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Sunday, February 27, 2005
Market Recap
Another excellent day for the stock market on Friday as the Dow was up nearly 100 points again, closing with a 92 point gain. The S&P was up 11 points and closed near last weeks high of 1212. The NASDAQ closed up 13 points and is by far the weakest of these three indexes. Last week, I showed a chart of the Dow with a double top formation and said it would not likely break through the resistance of the 52 week high on the first attempt. It has subsequently failed to breakthrough and a sell off ensued. The Dow is getting close to making a second attempt to break through to new highs. The Dow has been up big three days in a row but volume has been declining each day instead of increasing. I would like to see increasing volume as the market moves up. Often, when markets move up on decreased volume, it signals that the end of a move may be near. I am not saying this Dow move is over but it is something to watch for as we near the 52 week highs again next week.
Change in Strategy
Friends, the NASDAQ is underperforming the NYSE. There were over 250 stocks on the NYSE that made 52 week highs Friday. While the NASDAQ stocks are more volatile and provide faster returns when they are moving up, they are not performing well at this time. NYSE stocks are less volatile and move up much slower when they are moving up. Nevertheless, this slow steady climb is providing decent returns while the NASDAQ struggles. For this reason, I will be listing some NYSE stocks on the bulletin for purchase and hold for longer than our normal swing trade period. This strategy will change if the NASDAQ can get in gear but until then we have to look for stocks that will give us at least some returns.
Last week I mentioned that if you could find stocks with good fundamentals and a great technical chart to go with them, they may be ones to buy at this time. I spent the entire weekend looking for stocks with these characteristics and I have added several to the bulletin tonight. Energy, Metals and Housing stocks are the market leaders. I will leave these stocks on the bulletin until the trend changes.
The following is a list of stocks from the hottest sectors. These are currently on my back-up watch list but could be added to the bulletin any time. They are the leaders in this market move so you may want to watch them also.
Home Builders
RYL, TOL, LEN, BZH, PHM, BMHC
Basic Materials
CX, DD, PD, LSS, CRS
Energy
DVN, MHR, SLB, KEG
Oil/Gas
CVX, NAT, XOM, THE, SUN, PKD, POG, EPEX
Metals
AKS, NUE, OS, TONS
Your Insurance Policy
All of last week, there was a reminder in the commentary that I would not be available for trading on Thursday. Because of this, I made sure my stops were in place on any open positions I may have had. I do this because when I am away and cannot actively watch my positions, I want to make sure I am out if something should drastically go wrong. I do not expect anything bad to happen because hopefully, I have chosen only stocks with good charts that should not fail. However, there is always a chance that one will fail and breakdown. For this reason, my stop loss orders are in place. They are my insurance policy in case the unexpected happens. The value of my portfolio is worth more that the value of my home and, if I have an insurance policy on my home, it would only make sense to have an insurance policy on my portfolio. Unfortunately, the only insurance you can take out on your portfolio are either options or stop loss orders.
I bring this up tonight because there was a disaster with one of my long positions on Thursday while I was out. I had purchased BIOM at 2.54 at what looked like solid support of 2.45. I mentioned that I would not be available for trading Thursday and because of this, I would not be able to send alerts. It was for this reason; I stated that I had a stop loss order in just below the 9 EMA. This was mentioned in both the chart and the comment area of the bulletin. Even though no alert was sent, our stop loss kicked in and we are now out of the trade. This is an example of how the bulletin, if used properly, can save you a ton of money if a stock should go against you. When I announce that I will be missing a day of trading, the comments become just that much more important. The BIOM position is closed at 2.43, even though no alert was sent. The only time positions will be closed without an alert is if I announce ahead of time that I will be unavailable and place a stop loss in the comments on the bulletin. In this case, since I did announce a stop loss price in the comments, the position is closed. If I had been available, the alert would have been sent at 2.43 (the 9 EMA listed in the bulletin). I hope everyone listened and placed their stop loss order.
Effective Stop Losses
Because of the situation with BIOM, I thought I would cover the topic of stop loss orders tonight.
Market Orders and Limit Orders
There are two kinds of stop loss orders, a market order and a limit order (stop loss & stop limit), and there are times when it is best to use one over the other. A stop limit order becomes a sell limit if your price condition is met. Your shares will only be sold at your limit price. A stop loss order becomes a market sell if your price condition is met. Your shares will be sold at whatever prices are available at that time. If you set a basic stop loss and a stock gaps down, you will exit your position with a market sell at the gap down price because it is now a market order.
The best time to set a stop order really depends on your ability to watch your stocks. If you are an active trader, you may never choose to use a stop order. If you can watch all of your stocks throughout the day, you can make decisions based on market activity at the time and there is no need for stop loss orders to be placed.
If you have less time to watch the markets, then it is much more important to make use of stop orders. You can always enter a stop loss order immediately after you have bought a stock. This automatically takes the emotion out of the trade, and allows you to focus on other stocks you may want to trade.
Where to Set Your Stop Loss
There are many ways to determine where to set an appropriate stop loss. You may choose to automatically set a stop at a certain percentage loss. This is based on your level of risk tolerance. Those with greater tolerance will set a wider range. You can also use levels of support to set your stop loss. Stocks typically bounce off areas of concentrated support and resistance. When you buy a stock near its support level, the most appropriate stop would be placed below the level of support. By doing this, your stop loss will protect you should the stock fall through that particular support level.
Stop Loss Orders Can Also Limit Profits
Trailing stops will allow you to let your winners run, but if you set them too tight they can stop you out on the first pullback and you will not be in the stock when it runs up again. A stock will often retrace after a major run up, and this is when a lot of people get shaken out before the next big gain. They are not using stop losses correctly, or they are not using them at all, and let their emotions dictate when to sell. Once the retracement is over and the stock begins to move up again, you would move up your stop loss to just below the level of retracement. This allows the stock to retrace slightly. Then move your stop loss up from there. Set your stop loss at intervals as the stock moves up. Once it has cleared resistance, that resistance becomes support. You can use these levels to help position your stop loss.
Too tight of a stop loss order, and you will get taken out early. Too loose of stop loss order, and you risk your profits. Stop losses are very tricky and very hard to use but they can save you from losing a lot of money. However, they can also prevent you from making money if you are too strict with them.
For New Members:
For all the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
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Earnings Calendar
Do not forget to check your short-term holdings and know when those companies are reporting earnings. Holding a stock through earnings is risky and I do not recommend it. You can always buy the stock back after the dust settles.
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