Wishing Wealth Blog

Jim Cramer on stop loss orders–terribly wrong again! KCI soars; How I trade the 3X ETF’s

2010-03-15T02:18:50Z

I am dumbfounded! I recently taped some of Cramer’s shows and reviewed Friday’s show this weekend. At about 10 minutes into his show, Cramer responded to a caller who asked him about the use of stop loss orders. Cramer ranted on about how he did not want his “home gamers” to put their orders on “automatic.” Stop losses, he said, were okay for professional traders but not for his listeners who are part-time traders not glued to the market, and who are not robots. I had to listen to him several times to make sure I heard what he was saying, because his advice was exactly opposite to what I think people should do. His reason for not using stop losses was that one might get whipsawed–buy a stock at 60, put in a stop loss order to sell if it falls to 59 and then have the stock fall to 58 and be sold out, only to reverse and close back above 60. But it is precisely the part-time traders who are not watching the market every minute who need to have automatic stop-loss orders. Traders who are glued to their monitors can watch their stock closely and manually sell when they want to. It is the part-time trader who get his head handed to him when his stock plummets while he is at work or in a meeting. In 2005, I lost a lot of $$$ profits when I went to a business meeting thinking I did not have to put a stop in on a very strong stock (TASR) I was holding. That mistake cost me big–the market always exacts its tuition, and we must learn from our mistakes.

I could not disagree more with Cramer’s advice. Before I buy a stock, I calmly decide how much I will let it fall before I think I am wrong and how much of a loss I will tolerate. In this way, this “home gamer” who has a full time job, does not have to be glued to the monitor like a professional trader and can go about my business knowing that if my stock falls to my sell level I am immediately and automatically sold out. Once I have my stop loss order in place, I have taken my emotion out of the trade. If the stock falls and I have taken a small loss, I can always go back in and buy it back if it shows renewed strength–now that’s smart trading! Every small loss bring me to my next big gain. It was the use of stop losses that helped the great Nicolas Darvas (see his book below) to make a fortune in the market in just 18 months. It is how one keeps his losses small.

Put this advice along side a lot of other bad Cramer advice, including calling chartists morons and recommending stocks based on fundamentals alone that were later devastated by the 2008 market decline. (I think Cramer started showing charts for a while after he found that a lot of his fundamental/value choices tanked).

So, how do I put in a stop order? Before I buy a stock I determine at what level I will have been wrong. Since I am buying the stock at what I believe is the right time and assuming that it is in an up-trend, I should not tolerate much of a decline below my purchase price. The best way to enter a trade is to assume it will go wrong, so that I can calmly prepare my risk control strategy in advance. I select a price level based on prior support, at a moving average or a recent reaction low. As soon as my buy order is executed, I place an order to sell my newly purchased shares on stop at my predetermined loss price. I typically place a GTC (good til canceled order) so that I do not have to put a new stop order in every day. A day order expires at the close each day. Now, once the stock trades at the stop price level I put in, the broker automatically sends the order in to sell my shares at the market. I may or may not sell the stock at the stop order price. The order goes in line behind other market orders and gets executed in turn at the best price offered. The greatest risk from using a stop loss order is that if the stock suddenly trades far below the stop price (as in a gap down at the open the next day) one gets only the best price that someone is willing to pay. A good strategy is to cancel the stop order after the stock has advanced enough and to put a new sell stop order in at a higher exit price to ensure I do not give back all of my profit. I do not use automatic trailing stop orders because I prefer to raise the stop price manually after carefully reviewing the stock’s technicals. If I am stopped out and the stock rises again I love to buy it back at a higher price than I sold it. Such trades often are quite profitable because during the whipsaw, as the shares decline, they are bought by others who then hold on for a larger advance. Many large advances begin after a sudden decline…….

Meanwhile, the GMI and GMI-R remain at their maximum levels. As the table below shows,

the QQQQ completed the 16th day of it short term up-trend on Friday. Both the QQQQ and SPY index ETF’s closed above their 10 week averages for the second straight week, a sign of strength. The only caution signs I see right now are the fact that 91% of the Nasdaq 100 stocks closed with their MACD above its signal line and the Worden T2108 indicator is now at 84%, not far from the highest levels it gets to. So, in order not to lose my profits gained in this up-trend, I am moving my sell stops up a little. Remember, in ancient Rome, the lions ate up all of the prophets!

