Technical Analysis

Stock Bias Test

June 6, 2008 by Chris 39 Comments

I was inspired to write this educational piece after listening to the audio interview between Tim Bourquin of Trader Interviews and Brian Shannon of Alphatrends.net, also the author of Technical Analysis Using Multiple Timeframes. Brian’s book starts shipping on June 7, 2008, a book I had the pleasure to read as an advance copy; I definitely recommend his work. I will be posting a complete review of the book within the next week.

Which stock would you buy below based on the nameless & dateless charts? (listed 1,2,3,4)
How would you rank them in order of technical characteristics?
Would you avoid buying of any of the stocks below based on price and volume?
Would you short any of the stocks below?

Tim mentioned that a couple traders he recently spoke with have written code within their charting software that allows them to strip the company name and ticker symbol off of the charts. I find this absolutely amazing – a tool I would pay for in a heart beat.

These traders do this to avoid the human biases of the companies they are trading. Humans tend to rationalize their thoughts and decisions based on what has happened, what is currently happening and what they think will happen.

For example (one provided in the interview that I agree with): Many traders are starting to talk about a bubble or possible top in oil. Now, I don’t know if oil is topping but I have been avoiding some oil and energy stocks in my own research based on the indicators of my screens. I truly can’t tell you if this is based on the biases of what I have been reading and hearing or the based on my screens dropping clues.

I typically avoid old time blue chip stocks such as GM, IBM and MSFT but maybe I wouldn’t do this if they were making a move and I didn’t know what company I was trading because the ticker symbol was stripped. I did analyze IBM earlier this year but I avoided the write-up for as long as possible because it has underperformed for much of my adult life.

Anyway, take a look at the stock charts below and let us all know (in the comments) which ones you would buy, sell or do nothing. I will post up the full charts with ticker symbols and dates in a couple of days. Some of you may be very surprised to see what stocks they really are and may question your own conclusions once the company names are revealed.

Good luck – let’s see what everyone comes up with (leave them in the comments section). Click through to see charts 2 through 4.

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Filed Under: Education, Technical Analysis

Trend Following

May 21, 2008 by Chris 3 Comments

I would like to focus on several excellent questions discussed
by Michael Covel in his book:
Trend Following: How Great Traders Make Millions in Up or Down Markets

1. How do you determine what market to buy or sell at any time?
2. How much of a market should you buy or sell at any time?
3. How do you determine when to enter a market?
4. How do you determine when to exit a losing position?
5. How do you determine when to exit a winning position?

However, I would like to structure these questions specifically to the stock market (for the purpose of this blog audience) and answer them to the best of my abilities while anticipating comments from readers (for your answers):

1. How do you determine what stock to buy or sell at any time?
Hint: Stock Screens & Scans

2. How much of a stock should you buy or sell at any time?
Hint: Position Sizing and Expectancy

3. How do you determine when to enter a stock?
Hint: Risk/ Reward strategies

4. How do you determine when to exit a losing position?
Hint: Sell Strategies

5. How do you determine when to exit a winning position?
Hint: Taking Profits

I will follow up with detailed answers after you give the questions some thought. Hint: Answers to these questions are all over the blog – see categories and the archives for further clues.

Filed Under: Books, Education, Technical Analysis

Market Distribution

May 8, 2008 by Chris 2 Comments

“Higher oil, rate-hike fears and new regulations in the financial sector handed stocks their biggest beating in nearly a month…”

– Stocks Get Hit In Heavier Volume, By Vincent Mayo of Investor’s Business Daily.

There is some truth to the statement above but the charts have clearly been raising red flags that this market may be heading lower. I highlighted this trend over the past week or so I as I started to see the same faulty charts appearing on my screens. Visit these posts to see what I have been saying over the past week:

The Big Decline
DryShips (DRYS) Drying up?
(By the way, DRYS was down 2.87% on above average volume – distribution)

The NASDAQ, DJIA and S&P 500 fell about 1.8%, 1.6% and 1.8% respectively as crude oil was up $1.69 to close above $123 a barrel (a new record).

I originally started to point out market troubles back on March 14, 2008 in a post titled Snapshot Friday; I highlighted both the Dow Jones and NASDAQ with clear yellow shaded areas showing the 200-day moving averages pointing down for the first time since 2003 (that’s huge if you ask me).

