The following is a guest post from Vincenzo Desroches. Vincenzo started a financial and forex trading site after years of self taught investment and has had an interest in economics virtually his entire life.

Stock Market speculation has produced thousands of millionaires in the 20^th century. The historically unprecedented rise in the United States economy and equity markets during the last half of the 20^th century increased the standard of living in America to levels generations past could not have conceived. This dramatic and steady rise in stocks and profit taking over the last 60 years has caused an investment truism to form—invest in the stock market over the long-term and you will see strong growth in your capital.

Although this truism of the last 50 years is now being questioned by the current global economic crisis, most long-term investors believe the market will continue to rise once America gets past its current troubles. The logic is simple. America has endured through every economic obstacle it faced over the last 50 years—why would this time be any different? Thus, in this article we will break down the very basic principles that cause stock prices to rise and fall.

In order to understand stock prices, we must first understand who sets a stock’s price. Human market participants are the ones setting a stock’s price by their buying and selling behaviors. Now, what do humans want in regards to stock market investing? Of course, they want money. And the easiest way to make money in stocks is to invest in companies that are making money.

As a basic rule of thumb, if a company is making money, its stock will increase. If a company is losing money, its stock will decrease. When a company has strong earnings, then its stock rises as well. Companies generally release a public announcement of company earnings every quarter. Prior to the announcement, Wall Street analysts predict how much the earnings report will be. If a company’s earnings beat market expectations, then its stock will tend to rise significantly. Conversely, if a company’s earnings fall below market expectations, then its stock price will tend to fall sharply.

Earnings are the primary driver of a stock over time. However, as we stated in the beginning of the article, a stock’s price is set by human market participants. Therefore, a company’s present earnings is not always the primary influencer of its current price. At times, and sometimes very often, a stock’s price will be set by market participants’ expectation of future earnings. For example, if a new company has lots of debt and poor management, but it has an incredibly powerful and innovative technology that is set to hit the market, then its stock price may explode based on the expectation of future earnings.

However, eventually things will balance out. If a stock is not able to support market expectations with true earnings, then the market will drive price down. There is a small sector of traders called “short-sellers” that actually specialize in finding companies that are overpriced due to fanatical market expectations. Once a short-seller finds such a company, he shorts the company’s stock in expectation that the true financial condition of the company will soon be highlighted and there will be a sharp drop in the stock’s price.

Thus, while stocks are primarily driven by earnings, it is very important to understand that stock prices are not always priced according to current earnings; instead, they are more often set according to market expectations for future earnings. Although a company may finally catch up with earnings and market participant projections, often these companies never fulfill the aggressive expectations set by investors. In fact, during the tech boom of the early 2000’s many companies and investors lost countless millions of dollars as companies’ stock prices got out of control and were based much more on hype and potential than actual real earnings. In the end, traders need to realize that while fundamentals certainly influence a stocks price, it is humans and their expectations that ultimately set the current price.

I am going to preface this article by stating I don't think the markets are healthy right now. While I remain unconvinced that the markets are headed appreciably lower, I do think at best it will still take some time to absorb the recent distribution. Worst case, is that this is only the beginning of a larger decline but it is still much too early to make any assumptions. With that in mind I wanted to show some examples of charts I think are worth following even in this environment.

I think traders too often get caught up in chasing stocks that are on "sale" or so called "values". While this may work for fundamental investors with long time frames, the odds are that if you are reading this you are trading on much shorter time frames and on technicals. More often, it pays to stick with stocks that are showing relative strength and remain with healthy charts. This is even more important during times of market uncertainty. When the markets are rolling, even bad stocks will tend to get supported by rising with the tide. However, in tough times traders should be much more picky about what they trade and stocks that are beaten up are like that for a reason. Simply put, someone is selling.

While focusing on stronger stocks doesn't give traders a fool proof trade, at least you are not trading against the trend. Acme Packet, Inc. (Public, NASDAQ:APKT) is an example of a stock that has weathered the recent storm very well. While APKT suffered through a sharp gap down in late July, it has recovered fairly quickly. APKT is now consolidating in a tight range just underneath resistance. Traders should be aware that this resistance level is fairly strong and APKT has already failed at this level a few times. However, if APKT can clear this area it would take it to new all time highs and a probably cause a short squeeze.

Yum! Brands, Inc. (Public, NYSE:YUM) is another stock that has held up well along with other fast food stocks like McDonald's Corporation (Public, NYSE:MCD) and Chipotle Mexican Grill, Inc. (Public, NYSE:CMG). I'm not sure why fast food stocks have held up so well, but its always better for a stock when the entire sector is trading in unison. This action reveals institutional support as large funds often trade in baskets to diversify their exposure to any given sector. It is important to note that YUM hasn't cleared anything yet, so traders are better served watching this patiently. It's highly likely that even if YUM broke the descending trend line shown on the chart, it would probably trade back to that level a few days to weeks later to retest the area as support. However it is definitely worth watching as a strong relative performer in a good sector.

