds, I suspect one of the enemies of staying with a good stock (at least for swing traders)  is focusing on charts with daily and shorter time periods to signal an exit. I am told that the great William ONeil, founder of IBD, used only weekly charts because they more clearly revealed to him the meaningful stock trends. If I checked my blood pressure or cholesterol daily or hourly, I suspect I might see  a lot of noise and volatility that would make it harder to obtain a valid assessment of my longer term status.

As a solution to this problem, I have found it very helpful to focus on weekly charts using three simple moving averages: 4wk, 10wk and 30wk. An advancing growth stock will have a pattern of the 4wk>10wk>30wk for long periods of time, in addition to being near an all-time high. During a strong advance the stock will go many weeks without ever closing below its 4wk average. Once the stock closes below its 4wk it is a potential sign of weakening at which point I might raise my stops or sell a little. A weekly close below the 10week is a call for me to exit my position immediately. Growth stocks should not close the week below their 10 week average.

A weekly chart is worth a 1,000 words, so it will be easier to demonstrate this strategy with an example. NTES showed the 4>10>30 pattern from June, 2016 through November, or for about 21 weeks (4wk=red dotted line, 10wk=blue dotted, 3o wk=red solid). During that time the stock rose over 40%.  During this period, NTES closed  the week below its 4wk average only 3 times. I say closed the week because a stock often trades intraweek below its 4wk average only to find support and close the week back above it. This strategy therefore works well for part-time traders like me who are able to review their stocks over the weekend or near Friday’s close. I am looking for weekly closes below the 4wk after several weeks of closing above it and for any close below the 10 wk average. In early November, NTES closed below its 4wk and then its 10week, a clear signal for me to exit (if I had owned it). Note that NTES is still in a Stage 2 advance, above its rising 30 week average, and I would consider purchasing it with a weekly close back above the 10 week average.

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Note how this strategy would have kept one in NVDA: (I wish I had used it!)

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I often tell my students not to take what I teach them on faith, but to test everything for themselves. Go  out and look at the weekly charts of stocks you are trading and see if this method could have helped you. I have too many times been prematurely shaken out of a stock by focusing on its daily movements, only to see that a glance at its weekly chart could have given me the confidence to ride it higher.  This method slows down my selling. I described this strategy in greater detail  in a 2012 speech to the Houston Worden TC2000 Users group. A link to the archived webinar appears here and to the right of this page.

Meanwhile the GMI is back to 6 (of 6) and the QQQ short term trend is now up (U-1).

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My trading diary entry from William O’Neil’s workshop in 1995; a set-up for buying $LMAT; $HEIA–Cup and handle break-out

@ 9:04 pm
GMI5/6
GMI-27/9
T210850%

In the 1990’s while I was teaching myself to trade in that roaring bull market, I kept a diary of my trades and reactions to the market and current events. I looked it over this weekend and saw this entry from 11/11/1995 and thought you might be amused by it:

This past week I attended a lecture at the Sheraton by William O’Neil, founder of Investor’s Business Daily and one of my heroes. Most of what he said I already knew from reading his book. The most startling thing that I learned was that contrary to his rules about selecting only stocks with high EPS values, he was advising institutional investors to buy the current fad internet stocks like C-Cube and Netscape. I got the distinct impression that he was saying that volume and price action was more important than demonstrated earnings growth. In fact he did say that a dramatic rise in volume could be the most important factor. His lecture sensitized me to the need to always look for the most dynamic and fastest growing companies. Stocks that are growing 100% in price a year or have 99 Relative Strength seems to be his major criterion. I would have liked to ask him whether he consciously breaks his written rule to also require a high EPS before purchase. (Copyright, Dr. Eric Wish trading diary, 11/11/1995)

I have written 200+ pages about my thoughts while I traded my way to a small fortune during the 90’s. The diary shows how difficult it was for me to trade profitably as I reacted to the market and current events. When one looks at a long term chart of the indexes over that period it looks like it was easy to make money. It was not. I wonder if anyone would want to read my trading diary if I chose to publish it………

The focus of my class for undergraduates is to teach them, “in a rising market buy visionary rocket stocks that are breaking to new all-time highs or bouncing off of support.” They have now completed 5 weeks of classes and are ready to start specifying their set-up for purchases during a trading competition of a virtual 100,000 margin portfolio. I am posting this analysis of LMAT to provide them with an indication of a possible set-up.

LMAT came to my attention because it hit an all-time high on 8/30.  I looked at a monthly chart using TC2000 and drew in a green line top at the last all-time peak that had not been surpassed for at least 3 months. I then looked at its modified Guppy chart of 13 weekly exponential moving averages (six short term and 12 long term averages plus a one week average that shows its weekly closes).

lmatrwbI saw that LMAT  had an RWB pattern with all 6 short term averages (red lines) rising above the rising longer term averages (blue) with a white space between them. Thus, LMAT had an RWB pattern and is a launched rocket stock.  In other words, it was an advancing stock that had rested for at least 3 months (formed a base) and broken to an all-time high.

