New Buy:(ACM)

Today I bought (ACM) again. I felt that it formed a handle with a $31.15 buy point and my order was executed at $31.19. The handle was not ideal as volume didn't drop as the handle formed, however the shape is good and it's formed in the upper part of the overall cup pattern.

I think what keeps bringing me back to (ACM) is the overwhelming strength it's shown for the past five weeks - all up on heavier than average volume. This is the kind of quality in a stock that will cause me to overlook characteristics like a flawed handle or a weak industry group rating.

I also see the overall market showing strength one day after another. Again today the indices dodged a distribution day following the accumulation day yesterday on the news of the Fed lowering rates to 0%. If I looked purely at the indices and ignored the daily news (which is what I'm training myself to do) I'd think we're in a solid bull market.

There are however some caveats. For one thing, volatility remains extremely high. This factor alone can frustrate even the most seasoned investors. In times of uncertainty I react by using tighter stops on my buys, increasing the likelihood they will fail, creating more uncertainty (fancy word for fear). Certainly it's prudent to limit my risk when the market is unsettled, but I wonder at times if keeping such tight stops creates a self-fulfilling prophecy.

The other issue I see is a lack of quality stocks breaking out of sound bases. This may take some time to develop but for the time being I don't see any obvious market leadership.

I'll continue to evaluate these factors, but I think when you cut through all the crap the bottom line is investing is tough in a bear market and less tough in a bull market. It's easy to look dumb right now. I don't mind taking chances when I feel the market warrants it, as I do now. However, if I stop out again I will put myself in the penalty box for three weeks - barring myself from any new buys during this time period. I've read about similar strategies and feel it's an effective move. Whether the problem is me, the market, or dumb luck, if I'm striking out it's time to step away and get a new perspective.

Anyway, it would help me to relax and enjoy the holidays.

-Geoff

Stopped Out (THOR) and (ACM)

Stopped out of both of my positions yesterday, I had moved the stops up a bit so I took about a 3 to 5% loss on each.

This market continues to whipsaw, yet it doesn't roll over. As I'm typing this it's absorbed the news that the auto bailout was voted down and is now trading positively.

I can't predict the market and I won't try, but I'm still seeing evidence of a rally here. Whether or not it's tradeable remains to be seen - my results have been poor so far.

I've got one stock left on my watchlist that is setting up for a possible buy point next week. If I have another failed buy however, I will put myself in the penalty box for three weeks. I've heard of this strategy and I like it. No matter what the market is doing, if I fail on three to five trades in a row something is wrong and I need to take a break and re-evaluate.

New Buy:(ACM)

I added (ACM) to my portfolio today. This stock comes from a weak group (builders) but it's an infrastructure play. I like the chart a lot, it's had heavy accumulation the past 4 weeks or so. It's close to a 52 week high and after that an all time high, and it IPO's within the past few years which is also good.

On the downside, I probably bought a little high. IBD described the ideal buy point at $27.30 based on a cup with handle pattern. If it did form a handle, it's flawed. I actually think this stock can be purchased when it clears the whole cup pattern at $32.51.

Once again the market had an alright day, down but on lower volume and the volatility seems to still be easing down. The holidays might help that to come back to normal levels.

New Buy:(THOR)... and a Confession

I have to admit I purchased and stopped out on a stock last week: (EBS). It's a great stock I had no business buying. It was nowhere near a buy point and I basically just took a stab at it, stopping out the very next day. I didn't post about it because I was so disappointed in myself - but of course that's not the right way to handle a mistake. Instead I'll post it here and use it to remind myself not to be such a dope next time.

I do see a real change in the market the past week and think we could have a tradeable rally here. Suddenly the market is acting well, shrugging off bad news and powering higher.

My problem is that work has me so busy right now I probably don't have the time, attention, and emotional fortitude to be in the market. I've had 4 days off in the past 5 weeks, and I'm exhausted. It's taken a toll on myself and my family. I'm doing what I can to change the situation and believe I'll be in a different organization early next year, but for now life is very chaotic. This is not the ideal scenario for investing.

It's hard enough for me to keep a level head under normal circumstances, now I find emotions dominating my investing actions. I have a nice watchlist but I was plagued by doubt and missed the buy point on (ACM) while I purchased (THOR) at $29.68 only to see it close slightly below the $29.60 buy point at the end of the day.

Sticking with the theme that the system is where my success will come from, not some grand stroke of genius on my part, I'm going to have to find a way to handle this market without emotion or just stay out altogether.

Sell Stop:(MYGN)

Stopped out of (MYGN) today at $68.20 for about a 3% loss on my total position.

Not too much to say, this was a probe buy in case the rally took hold, I knew it was risky and kept a tight stop - which worked.  Probably should not have added to my position with a second buy in this climate, but I kept my risk of capital roughly the same so it didn't cost me much more.

I believe today's action effectively ends this rally, I'm back in cash and it seems the market has more work to do before we see a tradeable uptrend.

-Geoff

Add On Buy:(MYGN)

Today when (MYGN) dipped down to $68.50 again I put in a buy at the original $69.24 buy point which was executed.  My cost basis is now $70.20.  It's a risky business averaging down, but stocks often come back to the buy point I don't mind getting some shares closer to the true buy point as long as the stock is moving in the right direction at the time I buy it.  I also use a tight stop in that situation so I won't compound potential losses.

As a rule it's poor practice to ever make a second buy at a lower price than the first, and with the negative action of the market the past two days I may regret it.  I've moved my stop up though so my risk exposure has increased only slightly.

-Geoff

New BUY:(MYGN)

I made an initial buy today of the stock that I saw breakout yesterday - (MYGN). It was a small initial buy at $70.70 with a 5% stop loss. If I suffer that loss it will make up less than 2% of my total capital.

This stock made my screen yesterday as it staged a powerful breakout to a new high on earnings news (just the way I like it). The ideal buy point was $69.24, and it traded below that point for a time this morning. However, the market opened poorly, and I wanted to wait to see how the volume was tracking before making the purchase. I'm remaining cautious and would rather pay a couple percent more for a stock than buy it as the market is logging it's second distribution day in a week.

As it turned out, volume was running lower than yesterday so I went ahead with the purchase. This stock is in a strong group, is newly profitable, is in a 'recession proof' business (if there is such a thing and the chart looks strong. Growth forecasts are good as are the fundamentals.

Of course, none of this guarantees my a profit. However, I think it's a good candidate and my risk is managed as well as I know how so I feel comfortable with the buy. In the current climate I will continue to focus on risk management and capital preservation as my primary goals.

-Geoff

Signs of Opportunity

I found today's market action positive.  I viewed the distribution day immediately following last week's follow through day as an end to that rally attempt, as something like 90% of the time rallies fail if they suffer a distribution day one of the first three days after a follow through day.  I don't like those odds.

Therefore I started tracking the market anew last Thursday, when it began what I considered a new rally attempt.  Based on that view, today was a follow through day on all three major indices.

I think there are some compelling reasons to market can mount a successful, if short term, rally now.

First, the election is over.  For better or worse, the issue is decided and the market hates indecision.  Now that we will know who we have in Washington, the market can get on with pricing the new establishment in.

Second, volatility has been steadily declining from it's historic levels.  The market is calming down.

Third, the S&P 500 retook the 1,000 level - there could be psychological support here.

Finally, and probably most importantly, there are some quality stocks breaking out of decent bases this time.  Worth watching is that most are related to the medical field - typically defensive - but that doesn't mean some money can't be made from them.

I had a nice candidate come up on my screen tonight and I'll have a look at it tomorrow.  If it acts well and I can get in near the buy point (it would need to pull back some) I'll take a run at it.

-Geoff

One and Done?

Today the FOMC lowered short term interest rates 50 basis points to 1%.  The market stayed true to form and was very volatile following the news, concluding with a massive drop in the final 10 minutes or trading that landed the Dow and S&P 500 negative on the day.  Both indices also logged a distribution day.

Traditionally, a distribution day within the first three days of a new rally signals the rally will fail (about  90% of the time).  Since there are nearly no high quality stocks breaking out of sound bases it's really moot point anyway.

Patience is still key, there is no need to swim against the tide.

-Geoff

Another Follow Through Day

Just as I thought the market was setting up to take another dive, it once again did what I least expected and logged a follow through day with massive gains on equally massive volume.

In spite of this, there is still plenty of reason for caution.  The market's unprecedented volatility over the past month renders any move to the upside or downside questionable - the old rules about what a big volume move means don't necessarily apply here.  This may have been an unwinding of short positions ahead of the Fed's announcement on interest rate policy tomorrow (a 50 or 75 basis point cut is likely).  In my experience, any market movement the week of the FOMC meeting is suspect - it's prudent to wait until a couple of days after the rate announcement to see how the market reacts.

Furthermore, there is just no leadership visible.  IBD shows no stocks making a new high today on the NYSE or Nasdaq, while almost 1,000 made a new low.  Few stocks trade above even their 200 day moving average, as I've discussed before this is woeful.

Nonetheless, I will not dismiss this new rally outright.  Despite all the bad news (or because of it), we may see a powerful snap-back rally.  I have one stock on my watchlist, and will keep an open mind if other stocks make my screen.  In the meantime, I'm in no rush and will 'let the market come to me,' so to speak.

