Sell Stop (HMIN), New Buy (PWRD)

Volatility remains high and this rally hasn't gotten any easier. Trading is very tough. My recent 'success,' if I can call it that, is a result of a commitment to my rules - they are what's kept me in the game. What's encouraging is that the rules appear to work even in very challenging circumstances. There are numerous times over the past couple of months that I would've been shaken out of a position if I was actively managing my holdings - instead I've held on, and time will tell if I profit from this.

Friday the market opened hard and (HMIN) took out my break even stop loss order. This position was opened from a conventional canslim buy point well above the moving averages, and those have had trouble in this rally. Since I'd been up 10% the stop loss was at break even so that's fine with me.

My record since my 'reset' is now 0 - 1 - 2.

(EJ) has been really tough to watch. It's been up as much as 25% and come all the way back to within a few percent of my stop loss order. Turns out the company spun off a unit into an IPO of (CRIC) on Friday. That may have marked a bottom for EJ and it came off the 50 dma Friday morning and is up over 10% now from that point.

Friday I took the capital from the sale of (HMIN) and put it into (PWRD) which I've been looking to get into. It's been trading around the 50 dma for about a week. It remains to be seen if the stock is consolidating or if it will bounce off this area. I purchased close enough to the 50 dma that I was able to put my stop loss at 2% so I have very little capital at risk in this position. So far this morning it's up nicely on solid volume.

Backtesting the New Idea

Here's my very quick study of the top stocks on my watchlist, trying to apply a simple and mostly mechanical purchasing method using the 10 wk ma. I attempted to be very conservative and didn't really throw too much logic in - for the most part I just looked at the charts and bought within 3% of the 10 wk - there are however some noted exceptions that I found to be no-brainers (like STEC on crash day, obviously would not have purchased that one).

Leaders from around 8/21
Rules - Buy limit 3% above 10 wk ma
Sell Stop 5%, breakeven after 10% advance
1 week hiatus after stock stops out
EJ - could've been purchased around $18.60 on 8/25 and survived 5% stop loss (now breakeven) - current price $23.58
HMIN - could've been purchased around $28.75 on 10/2 and survived 5% stop loss (now breakeven) - current price $33.30
PWRD - could've been purchased around $36.69 on 9/2 and survived 5% stop loss (now breakeven), high of $50.49, current price $43.82
FUQI - could've been purchased around $24.35 on 9/2 and would've stopped out same day for 5% loss
FUQI - could've been purchased around $27.44 on 9/18 and would've stopped out for breakeven on 10/1
FUQI - could've been purchased around $28.20 on 10/8 and still holding with 5% stop loss - current price $28.00
STEC - did not come near the 10 week until it gapped down and crashed through - easily avoided
GMCR - was below 50 dma and to be avoided at this time, basing
BIDU - could've been purchased around $337.21 on 8/27 and stopped out on 9/1 for 5% loss
ARST - broke the 50 dma several times and therefore would be avoided
MED - could've been purchased around $18.27 on 10/2 and survived 5% stop loss (now breakeven) - current price $22.38
VIT - 5% loss, then avoided (too wide and loose)

Scorecard:
4 - 3 - 1

4 winners up 26%, 15%, 19%, and 22% - each stock has been up at least 20% at their high since purchase
1 stock still held down less than a percent
3 stocks stopped out for 5% loss
1 stock sold for breakeven

Adaptation

We've been having some interesting discussions on the Trade to Retire forums and I wrote a post there that I'd like to put here on my blog as well as it highlights my thoughts and approach to this currently rally.

Here's how I handle market analysis - it's one thing to have an opinion about the market (it's gone too far too fast, etc.) but it's another to act (trade or not trade) on that opinion. I try to separate the two. If the market is in an uptrend and I see a stock I like in a position I like then I will buy it - whether or not I think a rally is extended. This probably adds to my risk, but I'm just not good at picking market tops, so it's best for me to let the market posture and/or my three strikes rule handle that for me.

Now on the other hand, I do think it's important to adapt to the current environment. Standard CAN SLIM buy points have not worked for weeks. They just haven't. The stocks have closed below the buy point, shaken out holders, then turned and advanced. They advance 10 or 15% from traditional buy points and pull back to a moving average instead of the 20% one could historically count on. I saw this through the middle of the year (it was a very expensive lesson) and since I've adjusted my buying strategy I've managed to survive for a few weeks. I would NOT attempt any buys on breakouts/new highs at this time UNLESS the 50 dma/10 wk line were within about 8% of the buy point - that would allow me my standard stop order while giving me the cushion for the stock to pull back to support ((HMIN) did this).

