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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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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Most stock traders know that momentum trading can be a very profitable activity. You can make big amounts of cash in a short period of time. The problem is, that if you don’t know what stocks to look for and how to approach them and leave everyting to chance, you could end up wasting money instead of making your profits grow.

That’s why the most important aspect of momentum trading is the knowledge FILTER you employ to make your buy and sell decisions. There are many fantastic stock systems and trading strategies outhere, but you need to test them in order to discover which ones help you the most. That’s part of your homework as a stocktrader. Test, test and test again.

Complicated online trading strategies that rely on a boat load of technical analysis indicators can make you slow, and being slow when trading hot momentum stocks can be as dangerous as not knowing what to do in the first place.

The worst thing that can happen to a beginner momentum trader is to get information overload. It’s better to go step by step, and test a simple stock trading strategy that can show you how to focus on concrete ways to make money and pick better hot stock trading opportunities once at a time.

Fortunatly there are great sites on the web today that can show you how to trade in a sharp and effective way. One of those sites is Sharp Trades http://www.sharptrades.com

In the end, momentum trading is all about buying and selling stocks according to your knowledge FILTER. Once you master and follow your proven filter parameters like a clock, you can expect to start making serious amounts of cash on a consistent basis.

Find out how to do it with ease and simplicity at Sharp Trades.

Dan Sheldon is a UK based momentum day trader focusing on US markets since 1986. He helps people become confident and practical momentum traders, showing them how to choose stocks with ease and simplicity every day at http://www.SharpTrades.com

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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