-Geoff

Rude Awakening

It's a pretty overwhelming task to comment on the market these days. What we're seeing is certainly historic, perhaps a once-in-a-century event. Though we don't have the kind of sell-off that occurred after the tech bubble burst (yet), we're looking at a global recession that is possibly beyond anything we've seen before. The 'VIX' - or volatility index - which measures fear in the market is DOUBLE the previous high level it had reached in almost 20 years it's been measured. Despite this, each time the market looks like it will capitulate, it instead reverses and closes up or down more moderately. Some of this is due to constant governmental interference (necessary or not depending on one's personal views), and some of it has no real explanation. This market seems to befuddle even the most experienced traders.

I still expect to see the S&P 500 in the 700's, and possibly below. I think the PE ratio for the S&P 500 is still too high for the current earnings expectations, which will continue to be revised downward. Of course I don't buy or sell stocks based on what I think, but I do still follow the behaviour of the market and look for 'setups' to the upside or downside. I don't think there is too much harm in forming expectations of what the market or an individual stock will do, as long as I base my decisions on what is happening, not what I think will happen.

As bad as things are the CAN SLIM method has kept me in cash most of the past year. The few times I've invested in rally's I'm made small gains or stopped out for small losses. I'm happy with my risk management and capital preservation this year. Outside of the cost of trading materials, I'm down only a few percent on my trading portfolio.

Friday I used all of the money in my Traditional IRA (about 1/3rd of my trading portfolio) to purchase a fixed income bond fund (LSBRX). I use this same fund for my son's educational IRA, and I've watched it drop from $15 to $10 a share this year. I would never trade a stock this way, but at a yield of close to 9% now and an all time low on the share price I find this an excellent opportunity for that portion of my portfolio. I believe it will provide solid return by the time I want to put that money back to work in stocks. Meanwhile, the remainder of my portfolio is cash.

Over the past year I've given a lot of thought to the concept of risk management and capital preservation as the most important factor in trading. Since I began investing, I was always aware of the potential for a catastrophic loss on an individual stock, but felt I had this risk managed well with my stop loss orders (never more than 8% below my purchase price). I knew this system does not remove all chance for a catastrophic loss, but felt that it mitigates the risk sufficiently.

Then last night a friend emailed me about a stock that I've owned a couple of times in the past few months - (THOR). This stock has held up better than anything I've seen through this bear market, and was on the top of my watchlist. That is, it was on the top of my watchlist. My friend brought to my attention a news release after the market closed on Friday, where in short (THOR) stated that:

...wear and fatigue related to its implanted heart pump may require surgical replacement that could potentially be fatal...

...In five of these cases, patients expired as a pump replacement was not feasible...

Shares dove to $12 in after hours trading.

IF I'd still held (THOR), there isn't a thing I could've done to foresee this event or protect myself from the price move after-hours (same might even be true if the news came out while the market was open). This stock looked great and showed all the signs of institutional support, then without warning lost half of it's value. That is a very sobering realization for me.

I really still haven't come to terms with this. I plan on doing some research to see if there are further steps I can take to protect myself. I'd like to think the method I use had me out of the stock before the news came out, but couldn't this just as easily have happened if I owned the stock during a rally? I owned (THOR) a week ago - couldn't they have released this news then? Certainly the answer is yes.

This is a further reminder to me what a serious thing stock investing is. It's not nearly as 'fun' as it was when I began - and I think that's good. It's a business, a second job, and a risky one. I need to approach it without emotion, follow my rules, and be aware constantly that the market is still very random and can humble me at any time. It certainly got my attention yesterday.

-Geoff

New Buy: (LSBRX) and Portfolio Management

I didn't think to post about a new buy I made last week, because it wasn't really a stock trade. Today I got to thinking since I consider it part of my trading portfolio, I should treat it like any other stock trade with this capital.

I consider myself to have three different sections to my portfolio: my 401k through work, my Roth IRA, and my Trading capital.

I contribute 7% of my income to my 401k - that's the maximum amount that my company matches with a 25% contribution. Nothing like getting an immediate 25% return the first year you add to your capital! These funds are split just about evenly among three mutual funds: an S&P 500 Index Fund, an International Fund, and a Small Cap Value Fund.

I also contribute the maximum I'm allowed to my Roth IRA on a monthly basis. Like my 401k, these funds are split pretty evenly into mutuals: an Energy Fund, a Mid Cap Growth Fund, and an International Fund. I'm probably too heavily weighted in International funds and will look to shift some of that weighting to the Small Cap Value and Mid Cap Growth Funds.

Finally I have my trading capital, which includes a cash account and a Traditional IRA account. The Traditional IRA is a small amount that I had saved before the Roth existed. Because I'm optimistic that I'll be better off in retirement than I am today, I contribute to the Roth IRA now and the Trad IRA I just trade with the amount it has.

If CAN SLIM is so great, why not trade with all of my capital? Originally this is the question I asked myself. Fortunately my coworker and fellow CanSlimmer (see his investing blog here)is less aggressive and probably more prudent than I am, and he gave me the following advice: 'Don't nuke yourself!' Ok, there was more to it than that, but the basic premise is pretty simple. If I'm successful investing, I won't need my 401k and IRA to generate wealth. If I'm unsuccessful, I'll be glad I left them alone and should still be able to retire comfortably on their proceeds.

That brings me to this week. I've been buying a Loomis Sayles bond fund, (LSBRX), for a couple of years for my son's education IRA. This is a well respected, well managed, well performing fund historically. Not surprisingly, it's been beaten down this year, particularly in the past few weeks. It trades around $10 NAV now, when I began buying it it was at $15 NAV. This doesn't concern me for my son's education because I believe my time horizon is long enough (at least 10 more years) that I'll have a good exit point and because I contribute monthly so I'll dollar cost average down during these low points. Furthermore, the fund is now yielding close to 9% so each month I reinvest that at this all time low price.

With my outlook on the stock market and belief that we have another year left in this bear market, I decided to take my entire Traditional IRA, which is about 33% of my total trading portfolio, and put it in (LSBRX). While I don't subscribe to bottom fishing in individual equities, I think it can be done in funds, particularly those with a strong track record and a high yield. When the fear leaves the market (and it will) there should be plenty of buyers lining up for bonds with that kind of yield. In the meantime, I'll earn the 9% and if the price goes down further I don't mind leaving this money invested in LSBRX for a longer time period.

We should get a bear market rally soon and I've left myself plenty of working capital to take advantage of it.

-Geoff

Sell Stop: (THOR)

I stopped out on (THOR) today for a 4% loss, about a 1% loss for my total portfolio.

This stock is still on my watchlist, so the only real self review I have is that I could've played it more conservatively and purchased as the stock was making a new high at $29.82 (I still have this option).

Nonetheless, this is a volatile market without any clear leadership, so any buy is riskier. I chose to take a chance and protect my capital with a tight stop, and that's what happened.

-Geoff

New Buy: (THOR)

I watched what I consider the best stock on my watchlist - (THOR) - throughout the day yesterday, and took a position after 3pm at $29.10.

I'm going to start including charts from the day I buy a stock, so here is how (THOR)'s chart looks currently:

I spend most of my time on weekly charts as I think they provide a more accurate picture of the price and volume action than a daily chart.

I owned (THOR) after it's big breakout in early August, and though I followed my rules and sold it when we went into a correction I've never stopped watching it. I believe it's held up through this correction as well as any stock in the market, and that's very positive. The fundamentals have not changed, it's still showing accelerating and triple digit earnings growth. Q3 earnings are due out on Nov. 1st, which means I'll have to build a cushion fairly quickly or get out of the position. In this market an earnings miss could be devastating.

Over the last month the stock has corrected it found support at the 200 dma and then the 50 dma, both positive signs. It came off the 50 dma Friday on 180% normal volume, another requirement for a purchase. I could've waited for this stock to make a new high to purchase it, but it's acted well enough I got in on the early side. If it continues to move higher I will add to my position.

I have a 5% stop on my position now, which I may adjust to avoid a shakeout Monday morning. I often take my stops off for the first 15 minutes the market is open to avoid a shakeout, and this practice has worked in my favor a large majority of the time.

-Geoff

Technical Follow Through Day

In technical terms, the market followed through today, signaling a confirmed rally.

The major indices were all up more than 2% on significantly higher volume today, the fourth day of an attempted rally.

With record high volatility position sizing and risk management will be more important that ever.  Patience is the order of the day.  I did not make any purchases today, I do have one stock I'm watching closely and others on my watchlist - however I am in no rush and the market will need to get through the next few days without a distribution day for this rally to have a chance.

-Geoff

40 Week Moving Average Tells the Tale

I started keeping a more detailed watchlist spreadsheet in late July.  It's been very helpful and I'd recommend it to anyone.  It's simple now; I track the date I became aware of the stock, what screen produced it, what kind of pattern the stock is in, what I think the buy point is, information about the stock's relative strength and the same measure of the stock's industry group.  I hope to write my own web application eventually that will track this data and give me more advanced sorting and reporting features on it, but for now a spreadsheet does the trick.

With the tremendous volatility of the past weeks persisting in a huge downward move in the market today, I wanted to take a moment to review my list and see how the stocks look.  To no great surprise, of the 25 stocks on the list, only four are above their 40 week moving average.  It's almost more shocking that nearly 20% of the list has managed to hold that level.  I expect the numbers are worse than that across the broad market.

