Custom Search

REFINING BUYING PROCESS

Resistance

Always check where and how much overhead resistance there is on any stock, first on 2-4 years, then on 10 years chart.

Volume

Never trust a breakout that isn’t accompanied by a significant increase in volume. Either:

a.     a one-week volume spike that is at least twice the average volume of the past few weeks, or

b.   a volume build-up over the past 3-4 weeks that is at least twice the average volume of the past several weeks, coupled with at least some increase in the breakout week

Relative strength

Measure of how strong a stock is in relation to the overall market. Never buy a stock if its relative strength is in poor shape.

Buying checklist

Check overall direction of market Scan the industry groups that look best technically List stocks in favourable groups that have bullish patterns but are in trading range. Write down price they need to break out. Narrow down the list discarding ones with overhead resistance nearby. Narrow list further by checking relative strength Set what stop loss level should be – discard unacceptable ones Put in buy-stop orders for half of position on stocks that meet buying criteria If volume is favourable on breakout and contracts on decline, but other half position on a pullback near the initial breakout If volume pattern is not high enough on breakout, sell stock on first rally. If it fails to rally and falls back below the breakout point, immediately dump it.

Some chart patterns one needs to be familiar. Do not anticipate their completion.

1.   head-and-shoulder (easier on daily than weekly charts) – most powerful and reliable of all bottom formations. Important indicators: 30 week MA not declining and crossed by prices at breakout; there must be a significant increase in volume on the breakout. Head-and-shoulder can also be indicator for a group or overall market, if several similar patterns in same time span.

2.   double bottom – very profitable formation when it occurs in conjunction with impressive volume, favourable relative strength and minimal overhead resistance (frequent, so look for confirmation signals).

The bigger the base, the bigger the move.

Diversify stocks and groups.

Don’t average down in a negative situation

Don’t refuse to sell because the overall market trend is bullish

Don’t wait for the next rally to sell

Always have protective stop-loss. When set initial stop, pay less attention to 30 week MA and more to prior correction low. Place it below round number.

After buy on breakout, place stop-loss below lower end of base.

When trending, give it plenty of room and raise it after each substantial correction have stopped.

At stage 3, become more aggressive with stoploss. Do not wait for 30 week MA to be violated before selling.

Way of locking in even more of the profits. Sell at least part position when trendline (connecting at least 3 points) violated.

Either whole position stoploss just under trendline, or half there and half under last correction low.

Does not appear often, but very accurate. When there is an important decline, subtract new low price from previous peak, then double it: this gives potential near term price area for upswing.

Taking a loss on some positions is just a cost of doing business.

Stocks fall much faster than they rise, because fear causes a panic reaction while greed takes a while to simmer.

Don’t short a stock that is too thin – or covering position will raise the price.

Don’t short a stock in Stage 2 (above 30 week MA)

Don’t short a stock that is part of a strong group.

Always set a buystop.

1.   Market. Check that market is bearish

2.   Group. Isolate market sectors that are potentially vulnerable. In group chart: below its 30 week MA, relative-strength is trending lower, possible negative chart pattern, several chart from that sector are technically weak

3.   Individual chart pattern. Stock should have had significant runup before top was formed. Far from significant support areas.

4.   Relative strength. Indicator must be trending lower.

5.   Volume. Not a major priority on the short side.

Ideal to short at breakout, but ok to short well into Stage 4. However, make sure a consolidation pattern forms beneath the declining MA and then a new breakdown occurs.