S&P 500 Charts - July 17th 2008 - Technical Analysis

The following charts are that of the S&P 500 Index. Each chart highlights a different perspective in time and method of analysis.

S&P 500 Index Chart Analysis

Lets go over the S&P 500 Large Cap Index chart. The chart shown below is a daily chart and I want to go over where we are currently.

• From the high in October 2007 to the low last week the S&P reached 19.3% decline from that high in October. As of the close on Friday we are currently down 11.4% from that high in October.
• The RSI peaked in October 2007 along with the highs in the price levels. Since that time the RSI has weakened further and currently has approached resistance.
• The price level has reached a very significant resistance level which is identified by the blue rectangle on the chart. The fact that the RSI is at resistance at the same time the price is at resistance tells us that we are likely to see either a sharp pullback soon or at the very minimum some consolidation around these current price levels.
• The long term view of the index, and of the markets in general remains bearish. In order for there to be some restored confidence in the markets we need to see the S&P reach 1510. At this time we don’t see this happening any time soon.

There has been much in the press lately that has said once Ben Bernanke cuts interest rates the bull market would return and the markets would reach new highs soon. We don’t see that scenario playing out at this time, there are still too many economic indicators and company earnings that tell us that we still have more downward moves to come.

It has been said that a bear market occurs when an index reaches a loss of 20% or greater. But other technical indicators along with the intense nature of the selling we have seen tells us that a bear market is already here. Now the question is how long will it last and just how severe will it get.

My view, taking into account the economy, credit crisis, housing crisis, the losses by major financial institutions, and the remaining uncertainty of the global economy as a whole is that this will be a substantial bear market. Every effort is being made by the FOMC and the Government to stimulate the economy. But the damage is too severe to be turned around quickly. Recessions take time to correct, they don’t improve overnight.

The President has made it a point to say repeatedly that the "fundamentals of the economy are strong". In actuality the fundamentals of our economy are in a dire situation and are still deteriorating.

Requested Stock analysis

Over the past week we have received requests for some individual stock analysis. In tonight’s post I will address these individual stocks/ETF’ questions.

The first stock is that of Mattel, Inc. (MAT). And this analysis is based on a long term investment. As we all know the toy industry has had a rough patch of time with the Chinese toy recalls over the past year, Mattel has not escaped this problem and it is reflected in their stock price as Mattel has lost approximately 35% of it stock value from the recent high in April 2007. The chart analysis is a very interesting one, there are multiple scenarios at play and I will discuss each one.

• The monthly chart for Mattel shows a nice symmetrical triangle pattern in development since 2000. Symmetrical patterns can resolve to either side over time, it is essentially a 50/50 chance of a failure of the pattern and a drop below, and a roughly equal chance of an upside resolution. Examine the chart shown below, notice the triangle pattern as shown with the black lines drawn below and above price patterns. Also notice the blue box drawn in the center of this triangle, this is a strong support zone. At this time Mattel is trading right at that price support zone. To use this current support as an entry for a long term investment has the risk of failing this support zone and falling to the lower triangle support. So buying at this price is technically a sound idea with the caveat that it could still go lower to the lower support line. And because this is a symmetrical triangle one has to keep in mind that it could fail the lower line, and if that happens then Mattel will be on a new downward path for a long time. Entering at this current price level offers a good price entry with higher risks involved.
• The second investing scenario would be to wait and see if Mattel does pull back further to the lower support line, and then if it consolidates at that price region then that would be a lower risk entry. Why lower risk? Because the lower triangle support line provides an excellent stop loss point to use as exit criteria, for if the price fails the lower line then it will be a significant trend change for the worse and you would want to exit the trade. It also offers the best reward potential as the entry would be on the lower support price level.
• The third and last scenario for considering Mattel as a long term investment would be to wait for an upside resolution to this triangle pattern. If the price breaks above the pattern that has been developing over the past almost 8 years, that would signal a new shift in investor psychology on Mattel and would be the start of a new up side pattern development. The risk of entering this stock on the upside break out of the triangle pattern is lower but the reward is also lowered due to the higher price entry.