With an assumed four out of five stocks this heavily beaten down, record volatility, massive credit freeze and a slowing global economy does this market have any chance to rally?

I have no idea, but I want to be ready if it does.

Of my four watchlist stocks that have managed to hold their 40 dma, all are related to the medical field (another bearish indicator, as this tends to be a so-called 'defensive play') and all belong to an industry group in the top 10% of the market in relative strength (no surprise here, either).  Two of the stocks actually belong to the same industry group, and I owned one of them previously and have never taken my eye off of it.  It's shown tremendous resilience in this bear market, and is in the best shape of any stock on my watchlist now - trading just below it's 50 day moving average.  This stock would be my first (and perhaps only) buy if the market followed through tomorrow.

It's difficult to make any sense of the current market, so I won't try.  I'll continue to track whatever solidly fundamental and technical stocks appear on my screens and watch the market for the signal indicating a rally.

-Geoff

Playing by the Rules

Thank goodness I have a system with 'rules' to trade by.

Hard as I try, I tend to get caught up in the latest action of the market.  I'm an emotional person, and most likely always will be.  So when the market advances 12% in one day, I tend to start feeling 'bullish' and could get carried away.

That's why it's so important for me to trade within the context of clearly defined rules or guidelines.  Without them I would most likely get caught up with the lastest movements of the market and get whipsawed into a zero balance.

Instead, I know that I don't buy stocks until we get a follow through day signalling a new rally (not all succeed, but this is the time to test the waters).  Meanwhile I have a small watchlist of stocks that have held up well within the context of the current market volatility.

I'm using this time to continue my studies and have begun the Van Tharp book 'Trade your way to Financial Freedom' - this may be why I'm focused on the idea of a system right now.  Though I haven't read much yet, the book is intriguing in it's study of psychology and the development of a trading system like a business.

I look forward using what I learn in this book to refine and document my trading system; for although I follow the CAN SLIM methodology, each of us has our own unique way of interpreting and implementing the same information.  It's important that I 'mold' this method to fit my style, personality, and goals.  Through this process I will make someone else's method into my system.

-Geoff

Capital Preservation

I'm feeling quite pleased with the progress I've made in my short investing career.

As I'm able to look back on it now, I began investing a year and a half ago, about six months before the start of one of the worst bear markets in history.  Despite that I've only lost 26% of my capital, just under 20% annualized.

Yes, I said 'only 26%.'  I lost the majority of this money my first six to nine months trading, and by the time I started to figure things out a bit the market had really gone bad.  In spite of this I'm still positive on my trading activity this year, the loss in my account is due to the cost of materials for the IBD services I subscribe to.  They are expensive, and it hurts to shell out the money when we're in a prolonged bear market, but I believe in the long run, they will be well worth the price.

Additionally, my trading account has outperformed my IRA mutual fund account as of this week.  Now, that's a rather ignanimous accomplishment on the one hand - it came about as the stock market has swooned to five year lows.  However, this does not change the fact that I've been in cash in my trading account, which preserved capital and has as of this moment led me to out-perform my mutual funds - even including my cost of research materials.  I've reached my goal of outperforming the professionals, now I need to do so to the plus side in the next bull run!

As far as the market is concerned, my watchlist has been whittled down each day this week and the last of the stocks on it were damaged today.  I will, as always, continue to watch the market for a turn but for now it looks like there's more to work through before we put in a solid bottom.  This is a good time to catch up on some reading.  I've almost completed 'The Successful Investor' and then I want to begin 'Trade Your Way to Financial Freedom.'

As time allows, I'd also like to make use of another interest I have and try to develop a program to track information on the stocks I purchase.  I'm not exactly sure what I want it to look like yet - which makes it difficult to get started - but I'd like to have something that will allow me to store data and get percentages on what characteristics my best trades share.

-Geoff

Watching and Waiting

IBD viewed yesterday's action as a follow through day, and it did meet the technical definition as the S&P 500 was up nearly 2% on higher volume than the previous day.

Nonetheless, the stocks on my watchlist had a decidedly muted reaction - not the kind of explosive action I'd expect to accompany a follow through day.  In fact, the industry groups that moved the market yesterday have been among the weakest performers.

What does all this mean?  I will keep an open mind.  It is obvious to everyone that the financial system and US economy are in big trouble.  Whatever form the government bailout takes, it will most likely increase inflation and although it will help, we are still in for a protracted economic slowdown.  In spite of this, the market may rally and I'm ready.  I will take a conservative approach and view this as a bear market rally - I think we have some ways to go before the next bull market.

I will buy stocks only on convincing breakouts.  Many of the stocks I owned in the previous failed rally have held up very well during this correction and remain on my watchlist.  If the market wants to run a little I will join the ride, but I'm not going to take any undue risks.

-Geoff

Watchlist Time

What an exciting week in the market!

I'm greatly enjoyed the break from the daily concern over the market, but never let it completely out of my sight because I know the market often turns when the majority least expects it. We may have experienced the bottom of this bear market with the failure of Lehman Brothers over the weekend.

The market tends to repeat itself over time, and huge washout or 'capitulation' days with dramatic drops in the market accompanied by a significant news event and a spike in fear (measured by the VIX) can often signal a bottom. It's certainly been dramatic and volatile.

It's pretty contrarian to start looking for opportunities and building a watchlist just when the stock market and the economy appear as bad as they can get. I don't know why this paradox works, but it does. Perhaps it's just that things finally get so bad, they've no where to go but up.

I certainly won't rush in to bottom fishing or value investing here - but I'm tuning back in to the market and will keep watch for a follow through day. I'm building my watchlist again and though some of the stocks I liked have broken out early, like (BKE) and (THOR), there will be plenty more opportunities.

There are plenty of factors to set up for a rally at this time - the capitulation in the financial sector (AIG had to get bailed out today by the Fed on the heels of the Fannie and Freddie takeovers), getting close the October/November in an election year, housing market looks ready to put in a bottom, and this bear market has lasted a year and corrected well enough that we could rally from it.

Despite all of this, I'm not in the business of predicting the future. I'll be prepared but the market will let me know exactly when it's time to get back in. I'll be ready when it does.

-Geoff

Sell: (THOR)

DISCLAIMER - This post is being made several weeks after the actual date I sold the stock

Today I followed my new rules and sold out of (THOR) for just over a 2% gain. With the backdrop of the current market (in other words, lack of leadership and no lack of failed breakouts) I didn't need to see any more than five distribution days on the NYSE indices to get me out. This is a marathon, not a sprint, and there will be much better opportunities ahead.

I began my investing career in a very challenging environment, and the difficulty it's given my over the past year and a half should serve me well over time. I've seen the bad, so I expect I'll recognize the good. I haven't gotten away with any bad decisions - they've all burned me so I didn't make habits of them.

I actually consider this short rally my most successful stretch investing - and I lost money during it. What made it successful though was a few things:

• I entered the market slowly and deliberately
• I bought only a few high quality stocks from leading groups with great prospects
• I kept a tight stop on my positions, so my risk exposure was low, and so were my eventual losses
• I stuck to my rules and sold out when the distribution days mounted

Because I believe in the rules (they've worked for many investors) I know measure my success or failure based on how closely I've followed them - as well as the results they produced. In this case the system allowed me to dip my toe in the water, and then when I found it was still too cold to back out with little damage.

I'm also encouraged still by the new approach to the break-away gap up on earnings method. I've watched a number of stocks that fit this model and without question will look to buy this type of breakout in the next rally. There's always another.

One final point - other areas of my life, both professional and personal, had greatly increased my overall stress level. That is as good a reason as any to step away from the market, and it's why I haven't kept up with this blog nearly as frequently of late. It takes a clear, unemotional approach to do well in the market, and when I'm unable to attain for some reason that I believe it's better to just cash out and wait until my head is level again.

-Geoff

Sell Stop:(MPWR)

The bad news is that I stopped out on (MPWR) today, one day after I bought it.

The good news is that I correctly assessed the market, so my loss was minimal 3% on a small entry position.

There's not much more that needs to be said - the NYSE indices logged another distribution day today and leaders are breaking out and breaking down with regularity.

The market is doing it's best imitation of the Amityville Horror: 'Get out... get out...' I'm leaving (THOR) in place with a tight stop and will certainly not make any new buys.

-Geoff

New Buy:(MPWR)

(MPWR) came up on what has been my best screen last night, and it really has most of what I look for. Earnings and Sales growth decelerated in the recent quarter, but beat estimates and were good enough for the stock to breakout yesterday on volume almost four times average. The stock cleared a first stage cup base on base buy point of $27.60 to close yesterday at $29.91.

Estimates call for earnings to grow 44% this year and 30% next year - just the kind of growth I look for. All the other fundamentals are solid and the group strength is good.

What concerns me a bit more is the general market. The currently rally is not strong. I decided that I like (MPWR) enough to take a chance on it, but I wanted to see what the overall market looked like today - I'm skeptical and cautious.

Initially (MPWR) shot up but throughout the day it pulled back with the overall market. On a positive note it held the buy point most of the day and closed above it. My concern was that I didn't want to make a new buy into a distribution day, which would've been the third in three weeks for the NYSE indices. Midday the market was headed for just that - down on higher volume than the prior day.

