The Most Important Post Since This Service Began!

When I created RebelTraders it was to help other investors and traders learn the proper ways to survive the stock markets. I have witnessed too many things over time that just makes me even more passionate about doing this.

I have known people who have lost their entire capital and most of their savings by not knowing when to get out of a stock. I have known people who have gotten swept up in the desire to get rich overnight and then make bad decisions and lose it all. I have seen people get taken advantage of by unscrupulous people trying to line their own pockets at the expense of others.

We all know what Enron is, we all remember how advisers and analysts, who are people who are supposed to be providing objective advice to us were actually part of that cover up. Those analysts kept telling people to buy that stock even though the price was collapsing.

Then add to that the many, many companies that are not even around any more after the "tech bubble burst" in 2000 and 2001. So many analysts kept saying buy the stock, it is so cheap it is a bargain. And while the stock kept dropping the analysts kept saying to buy. Now I'm not saying all analysts are not to be trusted, some are good and honest people. The point I'm trying to make is that you should take anything you are told by an advisor, analyst, etc and then run it through a sanity check. And what is the sanity check? The chart !!!

Do you know that the "buy and hold" investors who were buying stocks in the 90's when the technology stocks were so hot ended up losing most of their money after the tech bubble blew up. Why did they lose their money? Simple, they kept telling themselves things like "the company will get better", or they would say "I'm in it for the long term so I'm not worried", or they fall in love with a company, or a product, or the belief that the analysts or company would never steer them wrong.

Now consider this, another type of investor also started buying stocks in the 90's, the same stocks as the "buy and hold" person. But this person did not lose his money, he did not get his savings wiped out, instead he is today a much more wealthy person with a large bank account. So what did this investor do to keep his profits while his friends were losing all of theirs? They followed the charts and let the charts tell them when danger is approaching. It is that simple. There is no rocket science, there is no black box of secrets, there is no magic, it is common sense applied to "reading the charts".

No matter how good you think a company is or how good their products are if the chart signals danger and there is a significant shift in the supply and demand of the stock then you need to get out. If you buy a stock many years ago and it has done well for you all those years then you have a good stock, but even a good stock will have it's day when there is a shift and it is no longer the stock to be in. The charts tell you when to get in and when to get out.

If your house was on fire would you stand out front and watch it burn without doing anything? Would you tell yourself "it will get better".. no need to panic. But as you keep telling yourself that there is nothing wrong the house continues to burn to the ground and then you have nothing. That is what happens with "buy and hold" investors who always think things will get better. And then they lose their money and later they say to themselves "what happened?

If you practice good money management, know when to spot danger, and know how to read the charts you will NEVER get wiped out. Let me give you a real example of "buy and hold" investment compared to technical analysis trading.

For this example I will use Nortel Networks (NT). Nortel Networks was one of the tech bubble companies. In the late 90's everyone who was buying it and thought nothing would ever go wrong. The stock was on a huge run, they had great products, they were growing by leaps and bounds. Then the bubble burst. For those that were "buy and hold" lost huge amounts of money. They lost the money because they were the type that would stand in front of their house and watch it burn down instead of calling the fire department right away to save it. IF you do not take an active role in managing your investments and practicing good money management (using stop loss, etc) then you are not going to survive in the stock markets.

Take a look at this screen capture from my MetaStock software program. MetaStock is an excellent software package for technical analysis. It also has a system tester to lets you go back in time and apply "what if" scenarios. Tonight I ran a test on Nortel Networks. And it is a VERY simple trading methodology, no black magic. I ran Nortel through a simple trading discipline plan which used a 5% stop loss, and to buy and sell on a very simple moving average indicator(in other words it uses moving averages to determine when to buy and when to sell, just like we use in our technical analysis now).

Here is the test:

On January 3rd 1995 you set aside $5,000 to invest in Nortel Networks. Your broker pays 1% interest on your money that is sitting idle (not in a trade), and you rollover your gains whenever you sell into the next time you re-enter the stock.

If you put that $5,000 into Nortel and you are a "buy and hold" investor then today your profit would be $-2,677.81, Yes that is a negative number!

Now if you used the charts to tell you when to get in and when to get out that very same $5,000 would today be $29,166.22! See how some very simple trading discipline and technical analysis turns a "losing your shirt" into making good money. And you did not have to be an active day trader to accomplish this. Using the technical analysis criteria for this test resulted in only 24 trades since 1995 when you first started.

We are currently in a very volatile market. There are many stocks that are now turning very bad. Some of the very best companies in the financial sectors that "buy and hold" investors will say "everything is fine" could end up just like those who invested in Nortel back in the tech bubble. IF the "buy and hold" people don't take notice to a significant shift in investor confidence as viewed on the charts and take their profits then they could end up riding it all the way down to the bottom. And you know what is even more sad. Some of these people who have lost so much money will still say "it will come back one day". That is nothing more than denial of what has happened. And people who are in denial of what is going on around them will fail.

