QID trade

I added to my QID position on the big spike this morning. I also sold out my WFR position. I buy it again on a more substantial pullback.

Chicago Snow

Ok, its not that bad but its the worst since I've lived here.

My CorVel Corp. (CRVL) call

Before I get started I would like to apologize for the following self-congradulatory post. I don't have a large readership so I have to pat myself on the back every once and a while.

Perhaps some of you remember my conversation with TradingGoddess regarding CRVL after I posted my concern over many of the leaders taking a nose-dive. She wondered what my "crystal ball" had to say about CorVel's future. Here is what I said:

The strength shown by the market last week probably means that you are ok for now, but with CRVL almost 100% above the 200 dma I would probably be one of the profit takers. Also, just before the large decline, CRVL was making new highs on much weaker volume. This is always a big warning sign. The bounce on Friday
was also pretty weak and on much lower volume than the ealier decline. (Jan 15, 2007)

TradingGoddess responded with a chart that showed increasing RSI and MACD, to which I replied:

Using RSI and MACD for market leaders can be very dangerous. They usually work best with stocks that are in consolidation patterns. My sell rules are based on William O'Neil's methods, which work very well with high-flying growth stocks (like CRVL).Look for CRVL to retest the highs and if there is a failure, then get the hell out of there fast. With only a 7.8 million float, it is easy to push around. (Jan 15, 2007)


Here is the chart as of today. I hope she got out when the highs were tested on much lighter volume.

What is interesting is that CRVL came out with earnings today and they doubled their earnings compared to earnings a year ago. This just goes to show that fundamentals mean absolutely nothing with growth stocks. It has been shown time and time again that growth stocks usually top when their fundamentals look the best.

UNC vs Duke

UNC 79 Duke 73

The good guys win!

Update: Here is something you don't see everyday.

My MVP for the game: Tywon Lawson

I've been watching you Ormat (ORA) and Atheros (ATHR)

Here is a stock that I've been watching for a long time. Ormat Tech. is a subsidiary of Ormat Industries, an Israeli company that builds geothermal plants for energy generation. ORA has been in a tight consolidation for almost a year. I've kept an eye on it because I like what the company does and I've also felt that if it could bust out of the flat base that it was in, ORA could really take off.

Well it seems that Bush's budget proposal gave Ormat the kick-start that it needed, promising tons of money for alternative energy. It will have to prove itself to me, but things are looking good. I also expect the budget to have a positive effect on MEMC Electronics (WFR).


Atheros (Athr) has also been on my watch list for a while now too. It has endured a large and long price correction that looks to have ended. Athr broke out of a cup-with-handle pattern today. I won't chase it because I already own a similar company, Silicon Motion (SIMO), that had another huge day today.

MEMC Electronic Materials (WFR) and Silicon Motion Technology (SIMO)

So it is superbowl Sunday and I'm stuck at home writing a research proposal for my boss. Uhg.

As a break, I thought I might write about a couple of buys I made last week. I'm still up on my QID hedge so I feel quite comfortable buying some tech stocks. The first buy was MEMC Electronic Materials (WFR). This is a large-cap company that sells silicon wafers to semiconductor and solar cell companies (silicon wafers are the primary materials in solar cells). I like the chart, breaking out to new highs, but also like the way all of the solar energy companies have been acting. Look at Sunpower Corp. or Suntech Power (STP).

On the fundamental side, check out what Will Gabrielski had to say about WFR last week. I really trust his analysis, mainly because it was Will that opened my eyes to Flotek Industries. He has a tendency to be a little early when it comes to trades, but he is usually right about the overall story.


The second buy I made was Silicon Motion (SIMO), a small-cap semiconductor company that supplies electronics for consumer electronics like mp3 players, cameras, and notebook computers. Simo just broke out of a cup-with-handle chart pattern on massive volume. I love that kind of action.

Counting Bases

I just ripped this off from IBD so I can refer to it later. I am always confused by the base count issue.

