How do you handle a Stop Loss?

…I strongly agree with the philosophy of cutting losses quickly as suggested by many great traders, more specifically: Jesse Livermore, William O'Neil and Nicholas Darvas. Over the past several years, I would implement a trailing stop by manually moving the stop myself as the stock was rising. More recently, I started to use the jazzy tools or new technology that my online firm offered (the system moves the stop for the trader at a pre-determined percentage as the stock rises, say 10% from the price).

Over the past 18 months, I have noticed that several stocks (more so than ever in my portfolio and research) will implode intraday and then rebound in the final hour of trading. This has always been the case since I started investing but has become more apparent in the past year or two (at least to me). It seems that "program trading" is really taking over the individual investor and took advantage of the “little guy or gal” in the latest bull market by shaking out weak investors every chance they get.

I had always cut a loss with my stop already placed at 7-10% below my purchase price, depending on market conditions and individual stock conditions. Several times in late 2002 and 2003, I was stopped out intraday, only to see the stock bounce back by the end of the day. I was becoming angry as my trades were placed correctly but I sold out intraday, only to see the stock end above my original sell stop position.

As the year progressed, I decided to remove my automatic stop loss and determine if I should sell based on the full day's action. My results improved slightly. Stocks that are worthy of keeping are now held until the final trading hour so I can review the entire day’s action without the noise from day traders and program trading. I don’t need to buy back my stocks at the end of the day, the next morning or next several days because program traders triggered my sell stop. On very volatile stocks, such as TZOO, I still place a manual sell stop to protect my downside but I leave room outside of the traditional 7-10%. If I have some profits, I will set the stop at 15% to allow movement during the day.

I must ask:
Does anyone else see similar situations?
I am curious to know if any of you have bought a stock and was forced to sell via a sell stop, only to watch the stock rebound later in the day or the near future. Respond to the blog so we can interact. Don’t be shy.

I went back to read Jesse Livermore and realized that he did suggest to ignore all intraday activity. This advice was given in 1923, so the game has always been the same, as I have been taught, but I have noticed an increase in the program trading over the past 18 months.

NOTE: I am not only speaking of stocks breaking out, I am mostly talking about stocks that have made considerable advances and then correct (healthy corrections on solid stocks). With a stop loss in place, you may get shaken out. I now make all decisions after the market closes. This allows me to view multiple charts and gives me the choice to make an evaluation without intraday emotions fueling my thoughts or persuading that final decision.

Enjoy the Weekend,
Piranha

Common Member Questions

…This is a series of questions from one of our community friends. He asked a few questions that I have received in the past so I though it would be best to answer him through the blog for everyone to benefit. I may even add some of these questions to the permanent FAQ page: -

- How should I best ready myself in using MSW?
- Should I go back and make a database of all your old stocks or do you feel that the new ones will keep me sufficiently busy?

I feel that the new screens will keep you busy enough, particularly when the market turns positive with a follow through. You could go back and overlook the weekly screens and study how certain stocks made those screens almost every week. When a stock starts to make the weekly screens every week, it is usually a very strong buy signal but it must be bought properly. By this I mean: do not buy a stock that is too far extended from either the pivot point or any long term support line such as the 50-d moving average. When you see some of the stocks that made those screens in good times, study the chart and highlight proper entry points. Become familiar with how the stock reacted to support lines. These patterns repeat over and over. You will be amazed at the feeling of déjà vu as you continue to buy and study new stocks.

- When the market is right and it's time to buy, will you be giving pivot points or other entrance information?

I will try to be as honest as possible with entry and pivot point information. Remember, we are not always going to be right or perfect for that matter. If I was always right, I would be one of the richest men on the planet. We make mistakes and we do make wrong judgment calls but we always protect every buy with sell rules. If you sell immediately after realizing you made a mistake, you will have minimal loss and be ready to try again with another stock. I always alert the community if a particular stock is too extended even though it is listed on a weekly screen. You are not the only person to ask for pivot point numbers. I will make this a priority when blue and green stocks start to make the weekly screens again. I will also consider writing exit points or sell stop areas in case the stock breaks down – similar to our red flag alerts.

- Since I normally work through the entire trading day and do not have access to a computer, what would be my best way of entering trades using MSW info?

