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Weekend Newsletter of March 30, 2003
Summary of this newsletter
Part 1. Administrative Notes
Part 2. Brief War Comments
Part 3. Money Management Discussions
Part 4. Market Index, daily analysis and conclusions
Part 5. Gold, US dollar
Part 1. Administrative Notes:
First off, some administrative notes: We setup our MSN based chat room last week and it has been a resound success so far. We now have 33 active members who use the chat room throughout the day. The feedback from members who have used the chat room is great. Most of then comment how the chat room is like being in a trading classroom and have learned a lot in just a few days of being there. In the chat room, you will see professional traders comment on trades and setups as they happen. I realize that some of you may not be able to take advantage of the chat room because of job/firewall restrictions. However, if you can visit the chat room, I strongly advise you to at least check it out. You might learn something, or in the very least, have a little fun interacting with the other members and us. To access the chat room, please follow the instructions in this link: CHAT ROOM
I am also changing the Market Analysis section to a more condensed form. Rather than having static charts, there will soon be a table that includes the Market indicies and sectors. Click here to see how the section was revised.
Also, I have added a new section to the website called Insider - Technical Setups. This Section will contain a brief list of potential long and short picks with chart patterns that are confirmed by insider buying and selling. In other words, it is an attempt to combine technical analysis with fundamental analysis based on recent insider activity. It is my belief that the long and short candidates available here can be held for longer periods of time and may be ideal for swing trades.
How might one use this data: For example, an Ascending Triangle is a bullish biased pattern, that tends to break to the upside. Let's say a trader has two stock picks that exhibit nearly identical Ascending Triangles patterns, but one of them is confirmed by strong insider buying. Obviously, the stock with the insider buying would be the better choice for a swing trade and could be held for a longer period of time. The other stock could still be traded, but sold more quickly for a fast profit.
Please note: This is a new concept and something I have not yet practiced myself. However, the concept seems logical.
This website contains both Day Traders and Swing Traders. This method will not help the daytraders much, but could help our members who work a job during the day and don't have the time to actively trade all day and want a small list of stocks that can be held for longer periods of time. Also, the list here will be short, I will try to keep it between 3 - 10 picks a week, as some of our members have told me they want a smaller list to trade from. Of course, the Day Traders of the site want a long list of picks, now we have both.
Here are a few examples of stocks with good patterns and confirming insider activity.
Below, BEAV is a bounce play setup with resistance at $2.10 and a target of $2.60. What makes this pick different from other bounce plays is that major insiders have filed to buy shares in this stock last week. The combined insider buying along with a decent chart might make BEAV more likely to breakout and hit it's price target.
BSC is another example of combining insider knowledge with technical analysis. BSC is a short candidate, it is currently at resistance, and 6 insiders have filed to sell over 7.5 million worth of stock. A likely action here would be to short BSC and place a stop just above the resistance line.
The new section is called Insider - Technical and is in the Watch list section. Go to this section and have a look.
Part 2. Brief War Comments
This section will be brief, as most of you already have probably watched countless hours of TV on the war. I am also not going to make predictions about the stock market based on the war because it is too complicated to come to a definate conclusion. I will therefore stick to technical analysis based on the charts for prediction the market direction via support and resistance lines.
Brief synopsis:
With the first week of the war past us, the following things are becoming clearer. The expectation of a quick easy war is giving way to a more realistic version. With a northern front opening up and people becoming densensitized to individual casualties, the news will be focusing on the larger events unfolding in the war. Expect the U.S. to find evidence of weapons of mass destruction very soon to bolster its position in world opinions. Also it should not be forgotten what the position of the U.S. military is. It still has tremendous advantage over the Iraqi military and the issues making news now are small in the big picture. The U.S. military does not have to accomplish its goals in one or two weeks. Expect the military to try to achieve more timely progress in the coming weeks and reigning in the media in order to package the events more advantageously to the U.S. position. Lastly, look for other countries/Islamic groups to try to jump on the bandwagon (i.e. fanatics will flock to the region for politically motivated reasons)and tensions to further rise in the region.
Part 3. Money Management Discussions
I received many emails last week asking for about various buying and selling strategies and money management. I will go into this further in the future, but here are some brief philosophies/concepts/strategies.
I myself generally try to keep losses very small while trying to let my winning positions run. Some of us still work a job, and are just trying to build our trading accounts up quickly. If you have a small account, you don't have the time to hold a losing position for a long time. You need to generate consistent profits by keeping your losses small and letting your winners run. Also remember that you don't need to hit home runs every time, 5% a day or even a week will add up very quickly.
Money management is the key to any successful trading strategy and I employ some very basic strategies to keep my account growing ever larger over time. One thing I try to do, is set up my trades so that the emotion is taken out. One strategy I employ to achieve this is to sell 1/2 my original position and then place a stop either where I bought it or somewhere close to where I originally bought in such as at the 50MA, 200MA, or support/resistance lines. Try to buy or short stocks as close to their respective support and resistance lines as possible. Doing so, allows the trader to place stops very close to their buying price. This keeps losers small if the trade goes wrong. Never buy or short a stock that is far from resistance or support levels, because the risk/reward ratio is not optimal. A good risk/reward ratio is 1 to 5, and preferably higher. For example, you might risk 200 dollars to make $1000. However, a bad risk/reward situation would be to take a trade where you risk $1000 and have the potential to make $1000, or a 1 to 1 risk/reward situation.