As you study the chart (it's best to use a weekly one) isolate all corrections of seven weeks or longer, plus any flat bases of five weeks or more.
How far back do you count?

In most cases, you start counting with the first base once the current bull market started, in March 2003.

Bear markets "reset" the base count on all stocks, wiping the slate clean for new rallies to take root.

Also, don't count bases until the company is producing strong earnings and sales growth, the type that you would demand from your investment candidates.

Baker Hughes, (BHI) for example, didn't become a growth stock until its 87% EPS gain in Q1 of 2004. Thus, its first base was the March-July pattern 1.



Make sure the stock has gone up at least 20% from its last breakout before you count another base. Start from the proper buy point of the last breakout. That's usually 10 cents above a key resistance point, such as the handle in a cup-with-handle base.

Corrections starting before that 20% threshold could simply be normal pullbacks. For example, Baker Hughes climbed 16% from its February 2005 breakout before forming a new correction the next month.

That was a base-on-base pattern — from October '04 to early June '05 2 — that should be considered a single base in your count.

Sometimes, stocks form irregular or improper bases. If they result in a 20% or better advance, include them in your base count.

Bear markets aren't the only way to reset base counts. Another way is when a stock falls so much that it undercuts the prior base.

Baker Hughes' current correction has done that, by sinking below the lows in its February-to-April 2005 consolidation 3.

Sometimes, stocks hit their peak after third-stage bases. That's what may have happened to this oil services provider; the stock is now 21% off its high.

Dead Bear

We have to be getting close to the capitulation of the bears.

Sold Ingles Markets (IMKTA) Today.

I've grown to hate earnings season. Especially when I'm holding a stock that is moving up fast. I feel that IMKTA, which reports tomorrow, will have good earnings but not good enough to warrant the recent climb. I would hate to give back all my gains on a "sell-the-news" reaction.

I'll look to get back in when the 50 day moving average catches up to the price, or vice versa.

UPDATE: Ok, so I missed some big time upside by selling yesterday. The ABC structure will be done at 39 and then IMKTA should pullback to the breakout point. I won't kick myself too much for a profitable trade, but I hate earnings season!

Breaking Trendlines: the SPX and the Nasdaq

I recently finished "The New Market Wizards" by Jack Schwager, published in 1992. During an interview with Victor Sperandeo, Schwager asks about his methods of spotting market tops. Check this out.


JS: ...What are your three-step proccess of chart analysis?

VS: Once the trend line is broken, I then look for an unsuccessful test of the
recent high. This failure may take the form of prices reversing below the
previous high or, in some instances, prices might actually penetrate the
previous high by a modest amount and then break. In the case where prices
penetrate the previous high, a pullback below that high would serve as
confirmation of a failed test of the high. The third and final confirmation of a
trend change would be the downside penetration of the most recent relative low.

JS: In the second criterion you mentioned-the failed test of the
previous high-you indicated that sometimes the rebound will fall short of the
high and sometimes it will penetrate the high before prices break. Is the
pattern more reliable if the previous high is penetrated before prices pull
back?

VS: As a matter of fact, yes. In fact, this one pattern alone can
sometimes catch the virtual exact high or low. Im my view, these types of price
failures are probably the most reliable and important chart patterns.

The reason these types of failures often mark major turning points is
related to the mechanics of the trading floor. Many traders tend to set their
stops at or near the previous high or low. This behavioral pattern holds true
for both major and minor price moves. When there is a heavy concentration of
such stops, you can be reasonably sure that the locals on the floor are aware of
this information. There will be a tendency for the locals to buy as prices
approach a concentration of buy stops above the market. The locals try to
profit by anticipating that the activation of a large pocket of stops will cause
a minor extension of the price move. They will then use such a price
extension as an opportunity to liquidate their positions for a quick
profit. Thus, it's in the interest of the locals to try to trigger heavy
concentrations of stop orders

Look at today's SPX and Nasdaq charts. Do they remind you of anything?

Whipsaw

This whipsaw action is crazy! I'm glad I didn't panic and sell my QID position.

