…I strongly agree with the philosophy of cutting losses quickly as suggested by many great traders, more specifically: Jesse Livermore, William O’Neil and Nicholas Darvas. Over the past several years, I would implement a trailing stop by manually moving the stop myself as the stock was rising. More recently, I started to use the jazzy tools or new technology that my online firm offered (the system moves the stop for the trader at a pre-determined percentage as the stock rises, say 10% from the price).

Over the past 18 months, I have noticed that several stocks (more so than ever in my portfolio and research) will implode intraday and then rebound in the final hour of trading. This has always been the case since I started investing but has become more apparent in the past year or two (at least to me). It seems that “program trading” is really taking over the individual investor and took advantage of the “little guy or gal” in the latest bull market by shaking out weak investors every chance they get.

I had always cut a loss with my stop already placed at 7-10% below my purchase price, depending on market conditions and individual stock conditions. Several times in late 2002 and 2003, I was stopped out intraday, only to see the stock bounce back by the end of the day. I was becoming angry as my trades were placed correctly but I sold out intraday, only to see the stock end above my original sell stop position.

As the year progressed, I decided to remove my automatic stop loss and determine if I should sell based on the full day’s action. My results improved slightly. Stocks that are worthy of keeping are now held until the final trading hour so I can review the entire day’s action without the noise from day traders and program trading. I don’t need to buy back my stocks at the end of the day, the next morning or next several days because program traders triggered my sell stop. On very volatile stocks, such as TZOO, I still place a manual sell stop to protect my downside but I leave room outside of the traditional 7-10%. If I have some profits, I will set the stop at 15% to allow movement during the day.

I must ask:

Does anyone else see similar situations?

I am curious to know if any of you have bought a stock and was forced to sell via a sell stop, only to watch the stock rebound later in the day or the near future. Respond to the blog so we can interact. Don’t be shy.

I went back to read Jesse Livermore and realized that he did suggest to ignore all intraday activity. This advice was given in 1923, so the game has always been the same, as I have been taught, but I have noticed an increase in the program trading over the past 18 months.

NOTE: I am not only speaking of stocks breaking out, I am mostly talking about stocks that have made considerable advances and then correct (healthy corrections on solid stocks). With a stop loss in place, you may get shaken out. I now make all decisions after the market closes. This allows me to view multiple charts and gives me the choice to make an evaluation without intraday emotions fueling my thoughts or persuading that final decision.

Enjoy the Weekend,

Piranha

…This is a series of questions from one of our community friends. He asked a few questions that I have received in the past so I though it would be best to answer him through the blog for everyone to benefit. I may even add some of these questions to the permanent FAQ page: -

- How should I best ready myself in using MSW?

- Should I go back and make a database of all your old stocks or do you feel that the new ones will keep me sufficiently busy?

I feel that the new screens will keep you busy enough, particularly when the market turns positive with a follow through. You could go back and overlook the weekly screens and study how certain stocks made those screens almost every week. When a stock starts to make the weekly screens every week, it is usually a very strong buy signal but it must be bought properly. By this I mean: do not buy a stock that is too far extended from either the pivot point or any long term support line such as the 50-d moving average. When you see some of the stocks that made those screens in good times, study the chart and highlight proper entry points. Become familiar with how the stock reacted to support lines. These patterns repeat over and over. You will be amazed at the feeling of déjà vu as you continue to buy and study new stocks.

- When the market is right and it’s time to buy, will you be giving pivot points or other entrance information?

I will try to be as honest as possible with entry and pivot point information. Remember, we are not always going to be right or perfect for that matter. If I was always right, I would be one of the richest men on the planet. We make mistakes and we do make wrong judgment calls but we always protect every buy with sell rules. If you sell immediately after realizing you made a mistake, you will have minimal loss and be ready to try again with another stock. I always alert the community if a particular stock is too extended even though it is listed on a weekly screen. You are not the only person to ask for pivot point numbers. I will make this a priority when blue and green stocks start to make the weekly screens again. I will also consider writing exit points or sell stop areas in case the stock breaks down – similar to our red flag alerts.

- Since I normally work through the entire trading day and do not have access to a computer, what would be my best way of entering trades using MSW info?

Believe it or not, I usually decide if I am going to take a position after the market is closed, after I complete my research. I buy and sell from the same screens you view every week. How do you think I came up with those screens? I started doing my own research years ago and developed my screens for myself long before MSW was ever an idea. I have made trades during trading day hours but more emotion is tied to the decision so I try to keep it to a minimum. I typically make my decisions at night and then place the trade at the market the next morning or enter some other stop or limit. I prefer market trades on both buy and sell decisions.