Now when you add in the current economic conditions, we would tend to think that there is a higher chance of this stock failing the support price range it is currently trading at. Any more news of toy recalls, decreased sales (especially this Christmas), or more general economic data showing a slowing economy would impact Mattel. So there is the potential for Mattel to fail the current support zone and head down to the lower triangle price support. If it were not for the current economic conditions, I would use this current support pattern to scale into Mattel, but the economy and the declining retail sector concerns me. My risk tolerance would have me wait for a pullback to the lower triangle line or the break above the upper triangle line for a long term investment entry.

The next stock is CountryWide Financial (CFC). Someone asked if this would be an opportunity to get in cheaply. Lisa and I discussed this and we both share the same view, and that is the risk is too high. The sell off in CountryWide stock is not due to normal seasonal conditions, or a slight miss on earnings, or a slightly soft housing market. The sell off has been unprecedented in terms of volume and intensity. We feel Countrywide (CFC) offers day trading opportunities only at this time, over the longer term there is still a high risk of CFC shares going lower still. There is still speculation by well respected analysts that CFC could end up out of business in the future. So with CFC we say "no" to a long term investment, the reward potential is high, but the risk is even higher.

Next question was on ETF’s (IAK) and (PEY). IAK is a fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Insurance Index. The Index measures the performance of the insurance sector of the U.S. equity market. This fund became active in early 2003 so there is not much in the way of long term price history to draw any conclusions from. However, based on the insurance sector stocks themselves, there has been a general down trend since the middle of last year. We don’t recommend this ETF for a long term investment.

PEY is a fund that seeks investment results that correspond to the price and yield of a index called the Dividend Achievers(TM) 50 Index. The Fund seeks to achieve this by investing at least 90% of its total assets in stocks selected on the basis of dividend yield and consistent growth in dividends. While we like the investment strategy that the fund manager has chosen, we are again left with little price history from which to work with, this fund became active in late 2004. With the little price history there is, the current pattern looks bad. In general, Lisa and I do not favor ETF’s as long term investments due to the fees involved. We do like them for short term trades to capture some large moves in a relativity short period of time, for example, our play on the GOLD price tracking ETF (GLD). That play yielded us a 20% profit in 3 months.

In summary, we would prefer selecting individual stocks from each of the sectors that the ETF’s track for long term investments, and not an ETF itself. For the insurance industry, we don’t like this sector for the short or long term as this point. As for stocks with consistent growth, many of which reside on the S&P 500, we want to wait until the current economic conditions and credit crisis is behind us before getting to heavily invested in companies for a long term investment. Many prices ‘look’ cheap right now, but they could easily become even cheaper later.

Another question is on Apple (AAPL) and our thoughts on earnings in January 2008. It is our current believe that Apple is over valued and the price momentum has been largely a result of the large popularity of this company. The expectations of the iPhone and their iMac sales are hugely over rated when compared to the PC sales from such names as Dell and HP who have a much higher market share. When a stock becomes a ‘momentum’ stock, it is bid up much higher than reality would normally dictate. Apple has a P/E of 42.25 (at the current price level), where the industry that Apple trades in has a P/E ratio average of 34.94. This would put Apple higher than it’s peers, of course some of the higher price is based on a very well run company, which Apple is. But the price of the stock does not always track the performance of the company financial’s, instead they follow the hype and growth expectations (even if they are over inflated). When the Nasdaq took the hit over the past two weeks Apple has pulled back and so far is hesitant about being bid up anymore. The projections of a subdued retail sales season would have a substantial impact on Apple if their reported sales takes even a minor hit. The expectations of Apple’s performance are being held too high. And if the projections of a bad Christmas shopping season materialize it would be reflected in their next earnings period and the stock would most likely suffer severely. We would be inclined to wait out any retail stock (even though Apple is a technology industry company, their sales are mostly retail dependent) as the economy and falling retail sector stocks are not showing a reversal yet.

The next question is a broader question, it pertains to the price of oil. Some would say that oil has reached a top while others say there is still more room to move up. When gauging commodities prices, some analysts use inflation adjusted data for determining the current value of a commodity. While that analysis methodology is useful from a point of reference (i.e. historical value), it serves no purpose on the actual technical analysis of the charts and the potential of upward or downward potential. We view oil in a healthy up trend that has been in force close to 9 years. The only way we would claim oil was going to be in trouble (speaking of the trend) is if we saw a trend break. Currently, crude oil has a strong support zone in the $75 to $85 range. If oil remains above that price support, then the up trend of oil remains in tact. The fact that we have pulled back slightly from the near $100 price level is of little significance to us. Oil remains on an upward price trend, and only a break below $75 would we see the potential for a shift in that trend.

