Technical Analysis

Stages of a Stock Breakdown

March 11, 2008 by Chris 5 Comments

The five charts tonight profile what a stock looks like as it starts to breakdown and become a prime shorting candidate. I have been highlighting multiple shorting candidates (stocks trending downward) over the past several nights with the exact characteristics of the charts below.

Recent stocks trending down:

Stage I
Bunge – 96.00, is a stock that is starting to breakdown after a prolonged period of up-trending price increases. The stock continuously maintained a position above the 30-week moving average after the 10-week moving average crossed above it in the summer of 2006. However, recent action suggests the stock is going to fall as the 10-week moving average is now pointing down on above average volume. A cross of the 10-week moving average below the 30-week moving average is a major red flag and sell signal. The first failed attempt to recover the 30-week moving average is the ideal shorting signal.

Stage II
SYK – 59.74, here is a stock that also enjoyed a prolonged period of up-trending prices from the summer of 2006 until the close of 2007. The stock started to drop hard on above average volume in January of this year and now shows signs of a prime shorting candidate. The 10-week m.a. is now below the 30-week moving average with both lines starting to point south. The next failed attempt to recover either moving average is a short setup. Rallies will occur and this is where opportunity will lie.

Stage III
MS – 38.30, Morgan Stanley is a stock that has been hit hard since the collapse of the credit markets and the sub-prime fallout. The 10-week moving average gave us the exact moment to classify this stock as a red flag back in July of 2007. From there, the stock failed to recover the 30-week moving average and presented a prime shorting opportunity. Only the best traders took this trade as the overall market was still trending higher. The extreme volume confirmed the downward spiral that would follow and the stock has yet to recover the 10-week moving average. Day traders will continue to short every failed rally attempt back to the 10-week or 50-day moving average

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Filed Under: Education, Shorting, Technical Analysis

Start Here: Top 20 Posts

March 7, 2008 by Chris 3 Comments

I went back and tried to pick out the best 20 posts that new readers can start with when coming to this website. I will be permanently placing them at the top right sidebar.

Top 20 chrisperruna.com Posts

Let me know if I am missed an article that you believe should be on this list.

Filed Under: Education, Expectancy, Fundamental Analysis, General Market, Links, Point and Figure, Position Sizing, Psychology, Technical Analysis, Wall Street

Cramer YELLED Buy, I wrote Sell

January 24, 2008 by Chris 6 Comments

Jim Cramer was yelling about buying overvalued stocks on October 31, 2007 while I was continuously writing about selling, distribution days and taking profits. He also predicted that the banking stocks would be the top performers in 2007 – go figure (at least he paid his $50k bet for losing that prediction). YES, I did upload daily screens and stocks with the strongest relative strength ratings so I am not the superhero of calling this first bear market push but I feel very good about what I wrote (especially since the number of readers continues to increase – that says it all).

Looking back, I offered at least a dozen high quality, highly detailed articles about some type of selling, profit taking or market distribution days. Shame on anyone (including me) that ignored the signals as they slapped us in the face, week after week!

Take a look at some of the highlighted articles I wrote as the market was topping. I think this list contains some of the best work I have ever done on this blog or my former equity research website. Finding growth stocks and presenting them during an up-trend is the easy part. Selling and profit taking is the hard part; let me correct myself – selling is the hardest aspect to grasp when trading (in my opinion of course).

A Review of Articles Talking about Selling, Profit Taking and Market Distribution:

10/03/07: Is Shanghai a Nasdaq Déjà vu

Well, the current two year rise of the Shanghai Stock Exchange Composite Index looks remarkably similar to the rise of the NASDAQ of the late 1990’s and the charts below explain better than I can!
10/04/07: A Technique for Profit Taking

What do you do in a market like today when you have profits in multiple positions but you don’t want to give it all back? You want to continue to ride the winners but at the same time, you want to maintain the unrealized gains in your account. HOW?
10/12/07: Distribution Day

This was the largest showing of volume in two months and is not healthy because it was pure distribution. It was only the second distribution day over the past month so we can’t call this a bear run but please be on the lookout for a possible correction of 5%-10%. Technology stocks led the decline as BIDU gave back 10% of its amazing run.
10/15/07: How to Make Money Selling Short
10/17/07: Inverse ETFs

Have you ever wanted to short the market because you knew it was going down but your were too overwhelmed, nervous or even scared because you were unsure of how to do it. Well, Inverse ETFs may be your thing.

These inverse ETF’s closed Wednesday with gains of 13.42%, 15.43%, 22.31% and 18.76% since I wrote about them.
10/18/07:The Real PTR Climax Run?

