Free Swing Trading and Day Trading Picks & Education

After much delay, lets take a look at the GENZ trade from beginning to the present time.

After much delay, lets take a look at the GENZ trade from beginning to the present time.

GENZ is the symbol for the stock of Genzyme Corporation. These trades are shown as examples of objective analysis and are not always perfect. My job here is to show you how I analyze trades to minimize risk and hit targets. It is not any sort of holy grail and should never be considered as such. :)

GENESIS of the Trade:

These trades are all long (bullish) trade set ups.

On the evening of January 13 (after market close), I did my usual daily scan of 11,000 securities and ETFs to look for key criteria for pattern completions.

The screening criteria I use are these:

1) I scan the entire universe of U.S. equities for stocks with price greater greater than or equal to 10 dollars.

2) I also scan for stocks with volume greater than or equal to 100,000 shares daily on a 50-day simple moving average basis

3) I look for the propietary momentum indicator to cross above its 3 period (in this case 3-day) simple moving average.

4) I also look for the price bar for which the close is greater than the open (meaning that I have bounced off of a resistance level and moved higher on that day.

5) I identify patterns that are consistent with the model that I use. The basic pattern I look for is here. That is not the absolutely perfect pattern, but it is one that the nets can analyze statistically. In another blog sometime this week, I will attempt to explain the difference. For now, let us run with what you have just seen.

What did the GENZ patterns look like? Take a look at these charts:

Daily with Fibonacci patterns

A longer term intermediate long (which ultimately will end in a bearish pattern):

The final chart to note is the combination of the bullish bar and the momentum crossover. If those two conditions do not exist simultaneously, I DO NOT TRADE IT. Why? because my rules of entry and engagement are ALWAYS the same. There must be consistency in the trading approach, or one is taking the bus to Vegas and pulling the arm of the one-armed-bandit. What is important to note in a future discussion of neural net pattern identification is that the nets likely see BOTH of those patterns if it focuses on a 0.618 retracement as a primary factor (which about 70% of the time, it does). If it sees both of them, it gives greater weight to that pattern repitition in its statistical analysis.

When I am done with observing the patterns visually, I rank them by the process below. I take note before ranking them, however, for the number of stocks that show up in a given sector. If I see a given sector show a lot of strength on any given day, the stock with the stronger patterns will have a higher chance of making the final list.

It had just so happened that in the last few days, other biotech drug stocks like GILD, ILMN, ISIS,REGN, ALNY were also hitting the screens. The biotech drug sector had been and was still undergoing accumulation at that time. 

Typically after that screen, I will list the stocks that show a given pattern and then I rank them by value (price/near Free Cash Flow fair price), safety of earnings (somewhat subjective, but ranked in order), and a ratio of change in price to change in price of the Russell 5000 index.

From that each stock that ranks in the top 10 of that list gets a point.

 GENZ was one of the top three in that category. GENZ had a near free cash flow value of  approximately $115 (this value is one I purchase, but it is close to revenues less relevent debt and overhead expenses divided by the shares outstanding). Does that mean that GENZ is guaranteed to run to $115? Are you kidding me? In this market, probably not, BUT, it is a realistic estimate of what could happen if earnings continue along at the given pace used in that model based on estimates of earnings growth.

If a rational money manager is going to attempt to be long something, the manager has to have an objective at which he or she takes a profit. My goal is using these numbers is to find something cheap enough to be comfortable enough holding long over an extended period of days. If I am right and I continue to hold a fractional position, I want to have a decent shot at getting an extraordinary return for my time. If I am a trader, I just want to know that I have a shot at reaching my target, any target, in a reasonable period of time. If I am long, I want to be long and cheap. If I am short, I want to be short and know that the stock will crater like a lead ballon.

QUICK ESTIMATE OF TARGETS AND FINAL TRADE SET UP:

The final set up is shown here for January 14 (entry day)

Note that the first target is the 0.618 retracement of the last down leg (66.11)

The second target is the next resistence level at the swing high after the November low (69.14).

The final target is the 1.27 (roughly 1.272) extension of that last odwn leg at 70.24. If there is real price symmetry from the November low to the December high (as shown by that farthest left up-sloping arrow) and extended target of 74.35 is possible. There is real price resistance very near that extension price (so there is real market evidence that such a target exists, beyond momentum and pattern analysis).

How did we do? Let's take a look. Here is the post mortem chart for January 30, 2009.

As it turns out, we hit all three targets. At the present time, however, it looks like bullish momentum has died and that a double top price pattern has formed. Regardless of that, would it be a bad thing to hold onto a piece of it assuming that you have a break even stop at the opening price on January 14 of 63.62. No, of course not, you have a profit (without removing commissions) of 8.3%. If the stock has a chance of blowing out its extended target objective and you have taken profits at the three target levels, you are basically playing with the house's money with the rest of the position. At that point, your trade plan would determine for you if you would close or maintain the position.

One of the things I learned from a technician I have met and admire tremendously, John Murphy (whose books are listed here) is that technical analysis that is not driven by determining price objectives is pretty useless. You should at least read Technical Analysis of The Financial Markets and own the book if you can. It is a pillar of modern technical analysis.

All of his books, however, are an invaluable resource for technical analysis, geared toward profitable trading. 

CONCLUSION:

What I have shown you today is basic price objective analysis. The screening process I use includes value and sector analysis also. I am trying to find the cheapest stocks in the strongest sectors to be long. If I were shorting, I would be trying to find the most overpriced stocks in the weakest sectors.

If you are not doing price objective analysis, in my opinion, you are going to Vegas. Vegas has been designed and financed to make you LOSE MONEY.

