Credit Card ’s Talk

We place consider buys on stocks for several reasons. If the chip sector is moving higher and we see a chip maker approaching a near term resistance, that gets our blood moving! Why? Because if it gets through that resistance, it can squeeze a bit and really break out. But when the market is nervous, and whippy, too many times a stock crosses above the resistance, they get cold feet and down it comes. At that point you have to make a decision. do you hold it under where you paid or do you bail out? It’s not an easy choice.

Many are the times you will bail out and the darned thing will reverse back up and blast higher. Then again there are the times it will simply keep falling. Is there any way to truly know the difference? No, unfortunately, we don’t care what you have read about systems, volumes, technical indicators, voodoo, or aliens, the fact is no one knows the future. So, naturally the best plan is to sell out when a breakout comes back to where you bought it. Jump out with little or no loss and live to fight again.

Over the past few weeks we have entered and then had to bail out of so many stocks we have lost count. But this is the important part and you have to remember it: We are up big on the win/lose column. Yes it takes work, yes it’s a royal pain in the butt, but the fact is that active management saves the day. Look at DISH back in late October of 2001. Pull up the chart. See that messy line right around the $28 level? Well if you draw a line across 28 from the high of the day on October 28th (at 27.99) you see 28 is like a fairly staunch resistance. So, we had a consider buy on it if it got back over 28, give or take a few cents.

Sure enough it opened at 28.01, stumbled a bit and pushed up to 28.53. Great right? It sure was, we were in it at 28.10. but then sure enough it reversed and down it came. When it got to 28.12, we had to make a decision. Do we hold it under where we pain or do we sell it flat? We held for about 10 cents and dumped it. Swell right? A 10 cent loss, after being up 40 cents. But, here is the really important part folks, it closed the day at 27.53. Now, if it came back up, then we looked stupid. If it fell more we were heroes.

Well let me tell you something. We will generally take the flat or a 10 cent loss rather than holding under where we bought it hoping’ it comes back. Sure we could have sold it at 28.50, or 28.40 or 28.30, but we didn’t. Maybe we should have, the thing is quite often we have to settle for the dimes, but it’s not what we are after.

Unless the day is totally in the toilet, we try and buy into the stocks we put on the consider buy list. More times than not they work out for us, but not without a bit of work. Yes we have often had to do the DISH thing, watching a small gain disappear and then bail out flat. But then we catch the right one. That’s what we are after! Unfortunately, when the market is whippy, unless you can seriously daytrade, you have to be prepared to be nimble enough to bail out when the stock you bought is falling back to where you bought it.

There are times when we do hang onto the stock even though it has violated our entry price intra day. Why do we do it? Well maybe we still had really high hopes and thought it would rebound. Maybe we felt the only reason it pulled back was because the overall market got scared over a news item or such. Well, we went back through hundreds of trades over the years and did the math. On the ones we held onto even though they failed our original entry price, 61% went on to become winning plays. That isn’t bad at all. Would we encourage it? Not at all, we encourage you to bail. But that said, we only put out plays we feel have a real shot at moving higher, and the numbers back that up. Even though they failed the initial buy in price, 61% still became winners down the road.

Why didn’t we hold onto DISH? The day was poor at best, there were big earnings after hours that could have put the market in a bad mood if they were poor and we saw them picking away at GE, IBM etc. When the leaders are getting plucked, there is always the chance of a big sell off. We bailed flat and moved on. When you are looking at a stock that has pulled back to where you entered it, please take all things into consideration.

How is the overall market acting? Is there a bad headline floating around? Is the mid East erupting? Has gold or oil shot higher? Did someone just warn? When you have the answers to these questions, then you can make a better judgment about whether you want to hold onto a falling stock, or bail out. More times than not its still best to bail, but occasionally you may decide the stock is falling and its not the stocks fault.

Suppose you see a high volume breakout and everything looks great. The resistance line was 50 and you get in at 50.15 and soon its at 50.60. Then it starts fading. You notice the DOW was up 80 and now its up 40, 30 20. Something happened. Maybe a program trade, maybe a profits warning, maybe a fight in the mid East. In a situation like that, especially if the breakout came with volume, we’d tend to hang onto it even if it failed 50.15, but we wouldn’t let it fail 50, the original breakout line. Why? Because the stock didn’t do anything wrong, some outside influence drove the market lower and took our stock with it. We would hold it under our buy in price, but not the breakout price. If the short sellers see it couldn’t hold the breakout, they might step up their shorting and drive it lower.

