What does the ‘M’ in CANSLIM stand for?
*This is an update to an article I have written in the past*

According to William O’Neil (www.investors.com) , it represents the overall health and direction of the major market indexes. It is very important to understand and recognize what type of market you are in before you ever place a position (this may not include day traders but is extremely important to trend traders). How can you realistically make money and set goals based on a blind strategy without knowing if the current market is in bear mode, bull mode, up-trending, down-trending or if it is trading sideways. The market trades sideways with only slight deviations from an average about 80% of the time. This leaves us with a market that trends up or down with sustainable swings only 20% of the time. Three-quarters of all listed stocks will follow the general direction of the major indexes which include the NASDAQ, the DOW and the S&P 500.

By ignoring the ‘M’ in CANSLIM, your portfolio may get hit with losses if you are trading on the wrong side of the trend. Simply picture a river and understand that it is much more difficult to swim up-stream than it is to swim with the current downstream. The stock you buy may have a nice basing chart pattern and excellent fundamentals but it may come under pressure and move in the opposite direction you anticipated due to the general market weakness and/or sector weakness. The same can be said in a bull market; a stock that is a sub-par performer may act strongly and give the investor solid gains due to sector strength and/or overall market strength but the gains are primarily due to sister force (in this case, a bit of luck helped your position).

Study the market and you will see that stocks move in groups and many of the stocks in a strong industry will move in tandem. The same holds true for weak markets; if you own a stock in an industry that is starting to churn or breakdown, it may be wise to pull in a portion of you position to lock in gains before the bottom drops. More times than not, the leading stock in an industry group must conform and move in the direction of the others. A perfect example was the home builders, they have moved in tandem for the past eight years. If you look at their weekly charts over the past decade, you will see that they all have the same patterns but with different numbers. The image provided is from a case study I did back in 2005. Nothing has changed from 2005 to 2008 as this industry is still traveling the same road (most recently that was down).

As many of you know, I also use the daily new high and new low ratio (NH-NL) to compliment the overall strength that the market is presenting. The price and volume alone can fake out many investors and lead them down the path of faulty investing. In order for the market to be a formidable bull, the NH-NL ratio must compliment the general outlook and present us with at least 500 new highs per day on a consistent basis. When both the NH-NL ratio and the ‘M’ in CANSLIM are strong, we can justify placing larger positions (maximum 1-2% portfolio risk) and label the market as a bull.

William O’Neil, the founder of Investor’s Business Daily, states that many of the most profitable stocks over the past 50 years made their advances when the overall market was strong, not weak. The NH-NL ratio is always comprised of the strongest stocks in the current market and we know that these individual leaders are responsible for the bulls and the bears.

How can an investor monitor the market action to tell if it is weak or strong?

Continue reading this entry »

It is never the system or author writing the trading book that fails.
It is YOU! It is your lack of focus.
Focus on yourself and then you can focus on trading successfully.

Trading is at least 98% psychological. It’s a mental state of mind based upon your beliefs of what may happen. Books, systems and technical indicators can only take you so far! You must accept and understand that the market is all in your head. It is you versus the other trader. If you don’t understand YOU, how will you ever understand other traders; thus taking advantage of market moves based on their mental state of mind and their underlying beliefs.

Many investors, both novice and experienced, drift from book to book to book and system to system to system, never understanding why they produce inconsistent profits. They are confused, looking at too many things, complicating the entire process while ignoring the essentials to success.

Keep it simple.

Why complicate things when simplicity works; especially when it comes to trading? We know that trading may be the most difficult endeavor that any human may attempt to undertake.

Thousands of different systems work in the stock market so we can conclude that it is the user that ultimately fails because of lack of concentration and motivation to stay the course. Wall Street is not for drifters and most people can’t play the game profitably because they never sharpen their own mental skills while applying basic money management techniques. They focus on the wrong set of skills.

We all see people come and go every day: rags to riches to rags. They are motivated for weeks, months and sometimes years but most fizzle away after they fail and can’t figure out what they are doing wrong. Some investors copy a system from a so-called guru and may find success for a while but they don’t tailor it to their personality, integrate it with their investing style and focus on their mental state of mind, therefore, it will become obsolete and they will fail. Working hard to become successful in the market is fine but understand that working smarter will always take you further.

Our goal as traders and investors is to understand the crowd and anticipate how they will act and react based on the thoughts we had, prior to focusuing on the proper skills, when we were just one of the sheep (waiting to be slaughtered)!

Focus on what is important and the success will follow.

Stop focusing on iffy stochastics, Bollinger bands, MACD, ADX, earnings releases and bogus news stories. Yes they can aid you to success but the main focus is on you!

Personally speaking, I require specific fundamentals, price, volume and basic daily and weekly charts to succeed but they are secondary tools. They can help me make money as long as I am focusing on the overall picture which is my mental focus and my emotional balance.

I know I am getting all “Dr. Perruna” on you but it is true.

Once your conscious mind understands how the beliefs of the crowd work, your subconscious mind takes over and intuition kicks in and you start making some of the best decisions of your life by flawlessly following your system.

