27th day of QQQ short term up-trend; Bollinger Band constrains QQQ and gives me an edge


QQQ fails to break above top Bollinger Band (15,2) and bounces down.

QQQdaily11182013I look for support at the lower band, around 81.77. I find that the 15 day 2 standard deviation   Bollinger Bands are very useful for identifying short term support and resistance levels for the index ETF’s. Just look at the daily chart below to see how prices stay within the bands. A move outside the bottom band is often a sign that the index will reverse up. However, if the lower band is broken and starts to turn down, it often tells me that a larger decline is imminent. While not perfect, the BB’s give me an edge when interpreted   in the context of other confirming indicators. You can plot Bollinger Bands yourself on most stock charting programs.   Freestockcharts.com is a simpler, free version of TC2000 (the subscription software I use).


How I find the next AAPL growth stock; New GMI buy signal; IBD50 out-performs again


When I presented at the DC Worden Seminar two weeks ago, I asked the audience how many would buy a stock at a new high.   Only about 5% of the 200 people in attendance raised their hands. I was incredulous. All of them admitted they wanted to buy a stock that went to the moon, but failed to understand that a stock that climbs to the sky has to hit new daily highs many times along the journey.   People want to buy bargains, when stocks typically sell at a bargain price for a reason.   If one wants to buy a terrific winner, one should not look for bargains.   The greatest stock traders bought stocks at highs and sold them at higher levels.

Everyone would like to have profited from AAPL’s meteoric rise.   How might someone have identified AAPL’s potential for growth before it took off?   I went back and looked at AAPL’s performance from late 2011 on, just before the start of the December market rally.   On October 17, AAPL hit an all-time high of $426.70.   That high was broken on January 9, at $427.75.   On January 18, AAPL hit a new high of $429.47 and by the end of January it had hit a new high on 4 days.   The final new high that month was on January 31, at $458.24.   This collection of 4 all-time highs in January was a clue of things to come.   In February, AAPL hit a new all-time high on 13 days, or 65% of the trading days in that month!   By the end of February, AAPL had hit $547.61, a gain of about $90 per share from the end of January.   AAPL proceeded to hit a new high on 50% of the trading days in March, with the March top of $621.45. To date, AAPL has hit 4 more daily highs in April, topping out at $644.

There are some very important lessons from the above.   First, if you refuse to buy or hold a stock at an all-time high, you will never ride a wonderful stock like AAPL.   Second, if you want to find the next AAPL, begin by looking at the list of stocks that hit a 52 week high the prior day.   Then weed out the stocks that are not near their all-time high. Then research the remaining stocks’ fundamental and technical characteristics.

If my GMI has a buy signal, I concentrate solely on stocks at or near their all-time highs that have risen strongly for months and are now breaking out of multi-month consolidations.   The best way to see such stocks is to look at their monthly charts.   Here is an example of the type of stock that interests me. I bought some PSMT last week when it touched $80.   This monthly chart shows the stock breaking out of a 6-7 month consolidation, coming after a 7 month rise when it doubled in price.   I make a small pilot buy of such a stock and place a stop loss below the break-out level.   If the stock continues to rise, I will add to my position and raise my stop.   I love to pay more for a stock that I have already bought.   I never average down. I found PSMT simply by using TC2000 to scan for all stocks that hit a new high and then charting their monthly price patterns. The fact that the stock was flagged as having appeared on an IBD 50 or New America list increased my confidence in the stock. Other stocks that hit a new high last week and that had promising monthly charts were: CF, DSW, WPI, ECL, LKQX, CB, KMB, ULTI, FDO, SBNY, GEOI.   These are worth researching.   I always check out whether earnings are imminent–I stay away from stocks that will report earnings soon…..

I am willing to go long again because the GMI just issued a buy signal. I am slowly going long and have bought some QLD.   I also sold some weekly cash secured puts on SPY.   I am basically betting that the SPY will close next Friday above the strike price (140) on the put options that I sold.   If I am wrong, I will have to buy back the puts at a higher price, or buy the underlying SPY shares at the strike price.   I feel comfortable with these short term bets on the SPY as long as the GMI is bullish. Furthermore, the SPY is about the only thing I would be willing to have put to me.   I do not do this with individual stocks that can be much more volatile. If I can pocket a premium of 1/2 to 1% each week, it gives me a nice monthly return on my money….