No, we’d probably bail at 49.95 or so if we could. So, as you see, there is no cut and dry answer, and the situation will determine your best course of events. We hope that helps you make good decisions in the future!

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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.

About the Author

Chris Perruna

http://www.marketstockwatch.com

Chris is the founder and CEO of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don?t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Fading the gap. Earnings runs. Moving average cross over’s. Support and resistance. I could go on an on about all the ?tools? a good ?trader? uses to make a trade. In one form or another we have employed each and every one of them, and for the most part, if done right, they work. But, there is one issue that will always make you shake your head in wonder. What?s that? ?Why didn?t I hold??

One time we watched EBAY get to 104 dollars a share. Well, we went long EBAY on 8/11/04 at 76.30. We held it for a pretty long time, and sold a portion on 9/2/04, at 89.53. We had picked up $13 a share, and yes indeed we were proud of ourselves. Yet, it went over 104. Suddenly selling it at 89.53, looked pretty silly didn?t it? Indeed.

One could easily ask ?why on earth did you sell it?? One could easily answer, ?did you ?know? it was going to go to 100?? Do you see the point? There are indeed investments that you are going to make from time to time, when you will take your profit, feel like a king, and then feel like a fool because the stock keeps going higher. But, we have a short memory in this country. This is the same type of thinking that saw tens of thousands of investors get crushed in 200 ? 2003. They all ?knew? their stocks were going higher. They held onto them. They are still licking their wounds.

There is NO answer to this problem folks. Cocky talking head fund managers wrote all sorts of catchy books about ?let your runners run, and cut your losers?. Peter Lynch had the good fortune of buying stocks during the biggest bull market in the history of the US, so he gets to act pompous and wave his hand in the air and say ?I just buy good companies and let them ride?. Well, lots of ?good companies? he bought in 99/2000 spent the next three years underwater.

How do you know when a runner is running? How often do you buy something, it gains 3, 4, 5, even 10 dollars a share, only to roll over and give it all back? Should one hold onto it as it loses another 7% from your entry as the ?gurus? tell you that the proper play is to cut losses at 7%, and let winners win?

My theory is that you really need two if not three separate piles of investment money. First off if you are lucky enough to have a company sponsored 401K, well then, good for you! But if you don?t you should have an IRA set up. Then, for your personal investing you really need to approach this with two mindsets. One is the day to day, week to week trades we make, but secondly, what about some ?buy and hold? type stuff?

I?m not a buy and hold sort of guy naturally, but the fact is we do put out story stocks that go on to make tremendous gains. Quite often we?ve suggested ?Buying a few shares and putting them away for a year to see what happens?. Many of those very suggestions, have gone on to be three or four ?baggers?. (tripled or quadrupled in price)

For short term swing trades, the thing that keeps us in the game is taking profits, setting some form of stops and moving in and out when the reasons line up. But that said, taking a longer view approach with a small pile of cash, on specific story stocks, can really reward you. No one knows the future, and hindsight is always 20/20. It?s easy to ask ?why didn?t I hold that?? But you really didn?t ?know? it was going to continue going higher. For that type of trade, find a story that?s compelling and take a SMALL position and put it away. If we?ve done our homework, we should see good results.

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I cringe every time I hear a novice investor tell me that they only purchase low priced stocks because they offer higher potential gains. A common phase I hear is ?I like to buy $1 and $2 stocks because they can double easily and I will make a 100% profit?.

My reaction is to always let these people know that ?stocks are priced low for a reason, just as stocks priced high are there for a reason?.

Like anything in life, quality is never offered at a discount. When I am in the market for a car, I don?t expect to purchase a Mercedes for the price of a Pinto. No pun directed towards Pinto car owners as I am just providing an example.