Another question is concerning buying ‘puts’  (options trading) on some sectors by buying options in ETF’s. First, not all ETF’s are able to be "optioned", and those that are it is our opinion that trying to capitalize on the current volatility in the financial and retail sectors, and their impact on the overall markets is too risky. The chances of gap ups and gap downs within these sectors could be too costly for an options holder. Lisa and I are not day to day options traders, we prefer the stocks over the options, less risk. We will use options in complex trade scenarios where we want to balance our risks on long term investments. But we need to say that absolutely no one should play with options at all unless they have already obtained a steady profit from swing trading over time. If you are struggling with your stock trades, do NOT think that options will be your savior. On the contrary, options more often wipe out the equity of traders who are not already taking profits out of stocks. Stick with the stocks, taste great, less risk. And 4 out of 5 dentists recommend stocks over options.  :)  Ok, a little humor.

Another question is on Garmin (GRMN). The market would not have liked it if Garmin acquired Tel Atlas because the price was too high. The view is the acquisition would have diluted GRMN earnings too much for years to come. The stock price of GRMN gapped up on some upgrades on Friday morning and due to the upgrades the shorts in the stock had to cover. This sent the price up substantially on Friday in pre market, but the upward price gap provided additional opportunities for more people to sell out. In the first 1/2 hour of trading GRMN sold off on high volume. This shows that there were more people wanting to get out then wanting to get in. the chart shown below is an intra day chart of GRMN from Friday (November 16th). Notice the intense selling out in the first 1/2 hour and then throughout the remainder of the day the money flow continued to weaken. This chart patterns reveals the real dynamics of the stock where the gap up was a short covering rally and once the market was open the smart money was cashing out. If there was a genuine belief that GRMN would go higher then we would not have witnessed so much selling immediately after the market opened. Garmin, like many stocks trading on the NasDaq or otherwise considered a "tech" stock are off limits for now. Too much uncertainty surrounding the roll over we saw in many of the momentum stocks. Garmin has been one of those highly speculative momentum stocks. If you are considering Garmin as a long term investment we would prefer waiting for the price to drop to trend support ($70.00). That would provide a lower risk entry for a long term play on Garmin. Grabbing share at this time is too high of a risk to reward ratio.

Another question was on SalesForce (CRM). Last week CRM issued quarterly earnings, they beat the current quarter estimated revenues and issued an "in line" forward guidance for FY2008, for FY2009 they lowered their revenue expectations. Heading into the earnings announcement CRM had a large short interest as the expectations among the street was for a worse than expected quarter. With the beat on current revenues expectations and an "in line" FY ‘08 the shorts had to cover (the majority of shorts on any stock are short term trades) and propelled the share price up almost 13% on Friday. But it stopped right at resistance. We would expect to see CRM trade lower in the coming days, a good entry on CRM would be on the ‘break’ above resistance. CRM is a difficult trade with the lower FY2009 revenue expectations that the company announced. Lowering forward guidance a year or two ahead shows that the company has reached "saturation" within it business space. I would be willing to say that CRM will trade sideways or down over the coming months.

Well, that wraps up the questions we have received over the past few days. We hope we have not missed any. What I decided to do is set up a new email address that both Lisa and I will be able to access. And the email address will be for asking questions on stocks, sectors, etc.. That new email address is: questions@rebeltraders.net

Once the full RebelTraders web site is operational there will be a message forum where anyone will be able to post questions and even discuss among yourselves your trading ideas and get to know the other readers and subscribers of our service!

