Play Another Day

...Money management starts with protecting your capital, realizing profits and cutting losses. As I have stated in the past, without cash, you can't invest. Cash is king and learning to manage your money is the most important aspect to investing in stocks. The game is won by lowering your risk by properly turning the numbers in your favor. Cutting losses is the best insurance to keeping your cash.

Emotions fuel the decisions of many investors; leading the pack is hope, fear and greed. In order to control these emotions, proper money management skills must be developed through a defined set of rules. How do you know if an investment is working and moving in the right direction? If it shows a profit, you are correct, if it shows a loss, something is wrong and it may be time to protect your capital.

Most investors develop the emotion of hope after a stock has declined from the initial purchase price. They hope that it will rebound and make promises to themselves that they will sell at breakeven. If and when the stock rebounds, they break the promise and become greedy and decide to hold on for a profit instead of selling. Typically, the stock will start to decline and the investor will start to accumulate losses. Investors are full of pride and will not admit that their judgment is wrong, so instead, they decide to hold on and accumulate additional losses.

When a stock is purchased and starts to decline, especially on heavy volume, it is time to admit that you may be wrong and sell before the loss is too steep. If the stock rebounds after you sell, you can always re-enter your position. Cutting losses is the best insurance an investor can have in their portfolio. By developing rules and eliminating emotion, investors can start selecting high quality stocks and buying them at their proper purchase points. This will lower your risk and help prevent you from using insurance. In my previous post, I explained how to develop a watch list of high quality stocks using fundamental and technical analysis.

Piranha

Making a Stock Watch List

…I am taking the time to help others learn the basics in evaluating stocks for investment using both fundamental and technical analysis. Both tools are equally important in making serious decisions with your hard earned CASH!

If you wish to invest in stocks, treat it like a business, NOT A HOBBY. (ex: a retail outfit can't make money if it doesn't have goods to sell; the same goes for investors, without cash, you can't invest). You need rules and you need to follow these rules or money WILL be LOST. Once proven rules have been established, they cannot be broke or you will lose money. Everyone loses money in investing but we must learn to cut losses quick and allow gains to develop. Small losses are acceptable because they teach us lessons that allow us to win big!

Start your search by looking for stocks with superior fundamentals. After fundamentals are established, look to see if this particular stock is in good company, by this I mean a strong industry group – similar stocks, historically move in the same direction (this is fact not opinion). This is not to say every stock in the industry group will move higher or lower because a sister stock is going in that direction (this is a generalization rule). After the industry group has been confirmed strong, determine if overall market is in a specific trend (up, down or sideways).
If you are long a stock, the market must be in a confirmed up-trend, if you are short a stock, confirm a down trend. Note that 75% of all stocks will follow in the direction of the overall market. Don’t fight the trend, the market is always RIGHT.

Let the market and the stock dictate how long you will be in a position. Don’t worry about time frames; price and volume will tell you when to exit the position as long as you follow rules.

After fundamental have been established, you must study the technical side of each individual stock, the specific industry group and the general market trends. Record if the stock is forming a proper base, if it’s about to break out of a base, if it’s extended or if it’s pulling back to a key support line.

At this point, add any qualifying stock to your watch list or buy the stock according to the technical entry signals (remember the fundamentals have been established earlier).

Key numbers to use in fundamentals:
Earnings (current, past: quarterly, yearly and future estimates)
Sales (current, past: quarterly, yearly and future estimates)
Return on Equity (ROE)
Price/Earnings Growth (PEG)
Price/Earnings Ratio (rise over time of base)
Debt/Equity
Assets, Liabilities
Accumulation/Distribution ratio
Up/Down Volume over past several months
Number of Institutional Holders (is this increasing or decreasing recently)

Key things to use for technical analysis:
Look at the 1 year daily chart
The 1 year weekly chart
Check volume action when bases are formed
Look at Point & Figure charts for support and resistance lines
Look for new 52-week highs


For further study, please go to the free Philosophy and Education section and the free Technical Analysis section of our website.

Enjoy the Weekend and Halloween Treats,
Piranha

F5 Networks – FFIV

...I first saw FFIV in my screens late in the year 2003. I posted FFIV as a stock making a final push in early 2004. I only posted FFIV 2 times in 2004 realizing that the stock was heading into a top, the first on 1/16/04 at $31.63 and the second the following week at $37.63. Today FFIV closed at $40.05 and just broke out on HUGE volume from a 7-month base that started in early April of this year.

The base is a cup with handle with the breakout occurring today on volume 922% higher than the 50-day average. Today FFIV showed volume larger than any day in well over 2 years. During my daily screens tonight, I will check to see if this is the largest volume in the history of the stock.

FFIV was a strong fundamental stock in early 2004 as it is a strong fundamental stock now. The difference is the timing:
In early 2004, the stock was completing a huge 300% during the course of 2003. It needed to digest it’s gains and form a proper pattern. When ever you hear me talk about proper patterns, this stock is very close to textbook.

If the market is healthy and the NASDAQ and DOW feel like sparking a rally based on today’s action, look for FFIV to be one of it’s leaders while it tries to establish anew up-trend. If the market fails to follow-through, watch the action of FFIV as it will most likely fall back into a base until further advances in the indices.