Better yet, I'm looking to buy around the 10 wk line if I like a stock. I think (PWRD) is setting up perfectly for this, and I will look to purchase this if it dips under $42 (assuming nothing else changes). This position would allow for a tighter stop around 4 or 5% and let the stock work up the moving average or just stop out if it can't hold that area. This is how I bought (EJ) and it allowed me to ride out a lot of volatility.

I've decided to conduct the following exercise. I will go back to August 21st on my watchlist and pick my favorite five stocks, then look at the charts from that day and see what would've happened if I'd picked them up around the 10 wk line (within a percent or two - I bet most or all of them touched off this line since August 21st) with about a 5% stop loss order. I'll bet about 75% of these trades would've yielded a 20% gain, possibly before the stock even made a new high. Furthermore, I'll be I could still own the stock today and be in good shape - in fact I do still own (EJ) from that type of purchase around that time.

Short version is this - I think in the current market, traditional CAN SLIM thinking has had me buying when I should be selling (around the new highs) and selling when I should be buying (stopping out around the moving averages). I don't think it's ALWAYS going to be like this and I firmly believe in CAN SLIM, but I also believe in reviewing past trades and adapting as necessary.

Stay the Course

I'm not posting to this blog much these days, and that's a pretty good thing.

In late August I drew a line in the sand and started over sticking to my rules. Since then I've gone 0-1-1, and I currently hold two positions. That's not tremendous results on the surface, but looking at it relatively shows some improvement.

Simply comparing my results over the last two months to the rest of the year shows progress. I've held one stock, (EJ) since 8/24, which embarrassingly is probably some kind of a record for me - my positions usually don't last that long! The stock is up close to 20% for me at this time, and is breaking out of a second stage cup with handle pattern today which allows me the opportunity to hold it for 20% more gain.

My other stock, (HMIN), is also beginning to work a bit.

What's really encouraging is that I've held these stocks through an extremely turbulent market. I've done so not through some great insight or market wisdom, but just from following my own rules. So far, these have worked. Buying close to the right time and giving these stocks the full 8% stop loss has kept me in the market through some violent shakeouts. Now, of course this could all turn tomorrow but for now it appears to be working.

Most importantly, I've had next to no stress about the market. I enjoying talking about it on the forums associated with this blog, but I don't have any emotional baggage directing my actions with regard to my positions. I buy them and I leave them alone. Sure, I have some fear that I'll fail again - but not nearly like I have in the past, and I'm quite certain I don't act on this feeling.

So I guess all this can be summed up as 'no news is good news.'

Sell Stop:(FUQI), New Buy:(HMIN)

I never got much more than 5% in my position in (FUQI), and on 9/18 I stopped out for an 8% loss - the first since my 'new beginning' this year. I'm now 0-1-1.

I took that money and invested it in (HMIN), another small Chinese stock I've been watching that had actually broken out a few days earlier. It was back within a percent of the buy point so I picked it up there.

Having said that, I will hold (EJ), which now has the stop at breakeven, and (HMIN) until they profit or stop out, but after that I will not reload until I see the market acting differently. Right now I just don't see leading stocks leading, breakouts are having trouble, and it's just very, very hard to make a profit. That's not the time to have money in the market.

I don't want to get in the business of predictions, but I think it's reasonable that the market needs to correct before we'll have another nice opportunity. Until then I'll keep watching and do my best to be ready the next time there is a chance to profit.

What I'm Working On

In addition to my daily homework on the market and my positions and watchlist I try to make some time to continue reading books that may help me improved. I've been a bit 'stuck' on Trade Your Way to Financial Freedom for some time. It's academic and a bit dry - though I think it's a worthwhile read.

To greatly oversimplify the content, the book is aimed at helping investors develop as mechanical a system for trading as possible. In fact, many of the topics are directed at program trading (automatic computer trading), though the principles of disciplined trading apply just the same to an individual trading manually.

While I do not necessarily intend to program trade, I would like to take what I can from this book and apply it to my trading with the goal of becoming more disciplined. Additionally, I may have found a nice convergence between a skill I need to develop for my career (I'm a developer for an Identity Management application) and my trading career. I need to learn a software language to further my career. I'm going to be learning JAVA as this is the language most commonly used in my area.

I can put this to use as well in my trading, as I recently had an idea spring out of a frustration I have with IBD's Custom Screen Wizard. What is lacking from this application is any method to gather or store (in a time efficient manner) the information from the screens. As important to me as the current data is, I find historical data equally important. I would like to graph and trend the information on stocks like the price when the enter my screen, how long they stay on it, and the price when they drop off of it. I could do this by exporting the data into spreadsheets every day, but that would take too much time.

