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

Trade Review: (PWRD)

I don't like reviewing my past trades. I feel either there is some obvious reason that I should not have purchased a stock, or else it's just simply the odds that not every stock I pick is going to succeed. I've reviewed my trading career and there were strings of horrible trades - looking back it's easy to see that my head wasn't in the right place at all. As I'm improving though, I'm not sure how reviewing failed trades will help.

I can surely find flaws in any stock that has lost me money - the same as I can find flaws in those that have made me money. If it was such a sure thing to find which flaws lead to failure and which do not, well then I'd never lose any money.

Having said this, every successful trader I've read about reviewed(s) their past trades. Therefore I'll do it - whether I fully understand the value or not. I suppose it's enough even if I find one quality in ten reviews that benefits me in the future. Maybe every stock that lost money is not a failure on my part, but I'm looking for any that are.

There is nothing that jumps out at me when I look over (PWRD). I won't discuss again why I liked (PWRD), you can find that in the post I made when I bought it. At the time I purchased it I knew the group was weak, but as I had written about when I purchased (SOHU), there were a nice number of stocks moving well in the group. (SOHU) has been very successful, just making new highs again last week.

At the time of the purchase I did note the cash flow was less than ideal, and the fund ownership had decreased. These are not positive characteristics, but they also do not rule out a stock from potential purchase in my opinion. Fundamentally and technically, I don't find anything wrong with this purchase.

However, I have found an issue with how I purchased and owned (PWRD), and in fact it opened up a window to a change I can make in my buying and stop loss management that has already cost me a good deal of money.

The traders I've read about all recommend 'pyramiding' up into a purchase - buying more of a stock as the price increases. I've tried to stick with this practice in the way IBD recommends - purchasing 50% of my position at the buy point, another 30% as the stock advances 2.5%, and the final 20% as the stock advances to 5% past the buy point.

The idea behind this methodology is that you add to your position as the stock 'proves' itself. I think the idea is correct, but the implementation that IBD suggests is flawed. A stock advancing 5% proves nothing, in my opinion. I don't have the exact numbers, but I'll bet that 10 to 20% of my losing trades were up at least 5% before turning around. By pyramiding up this close to the buy point, all I've done is increase my cost basis, and therefore I stop out sooner or lose more money.

Instead, I'm adopting a new approach. I'm going to go in with 60% of my position in my initial purchase, as close to the buy point as possible. If the stock advances, I will trail my stop loss order up based on the closing price. If it closes one percent higher than the buy point, I'll move the stop loss up one percent, and so on. I'll do this until the stop loss is at my break-even point, and then I'll leave it alone.

If the stock advances 20% in more than three weeks, I'll sell and take my profits. If it advances 20% in less than three weeks, I'll look to add to my position at the next pullback or base.

If I have continued success this way, I'll eventually up the ante on my initial purchase to 70% or 80% of my position, eventually I may even buy the whole position in the first purchase. Then any additional buys might be on margin - again only after I have more experience and a track record of positive results.

This is what I've learned looking at (PWRD) and similar past trades. I'll make this adjustment for a time and see how it works out, and I'll change it as needed. Trading stocks is a dynamic endeavor - that's what keeps it interesting.

-Geoff