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October 2009 Headlines
Thursday 10/29/09. Worst Case: Dow 8100!
The chart shows the Dow industrials (^DJI) on the daily scale. I drew two red trendlines along the peaks and valleys. That forms an
ascending broadening wedge chart pattern.
What concerns me is the failure of the Dow to touch the top trendline at A. That often spells weakness. What does that mean?
It suggests that the Dow might have enough strength to continue through the lower trendline, staging a downward breakout.
If that happens, there are plenty of support zones along the way, but the Dow could, COULD drop back to the launch price, namely about 8,100 (B).
That would not happen any sooner than the new year, judging by how long it took the Dow to rise up from B
What's my guess? I think the Dow will drop to 9600, which is where the trendline is now. Once it hits the trendline I expect and hope it reverses but if not, the Dow could drop
to 9400. That would probably take about two weeks or so and that would also correspond with the end of earnings season. I do not expect the Dow to crash down to 8100.
If I did, I would be selling my stock.
-- Thomas Bulkowski
Tuesday 10/27/09. Tutorial Tuesday: 2B Trade in HGG
When I first discovered hhgregg (HGG), I thought it was another Michaels Stores. With Michaels, I made almost 5,000% and it allowed me to retire at 36. Sadly, it's not another MIKE
(which fell into private hands and no longer trades).
HGG sells consumer electronics and appliances in 110 stores in the mid west and southeast, a competitive retail segment with Circuit City declaring bankruptcy and Best Buy doing its best
to grab the Circuit City scraps before HGG can. HGG is shooting for 400 stores in the next 10 years, is gaining market share from weaker competitors, but expansion is hurting free cash flow.
Half of revenue is from video products, such as flat panel TVs and Blu-ray players. Home appliances, refrig, stoves, dishwashers, and so on make up 35% of sales with 15% in audio,
mattresses (can you believe that?), notebook computers and other popular consumer electronics and accessories. Sells 100 models of TVs and 350 appliance with same day delivery.
Uses highly trained sales associates, commission based, which helps educate consumers and more up-selling. Insiders bought lots in Nov '08 and then sold in June, some in Feb.
The picture I used to make the buy shows the breakout occurring a day or two before I bought. Here are my notes from the buy. "A symmetrical triangle breakout,
but it's on low volume with market perhaps making a pullback to a head-and-shoulders top, suggesting more down ahead. Since breakout volume is low, I'm going
to reduce the position size."
I bought the stock and received a fill at 17.01.
The next day, the stock dropped on news that the company would sell several million shares. I wish I had known that ahead of time... When the stock gapped up four days after
I bought (July 21), the company signed the agreement to issue new stock, up to 4.25 million shares, at 16.50. One insider picked up 60,606 shares at 16.50 on that day. The stock closed
at 18.41, so he made a tidy profit without doing any work.
The stock peaked at A before drifting lower over the summer. When the stock neared the price level of A,
I took another look at the stock.
I don't like the highly competitive nature of the appliance business so I changed my mind about the stock. The day after price peaked at B,
I sold at the open.
If you look closely at B, the candle is black. The Dow closed higher almost 100 points on that day and above 10,000...but this stock dropped. I don't like
that type of divergence, so I figured this was a 2B chart pattern. That's a fancy name for price forming a double top instead of continuing higher.
I sold the stock and received a fill at 19.27 for a gain of 13% in about 3 months. As the chart shows, the stock has declined since I sold.
-- Thomas Bulkowski
Thursday 10/22/09. Fibonacci Retrace in S&P 500
I show the S&P 500 index on the daily scale on the chart to the right. Now that earnings season is here, the indexes are going through the motions of deciding where they want to go.
If the index drops, you can use a Fibonacci retrace to help predict where it will stop. Let's take a closer look.
Using the rise from A to B and taking 38% of it gives the minor low at C.
Notice that price turned there and kept above the line for a few days.
A 62% retrace of the AB line shows price turning at D.
If we use this same technique and the index behaves as it did in the past, the drop could be: 1,070 for a 38% retrace of the DE move,
1,060 for a 50% retrace and 1,050 for a 62% retrace.
Will a decline happen? It appears to be underway already. In fact, the Chart Pattern Indicator switched to bearish, suggesting a market turn. Of course,
any good earnings reports will make this market jump, probably at least 100 points but maybe 200 or more. Bad reports will force it lower.
Since it's raining today and my crystal ball only works on clear days, I have no idea what will happen. With my own portfolio, I'm holding steady but taking profits on weaker issues.
I plan to write about another trade on Tuesday.