Good Trading,

Joey

As I was running through charts this evening, I noticed that McDonald's Corporation (Public, NYSE:MCD) was trading very close to all time highs, which was impressive considering how weak the markets have been over the past few months. There is no sign of strength more certain than a stock trading at its highest point. Stocks trading at an all time high have no clear resistance overhead, as any traders that are long are sitting on profits. In fact the only traders in pain are shorts, or possibly traders who may have missed the opportunity to get long. One of the most simple ways to find the strongest stocks is simply to look for those trading near all time highs.

Typically, stocks trading at all time highs dwindle during bear markets lending even more credence to the few stocks that maintain their strength through extended market weakness. If a stock can find enough institutional support through a bear market to remain near all time highs, it may very well lead the way in a Bull market.

Mead Johnson Nutrition CO (Public, NYSE:MJN) is a stock that has held up very well through the correction that began in April and has actually started to outperform the markets on a relative basis over the past few weeks. While the markets have been attempting to bottom, MJN has started to set higher lows as it trades up to the top of its base near $55. While this base is nice on its own, the fact that the top of this base also coincides with MJN's all time highs makes it more attractive. A breakout from here would push MJN to fresh highs and possibly squeeze some shorts.

Another stock trading near all time highs is Cracker Barrel Old Country Store, Inc. (Public, NASDAQ:CBRL) . In fact, the top of the current base marks its all time high, much like MJN. The key difference here is that CBRL is still in the middle of its base and has a level of resistance near to clear before making a run at its all time high. However, the recent action is promising and a move above $50 would likely lead to a test of that high.

Tractor Supply Company (Public, NASDAQ:TSCO) is another stock pushing up to the top of its base which also coincides with its all time high. TSCO has shown clear support on each pullback to the bottom of its base near $60 and buyers may be close to overwhelming sellers. If the markets can continues gaining some traction, then TSCO will likely breakout of its base.

Many trend following strategies are centered upon stocks breaking to new highs, and with good reason. Strength often begets strength, and the popular catch phrase for trend followers is “the trend is your friend until the end”. These stocks are pretty close to testing their all time highs, and could easily breakout if the markets continue higher.

Good Trading,

Joey

I mentioned last week how I had been stalking a couple of stocks on the long side despite the market outlook looking bleak. I've always maintained that its good to be prepared for any move, and thus I wanted to have a few stocks that were showing relative strength just in case the markets surprised with a rally. While the markets are certainly not out of the woods, the S&P500 was able to close above its 50-day moving average and the bulls have strung together a solid 2 out of 3 days.

Finisar Corporation (Public, NASDAQ:FNSR) was one of the stocks I highlighted and I started a position in it today. While the stock is still under resistance, I felt comfortable with the recent price action and the risk versus reward from this level. FNSR looks like it has begun to emerge from the triangle base it has been forming and could easily gain some traction if the markets continue to rally. I'm keeping the risk pretty tight because the play is either for FNSR to break out immediately from here, or for further consolidation. FNSR needs to clear $16.50-16.60 first, and if it does, it will likely head to new highs.
While the other stock (RDY) I was stalking didn't work out, I did find another stock that had a very similar chart to FNSR. Network Engines, Inc. (Public, NASDAQ:NENG) is also trading in a triangle and could be ready to emerge from its base. This is another case where a tight stop can be employed because NENG will either breakout and likely at least retest its prior highs, or head back down for further consolidation. While I'm not convinced it will follow through, the thought process is that if NENG can clear the $3.05 area it could end up making new highs for the year.
Like I mentioned before, there are no guarantees the markets are headed higher from here. In fact, there is the very real possibility that the markets could head much lower. Despite that, these stocks are showing enough strength for me to take a shot on and if the markets can follow through on this rally attempt, these stocks should end up setting new highs. As always, please complete your own due diligence and manage your risk, especially in this environment.


Good Trading,

Joey

I've been patiently waiting for the general markets to stabilize and have been very carefully picking my spots over the past several weeks. Despite the fact that I have been trading less frequently, I do continue to add potential longs to my watchlist. The general indexes are at an interesting spot here as the S&P500 pauses near its declining 50-day moving average. I can see multiple scenarios happening from here and remain open minded to all of them.

As many of my regular readers know, I prefer to look for stocks that are showing relative strength and the following two stocks have held up very well through the recent correction. While I think the markets could use a little rest here, these stocks are far enough along in their bases that they could be ready to breakout soon.