Did you notice what happened to KCI last week? On March 1, I wrote that KCI looked like a bullish cup-with-handle pattern. It’s up about 17% since then.

A reader asked me if it was dangerous trading the 3x ultra ETF’s, like TYH. Yes it is, but only if I have too large a position and do not have a suitable stop in. Since these ETF’s are designed to move 3x the daily move of the stocks they track, I always tiptoe into my position by buying in small amounts and averaging up. So, I might start with buying a few shares and only add more after the ETF has moved up. I try to enter at the beginning of an up-trend, when no few typically expect the market to begin a sustained rise. It is at such times that I am most scared to go long. If I had the discipline to just buy the TYH when my QQQQ short-term indicator turns positive, I would do quite well. For example, the current QQQQ up-trend began on 2/25 and QQQQ has risen by 6.2%, while TYH (the ultra 3x bullish tech ETF) has risen 15.5%. Yes, TYH moves quickly, but I believe the actions I noted above bring the risks down to an acceptable level for me.

gmi: 6
gmi-r: 10
t2108: 84

Growth stocks continue to rally; The Ultra long ETF’s, QLD and TYH beat most tech stocks again

2010-03-11T03:09:55Z

With the GMI and GMI-R at their maximum levels, growth stocks continue to rise. AAPL continues to rise, along with PCLN, RMD, GMCR, NFLX and CREE, all of which I own. As you know, I concentrate my trading in stocks at or near their all-time highs. I also like to see good earnings trends. Some of these stocks had recent quarterly earnings increases of 100% or more. The current short term up-trend in the QQQQ has now reached 14 days. During that time, the QQQQ has increased +5.2%, QLD by 10.6% and TYH by 11.1%. In the same period, only 15% of the Nasdaq 100 stocks (and 14% of the S&P 500 stocks) rose 10% or more. Again, we find that in an up-trend, one can beat most Nasdaq 100 stocks (and S&P 500 stocks) by simply buying the ultra long tech ETF’s, QLD and TYH.

gmi: 6
gmi-r: 10
t2108: 84

AAPL breaks out–T2108 near peak? Tech up-trend looks strong.

2010-03-08T03:53:32Z

The market closed strong on Friday, as AAPL broke out to a new high. Technology is where the action is right now. However, one caution flag is that the T2108 is now at 81%, very near to being in overbought territory. Last May, the T2108 reached a peak at 92%. Meanwhile, the GMI

remains at the maximum of 6 and the GMI-R, at 10. The QQQQ and SPY have now closed back above their 10 week averages, a critical sign of strength. There were 527 new highs in my universe of 4,000 stocks on Friday, the largest number since January 11. 89% of the NASDAQ 100 stocks closed with their MACD above their signal lines. This looks like a good time to ride the new short term up-trend in tech stocks, which completed its 11th day on Friday.

gmi: 6
gmi-r: 10
t2108: 81

KCI–A cup-with-handle break-out?

2010-03-01T00:05:08Z

The short term up-trend in the QQQQ finished its 6th day on Friday. I like the fact that AAPL is holding up. We need to watch the leaders for signs of where the market is headed. I went through the new highs on Friday using the methodology I described last week. In doing so, I found a stock that appears top have broken out from a cup-with handle pattern. So, I am showing it below to provide my class with an example of this important bullish pattern, described by William O’Neil in his book (listed to the lower right).

This bullish pattern is really a base formed after a large up-trend. The stock reaches a high, retraces some of its rise and forms a somewhat rounded cup. Then the stock rises back up but usually stops below the prior peak. Once it stops rising, it falls back a little on lower volume. Then it breaks through the price where it most recently stopped on higher volume than normal. KCI had a big down volume spike (red vertical line) in its handle which makes this formation a little suspect. But on Friday, KCI did break through the top of its handle (pivot price) on volume above its 50 day average of volume. According to O’Neil’s strategy, if one bought this break-out, one should cut a loss if its falls about 8% below the pivot price. For me, I would place a stop below Friday’s low price, where it also found support at its 30 day average. It will be interesting to observe whether KCI holds this break-out. KCI is far below its all-time high, so it is not the type of rocket that I typically purchase. The best way to find cup-with-handle formations is to scan a lot of charts over the weekend…..