-- Thomas Bulkowski
Tutorial Tuesday: Trade in CNO
Before I get to the trade, I received the second of two calls from a company called Value Ad or something like that. I've never done business with them and my number is on the
national do not call list. The last time they called, I asked them not to call me again. This time, I reported them to the Federal Trade Commission. They have a
website dedicated to the do not call list. On the page is a "File a Complaint" option. All it takes is either the name or phone
number of the company calling. The FTC won't resolve individual complaints, but if enough get filed on one company, they may decide to take action.
# # #
On the right is a chart of Conseco on the daily scale. It's a stock I have successfully traded before.
I bought the stock after it retraced 38% of the rise from 7/28 to 8/4/2009 (not shown). I missed the low on entry by a day because price dropped the day after I bought.
Since this is a very volatile stock, I didn't use a stop. The position size was 1/4 normal, so if the company ran into trouble and price dropped, it wouldn't be too painful.
Anyway, the stock made a nice run up from the low at A, ending at B. If you look at the price and time scales, you'll see that it doubled in less than 2 months. That means it qualifies as a
high and tight flag chart pattern. The flag is a long one, from B to C. The pattern confirms at D, when price climbed above the high shown in the flagpole (AB).
I illustrate confirmation by a thin horizontal green line connecting B and D.
Why did price gap higher from C to D? The answer is manifold. Moody's boosted its outlook to positive from negative, citing efforts by the company to pay down debt. FBR Capital Markets
upgraded the stock to outperform from market price (whatever that means) and raised their target to 9 from 4. The stock gapped 29% higher on those events.
I have written about the inverted dead-cat bounce, most recently in YRCW. I made 34% in one day. This trade is another example of that
With price shooting higher in one session and given that the company appears headed away from bankruptcy, this looks like a long-term winner. There's just one catch.
To help pay down debt and improve their finances, I read that they plan to issue something like $200m worth of stock. If and when they do that, this stock will get clobbered, probably
to the tune of 10%, more or less. I didn't want to see my gains evaporate, so I sold it at the open the next day.
I considered day trading the exit but am glad I didn't. The stock opened and then dropped for several minutes before recovering and soaring to a new high. My guess is I'd hold it
long enough for the stock to have bottomed and then sold, resulting in a larger give back. That's only a guess, of course. I decided to avoid all of that stress of watching my stock
drop, selling, and then watching it recover by just exiting on the open.
I made 90% in two months on this one.
-- Thomas Bulkowski
Thursday 10/15/09. Solar Shingles: Deal or Dud?
Gabriel Wisdom has a new book out titled,
"Wisdom on value investing: How to profit on fallen angels"
shown on the right. When I receive a copy of it, I'll post a review.
The reason I mention Gabe is because I just finished an interview with him on Business Talk Radio show just a few minutes ago (Wednesday evening) when one of his guests couldn't make it.
I was worried about my dog that likes to bark when
I'm on the phone, so I pushed her into one bedroom, closed the door and closed the door to my office. Fortunately, she remained quiet during the 20 minute session. With 4 books and over
100 published articles plus over 500 pages on my website, there's no telling what questions an interviewer will ask. Since I'm not as young as I used to be, trying to think of an answer or even
understand the question can be difficult, but Gabe makes it easy.
# # #
As the chart shows, I put Dow Chemical (DOW) on my watch list back on April 6 when it was trading at 10.78 and it closed on Wednesday at 27.07.
At the time, I thought the stock
was too expensive, so I put a target buy price at 9.50. My notes say that the merger of Rohm and Haas would produce synergies that would lower costs. Plus they were selling their Morton Salt
business for $1.675 billion, so that would help pay for the Rohm and Haas merger. The disposal of other assets would help produce cost savings as well.
On April 25, I decided not to buy it because the stock had risen too far (about 13 then). The lowest the stock fell was 9.95 the day after I posted it on the website.
As the stock climbed, I kicked myself repeatedly for letting such a winner go.
On October 5, I learned about their solar shingle. What I brilliant idea, I thought! I decided to buy the stock at the open the next morning. Had I done so, I could have gotten in at
25.21 or so (the open).
After doing research on the product and the company again, and sleeping on the idea, I decided not to invest. Why? Dow is a large cap stock and I know that large caps underperform
mid caps and mid caps underperform small caps. In short, buy small cap stocks and not anything else. Plus, I read one report that said the cost was $27,000 for a 60% savings on electricity.
At my electric rate of $60 a month, it would take 63.5 years just to break even if those shingles were installed on my roof. That probably exceeds the lifetime of the shingles, and I'll
be dead well before then anyway.
