New Buy:(STEC), Addon Buy:(GMCR), Mid-Year Review

It looks a bit like I'm trying to trade my way out of a slump. I'm caught a bit between a rock and a hard place. On the one hand, I've over traded, made poor decisions, and lost some money. These factors indicate I should slow down. On the other hand, the rally is working, and leading stocks are acting well and breaking out. This is an excellent opportunity to pick up some stocks that I've been watching for an entry point for weeks. Never bashful, the latter is the approach I adopted. I'm not going to let past failures keep me from buying good stocks at the right time.

My first position in (GMCR) came close to stopping out on Russell Rebalancing day last Friday, but quickly recovered this week. I still haven't seen the volume come in they way I'd like, but the stock seems to be acting well around key support levels. I've been watching it bump up against $60 for about a week, so when it passed through that level I added to my holding. I would like to see the stock make a new high next week when the traders return from vacation.

Additionally, I've been patiently watching (STEC) to see if it would form a high tight flag pattern. It got impatient and broke out today after correcting only a week, and I bought it just above the previous high at $25.33. This stock has as good a technical and fundamental pedigree as anything I've seen. Now it just remains to be seen if that translates into 'monster stock' status.

That's my trading activity today, but I've been giving a great deal of thought to my trading activity this year. I started out quite well, and at this point I'm doing as poorly as the last two years. That is a wakeup call and an indication it's time for me to seriously evaluate what's worked and what hasn't. For the first time I feel I've progressed enough to gain some real value from reviewing the charts of my purchases. In the past that was nearly pointless, because most of the time I was buying crap. This year I've traded fantastic stocks, but more often than not I've timed my buys poorly. It's my goal to further quantify my purchase process in a way that is flexible but successful and repeatable.

At this point, my record on purchases is 2-11-2. With my goal being to hit .500 on my stock picks, I'm a long, long way off. That's fine though - the important thing is to get it right from here, I can't undo history.

Tonight I'll look at my first two purchases, (SNDA) and (TNDM), which I purchased on 3/12 and 3/13 respectively just as the market followed through on this rally.

(SNDA) had broken out from a double bottom pattern prior to the start of the rally on week volume. It reversed the following week all the way back to the 40 wma, where it found support. It rode this line and then the 10 wma right up until the follow through day where it broke out in above average volume, and this is where I bought it. The chart does not show the obvious accumulation that I tend to look for now (think the bars in the ATT wireless adds), but adding up the weeks in the chart the ratio was more toward accumulation than distribution.

(TNDM), on the other hand, did sport obvious accumulation in the chart. The volume soared in the weekly chart as the stock climbed the right side of a well shaped cup base. Like (SNDA), (TNDM) broke out ahead of the follow through day, then consolidated further, and exploded to new highs from the 10 wma on the follow through day.

Both stocks were in strong industry groups at the time of their breakouts, and both proceeded to notch gains of 20% or more before correcting. So why did I sell them for no gain?

Just two days after the follow through day, the market logged a distribution day across all the indices. Historically, this has spelled doom for a new rally 90% of the time. Still gun shy from my prior failures, I played it safe, moved my stop loss orders up, and stopped out of both positions in a couple of days.

Lessons Learned:

• Watching the market is important, but listen to the stock too. Both of these stocks were acting well and probably deserved some room to work.
• Trust the 5% stop loss. If I'm buying the right stocks at the right time in the right market, the 5% stop loss should protect me. I have to be careful moving stops, although I will do so to put it near key support levels when the situation calls for it.
• Don't be afraid to lose money. I should feel fear before buying a stock, not after. I should imagine how I will feel if the position doesn't work out, and if I will regret the purchase. Once I determine it is a sound buy, I should leave the stock alone and let it work (within reason).

All in all these positions were listed as a 'Push' - neither a win or a loss. They went on to be winners, but there was a strong argument for selling at the time that I did. I bought good stocks at the right time and sold for a sound reason, so I consider these fair trades that I do not regret.

I'll get into some trades that I do regret in my next post...

Sell Stop:(PWRD)

The Chinese MMORPG group got destroyed over the past couple of days after the government changed some rules so that gamers could no longer buy real world goods with in-game currency. My position on (PWRD), which was looking extremely promising, ended up at an 8% loss (the maximum I'll accept).

I started out the year well, and now I'm in quicksand. I've been here before. I'm pressing, struggling, and the harder I struggle the deeper I sink (more money I lose). PWRD was unfortunate because it was more a case of bad timing/unforeseen news than an issue with stock. The situation changed dramatically a couple of days after I got into the stock.