LMAT closed above its green line 2 times on above average trading volume (see daily chart below). The first time the break-out failed, as it traded back below its green line for 3 days. (I immediately sell failed break-outs.) Then LMAT had a much larger break-out on considerably higher trading volume. If I missed that break-out or had exited after the failure, then I wanted to enter this rocket after a decline to short term support and a likely resumption of the up-trend. That happened on Friday when LMAT bounced up off of its rising 30 day average and its lower daily 15.2 Bollinger Band on increased volume. This is one of my favorite set-ups. If I were to buy LMAT on Monday I would do so and place a sell stop around the low of the bounce, near 19.29. However, I must sell immediately if the bounce I bought on does not hold. One never knows in advance if a particular set-up will be successful. Of course, I would first check LMAT’s news and fundamentals to make sure that it was worthy of my risking capital to purchase it. For example, IBD gives LMAT a composite ranking of 99, the highest possible reading.

lmatdailysetup

I actually use TC2000 to scan for stocks with this set-up. By the way, the Worden people are presenting a workshop in the DC area next weekend.  Will see you there on Saturday…

I noticed this possible cup and handle break-out from Friday. Note HEIA is above its last green line top–a good sign. It also has a nice RWB pattern (not shown).  I do not like the high volume down day in the handle on Friday, just  before Friday’s bounce, however. IBD composite rating for HEIA= 98. Let’s see if HEIA  holds this break-out on Monday.

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The GMI remains Green. Note the QQQ short term up-trend is now 11 days old. Since that short term signal at the close on 9/16 through Friday’s close, the QQQ has advanced +1.22% and the leveraged 3X bullish ETF, TQQQ, +3.37%.

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How I buy rocket stocks bouncing up off of support (BOS): Examples: $HII and $AWK

@ 8:20 pm
GMI6/6
GMI-28/9
T210877%

After tradings stocks for over 50 years my trading strategy continues to evolve. I used to ignore indicators like stochastics and Bollinger Bands because I mistakenly believed that such concepts as overbought or oversold were useless. I fortunately  began to re-analyze some of my trades using these indicators and found these indicators to be extremely valuable.

The biggest problem faced by me and my students is buying great stocks that then turn out to be “extended.” These stocks promptly turn around and decline right after what we thought was a perfectly timed purchase. Sound familiar? After listening to some of the expert traders who come to lecture to my students I decided that rather than buying stocks that break to new highs, I should buy strong stocks that have rested and become oversold and then start up again. I do like buying green line break-outs (GLB) but maybe should wait to buy them after the break-out when they subsequently become oversold. The GLB is just evidence of a strong stock that has broken out to an all-time high after a rest of 3 months or more. At the moment of break-out they are rarely over-sold!

I prefer to buy  strong oversold stocks that are bouncing off of support (BOS) and to place a sell stop just below where they have bounced. This means that if the bounce fails I am sold out quickly with a small loss. Since a lot of my purchases will likely fail, it is critical to have very small losses when my trades go awry. When the bounce holds, I can then ride the stock and even add more to my position  so that my relatively few large profits make up for my many small losses. There is nothing more freeing emotionally than to buy a stock and place an immediate GTC stop loss order to sell with a very small loss. My mantra is that each small loss brings me closer to the next big gain–no ego allowed.

I have written a number of scans in TC2000 that can detect strong rising stocks that have become oversold and that are bouncing off of support  (BOS). My primary measure of oversold is a bounce up from the lower  15.2 daily Bollinger Band. Once I find a list of bouncing stocks I  investigate such things as their trading volume, fundamentals, market trend and anything else that can help me decide which stock to buy. But these additional  analyses really do not matter much because in the end it  is impossible to reliably predict which stock’s bounce will hold. By the way, I have used this strategy successfully with all types of stocks and ETFs.

Below is a chart of a BOS stock that bounced on Friday, HII. Each previous bounce from its lower BB is shown with a “B.” The 2 magenta lines show when the major market indexes’ recent mini-corrections ended. Note that even though the decline to Bottom 2, the Grexit decline, was lower and steeper than the decline to Bottom 1, HII managed to show incredible relative strength and resist the declines. HII was actually trading higher at Bottom 2 than Bottom 1! Will HII’s Friday bounce hold? I do not know. But if I wanted to trade it I would buy it on strength (if it trades above Friday’s high) on Monday and place my sell stop below the bounce, perhaps around 167.19. I am presenting this only as an educational example of my technique. I do not own HII.

HIIbouncesWhile I am not showing its chart, my favorite water stock, AWK, showed a similar BOS on Friday.

During the trading day, when TC2000 alerts me to a BOS, I often tweet the symbol to the world. You can receive my tweets intraday at @WishingWealth. Just keep in mind that I tweet only to teach people and to enable them to evaluate any of these stocks using their own criteria. I do not trade all of the stocks I tweet about. I am looking forward to fall semester when I will teach a class of 180 freshmen what I wish someone had taught me at their age.

The GMI remains at 6 (of 6).

GMI07222016