Believe it or not, I usually decide if I am going to take a position after the market is closed, after I complete my research. I buy and sell from the same screens you view every week. How do you think I came up with those screens? I started doing my own research years ago and developed my screens for myself long before MSW was ever an idea. I have made trades during trading day hours but more emotion is tied to the decision so I try to keep it to a minimum. I typically make my decisions at night and then place the trade at the market the next morning or enter some other stop or limit. I prefer market trades on both buy and sell decisions.

I always wait for a stock to make the weekly screens, I don’t make decisions off of daily charts as I am more interested in the long term trend. I do stuffy daily charts for entry points once I am convinced to buy or sell a certain stock. I have found more success with this method. I admit that I have missed a few stocks using this method or I entered my position slightly higher or later than some traders but it has worked out better for me in the long run.

Hope this answers your questions and helps a few other along the way.
Piranha

Talking Heads in Action

...Do you really want to listen to the talking heads on TV?
I have preached that these firms are only looking out for their best interests, not yours. They don't care about anything but your money; they never look out for the small investor!

Look at how these major firms kept sending out buy signals based purely on fundamental analysis. If they looked at the charts, they would have noticed several breakdowns among every type of chart available. It didn’t matter what chart you viewed, they all had red flags in every direction you could have looked. NGPS was hot in 2004 but I started posting red flags the minute I saw them on the charts. Guess what, that stock that was up over 300% in 2004 is now down about 50%! I bet we see at least one firm reiterate a “buy or hold” on NGPS in the coming weeks.

This is a condensed summary of the case study I posted today based from the Dorsey Wright analysis of the Enron collapse (all research was performed by Dorsey Wright- www.dorseywright.com) I have no affiliation with Dorsey Wright:

ENE - Enron

Merrill Lynch:
March 21, 2001: $55.89 Reiterated Near-term “Buy” at Merrill
April 17, 2001: $60.00 Reiterated Near-Term “Buy” at Merrill
August 15, 2001: $40.25 Cut to Near-Term “Neutral” at Merrill
Oct 9, 2001: $33.39 Raised to Long-term “Buy” at Merrill Lynch
Oct 16, 2001: $32.84 Raised to Near-term “Accumulate” at Merrill Lynch
Nov 1, 2001: $11.99 Cut to Near-Term “Neutral” at Merrill
(finally cut after 79% loss – not cut to sell)

Banc of America:
August 15, 2001: $40.25 Reiterated “Strong Buy” at Banc of America
August 28, 2001: $38.16 Reiterated “Strong Buy” at Banc of America
Oct 25, 2001: $16.35 Cut to “Market Perform” at Banc of America
(finally cut after 59% loss – still market perform)

Commerzbank:
March 14, 2001: $62.75 Raised to “Accumulate” at Commerzbank
March 22, 2001: $55.02 Reiterated “Accumulate” at Commerzbank Capital
April 18, 2001: $61.62 Reiterated “Accumulate” at Commerzbank Capital
Nov 9, 2001: $ 8.63 Cut to “Hold” at Commerzbank
Nov 28, 2001: $ .61 Cut to “Sell” at Commerzbank Capital
(finally cut to “SELL” after 99% loss)

Lehman:
March 12, 2001: $61.27 Reiterated “Strong Buy” at Lehman
Oct 24, 2001: $16.41 Reiterated “Strong Buy” at Lehman; “the stock is
attractively priced)
(still a strong buy after 73% loss)

The Lesson: Use both Fundamental and Technical Analysis!
And always cut your losers, no matter what anybody says!
Piranha

Syneron Medical Ltd (ELOS)

…It closed today at $29.77, down $1.05 on volume lower than the 50-day average. This would be considered a positive pullback on low volume.

ELOS was a strong stock for MSW in 2004:
139% Gain
Posted 9/22/2004 @ 15.85
Peaked 11/26/2004 @ 37.84

In two months the stock more than doubled as we listed it over 10 times on daily and weekly screens. I did several write ups on this very blog back in November on ELOS as it started to break down and fall into its current base pattern.

ELOS was listed on the daily screen last night but was not near a new 52-week high? I received some questions as to why ELOS made the screen if it wasn’t a buy. On the daily screens, I try to display stocks that can become a buy in the coming days and weeks, I include stocks that may are current buys and stocks that are already trending up. It is up to you, the individual investor to decide what stocks to buy. I can only take you so far before you take the final action.

