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Mike
05-02-2016, 10:42 AM
I updated watch lists just before the open. Possibly because of the market pullback the long watch list is longer than usual; this doesn't imply we are setting up for a bounce. However, bounces can start this way. The last rally, to me, looks like a second right shoulder of a 20-month head and shoulders pattern. I place the NASDAQ left shoulder in September 2014. IBD has the market rally under pressure. If you look at breakout performance under the different market conditions, under pressure is the worst possible time to buy stocks. Friday, the NASDAQ closed just under the 50-day moving average. In a bull market, the 50-day is often a place of support. Since I don't believe we are in a bull market, this isn't a place where I expect to go long.

I do most of my watchlist research on the weekend, so I find the shift in Investors Business Daily to a weekly hardcopy (and pdf) paper fits with my schedule and preference for the longer view. I focus most of my chart analysis on weekly charts. I noticed around 2001 in Bill O'Neil seminars that he invariably showed weekly charts to the audience. He began trading in the 1950's, long before we had computer charting. He drew and updated his charts by hand and became an expert in the nuances of price and volume action on this time scale. The largest fault in many traders is "over trading". If you suspect that you are in this category, shifting your timeframe to longer period analysis can help. I still look at daily charts but limit the real estate on my screens to daily chart views. I just took a quick measurement, my daily chart view occupies 7% (area) of one screen (I have three). The only intraday information I am interested in is volume.

I recently watched a presentation by an astute trader in Silicon Valley; he is an engineering manager in the region. As such he needed a system that did not require him to monitor the market all day. He developed an end-of-day and end-of-week system with which he is quite successful. He places on the order of 10-20 trades per year with an average holding period of 200-days. I summarize his approach below.

On the buy side, Ashish Dave creates watch lists of strong fundamental stocks nearing classical buy points, quintessential CANSLIM. He then waits for the stocks to breakout on strong volume. His minimum requirement is breakout volume 100% above 50-day average volume for liquid-strong-fundamental stocks. He wants 300%-400% above average volume for less liquid stocks. Volume can be a little difficult to discern early in the trading day, but he says if volume equals average by 1 1/2 hours in the trading day, he is quite confident he will meet his requirement. Since he lives on the West Coast, he can watch the open of the day before his day job begins. Thus, most of his buying is in the morning.

The brilliance of his approach, however, is on the sell side. He has a total of six sell rules, a maximum of three are applicable at any time. Sell rules are as follows:

Rule #1 Sell any position that closes more the 5.5% below your purchase price at the end of the day. The end-of-day comes during the lunch period on the West Coast, so he eats in and watches the close.

Rule #2 Sell any position that closes at the end of the week below the pivot point. Institutions should support prices at the Friday close. By Friday of the first holding week, sell rule #2 usually occurs before sell rule #1 and often with minimal losses.

Rule #3 Sell any stock that you do not have 5% cushion before the earnings report day.

Rule #4 kicks in at the end of week eight and replaces sell rule #1 and #2. Sell any position that does not have 8% profit at the Friday close.

Rule #5 Applies to week 9 and after. Sell any holding that closes Friday below the 10-week moving average with above-average volume.

Rule #6 applies on Friday close for positions held longer than 18 weeks. Sell at the Friday close price any position showing the largest weekly volume since the beginning of the advance, either up or down.

Ashish has an exception for Rule #5 where he will buy stocks back the following week if they close back above the 10-week.

If you follow a simple system like this in a new uptrend, you would find yourself entering the stocks breaking out at the beginning of the rally. These stocks are often the best performing stocks and you will be in them long enough for them to appreciate.

Pascal
05-02-2016, 11:07 AM
This is an interesting method. Thank you for posting Mike.

Two questions:

1. In today's environment, does this investor buy breakouts or does he follow the CANSLIM market direction calls?
2. Have you decided to use his selling rules and hence adapt your own method (adaptation is key to survival?)



Pascal

Mike
05-02-2016, 11:40 AM
This is an interesting method. Thank you for posting Mike.

Two questions:

1. In today's environment, does this investor buy breakouts or does he follow the CANSLIM market direction calls?
2. Have you decided to use his selling rules and hence adapt your own method (adaptation is key to survival?)



Pascal

Pascal,

I have adopted the sell rules. I have made one change to the sell rules to accommodate gap up buying opportunities. I will chase a gap up on high volume. Ashish Dave in his presentation said he needs to place a buy within 2% of the pivot. He also said he will chase in a gap up situation. Instead of the classical pivot reference for sell rule #2, I use a close on Friday below the lows of the gap up day as the revised sell reference.

Nominally I follow IBD market calls; I will make buys before a follow-through day if quality stocks are setting up in proper bases and they break out. The one IBD market call giving me the most restraint is uptrend under pressure. There are no sell rules associated with the general market, just the six rules I listed. It is a system that has no discretion and thus a real candidate for someone who tends to overtrade.

In the table below I show the method applied to the rally that began with an FTD on 2/17/16. I don't consider the rally to be particularly robust, but you can see that the method keeps you out of trouble plus possibly allows for significant gains. The only stock on the list that does not conform to the 100% above-average breakout is MTSI, a stock I owned at the time from an alternative buy point that was 7% lower than the pivot. With the mentioned exception, the table shows the stocks with good CANSLIM traits that broke out on volume 100% or greater than average. I didn't necessarily capture 100% of the buy opportunities, but with a diligent effort, I am sure I caught most of them. The current performance is summarized by unrealized and realized P/L.

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