The GMI remains at 6 and the GMI-R at 9. While my GMI indicators are strong, the trend of the QQQQ is erratic and not well defined. And the QQQQ and SPY are still below their 10 week averages. The Worden T2108 indicator is in neutral range, still at 53%. 84% of the Nasdaq 100 stocks closed with their MACD above its signal line, a sign that the stock is gaining strength. I am looking for stocks to buy but I am wading in very slowly.

Short term QQQQ up-trend in question

2010-02-25T05:18:54Z

The QQQQ is going back and forth over its key 30 day moving average. Time will tell whether this new short term up-trend, now in its 4th day, will hold.

gmi-r: 9
t2108: 51
gmi: 6

How to use IBD 100 and New America stocks and TC2007 to find potential rocket stocks; Market rally begins

2010-02-22T02:16:25Z

I am writing this post primarily to teach my students how I search for potential rocket stocks–stocks that have been launched and appear headed towards new peaks. As I said in class this week, it makes the most sense to buy stocks that have the best fundamentals and technicals. This strategy has been advocated both by Nicolas Darvas and William O’Neil in their extraordinary books (listed at lower right of this blog). Darvas, made a fortune trading in growth stocks in the late 19050’s and said that he liked to buy stocks that were trading at all-time highs and that had already doubled in the past year. So, I am going to show you how I use the great TC2007 stock charting and analysis program to find potential rocket stocks that I research further before buying.

First of all, I am interested in buying stocks again, now that the GMI has risen to 6. Remember, I want to trade consistent with the general market trend-I must not fight the tide. I only have an edge buying stocks when the market is in an up-trend, as shown by the GMI being at least 3. Both Darvas and O’Neil stressed the importance of trading consistent with the market’s trend–70-80% of stocks follow the general market’s direction. Both tend to sit out the market in cash when the market’s trend is down. One of the hardest things to do is to stay away from the market (at least from the long side) when the trend is down.

So, with the trend now up, I used TC2007 to sort my watch list (called stock universe) of 4,000 actively traded stocks above $5, by whether the stock traded at a new 52 week high on Friday. I found that there were 222 new highs in my stock universe on Friday. Next, I needed to find how many of these stocks were trading at or near their their all-time highs, defined as the highest price they have traded at in the past 10 years. To do this, I set my chart to show monthly prices and space barred through each stock. For each stock that was trading at or within a few $$ of the highest price it had traded at during the past 10 years, I flagged the stock by pressing the “F” key . I then created a new watch list and copied the 32 flagged symbols into it. I next unflagged the stocks in this new watch list and selected my watch list tab that includes selected fundamental and technical information, including quarterly and yearly earnings changes, PE, last closing price divided by close a year ago, % change in revenue last quarter, and P/S (price to sales) ratio (see table below).

As I looked at this information for the 32 stocks, I found the following. A little more than one half (56%) of these stocks had an earnings change during the most recent quarter of +35% or more, with 22% having had at least triple digit earnings increases. In addition, 38% had losses the prior quarter or blank fields because they had no prior earnings with which to make a comparison. The PE ratios ran from 0 (no earnings) to 128, with 53% having a PE above 20. One half of these 32 stocks were trading at twice the price they were trading a year ago. 38% had revenue (sales) increases the last quarter of at least 12%. P/S (price to sales ratio) varied from 0 to 40 with half being less than 2.

