Nicolas Darvas

GMI:+6; My favorite posts; GMI as a trend indicator; WPM shows all indexes strong; Jim Cramer on charts; Some big earners at new highs

@ 9:50 pm

NOTE:    A NEW SECTION TO THE BOTTOM RIGHT PROVIDES LINKS TO MY FAVORITE PRIOR POSTS.  THESE INCLUDE MY STRATEGY POSTS, DEFINITIONS OF THE GMI COMPONENTS, AND MY ANALYSIS OF WHY THE TRADING TECHNIQUES OF THE GREAT NICOLAS DARVAS WORK BEST DURING BULL MARKETS AT ALL-TIME HIGHS.

What a week!  The GMI remains firmly at a maximum +6.  Gmi1111 I will show you below how the GMI has kept me out of the market (or short) during declines and back in during rallies.  80% (57/71) of the stocks that hit new highs 10 days ago closed higher Friday than they closed 10 days earlier.  In contrast, only 24% of the stocks that hit new lows 10 days ago closed lower than they did 10 days earlier.  The moral?  In a strong market buying new highs is much more likely to prove profitable than shorting new lows. There were 234 new highs on Friday and only 44 new lows in my universe of 4,000 stocks.  56% of stocks are in a short term up-trend and 53% closed above their 10 week averages.  Almost three quarters (72%) of the 165 stocks that have doubled in the past year closed above their 30 day averages, along with 80% of all of the Nasdaq 100 stocks.  Friday was the ninth day (U-9) in the QQQQ (Nasdaq 100 ETF) up-trend.

Here is a chart of the changes in the GMI since its inception. Click on this to enlarge.  Note the periods Gmi1111_1 when the GMI is greater then 5 that it has been a good time to be long.  The GMI was +6 for all of July and 5 or greater since November 1. I leave you to judge whether it is a useful market timing indicator.  It is for me.

The WPM showed major strength in all five indexes.  Wpm111105 All of the indexes closed above their 30 day and 30 week averages.  83% of the Dow 30 stocks and 80% of the Nasdaq 100 stocks closed above their 30 day averages and the remaining three indexes were not far behind.  60% or more of the component stocks are now above their 30 week indexes.  This is a market where all types of stocks are participating and where both the short term and longer trends are up.  It is noteworthy that the Dow 30 stocks are now quite strong. 

We never know how long a trend will last.  But it is important to hitch a ride on a strong trend early and ride it until it flashes warning signals.  The reasons behind this up-trend will eventually come out.  But often times the good news comes out closer to the end of the up-trend than to the beginning.  It is important not to fall into the trap of waiting for a rationale for an up-trend before getting in.  When your train leaves the station, it does little good to stay on the platform and argue that the schedule is off or that it should not have departed.

Cramer had a nice interview on 60 Minutes tonight.  It was a love feast–I thought they were supposed to be investigative reporters!!??  Anyway, I though I would quote you what JC has to say about charts in his new book.  "Looking at the chart, the graphic demonstration of where a stock has gone, is not homework.  It can tell you nothing.  …………..In investing a picture is not worth a thousand words; in fact it is almost worth nothing.  A chart is never enough to buy a stock. Never. Don’t be conned into believing that looking at a chart can suffice for homework; it simply can’t." (Cramer, 2005, pp86-87.)

I agree with Cramer that trading decisions should not be made solely according to a chart.  (Why not buy stocks that look technically strong AND that have good fundamentals?)  A few pages later Cramer writes: "Because stocks anticipate the fortunes of their companies, the collapse of Maytag the stock occurs ahead of Maytag the company." (p. 110).  Cramer proves the value of charts.  If a stock tanks before the bad business news underlying the decline comes out, the only way we outsiders can discern the weakness early enough to get out is by studying the stock’s price and volume trends via its chart.  Studying the Nasdaq’s chart got me out of the market in 2000, and had me buying put options (selling short) on Enron long before the bad company news came out.  I rest my case.