The very best and smartest traders and investors know when to be in and when to be out. During this market turmoil we have now I have not been as active in the markets as I would be if we were in a normal bull market. I have some watch list items and I have a few open trades but I will exit them faster than you can say "fire" if they start to go red (that is what a stop loss is for). I am not trying to jump on every stock I see going up during this time. Because I know from experience that there is always a time to be trading actively and a time for sitting on your money and waiting for the storm to pass. You do NOT have to be trading every day. You must know when it is prudent to just sit it out and watch safely from a distance. I have been receiving some emails during this terrible financial market/credit crunch crisis about why I am not trading more. Some have emailed me and told me that they bought this stock or that stock and wanted to know what I thought of it. My first reaction is "WHY". Why would you be trying to buy stocks that are still falling. Why would you be buying a stock that is bouncing in an unhealthy sector. Why would you be buying a stock that some one said in an email SPAM message (stock pumper). Why? If you feel the "need" to be trading all of the time then you are more likely to lose your money than if you just use some control and know when to sit it out.

As a investor, swing trader, day trader, whatever kind of trader you are you have only 2 things you need to remember. And they are in this order:

1. Control your losses. Keep risk to a minimum. Only after you learn to practice this step can you move to step 2.


2. Make profitable trades.

The charts of the financial sectors have been signalling trouble for weeks. I have said a month ago that the financial crisis was going to spread. I stopped actively entering into new swing trades back then. I said that trading in this kind of environment is too risky. Now we see that it is getting worse. Many stocks of banks, brokerages, and other financial related companies have lost huge amounts of their value. IF your a "buy and hold" person you are feeling the loss hard. If you had used the simplest of technical analysis tools you would have known when to sell. You would have sold, taken your profits, and left your money sitting in your brokerage account (most of them pay a very small interest on money that is just sitting in your account and not in a stock) while you watch from a safe distance the market get worse. Then later when the storms are over you take your money and buy the stock again if you still like it. Now you are able to buy more shares because the price is less and then using technical analysis again you stay with the stock until you get another signal to get out. That is how you make money consistently. Take a look at the books I have listed on the right side of this web site. They are there for a reason. Every one of them I have read, every one of them is the best in my view, and they are worth every penny. If you are just starting out get the book written by John Murphy "Technical analysis of the financial markets". John is an excellent writer and his books are easy to read. Then get the book "Trading for a Living" by Dr. Alexander Elder, and then the book "Trading in the Zone" by Mark Douglas. If you start with those 3 books alone you will learn how to make good trades, learn how to get out of a trade to protect your capital, learn the art of technical analysis, and learn how to be a disciplined trader.

I will close out tonight's message with a quote from one of the best.. Jesse Livermore:

"A loss never bothers me after I take it. I forget it overnight. But being
wrong - not taking a loss - that is what does damage to the pocketbook and to
the soul"

The Day that Was - July 26th 2007

And what a day is was indeed... I have some very interesting market analysis tonight. Be sure to check out all of the charts in this post!

Tonight I am not going to talk about individual stocks. Instead I am going to focus on some of the market sectors and the broad market health. Before I dig my teeth into that I will highlight the events of the day.

In the pre market we had earnings from more home builders and as expected the results were terrible. Perhaps even worse than some were expecting. But one thing that stood out was that the housing problems appears to be spreading into the commercial construction now. This was further reinforced when the Durable Goods data was released this morning. It was showing capital expenditures had declined whereas business spending was concerned.

Then we also had today the growing fear that the sub prime (and now the prime) lending issues could erode some of the big M & A activity. Large company buyouts, mergers, etc. would be impacted by more problems in the lending sector. And today a lot of companies that are already in a takeover (but not yet finalized) pulled back some as investors were growing fearful that the money needed to make the acquisition may not be there now. This may be more fear than reality but it is still worth mentioning as it is important. Once private equity and/or other companies can't secure the assets they need to do take overs, mergers, and acquisitions then the bull market will then be running on only 3 legs.

These events sent the market into an outright selling frenzy. At the end of the day all three of the major indices recovered some but in my view this was not all bargain hunters stepping in to start buying. It was a lot of shorts covering at the end of the day to take their profits. When the major indicators today showed the panic selling was underway hedge funds and other very large money movers started shorting just about anything with downside room. And these hedge funds that shorted large amounts of money today made a good deal of cash today when in the last hour they started covering and banking their profits. Remember that on just about any down day that at 3pm you will see a bounce. The last hour is when shorts start covering and bargain hunters come in for the kill. Today I feel it was more short covering than bargain hunters.