ELOS is currently building a cup shaped base, the first base since it opened as an IPO in 2004. The fundamentals are excellent with 3-year earnings of 449% and 3-year sales of 302%. The ROE is slightly below par but still good. The PEG ratio sits at 1.17 which is slightly higher than the key 1.0 mark.

This stock would not become a buy until the right side of the base is finished and a downward sloping handle forms on lower volume. I will keep you posted if this stock correctly finished its base. Do not buy prematurely as the majority of stocks that don’t finish their base will continue to fall. A case study will be posted if a handle starts to form and this will be posted BEFORE the possible breakout.

Consider this an ongoing real-time case study.
Piranha

Green "APPLE"s

...I love my laptop, a Dell to be specific. I bring this machine everywhere I go and my life depends on it. Whenever I have a problem, I call up technical support and they answerer or fix my problem as quick as possible. I love the product and I love the company but I do not love the stock.

Never love a stock, we have taught you to control emotions!

I never learned to use a MAC so I never had any experience with Apple (good or bad). Recently, my wife and I purchased an iPod and have been downloading songs from iTunes. Excellent products! I love these products and have since seen Apple show up on my screens over the past few months. Should I love the stock? NO. Never love a stock!

Apple (AAPL) first showed up on my weekly screens on 10/24/04 at $47.41. Since this time, Apple has made the daily and weekly screens numerous times. I didn't post Apple because of news; I posted the stock based on technical and fundamental information. The charts said that AAPL showed the potential to move higher based on the trend.

10/25/04 - 10/29/04: $52.40
11/22/04 - 11/26/04: $64.55
11/29/04 - 12/03/04: $62.68
12/06/04 - 12/10/04: $65.15
01/03/05 - 01/07/05: $69.25

The most recent daily post was on 01/05/05 at $64.50.
Apple has an intraday high of $74.72 and opened for a gap-up at $73.87, giving us a total gain to date of 57%. Not bad for 10 weeks of work, especially in this muddy market environment. I do have to say that AAPL closed near the intraday low – a negative sign.

The lesson of this blog is to pay attention to the charts, not the news. The charts showed us a buy 10 week ago and confirmed this buy several times since late October. Many people went out and bought Apple today based on the great news from yesterday (Apple shattered estimates). I am not saying that AAPL can't go higher but I know from experience that it may be too late to join the party when the news hits the street and everybody knows, even the "dumb money". If I was smart money (an institutional investor), I would be selling into strength today. If I was really smart money, I would have most likely sold over the past week or so, based on the 'M' in CANSLIM.

Piranha

Is NGPS a Short Candidate?

…I was asked if NGPS had become short sale because it had reached overbought levels in the past month. As we can all see, NGPS was down 36.49% on the largest weekly volume of all time. This does not mean we sell our shares and immediately short the stock. Why?

A stock, in my view, is never a short sell until is below the 50-day moving average (at least) and even more so when it drops below the 200-day moving average. The first break below the 50-day is still not the ideal time to short a stock. The stock must try to break back above this line and fail one or two times. At this point, based on charts, an ideal short position can be opened.

I will look in my files for a short sell chart that I have used in the past. I will also look for a current short sell chart pattern in today’s market. I will post a case study this weekend highlighting the characteristics of a prime short candidate.

As for NGPS, it's still above the 50 and 200 day moving averages. A stock does not automatically become a short sell because it becomes overbought. This is a very common misconception to most investors.

I don't recommend shorting stocks until you have mastered years of making profits buying and selling regular positions. It's hard enough to do just that consistently.

Piranha

Our Daily and Weekly Screens

…I have been publishing MSW weekly screens for free since late 2003 on several key website forums on the internet. Occasionally I would post a daily screen on a few of my threads but not as often as the weekly screens. As of this week (01/09/05), I will no longer be able to publish the information for free and expect the members of the community to accept that policy. The only way to access the screens will be here at MSW. The screens are now exclusive to community members and will become more personal as members become more interactive with questions on their own portfolios.

Occasionally I will post the daily and weekly commentary on the home page for free but the actual stock screens will never appear on the home page. They will only be found in the member’s area of the website which requires an e-mail username and password (Daily and Weekly Screens Page and Archive Pages). I encourage questions or comments on the blog as it becomes more involved with current day-to-day activity instead of only lessons or articles. I will answer member questions or comments on future blog posts and I can always be inspired by a member to conduct a specific case study.