The GMI is now at 5 and the GMI2 is at 6.   The GMI was >3 for two consecutive days, which is my criterion for a buy signal. So I am closing all shorts and going long in my trading account.   The   Daily QQQ Index component of the GMI will turn positive with an up or flat day on Monday.   I use a very stringent criterion for a change in the short term trend of the QQQ.   Thus, Friday was the 10th day of the QQQ short term down-trend, within a longer term up-trend.   I will be much more confident of the new up-trend once it lasts 5 days. The QQQ and SPY have now closed above their 10 week averages, an important sign of strength.   52% of the NASDAQ 100 stocks closed with their MACD above its signal line, another sign of a strengthening market. The Worden T2108 Indicator is in neutral territory, at 60%. IBD continues to see the market in a confirmed up-trend…..

Over the years I have investigated how well the IBD100, now IBD50, stocks perform versus other groups of stocks.   The stocks that meet the IBD growth criteria usually outperform other stocks in a rising market, but under-perform in a falling market. I replicated my past analyses by looking at the performance of the IBD 50 stocks published on 12/22/2011 at the beginning of this year’s rise, through last Friday.   The IBD50 stocks did much better than the NASDAQ 100 stocks or the S&P500 stocks.   The median change in the IBD50 stocks was +20%, compared with +15% for the NASDAQ 100 stocks and +10% for the S&P 500 stocks.   Moreover, the IBD 50 stocks really shined when looking at the likelihood of a larger ,+30% gain.   34% of the IBD 50 stocks gained 30% or more, compared with only 16% of the NASDAQ 100 stocks and 9% of the S&P500 stocks.   Clearly, the IBD selection criteria resulted in a lot more winners than one would find among the stocks in these other two indexes. That is why I focus largely on watch lists and scans containing stocks that have appeared on IBD 50 stock lists published every Monday.



Leaders rebound strongly; TQQQ-3X ETF for the QQQQ, CTXS: cup-with-handle?


The GMI is 5 (of 6) and the more sensitive GMI-R is back to 9 (of 10). The relatively weak major stock averages do not tell Monday’s story.   Leading stocks like AAPL, AMZN, NFLX, and PCLN had terrific days.   The new QQQQ up-trend is now in its 2nd day. I am more certain of a new short term trend if it can reach 5 days.   For now, however, with the longer term up-trend intact, this is a good time for me to buy   leading stocks that recently became oversold and are now rebounding………

My IRA account is now near its all-time high, having increased 15x since 1995.   My margin account has doubled since earlier this year. The GMI has kept me on the right side of the market. Half of the key to investing success is to just follow the trend of the overall market. My university pension remains 100% long in mutual funds. I rarely move out of these funds into money market funds.   But by following the GMI, I remained safely in cash during the 2000-2002 and 2008 market declines……..

For quite a while, I have shown how the 3X technology ETF, TYH,   outperforms the QQQQ, and virtually all   stocks, during an up-trend.   I did not know that a 3X ETF exists for the QQQQ.   Apparently, UltaPro created one last February.   TQQQ is designed to track the QQQQ by 300%. Since the QQQQ rallied on September 7 (+15.8%), the TQQQ increased +54.4%, while TYH advanced only +49.2%. The comparable inverse ETF for QQQQ is SQQQ, which goes up as the QQQQ declines.   Other 3X ETF’s from UltraPro are: URTY, UMDD, UPRO, UDOW, SPXU, SDOW, SMDD, and SRTY………..

I bought a little CTXS on Monday.   Judy told me about this stock long ago and I have been watching it for an entry.   This chart looks like a cup-with-handle pattern (click on chart to enlarge), but I am concerned that there was no increase in volume as it broke above its handle.   If it starts to slip, I will sell out.

CTXS is also a RWB rocket stock, as shown by the weekly GMMA chart below. All of the short term averages (red) are well above the rising longer term averages (blue).

How I buy AAPL for 12% down without using margin!


I thought you might like to know a way to buy a stock for little money down using deep in-the-money call options.   I became aware of this option (pun intended!) by reading Lee Lowell’s wonderful book on ways to get rich from options. A call option provides someone the right (but not the obligation) to buy 100 shares of a stock at a particular price (strike price) for a period of time (until option expiration).   Most people gamble with call options and try to buy a cheap call that is far out-of-the-money.   For example, if one goes to yahoo finance and enters AAPL and then selects options, one can get a whole table of possible call and put options for AAPL.