So that is what got the selling started. Early in the morning RebelTrader swing trade NightHawk Radiology (NHWK) gaped up at the open (last night they released good earnings) but I quickly saw what was looking like heavy profit taking and the price was going to fall through the floor. So I sold my entire NHWK position. That swing trade provided me a 5% gain today. Later I added to my position on FEEC when it broke above the next buy point. Because of the market conditions today I raised my stop level to $1.60 so that if FEEC fell back too much I would exit the trade at break even. And that is what happened. FEEC is still good, I will re-enter when the time is right.

That leaves only one currently open swing trade and that is WWAT. And that is sitting today at a 16% gain.

Ok, now I'm going to move on to some in depth analysis of the market in general. Some of the things I'm going to say in the next few paragraphs may be a surprise. What I mean by that is some of my analysis goes against some of the talking heads on TV. But I call them like I see them and I feel we still have trouble ahead of us. There are some significant resistance levels that need to be overcome in order for me to believe that the tech sector is 'hot' as some are saying. I'll start off with that. The chart shown here is the "SOX" as we call it. It is the Semiconductor Index. Look at the chart and observe that currently we are right up against a resistance level. If the overall market continues to be weak then this resistance level will be strong and the index will turn around (and the tech stocks with it). If however the index is able to "break through" the resistance then I will be bullish on tech. But until it does tech remains questionable and I will trade it with extra caution.

The next chart is the Philadelphia Bank index ($BKX). It shows that this week we fell below a major trend line. Once a major trend line is broken we are in new territory whereas we are no longer in an uptrend. Now the index will trade sideways, fall more, or have trouble getting back above the trend line (remember that once support is broken that support line then becomes resistance).

The next chart is the Housing Index (a good index for all things housing, construction materials, etc). The chart ($HGX) shows a head and shoulders pattern. In technical analysis a Head and Shoulders pattern is the name given to a chart that exhibits three main events. A rally that peaks (left shoulder) and then another rally that is even higher (head) and then followed by another rally that is lower than the previous one (right shoulder). From those three events one can draw a neck line. When a stock or index fails the neck line the trend is taking a turn for the worse. This chart says we have larger troubles ahead in housing, construction materials, and in turn the mortgage business.

Next is the S & P 500 Large Cap Index ($SPX). On this chart notice how we have come to rest right on top of a very significant support region. This support must hold otherwise we will be in for an even bigger market meltdown.

Next chart is the NYSE Composite ($NYA). Same thing as with the S&P. The index has come to rest right on top of a significant support line. This must hold! Otherwise lookout below..

Next is the Volatility Index ($VIX). I present this chart in a new way tonight. I examine this chart in terms of when bull markets and bear markets have been in control. Remember the big market bubble that came crashing down in 2001 / 2002 (that was the big tech bubble burst). That was a bear market. Notice on the VIX chart the volatility in 2001, 2002, and 2003. See how high it was back in the bear market. Then at the end of 2003 and early 2004 we started a new bull market and the volatility declined all the way until 2005. Then the volatility started trading in a rectangle pattern up until now. But today the volatility broke above the pattern! Could it be that we are seeing the very early stages of a new bear market approaching? Wait until you see my next chart!

This chart is the NYSE index of new highs - new lows ($NYHL). Look at this chart carefully. I have indicated where the bear market was and the current bull market is. But what I want you to notice is the blue trend line drawn above the new highs. See how over the past 3 years the trend has been declining. This tells me the economy is declining and taking companies with it as reflected in the decline of new highs over the past 3 years. Some interesting things to ponder.

Now I am not saying that we are on the verge of an outright bear market. But I am saying that we are at a difficult time and finding good swing trades will be tough. But I will do my best to find them for you. There is always money to be made... finding the right plays at the right time is what I am here to help teach you how to do.

Good night Rebels!

Durable Goods data

I said in my earlier post that construction problems were now spreading into the commercial sector. The durable goods data confirms this as capital expenditures has declined.

Keep your stops in place on any trades you have active. Remember, good traders and investors will always put a tourniquet on a loss. Never let a trade take you more than 8% in the red. 8% is the absolute maximum. Personally I try to limit my losses on a swing trade to no more than 4% (and sometimes even less depending on where support levels are).

Please.... never invest or trade on hope. That will erase your money. You invest and trade with a plan and that plan is to ALWAYS limit your losses. When a trade or investment does not work out you sell and move on. Don't keep holding it and think it will get better. What if it does not get better.. then you have an investment that starts out at a loss of say 10%... you say "no problem" it will turn around, then your down to a 25% loss. Now you say I can't sell here because it is too big of a loss to sell here. I'll just hold on and one day it will come back. Then your investment is down 50%. Never tell yourself I will hold and wait for a turnaround. Because you don't know if it will. Don't trade/invest on hope... Always have a plan and get out before your losses get bad. No matter how much you like a company or their products you never let that influence your investing smarts. If you go red you cut the loss and limit the risk to your capital.

So many investors fail because they fall in love with companies and think the companies will never do them wrong. Or they let their investment brokers tell them to keep holding on to a bad investment. Just like financial advisers were telling investors during the Enron collapse. Listen to your own logic and discipline, it is your money... not theirs.