For example, let's say XYZ stock has an ascending triangle pattern, with resistance at $10.0. XYZ then breaks $10 and I buy 1000 shares. If XYZ stock hits $10.75 - $11, I would promptly sell 1/2 my shares and then place a stop possible at 9.89 for the remaining 1/2 my shares. This way, I lock in an automatic profit even if XYZ falls all the way back to my stop I would still make over 4-5% profit. You'd be surprised at how fast this will add up. Also, since I have sold 1/2 my shares, this freed up more cash to move on to another stock and repeat the process.
This way, the emotion is taken out, and now I can simply wait to see if ZYZ continues to run up. If it does, then I would simply place stops under each of the higher lows thus letting my winners run. I would also look for signs that the rally is topping out, by looking for Negative Divergence. If XYZ falls and I am stopped out, so what who cares, I made a profit, move on to the next play. Many times, I have sold 1/2 my shares, and rode the other 1/2 up another 100% before being stopped out - it doesn't happen too often, but it does eventually and by doing so, you are letting your winners run.
By keeping your losers small and letting your winners run, you can make money even if your picks work out less than 50% of the time. For example, let's say a trader made 5 trades and lost on 4 of them. On the 4 losing trades, he lost an average of 5% a piece, but made 50% on the 5th trade by letting it run. This enabled the trader to make good money even though his picking % was 80% losers.
Another strategy to employ is to "FORCE THE STATISTICS IN YOUR FAVOR". Most people starting out, try to become the best stock pickers. They try to become so good that they never pick a losing trade. However, this is an unattainable goal, a "Holy Grail" if you will. You can never pick right 100% of the time, therefore, the trick is to force the statistics in your favor.
For example, let's say your picks work out on average about 90% of the time. For you to make money, you want to first make sure you keep your losses small and let your winners run, as in the example above. For instance, you could make money out 9 out of 10 stocks you buy, but then lose it all and more on that 10th stock. So the first thing is to keep those losses small. Therefore, being right most of the time won't ensure that you make money. Again, the trick is to keep your losers small by getting out quickly when the trade goes against you.
However, there is a way to make money even if your trades are only right 40% of the time. To "force the statistics in your favor" you want to make sure you have more money in the winning trades and less in the loosing trades. This is an old casino trick called progression. For example, let's say you have $10000. One strategy might be to use $2500 for your first trade, and let's say you take a small loss. For your next trade, use $3200, and if that turns out to be a looser, then for the next trade up the amount to $4000. If that trade is also a loser, then up the amount to $5000. Basically, what I've done is increase the amount by 25% every time I had a losing trade. Now let's say the trade where I used $5000 is a winner, I have effectively forced the statistics to where I had more money in that winning trade than in the loosing trades. Important, After I hit a winner, I would then lower the amount I use, back down to $2500 and repeat the process until I had another winner. This strategy (along with using tight stops) will increase your account balance even if your stock trades work out less then 50% of the time. In other words, your trades can usually be losers and you will still make money this way by forcing the statistics to your advantage. This strategy works especially well with a small account, like 10,000 or higher and if the traders picks don't work out most of the time. Eventually, your account will hit $20,000, and now you can start with $5000 for the first trade.
In the example above, I used 25% as the starting amount for my trades, and increased that amount by 25% after each looser until a winner as found. Is 25% the optimum level to start at and to increase by, probably not, this is an area you can experiment with.
I'm not sure if I explained the above method clearly, If I didn't , then please email me and ask some questions.
This next section only applies if you have a good feel for technical analysis.
If you are have been using technical analysis for a long time and are know it well, then here's a very simple strategy to use to force the statistics into your favor without the complicated progression betting strategy discussed above.
The way I normally trade is to evaluate the confidence of the stock I want to trade. What do I mean by this, well I myself know what I like a stock to look like, and every once in a while, I'll see that perfect chart pattern or set up that looks like a "text book" play. Most of you know what I'm talking about, every once in a while, you see that chart that just stands out from all the rest. This comes with experience though, and new traders might not be able to do this and should employ the strategies above.
Anyway, when you see those charts that just sticks out at you screaming "I'm a text book play", put more money into those trades as they usually work out more often. Say for instance, the normal amount I put into a trade is $10,000, however, when I see one of these "text book" plays I might put $20,000 or more into the trade. Again, this usually forces me to have more money in my winning trades than my losing trades.
To be consistently successful traders, we need to trade objectively and try to keep the emotion at bay. Technical Analysis is the study and application of mass human psychology in trading financial securities. We don't want to fall prey to this emotion ourselves, and this is part of the reason I listed some of the strategies above. These strategies keep me objective, keep my emotion at bay, and generate consistent profits over time.