Nonetheless, this is a danger zone and I need to be very careful from here on out. I'm in two good stocks, (ARST) and (GMCR), and I'm watching (STEC) for the formation of a high tight flag pattern. Other than these stocks, I need to exercise caution and patience more than anything else right now. The losers are eating the winners alive.

New Buy:(GMCR)

Friday I thought I had the opportunity I've been waiting for to pick up (GMCR) as the volume started to come in while it retook the 21 dma after finding support at the 50 dma. I bought around $59 only to watch if fade throughout the day and get hammered in the closing minutes.

Most likely it was a Russell Index rebalancing move, but I don't know what that means for the stock today except that it leaves me in a precarious position. The stock is right near my stop, which I'm removing this morning for a bit until I see how the stock settles in and trades. This is the only situation that I ever leave myself vulnerable to a greater than 8% loss, but 90% of the time it's worked out in my favor - in fact I don't recall ever taking a loss greater than 8% on any position.

Of course, now that I've said that...

Quick Hit at the Open

I've said a number of times that I don't like leaving stop loss orders in at the open if a stock is close to stopping out, as the opening 15 minutes are often not indicative of a days action. Today this came true as I was whipsawed out of (PWRD) in the opening minute of trading - I wasn't watching the market at the time.

The stock promptly recovered and I purchased it back again at the same price, $30.15, adding a secondary buy at $30.74 as it made a new high. This stock has the massive ramp up in volume that has accompanied the winning stocks I've had in the past, we'll see if (PWRD) can do the same. I've definitely seen my optimism of earlier this year as I've struggled and made far too many mistakes. It's time to get back on track now.

Sell Stop:(TSRA); New Buy:(PWRD); Addon Buy:(ARST)

It was a busy day. I stopped out yesterday on (TSRA), which I had set the buy stop order wrong for. I've been on a not so smart streak lately and that just capped it off. After my strong start this year, I'm now just basically even and really need to be careful that I don't get into old habits of 'swinging away.'

Of course having said that, I made two new buys today... I've torn because I see so much opportunity - so many leading stocks are offering entry points here. One of my buys was (ARST) at $16.37 as it found support at the 50 dma for a second time since it's initial breakout. The relative strength on this stock has been improving, and it's worked for me so far, so I tried to go back to basics and add to what's working.

I also purchased (PWRD) at $30.15. This stock has been been popping up on my screens lately, and I just can't ignore the massive volume it's seen as it moves up the right side of what I see as a long and deep cup pattern. IBD says it has not offered a proper base, but neither did (FUQI) according to them. All I want to see is a stock clearing resistance on massive volume, and that's what I think I'm seeing with (PWRD). In fact, this quality was lacking in my recent failed purchase on (SNDA), which could've been bought better today than when I bought it last week. Back to my mantra, buy strength, not weakness.

Tomorrow should be interesting, with the low summer volume and post-FOMC-volatility.

Sell Stop:(SNDA), and a Rookie Mistake

Today (SNDA) stopped out as it dropped below the 50 dma. I still believe I'm going to have more success buying 50 day pullbacks around the moving average, but would be better off waiting until I see some volume come in to the upside.

I also made a pretty stupid mistake. I set up a couple of buy stop orders Sunday night, as often do in the evenings, but I had the price wrong and ended up buying (TSRA) around $24.26. I like this stock, but wanted to see it clear $25.14 before buying as I think I see some resistance around that area. Of course today was also not the day to take new positions in anything.

I'm not convinced this rally is done, but I've racked up 3 failed trades recently so I'm going to pause any new activity for now and just manage my current positions. The three failed trades are not (yet) in a row as I still have a successful trade working in (ARST), however common sense dictates caution at this time.

New Buy:(SNDA), Addon Buy:(ARST)

After keeping my eye on (ARST) for a few days after earnings I decided to rebuild to a full position in the stock again, picking up a third of a position at $17.44. The stock has been holding a nice zone during the weakness in the market lately, which I believe points to relative strength in this stock.

I also purchased (SNDA) this morning as it's finding support at the 50 dma. Recently I've decided to take a more aggressive approach with stocks finding support at the 50 or 21 day moving averages. I have more success buying early in this situation than late. Waiting until the stock clears a new high has shaken me out of several positions, and would've with (ARST) as well. It was the lower price I got on that stock that kept me in it through some of the volatility.

