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

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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,

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QQQQ rally continues, in 14th day and up 8.7%, but 3X emerging bull ETF, EDC, up 28.2%

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There were 11 new highs and 4 new lows in my universe of 4,000 stocks on Monday.   Five of the 11 new highs were on the IBD100 list from March 30:   TNDN, NFLX, GMCR, NTES and CPSI.   All of these but CPSI hit all-time highs, an extraordinary accomplishment, given the market’s decline over the past year.   Any stock trading today at an all-time high is probably worthy of   attention.   I own GMCR and NFLX.   One other stock on the new high list Monday is TSYS, which I wrote about months ago.   It has huge recent earnings increases and has been in a steady up-trend.

I am putting more and more funds back into the market as this up-trend continues. By my indicators, the QQQQ   just completed the 14th day of its short term up-trend.   During that time, the QQQQ has advanced 8.7%, while the ultra long QQQQ ETF, QLD,   has advanced 17.6%.   During QQQQ up-trends I buy QLD.   During this same time period, the emerging markets bull 3X ETF, EDC, has advanced 28.2%.   Those who say the 3X ETF’s are worthless as trading vehicles (as in J. Cramer) should look at these data.

Jon Stewart takes on the pundits at CNBC… Finally!

Mike Wish here.

I try not to watch too much of the liberal media but this is hilarious.   This is what dad complains about at the dinner table shortly after watching Jim Cramer fire off a storm of cheap, canned audio from his soundboard.   These are the pundits that keep Dr. Wish up at night, tossing and turning.   The infamous pundits responsible for everything that’s wrong with financial analysis and prediction media. (not that I have any opinion on the issue…)

I showed this video to him and he laughed and laughed.   I thought I’d be the one to share it with all of you because he doesn’t yet understand how to embed YouTube videos into his posts.   We’re still working with twitter, we’ll get there soon enough though!

See the video on the next page:

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Jim Cramer finds (TA) religion; TSYS: cup with handle breakout? Indexes are weak, but some promising IBD100 stocks appear

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I know that the GMI has kept me and, I hope others, out of the long side of this market since at least August 2008, the last time that the GMI was 4.   I prefer the GMI to be at least 4 before I commit many IRA funds, and especially my university pension,   to the long side.   Since the GMI fell below 4 in late August, the QQQQ (Nasdaq100) and SPY(S&P 500) have declined 35%, and the DIA (Dow 30), by 31%.   During that same time period, 95% of the Nasdaq 100 stocks declined, 36% have declined more than 40%.   The biggest losers in the Nasdaq100 component stocks includes such well respected stocks as: RIMM, ISRG, and DELL (each down 63%), and JOYG (-69%)   and WYNN (-72%). As to   the “safe, buy and hold” Dow 30 stocks; 100% declined in this period, with whopping declines in: AXP (-58%), GE (-60%), GM (-75%), AA (-76%), C (-80%) and BAC (-81%).   Do you see why it does not make sense to fight the general market’s trend, as reflected in the GMI!

Speaking of the GMI, the table below shows

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Addicted to market prediction; GMI; 2; GMI-R: 3

GMI1226 Why is it that we all appear to be addicted to predicting the markets?   If you will review the many pundits’ predictions from the beginning of this year (and every year) you will find that it is very rare that anyone successfully predicts the market’s performance over the coming year.   Whether you look at Jim Cramer or Gary Smith or Tobin Smith or any of the media pundits you will find that no one predicted this year’s melt-down, although they all assert that they have been telling people to sell since the beginning of the decline.   (Revisionist history anyone?)   Given the many years of erroneous predictions by all market seers, why do we continue to look to anyone to accurately predict the market’s course?   The simple truth is that the best we can do is to assess the current trend of the market and align our trading to be consistent with it.   And we never know when a trend will end.   Therefore we MUST ALWAYS put in place stop loss orders or other methods to protect each position from a sudden change in the trend…..

For me, the current long term trend of the market remains down, and my university pension has been in cash for months and remains unaffected by the market carnage.

However, the short term trend of the QQQQ remains in an up-trend, having completed its 13th day.   The GMI remains at 2 (of 6) and the GMI-R at 3 (of 10). The Worden T2108 Indicator is at 51%, well in neutral territory.   But my technical indicators are “bearly” positive and unimpressive.   So, I remain mostly in cash in my trading IRA account.

GMI: 0; GMI-R: 0; 2,832 new lows on Friday; T2108: 1%; Our embarassing failure to educate youth about the market

The GMI and GMI-R remain at zero.  On Friday, there were 23 new highs and 2,832 new lows in my universe of 4,000 stocks.  This is the largest number of daily new lows since I started this blog three years ago. The Worden T2108 indicator remains at 1%, about as low as it gets.  This is the time to be on the sidelines in cash.  No one knows when this down-trend will end.  Friday was the 29th day of the current short term down-trend in the QQQQ…

It is amazing how Jim Cramer is now claiming to have been urging people to be in cash.  The truth is that he and the other market pundits have been urging people to buy stocks all the way down.  At  no time did any of them say to go mainly to cash.  Cramer has repeatedly ridiculed the use of charts.  But it is the chart patterns that warned me to get out of this market recently, and in 2000.  I started this blog to give the little guy (and gal) a chance to learn  how to discern the market's trend.  When the trend is down one should not be looking for stocks to buy.  One goes to cash or goes short.  There will be plenty of time to ride the next up-trend once it has proven itself….

It is a crime that we do not teach people how to think for themselves when they invest their hard earned money. High schools and universities should require students to attend classes in financial planning and investments. I teach an honors course at the university  and my students have a thirst for knowledge about the market. They often report that my class on technical analysis  is the most practical course they have attended and that it should be required for all students.  Why do we fail to educate our youth about such an important topic?  Think how many of our ageing baby boomers are now looking at greatly reduced assets for retirement. It is painful to me to consider the ramifications of this colossal failure to educate our citizens about how to manage their stock market investments.