Stocks are valued at their current market value or perceived value under the current situations. A $1.00 stock is trading at this level because it is only worth this much in investor?s eyes. A stock priced at $50 or $100 is trading at these levels because of a quality that the lower priced stock does not have. Institutions, such as mutual funds, will not purchase a stock at $1 based on strict internal rules and fund guidelines. Stocks move based on vast amounts of support from institutions that have the buying power to propel prices 100%, 200% or more in less than 12 months.

A quick study of stock market history will prove that the majority of stocks priced at $2 or less will be de-listed or bankrupt before they ever give an investor a triple digit return. High quality stocks are typically representative of high quality companies that usually have innovative products or services that are increasing revenues and earnings thus peaking institutional interest. I have seen more stocks double or triple from the $20-$50 range than any other price level during the past five years.

A stock going up 25% in one month?s time is the same whether it is from $5 to $6.25 or $60 to $75. It happens every year. The novice investor is usually hesitant to buy a stock that is priced at $50 or more as it looks too expensive to the untrained eye. What?s expensive to an uneducated investor may be a bargain to an educated investor.

Always buy the stock that presents the highest probability of success based on both fundamental and technical analysis. The price should never matter nor should the lot size. A 25% gain will always be the same whether you buy a $2 stock with 5000 shares or a $100 stock with 100 shares.

I agree that the chances for a quick 25% gain on a $5 stock seems greater than a 25% gain for a $100 stock but it’s also much greater for a 25% slide on the $5 stock than it is for $100 stock. Your downside protection is limited with a low priced stock as it can move quickly and present you with an illiquid position that a higher quality stock may not present.

Here is a very basic example:

If you buy a $2 stock and it gains $1 in two months, you now have a 50% gain. But, if the stock falls $1 in two weeks, you now have a huge 50% loss in your portfolio, a number that usually devastates most traders.

If you buy a $60 stock and it gains $30 in two months, you will have a 50% gain. Now, if the stock starts to fall rapidly and is now down $10 in a few days, you still have a chance to sell the stock within 10% of your purchase price and prevent further loss and devastation to your portfolio. You, the investor will most likely be able to spot negative action or red flags and get out quickly enough without the sudden 50% drop that the lower priced stock could blindside you with.

Don?t buy a stock based on low prices or a quantity of shares. Always buy a stock based on quality looking towards the fundamentals and technicals and the price and volume action. Study our archives and look at the number of stocks that have gone on to tremendous gains from the $20, $30 and $40 levels.

Chris Perruna - http://www.marketstockwatch.com

Chris is the founder and CEO of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Stocks breakout from properly formed bases everyday but many investors don?t understand how to locate a pivot point or what patterns to study that may contain this very important buy signal. A pivot point can be described as the optimal buy point or the area at the end of a familiar base pattern where the stock breaks out into new high territory. William O?Neil, the founder of Investor?s Business Daily is considered the pioneer of the pivot point in modern times. As Jesse Livermore explains in his book (1941), the pivot point can also be described as the point of least resistance. When a stock breaks the point of least resistance, we are presented with an opportunity where a stock has the greatest chance of moving higher in a short period of time, especially when volume accompanies the breakout.

The pivot point can be calculated as the stock is forming the handle on a cup-with-handle base. The ideal buy price would be $0.10 higher than the highest spot during the handle, also know as the top of the right side of the base. The intraday high can qualify at the highest point and does not have to be the closing price of the stock. If the stock closes at the high for the day, then we will use this number as the high point.

The exact methods used for finding pivot points vary depending on the base pattern that is forming on a daily and/or weekly chart.

When a flat base occurs, an investor should look for a move $0.10 higher than the top point on the left side of the base or the start of the formation.

A saucer-with-handle follows the same rules as the cup-with-handle and is described in detail above.

A double-bottom formation triggers a pivot point that will be $0.10 higher than the middle peak in the ?W? shaped pattern.

Many investors will try to cheat the rules and place a position prematurely before the stock breaks out and passes the pivot point. I do not suggest buying until the stock triggers the pivot point on above average volume also known as qualifying volume. The area considered as the least amount of resistance is weighed so heavily because all overhead sellers are gone as we break into new high territory. The pivot point usually comes within 5% to 15% of the stock?s old high 52-week high.