Starting next week, the case studies for the remainder of the month will be analysis on stocks that are in current patterns or may be about to breakout. All case studies will be based off of a specific stock that was listed in a daily or weekly screen from that week.

Again, I am here to help you, the more ideas or questions I get, the better the blog, case studies and screens will be for everyone. MSW will maintain its goal of becoming the best investment education tool on the web today. I can be reached through comments on the blog or my MSW e-mail. I try to answer every e-mail as quickly as possible in some form.

Thank you and enjoy the weekend.

p.s. – at 3:50pm, the general market looks flat for the most part. Complete weekly analysis will be done by Sunday night. Keep in mind that we don’t perform a daily screen on Friday as noted on the FAQ page.

TZOO Buy Points

...I was asked by a member of this community on a message board about TZOO buy points. Here is the question:

When TZOO broke out of its cup with handle in April, what if you missed the pivot point. IF it is above my pivot point by 5% then I feel I am to late to jump in. I hesitate to buy into a stock when it pulls back a little. I know you recommend stocks even after their initial breakout if they have good volume support but what are some spots that you think would have made ideal entry points in TZOO after its initial breakout and why?

Two key buy points presented themselves for TZOO:

The end of June,– Breakout on largest volume of the year. You know I follow the overall trend rather than pure bases as IBD does. I found more opportunities and success with this method. I like to buy on New High breakouts!

Middle of August – Two consecutive breakouts on the largest volume of the year (two consecutive weeks). This volume was confirmed 2 weeks later with even larger volume and then again on the 3rd week from the middle of August with the largest weekly volume ever until the breakout in November.
November was another buy point but a reversal took place and the new shares should have been sold immediately to prevent further loss. Original positions would still be held as they would still be in the overall up-trend.

Since then, a wedge type formation has been forming the past several weeks. I have a case study about DHB that shows a wedge formation in action with a breakout. I am looking for a breakout above $100 on the largest volume ever; this would be another entry point!

NOTE: In traditional bases, a buy 5% above the pivot is no good. I am buying on the trend. A traditional base never formed with TZOO after May of 2004.

Piranha

Red Flags that NGPS Provided

…For this particular stock, I used the point and figure charts to show me that it was reaching overbought levels. The stock was 100% above it’s 50-day moving average and almost 300% above the 200-day moving average.
This is pure overbought levels.

Another huge indicator was the P/E ratio that tripled while plotting on a chart. Once a stock’s P/E ratio doubles, this is the first sign of overbought levels. This is only a secondary indicator to price and volume.

The stock logged a couple distribution days and a few days of ‘higher’ highs on lower volume – all red flags that you make you aware of the stock topping.

Finally, the stock was moving from $25 to $50 in one month – this is too much, too fast, it must digest its gains at some point.

I encourage questions on this blog pertaining to Daily Screens and Weekly Screens that I can answer and provide more detailed analysis in new blogs. Become active in posting comments, I have opened the comments to anyone on the web as of today. Members of course will always be first priority.

Piranha

Red Flags

…We have a service here that makes members aware of common red flags to avoid or stocks that are topping or making a major reversal. NGPS has been one of the biggest winners at MSW over the past 12 month while doubling in the past month on above average volume. In the past few weeks, I warned about a few red flags with NGPS even as it made new highs and moved to the #2 All-Star Stock of 2004.

Today NGPS – $35.91, down 23% on largest daily volume ever.
I warned all members with multiple red flag “text” over the past few weeks that NGPS was in overbought territory. I hope anyone that owns or owned NGPS wasn’t caught off guard today.
Post from 12/31/04 Weekly screen: “NGPS – 44.39, closed in lower half – red flag”
Post from 12/20/04 Daily screen: “NGPS – 34.41, entering overbought levels.”

As time moves on, all members of this community will be aware of the initial red flags that will allow you to lock in gains or be ready to sell when the proper time approaches. You won’t be caught off-guard in most instances. No one is perfect but we can all lower our risk with a solid set of rules.

For more analysis on today’s market, please login to our daily screens and review the stocks making the strongest moves today.

Piranha

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