Please note, there is a lot that I left out here, such as what type of volume and what type of patterns are better than others. I will add to this discussion in a future newsletter.
Part 4. Market Index, daily analysis and conclusions
How do the indices look on a daily basis and intra day 60 minute basis? Let's take a look:
First off, the Nasdaq daily chart below. The Nasdaq rallied to a 61.8% fibonacci line and has been in a small downtrend ever since. I expect some further weakness early in the week, however, I don't expect a total melt down either. I think the Nasdaq will likely fall and then bounce off the 38.2% fibonacci line at about 1340.
Below is a chart of the Nasdaq on a 60 minute basis. See the Descending Triangle? This is another supporting reason why I think the Nasdaq will fall early in the week, probably starting on Monday.
Both the DOW and S&P 500 have similar patterns to each other. Both rallied up to a downtrend resistance line, but could not break it, and have fallen back considerably. In the chat below, notice how the DOW rallied to the red dotted downtrend line, but could not break it. The top of the rally was simply a lower high, therefore, the rally was nothing more than a bear market rally, and the downtrend is still intact. There is some support at the green dotted line, but a fall below 8000 seems likely.
The chart below is a 60 minute plot of the DOW. Notice the Descending Triangle pattern, similar to the Nasdaq above. The S&P500 60 minute chart also displays the same pattern. Therefore, I'd expect weakness in the early part of the week for the DOW and S&P and Nasdaq.
Conclusion :
As evidence from the charts show, the rally we saw in the major indicies was just a bear market rally. The Nasdaq did not rally past the 61.8 Fibonacci line nor did it form a higher high, but formed a lower high. The DOW and S&P rallied to their downtrend lines and fell back hard. All the major indicies now have Descending Triangles on their respective 60 minute charts. Therefore, expect further weakness in the early part of the first week of April. However, I still do not think the indicies will just roll over and die here. After some weakness in the early part of the week, the markets could get another bounce. And again, the war is a major uncertainty factor. Therefore, trade nimble.
Part 5. Gold, US dollar
Gold bounced off the uptrend line that was started in December 2001 which is significant. This also caused a big bounce in gold stocks on Friday.
Both the XAU and the HUI bounced hard last Friday. The XAU has long term support in the low 60's, while the HUI has long term support at about $115. Notice below that XAU found support at this long term uptrend line.
The HUI bounced nicely off it's long term uptrend line and is thus far signaling a buy for gold stocks. Because of the parabolic nature of the HUI's price movement, I had to plot it using a logarithmic scale.
While I was still fairly bearish last week on buying gold stocks, I have changed my stance to bullish on gold stocks. Many gold stocks bounced nicely off strong support areas and some are even exhibiting Positive Divergence. Also, many of the gold stocks are forming W bottoms or bounce play setups that look prime for breakout plays. Click on any of the gold symbols in the table below to pull up a real time chart from stockcharts.com. Many of these stocks are now tradeable or could be bought for long term holds.
Here is a list below, just click on the symbols to pull up a real time chart.
As I stated above, many of the gold stocks now look attractive such as HL, VGZ, below:
In conclusion, gold stocks are looking much more attractive now, and may of them can now be entered for either swing trades or long term trades. However, one thing to note: If you have never played gold stocks before, please be aware that they can be volatile, tough to trade, and can really mess with your emotions Therefore, be prepared for an emotion roller coaster with them, they are tricky to trade, even for the best of us, but can also be very rewarding if you buy/sell them at optimal times.
The US dollar rallied hard during the start of the war, but has fallen back from resistance noted by the red dotted line at $101.85. This action has caused recent strength in gold. Hard to say what the dollar will do in the short term, it is in between support and resistance and could fall further or rally back to the resistance line. One thing is certain, when the US wins the war in Iraq, expect a jump in the US dollar. However large that jump may be, I will bet that 103.4 resistance will hold.
One final note, previously I mentioned Russia as a good long term investment. Russia's ecomony is set up for growth, and has grown 10% since late 2001, while it's stock market has doubled. Putin set a flat tax of 13% for all corporations and individuals and is having a profound effect on growth. This is in sharp contrast to the US's 38% tax that is not a flat tax, but based on class envy, i.e. taxes are higher the more money one makes.
It is usually argued that lowering taxes lowers revenue to the government. This may be true in the short term, but in the long term, the extra growth such a low tax provides usually causes more tax income for the government.
I say there's no difference between the Republican's and Democrats in this country when it comes to taxes, one group says 38% tax rate is fair, while the other group says 38% is too high, that it should be lowered to 36%! I say so what, what the hell is the difference between a 38% and a 36% tax rate?. Russia's flat tax of 13% is only fair, but is setting their economy up for long term growth. Russia's stock market is in a bull market, and if you want a good long term investment that you can throw in the corner and not look at it for a year, buy some Russian Mutual funds.
Leuk from the message board posted this article on Russia's flat tax, read it.
Russia's Flat Tax Miracle
And you can also check out some charts of the Russian Stockmarket in my Foreign Investments Section
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