I next decided to re-flag (press “F” key) each stock that had a most recent quarterly earnings increase of at least 30% OR revenue growth of at least 12%. I then copied the flagged symbols into a new watch list which became my final watch list of stocks at all-time highs with good recent quarterly earnings or revenue increases. The final watch list of 22 stocks appears in the table below, with stocks sorted by their most recent quarter’s % change in earnings. I then unflagged the symbols in this final watchlist (right click in the box to the left of a symbol and choose unflag all symbols in watch list) , and went to another watch list I maintain that contains many of the stocks that have appeared in the IBD 100 lists or the IBD New America column during the past year, and flagged all of the symbols in that watchlist. A list of the New America stocks over the past few months typically is published in the New America section of IBD each Friday and the list of the IBD 100 stocks is updated each weekend and is available in their website (investors.com). Thus, when I returned to my new all-time high watch list, I knew that any flagged symbol was a stock that had been an IBD 100 or New America stock, indicating that the IBD analysts thought it was a strong or promising company. Interestingly, more than two thirds (15/22, 68%–CREE was added to my IBD 100 list today, after I produced this table.) of the stocks that met my stringent criteria had been independently selected as an IBD 100 or New America stock! (This is why I can often begin my search for great stocks by going to my lists of the IBD 100 and New America stocks.)

Taking a look at the surviving 22 stocks in this table (click on table to enlarge) I can make some additional observations about these stocks. For all of the stocks with earnings increases of at least +35.7% (column 2) but one (ISRG), their PE (column 5) is less than their earnings % increase for the most recent quarter. This means that their PEG (PE to growth ratio) was less than 1, suggesting that the stock may be in a favorable price range to people who use this statistic as an indication of a stock’s value. For example, CREE had a recent quarterly earnings increase of +166% and a PE of 86, giving a PEG of .52 (86/166). The PE is high, but the earnings growth is even higher. Even ISRG has a PEG close to 1 (56/53). (The table is sorted by column 2, most recent quarter’s earnings change.) Note also that P/S (column 8, the price to sales ratio, analogous to the PE, but using sales instead of earnings) for half of these stocks is less than 2, another indicator of value, to some. Some technicians believe that sales are a better measure of a company’s performance than earnings, which can be more erratic. Where there is no value in the table, it means that there were no earnings with which to make a comparison. Note that there are a few companies that have relatively high earnings and revenue increases (ALXN, BIDU, CREE, ISRG, NFLX). These stocks might be especially good candidates for additional analysis. (Column 7 shows % change in revenue in the most recent quarter. ) Other characteristics that I would look at next is trends in the volume of shares traded, recent news, next earnings dates, and the types of fundamental and technical information provided in the IBD Stock Checkup screen.

While it took some time to write (and read) these instructions, be assured that once you get the feel for TC2007 you will find that you can do this analysis in a few minutes each night…….

Now, the GMI and GMI-R are back to their maximum levels. My short term trend count for the QQQ is now U-1, the first day of the new short term up-trend. How long will it last? Nobody knows! So I buy and always keep an eye on the exits. The QQQQ and SPY have now closed above their 10 week averages and 88% of the Nasdaq 100 stocks now have their MACD above their signal line. The Worden T2108 indicator is in a neutral zone, at 53%. I own and am watching many of the stocks posted on the right of this blog, in the Stocks I’m Watching column. I wade in slowly to my positions. One rule I like, is to enter every trade as if it might fail so that I have an exit plan ready and am not unprepared if the stock goes against me. The key to profitable trading is to have many small losses and a few large gains.

gmi: 6
gmi-r: 10
t2108: 53

Short term down-trend ending?

2010-02-18T03:07:17Z

A rise in the QQQQ on Thursday and Friday will likely turn my trend indicator up. Wednesday was the 18th day of the short term down-trend. However, there were 167 new highs in my universe of 4,000 stocks on Wednesday, the most since January 21. And 53% of the Nasdaq 100 stocks closed above their 30 day averages. With the indexes up against their key moving averages, it remains to be seen whether they will break through this week. With many growth stocks getting stronger, I suspect this market is going higher. The key is to not jump the gun, however, but to wait for confirmation.

gmi: 2
gmi-r: 5
t2108: 46

Federal Reserve raising short term interest rates? Stocks ready to rally?