As Jesse Livermore said:

“Wall Street never changes, the pockets change, the stocks change, but Wall Street never changes, because human nature never changes”

Why? Because humans never change!

Once you understand this and learn to trade other humans, you will become successful. Yes, you will need some of the tools mentioned above but don’t focus your attention in this area. Focus when investing by mastering the beliefs of the crowd and you will always be one step ahead.

“Higher oil, rate-hike fears and new regulations in the financial sector handed stocks their biggest beating in nearly a month…”

- Stocks Get Hit In Heavier Volume, By Vincent Mayo of Investor’s Business Daily.

There is some truth to the statement above but the charts have clearly been raising red flags that this market may be heading lower. I highlighted this trend over the past week or so I as I started to see the same faulty charts appearing on my screens. Visit these posts to see what I have been saying over the past week:

• The Big Decline
• DryShips (DRYS) Drying up?
  (By the way, DRYS was down 2.87% on above average volume – distribution)

The NASDAQ, DJIA and S&P 500 fell about 1.8%, 1.6% and 1.8% respectively as crude oil was up $1.69 to close above $123 a barrel (a new record).

I originally started to point out market troubles back on March 14, 2008 in a post titled Snapshot Friday; I highlighted both the Dow Jones and NASDAQ with clear yellow shaded areas showing the 200-day moving averages pointing down for the first time since 2003 (that’s huge if you ask me).

Yes the market is now higher than it was in March but the recent bounce is smacking up against the 200-d m.a. for the first time since 2003 for both indices. The last time the market crossed below a down-trending 200-d moving average and couldn’t recover was back in 2000 and 2001.

So what does that mean? As I said yesterday, I think it means a possible Big Decline.

The Dow Jones is now back below the 200-d m.a. and is failing to challenge recent highs. The day’s action came on above average volume which makes today pure distribution.

I hate to pick tops but we may be coming off the official top of the bull market that lasted from 2003 to 2007.

Continue reading this entry »

I am a positive person by nature and I prefer to buy stocks going up but I am starting to see several leading stocks struggle to hold new highs or fail to challenge recent highs. These patterns are familiar and they are suggesting that the recent bounce is the final stage before a possible market decline. A perfect example can be the charts posted of DRYS yesterday.

Now, this big decline could take years to materialize so I don’t want to jump the gun and start yelling sell or short sell everything in sight. I trade to catch the mid to long term trends so time is on our side to determine what is happening.

• I don’t need to call the tops and bottoms of moves
• I just need to be able to identify the trend (if one exists) and then trade accordingly.
• It’s a fairly easy method of investing and doesn’t require watching the market every hour of every day.
• Trending markets are not very common to begin with but certain sectors, industries or markets are always forming some type of trend.

I will look to post up examples from former declining markets and will highlight what the charts looked like before those big declines.

Now, take a look at the charts of First Solar Inc. (FSLR). The market leader recently recorded new highs after the first correction since its IPO but it is now starting to churn. We have witnessed three consecutive weeks of churning action as the stock is not moving higher on above average volume.

I do admit that the overall trend is still higher but the red flags are starting to appear (with this stock and others).

Continue reading this entry »

Stock Snapshot
Dry Ships Inc. (DRYS) - $90.99
Both Blain and Rajin highlighted DryShips (DRYS) this past week as I linked to them in my weekend post but I am not so sure if I agree with their conclusions. Blain calls the stock breakout a beauty and Rajin grouped it in as a top weekend hold (actually he noted TBSI as his top hold).

Investor’s Business Daily placed DRYS at #8 on its IBD 100 which is fine but it raises suspicion because the stock didn’t even make the list the prior week. How can a stock go from not listed to #8 in one week? I have been a subscriber for almost 8 years but I have never understood or agreed with the way IBD mysteriously manages the IBD 100. DRYS could have only been at 101 at best so I just don’t understand how it jumps to #8.

Anyway, to my point: the IBD 100 has become more of a bandwagon list rather than a guide towards trending stocks. More specifically, they are usually late or on the tail end of trends for stocks that have already established runs (in my opinion based on reading the paper). Will DRYS prove them later again?

In any event, here are some amazing fundamental numbers for DryShips:
35% annual EPS growth
484% EPS growth last Quarter
2,064% EPS growth two Quarters ago
195% Sales growth last quarter
46% Return on Equity
Next Earnings Due: 5/29/08

So what do I see?
I see a decent consolidation over the past few months but I have a problem with the current pattern that is forming if it does not test former highs near $130. Volume is increasing as it moves higher but the stock is starting to struggle near the last peak of $88.

In addition to the basic weekly chart, I see the 30-week moving average starting to turn-over and point south for the first time in years. This does not mean that the stock can’t move higher and reverse the course of that average but the odds are starting to suggest otherwise.

All in all – I am not a buyer of the stock at this level. It may be a solid short term buy for traders that make these types of plays such as Blain and Rajin but it does not fit into my criteria for a trend trading opportunity. A challenge of new highs or a push into new high territory will change my perspective of the stock.

Let’s see where it goes. What do you think and in what time frame?