Looks like I missed some upside action with AB, but not much. They blew away numbers and were rewarded with a measly 1.5% gain. It seems, as suspected, the good news was already priced into the stock. I'll be looking to get back in on a pullback.

Bulls on parade

Ok, so the market took back half of my QID gains today. That happens. I just wish it would make up its mind and pick a direction.

I got back into IMKTA today. The low volume pullback of the last few days just looked too good. I also missed getting into Agnico Eagle Mines (AEM) by 2 cents on the morning pullback in gold stocks. Damn limit orders!!!

Why I sold AllianceBernstein (AB)

Besides the fact that the market is turning sour, I sold AB because of several factors.

First, AB has been getting more press lately. This used to be a quiet little stock that nobody paid attention too. Now I keep reading about how this is a great place to put your money if you want to play the world markets. With higher visibility comes higher expectations and the way the market has been selling the news I didn't want to be on board during earnings (Jan 24). Last quarter AB reported blah numbers and the stock didn't budge. Since then, the stock has really ramped up and is now poised for a pullback.

Also, the chart shows some signs of churning. This is when an above average amount of volume is accompanied by little or no price movement. This shows that the institutions are exiting.

The bottom line is that I rode AB up for a 23% gain. Might as well get out while the gettin's good.

The Spectacular Collapse of Amrep (AXR)

I wrote about AXR, #1 on the IBD 100 list, a short time ago and compared it to Empire Resources (ERS), a former #1 on the list. I predicted a collapse and that is exactly what we got today, with Amrep dropping by 22%.

The volume on the Nasdaq was lower than on Friday so we didn't pick up another distribution day. Nevertheless, the price destruction of AXR was the final piece of my market top puzzle, with US Global Investors (GROW) having already tanked. I therefore sold out another long position, AllianceBernstein (AB), with a nice 23% gain. (I got out of my IMKTA and HRZ position last Friday.)

So what do I have left? I'm still holding those QID shares I bought at last Thursday's open and a small core position in FTK. This makes 90% short right now. I plan on adding to that QID position after the first short covering rally.

I'm also thinking about shorting AMK at the first short covering rally, which should be huge since the short interest increased this last month to 84%.

Damn, this stock market stuff is sure fascinating!

Tom O'Brien Interviews

I like to listen to Tom O'Brien (www.tfnn.com). His market calls have been right on for as long as I've been listening. One of the best things about him is the respect he gives each one of his callers, no matter how crazy they might be.

His trading style is difficult and complicated and I'm not sure his system is as teachable as he might think. Nevertheless, he is out there putting his neck on the line each and everyday and is really trying to stop people from making mistakes.

Some people are beyond hope, however. Just listen to these two clips. They are amazing.

One guy has all of his money (multiple six-figures) in only one stock. Guess what this stock is? Motorola! What a nut.

The other guy is asking advice for an entry point into an ETF he know absolutely nothing about. Someone needs to tell this guy to just put his money into a mutual fund. You know the call is going to be bad when the caller asks about the "exchrange traded fund".

You can listen to Tom O'Brien every weekday from 10-11 am and 4-6 pm (eastern time). The Tom O'Brien Show

Tread lightly!

Many of the leaders took a big hit today. My bellwether stock has been US Global Investors (GROW) and that thing has officially tanked. Now if that AXR can follow suit. It will be difficult considering that 81% of the float is shorted.

We have 3 distribution days in the last 4 weeks. One more day of heavy selling and its time to go completely into cash. My long positions all acted well today, but I'm thinking about cutting them loose if we get another ugly day. It is time to be very, very careful.

It looks like that QID buy was a good one.

QIDing it again

There were some poor outlooks from Apple and LRCX last night so I bought some shares of the QID again. It got in at $50.80.

Also, it looks like the Nasdaq is headed for another ditribution day. Look out below!!!

Another buy in front of the impending pullback

I keep waiting for it and just never comes. That pullback came a little closer today when the Nasdaq chalked up another distribution day. We also saw some weakness in the leaders again, especially US Global Investors (GROW), which sliced through its 50 dma.