Repeat of a commentary I wrote...

With the markets getting attention again with the new highs achieved today. I want to share an article I wrote some months ago. It highlights how one must remain in control. Don't get caught up in the excitement of the markets, or of any particular stock for that matter. Here it is:

The stock market is alluring with its vast amounts of money being exchanged
every second.

The sights and sounds of the floor of the stock exchanges inspire in us the
images of a fast paced nose to nose horse race, the fever pitch of a baseball
game, the feeling of rolling the dice in Vegas. It is sexy, it is powerful,
and it is addictive.. It conjures up within us all the dreams of being
instantly rich with the roll of the dice or the well placed bet on which horse
will win..

For stock traders and investors the dreams of fortune come from "winning
the game" of stocks. The problem is that there is no one throw of the dice or
one pull of the slot machine handle.. In Vegas you can loose everything on
one roll of the dice.. In the stock market you can not approach your plans
of being wealthy the same way you would roll your dice on the tables in
Vegas.. You have to control yourself, plan your next move, and strike like
a tiger when the time is right. And more importantly you have to sit on
your chips and only gamble with a percentage of your chips at any one
time. That is how we manage our portfolio and protect our
capital.

Because in Vegas if you bet the farm and the dice don't stop spinning in
your favor.. you've lost the farm and your out of the game with nothing. In
the game we call the stock market.. there is no "blowing on the
dice"... there is no "come on baby...daddy needs a new pair of
shoes"... For if that is your approach to the stock market then you have
already lost the game.. for you are relying on
hope... not a strategy.

Walking up to play the stock market game requires a whole different
mentally. Sure the attraction of fame and fortune is what brings many
traders.. But the ones who win are the ones who come into the game with the
plan of not winning. Yes.. I said that correctly.. Let me say that
again.. the winners in the stock markets are those that plan every move,
every step, every trade with the intention of not losing any money.. Accept
little looses and let the winners add up. If you run into the stock market
expecting to win big in the first few weeks... you will be out of the game
in no time.. Your approach to the stock market game must be to take bits and
pieces at a time.. Don't go for the gusto in one shot... that is the
wrong attitude and will drive you to make bad trading decisions. Winning in
the long run requires careful and precise moves... such as a chess game.
Don't let the lure of the 'big money' drive your trading decisions. That
will lead you to the soup lines. Instead make it your plan to NOT lose any
money, then the money you gain will add up slowly. This will also allow you
to remain focused on your trading style and remain disciplined to that trading
style.

Once the heat of the race takes over your emotions then mistakes will be
made.. And the ones who remain cool, calm, and in control of their strategy
will be the ones taking your money when you get wrapped up in the heat of the
money. Remember... when we perform technical analysis of the charts
and apply the understanding of greed & fear it is WE that will
be taking the money away from those being caught up in the heat and
excitement of money.. The stock market can be a vicious game.. the
money made every day by traders is not mysteriously printed
somewhere... For every dollar someone makes... someone has lost.. And
in order to be on the winning side.. remain in control.. don't let the
excitement and lure of big money take over your emotions.. For if you do
then those that sit on the side lines; disciplined and waiting to strike; will
be there to take the money from you.

Current Rebeltrader portfolio status

As of the market close, July 12th, 2007 the current open trades:

WDC 4.4% gain (open)
AKS 3.8% gain (open, average cost $38.58)
ONT 3.3% gain (open, average cost $2.77)
BIG 2.9% gain (open, average cost $29.91)
GRP 2.2% gain (open)
ALGN 1.2% gain (open, average cost $25.29, multiple trades)
NTGR -0.9% loss (open, average cost $38.79
WWAT -2.2% loss (open, multiple trades)

JDSA -5.3% loss (closed today)

Multiple trades means this is the second time a trade is being attempted on that stock. The gain/loss calculation takes into account the gain or loss from both trades!). Gains/losses are calculated on the average cost where the stock play has been to scale into the trade.

Money management stems losses and keeps the winning trades in play. You do NOT have to win every trade. That is not possible by anyone. All one has to do is win more than you lose over the year and your ahead. After each trade is completed you put that cash right back into your capital for use in the swing trade methodology, increasing your buying power as time goes on. Remember, take your trading capital you set aside for swing trades and divide it up into 10 parts. And each part is what you use for one swing trade,one stock. So no more than 10 stocks will be owned at any one time.

Where you read that I scale into a trade with a 1/3 or a 1/2 that means I have taken that one 10% part and cut it into more parts. This way I enter into the trade a little at a time until the whole 10% part is loaded into the one stock. This is done to protect capital. The more the trade works the more you add until it is loaded. The scaling into a stock is even more important in times of extreme market volatility where it can change direction in a flash. Under normal conditions entering a trade is usually in 1/2's and in some cases (depending on the situation at the time) will enter the trade with the entire 10% part all at once.