Looking at this table of May options on Sunday evening, I see that I could buy an out-of-the-money call on AAPL with a strike price of   $270 for about $2.47 per share or $247 total for 100 shares (excluding commissions).   This call gives me the right to buy 100 shares of AAPL at $270 per share through May option expiration (3rd Friday of each month).   Since AAPL stock is trading at $247.40, this option is far out-of-the-money.   It would have no real value to anyone until AAPL is above $270 per share (strike price).   The reason people are willing to buy the option for $2.47 per share is that they hope (and are betting) that AAPL will be above $270 by option expiration.   The money they are paying for what is currently a worthless option is   called time premium. In fact, this option buyer would have no profit at expiration unless the stock is selling at $270 + $2.47 (price paid for option) = $272.47   This is gambling.   But remember, if AAPL closes at, say $280 per share by option expiration, the option that was bought for $2.47 per share would now be selling around $10 per share, a quadrupling of the initial investment!   This is because one could execute the option and buy the 100 shares at $270 per share and then turn around and sell them immediately in the market for $280 per share.   One does not need to buy the shares, however, to reap the profit.   Before the option expires, one could just sell the option in the option market for around $10 per share ($1,000 total) in this example.

But an unusual characteristic of options is that as the option is deeper in-the-money, the time premium becomes very small and a small rise in the stock can make the option profitable to a buyer.   For example, the May call option with a strike price of $220 is offered at $29.40 per share, or $2940 for 100 shares.   This means that I could pay $2940 to control $24,700 worth of AAPL through May expiration.   Since AAPL is trading at $247.40, the May $220 call already has real (intrinsic value) value of $27.40 per share ($247.40-220.00).   Since the option would cost me $29.40 per share, the stock only needs to rise $2.00 to $249.40 before I begin to make money as AAPL rises.   Thus, for an investment of $2940 I get to reap the benefit of the gains in a $24,700 stock.   This equals about a 12% down payment, without the need to go on margin and pay interest!

What is the down-side?   Since I pay $2940 for the option, if AAPL closes below the strike price of $220, the option would expire worthless (why would someone buy the right to buy a stock at $220 if at expiration the stock   is   trading below $220?)   So, one can lose the entire investment if the stock falls a lot.   But this strategy loses less money than if one had paid full price for 100 shares   and then seen it fall far below $220!   The most one can lose is what they paid for the option. The big temptation to be avoided here is using the leverage to buy options on more shares than one could have bought outright. That is the way to make a huge bet and lose a lot of money.   I use this option strategy to buy the right to purchase about the same number of shares I would   have been able to purchase.

If you like this strategy, I suggest you read Lowell’s chapter on this topic.   Also, read up on how to open an options account and trade options. By the way, I would not even consider buying AAPL call options until after the earnings come out this week.   Look what happened to other high fliers last week, after they reported great earnings.

Now, the GMI and GMI-R are still at their maximum values.   However, the action in ISRG and GOOG led me to sell out some positions on Friday.   I think it is a warning sign when the leaders crack like that.   Remember, as trend followers, we only tend to exit the market after the trend has changed.   Thus far, the markets remain in an up-trend.   However, I am moving my stops up and am ready to get defensive. Friday was the 4oth day of the current QQQQ short term up-trend.   The last time the QQQQ closed below its 10 day average was February 23rd! That moving average is now at 49.17, only .36 below the current value of QQQQ.   It would not take much of a decline in QQQQ   to break below this important moving average. Note that the Worden T2108 Indicator is now below 80% and may be getting ready to decline.   Be careful out there.   Things probably can’t get much better.

Jim Cramer on stop loss orders–terribly wrong again! KCI soars; How I trade the 3X ETF’s


I am dumbfounded!     I recently taped some of Cramer’s shows and reviewed Friday’s show this weekend.   At about 10 minutes into his show, Cramer responded to a caller who asked him about the use of stop loss orders.   Cramer ranted on about how he did not want his “home gamers” to put their orders on “automatic.”   Stop losses, he said, were okay for professional traders but not for his listeners who are part-time traders not glued to the market, and who are not robots.   I had to listen to him several times to make sure I heard what he was saying, because his advice was exactly opposite to what I think people should do.   His reason for not using stop losses was that one might get whipsawed–buy a stock at 60, put in a stop loss order to sell if it falls to 59 and then have the stock fall to 58 and be sold out, only to reverse and close back above 60. But it is precisely the part-time traders who are not watching the market every minute who need to have automatic stop-loss orders. Traders who are glued to their monitors can watch their stock closely and manually sell when they want to. It is the part-time trader who get his head handed to him when his stock plummets while he is at work or in a meeting. In 2005, I lost a lot of $$$ profits when I went to a business meeting thinking I did not have to put a stop in on a very strong stock (TASR) I was holding. That mistake cost me big–the market always exacts its tuition, and we must learn from our mistakes.

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,

Read moreJim Cramer on stop loss orders–terribly wrong again! KCI soars; How I trade the 3X ETF’s