I always wait for a stock to make the weekly screens, I don’t make decisions off of daily charts as I am more interested in the long term trend. I do stuffy daily charts for entry points once I am convinced to buy or sell a certain stock. I have found more success with this method. I admit that I have missed a few stocks using this method or I entered my position slightly higher or later than some traders but it has worked out better for me in the long run.

Hope this answers your questions and helps a few other along the way.

Piranha

…It closed today at $29.77, down $1.05 on volume lower than the 50-day average. This would be considered a positive pullback on low volume.

ELOS was a strong stock for MSW in 2004:

139% Gain

Posted 9/22/2004 @ 15.85

Peaked 11/26/2004 @ 37.84

In two months the stock more than doubled as we listed it over 10 times on daily and weekly screens. I did several write ups on this very blog back in November on ELOS as it started to break down and fall into its current base pattern.

ELOS was listed on the daily screen last night but was not near a new 52-week high? I received some questions as to why ELOS made the screen if it wasn’t a buy. On the daily screens, I try to display stocks that can become a buy in the coming days and weeks, I include stocks that may are current buys and stocks that are already trending up. It is up to you, the individual investor to decide what stocks to buy. I can only take you so far before you take the final action.

ELOS is currently building a cup shaped base, the first base since it opened as an IPO in 2004. The fundamentals are excellent with 3-year earnings of 449% and 3-year sales of 302%. The ROE is slightly below par but still good. The PEG ratio sits at 1.17 which is slightly higher than the key 1.0 mark.

This stock would not become a buy until the right side of the base is finished and a downward sloping handle forms on lower volume. I will keep you posted if this stock correctly finished its base. Do not buy prematurely as the majority of stocks that don’t finish their base will continue to fall. A case study will be posted if a handle starts to form and this will be posted BEFORE the possible breakout.

Consider this an ongoing real-time case study.

Piranha

…I love my laptop, a Dell to be specific. I bring this machine everywhere I go and my life depends on it. Whenever I have a problem, I call up technical support and they answerer or fix my problem as quick as possible. I love the product and I love the company but I do not love the stock.

Never love a stock, we have taught you to control emotions!

I never learned to use a MAC so I never had any experience with Apple (good or bad). Recently, my wife and I purchased an iPod and have been downloading songs from iTunes. Excellent products! I love these products and have since seen Apple show up on my screens over the past few months. Should I love the stock? NO. Never love a stock!

Apple (AAPL) first showed up on my weekly screens on 10/24/04 at $47.41. Since this time, Apple has made the daily and weekly screens numerous times. I didn’t post Apple because of news; I posted the stock based on technical and fundamental information. The charts said that AAPL showed the potential to move higher based on the trend.

10/25/04 - 10/29/04: $52.40

11/22/04 - 11/26/04: $64.55

11/29/04 - 12/03/04: $62.68

12/06/04 - 12/10/04: $65.15

01/03/05 - 01/07/05: $69.25

The most recent daily post was on 01/05/05 at $64.50.

Apple has an intraday high of $74.72 and opened for a gap-up at $73.87, giving us a total gain to date of 57%. Not bad for 10 weeks of work, especially in this muddy market environment. I do have to say that AAPL closed near the intraday low – a negative sign.

The lesson of this blog is to pay attention to the charts, not the news. The charts showed us a buy 10 week ago and confirmed this buy several times since late October. Many people went out and bought Apple today based on the great news from yesterday (Apple shattered estimates). I am not saying that AAPL can’t go higher but I know from experience that it may be too late to join the party when the news hits the street and everybody knows, even the “dumb money”. If I was smart money (an institutional investor), I would be selling into strength today. If I was really smart money, I would have most likely sold over the past week or so, based on the ‘M’ in CANSLIM.

Piranha

…I was asked if NGPS had become short sale because it had reached overbought levels in the past month. As we can all see, NGPS was down 36.49% on the largest weekly volume of all time. This does not mean we sell our shares and immediately short the stock. Why?

A stock, in my view, is never a short sell until is below the 50-day moving average (at least) and even more so when it drops below the 200-day moving average. The first break below the 50-day is still not the ideal time to short a stock. The stock must try to break back above this line and fail one or two times. At this point, based on charts, an ideal short position can be opened.

I will look in my files for a short sell chart that I have used in the past. I will also look for a current short sell chart pattern in today’s market. I will post a case study this weekend highlighting the characteristics of a prime short candidate.

As for NGPS, it’s still above the 50 and 200 day moving averages. A stock does not automatically become a short sell because it becomes overbought. This is a very common misconception to most investors.

I don’t recommend shorting stocks until you have mastered years of making profits buying and selling regular positions. It’s hard enough to do just that consistently.

Piranha