(MPWR)'s pullback looked like a healthy break from the prior day's move on much lower volume, so I decided to pick some up at $27.64 with a tight stop of 3%, and just close out the position around 3:30pm if the market was on track for a distribution day. The afternoon came and as the market continued to drop volume dried up, so I held my position.

I still have the tight stop in place and I moved my stop up on (THOR). Many breakouts have been failing and I don't think this is a market to give stocks much room in. If they work, great - otherwise I get out.

-Geoff

Caution and Patience

I thought last Thursday that the market was ready to roll over. It looked like too much distribution too quickly into a new rally, plus the Dow and S&P 500 were turning tail at their 50 dma again. Friday didn't do much to change my mind, as the market moved significantly higher but on lower volume that Thursday - I thought this set up for a drop on Monday.

On the contrary, today the indices each cleared a moving average - the 200 day for the Nasdaq and the 50 day for the Dow and S&P 500 - and did so on higher volume. This is pretty bullish action. Add to this the negative news the market has absorbed recently and it makes a case that this rally has some legs.

Another concern though is the number of failed breakouts. I've seen more high quality stocks stage strong breakouts only to collapse a few days later. This is not the action I'd expect in a strong rally. It could be a rotation of leadership, or a sign that this market is living on borrowed time.

For now I'll continue to go slowly. I have my existing position in (THOR) and I've identified another stock I may buy tomorrow depending on the action of the market and the stock itself.

-Geoff

Sell Stop:(UTHR)

Once again an add-on buy only increases my losses. I stopped out of both my positions on (UTHR) today. I still think this stock will eventually do well, but I had decided that if it couldn't hold the $110.18 buy point I didn't want to own it. That's exactly what happened, and I took about a 4% loss on my positions.

The market looks very ugly today, with now two distribution days logged on the NYSE indices - the financials continue to weigh.

As of this moment (THOR) is looking good though, up around 5%. If I can just get to a point where I'm right half the time, my results will start to improve pretty dramatically. I just need to book a few 20% gains.

-Geoff

New Buy:(THOR), Add-on Buy:(UTHR)

My goal when I started this blog was to always post a new buy or sell the day it occurred. I've done so until now, but was very busy this week and unfortunately fell behind. It's a shame, because once the moment has passed the perspective changes and it's impossible to recapture my state of mind at the time of the buy. (THOR) was on my radar for some time from my screens but from a CAN SLIM sense I didn't know what to do with it. It had broken out on a break-away gap on earnings news, a powerful move on 10 times it's normal volume traded. For some reason, it's hard to buy a stock in this situation, I guess human nature kicks in and it feels like once the stock has made a huge jump, it's too late to get on board. Of course there is no logic in this.

Then I was fortunate enough to come across a blog by a gentleman who calls himself the 'Solitary Trader.' This investor follows the CAN SLIM method, and by his account puts a massive amount of ours into his study of it. He has distilled the method into what works best for him, as I believe we should all be driven to do.

In short, he evaluated the best stocks of the last five or so years and found that one common thread was break-away gap ups to new highs on earnings. This is a mouthful, but as soon as I read what he had to say it rang true. It takes the CAN SLIM method to it's purest play - a stock that has just delivered news good enough to cause it to explode past all resistance to a new price high on huge volume. In the past year I've seen it occur enough to immediately see some sense in this method. I don't want to try to relate the person's ideas in my words - I highly suggest you visit his blog and read it from the beginning - good stuff.


When I read this blog a light went on and I decided to buy (THOR). The recent quarterly earnings increased 122%, the 3rd straight quarter of acceleration. The relative strength line is leading and the group is on an uptrend. The stock broke out on volume about 10 times average daily volume. Estimates for the next couple of years look good - 48% and 33% respectively. I entered a position at $23.42 and finished the day up several percent - just the way I like it.


As for (UTHR), I went out of my comfort zone and added on at $115.02. I regretted it almost immediately. This position closed down, and I felt then like I had too much money in the market. I think this buy showed a lack of patience. This market is just not solid enough to have much capital in - right now I'm about 50% invested. I have a tight stop around 4%.


-Geoff

Post Fed Thoughts

I've been taking this new rally very slowly, and so far it's keeping me out of trouble.

I have a mindset I use to try to keep myself on track. Before I make any new buy, I ask myself: 'If this trade loses money, will I be disappointed in myself?' Obviously any losing trade is disappointing - but they do occur. My goal is to avoid any mistake within my control that leads to a losing trade. Since I started this blog I've broken my own rules at times, and there's no excuses for that. As I stated recently, those times are over.

For instance, I considered today adding to my position in (UTHR). I'm not a big fan of the add-on buy, but the stock seemed to be gaining momentum and moved up in big volume. I could've added shares up to $115.58 within the CAN SLIM rules. However, I knew the FOMC was meeting today to discuss interest rates, and at those key points discretion is the better part of valor. It's too easy to lose money and too hard to make it, so I continue to temper my aggressive nature and work toward a more patient and disciplined approach.

In the past year the market has displayed a good deal of volatility around these Fed decisions. Today the market finished up nicely in a powerful move on great volume - but the wise play I think is to see what it does tomorrow. I expect it to fade some, and that may provide an opportunity for another buy or it may lead to the end of this young rally. As long as I remain patient and measured in my approach though, I will have no regrets however it ends up.

-Geoff

New Buy:(UTHR)

I stepped back into the market today with a purchase of (UTHR) on it's breakout with an earnings beat announced this morning.

This rally is new and could end tomorrow depending on the jobs number, so I've assumed some risk there, but the stock itself has a lot of the qualities I'm looking for: small float, relatively high short interest, triple digit earnings growth and large estimates for the future, leading relative strength and a strong group. Add to that a breakout on 3 times normal volume on a day when the market was down and the stock looks pretty strong.

I'm really not a big fan of biotechs, feels like roulette to me, one lawsuit or dirty look from the FDA and the stock can get creamed. Nonetheless, I couldn't ignore the strength of this group, and I like that UTHR is a first stage base (it formed it's cup pattern during the current bear market) and has made a new high with the breakout - no overhead resistance.

There were also a number of bullish characteristics in the chart formation, including several occurrences of tight closes over a number of weeks - I learned in 'The Successful Investor' that this is a positive feature.

Just the same, this is a new rally in a bear market so I've got a very tight stop, around 3% below my buy point. I don't see any reason to risk more capital than that now - if the market or the stock turn south I want to get out quickly with minimal loss of capital.

-Geoff

Much Needed Break

Hard to believe it's been two weeks since my last entry here. Well, maybe not - I really do tend to run hot and cold. After the roller coaster ride my last foray turned into, I've used this period of correction for a much needed mental and emotional break from the market.

I've probably devoted about 20% of my usual time my market homework over the last couple of weeks. There are certainly other valid ways to spend time during a correction - reviewing past trades, adjusting rules as needed, doing extra reading - but in my case I think the best thing for me was to take a step back.

My recent mistakes now seem relatively distant, which allows me to proceed with a clear head. In the past I've been overly anxious to put money in the market at every opportunity, and that's cost me. Today we had a follow through day, signaling the start of a new rally. Formerly I would dive in at the first stock that I saw in a new rally. I don't feel that sense of urgency now. My screens are showing some interesting stocks, but I'm suspicious - I'll look them over carefully and see if anything looks sound enough for purchase. I'm tired of losing money.

One other thing I want to spend some time on soon is an improved trade log. My coworker is a successful CAN SLIM investor, and he's made himself a trade log database to track his trades. This blog is less useful for that as it's anecdotal more than statistical. I need to have a firm grasp of exactly what a stock's numbers looked like when I bought it, what it's industry group was doing, what kind of chart formation it had; and I'd like this data to be sortable and filterable so that I can detect any trends. It will take me some time to put this together, but I think in the long run it will improve my results.

-Geoff

Sell Stop:(CLR)

I stopped out on my (CLR) position today at $75 for a 2% loss.

I could write a bunch of fancy sounding jargon about a capitulation day, about how the stock reversed and closed in the upper half of the range, how I was shaken out, etc...

It's all bull crap. I opened my last post with the only statement that matters "I broke the first rule of CAN SLIM investing today..."

Until I have the discipline to follow my own rules, I will never be a successful trader. It just isn't any more complicated than that.

That's not all that's required to be successful - but it's the first step. Nothing else will work without that foundation. No amount of effort or knowledge can save me from myself, until I decide to follow the rules of the system I claim to be using. Though I've said it before, I hope this is a turning point. I hope I've embarrassed myself enough to finally check the ego at the door and trade a machine - without hopes or fears and always putting the odds as much in my favor as possible.

That's all for now - I'm going to keep watching for a follow through day, and when it comes I'll be ready. I know WHEN to pick a winner - during a rally. I know HOW to pick a winner, I've owned a few. I know when to SELL a stock - and I put it in writing. Now it's time to start acting on what I know, not what I feel or think.

-Geoff

New Buy:(CLR)

I broke the first rule of CAN SLIM investing today, and bought a stock in the midst of a market correction.

This is not something I take lightly or would do in many situations. If my instincts are wrong and this trade doesn't work out, I may never do it again. Even if this trade does work out, I may never do it again. When the market is in a correction, the odds are not good on a long position.