The Day that Was - October 29th 2007

A quiet day was expected and a quiet day is what we got. Most of the big money holders are waiting for the economic events to unfold this week before they decide on how they are going to position their funds. With the odds in favor (as far as those on the street are concerned) of at least a 25 basis point cut in the Fed Funds Rate this Wednesday, there is some hedging in the financial sectors for an upward advance in some financial stocks. Today we saw light buying in some of the financial’s in the anticipation of a "FOMC bounce" afterwards. Will there be a bounce if they cut rates? Will it hold? Good questions. When the FOMC cut rates on September 18th by 50 basis points and also cut the discount window rate by another 50 basis points the financial’s did bounce. And if you blinked you missed it. Since that rate cut the financial’s continued their downward march. So don’t always think a rate cut will stop the financial sectors from going any lower. They said back in September that a rate cut would stem the bleeding, it did not. Will another cut stem it this time? Can’t say, there is too much weakness in the financial arenas to gauge at this point if another rate cut is going to do it or not. If you were a high risk trader you could put some money on the XLF going into the FOMC announcement, but it is a high risk trade. I will be in cash heading into the announcement, better safe then to get surprised and have the market go against me. Remember that some of the possible rate cut is already getting priced into the market. So there is the potential for a short pop, then a sell off. No telling what would happen if there is a 50 basis point cut, some have speculated that that would signal even bigger problems exist within the economy and that could send the markets down. And on the other side of the coin there are those who say it could rally. We remain in the middle and will see which way it goes, then decide how to play it.

Some earnings came in after the market closed tonight, it was essentially a mixed bag. If I had to put a number on it of who beat and who missed I would say it was about a 50/50 split of beats and misses. One notable stock is SWHC (Smith & Wesson), they issued a dismal earnings report and lowered guidance for the year. In after hours that stock went down almost 26% (ouch!).

A small lesson tonight on the importance of trend lines and how they communicate danger signals to us. Every stock trades in one of three directions, up trend, down trend, or trading sideways. And each trend can be put into one of three categories, major, intermediate, and minor. A major trend is one which is in force for a minimum of 2 years, an intermediate trend is one which is typically a few months to 2 years, and the minor trend is days to a few months. When trading any stock, long term investment or a short term swing trade, always pay attention to the trend.

As you view a stock chart you want to identify the trend by drawing a line under all of the lows as the stock price has been going up. A valid trend is one that can be marked with a straight line and which intersects at least three points along the way, and you project that line into the future so that you can use it as a gauge to see if the trend of the stock remains in force, or if it breaks it. Technical analysis is at it’s core, the study of human behavior. There are many nuances in technical analysis, all of which tie back to the two basic fundamentals of what makes the markets operate in the first place, greed and fear.

For every action on the chart there is an underlying force driving that action, it is either greed (buying up) or fear (selling out). Every bit of news, rumors, earnings expectations, feelings of the company executives, their cash flow, the products they make or sell, and the list goes on and on. Everything perceived or believed about a company is reflected in the stock price. And all that combined knowledge (fact or fiction) comes back down to greed and fear. So when you watch a stock chart trading on a trend line and you see a divergence, or a break away from that trend that means that one of the two basic building blocks of the market has shifted dramatically. In the case of a down ward break from a trend that signals that fear has taken over for reasons which may not be completely understood or known. Sometimes all it takes is a little bit of inside information to be exchanged between a few mutual funds and they decide to sell out, or it could be a rumor on the street of a bad earnings report is coming, any number of things. Think of it this way, a large group of birds is flying over head and you notice that they suddenly change direction. What was it that sent them running (flying) the other way? All it takes is for one of them to get a sight of something dangerous and that fear is quickly spread to the flock. Same on Wall street, but the birds are the traders. In the stock market, when something happens that drives fear to the forefront, we as traders need to be watching for the signs of the flock moving the other way, for they are taking their money with them and the bird that stays behind could be eaten up by the dangerous bird (which spooked them in the first place), or all alone and holding the bag (reduced stock price).

Always remember, that whenever a trend is broken it means something has changed the trading psychologically of those in that stock, it does not matter what caused that shift, what is important is to recognize that it happened and realize that it may be serious. So you should exit the trade to protect your gains before they turn into a loss. Not all trend line failures will offer you enough time to gracefully exit the trade, but many will. Always use trading rules and technical analysis to your favor, it can save you a lot of money.

The chart shown here is a perfect example of what happens when a trend line is broken, it signaled something was wrong, and the next day the company issued bad news. There was a day before the news hit in which you could have gotten out of the trade and held onto your gains before the bottom fell out. Print out this chart and paste it on your wall, refer to it often, for this is why trend lines are so important and how they communicate to us that something is changing in the stock, and it may not be pretty!