For the new members of the site please read this earlier post. Click me!

If you are new to the concept of swing trading please, I encourage you strongly to start out by paper trading and reading some books on swing trading. Never put all of your money into one trade, ever! That is financial suicide. Practice how to manage your capital and it's 10 pieces for swing trading. Get a feel for how swing trading works and the concept of compounding your gains into the next trades.

The Day that Was - July 11th 2007

Today the market was able to recover some of its big drop from yesterday. Yesterday the big driving force that made the already nervous market take a dive was that ugly word popped up again. That word is "sub prime". Any time the market hears that word there is a fear that runs all the way down the spine of the markets. Personally I feel the sub prime issue is still looming over the economy and it will manifest itself into other areas over time. We are not done hearing about sub prime woes.

Today the market was helped by the M/A news of Chaparral Steel being purchased by Gerdau Ameristeel Corp. That boosted the metals sector today. And the rebeltrader portfolio holding A K Steel Holding Corp (AKS) got a boost from that today as well closing up 1.78%.

Portfolio holding Grant Prideco Inc. (GRP), an oil services sector play remains in play. I am still bullish on GRP. Yesterday Motley Fool mentioned that GRP is still on their 10 highest rated stocks list per their investors subscriber base of recommendations.

Yesterday I took a position in JSDA as it was advancing throughout the day after it had closed above a key support level ($17.00). The entry price was $17.85. Today JSDA sold down to $17.07 on a CEO interview that made it through the markets as being "not so hot". I watched the interview and while the CEO was not well spoken he did not say anything in my view that warranted a sell off. But one always has to remember the market does not care about the old saying "what have you done for me lately", but instead wants to hear more of what are you going to do for me tomorrow. The CEO addressed that by the end of the year they would be introducing some sort of new product. For me it does not matter what the CEO says or not. I'm playing the chart. And for now $17.00 is still a support line that if there is going to be a leg up it has to start from somewhere. And $17.00 is that starting point. Every swing trade has to have a plan. You can not just buy something you hear about or see flash by on a ticker window showing a big gain. You have think like a tiger, stalking your prey. A tiger waits for the right moment to attack. JSDA was a stock that ran from $14 to as high as $19 in the span of 3 days. It was a moving target in the middle of a freeway at rush hour. Trying to rush into traffic to catch it could either get you run over or when you caught it the stock could change direction and head for the off-ramp. Smart traders will wait for a setup. The setup was the formation of a base above $17.00. That we got, we made the kill on the move up out of the base (albeit a short time frame base) and we will play it by the book. If it fails the base then this stock is not ready for prime time yet.

Discipline is always the key. Never buy any stock that is being talked about in the news blindly without looking at it carefully, plan your attack, and wait for the conditions to establish and then you have your trade. Have a plan and trade the plan.

Today I entered ALGN on a very healthy advance. The volume was good and it closed up 5.23%. Today it set a new 52wk high. I did not enter the second 1/2 of my swing trade funds to this trade yet. Although it did clear the second buy point it did it at the end of the day and by only a couple cents so I will wait until tomorrow. If you had a pre programmed trade setup to grab it at the second buy point then that is fine, you may end up with a better entry than I will when I enter my second buy.

We are still in a place I don''t like being. We are still in this sideways trading range on the major indices and it's makes swing trading difficult. But perseverance I have and I will keep looking for good trading ideas. For those of you that email me asking me what are some good trades I can only tell you that I have a list of stocks in my office up on the wall that I like, but I am stalking them and looking for the setups to establish themselves. Over the weekend I will post a picture of the RebelTrader 'research department' and you will see my wall of stock plays.. LOL

I hope all my fellow Rebels had a great day and to all I wish a wonderful good night.

p.s. - Today I was contacted by Lindsay, a wonderful lady at http://www.ino.com/ asking if I would be interested in providing some guest commentaries for their site. So from time to time I will provide her with some articles that I write and she will share with me some of their content in return. Thank you Lindsay for considering my market views as worthy for your site.

Updated ONT and ALGN charts:

Amrep Corp. (AXR) Profile

In this post I highlight AXR (Amrep Corporation). AXR has been on the Rebel Traders watch list for many weeks. It is a play on a trend reversal along with a high short interest.

Amrep began in 1961 and began trading on the NYSE in 1972. The primary business of Amrep is magazine subscription services, and real estate development (Fp80 comment: The two business operations of Amrep could not be further apart, processing magazine subscriptions AND real estate development is not a successful business model in my view). Amrep has their headquarters in Princeton, NJ (25 miles from RebelTrader HQ). Picture shown is of the building they occupy from the real estate owner in Princeton.