Nonetheless, I took a position in (CLR) for about 30% of my portfolio. If we were in a confirmed rally, I might've put 100% in, perhaps even added some on margin.

This stock is CAN SLIM perfection. I mean that literally - it is the only stock to appear on my strict CAN SLIM screen. The last stock to do so was (RIMM) last fall.

The sales and eps growth are in the triple digits and have been accelerating for the last 3 quarters. ROE is 39%. The number of funds owning the stock has doubled since last September. The debt is high at 26%, however that is a very low number for this group - and this is arguably the number one stock in the number one group.

Oil is one of the few things that have been working this year - and it has been working big. (CLR) has been the leader in the US Oil and Gas Exploration group since shortly after it's breakout the week of March 28th. Since then it's demonstrated technical perfection, more then doubling over 11 weeks before pulling back to the 50 dma over the past 4 weeks. Early this week it broke the 50 dma in the morning, then retook it to close above it and at the high range of trading for the day - a very bullish sign.

When I saw the news last night that (CLR) was getting better than expected results from their second well in the Bakken shale, I thought there was a good chance it would move today - but I didn't expect it to explode like it did. However, I've been watching it long enough that I was ready and got my buy stop order in for $76.20 - it was filled at $76.29.

Because I'm playing around in a weak market I have the stop loss order in at 5% and will move it up as the stock advances (if it advances). I'll reduce my risk as early as possible. I think this stock is worth the chance though, it has the markings of a major winner. The last two times it cleared a short area of consolidation it never came back into it, so I'll watch for that same behavior now.

Of course there is always the chance that crude prices drop tomorrow and this thing comes right back on me. We'll see...

-Geoff

Sell Rules

Now that I've been in cash for a couple of days, it's so hard to believe I held on to (SOL) for so long. The market is clearly broken for a few weeks now, I clearly should've just taken what profits I had left when it began correcting. It's so nice to watch now with nothing on the table, no stress with the ups and downs of the market. Of course I'm still a bit bruised from my mistakes, but I'll have years to make up for them.

Tonight I want to publish the sell rules I'll use. I'm going to list the defensive sell rules and the offensive sell rules. They are, like everything else in this venture, a work in progress - but I will follow them to the letter until I have a good reason to make a change. I'm going to also attempt to post them in short form on the sidebar of the blog website, for quick reference.

As I've stated, many of these rules are copied verbatim from a post made by williamsj55 on the investors.com forums. They are his interpretation of the CAN SLIM sell rules, and I could certainly rewrite them in my own words but I see no need. He got them from Bill O'Neil, who got them from many other traders and his own experience through the years. I've adjusted them as fits my style, but made no fundamental changes.

Defensive Sell Rules

• Sell anytime a stock falls 7% below my purchase price. This is described in 'The Successful Investor' (also by Bill O'Neil) as the "3-to-1 profit and loss percentage plan." In short, it means that if I lose 7% on two trades for every one that I make 20% on, I can stay in the game with relatively small loss of capital until my pick percentage increases.
• When one of the major indexes (Nasdaq, S&P 500, or the Dow) flashes 5 distribution days in 4 weeks, I will immediately sell any stocks up less than 20%. If I am holding any 'big winner' stocks (up more than 20%) I will put a 5% trailing stop order in for them.
• The defensive sell rules trump all offensive sell rules.

Offensive Sell Rules

• Take profits on a stock that increases 20-25% in more than three weeks. I will use a 5% trailing stop loss once a stock reaches a 20% increase from the proper buy point, in hopes this will minimize my downside and allow the upside if it wants to run. If the trailing stop is hurting more than helping I'll adjust my approach.
• If the stock shoots up 20% from a proper buy point within 3 weeks, I will try to hold that stock for 8 weeks. I will place a stop at break-even to ensure I don't lose money, but unless the market enters a correction I will leave the stop there and evaluate the stock after three weeks.
• I will sell if a stock makes a climax top. Warning signs for a climax top are: greatest weekly price spread, exhaustion gap, and break of the upper channel line. I'm not going to go into detail about these here.
• I will sell if a stock slashes it's 50 dma on heavy volume and fails to rebound above it within a day or two. In most cases, my other sell rules would have me out of a stock before this could happen.

That's it for now. Pretty simple really, but should keep me out of trouble if I follow them. A cursory look at my past trades indicates strictly following these rules would have me in better shape than I am today.

-Geoff

Sell:(SOL)

Today I completed the round-trip journey I began with (SOL) in April. I bought it for $15.25 then, watched it rise to $29.48, and then watched it right back down to $16 where I sold today for about a 5% gain. I can assure you the ride up was more fun than the ride down.

The only review I think that's necessary for this trade, and for (SOHU) which I never posted a review for, is on the sell side. They were both great buys and bad sells.

There is one sell rule I'll incorporate that would've preserved much of my gains in both of these stocks, and that is once the market enters a correction, I will put a 5% trailing stop on any big winners I hold. This will allow them to run if they want to, but protect my profits.

This would've had me out of (SOL) around $22 for about a 45% gain and out of (SOHU) around $75 for about a 15% gain. This compared to 5% and 9% gains respectively is reason enough to employ the strategy. Add on the reduction of risk being in cash and it's clearly a sound rule.

Yes, there will be times when I stop out and the stock powers higher after that. My goal is to book profits on trades, not to ride every stock to it's ultimate peak and sell there. Learned that the hard way recently.

The most important rule is still to invest with the market, and this sell rule incorporates that into my strategy. I'll post my full rule set here in the next day or two.

On a personal note, I'm pretty embarrassed and demoralized by this trade. There's an analogy that I thought of tonight and will use to work past this:

There's a quarterback who's led his team down the field in short time, doing everything right, and positioned them inside the red zone ready to score. Instead he makes a rookie mistake, forces a pass into double coverage, and throws an interception which the other team returns for a touchdown. Instead of bringing his team 7 points (assuming the PAT) closer to victory, he's put them down 7 points (you know).

It's still early in the game, and the team can't afford to have their quarterback lose confidence. He has the ability, he just made a mistake. If he focuses on the mistake, he will inevitably make more. If he learns from the mistake, focuses on his training, and remains patient, he can surely bring his team back and win the game.

This is how I see myself. I pressed, and I got burned. It doesn't mean I can't do this. It means I still have a lot to learn about patience, ego, and trading stocks.

It's a helluva ride...

-Geoff

Time to Reflect

When I start to feel down about my failures investing I usually like to take up to a week to just process my feelings. That happened to me recently, as I had a swirl of emotions over my results so far this year.

The way that (SOL) has come apart really shook my confidence, it is a disappointing situation. However, with no intent to excuse any mistakes I make, I felt it was important for me to review my successes as well:

• I'm positive on my trading activity this year. My portfolio is down due to cost of my IBD subscription and the chart and screen tools. Based on stock trading only I'm up. Compare that to an 18% drop last year, and with how much worse the market has been this year, and that shows I'm making progress.
• I haven't lost capital in (SOL). Yes, I gave back profits, but I haven't lost capital and I have my stop set where I won't. My ratio of winners to losers is much better this year - my mistakes have cost me profits rather than capital.
• I haven't compounded errors. In the past if I started feeling stress about a loss or a position that was turning on me, I would look to put more money in play to 'make up for it.' This year I've shown patience and discipline. I realize the main goal now is to avoid catastrophic mistakes - the profits will come soon enough and more than make up for these relatively small gaffs.

With a return to a positive outlook I sat down and thought about how I can avoid being in this position again in the future. I've arrived on two main action items.

One is I am going to type up some sell rules and keep them with me at all times. It's not enough for me to have them in my head, I must put them down on paper and keep them with me. They are not 'mine' - in fact they are the interpretation of Bill O'Neil's CAN SLIM sell rules by a poster on the IBD forums who goes by the handle 'williamsj55.' So I'm using one person's thoughts on another person's ideas - which really came from several other people... This is not about reinventing the wheel. On the contrary, I'm looking for the tried and true, time-tested methods.

I will take these sell rules and modify them slightly to fit my style and trading personality, and then I think I'll post them here. As I've said before, it's good for me to put all my rules in writing here, I'm far more likely to follow them that way.

The second decision I made is how to handle SOL from here. I still think the fundamentals are there, but I can't keep sitting on this thing just waiting to see what happens, so I came up with a stop loss plan. It's really not based on anything technical, it's psychological. Each time the stock closes above a new dollar milestone, I move the stop up to $2 below and leave it there - no matter what. So, with it closing above 18 on Friday I moved the stop to 16. If/when it closes above 19, I'll move the stop to 17, and so on. This does two things. One - it relieves me of a decision and the associated stress. That's what I needed to move on from this one. It's mechanical from here. Second, if it does shoot up to 23 again, I won't watch it go back to 16 again - I'll stop out at 21 with a decent profit. If it retakes the 21/50 dma's and holds them for some time, I may consider treating it like a winner again, but for now it's just another tough lesson.

-Geoff

Emotions in Motion

I find myself in exactly the situation that the books I've read describe.

I decided to hold (SOL) for the long term play, and since that decision the market, the solar group, and the stock itself have all changed significantly.

The Dow is testing it's March and January lows, and the third leg in this bear market could be over soon or might just be getting started now.

The Energy-Other industry group, which includes solar, is still ranked in the top five at IBD, but a lot of the leadership in the group is coal companies, and the solars are not flying like they were a couple months ago.