2010-02-14T21:18:18Z

While the short term down-trend is still in place, a lot of stocks I watch are gaining strength. And surprisingly, short term rates are starting to rise, perhaps in anticipation of a recovery in the economy. First, note that the GMI-R, which is more sensitive to short term changes, has risen from 1 to 5 (of 10), while the GMI is now back to 2. As the table below shows,we have just completed the 16th day of the short term down-trend. But note there were 83 new highs in my universe of 4,000 stocks last Friday, up from 18 the prior Friday and the most of any day last week. The Worden T2108 indicator is now at 31%, out of oversold territory, and 48% of the Nasdaq 100 stocks have their MACD above their signal line, twice as many as the prior Friday. A lot of growth stocks are starting to rebound, so I am ready to go long if the indexes can rise through their critical moving averages.

The Fed may be letting short term interest rates rise, possibly in reaction to a stronger economy. The Guppy daily chart (GMMA) below shows that the short term moving averages (black) of the interest rate indicator are now above the longer term averages. The GMMA chart of the dollar (not shown) provides a similar, even stronger up-trend.

gmi: 2
gmi-r: 5
t2108: 31

IBD 100 TOP TEN STOCKS GET TROUNCED IN MARKET DECLINE!

2010-02-10T19:25:00Z

Last October, I wrote a post showing that in the market’s rise, 70% of the top 10 stocks in the IBD 100 list outperformed comparable stock indexes. Well, I repeated the analysis for the top ten stocks in the IBD 100 list published on 01/11/2010. I compared the closing price of each stock on the Friday before Monday’s list was published to the closing price yesterday, on 02/09/2010. I am a big fan in buying IBD 100 stocks in a market up-trend, but was still very surprised by these dramatic results.

(Click on table to enlarge.) During the time when the index ETF’s SPY, DIA and QQQQ all declined from -6.4%, -5.2% and -7.4%, respectively, 90% of the IBD100 top ten stocks declined from -13.6% to -43.3%. During this same time period,the Ultra 3X bullish technology ETF declined only -24.2%. In fact, while 58% of the NASDAQ 100 stocks declined -6.4% or more, only 4% of them declined -20% or more, compared with 60% of the IBD 100 top ten stocks! Clearly, the IBD 100 top ten stocks were trounced during the recent market decline.

I really should not be surprised by these results. The IBD 100 top ten stocks are among those growth stocks that have advanced the most in the up market. Therefore, when the market turned down, it makes sense that these stocks would decline the most, as many traders take profits. The key message of this analysis is that while the IBD 100 stocks might be great stocks to ride on the way up, I must exit them quickly when the market trend turns down. Hence the critical importance of the “M” in CAN SLIM.

gmi: 1
gmi-r: 2
t2108: 26

More new lows than highs; T2108 and stochastic in oversold territory

2010-02-08T16:29:23Z

For the first time since early November, there were more new lows than new highs in my universe of 4,000 stocks on Friday. Furthermore, the Worden T2108 indicator is getting near the level (below 20%) where declines sometimes end. Friday was the 11th day of the current QQQQ short term down-trend. We are either at the beginning of a major decline, or near the end of a short term correction. The best course for me is to wait for the market to tip its hand. The GMI remains at

1 (of 6) and the GMI-R is now also at 1 (of 10). T2108 is now at 24%. The only promising action on Friday was that the volume on major market index ETF’s was very high as they rebounded at the end of the day. They need to hold Friday’s lows to suggest the possibility of a sustained up-trend.

I have been focusing of late on the stochastic statistic as an indication of whether a stock or index is in oversold territory. The stochastic for x period, measures where the current price is compared with the range over period x. A stochastic of 10 measures the close versus its high and low over the prior 10 periods. A stochastic reading of 100 means that the current price is at the high price over that period. A reading of zero, means that the current price is at the bottom of the 10 period range. Typically, a reading below 20 means an oversold condition. I look at a daily stochastic 10,4,4. This measures a 10 day period, with one plotted line (red) representing the 4 day moving average of the stochastic, and a second plotted line (blue) representing a 4 day moving average of the first line. Below is the 10,4,4, daily stochastic of the QQQQ. Note that the stochastic is rebounding from way below 20 and that prior bounces have occurred at this level. We are either going to have a bounce or a prolonged down-turn.

gmi: 1
gmi-r: 1
t2108: 24