Yes the market is now higher than it was in March but the recent bounce is smacking up against the 200-d m.a. for the first time since 2003 for both indices. The last time the market crossed below a down-trending 200-d moving average and couldn’t recover was back in 2000 and 2001.

So what does that mean? As I said yesterday, I think it means a possible Big Decline.

The Dow Jones is now back below the 200-d m.a. and is failing to challenge recent highs. The day’s action came on above average volume which makes today pure distribution.

I hate to pick tops but we may be coming off the official top of the bull market that lasted from 2003 to 2007.

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Filed Under: General Market, Selling, Technical Analysis

Stocks Building Bases

April 28, 2008 by Chris 1 Comment

We start the week by studying stocks that are currently building bases. I decided to specifically narrow the list down to stocks that are building cup shaped bases. Each stock presented today contains respectable fundamental characteristics such as strong earnings and revenue. Many, if not all of the stocks below have been covered within the past 6-12 months on the blog. A few of the stocks listed are building their first major bases since their spectacular up-trends in 2007.

Each stock has gained support along the 200-d (40-week) moving average while building their current base. The market has been moving higher but many pundits are calling this positive move a “head-fake” or slight pause in the main trend which is down (in their opinion). I couldn’t tell you if they are correct but buying stocks while they make new highs during a suspect market can be costly if it reverses. I prefer to buy stocks making new highs during an obvious up-trend. In any event, let’s go over a few technical rules for stocks building cup or saucer shaped bases.

On the weekly charts:

Look for more up-weeks than down-weeks while the stock is building the base.
Make sure that the volume is higher during the up-weeks than the down weeks.
Volume should be below average or lighter during the down-weeks than they are during up-weeks.
Stocks tend to make 3-5 bases during a long run over a few years. Be careful with stocks making late stage bases (4th base or later); they are more vulnerable to failure as most of the “smart money” (institutions) have rotated their cash into new stocks.
Sell if a stock breaks out from a base on above average volume but suddenly reverses below the pivot point (ideal entry) that same day or a few days later.
Beware of stocks trying to make news highs on above average volume but fail to end the day in the upper half of its daily range. This may be a reversal and a possible red flag.

Read an article I posted last January on How to Calculate a Stock’s Pivot Point:

How to Look for a Cup with Handle (chart #1):

Look for relatively quiet volume as the stock builds the left side of the cup. Volume at the base of the cup should be slightly higher than the left side as support is coming into the stock. The right side of the base should have above average volume with more up-days than down days. The handle will be the last part of the formation and should slope slightly downward with lower volume than the right side of the base. The pivot point will be slightly higher than the highest point of the right side of the base. All breakouts should occur on volume 100% greater than average daily volume although IBD does say that breakouts above 50% do qualify.

How to Look for a Saucer with Handle (chart #2):

Look for relatively quiet volume as the stock builds the left side of the saucer. A saucer looks similar to the cup-with-handle but the dip from the high to the low is smaller and usually longer in duration. Volume at the base of the saucer should be slightly higher than the left side as support is coming into the stock. At this point, the base may almost qualify as a flat base. The right side of the base should have above average volume with more up-days than down days but this does not have to be as prominent as the cup-with-handle. The handle will be the last part of the formation and should slope slightly downward with lower volume than the right side of the base. The pivot point will be slightly higher than the highest point of the right side of the base. All breakouts should occur on volume 100% greater than average daily volume.

All stocks and charts are listed in alphabetical order:

Follow-through Head Fake

March 19, 2008 by Chris 3 Comments

Advancers lead decliners by a 17-to-1 ratio on the NYSE Tuesday and 10-to-3 on the NASDAQ. The DOW was up 3.5% with the NASDAQ up 4.2% making it seem like we had a follow-through but volume was lower. Besides, the NASDAQ violated the reversal range intraday on Friday and then again this past Monday. Because of this violation, the count had already reset and Tuesday’s huge gain acts as day 1 for a new rally. I know this can be confusing but it makes sense after you study the rules and then watch it happen over several years.

We can’t call this a follow-through on day 6 for the DOW because trading volume dipped from yesterday’s totals. The count does not reset because we have not violated the intraday low from the reversal day or day 1 of the rally attempt. Leading stocks didn’t do much to lift the market today so it is better off that we didn’t have a suspect follow-through. Rebounding financial stocks lead the market higher, not something we can hang out hats on.

Read up on the CANSLIM rules if you don’t completely follow what I am talking about when it comes to reversals, rallies and follow-throughs.