Then there is (SOL)... Man, a lot can change in a couple of months. This stock just can't get a bid. I've gone on about the situation ad nauseum, so instead of writing more about that, I'll talk about how I react to it.

It's not good. I've fallen prey to the trap that I've heard so much about. I had a stock that was up 90%, and it came back on me. I'm up 25% after today's close. Now I badly want for the stock to recover and succeed, both for the money and so that I was 'right' - of course being in this situation it would seem I'm wrong already, no matter what the stock does from here.

I don't want to sell and admit defeat, but each day I watch the stock weaken, in total disbelief. I stare at the live chart waiting for the institutions to pile back in. Honestly, I'm not kidding - I really curse the fund managers as I sit there. Sometimes it feels personal, like they hung me out to dry. How dumb is that???

I watch the news wires for any inkling of why the stock's in trouble, for any article that could spur a comeback - all the while knowing this is NOT how I've learned to invest.

Why, then, haven't I just sold? I can't tell you that my motivation is clear and right, but I hope the reason is that I don't want to make a bad situation worse. The stock still has some time to retake the 50 dma and get back on track, and yes - I'm concerned that it will do so the moment I pull out. There has not been any massive selling in the past couple of weeks, in fact the weekly chart is showing a contraction in volume this week. I'm probably kidding myself, but it might be wearing out of sellers.

It's easy to be disciplined and make the right decisions when everything is going well. Or, maybe it's not - because when everything is going well is the time to sell, and I have a lot of trouble doing that. It will take weeks or months to pass before I can review this saga and make some definitive rules for myself from it, but it's clear I'll have to do that. I can't build a career out of investing if I end up in these points of indecision - right or wrong I must determine what I will do in any given situation.

I know enough successful investors that go 100% during any correction that it seems that might be the right course of action. I could even trail a stop behind my winners once we enter a correction, so if they continue up I'll get the move but if they drop I'm out.

Right now I can tell you that anything looks preferable to being in this position again.

-Geoff

Sell Stop:(SOL)

Well, I got my answer today, as (SOL) seemed to fall completely apart minutes after the open. It fought it's way back to $21 briefly intraday, only to drop into the close again and finish up at $19.65. It is now once again below every moving average.

While there really is no bright side to a day like this, the volume was only 30% higher than average, which indicates that not everyone was heading for the exits. Small consolation.

I stopped out of both my positions at $20.20 - I was net ($8) on the whole deal. I maintain my original position in the stock at $15.25 - for now. I never wanted to assume any risk on these new buys though, given the change in the complexion of the market and the stock.

From this point I'll need to see the stock retake the 50 dma in fairly short order. I don't know why the buying hasn't come back in as I expected, and it doesn't matter. I must admit though my curiosity is overwhelming. How could this stock be a rocket six weeks ago, only to now find next to no support? Someone bought the 10 million shares in the secondary offering, and paid $20.50 a share for them. Why aren't they supporting the stock now to keep it at that level, at least?

Again - I must remind myself it doesn't matter. The only thing that's important is the price and volume action of the stock - and those have gone from fantastic a month ago to abysmal now.

-Geoff

Waiting Game

Today's action on (SOL) was a bit of a mixed message. It was up a little over a percent on poor volume, but it continued to hold the 10 wma which is positive. On the other hand, for the second time in a few days it seemed to find resistance at the 21 dma. Furthermore, the solar group in general had a big day with many of the stronger members posting gains of 5% or more, and in that regard (SOL) lagged.

The general market was quiet today and should remain that way in advance of the Fed's decision on short term interest rates, which will come Wednesday around 2pm EST.

I still think I'll have a fairly clear signal which way (SOL) wants to go this week. The 10 wma is rising to meet the 21 dma, which is falling. The stock is trading between the two, so something has to give. If (SOL) can catch a bid, break through $22 and hold it, I'll be confident it's back on track. I've moved my stops for my last two buys up to $20.20 - if the stock get's much below the $20.50 price that the secondary offer went at I think it's broken, for the time being at least.

-Geoff

Never Boring

Another week has passed and I hardly know what to make of it.

I'm still positive on my two add-on buys of (SOL), barely on the most recent. The stock came back nicely this week and ran up over $23 intraday Thursday, then fell from there to close at $22.15. Energy stocks were hit hard Thursday afternoon when China announced it was reducing it's gasoline and diesel subsidies, effectively raising prices at the pump. The market's immediate reaction was that higher prices will reduce demand, so crude sold off.

I still don't understand why solar stocks trade in parallel with crude prices, but they do. I've found no evidence that solar energy, which produces electricity, is any kind of viable alternative to gasoline - which is the primary use of crude oil. Crude oil is used to produce electricity, but in such small amounts it is insignificant. IF there are someday a large number of electric vehicles available, then solar energy could replace gasoline by producing the electricity that charges these cars; it would also reduce coal consumption (coal accounts for 50% of our electricity).

For the time being, I just have to accept that solar stocks tend to trade with crude prices, whether there is a good reason for it or not.

After giving back some gains on Thursday (SOL) opened lower on Friday and stayed down all day, along with the overall market. Encouraging signs were that the stock traded on below average volume and closed above the 10 week moving average - both indications that the stock is now finding the institutional support that was lacking when it dropped ahead of the secondary offering. In the past week all the evidence I've seen has indicated to me that (SOL) is right back on track with the strong support it had before.

However, the problem now may be the overall market. This week was just ugly. The Dow is very close to undercutting it's January lows, from there you'd have to go back to September '06 to find the last time the Dow traded below 11,600. The S&P 500 doesn't look much better, and the Nasdaq has finally lost it's 50 dma. If the massive drop wasn't enough bad news, it came on huge volume as Friday was options expiration day.

Things certainly look bad. From what I know about bear markets, we should have a third and probably even a fourth leg down. The market is set up for the third leg down to happen soon, if it isn't happening already.

On the other hand - maybe we're near the end of the third leg down?

Take a look at this chart of the Dow:

I've used red arrows to mark the January lows, the March lows (which led to the recent rally) and the current lows. I notice that the March lows stopped short of the January lows - could this be a level where the market sees 'value?'

Yes, there's a lot of bad news out there, but is any of it new? The sentiment is extremely negative, but that could be a contrarian indicator that the market is ready to turn.

The difficulty of the last rally was that it was led by crude prices - a catch 22. Only the energy stocks had momentum. If crude prices stabilize or fall, could that open up buying into the rest of the market?

Honestly, I don't see the stage set for any major rally, and certainly not for a bull market anytime soon. On the other hand, I don't see signs of the apocalypse, either. I think there's reason to believe this market can survive the summer and set up for a fall rally, especially it being an election year.

What does all this mean for my holdings? I'll continue to keep a tight leash on my recent buys, there is no reason to risk capital in this market. I have about 1% at risk on my last two buys. I'll let me original purchase ride unless I see the stock break down and roll over.

I can't help but think about the Saturday several weeks ago, when I was on a tremendous run and thinking of cashing out. I'd hate to think that it's proper to invest on instinct, but I would be looking good right now if I'd followed my gut and gone to cash then.

-Geoff

Post Script on (SOHU) - the stock lowered revenue guidance for 2009 and rolled over on Friday, crashing through the 50 dma on huge volume. As it turns out, my stop loss from last week worked out better than if I'd continued to hold. I was right for the wrong reasons. I'll take it.

Add-on Buy:(SOL)

I took another position in (SOL) today at $20.73. As is my practice when I'm able to, I waited for the first 15 minutes of the market to pass, during which time the stock shot up past $21. As usual, I thought maybe I'd outsmarted myself, but also as usual the stock pulled back again. When it did I entered my order, which was triggered before 10 am.

I chose a trigger price of $20.73 which was 10 cents above the 10 wma. I wanted to see the stock clear this level, and then hold it. (SOL) traded in huge volume today - almost 7mil shares, double the average. It ran as high as 21.89 and then weakened to close at $20.77 - but it held the 10 wma several times during the day, which is the action I was looking for.

The stock has advanced enough that I've moved up my stop loss on yesterday's buy to a break-even level. My stop loss for today's purchase is about 7% below my cost basis. (SOL) has advanced about 30% in three days, so I think I need to leave it a little wiggle room. It will probably trade below the 10 wma tomorrow, but I think it will be important for it to hold the 50 dma around $19.75.

It's my understanding that the secondary offer priced today, but I've seen no additional information on this, or what the final price was. I'll comment on it when I know something more.

-Geoff

Add-on Buy:(SOL)

(SOL) continued to show strength again today, retaking the 50 dma while gaining over 10% - albeit on less explosive volume than I would've liked to see (it increased about 30% over average). While it's not good to be in the habit of making excuses for a stock, I'm not surprised that the volume was lacking a bit. If indeed the institutions can pick up shares tomorrow for what I calculate to be around $18.70 a share, I'm honestly surprised it moved as well as it did today. For now, the action of the last couple days seems to confirm that the downward pressure on the stock has been 'artificial,' and once the secondary offering is complete (SOL) is ready to resume it's uptrend.

I took a second position as the stock crossed the 50 dma at $19.43. I could've had it for less numerous times over the last few days, but I wanted to see the stock clear this key level to show some strength in the bounce. It's now 22% above the recent lows and in position to recover the 10 wma next.