Don?t chase a stock that is 5% or more above the proper pivot point. This does not mean that you can?t buy on normal corrections and pullbacks to support or moving averages, especially if the stock remains in an uptrend. This rule only applies to the pivot point area as the stock becomes extended. If you buy with the pivot point and sell when a stock falls 7-10% from the pivot point, I guarantee that your yearly performance will increase dramatically.

Chris Perruna - http://www.marketstockwatch.com

Chris is the founder and president of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

We all know that emotions control every decision that an investor makes in any type of money related vehicle. Whether is be the stock market, real estate, art work or antiques, emotions ultimately set the final price on both sides of the transaction. Some investors have greater control over their emotions while other investors are destroyed by their emotional reactions to certain events.

One common occurrence that I have seen many investors make, including myself, is placing a position in a stock at the wrong time. My last article detailed the importance of timing, while this article will concentrate on the importance of staying focused and emotionally stable when things don?t work out as expected. In the past, I would study a stock?s chart, the fundamentals, the general market health and everything else that I felt necessary before placing a large sum of cash behind my beliefs. When things went wrong and I was forced to sell for a small loss, I would drop the stock from my watch lists and remove it from my memory. This was one of the biggest mistakes that I was making during my earlier years of investing. The greatest investors study their mistakes and learn why they were wrong. If you don?t learn from your mistakes, you will continue to repeat them and never move to the next level.

I was usually correct with my analysis on the particular stock but many times I was too early with my entry point during a new up-trend. Months later, I would come across the same stock in my screens but it was now up 25%, 50% or more from my initial buy point and stop loss. I would be frustrated for selling my stock too soon and was getting tired of using rules and missing big winners that I sold for a loss. I knew money could be made in Wall Street by using the law of averages to my advantage and employing strong money management skills but I needed to employ the rules more consistently. I started to practice what I was taught by selling my losers quickly and allowing my stronger stocks to ride their trends. Over time, I was experiencing a few more losers than winners but my stake was growing because these losers were smaller in size than the winners. The words written in the books were true; Jesse Livermore, Gerald Loeb and William O?Neil were all accurate with their lessons about cutting losses quickly.

More importantly, I learned to keep strong stocks on my radar even if I bought too soon and was forced to sell for a loss. My timing was wrong and my ego was shot because I was wrong, so I typically decided to stay away from that specific stock because it had already taken my cash and my pride. Emotionally, I was burned by the stock even though this was not entirely true. Investing is a game of trial and error. It is okay to buy a stock at the wrong time and sell, only to buy it again because they timing may be better. If you cut the losses small and allow winners to grow, the averages will ALWAYS work out, I promise. You must be honest with yourself to allow the averages to work out. You cannot allow a stock to drop past your sell point and you must try to always hold the strongest stocks without selling them during a premature pullback. This all sounds so easy but it is not! If it was so easy, we would all be extremely rich and the stock market would be everyone?s full time job.

I kept using my system of trial and error and started to record every thought and transaction I made. With my revised philosophy in place; I continued to study the stocks that I was forced to sell and tried my best to re-purchase, even at higher prices than my original position if the time was right. Even now I have these issues, the greatest traders of all time always had these issues and every fund manager must decide if the time is right. My latest example, which can relate to almost everyone in the community is Paincare Holdings, a stock that was purchased solely as a ?test buy? that I was forced to sell. If things turn around and the general market starts to rally, I would have no problem buying the stock at a higher price than my original position if the opportunity presents itself.

LaBarge is another example, first showing up on the screens at $9.35 but during a down-trending market. The new pivot point and buy area was $14, over 50% higher than the original price but a solid entry point regardless of past gains or prices. Mentally it is always the toughest to buy a stock at a higher price than you were watching it at an earlier date but it can be the most rewarding strategy. Never look at a chart and toss away a candidate because it has moved up 50% or even doubled in recent months, the real move may just be beginning.

The moral of this article is to make you understand that timing may be your only issue when buying stocks so never throw away a possible superstar because you bought too soon. Keep it on your watch list and be prepared to initiate another position, even if it will cost you an extra point or two. If you buy again and it doesn?t work out, re-peat the process, there is always a chance that the stock was not meant to be or your analysis was slightly faulty. In either case, learn what you are doing right and wrong so you can be prepared to use those lessons with the next stock.