I was early in September by trying to locate a climax run in PTR in this post:
Petrochina (PTR) Climax Top? However, the HUGE volume on the latest push to new highs clearly indicates something is going on.
10/20/07: Second Major Distribution Day

Technically speaking, we now have 4 distribution days for the NASDAQ and 3 for the DOW over the past month. It’s now time to start focusing big-time on the market leaders to see where they are going to take this market. If they start to roll over, you better be quick to take profits and even quicker to take losses.
11/01/07: CROX getting Swallowed

I wrote a post titled Will CROX get Eaten? on September 20, 2007 and strongly noted the declining institutional support (see numbers below). Someone was jumping out of the stock and we now know why!
11/08/07: Market Corrections, Bears and the Big Picture

Keep in mind that nearly 75% of all stocks follow the general market trend. Your cash doesn’t need to be committed to the market at all times. This philosophy is suited to making the most money in bull markets or markets trending higher.
12/11/07: When to Sell

Why do so few books exist on the subject of “How to Sell”? Selling techniques are far more complicated than buying techniques and subject to considerably more emotional pressure, than those of buying.

I promise that I will get back to analysis and uploading charts by next week the latest. That’s what I love doing most anyway and it seems to be the biggest draw in traffic.

Filed Under: General Market, Selling, Shorting, Technical Analysis

Short Term Oversold

January 18, 2008 by Chris 10 Comments

The market is oversold short term. Can it go lower? Of Course!

I am looking to take my first “long position” in YGE if the market bounces in this position. Below is my trade setup from January 8, 2008 when the stock was trading at $32.24. It closed at $25.17 yesterday.

Potential Trade Set-up:
Ideal Entry: $25.00
Risk is set at 1.0% of total portfolio or $1,000 of $100k
Stop Loss is 10% or $22.50
Number of Shares: 400
Position Size is $10,000
Risk is $2.50
Target is $44.00 (based on former peaks and bottoms)
Reward-to-Risk is 7.6-to-1 with ideal entry; less with current price

The first chart shows the NASDAQ filling my yellow gap within one day; the next stop looks to be 2,200 if it keeps falling.

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Filed Under: General Market, Technical Analysis

Charts Called the Top in October

January 16, 2008 by Chris 10 Comments

The charts clearly called the top of this market in October 2007 and did so with great accuracy. The NASDAQ was flashing multiple distribution days as you can see from the blog posts I made three months ago. You can view the original color charts through the links provided but I am including them here as grayscale images. I wrote about a possible top on several occasions in October but the market leaders continued to move higher so we kept trading the trend.

Bottom line – the warning signs were there, we talked about selling the red flags and it all came to fruition.

The chart tracking the number of stocks on the S&P 500 that are trading above their 50-day moving average has been extremely accurate. It is now starting to call for an intermediate bounce to the upside as the index flirts with the oversold 20 area (see color charts below).

Distribution Day #1: October 12, 2007

The number of stocks above their 50-day moving averages crossed above the overbought level of 80 last week and we saw our first major sell-off distribution day yesterday. This doesn’t mean you must rush today to sell all of your holdings but do understand that the next sell-off is not far from happening. Study the chart below and follow the purple line to see where and when the market had peaks and valleys as related to the number of stocks on the S&P 500 above or below their respective 50-day moving averages.

This is only a secondary indicator but one of the most reliable while trying to look for clues to a short term market top and/or bottom. I have come to realize that the bottom signals have been more accurate than the topping signals over the past several years!

The markets flashed a heavy distribution day Thursday as the NASDAQ was down 1.4% on volume 60% larger than the previous day. This was the largest showing of volume in two months and is not healthy because it was pure distribution. It was only the second distribution day over the past month so we can’t call this a bear run but please be on the lookout for a possible correction of 5%-10%. Technology stocks led the decline as BIDU gave back 10% of its amazing run.

Second Major Distribution Day, October 20, 2007

We witnessed our second major distribution day as the DOW was down 2.6% on volume 40% larger than the prior trading day. The NASDAQ was down 2.6% on volume 15% larger than Thursday.

It was the worst selloff for the NASDAQ since February and the largest for the DOW since August. Volume surged across all major indexes but do keep in mind that it was options expiration day.

Technically speaking, we now have 4 distribution days for the NASDAQ and 3 for the DOW over the past month. It’s now time to start focusing big-time on the market leaders to see where they are going to take this market. If they start to roll over, you better be quick to take profits and even quicker to take losses.