DRIV is another stock that has been making my screens over the past few days and weeks. They are both from the same that is ranked #30 out of 197 in Investor’s Business Daily.

My only downfall with this stock is the PEG ratio going forward; it is a bit high for great stocks.

See you tonight,
Piranha

Travelzoo Inc. – TZOO

What is going on with Travelzoo?
Up and then down, this way and that way.

TZOO ($65.14) was up 13.5% today on 1.6 million shares, well below the 50-day average (which stands at 2.2 million). In early September, TZOO was climbing the charts on volume as high as 8 millions shares per day. Late in September, TZOO started to flash minor red flags as the stock tried to continue making new highs on above average volume.

On 9/28, TZOO dropped 20% on above average volume (4.88 million to be exact). TZOO was well extended at the time of this correction, it wasn’t close to the 50-day average and didn’t have any solid long term support lines to cushion the fall. TZOO did not fall all the way to the 50-day line but put a hurt on many investors that did not see the red flags.

Since late September, TZOO has been in a $15 range with volume lower than average for the most part. Two weeks ago, TZOO reported earnings and started to move higher on volume slightly larger than average. Things looked healthy but TZOO never established a new 52-week high. This may have caused slight concern, especially since the general market averages were struggling. TZOO went on to peak at 67.49 intraday and formed a new top lower than September – a bearish signal.

More recently, last week to be exact, TZOO tried to make new highs again but on volume lower than average – more red flags. We have had a handful of distribution days since that 20% drop on 9/28/04.

The difference between now and September is the presence of the 50-day moving average that is providing support. What is an investor to do?

My advice to shareholders is to place sell stops approximately 3% below the 50-day average. Most stocks use the 50-day as support but market movers know that they can sell out weak holders by bringing the stock down slightly below the 50-day number. A small 3% cushion should be enough although this stock is very volatile.

I posted TZOO back in June as a buy at $23.06 (a gain of 180% + ). Investors still holding a position in TZOO from the early days of summer should sell a portion of those shares while watching the remainder very closely.

If TZOO breaks the 50-day moving average on above average volume I would head for the doors as fast as possible and lock in all gains immediately! The general markets are weak and you don’t want to mess with the ‘M’ in CANSLIM.

I will follow this blog post with a case study to outline my thoughts in graphical form. In the meantime, study similar chart patterns of past winners so you are ready to react when something familiar occurs. Selling is the hardest part of investing, so use this stock as a great example to learn in real time.

Piranha

Google - Can they do anything wrong?

Google reported Thursday and missed expectations by $0.11: Earnings were at $0.45 per share, up 25% vs. a year ago. Revenues rose by 105% beating views. Shares were up about 8% in after hours trading.

We can now see how the after hours trading would pan out today. A huge gap up on extremely large volume has sent Google up 16% today. Too bad Google can't help the rest of the market as it is "dead as a doornail".

The Google gap up started the day at $170.43 The stock closed the day yesterday at $149.38 Currently at noon, it is holding around $174 (up 16% for the day). What a run since the IPO.
Anyone could have gotten in at $98 to $100, too bad I wasn't one of them!

I have seen GOOG come up on my preliminary screens but I was holding off until they reported earnings and formed a pattern I was comfortable with. Sometimes, you miss a big winner but that will not keep me down. With portions of my cash tied up in three separate positions, I am fine with the current scenario.

I decided to buy into another IPO named Syneron Medical (ELOS) and have not made the types of gains Google has given it's shareholders.

ELOS is having a rough day today although the volume has stayed low. I will keep my eye on this stock and will always be ready to cut a loss. As you all know, I love the medical sector and I have made a lot of money in the past with companies in this area. I will stay patient and wait until the stock tells me what to do. I just hope that ELAB-ELOS relationship won't affect my emotions and I am not blinded by "hope". Time will tell, as for now, I will stay.

Back to Google, I love the site, I love the company and I love what I see in the stock, so why don't I own a piece of it?
Listen to me Google, set up a solid base and allow me to ride the next wave!

Piranha

Update on DWSN - Use those Stops

DWSN was crushed today on large volume. I speak about using stops in the Philosophy and Education section of the site. I specifically stated this in my post from yesterday. A lesson to anyone that broke the rules today:

This is why we keep "stops" when we are not sure of the pattern or not sure of the general market environment! I stated the "stops" specifically for this reason. I also stated how the new formation did not have "a handle". In some cases, handles don't form after the cup but a breakout is that much more convincing after a proper handle forms, especially in a second stage base or later.

I hope anyone that owned DWSN, followed the rules and used a stop.

Getting stopped out from my original buy point would still leave you with excellent gains. A stop on the most recent pattern would most likely leave you with a small loss - a small price to pay for insurance.

Piranha

Dawson DWSN - Update

DWSN - Dawson Geophysical Co.
$26.66 (2:00pm)

First posted on May 9, 2004 as the stock was consolidating. Within two months, DWSN had moved 60%. After this excellent run, DWSN settled back into a 14-week cup pattern.

Up 84% since posted in May. A recent cup pattern has formed and the stock has broken out without a handle. PEG ratio is excellent, ROE is ok. Keep your stops in case this thing would like to pull back and form a handle or breakdown. Otherwise, let this baby run.