Amrep started getting attention in June 2006 as shown by the increase in share trading volume and in the span of 8 months went from $35 (special dividend adjusted) to almost $150 per share. The share structure as provided by Thomson Financial data provider is:

shares outstanding = 6.65 million
shares in float = 1.73 million

As you can see based on the share float it does not take much buying activity in order to get a substantial price movement in the shares. What had taken place was the share price got way ahead of the true share value (based on fundamentals, market cap, and growth rate). In other words people were willing to pay up for the stock even though the business suggested it was not worth that much. In July and October of 2006 Amrep reported EPS numbers that were way ahead of analysts expectations, and that brought buyers to the table thinking the company was way under priced. Always remember that investors and traders will pay what they 'feel' the stock is worth. Hype goes a long way to the investor. Greed & Fear drive the real price movements

But in January 2007 Amrep released quarterly earnings and they went from an EPS of 2.42 (October 2006) to 1.04 ( 132% drop ). Reality had set in. Now all of a sudden investors were holding onto a stock that was in no way worth the value they paid for it in their views. The massive sell off began late January 2007 and has been a straight drop ever since.

The share price of Amrep is nearing a more realistic value now based on the actual earnings of the company. More importantly is that the share price a level investors "feel" it is worth? Where the price will stop falling can only be answered by technical analysis. At the present time on a weekly chart there are weak signs that it may have bottomed. But I caution that those signs are weak. (see the weekly chart shown below). What we need is to see more evidence of a reversal in the works before we can consider this a swing trade (mostly to capitalize on the short interest covering). We do this buy using the charts to establish criteria to test those conditions.

First we have long term support areas. Currently the share price is close to one support area with a stronger one below it. Is this the support area that is going to hold and be the base for the start of a trend reversal? We can't say. That is why we next set conditions which must be met to confirm to us that the bottom may have been established. We then look at a closer view of the stock chart to show the trend line and a baseline level we want to see the share price trade at to give us confidence that buyers are working up the price (daily chart shown below).

Is Amrep worth $46.91 a share (July 6th closing price)? Is it worth even lower than that and we will drop to the next support region around $34? A company with a current P/E ratio of 6 may sound good and may sound like a bargain but P/E ratios don't necessarily indicate that the share price is undervalued or even a good investment. A stock always trades at the price the investors perceive the value to be. And this is why I rely on the technical analysis of the tape (charts) to tell me what investors are willing to pay for a stock. Go back to Amazon a few months ago. They had a P/E of over 100 leading into their earnings release in April. Many analysts were saying that the price of Amazon was overvalued already and that any further upward price gains would be difficult. Well they were all wrong and even with the way overvalue condition investors bought up Amazon shares like they were printed on money themselves.. If one were to use P/E as a guide for determining growth potential or the lack thereof the chances for successful investments/trades will be lower. In swing trading I never use a P/E ratio. I look to the chart to tell me what the investor is willing to pay. And when there is a consensus that it is time to start buying upwards, then I join in for the ride and then hop off before the ride ends. Don't want to get stuck at the end of the line in a roundabout and then head back down.

A deeper look at JSDA and why technical analysis is important

Earlier today I posted a daily chart for JSDA and noted the resistance levels that were critical for the stock to overcome in order for JSDA to be showing signs that it is reversing the down trend.

The following chart is the JSDA intraday chart from today (5 minute interval). Three attempts were made by the buyers to bring the price up but each time the sellers would chop them down. And each try after that the buying intensity was dropping.

Technical analysis is the scientific study of supply and demand (the emotions of the buyers and sellers), and it reveals to us when the right time to enter a trade is and when it is not the right time. In the case of JSDA today having a nice rally it could attract the unsuspecting buyer thinking they were buying a bargain as the stock was on a new rally. But the chart tells a different story. The charts today show it failed to break the down trend resistance levels and a closer look at the intraday chart shows the intensity of the buying dropped off as it failed to break resistance. The charts tell the story. We wait for a break over resistance for confidence the trend is reversing.

Swing Trading Basics

Shortly I will be doing a multi part discussion on the basics of swing trading. The topic will cover everything from the type of equipment one needs (and does not need) to money management, discipline, stop loss, and executing the trade.

You can consider this as a "swing trade 101". It will be throughout the month of July.

Fp80

The day that was - June 29th 2007

Some early buying on low volume led to end of day selling on higher volume. The DOW experienced an intraday swing of over 200 points. Up almost 100 by mid morning to down almost 100 by late afternoon. The combination of higher crude oil prices, the car bombs discovered in London, the holiday coming up, the already volatile markets conditions, and the end of the quarter "shifting" of assets by the money managers at mutual funds all led to the markets behavior.

Look at the DOW chart I have in my public chart list. Keep in mind that we are still inside a trading range. The markets are still undecided here. While I am bullish on the markets for the near future the fact that we are in this sideways trading range makes it difficult to get too heavy on new trades. What is happening here is that for every attempt the bulls attempt to rally the bears come to the party and kill it. Makes swing trades very difficult.