Chris Perruna - http://www.marketstockwatch.com

Chris is the founder and president of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

There was dancing in the streets, well, at least on the floor of the New York Stock Exchange last week when the Dow Jones Industrial Index closed at an all time high. The many cheerleaders on CNBC-TV were ecstatic screaming, ?I told you so?. But what did it really tell us.

The DJIA or DOW as it is also called is composed of 30 stocks that actually represent about 25% of the value of the NYSE. That is very impressive and one of the main reasons this index is watched by so many the world over.

Caterpillar Tractor Company was $16 in the year 2000 and closed on October 2, 2006 at $65. The worst was Intel that dropped from $72 to $20. Many fell 50%. So what really happened? Only 9 of the 30 stocks made new highs that day ? only 30%. No one on CNBC bothered to mention 21 stocks, 70%, failed to participate.

New highs were entered by American Express 3 points, Boeing 12, Caterpillar 49, Johnson & Johnson 30, Minnesota Mining & Manufacturing (MMM) 33, Altria 55, Proctor & Gamble 4, United Technology 39 and Exxon 25.

There is no point in listing all the losers. Three lost more than 50% from the 2000 high. How can this make a new meaningful high when the index shows 70% of the stockholders lost money?

Way back when before you were a gleam in Daddy?s eye (1896) when the original average created by Mr. Dow and Mr. Jones first appeared in the Wall Street Journal all you did was add up the price of all the stocks and divide to get the Index.

Stocks went up and dividends were issued and those darn stock splits played havoc with computing what the average was each day. There is no point in going into the complex details, but let?s look at how they get to the final index number.

Each stock in 1990 was added and multiplied by 2. Today each stock is added and multiplied by 8 to get the DOW number. If you add the closing prices of the DJIA stocks on October 3 it came to 1465.91. With the current multiplier of 8 makes a closing DOW Index of 11,727. A new high. Not really.

Every investor is encouraged to go on the Internet to www.bigcharts.com to look at a 10-year history of each of the 30 stocks. A comparison to the DJIA may be superimposed. It will shock most investors.

Don?t buy stock based on what the DOW is doing. You must do your own research for each issue before parting with your money.

Al Thomas’ book, If It Doesn’t Go Up, Don’t Buy It! has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know. Copyright 2006 All rights reserved.

Some time ago I commented on the ETF’s, stating that in the future they would carry a lot more weight than most would have thought. I think that’s come true enough. Back in 00 and 01, not a lot of people were playing with the ETF’s, but since then, several major institutions have begun using them for their hedging practices. Volumes, once anemic across the board, has recently exploded.

The reason is really pretty simple. althought he ETF doesn’t mirror the underlying basket perfectly because of carry costs, interest rates, etc, it’s darned close enough, so if you have a macro view of something, the ETF’s are often much easier to gauge than say a basket of four or five individual stocks. This is what leads me to this topic, the macro view. How many times have you been right about the direction of the market, yet the stocks you are holding fell in the day? Often I’d bet, it happens to all of us. But, with the ETF’s, if your macro view is correct, 99% of the time the ETF will trade in the similar direction.

Let’s suppose you feel that the chip sector is overdue for a pull back. A quick scan shows there are almost 50 stocks that could be considered chips. Are you to believe that you will be so adept that you will pick the ones that go down? Probably not. But, if you shorted the SMH, and the chip sector was weak overall, you’d be rewarded.

For short term moves, there isn’t a ton of profits to be gained from most ETF’s. An exception for example would be the BBH basket of biotechs. that thing often gains or loses 3 dollars in a day, making it a really fun trader. But that’s the exception really, as the DIA, or QQQ’s which track the DOW and NASDAQ respectively will often move just 50 cents to a buck, even on a big market day. For some, that’s more than adequate returns and I agree they shouldn’t be scoffed at. But I find the ETF’s to be much more useful as swing trading vehicles or even semi long term holds.

Please use the ETF’s for your macro views folks. It’s easier to spot the trend than it is to spot the individual winners every time. I plan on using the ETF’s for a lot of the shorting we will do when the wheels come off the market. The charges aren’t much different than individual stock selection, and it’s easier to trade them. That’s not to mention the fact that options are available on them, AND you can buy or sell intra day, something you cannot do in any form of typical fund.

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