What I plan to do is write an application that will automatically execute my screens each weeknight and load the data into a database. I'll then come up with ways to manage and display this data so that over time I should be able to draw some mathematical conclusions about the potential for a stock when it makes one of my screens. Eventually I would hope that I can translate this into a mechanical trading system. For now though I've got a lot of work to do learning a new programming language.

I also ordered another book I want to read - Jack Schwager's Market Wizards. I need some inspiration. I think I'm doing well now but I want to read about some people who've made it - sometimes it's hard not to get discouraged after a string of failures, and I find these stories help get my positive outlook back.

New Buy:(FUQI)

Early this week I took a long look at (FUQI). I reflected on some of the lessons I've learned over the past two years: I tend to overtrade, I often look for the next big winner when I already have a proven winner right in front of me, I lack patience, I lack discipline.



With this in mind I decided to chart my watchlist of leading stocks in a comparison mode (my dailygraphsonline.com subscription has this feature), using a couple of different date ranges. First I compared the stocks (I have about eight on my watchlist) from the start of this rally in early March. I found that (FUQI) and (STEC) had outperformed the rest of the stocks by a significant margin. Then I ran the comparison from a starting date of August 21st, which is the first time IBD changed the outlook to 'Uptrend Resumes' after the rally had hit a rough patch.

The picture is slightly cloudier there - (ARST) has been the top performer since that time, mostly because of a nice breakout last week. (ARST) has had a habit of failed breakouts, but so far this one has held it's gains. After that (FUQI) and (STEC) were close second and third, and then came the rest of the pack.

The reason I ran both date ranges is that I wanted to see which stocks have been the best of the entire rally, and which are showing recent strength. The answer is that (FUQI) and (STEC) fall into both categories, so this is clearly where I should focus my attention. The stocks that have led will most likely (but not always) continue to lead absent some material change.

I already own (EJ) and it's acting well, but I had enough capital for a second stock so instead of watching (HMIN) - which I do think will do well - I decided to put that money to work in (FUQI) if it broke to a new high. It's rebounding from a trip to the 50 dma so this is a valid purchase, though I now try to buy rebounds close to the moving average, not at a new high. In a stock that has done as well as (FUQI), I'm willing to risk buying after it's already made some progress.

The breakout on Wednesday was actually a failure. The stock reversed and closed lower on above average volume. I had a number of thoughts about what to do during the day on Wednesday as the stock price dropped lower and lower. I thought about putting my stop loss below some key levels and cutting losses short. Then I recalled that all the meddling I've done with my stop losses this year has cost me a fair some of money. I followed my rules, left the stop loss order at 8% and just let it go.

Thursday (FUQI) close up a percent, and Friday up 4% after being up as much as 8% intraday. It's certainly not acting great, but I'm green on the position and that beats being red. This stock has outperformed every other stock I've seen in this rally, and I'm simply betting that it will continue to do so, and that if I'm patient with it I'll profit.

(EJ) has woken up a bit, and early morning Friday my position was up 10% so I've moved my stop loss to break-even according to my rules. That leaves only the 8% on (FUQI) currently at risk.

The market itself continues to act very strangely. It was up on good volume this week, but I didn't see leading stocks acting the same way as the indexes - the leaders tended to trade on average to below average volume. This is certainly something to watch, but the system should take care of me and get me out if the market begins to falter.

Sell Stop:(STEC)

Monday (STEC) advanced to $41.74 intraday, meeting the 10% threshold from my purchase price. Therefore I moved my stop loss up to breakeven. Before the day was over I had stopped out as the stock staged a huge volume reversal from a new high to close down around 8% (if I remember correctly).

I don't know what the stock will do from here, but I'm very happy with this new rule. If a stock returns to a proper buy point after being up as much as 10%, I'm just not willing to let that trade turn into a loss. Sure, I'll miss some winners this way - but if I've learned anything this past year it's more important to focus on not losing than it is to focus on winning - this is contrary to almost everything else I've learned in life.

My other position, (EJ) came within 3 cents of my stop loss order, found support around the 50 dma twice this weekend, and is now knocking on the door around $20. Chart looks good to me, fundamentals look good to me, we'll see what happens.

As for the overall market, once again we're in a strange position. Distribution days have built up to the danger zone, leaders have seen some pressure, but the market has not given up and succumbed to a correction, yet.

It's a time for caution, not a time to be aggressive.