Here are a few stocks with good fundamentals and charts.  Among the stocks that hit new highs on Friday, who are up at least 60% this year  and who have recent quarterly earnings  increases of  100% or more are:  TIE, LMIA, NWRE, TRAD, IRIS, HANS, ISRG, HUBG, MRVL, VTAL, HOLX, GHL, JLG, SUPX.  I own some of these and think they are good stocks to research.  I make a small pilot buy and slowly average up in the ones that work out.  I also always place a stop loss for insurance, to limit my losses.  Have a great week.

Please send me your feedback at: silentknight@wishingwealthblog.com.

Nicolas Darvas trading techniques require markets at all-time peaks

@ 12:49 pm

The basic principles of my method are in fact quite simple:

Firstly, except in exceptional cases I only buy the stock of companies in new or developing industries, i.e., companies whose growth and earnings prospects look highly promising.   I never buy stocks in established industries, in companies with huge capitalizations, or in companies which are already so big that the prospect of substantial growth is highly unlikely.

Secondly, having found such lively stocks, I certainly do not buy them straightaway.   I first check the overall market trend to ascertain whether stocks in general are in an uptrend.   I then check whether the stock belongs to a strong industry group, i.e., a group that is performing well in the market relative to other groups. Only when I have satisfied myself on these two points do I look in more detail at the stock that interests me.

Why all these precautions?   Because I like to be sure that the odds are in my favor.   If the market is in a downtrend, and the industry group is performing weakly I know that the cards are stacked against me and that my chances of making big profits are poorer than if the market and the industry are strong.   You cannot be too careful in the stock market.

Read more

GMI: +1; WPM shows weakening; Folly of fighting market’s trend; On Nicolas Darvas

@ 12:00 pm

What a devastating week for the bulls.     The market internals continue to weaken, with only 24% of stocks in my universe of 4,000 in a short term up-trend.   The GMI remains at +1, with only the Weekly QQQQ Index still barely positive.   There were only 28 new highs on Friday and three times as many new lows.   On Friday, only 55% of the Nasdaq 100 stocks, 66% of the S&P 500 and 50% of the Dow 30 stocks advanced, an insignificant bounce up from the week long decline.   Friday was the third day in the QQQQ down-trend (D-3).   Since its peak on August 2, the QQQQ   (Nasdaq 100 ETF) has declined 4.3% and only 34% of its component stocks have advanced, with only 18 stocks (18%) advancing 5% or more.   Why fight these odds?

The WPM shows the extraordinary weakness in the short and long term trend measures of   five market indexes.     All five indexes are below their 30 day averages and only 20-34% of their component stocks are above their 30 day averages.   The Dow 30 stocks continue to show the greatest weakness, short and long term.   The big industrial Gmi1007companies are clearly weak.   The DIA and SPY ETF’s are both below their 30 week averages, an indication of longer term weakness in trend.   Only 30-50% of the component stocks in all five indexes closed above their 30 week averages, suggesting that all of these indexes may find themselves below this key average soon……….

It has taken me 40+ years of trading to understand the folly of fighting the overall market trend.   Whether I look at Livermore’s “line of least resistance,” or O’Neil’s “M” in CANSLIM, or Nicolas Darvas’ writings (See Boik’s books at right) I find these gurus all saying that there is a time to be out of the market when it is declining, or to be short.   This is a very difficult rule to follow because even in weak markets, I am tempted to go long when I find the “perfect” text book price pattern that brought huge profits in a prior rising market.   The critical point to remember is that the same price pattern that works so well in a rising market, is likely to fail in a declining market.  Half of the battle for Wpm1007conserving capital is to resist the temptation to buy that unusually strong stock in a bad market.   The odds of success are against me.   And yet, being in the market is so seductive.   (One way I handle such a temptation is to use a very small portion of my portfolio to buy that irresistible stock–just in case I am right.) This topic is so important, I will prepare another post this weekend that will delve into the writings of my favorite guru, Nicolas Darvas, as they apply to the importance of following the market trend.