In other words, they are much too expensive. Costs will come down, of course, so maybe they will make sense eventually. And that $27,000 number may not be correct and it certainly
doesn't take my roof size or orientation into account.
They will begin selling the product in the middle of next year, so there's plenty of time for this stock to drop. Since we are dealing with a large cap stock, it will take a long
time before this product adds meaningfully to the bottom line. Nevertheless, the company says it will add revenues of $5b by 2015 and $10b by 2020. That's tempting...
-- Thomas Bulkowski
Tuesday 10/13/09. Tutorial Tuesday: Ascending Scallops are Tasty!
I thought I would spend this tutorial Tuesday discussing a little known chart pattern called the ascending scallop.
The chart shows an example on the daily scale
in Vertex Pharmaceuticals (VRTX). The pattern begins at A and ends at C. Another ascending scallop begins at
C and ends at E.
Look for price to rise leading to the start of the ascending scallop (price moves up to A) then drift lower into the bowl,
B, followed by a rise C. The pattern looks like a large version of the letter J.
Volume is often U-shaped, mimicking the shape of the bowl. Width of the chart pattern varies but if you see them get narrower over time, then that's an indication of a coming
trend change. If the tops of the two rims are at nearly the same price, that's also a clue to a trend change.
In this example, you can see how pattern ABC is wider and taller than CDE, suggesting trouble ahead. Price moves
sideways to down after E.
An study of these chart patterns discussed in my
Encyclopedia of Chart Patterns, Second Edition,
shown on the left, says that 80% of the patterns breakout upward. That should come as no surprise since it should be easy for price to close above the top of the ascending scallop
(C) than to close below the bottom (B, the lowest low in the pattern).
The measure rule can help you determine how far price is going to rise after the breakout from an ascending scallop. I treat ascending scallops no differently than other chart patterns
when calculating the measure rule. It's the difference between the highest high (C) and lowest low (B) in the
pattern multiplied by 58% and added to the highest high to get a target price.
Why 58%? Because that's how often
the measure rule works for this chart pattern (see my book for values on other chart patterns, including those in a bear market). That means price reaches the target just over half the
time before a trend change occurs. Thus, to get a closer target that has a success rate over 90%, then shrink the height using the 58% number as described above.
Ascending scallops will form a handle. That's what leaves the right rim high (C) on the chart. In many cases, the new handle will also be a scallop
so you can better time your entry by buying the stock near the bowl low (D). Just be careful because sometimes the breakout from these patterns can be
downward. If that is the case, sell a long position immediately.
-- Thomas Bulkowski
Thursday 10/8/09. Down for the Dow Utilities? What Does it Mean?
The chart shows the Dow utility average on the daily scale. I've read somewhere recently that the utilities often point the way (direction) that the broader market will take.
I didn't think much of the comment but perhaps there is some truth in it.
The chart shows a right-angled and ascending broadening chart pattern (red trendlines). Those have price following a flat bottom and up-sloping top trendline.
Price breaks out downward from the chart pattern 66% of the time.
If price behaves as I expect, it will form a partial rise at C. That's when price
touches the bottom trendline then rises up to approach but not touch or come that close to the top trendline before heading lower. An immediate downward breakout usually follows.
In fact, a downward breakout occurs 74% of the time.
If I am correct, then the utility average may return (in the longer term, weeks or maybe months from now) back to the launch price. I show that on the chart. I say it's possible
because of the straight-line run up at A often precedes another move back down (B). It's not often that the B move will also be a straight-line run down.
What is unknown at this point, is whether this will occur. Price broke out of a ragged congestion zone in June with peaks well above the start of the launch price. Thus, if the
average does pierce the bottom trendline, it might stop declining just below the horizontal red line. The prior peaks in June will probably lend support to price and stop the decline.
If that happens, then the broader market may be in for just a short drop instead of a nasty October surprise.
-- Thomas Bulkowski
Tuesday 10/6/09. Tutorial Tuesday: Scaling In Costs Money!
Scaling in costs you money! I was as shocked as anyone and hoped that wasn't the case. I scale into stocks to build my position all the time, but according to an article in
Active Trader magazine titled, "Scaling in as an entry technique," by Howard Bandy, the technique lowers profit.
Scaling in is important for buying thinly traded stocks. You buy a little each trade, hoping not to move price much. One rule of thumb to use about trading stocks is to take
1% of volume. If your trading size exceeds that, then look elsewhere for a more actively
traded stock. I threw out a trade in Bassett Furniture (BSET) because it's too thinly traded (3 month average volume from the Statistics page on Yahoo!finance
shows 27,614 shares trade daily, on average). With the stock selling at about $4, it can take a month to accumulate several hundred thousand shares without
moving price much.
