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.

Back in the Saddle

Yesterday I purchased two stocks - (EJ) and (STEC).

(EJ) made my High RS/EPS screen a couple of weeks ago so I've had my eye on it. I interpret the chart as a short, ugly cup that formed beginning the week of 6/12 and broke out on just average volume the week of 7/17. The stock advanced 40% and then corrected sharply last week with Monday's sell off, bringing it all the way back to the 50 dma.

What got my attention was the stock's action the rest of last week. While other leaders recovered in mostly below average volume, (EJ) was up on 150% average volume Tuesday and Wednesday and above average Thursday and Friday.

Based on this relative strength I purchased (EJ) about 15 minutes after the open yesterday at $19.30. Since then it has pulled back in average volume yesterday and above average volume today, so I'm in danger of stopping out. Per my rules I have the stop order at 8% below my purchase price and will target a 20% gain on this position.

(STEC) caught my attention with a massive volume move to the upside straight from the open. I missed the move and played it cautiously, holding off on any purchase throughout the day to see if the gains held. They did, and I purchased at $37.61, about 2.5% above the $36.69 pivot. So far the stock is following through to the upside again today. (STEC) is the clear leader of this rally, and should be bought at any reasonable opportunity. I intend to look for a 20% gain on this purchase but will evaluate the chart pattern further to see if this was a 10 wk pullback buy or a second high tight flag pattern. The concern still remains that (STEC) is trading at double it's 200 dma and should be due for a pause or a pullback.

Uptrend Resumes - What does that mean?

IBD has changed the Market Outlook to Uptrend Resumes based on Friday's follow-through action.

It's important to take a moment and evaluate the past couple of weeks and the current market health.

The leading stocks that I follow are, for the most part, extremely extended. Many have more than doubled since their initial breakout, and are even further past their 200 day moving average. Most are trading at prices four times or greater their 52 week lows. The market could use a break to consolidate these gains.

However, I won't carry over this opinion to some speculation about the future action of the market. The current situation is factual - the market still has five distribution days but after last Monday's selloff the indices responded in nothing but strength.

Still, the quick turnaround has not presented many quality buying opportunities. On the contrary I'm left to consider some leaders that have found support at the 50dma - not the ideal setup but one can have some profitable trades here.

I'm going to do something I haven't done before and post here a quick evaluation of my watchlist:

• (STEC) - This stock has found support near the 10wk moving average and could be on the way to forming a three weeks tight pattern. It's hard for me to ignore the selloff a couple weeks ago on the highest weekly volume ever, but equally hard to ignore the way this stock has led the market. Will continue watching.
• (EJ) - In a position to purchase off the 50 dma - could be bought immediately as it's already had two high volume up days off this line. Lot's of overhead but the RS line looks great.
• (FUQI) - Held the $22 buy point in Monday's big selloff and closed in the upper portion of the day's range. Since then volume has been quiet on up days. This stock looks like it has work to do yet, and could probably use a trip to the 50dma.
• (PWRD) - Monday's selloff took it to the 10wma and since then the price has rebounded well, but no volume to confirm the move.
• (BIDU) - Coming straight off the 50dma, but volume is absent.
• (ARST) - Has formed a four weeks tight as volume dries up. This heartbreaker continues to tempt me. Earnings are 9/3 so I will watch but not buy.
• (VIT) - Living on the 50day line - maybe lacking institutional sponsorship?
• (UTA) - See (VIT)...
• (GMCR) - Removed from the watchlist for now.

So that's it. I'll see how the market opens tomorrow and may take a position in EJ while keeping an eye on the rest.

Back to Cash

A bit of a delayed post here. Monday's market wipeout took out all of my stops and put me 100% cash. After the day's action IBD called the Market in Correction.

I'm not going to do anymore 'self-flagellation' as my friend puts it. I've made every mistake you can make investing. I've analyzed it and talked about it here.

Actions speak louder than words and that's why I'm not posting any big promises here anymore. I've refined and documented my rules and they are sound. All that's left is to watch the market and follow the rules.

On a positive note, I'm amazed at the response I've gotten to the forums I set up. It turns out people actually read this blog, and almost everyone who contacts me expresses that they can relate to my situation and feels we have quite a bit in common. It certainly makes any serious undertaking easier when you meet others in a similar situation - and it's great to see that there are a number of us all trying to succeed in this venture.

I believe we can do a great deal to help each other along the way.

Not for the Faint of Heart

(UTA)'s earnings news came out just fine last night, the stock opened higher and then it proceeded to tank, eventually closing down over 10%, right back to the $13 level. The eight week hold rule is either created specifically to ride out this kind of volatility, or it's just setting me up for disappointment. We'll see.

Aside from this stock there are a couple that could be setting up three weeks tight patterns - (BIDU) and (ARST) specifically. (BIDU) has been strong, (ARST) a bit hard to figure out this rally.

In fact, I have to admit I'm a little challenged overall in this rally. I've stopped out on (GMCR) which had the look of a big winner. I've bungled (FUQI) and (STEC) several times and continue to watch them lead the market while I don't own them. I feel at a bit of a crossroads and want to make any new purchases very carefully.

I have to admit investing is harder than I thought it would be.

I'm going to try something new and set up a private forum for investment discussion. There are a couple of readers of this blog who've contacted me and we enjoy sharing ideas and opinions on stocks. I find this very helpful and want to use a forum because once you get more than two people email isn't a great way to carry on a conversation. I'll post a link to the forum here, and see if there's any interest from other readers of this blog (if there are any besides my Mom).