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Insiders Club Trading Course Part 2 Bookmark

Technical Analysis


Here again I’m going to bother a lot of people. There are many out there that think somehow you can look at a chart and “know” where stocks are going. I am not one of them. Now don’t get me wrong, I use stock charts every

Technical Analysis


Here again I’m going to bother a lot of people. There are many out there that think somehow you can look at a chart and “know” where stocks are going. I am not one of them. Now don’t get me wrong, I use stock charts every single day of my life. I also use some technical indicators we'll talk about in a bit. But they are simple charts, and I’m looking for very simple patterns. These people that overlay the Fibbonoccis, with the Elliot waves, and the tangentially attached root squares.. are a bit “out there” to me. The fact that we’ve successfully traded the market for 20 years without them, should prove that you don’t need these esoteric “studies” to find good trades.

So, what do we use TA for? The basics folks. I want to find support and resistance lines. That’s really about it. After that, you can add what ever mumbo jumbo you want to your charts, but I think that what you’ll see in the next pages will convince you, you don’t’ need to.

There is always a chart program in your trading platform, but for historical charts, I like to use bigcharts.com and stockcharts.com. Both are very good and both are absolutely free. How bad can that be, eh? As we move forward, we’ll be showing you charts from both companies.

Here’s a “java” chart from Bigcharts…

Here we have the same company from Stockcharts in java…



Both are easy to read, and have useful tools for drawing lines, etc. So just know that I’m giving credit to bigcharts.com and to stockcharts.com for any of the charts you see in this course. I think they are very very good at what they do.

 

If you don’t use fundamentals and you don’t use technical analysis, how on earth do you know what to trade?


Okay, here’s where things get to be a bit more fun. Yes we use some technical analysis and I'm going to get into several indicators in a little bit. But for now... I know that you must have seen a few of our newsletters in the past, and you know we’ve talked about “connecting the dots”. I want to give you an example of connecting the dots.

A few years back, the big news was that China was going to be really growing rapidly, building plants and expanding like mad. Well, think about something. If you are going to toss up manufacturing plants all over the place, what’s the single most important thing they’ll need? Power. So, we bought China’s power and oil company. Bingo, it went up 20 dollars for us in a half a year. That’s really all there is to finding good set ups. Common sense.

“But Bob, it can’t be that easy”. It is and it isn’t. As you’ve heard me say probably too many times…we try and find a 1) good chart 2) in an area that has a “reason” to move 3) in a flat to RISING market. In other words, it’s too hard to find the one two or three stocks that are going to move up when the overall market is having a bad day or week. It’s better to do nothing on the long side during those times. Don’t be a salmon folks. You know those great fish that fight upstream over rocks and boulders, only to do what? Spawn and die. No thanks. Lean long in a flat to rising market. Stay out or go short in a falling market.

Now let’s explore that for a moment shall we? What am I talking about here? Well think about what we have really focused on in the Insiders Club for two years now. What do you see the most trades in? Commodity/material and technology.

Starting in early 09, almost two years ago, what were we buying? ANR, CLF, BTU, SLW, RIG, and a host of others in the “hard goods” space. And why was that? Because we knew Bernanke would devalue the dollar via printing more of them. Any time there are more dollars in circulation, the “hard goods” move higher.

Here is a chart of CLF.



Here is a chart of ANR



Here is a chart of BTU



As you can see, from early 09, these stocks have given investors incredible gains. Absolutely stunning. So, what was it that got us involved in these names, names that in January of 09 were virtually unknown? The simple knowledge that a falling currency will produce a rising commodity/material price. We didn’t need fibbonocci, we didn’t need Elliot and his waves. We needed “good” companies in the hard good space.

Here’s a chart of ATHR, this is a technology company



Along with the knowledge that loose monetary policy will boost hard goods, the excess cash created, often finds it’s ways into “hotspots”. Think Apple computer. Well not much is hotter than mobile wireless. When we first bought ATHR in March of 09, few knew of it. As you can see, it did very very well for us.

So, what we find the most success in is this. Don’t research companies for their balance sheets, that’s baloney and who knows if they’re real. Research companies that are in the correct “space” or sector…for the economic times that you’re in.

Let me put it to you this way…

What’s going to be hot over the coming years, no matter how ugly the economy? Mobile communications. Smart phones. Wireless. There is simply nothing that can stop its expansion. So, does it not make sense to try and find up and coming companies that are geared toward that movement? It does.

In our opinion, Bernanke is going to continue to flood the nation with Benji bucks, simply because he has no choice, the economy cannot stand on its own. So, again, what goes “up” when the dollar is falling? Commods, materials, etc. Find good companies within that realm and chances are good you’ll find winning investments.

This is what we do here at IY folks. It is NOT rocket science. What it is however is some common sense and connecting the dots. Two years ago I told everyone that they should sell their muni bonds. I was thought of as nuts, as usual. But I had a dot to connect. If towns and municipalities were going to get a fraction of their Real estate taxes because of all the deadbeats and foreclosures…didn’t it make sense that at some point the municipal bonds might not be able to pay?? OF course it made sense.

This is something each and every one of you needs to learn how to do. Take an ordinary day’s news, and chew through it, and then think of the implications of that news. If the news is big enough, there’s going to be money to be made via going long some stock that will ultimately be affected, or short depending on the news.

Can that be taught? I think so folks. I think that all of you have the ability to “ponder the outcome” of things. Use the simplest common denominators. Look at the “big picture”.

Now.. in the short term time frame, you can simply get some indicators from the market itself. For instance almost every trading platform and hundreds of sites post the “hot sector” of the day, with heat maps and all manner of things. Because on a day to day basis the market moves on recent news, those “hot sector maps” will show you what’s getting bought up in the present.