Let's return to the Bandy article. I last wrote about scaling out last month, so let's discuss scaling in.
Scaling in refers to taking a partial position in a stock at one price then adding more at a later time. Sometimes you are averaging down -- buying more of a stock
as price falls. Your average purchase price drops. Averaging down is a favorite technique for those that buy-and-hold because they know (or hope) that price will recover if they
hold the stock long enough. I do that, especially on my utility stocks. I want a large position to boost low tax rate income so why not buy at a lower price?
I almost never average down on my trading positions. All that does is make the loss grow when you throw in the towel and sell just days before price turns higher.
Others like to buy more stock as additional trading signals occur when price rises. I will do that too, when I see a buying opportunity. Perhaps a stock breaks out of a congestion
region. I'll double my position. Maybe it breaks out upward from a symmetrical triangle. Again, I will add to my position and ride the stock higher. I do not
buy half a position and then buy another half. I buy a full position and then decide to add more shares.
Bandy identified 5 reasons for scaling into a position.
- Averaging up. This is buying more shares of a position you own at a higher price. Trend followers and momentum players use this technique.
- Averaging down. This is buying more as price drops.
- Pyramiding. Adding to a position when buy signals appear.
- Rebalancing. If you own too few shares of a stock, you may decide to buy more to offset larger positions in other stocks.
- Scale Trading. Buying more shares as price drops and selling as it rises. Bandy says this is used often in commodities.
Bandy used 72 stocks and exchange traded funds of the highest average daily liquidity in 2008 and back tested them from December 31, 2003 to October 31, 2008.
Based on the SPY (S&P tracking stock), the general market went nowhere during that period. He bought positions of $5,000 and $10,000 each month. His system buys a position
at the close of the first trading day of each month and exits at the close on the last trading day. He did not adjust returns for commissions, fees, or interest applied to spare cash.
He performed seven tests and the results appear in the table.
|1. No scaling, no stops (buy-and-hold)||$1,810||Risk is $10,000. 93.4% of trades close with a loss of less than 10% with 82.5% having draw down of 10% or less per trade.|
|2. No scaling, 10% trailing stop||$-22||Risk is $1,000. Stop set at 10% below entry and trails it 10% below highest high.|
|3. No scaling, 10% trailing stop, half position||$-11 with stops, $905 without||Same as #2 but only $5k invested. Risk is $500.|
|4. Scale in $5k at 5% profit, 10% trailing stop||$73||Risk is $500 for first portion, $1000 after scale in. 65% didn't rise enough to scale in.|
|5. Scale in $5k at 10% profit||$76||Same as #4 but waits to scale in at 10% profit. 98% of trades had less than 10% draw down. 89% didn't rise enough to scale in.|
|6. Scale in $5k at 5% profit, set stop to breakeven then trail it||$-105||Risk is $500 until scale in then $0 afterwards. 98.4% of trades had less than 10% draw down.|
|7. Scale in $5k at 5% loss, 10% trailing stop (averaging down)||$264||Risk is $500 then $1,000 after scaling in. 98.5% of trades closed less than 10% lower.|
I take issue with his risk assessment. Sooner or later a stock will gap lower, sending the stock plunging well below a stop.
I would like to see this run using bullish and bearish markets, not just the neutral one he chose. Notice that #7, which is averaging down, results in the best performance besides
-- Thomas Bulkowski
Thursday 10/1/09. What’s on The Dow Channel?
If you have been watching the chart pattern indicator, it has been flipping from bearish to bullish to bearish with every large Dow move. It's now bearish, having turned that way
on September 23.
For a month that was supposed to be the worst performing, the Dow did well. What will happen in October?
I have an idea and the chart of the Dow industrials (^DJI) on the daily scale shows what interests me.
Price moves higher bounded on the top by a trendline that stops upward movement. If you extend the two touches of the
bottom trendline, you find another support area at A. The Dow will probably touch it shortly.
If it closes below the bottom channel, then it might form a head-and-shoulders top, a chart pattern I have been expecting to see for about a month now.
What do I think will happen? October is a difficult month just as September was supposed to be. My guess, and it's only a guess, is that the Dow will touch the bottom trendline
and probably move lower, then recover to form a right shoulder. That will probably take about 1.5 to 2 months, judging by how slow the pace has been recently. At that time, expect to
see the Dow at 9,500 or so.
-- Thomas Bulkowski