The one current open position in the FP80 portfolio (BIG) also pulled back on Friday but is still above the buy price. We are waiting for it to advance above $30.50 as a confirmation of more buying intensity before we go in with an additional 1/3 of our swing trade funds. Scaling into a swing trade or position trade is the safest and smartest way to trade. You get the advantage of having some of your money in at the lowest price while at the same time we are testing the trade (dipping our toes in the water). And if everything is OK then we go in all the way. Normally I would scale into a swing trade by starting with 1/2 of my normal swing trade funds allocated for any one trade. And upon confirmation of a successful setup I add the second portion. But with the increased volatility right now I am temporarily using 1/3 as my starting position. By doing this the risk is reduced even further if the markets take a dive and the stop loss point is triggered then the loss on the trade is even less than if you had gone all in from the start. Reducing ones risk is always a key to success.

To help illustrate the concept of how one should divide up their capital for swing trading see the chart here (click on the chart to enlarge). Remember, it does not matter how much you set aside for swing trading. The concept is to take whatever that amount of funds is and divide it up into 10 slices. And then each swing trade becomes one slice of your total swing trade funds.

I am working on some new swing trade charts and ideas. And I will post new charts by Sunday night for you to view.

Final thought for the day. The hype in Apple (AAPL) is done. The excitement in the iPhone is done. And for now the stock price of AAPL will likely pullback as the hype is quickly vanishing.

Buying on the way down...

Last night before I had to leave the house to go to a meeting I caught a few minutes of Cramer (the TV was still on CNBC from the morning.. really, it was). He was in the middle of a discussion on buying a stock each time the stock price went lower. He said if it drops a point then buy another 100 shares, drops another point go in even more, and on and on. What was completely void in his discussion was the topic of charts. Not once in the time I was watching did he say anything about long term trend support, support & resistance, etc. Nothing at all about the chart. He only said to keep buying as the price went down.

This has got to be the biggest and worst things I have ever heard him say. To me it is irresponsible to advise people to do that with their money. That is the wrong money management plan and is a potential disaster in the making for your capital.

Remember that the chart is our x-ray into the company. The chart tells us the health of the stock. For it represents all forms of money involved in that stock. It shows the big hedge fund money, it show the mutual fund money, it shows the investing public money (you & me) and everything else in between. The chart does not filter out anyone. It displays all monies involved day to day in the stock. So the chart is the most important tool we have in our trading arsenal (second only to our own grey matter) to read the health of our stock.

When you have a chart that has been trending up for many years and can be identified by major trend lines on weekly and monthly charts then that trend is your key to knowing when there is a significant shift in the people moving money in and out of that stock. In chart analysis the break of a major trend line is the most significant marker of a change. Pullbacks to moving averages, breakouts from consolidation, triangles, etc. don't measure up to the importance of a major trend line break. A trend that has been in force for 5 or more years for example is paramount in its significance to the health of the stock.

So when Cramer started speaking about how to keep buying when a stock starts dropping is irresponsible without addressing limits and charts. If the uninformed investor who watches his show decides he is going to do as he suggested and he has a stock in his IRA that has been dropping and he decides to keep buying more (based on Cramer and his buy, buy, buy idea on the way down) what is to prevent this investor from buying more shares of a stock that is in serious trouble? Without consulting a chart and understanding some basic technical analysis concepts this investor will just throw more money on a potentially already bad stock. When all is said and done this poor investor (and he will be poor when his investment turns to nothing) will be wondering why years later he has not made any money, or even worse has lost money.

Mr. Cramer has made it clear on numerous occasions that he does not believe in technical analysis. As he so demonstrated one night when he stood on his head and said he was a "head and shoulders" pattern and mocked people who study the charts. Well if he ran a hedge fund years ago then he had to of used charts and understands how to read them. So why would he now boo hoo charts and technical analysis? Guess only he knows that answer. Perhaps he does not want to give any power to the viewers to see through his recommendations???

The point I'm making here is that no one should ever buy on the way down unless they fully understand the chart and can identify the major trend lines. This way the investor could tell if the drop in price was nothing more than a sector rotation drop or some other minor cause and can say that the stock is still healthy (because it is still above the major trend support). And I should add that adding to your position is only acceptable for long term investments. But the chart still takes priority in the decision making process, even with a long term investment. I feel bad for the investors who blindly follow Mr. Cramer and don't take the time to understand for themselves the risks of buying on the way down. Without knowing the danger signs that a chart can signal then that person could be buying more shares of a stock that is on its way to the stock cemetery.

Did you know that during the Enron collapse some major investment analysts were advising their clients to add more shares, to buy more! Yes, it is true. While the smart investors who looked at the chart knew it was in trouble and got out before losing everything.

I want to quote another passage from one of William O'Neil's books (founder of Investors Business Daily)..