Well in the face of this impending doom I purchased some shares of Horizon Lines, Inc (HRZ). This is a shipping company that should be helped by the drop in fuel prices. What I especially like is the low volume pullback after its fantastic run last year. This will be kept on a short leash.

The Novice Bear Tracks Distribution Days

With the market off today I think it is time to add something new to the blog. The market is firing on all cylinders right now and we should be thinking about "tops". Is it possible to time the market? William O'Neil thinks so. All you have to do is look for distribution days. If you get 4 or 5 in the matter of four weeks then a correction/bear market is just around the corner. So what is a distribution day?

According to IBD :

A distribution day occurs when one or more of the major indexes (the
Nasdaq, S&P 500 or Dow industrials) falls more than 0.2% in higher volume
than the previous trading day. When volume spikes sharply higher but the market
fails to make any price progress, that's churning, another sign of distribution.

The chart shown above gives this last market correction as an example. If you read O'Neil's books you will see how this method worked time and time again. I will be keeping track of distribution days on this blog from now on. Just check out the links on the right.

Caveat: I may differ from IBD's distribution count from time to time so please understand that I'm doing my own analysis and not just taking the count from "The Big Picture" column.

Bearish but still long. IMKTA, AB, FTK

I learned my lesson some time ago when I sold out a position for no good reason only to watch it rise 20% in a matter of weeks.


Sure, I've been bearish about the market but that hasn't stopped me from holding my long positions. In fact, I even started a new long position at the height of my conviction that the market would turn lower. I found that buying one of these ultrashort ETFs was the key to my mental well being. For instance, I purchased some shares of the QID and put in a very tight stop. If the market went up I would be stopped out, but still have my long positions. If the market went down I would make 2% for every 1% the QQQQs went down. That gave me some peace of mind and a feeling that I would have time to exit my long trades.

As of now I don't have any QID shares and I'm currently enjoying the rise of my recent long position. Check out IMKTA.




I'm sure a pullback is in the cards but IMKTA has moved up almost 10% since I bought the flat base breakout.








AllianceBernstein is a model of strength. This one has been easy to stay long.














Like I posted earlier, the massive decline in crude prices has hurt everything connected to oil. I have been looking for an oil pullback and was ready to cut my FTK shares down on such a price break. Considering the beating that many of the other oil stocks have taken, FTK has held up pretty well. However, I think the bad weather in the Rockies will hurt Flotek's 4th quarter and expect them to report an EPS towards the lower end of their estimates. Who cares, the shares I still own are all profit. When oil turns around I'll add some more. Here is the chart. Notice the the recent distribution days and wild price swings (today especially). I'm looking for it to get down to the 21.50 area.

Creepy charts. Amrep Corp (AXR) and Empire Resources (ERS)

Every once and a while I see a chart and I say to myself, "wow I've seen this before". Check this one out. It goes follows nicely with my preoccupation with market leaders right now.

Amrep Corp (AXR) is currently sitting at the number 1 spot on the IBD 100 and has made a huge run in the last few months. (No one should be touching this stock right now. It only has a 1.6 million share float and has 81% of that float shorted. Crazy.) Now check out Empire Resources (ERS). This was at the IBD 100 number 1 spot just before the May top of this last year. The similarities to the AXR chart are uncanny. Its downright creepy.

Now look what happened to ERS. What goes up must come down. I have no doubt that the same thing will happen to AXR. The important thing to remember is that the market tanked a few days after ERS did. I don't know if the same thing will happen with the market today but I'll be ready for it when AXR crashes.

Leaders Tank! (GROW, ROS, VTS, IAAC, CRVL, GEF)

Last month I was getting antsy about shorting this market. As a result I nibbled a little at the QID and was stopped out rather quickly. What I quickly realized was that I was forgetting one important fact about market tops, namely, the leaders must tank before the rest of the market follows suit. I pointed out US Global Investors (GROW) as one of the leaders to watch.