Oh, and Smith and Wesson, there was a danger sign on that too! That trend line broke back in September and offered lots of time to exit the trade. Trend lines are your friends, know them, learn them , and use them

The Day that Was - October 25th 2007

Guess who reports earnings tomorrow? I’ll give you a clue. The CEO has a good tan, he is currently being investigated for selling his company stock before the bottom fell out, and they are partly responsible for the mess our markets are in. Give up? Country Wide Financial (CFC). Yep, the mortgage lender who has more sub prime than a bad meat packing company who sells sub prime cuts of meat.. Ok, bad joke!

CFC reports tomorrow on what could be a significant market moving event. What they have to say about the health of their company, the health of the mortgage industry as a whole, and if they are still losing money or not will all be looked at very closely. Any doom and gloom from the CEO and we can expect to see the financial sectors take it on the chin yet again.

The trading in the market today was all over the place. Another text book example of ‘indecision’. Using candlestick charting techniques the pattern printed today was a ’long legged doji’. “This candlestick has long upper and lower shadows with the Doji in the middle of the day’s trading range, clearly reflecting the indecision of traders.”There is so much uncertainty in the markets that it is becoming nearly impossible to gauge where we are going to go. Traders are fearful of the news that is coming out on the economy and how this will impact longer term stock prices, while other traders are trying to push the markets up in the hope that things will resolve somehow.

Next week we get the FOMC announcement on what they will do. Today the Fed Funds Futures have gone back up again and are pointing to another rate cut on Halloween. Will it be a “trick or treat” to the markets? Another big rate cut could signal that the economy is really heading in the crapper and this will have longer term stock prices in jeopardy, so traders will take money out while they can. If the rate cut is not as big as the market wants then we could also fall hard. Keep in mind that a rate cut could rally the markets in the near term and this brings in an interesting situation. With the FOMC meeting coming at the end of the month we could see a situation unfold before us that involves institutional money wanting to close the books on some of their positions, and thus will take advantage of any rally to cash out and bring the rally to an abrupt halt. The end of the month is usually when institutional money (mutual funds) make some of their biggest transactions. So the FOMC announcement will take place on a very unique day. With so much uncertainty in the markets, with the prospects of recession all around, and those looking many months down the road, they could take advantage of a market rally to get the best price they can for their sales. The more institutional money that leaves the markets the more downward resistance weakens.

Oil is back above $90 again, this time on tough talk from the US Government on Iran. This sent oil and Gold back up again today. Now, in addition to oil getting above $90, the new Iran tough talk has the gas prices inching up again. Today gas prices rose almost 10 cents a gallon on the trading floor. So expect to see your local gas station begin to change their signs soon! And it won’t be like Wal-Mart doing a roll back, they will be putting up bigger numbers on the signs.

I have charts for the Nasdaq and the DOW tonight.

S&P 500 Chart

An update on the S&P 500 index. Charting these broad market indices is difficult with the large market swings. But there are still trend lines which remain visible.

I will post charts on the NasDaq and the DOW throughout the day today.

The Day that Was - October 22nd 2007

We had a technical bounce right where we identified major support would be on the S&P 500. From a technical stand point, today could have been a text book page on what a technical bounce is. The S&P 500 low of the day was 1490.40. Does this mean everything is all OK now? No, unfortunately not. A technical bounce is just that, it is not on fundamentals changing, just oversold conditions and short covering. We are likely to see a continued upward advance,albeit on light volume until the next downward leg sets in.

On the DOW, the closing price was right under the 50 day moving average on the daily chart. That is not a strong resistance point, but it did provide resistance during the trading today and will likely be easily overcome in the next few sessions. But we still have a general market that is ‘trendless’. A market that is unsure of what direction to go makes swing trading very tough. Because within a trend-less market the various sectors are also all over the map. In a healthy bull market when a sector makes an advance out of consolidation it is, more often than not, a buy signal for equities within that sector. The problem we are facing is that sectors are making wild swings, what is a buy signal one day becomes a sell signal only a few days later. And it is not just the big cap stocks and sectors. This is occurring on every major index (Russel 2K, Wilshire 500, small caps, mid caps, etc). During a normal market, swing trading is our primary money maker. And while no trade is ever ‘easy’ (meaning that all trades require work to manage them properly) it is difficult in a trend-less market to grab something that will offer the best reward profile. Last night we presented some stocks in a sector that recently displayed signs of further weakness, and within that sector we chose some stocks that are prone to succumb to that weakness. Today the retail sector was up on the technical bounce, but we still see continued weakness for that sector. So while we may present you wi th trade ideas it will not automatically mean they will trigger the next day, they have to be watched for the conditions to present themselves and then we jump on board.