One of the most unprofessional things a stockbroker can do is hesitate or
fail to call customers whose stocks are down in price. That's when the customer
needs help the most. Shirking this duty in difficult periods shows a lack of
courage under pressure.
About the only thing that's worse is for brokers to take themselves off the
hook by advising customers to "average down" (buy more of a stock that already
shows a loss). If I were advised to do this, I'd close my account and look for a
smarter broker.
Everyone loves to buy stocks; no one loves to sell them. As long as you
hold a stock, you still have hope it might come back up enough to at least get
you out even. Once you sell, you abandon all hope and accept the cold reality of
temporary defeat.
Investors are always hoping rather than being realistic. The fact that you
want a stock to go up so you can at least get out even has nothing to do with
the action and brutal reality of the market. The market obeys only the law of
supply and demand.

My advice is to never average down. If you have a trade that is not working then why throw more money into the fire. If the trade is not working then you should not be in it anyway. Because your money management rules would have you out of the trade when it went the wrong way. Protect your capital! This is key to winning. Never deviate from your stop loss rules, ever!

Why do we wait for prices to go up?

Someone once asked me...

"Why do you wait for the price of the stock to go up before you buy it? If
you like the stock so much why don't you buy it now when it is cheaper".

Well that is a question that any sane person would ask, and it makes perfect sense why someone would ask a question like that. Isn't the whole concept of buying stocks to buy low and sell high? The answer is that even though you may believe a stock (and the company behind the stock) is good we traders need to know how the market thinks of them. It does not matter what we think, but what does the people in the market with money think... that is the key!

Perhaps you have heard good things about a company and their products, maybe something about a good management team, or perhaps they have released some incredibly good sales data. Some nice starting points for any investment research. But what does the market think about them? I'm not talking about analysts at the big investment firms (who may have their own agenda) but what do the people with money in their pockets and big investors think of the company?

To answer that question we read the tape. Yep, reading the tape (technical analysis of the charts). Understanding the price movement of a stock is reading right into the minds of the investors putting their money into (or taking money out of) the stock. It is important to remember that any stock price moves up or down for only one reason. And that reason is people moving their money... in or out of the stock.

The science of technical analysis of stock charts is the study of human behavior. By interpreting the movements on the charts we are seeing the greed & fear behind the scenes of the people with the money. When we see a stock price begin to fall and the number of people selling is tiny compared to when the price was going up that tells us that as a collective the majority of the money is "sticking with it". Only a small amount of people are taking money out. On the other hand when we see a large number of people (volume) taking money out as compared to the volume when the price was going up then we have a big warning sign before us. It is telling us that the mass collective thinking on the stock is to "get out".

So how does this benefit us? In every way it benefits us. We use the charts to tell us what the market thinks of a stock. And we do this by applying technical analysis to the charts. Technical analysis on the surface may sound very geekish, nerdy, or downright complicated. But what it is at its core is the study of people. It is nothing more than that. We only want to buy stocks that people are putting money into. This way we have a better shot at the price going up. Even a great company with good sales figures and super products can be a loser on Wall Street. To know a winner from a loser we have to know where other people are placing their money. Because in the markets we really care only about one thing.. to have the stocks we are trading go up.

So getting back to the original question. Why do we wait for the price to go up before buying? The answer is that we want proof that people are buying a stock before we hop on also. When we look at a chart and if I put some notes on it that says "wait for a break above a certain price" that means that the stock is currently in a state of indecision perhaps, and that we want to see a continuation of more money flowing into a stock before we jump into it. If we were to use the buy it now premise without waiting for a clear sign then we could be jumping onto a train that is dead and is not going to go anywhere.. We could be sitting on that train waiting for a long time before, if ever it moves up. And even worse it could go down. That is why we wait for the train (stock) to kick up its engine and blow the whistle that it is going to start moving. That is when we get on board. The charts tell us where the money is, and we want to be on the same side of the trade as the rest of the money. Forget about how you feel about a company. What you always need to ask yourself is "What does the market (money) think about the company".

A passage from Jesse Livermore in the book "Reminiscences of a Stock Operator"... (by Edwin Lefevre)

Not so long ago I was with some friends. They got to talking wheat. Some of
them were bullish and others bearish. Finally they asked me what I thought.
Well, I had been studying the market for some time. I knew that they did not
want any statistics or analyses of conditions. So I said: "If you want to make
some money out of wheat I can tell you how to do it"
They all said they did and I told them, "If you are sure you wish to make
money in wheat just you watch it. Wait. The moment it crosses $1.20 buy it and
you will get a nice quick play in it!"
"Why not buy it now, at $1.14?", one of the party asked.
"Because I don't know yet that it is going up at all".
"Then why buy it at $1.20? It seems a mighty high price."
"Do you wish to gamble blindly in the hope of getting a great big profit or
do you wish to speculate intelligently and get a smaller but much more probable
profit?"

They all said they wanted the smaller but surer profit...