I did break one key rule in buying (SOL) today, as the market is not in a confirmed uptrend. I've mentioned time and again that the direction of the overall market trumps all other factors, so anything I say here may just be an excuse. The truth is, from everything I've seen with (SOL), and with the explanation that I believe for the drop in share price, I think the stock has a run in it up to the low to mid-20's. The $23 level looks like it might offer some resistance in the short term.

My thought is this - if the stock moves like I think it will, great. I'll trail my stop order up on the second position to minimize my risk - right now it's 5% below my purchase price. If I can get a 20% gain I'll move my stop there to lock that in, and let it run if it wants to. Meanwhile I'll still have to decide what to do with my original purchase - as crazy as it may sound I'm still inclined to let that ride.

If the market was really trending down, I probably wouldn't make this play. It isn't going in the tank though anymore than it's rallying. We seem to be seeing a classic summer sideways action for now.

Maybe I've just been following this stock so closely that I've fooled myself into thinking I know something about it. I'll find out soon enough.

-Geoff

Am I (SOL)?

I couldn't resist...

In my last entry, I said I was going to give more detail about my only remaining position, (SOL). I've covered my decision to hold, and why that might not have been the best way to handle the stock.

Still, if (SOL) was the institutionally sponsored winner that I suspected, I should've been able to count on it to find support around the 10 week or 50 day moving average line. Instead, last week it sliced through these levels on high volume, dropping as low as $16.33 a share - less than 10% above my buy point.

As a CAN SLIM investor, I remind myself that the reason for a stock's price and volume action is not important - reading the action correctly is. However, it's possible with (SOL) I've found a rare exception to this principle.

I have to admit I was baffled by the drop. How could institutions be piling into this stock four weeks ago only to rush for the exits last week? Yes, the solar group has cooled off and the Chinese market is struggling, but other solar stocks - even the real high fliers like (SOL) - were not taking this kind of damage.

Some speculated that it was the secondary stock offering the company had announced pressuring shares. That didn't make sense to me, as it had been announced a couple of weeks prior, and the stock had held up for about a week after the news.

Then I was pointed to a blog entry at Seeking Alpha that discussed the situation. I don't read many articles about stocks I own, and I don't usually put much credence in thost I do read. This article, however, was delivered calmly and made a great deal of sense.

If I understood it correctly, the story goes something like this. (SOL)'s prospectus came out and described the secondary offering, including that the shares would price based on the average closing price of the five days prior to the pricing day. Because the market in general and solar group in specific were week, the very institutions that had been buying (SOL) could now sell it and short it - taking profits and virtually guaranteeing themselves a low price on the secondary offering.

This might all sound too simple, but as further evidence, the moment the news came out about 11:30am that the stock would price on Tuesday it seemed to find a bottom and closed up for the first time in a week. Compare that to Thursday, when (SOL) announced yet another 6 year contract to supply silicon wafers to ARISE Technologies and the stock still closed down 10%.

The situation looks like a golden opportunity for the institutions, which has created a good opportunity for the individual investor. Based on trading the last four days, I think the secondary will price around $18 a share (if I'm understanding how this stuff works). After that, I think this stock can quite easily get back to the low to mid 20's in the mid term, and something around $80 a share in two years.

I will look to add to my position if the stock crosses the 50 dma - currently that's around $19.30 - on big volume. If I do this, I'll keep a tight stop - around 5% - just in case I'm wrong about the whole thing.

-Geoff

Roller Coaster

I've improved on my patience and discipline from last year, but I still have far to go managing my emotions. I believe if I'm still trading stocks in thirty years, I'll still be working to manage my emotions better.

Several weeks ago, when the market's rally began to struggle, I made a decision to hold all of the stocks I owned at that time: (SOL), (SOHU) and (GU). (GU) promptly rolled over and stopped out for a loss, but (SOL) held up for awhile and (SOHU) actually made new highs. I was feeling quite confident that I'd acted properly deciding to hold and ride out the correction.

I've had almost everyone aware of my decision question why I tried to hold (SOL) instead of taking profits (I've been up as much as 92%). Some folks feel that any time a stock moves that far you should sell at least half of your position. Others look at the situation more technically, and believe it was a sell because the stock had advanced 100% past it's 50 dma. I've also heard from traders who are not opposed to holding a stock for the long term and riding out a pullback, but felt that this was not the market for that.

When I decided to hold (SOL), I thought about all of these methods. I need rules to sell a stock I'm up in as well as rules to sell a stock I'm down in. The problem for me is, I find the rules for stopping a loss much more simple. I never lose more than 8% on a stock - period.

Selling a stock that's up, on the other hand, presents a variety of factors to consider.

Perhaps first and foremost - is the market in my favor? Even this question cannot be easily answered. It seems like a bear market now - all the news is bad, the economy is horrible, inflation is a problem at the same time growth is slowing... However the market often turns up in the least likely conditions. Once I've experienced several market cycles, I hope I'll develop a 'feel' for a strong bull market - but right now I'm assessing things from a purely academic perspective. Although the market does not look good, and I would not by any means suggest we are in a rally, it has also not rolled over - yet. From what I've learned, it seems we can expect another leg down if this is indeed a bear market.

Secondly, how is the stock's industry group? Has it flashed any kind of climax signals? The Chinese market in general and solar stocks in particular have been under pressure, but again have not suffered any major damage.

Third, what is the technical action of the stock? Has it violated any key technical support levels on high volume? Has it become too extended, indicating it's due for a pullback or correction?

There's more of course, but I've tried to distill the considerations into what I think are always the three main concerns: the market, the industry group, and the stock.

Without rehashing it in detail, when I decided to hold (SOL) I thought the market and the Energy-Other group were reasonably good, and the stock itself had flashed no warning signs. It did appear ready for a pullback, but I saw no reason to suspect it would not be orderly, and the stock appeared to have strong institutional sponsorship to offer support.

There are two strong arguments I've heard against my decision to hold. The first comes from what I'll call the 'active traders' camp. These folks are pretty active - they ride strong breakouts for quick profits, frequently cashing in at 15% or 20% gains and moving onto the next stock. I've also heard this referred to as 'swing trading,' and it can be very successful.

A swing trader would've taken profits in (SOL) when became extended 100% past the 50 dma - and they would've made nice profits. They know the law of averages says that most stocks this extended will correct, by cashing in they remove the risk of riding out the correction, and can often take a position in the stock again at a lower price in the pullback. By taking profits though, they can avoid the stock if the pullback looks unhealthy or market conditions change.

This is a pretty difficult strategy to find fault with. I suspect that swing traders suffer more losses on failed entry points simply because they are more active, but I have no facts to support my suspicion.

The second argument I've heard does not find fault with holding a stock with great potential through a pullback or correction, but stresses that this should only be done in a strong bull market. Again, that's a difficult position to argue with.

Investing is about keeping the odds in my favor. My interpretation of the CAN SLIM selling rules kept me holding (SOL), but I certainly could've interpreted the rules wrong. I've quoted here a number of times the special situation that calls to hold a stock for eight weeks if it advances 20% or more in three weeks. However, I could also quote a number of passages from 'How to Make Money in Stocks' that would've indicated I should sell the stock, based on market factors if no other reason.

I'm glad I've experienced holding a stock through a pullback. I've had to live through a 92% gain becoming a 10% gain. In the future this will help me immensely when I have to decide again whether I want to try to hold a stock through a pullback. I'll know what it feels like, I'll know the emotional turmoil it can cause.

It's easy to be resolute conceptually - but when the money starts going away my emotions begin to play tricks on me. I argued with people when the stock was above the 50 dma that I'd made the right decision and it would work out. When it crashed below the 50 dma I admitted I was wrong and should not have tried to hold the stock. When it seemed to find a bottom today, and I began to see a reason for the drop and the potential for a comeback, I started to think I might've been right after all. I've been through all these emotions and more in just the past two days; anger, frustration, disgrace, hopelessness, resolve, elation, indecision, and more.

Here's the real danger of letting emotions get the best of me. Yesterday, as I watched in disbelief as (SOL) continued to plummet, I broke my own rule and moved my sell stop up on (SOHU). I have a rule not to make sell decisions intraday - exactly for this reason. It's just too emotionally charged. So, I had a stock that was behaving poorly in (SOL), which I held, and a stock that was behaving well that I sold for only a 9% gain in (SOHU). (SOHU) had an average volume pullback to the 10 wma and came off it nicely. This is a strong stock that appears to have fine institutional support, and I wish I had not panicked and sold it.

It defies explanation really. In the moment, all I could feel was shame for being wrong and a need to salvage some profits. So why didn't I sell (SOL) instead? Partially ego and partially because I didn't want to compound my mistakes by selling (SOL) at the worst possible moment. I didn't want to be shaken out, even though it's now trading below the 50 dma. As my coworker said, the 50 dma 'is not a wall' - a stock can trade below it for some time but does eventually need to retake this level. Hard part is knowing how long to give it.

There's a lot more to the (SOL) story, but I've written more than I expected tonight so I'll have to continue with that later.

Hey, I think that's my first cliff-hanger!

-Geoff

Sell:(SOHU)

I sold (SOHU) today at $74.50 for about a 9% gain. It is a profit, but I was up as much as 33% at one point and could've easily locked in a 20% gain.