Moral of the story: DON'T GO TO VEGAS! Have a plan in mind when you trade that has a rational entry and rational exit.

Using this example over the next few days I will discuss how to move stops and be prepared should a trade work against the trader.

Happy February, everybody. Here's a simple but important chart from Elliott Wave International (used with permission) indicating the critical support upon which we're resting.

I know a lot of us are awaiting the "five 5 washout." I sure am. This could be a pretty amazing week (or two), since so many important decisions are in front of the government with respect to.....errrrr.....saving the financial system. Hang on tight.

I thought that had a catchy name - ABC on TLT.  What it means is that we’ve had a clean Elliott Retracement phase on the 20-year bond fund TLT after the sharp rise going into 2009.  Let’s see these developments and what it might mean.

TLT Daily Chart:

The TLT Fund broke out of consolidation pattern in November before surging to significant new highs in late December for a variety of reasons.  Interestingly enough, the Stock Market held its own during this time.  The 2008 low was made in November, but the market has ‘recovered’ in a corrective phase as the TLT surged to new highs.  One would have thought this upward surge would have taken place as the stock market collapsed - not as it made an upward swing.

Nevertheless, the daily chart shows a clear 5-wave upward pattern that peaked above $122 per share in late December.  As some readers of this blog pointed out, after such a drastic rise, there’s bound to be a nasty correction which is exactly what we got into 2009.  Price has made a three-wave ABC Correction (zig-zag style) into new 2009 lows of $104.  The correction may or may not be finished at the current time, but it serves as a lesson NOT to panic INTO a position when you feel price has run away from you.

Let’s pull the perspective back to the weekly chart to see just how remarkable the December price surge was.

TLT Weekly:

Price established a steady and comfortable uptrend for all of this chart until the end of 2008 when price covered more ground in one month than it did in five years (a surge from $95 to $122 = $27.  The lows of 2004 were around $65 to the breakout point around $95 which was roughly $30).  You shouldn’t take that lightly.

The correction is proving to be just as steep as the rise.  One may have felt safe jumping into bonds but it’s not always that easy, as evidenced by this chart.

Keep watching the TLT and other bond related funds for additional insights and be aware that the current economic environment is taking many stocks, bonds, and commodities into extremely volatile periods.

Two or three years ago, around half of the $1 trillion spent by Americans each year on food went into the tills of restaurants and fast-food outlets. But the fashion for eating away from home -- a strongly growing feature of the U.S. marketplace for the past 35 years -- has now been thrown into reverse. "What we see now, over the last year and a half, is a very, very significant change in the direction of that trend," Powell said.

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Something seems amiss here....

Friday gave us yet another “Trend Day Down” in the market - making two in a row - but there’s something quite interesting you need to review about Friday’s Trend Day action.

DIA 5-min:

Do you know what it is without looking?

At 1:00pm, all short stops were triggered, knocking trend-day traders out of their positions (unless they used wide stops) before reversing back down through support immediately into new intraday lows, officially confirming (and springing) a Bull Trap.  Let’s take it step-by-step.

The day actually opened on an upside gap, which gave a low probability of a trend day (down) developing.  However, the gap was quickly (instantly) filled and price then broke sharply to new lows with a large red bar.  Price skirted lower and we registered a new momentum low, signaling that we should short the first pullback to the 20 EMA when it came.

It actually didn’t (officially) come at 11:00, as price failed to muster enough strength to test the EMA though a bear blag did develop and price broke down out of the flag to new intraday lows at 11:30.  We should have been suspecting a trend day was developing at this point because of the positioning of the key EMAs.

Price did form a positive momentum divergence, taking us all the way up to the falling 50 EMA and knocking out any stop-losses placed by the sellers - easy come easy go.  If trading were easy, everyone would be doing it!  You were right to take a stop-loss there, but not right to buy (wait for the EMAs to cross ‘bullishly’ before buying).

Price then plunged over the next hour to new lows, leaving bears scratching their heads as to why they were just stopped out and price plunged to a new low.  It’s an example of either choosing to use wider stops, thus opening yourself up to larger losses, or tighter stops which prevents large losses but also decreases your win ratio.  One could have an entire discussion on this topic alone - it’s up to us to make the choice.

After making new lows at 1:30, price retraced into an ABC pattern that resembled a Bull Flag that took price back to the falling 50 EMA, nipping above by a few pennies.  You should have noticed the doji or indecision candle that formed at resistance, along with the long upper shadows and taken that as a clue price might be about to make a new run to the downside and indeed it did.  Price made new lows on the next downswing into 3:30 before reversing in a counter-move back up.

If felt like the bulls were giving it their all throughout the day but they kept falling short.  It also looks like we’re heading down in a fresh downswing on the daily charts (and weekly as well).

Continue to study this day for additional insights so you can recognize the patterns and act on them in real time.

With all the hoopla over a 3.8% drop in Q4 GDP in the United States and a 2.0% decline in industrial production reported two weeks ago, this seems like a good time to remind my largely Amerocentric audience that things are much worse overseas, particularly in Asia.

During the week Japan reported that December industrial production fell 9.6% and South Korea reported a December decline of 18.6%. These are staggering numbers, whether one chooses to compare them to U.S. data or to historical data sets.

In this week’s chart of the week, I have elected to compare Japanese industrial production data from December 2003 to December 2008, partly because I like the look of the Japanese characters and partly because it illustrates just how dramatically Japan’s export economy declined during the last three months of 2008.

Rapidly declining industrial production may well be Asia’s next major export to the U.S.

[source: Ministry of Economy, Trade and Industry - Japan]