Suppose for instance a tech stock knocks the cover off the ball over earnings. They’re simply blow out earnings. Usually the whole tech sector the next day will at least “start out” moving higher. So, if you can find a good chart set up in a sector that’s attracting money.. your chances of making a good trade are significant.

This is called Sector Sympathy, and we use it often. Sometimes a company will post up earnings that really lights up the whole sector. What we like to do in those times, is find a stock that's also got earnings coming up, that has a nice chart set up, like challenging some overhead resistance. If you can line that up, it isn't terribly hard to take in some fast swing trade cash.

 

Here's the take away... Although you might not be able to locate it every day, there is generally a sector or a subset of a sector that's attracting money on any particular week. If you can locate that sector and find suitable chart set ups in it, you are setting up well. For longer term holds, we want to find....

THE TREND

I'm sure you've heard the word a zillion times, but just what is it? It's nothing more than a market, or sector of the market, that is displaying a direction, either up or down, and continuing on that path. If you look at the market now in January, there is no dispute the "trend" since September has been up. So, remember my salmon theory, don't swim against the tide. Folks looking to go short when a market or sector of the market is in an uptrend are just baiting trouble. Now.. it's not always easy to spot a trend at first, because hey.. it's got to be in gear for a while for it to become visible as a trend. There's an old saying "one day does not a trend make". That's true. But for the REALLY big trends, we aren't talking about a couple of days..not a couple weeks. we're talking months. When the market or a sector of the market has put in a move of an entire month going basically the same direction, whether up or down, it's safe to assume a "trend" has formed. Interestingly, trends tend to feed on themselves and what ever direction the trend has assumed will usually continue.

Why? Because more and more people take notice of it, and pile in. So, oft times a trend that could have petered out several times gets re-energized as more and more folks, see the up-sloping chart lines, or the down sloping lines and then "hop in" on either direction. Naturally, there are times when the market is trend less.. and just chops up and down. But if you look hard enough, you'll find significant times when a trend has formed ( think the entire year of 2008 into 09 as the trend was down down down. Think Sept 2010 as the trend has been up up up)

When we see a trend is in place, that's when I start spewing about "lean long but keep a finger near the sell button.". We want to go with a trend. So, how do you know when a trend is about to end? Ahh, that's when we do want to look at the technical indicators.

Moving Averages:

When a stock or a market, or a sector starts a trend, either up..or down, it will generally bust over ( or under) a moving average. Okay, so what are they? A simple moving average is nothing more than an average. Stay with me here.

A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react. In other words, this is the average stock price over a certain period of time. Keep in mind that equal weighting is given to each daily price.

Many traders watch for short-term averages to cross above longer-term averages to signal the beginning of an uptrend.

You can have a simple moving average of virtually any time span, but certain one's come to mind that carry significance in the trading world. The 9 day, The 15 day, the 18 day come to mind as shorter term MA's. Then of course we have the 50 day and the 200 day. Now at it's most basic core, when a short term MA, crosses over a longer term.. you have a bullish set up on the stock, sector or market.

One of my favorite short term time spans is the 9 day simple moving average. Take a look at this DOW chart, and notice how tightly the index follows the 9 day in the short term.



 

Do you see how tightly the index has followed the 9 day moving average, both to the DOWN side when it fell from May through July, and the UP side until November when it crashed through, and then reclaimed it? When a stock or index, won't fall more than a handful of points below it's 9 day and bounces back.. the trend is definitely intact.

One of the most "respected" moving average situations, is when the 50 day is above or below the 200 day. if the 50 is substantially above the 200, you can consider an uptrend is entrenched and a lot of longer term holds will hang onto that, with little or no stops, until the 50 crosses back below the 200. For my personal style that's simply giving up way too many points to the downside, as I can be very nimble and get back in , in a day if need be. But here's a shot of our current market, with the 50 well established above the 200.

 



 

So, as you see, moving averages are indeed one of the few indicators I use when using my charts. I like to look at the 9 day on the really short term, and the 18 day on longer trends. Although the 50 is a staple to many, there's simply too much to be given up on a points basis if I wait for a market that's well above the 50 to come down and get on the other side of it. The 18 fits my personal style just fine.

You'll need to decipher which particular moving average suits you best for keeping you in a trade or investment. Just remember, that when a significant MA is punctured, and it holds above or below that line for a few weeks, a trend is forming. Give it a month and you've got yourself a full blown trend in place. So yes, MA's are very important.

 

What about Volume?

One of the things to consider when finding a stock, is that overall volume is indeed important. I personally won't play much with a stock that trades under 100K shares a day. The volume is so light that any order can literally toss the price around on you and defeat your own trade. For instance say you like XYZ.. but it's small the the volume is just 65K shares a day. If you try and buy 1000 shares of it, the market maker will have to scramble to get you some. Chances are good he's going to jack the price, to pry enough shares away from someone else.

The other issue about volume is that we would LOVE to line up a volume surge with a breakout to new highs. That's about as good as it gets. If you find something that's trading a daily average of say 250K shares, and you see it's going to test a resistance and it's already trading 300K shares and there's 2 hours left in the day.... that puppy has a shot at busting free and really running.

The problem is.. lots of time the volume wont' come in, until the stock has displayed it's move. So, we see ABCD get up and over a resistance level, and it just wavers back and forth. Then later in the day if it's still above that resistance line, the shorts will often cover, and the "new longs" will pile in, figuring the short sellers have lost control. So, seeing volume pick up in the afternoon on your particular stock, is a great indicator that you're going in the right direction.

 

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