I'm going to post at length about this trade, and my other holding - (SOL) - this weekend when I have more time. Suffice it to say I botched things. The wounds are a little fresh right now so I'll wait until I have some time to reflect this weekend and get my thoughts in order before I try to put them in writing.

-Geoff

Focus

I've always enjoyed online forums. No matter my interest - video games, fishing, investing, or otherwise - I like to connect with people who have similar interests. The internet is fantastic for that - it has made the world a lot smaller.

The forums at investors.com have been a great resource to me since I began working to learn the CAN SLIM method. I've had invaluable help on chart reading, fundamental analysis, entries and exist, and of course market analysis. I think it's greatly accelerated my growth to this point.

There's a downside though, and I have to manage my forum activity carefully.

Two of the great traders I read about - Darvas and Livermore - found it imperative to cut off all outside influences to their trading decisions. They would not bend on this matter - they did not want anyone's thoughts or opinions effecting their decisions.

I've thought long and hard about this, because on the one hand I can learn a lot from other trader's experience(s). On the other hand, above all else trading stocks is a business of managing emotions. Once I've heard someone else's opinion, I can't unhear it and I can't ever know if it effected my behavior (positively or negatively).

Recently I've come under scrutiny on the forums for my decision to hold (SOL) through a steep pullback. I've mentioned here a number of times that I'm not sure it was the right choice, but I evaluated the situation the best I knew how and that's the choice I made.

I wish I could say it doesn't bother me at all when I'm questioned or criticized about my trading (or almost anything else, for that matter), but that would be a lie. Unfortunately, I am far too sensitive about what others think of me. It's really quite silly considering these are strangers I've never met and probably never will, but it can really get to me.

When that begins to happen I have to reconsider the value I get out of a public forum versus the trouble it can cause me if it starts to cloud my judgement. I would rather lose money on a trade of my own free will and stupidity than make money because I was prejudiced by someone else. I think in the long run I'll always come out ahead relying on myself. At least if I fail I'll have only myself to blame.

The same can even go for conversations with friends and family. If I bring up the subject of a gain in a stock - probably searching for praise - invariably they'll question me. Why didn't I sell yet? Why don't I sell now? Isn't the economy bad? I realize very quickly that unless I want to give everyone I know a copy of How to Make Money in Stocks, I might as well just keep my trading business to myself.

For now I've been reminded that it's my money, my responsibility, my decision. I'll take another voluntary leave of abscence from the forums and get my head clear (well, as clear as my head gets). I'll focus on my reading and try to finish up The Battle for Investment Survival (slooooooow reading) so that I can get into The Successful Investor and Trade Your Way to Financial Freedom. Always something new and interesting on the horizon!

Oh, and in case you're wondering, I'm still holding (SOL) and (SOHU). (SOL) is sitting right on the 50 dma, I should know soon if it's going to roll over or get a bounce.

-Geoff

Bad with the Good

Friday was a tough day. Both (SOL) and (SOHU) gave back their gains for the week, plus some. (SOL) opened the day extremely well, then tanked and closed below the 20 dma for the first time in weeks. (SOHU) had a larger percentage drop, but did stay above the 20 dma.

I could spend some time now covering the various big news items for the week, the jump in unemployment, the huge two day move in oil prices, and more; believe me, I thought about it. However, there's a reason I haven't posted in several days and for the same reason I won't talk about all these news stories.

I don't know diddly. I could not begin to claim that I know what is moving this market. It is confounding folks who've been watching it for years. It's driven Investor's Business Daily to make what I believe is a series of questionable - if not downright revisionist - calls on the current outlook of the market in the Big Picture column.

Setting aside the variety of news items and focusing on the price and volume action of the market itself, let's review last week:

Monday the market had a large percentage drop, but did so on lower volume. This is why we watch the volume. I drop of more than a percent can seem pretty serious, but the lower volume indicates institutional investors are not rushing for the exits.

Tuesday the market fell less, but did so on higher volume. It dipped low enough to kill the fledgling rally attempt for all indices but the Nasdaq. The S&P 500 closed below the 50 dma, a warning sign I've been watching for. It looked like the correction was really taking hold.

Wednesday the Nasdaq had a nice gain, but did so on lower volume. The S&P 500 closed just slightly down on higher volume, another day below the 50 dma.

Thursday the market surged up. The Nasdaq and S&P 500 were both up almost 2%, and the Nasdaq recovered it's 200 dma in dramatic fashion. There was only one problem - when the final numbers came in, they showed that trading volume on had dropped from the prior day as the market powered higher. This was not what I'd like to see when the market appeared to be resuming it's march upward.

Friday it didn't take long to see that Thursday's rally was indeed lacking strength. The market tanked early and losses steepened throughout the day. The major indices gave back every bit of Thursday's gains and more. However, just to keep things complicated - the Nasdaq's loss was on lower volume than Thursday.

What to make of it all? Sometimes the answer is so obvious it can be easily overlooked. If it's this had to figure out the market, that's really all the information I need. There is no clear uptrend, and there is no clear downtrend. I'm not buying stocks, and I'll continue to hold my current positions, unless and until the market gives me a clear signal to get out.

I've talked about this approach for several weeks, and I have to admit it's becoming increasingly more difficult to stick to as time goes by. It's especially difficult days like Friday when I take a big hit. However, that's not the time to sell - when I'm bruised and reacting to emotions like fear and doubt. Technically (SOL) and (SOHU) are still behaving well, so I will stay the course.

-Geoff

Trade Review: (GU)

I'm afraid I haven't got much for my (GU) trade review. Sometimes a stock purchase doesn't work out, and I just can't see any good reason why not.

The only red flag that still jumps out at me when I review (GU)'s chart is the relative strength line lagging; I noted on the day I bought the stock this is always a concern for me.

I think I'm about 50% fundamentalist and 50% technician when I buy a stock, and about 90% technician once I own it. I believe the relative strength line is a great technical indicator, and like to see it 'leading,' or making a new high before the stock price. This information is a valuable indication of the support a stock is getting before the price might necessarily reflect it.

Taking this into consideration, perhaps (GU) is a laggard. After all, it was in the 2nd ranked industry group at the time but broke out late. Earnings and sales numbers had been poor up until the recent quarters announcement that caused the stock to breakout. I like buying on breakouts from good earnings news (see (SOHU)) but perhaps I washing pushing it on this one.

I think the best lesson I've learned is try to find the best stock in a strong industry group and stick with that stock - trying to find the next best stock in the group two has just cost me money recently.

-Geoff

Time Will Tell

From everything I've read, the single most important factor to making money in the stock market is the ability interpret the market's direction. This also might be the most challenging task.

I began investing about a month before Bear Stearns announced the collapse of two hedge funds associated with the burst of the housing bubble. This marked the beginning of the end of a nice bull market which began in 2003, I believe. Therefore, I haven't enjoyed any 'easy' time in the market. It's been difficult to fail, the number of failed rallies has been above average, and the uptrends have not produced broad based gains, for the most part. It's been a difficult environment for the seasoned trader, and much more so for myself.

It's probably better for me this way. If I'd been widely successful from the get go, I probably would've developed a huge ego and lost everything within a couple of years. Better for me to learn the hard lessons out of the gate and get put in my place. I know how dangerous the market can be, so I take my gains with a dose of humility and I'm always waiting for the other shoe to fall.

IBD offers a useful column each day called the 'Big Picture' which recounts the day's action and states their current outlook on the market. This is an excellent learning tool and because they post the distribution day count during a rally it's a great resource. I haven't always agreed with their market outlook, though - and I still think it's up to me to determine the stated of the market. It's my money on the line, after all.

As I stated on May 21st, I did not agree with IBD's call that the market had entered a correction.

The case that we did enter a correction was fairly strong. Distribution days had mounted up to six on the S&P 500 and NYSE composite. The market suffered two such distribution days in quick succession, causing the DJIA to pierce it's 50 dma. The rally's leadership had been in question - it was fairly narrowly limited to energy and commodity plays. These stocks seemed to be showing signs have weekness.

In spite of all that, I do not think the market entered a correction. For one thing, the Nasdaq index, which had been leading the rally, was well above it's 50 dma and only had two distribution days. The S&P 500 also remained above it's 50 dma, and was due to drop off three distribution days in the next week (which it did). Many leaders were pulling back, it was true, but few of them were even near their 50 dma. Yes, the leadership was narrow, but it was strong.

Here we are a week and a half later, and not too much has changed. The market did continue to fall, but on weaker volume. The Nasdaq and S&P 500 found support at the 50 dma and rebounded on progressively higher volume. The Nasdaq moved up enough to actually close above it's 200 dma yesterday, it's second attempt to clear this key technical resistance level.

What followed today looks pretty bad on the surface. The market suffered a deep, broad based selloff. Of key interest though is the fact that volume was lower today across the board, indicating big money was not rushing for the exits. Leading stocks that I follow sold off, but not on high volume. This looks to me like an orderly pullback.

I'm not trying to convince myself that we're in a roaring bull market. I'm not even looking to purchase a third stock. However, I remain comfortable in my decision to hold both (SOL) and (SOHU), which have acted well the past couple weeks. If I see the S&P 500 and or the Nasdaq close below their 50 dma I will have to rethink my position, but for now this market has refused to roll over.

-Geoff