But I will tell you this, our markets currently are as fragile as the lead-up to the tech bubble burst in 2001. We have not seen this much uncertainty in the markets in a very long time. This uncertainty in the trading can be seen in the tape, it is almost frightening to see some of the things crossing the tape. Until the market makes a decisive move one direction or the other we are going to remain in this state of trend-less back and for th ranging action. A swing traders nightmare. We are still working on the new web site with live interaction capability so that we can present daytrading ideas for those who day trade.  A blog is not the forum on which to present day trades. I’m am very confident you will like the full site when it is introduced. The more I work on it the more excited I am to introduce it.

Tonight, Apple released earnings and they were good, a surprise upside. A bit over the top in our opinion on their forward guidance.  Based on previous revenue growth reported by Apple, we can’t see how they will be able to manage that much of an increase with the retail sector showing a reduction in spending. Expensive toys (iPods, iMacs, and such) take a back seat to food, gas, clothes, and other living expenses. All of which are costing more and will likely go up even more this winter.

After hours tonight, Target (TGT), a bell weather for retail spending, issued a warning on their sales. They have reduced their same-store sales estimates by a substantial margin. They cut their sales growth in half. What was going to be a 3-5% growth has been cut down to 2-4%. This is no small event, this is one more knife in the retail sector back. This is what we mean by having 20/20 vision.  One has to keep the headlights on to see what lies ahead down the road. But, regardless of what is likely to happen and what is happening currently, many traders don’t associate them. They wait for danger to fall in their lap before they worry about it, and even once danger has fallen in their lap and they get burned, they forget about it very quickly and are prone to make another dangerous choice again later. We think Apple is a wonderful company.  Do we think the price is over extended, you bet we do. Going back to the slot machine metaphor I used last night… this machine is going to run dry and stop hitting soon, and someone is going to be left holding a large empty bag, for all the quarters will have been taken by someone else.

Texas Instruments released earnings today and they were not so great. The tech sector will likely be impacted by this. The extent and duration remains to be seen. After hours Thornburg Mortgage (TMA) announced that their chief lending officer was going to retire (that is a nice way of saying he was fired). I guess things are still not going so well at Thornburg

 Events on the calendar for the rest of this week:

Economic:

Wednesday, October 24th- 10am: Existing Home Sales; 10:30am: Crude Inventories

Thursday, October 25th- 8:30am: Durable Orders, Initial Claims; 10am: New Home Sales

Friday, October 26th: 10am: Michigan Sentiment

Speakers:

Tuesday- 8:30am:U.S. Treasury’s Paulson speaks about China-U.S. relations

Wednesday-U.S. Treasury’s Paulson speeks on India’s economy

Thursday- 9am: Fed’s Consumer Advisory Council to discuss mortgage rules

Friday- 4:15pm:Fed Governor Mishkin speeks on financial instability

Market Update

There is no ambition on the part of any market participants today to buy anything in great moves. With so many stocks marked down to basement prices that tells me that there is still too much fear that the markets are still going lower.

The charts tell me we stand a chance to drop more before this ends so maybe the market movers are paying more attention to the charts now that they realize that charts are “leading” indicators to the fundamentals. Remember that important statement as you begin your journey into the wild game we call the stock market. Old school, conservative, fundamental analysts and the belief that everything one ever needs to know can be found in a company financial statement will fail. This is no longer your Grandmothers market, with the increase in large money moves, computer trading, global economies tied closely together, and the increased scrutiny of company watchdogs, the press, etc. We have more company wrong doings being uncovered then we used to.

When your Grandmother bought stocks she put her certificates under the mattress and never looked at them until 40 years later. Doing that today will lead you to your savings being wiped out. You must monitor your investments and know that even if a company looks good on paper it has no meaning at all to how it looks to those with money in their pockets and wants to put into a stock. Public perception of a company (as reflected in the stock price) will migrate into and show itself in fundamentals in due time.