Check out the first chart I have on the left. GROW has tanked and tanked hard! As I said yesterday, I tried to short it yesterday but couldn't get my hands on any shares to borrow. It looked like a fortuitous event when GROW shot up 5% this morning. But that quickly changed when a midday reversal took place.

Check out some more of the leaders.

I have a particular fascination with climax tops. ROS is a classic example.













Here are some more leaders that have come off of their highs with volume.

Buys, Sells, and Naked Shorts!!!

The excitement continues today. I put in another buy order for the QID again and this time my order was filled. It was pretty scary watching it sink another 2% after I bought it. The good news is that the Nasdaq closed under yesterday's highs, which suggests that we will probably head down again tomorrow. We shall see.

I took my principle off the table for Flotek Industries. I'm going to let the profit ride. There is strong support at around 22.5 and it will be interesting to see how it reacts when it reaches this level. The bottom line is that these last couple of days have been the first days of strong distribution since FTK took off in October. I'm going to be very cautious right now.

I found a very interesting stock today that I think I'll buy tomorrow. Ingles Markets, Inc (IMKTA) is a supermarket chain in the southeast. It popped up on my CANSLIM screen recently. Today, she broke out of a flat base on the second day of big volume. Very nice strength considering the volatility we've seen.

Finally, I tried to short US Global Investors (GROW) today but couldn't because there were no shares available to borrow. Too bad because it dropped a whopping 13% today. Bummer. I did short Ford (F) today as it bounced off of confluence again.

Oil spill

Holly cow! There was some crazy action out there today. I must admit that the wild ride definitely distracted me from my day job.

Anything remotely connected to oil and natural gas got absolutely smashed today. I cut my Flotek position in half and will wait and see about the rest. While the volume in FTK today was well above average it didn't come close to the high volume panic selling I witnessed in some other small cap oil service stocks (see ALY and BTJ, which found some support at their 50 dma).

To make matters worse, I put in a limit buy order of 52.32 for the QID when the market gaped up this morning. I missed that huge reversal today by 0.15. Jeez! Oh well, judging by the drops some of the market leaders had today I think there will be some more opportunities.

At least I still have good old AllianceBernstein.

The suspense is killing me!!!

Ok, I'm officially nervous about tomorrows opening. The suspense is killing me!!!

I'm hoping for a big time downturn. Last summer was a great learning experience and I would love to apply the lessons I've learned since then. I only wish there wasn't such large short interest set against the market. It is the only thing holding me back from getting short myself. Oh well, I guess it just means that any large downturn will be followed by a massive short covering rally, which will be an excellent short entry point.

Confluence- Ford Motor Co. (F)

I've been listening to Tom O'Brien for several months now and have learned quite a bit. He uses, among other things, the idea of confluence throughout his technical analysis of charts. He defines it as "the price range sandwiched between the 0.382 retracement level of a trend and the 0.618 retracement of a related subtrend; confluence reveals powerful support and resistance level."

The method is used to find entry points and help establish stop loss levels. I'll use an example of a stock that I have wanted to short for a long time but didn't have the right entry point. Ford Motor Co. (F) is dying and I would like to make some cash on that fact.

First, I need to set up the trend and subtrends. I chose to look at the long term downtrend of Ford. The analysis of the weekly chart revealed confluence to be at 7.88 and 7.66. (A1 = 10.87, A2 = 8.67, and Focus = 6.02) As it can be seen, the price already broke through confluence on high volume. However, three week ago, Ford took a nose-dive on huge volume and began an ABC down pattern.

Now, lets examine the shorter term chart. Ford established a new uptrend with a powerful ABC up that busted right through the downtrend confluence points. Ford then fell off the highs on big volume and then made another leg up to finalize a double-top pattern. Now Ford is in the midst of an ABC down, coming off the second high of the double-top on massive volume. This time, slicing right through the newly established uptrend confluence points (green lines). I expect that Ford will rise up to the C point in the ABC down and then continue down. The C point will most likely be between the long term down trend confluence points of 7.88 and 7.66 (red lines).