Additionally, as I watch the real leaders of this market, such as (FUQI), (STEC), and (GMCR) for example, they've given entry points at the 21 dma. I think that I know a titan stock when I see one, and should not be afraid to pick up shares at a pullback to the 21 dma with these stocks. I will still use my 5% stop loss and actually feel more confident buying at a key support level than at a pivot point that I've seen show little support to stocks.

The action of the market is still a question mark lately, but as long as we're in a rally I will continue to buy stocks, carefully. I think the low volume of the summer can cloud the signals the market is sending, and it's likely that we'll trail a bit sideways until the fall, but of course I can't predict that. I actually have two stocks on my watchlist that I'm willing to buy if they continue to act right, and then I will cut the weakest stock(s) from my portfolio and hold those that perform. Because I have no great confidence in my ability to pick an individual stock, I'd rather cast a slightly wider net and just let go those stocks that don't act the way I'd like. I don't mind using margin to do this for a short time, because I have my stop loss orders so tight. I just try to keep my capital risk fixed at any given time to an amount I can live with.

Sell Stop:(LFT), (ARST) Earnings, Analysis

(LFT) flashed a warning sign on Thursday when it came within a penny of the 52 week high intraday only to reverse and close down on the day. On Friday I stopped out of the stock for the second time.

It does not bother me to lose money on the same stock more than once. If a stock looks strong and stages strong breakouts, I'm willing to purchase it on a new breakout, even if I lost money on the last breakout. Why? The stock has no memory of me. I should have no memory of it. Some stocks may fail to breakout two or three times and then go on to huge gains, I saw one do this my first year investing, I'm afraid I can't remember the stock at this time.

Bottom line is I evaluate the fundamentals and technicals and if everything looks like it's in order, I purchase the stock. This was the case with (LFT), and looking back on it I don't regret the purchase. There may be an issue with the stock or it may be the market getting a little 'toppy,' either way I bought within my system and not all buys will go on to be winners.

(ARST) earnings came out after the close Thursday and they beat estimates by 38%, yet the stock dove 13% in after hours trading. That's a nerve wracking thing to watch, since it would've turned my 11% gain in the position into a 5% loss. Nonetheless, the approach I took was to leave my stop in place - I don't trust extended hours trading, institutions don't trade after hours and therefore it is often not a true representation of the supply and demand for a stock.

This said, it still was a difficult position to be in Friday morning, and I wasn't sure quite what to do - I never am in these cases, a problem which I will correct in my analysis below. For one thing, I don't like to leave stop orders in place at the market open when I know there is going to be this kind of volatility - the first 15 minutes can shake me out of a position only to see the stock move higher once it settles down. Obviously, the problem with this approach is that I have no protection from catastrophic losses.

The second issue I had was with my add on buy. As I've said, I want to have a 10% profit cushion heading into earnings day, for exactly this kind situation. With the size of my account, I've been setting my stops based on my cost basis - I'm a small enough trader that I don't want to have multiple commission charges where I can help. What this meant in this case was that my secondary buy was exposed to a greater percentage loss than I would normally accept.

In the end, I decided to take the stop loss off for the first 15 minutes and look to get out of my second position for a 5% loss if possible. The stock opened down 11% and came up to a point where I was able to stop out on the second position. The problem was, the stock continued straight up from there and turned the loss at the open to a couple percent gain at the close. Needless to say, I felt a bit dumb for selling that second position, but I had no way to know the stock would continue to rise.

With the partial sell of (ARST) and the stop out of (LFT) I was feeling pretty dejected on Friday. I'm back in the red this year despite my recent winners, and that left me wondering if I can ever really get this right. Whenever I feel that way I choose to take a hard look at what is standing in the way of my ultimate success, and correct it when possible.

Evaluating this year's activity, several things became clear to me:

• If I had followed my own rules, I'd be 3-3-2 for my record investing this year, meeting my goal of a 50% success rate and have more capital. It's the dumb stuff like shorting and buying (SNDA) nowhere near a buy point that is killing me
• If I have a potential big winner, I should at least let it test the 10 dma before bailing. I might've gotten an extra buck a share or more out of (FUQI) - I could still be holding it today
• With the small size of my portfolio, it makes more sense to set my stops once for the whole position off of the cost basis and then NOT MESS with it. As I said, it seems like I burn myself every time I try to meddle with my stops.

So once again it's good news bad news. I have a lot of stocks that I was close to profits on and bungled, and half the time I lost money it was simply because I didn't follow my own rules.

Unfortunately, it may be some time before I'm able to demonstrate I'm learning my lessons. It looks to me like this rally is topping and it may be some time before we rally again.