The movement of money into and out of stocks in great amounts is what needs to be looked at to determine if the public thinks a company is worth anything. And P/E ratios are meaningless calculations. Price to Earnings is subjective at best. The price of a stock is not established by their earnings, it is established by what the markets are willing to pay for it. It is that simple.

Always follow a chart. Taking profits before a long downtrend is always better than looking up from the bottom and saying to yourself “wow… it will take a long time to get back up there”. Stocks always fall faster than they will rise. And as you wait in some cases many years for a stock to get back to where you have a profit (if ever) your money could have been in another investment that was growing, not just recovering.

The technical analyst experts , such as John Murphy (and others) will tell you that the price of a stock contains all known knowledge, perceived knowledge, earnings, earnings projections, the confidence in the company, and the the quality of the products. Everything known and perceived about a company is reflected in the price of the stock at the very instant you look at the ticker price. To say that the price is undervalued or overvalued is subjective. The only real gauge of undervalued or overvalued is what the market says it is worth. Not a P/E ratio.

This is why so many long term investors fail. They rely too heavily on only fundamentals, P/E ratios, earnings, and the like. But they lack the key ingredient to determine when to be in and when to be out of a stock. And that ingrediant is the public perception as reflected in the share price. No matter how good a company is on paper if the public does not trust it, is suspicious of it, is fearful of it, or just does not like it then all of the financial statements in the world will not make the price go up. Only when the perception of those buying and selling it change will the price go up.

When we do swing trades based on technical analysis we are following the changing attitudes of the public by the movements in the charts. Remember that a stock chart is simply a mirror of the human emotion. It is people buying and selling which makes the prices move. So we follow the charts to tell us when the perception of a company is turning favorable and that is how we profit.

A ‘buy and hold’ type investor today is placing his money into a company that will only have one thing controlling its price. And that is the public view of that company over the years, only the public moving the money will move a stock price. Not what the company says or does. When your Grandmother bought stocks and put them under the mattress the markets were a different animal then. Times have changed over the years and so must investment methodology.

The Most Important Post Since This Service Began!

Now if you used the charts to tell you when to get in and when to get out that very same $5,000 would today be $29,166.22! See how some very simple trading discipline and technical analysis turns a “losing your shirt” into making good money. And you did not have to be an active day trader to accomplish this. Using the technical analysis criteria for this test resulted in only 24 trades since 1995 when you first started.

1. Control your losses. Keep risk to a minimum. Only after you learn to practice this step can you move to step 2.
2. Make profitable trades.

The charts of the financial sectors have been signalling trouble for weeks. I have said a month ago that the financial crisis was going to spread. I stopped actively entering into new swing trades back then. I said that trading in this kind of environment is too risky. Now we see that it is getting worse. Many stocks of banks, brokerages, and other financial related companies have lost huge amounts of their value. IF your a “buy and hold” person you are feeling the loss hard. If you had used the simplest of technical analysis tools you would have known when to sell. You would have sold, taken your profits, and left your money sitting in your brokerage account (most of them pay a very small interest on money that is just sitting in your account and not in a stock) while you watch from a safe distance the market get worse. Then later when the storms are over you take your money and buy the stock again if you still like it. Now you are able to buy more shares because the price is less and then using technical analysis again you stay with the stock until you get another signal to get out. That is how you make money consistently. Take a look at the books I have listed on the right side of this web site. They are there for a reason. Every one of them I have read, every one of them is the best in my view, and they are worth every penny. If you are just starting out get the book written by John Murphy “Technical analysis of the financial markets“. John is an excellent writer and his books are easy to read. Then get the book “Trading for a Living” by Dr. Alexander Elder, and then the book “Trading in the Zone” by Mark Douglas. If you start with those 3 books alone you will learn how to make good trades, learn how to get out of a trade to protect your capital, learn the art of technical analysis, and learn how to be a disciplined trader.

I will close out tonight’s message with a quote from one of the best.. Jesse Livermore:

“A loss never bothers me after I take it. I forget it overnight. But being
wrong - not taking a loss - that is what does damage to the pocketbook and to
the soul”

Caution is still needed in our trading…

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