Vacation time

Time for a break. I gave back most of the gains I made with the MIND trade by going short too early (again). Will I ever learn? I must be patient!!! In the meantime, I will continue to watch for a break down in our leaders and keep my eyes open for short setups.

Now I'm off to the OC. It will be nice to see the family but Orange County, CA can be hard to take sometimes. Thank God Becky is going to help me through the madness.

Flotek Industries

After a little consolidation, Flotek resumed its upward march the last couple of days. Today was a technical breakout from a cup with handle base. The 50% correction of the last few months was pretty severe, usually a good base should only correct by 30-35%, but all signs point to higher levels.

• The 50 dma crossed the 200 dma.
• IBD ranks FTK in the top 5 of the Oil&Machinery/Equip Group.
• Someone said that it is VectorVest's #1 stock pick. (who cares)
• A+ Accumulation rating
• 96 Relative strength
• This all adds up to more exposure and higher prices.
  

What more can I say about FTK that I haven't said before. This was a no brainer down at the $15 and $18 levels.

I couldn't pass up the sell

Back on Nov 29th I picked up some shares of Mitcham Industries (Mind) for $12.01. I did this as the stock pulled back after a modest breakout. Earnings came out today and the stock was up to $15.50 in pre-market trading. The only problem was, this huge jump came with only 5,000 shares of volume. I know pre-market is not very liquid, but only 5000? A quick check of the earnings report showed that earnings were good but certainly not great. I sold right when the market opened.

It turned out to be a pretty good move. Check out the chart.

Identify the leaders (because they lead us down)

Today was the first day in a long time when the Nasdaq and S&P ended the day at the lows. It made me think back to earlier in this rally when my mom called just after the Dow hit new all-time highs and expressed some worry about my investments. The market was strong and seemed to end strong on just about every day. I told her that she should only start to worry when the market stopped acting this way and began to close sharply down.

The top is near! We picked up another distribution day today (3 on the nasdaq) and if we pick up another two in the next couple of weeks we will finally have that correction that I've been waiting for. I'm the novice bear, after all.

My game plan. First identify the leaders of this rally. Short the hell out of them when they break their 50 dma. Look for short-covering rallies and add to the short position.


Current Leader

US Global Investors (GROW) is one that is extended so far past its 50 dma that by the time it crosses the 50 dma it might be too late. GROW has a pretty big intraday reversal today and will stay on my radar screen. The big reversay might have been due to an Investors.com piece on the dangers of buying a stock that is technically extended.

Bottom line is that I'm not going to jump in too early. I'm just going to be ready to jump in with both feet.

Volume dries up in the QQQQ and the DIA

The price and volume in the DIA and QQQQ diverged quite a bit today. This is the first time that I have seen such a large drop off in volume while getting such a large move in price. (Remember, I'm relatively new to the markets.) The volume in the Nasdaq composite and NYSE were not quite as weak, which begs the questions: Who was it that decided that they

didn't want to participate in today's rally? Who are the stock operators that usually trade the q's, the SPY and the DIA? Are they the smart money? Do they know something? Is this just a blip on the radar or a harbinger of things to come? We shall see.

ProShares Ultra Short (QID)

If you didn't know, there are ways to short the overall market without actually shorting the SPY, DIA, or QQQQ. All one has to do is buy the Proshares Ultra Short ETFs.


QID = Nasdaq
SDS = S&P 500
DXD = The Dow

The advantage (or risk) is that the ETFs will move twice as much and in the opposite direction of market it follows. The nasdaq goes down 1% and the QID goes up 2%. I bought some of QID shares on Friday.

Window dressing

Through listening to Tom O'Brien I have come to learn about "window dressing". This is the time when money managers pump up winning stocks in order to make their performance look better, although somewhat artificially. If I'm not mistaken, this usually happens at the end of the month.

I just read a fascinating article by the guys at TradingMarkets.com. They did some back testing regarding the end of the month rallies and came to some very interesting conclusions.