Dr. Reddy's Laboratories Limited (ADR) (Public, NYSE:RDY) is one stock that I have been stalking since June. I have been waiting for it to base a little and the recent price action near the 20-day moving average looks positive to me. It is trading in a triangle and is close to testing the upper trendline. RDY is a little thin, so traders should be careful with it.

Finisar Corporation (Public, NASDAQ:FNSR) is another stock I've been stalking for weeks. FNSR had fantastic rally earlier this year as the Network group caught fire. It has been consolidating since April and could be ready to emerge from its base. It looks like $16.50 would be the first level to watch just above, and a strong move above this price should help propel it to new highs.
I'm still leaning towards the general markets heading lower before a meaningful rally can emerge, but I am also seeing a lot of traders sharing those negative thoughts. This could set the stage for continued strength when no one is expecting it, which is why I continue to prepare for both long and short plays. If the market rallies further, then these two should breakout.


Good Trading,

Joey

In reviewing some screens tonight, I ran across three stocks that had pretty decent looking charts, yet were unfamiliar to me. While I recognize the tickers for a couple of these, I can't remember ever trading these or even adding them to my watchlist. Sometimes these unknown stocks can move well if you catch an institution sneaking in, but they also come with their caveats. Each of these are fairly light on the volume side, so getting in or our is not as easy as in the more liquid stocks.

The Cooper Companies, Inc. (Public, NYSE:COO) is in a base right now but appears to be finding support at its 20-day moving average. This stock held up very well throughout the recent weakness and could be setting a higher low here. This might provide a good entry for a retest of the top of the base and with any luck a breakout above $42.


RAM Energy Resources, Inc. (Public, NASDAQ:RAME) is another stock still trading in its base, but also appears to be ready for a retest of its recent highs and the top of its current base. If RAME could pull the breakout off, the measured target would take it to over $3 per share.


Loral Space & Communications Ltd. (Public, NASDAQ:LORL) is another one that looks pretty nice here. It cleared a base March and rallied about 10 points. Although it came back for a full retest of support, it did hold near the breakout level and has been steadily rising through the past few weeks of market weakness. It might come back in for more consolidation, but its definitely worth watching.
One common factor across these three stocks is that they are all technically still in a healthy consolidation. They are not beaten down with the markets and they are also not too extended where your risk reward ratio would be unattractive. While the markets are no where near being out of the woods, today's bounce could lead to more upside over the next few weeks. If the markets can stabilize, I would rather focus on stocks like these than stocks that have an over abundance of trapped longs.

Good Trading,

Joey

The past few weeks have been one of my least active string of weeks as far as swing trading goes in the past year to year and a half. While the markets have presented ample day trading opportunities, I've found that I've only found a few 1-3 day windows in the past 2 months worth attacking. I'm sure long time followers on my twitter account have noticed my decreased updates, and this is directly related to simply not seeing that many attractive opportunities. However, despite knowing I would be unlikely to initiate new swing positions the next day, I have still been faithfully reviewing my typical 300-500 charts per night and running through hypothetical trading scenarios to try and build a trading thesis for the following few sessions. Sometimes I will play devils advocate with myself and build the case against a thesis to see where I will call the thesis invalid.

The reason I am mentioning this is I think its very important for traders to remain open minded objective when preparing for the markets. I often see traders fixated on a side of the market and this leaves them very vulnerable to being blind sided. The markets are not always rational and even if you're right, it could take weeks or months for the markets to agree. The best traders prepare for multiple scenarios and then react to the markets. Instead of attacking the markets at the open with preconceived trades, why not build a couple lists and wait to see if the markets confirm any of them. With that in mind, here are a few thesis' I have been running through and will be watching in the markets:

• With the markets seemingly fixated on a weakening economy again and possibly pricing in deflation, I am looking to the consumer discretionary sector as a possible target on the short side. In fact, I wrote an article on the recreational vehicles group on Monday night that has a few weak looking stocks.
• Another thesis I have revolves around some oil stocks that have held up well through the recent weakness in the group. With the markets oversold and this group coming off several weeks of selling, its possible that they could get a short squeeze in their favor soon. I wrote an article tonight on this thought and it should be published by tomorrow afternoon on Chart Advisor. Some stocks to look at include CLB and CRR.
  
• One thesis I had been working with was rising gold and silver prices and while that looked promising, I have to admit it looks like it may need more time or simply not happen. However, I continue to monitor this group and remain open minded to either scenario.

While these are only three thoughts, notice how it covers both a rising or falling market. This allows me to be prepared for either scenario and while I may not trade anything, at least I will be prepared for either side of the market. While I can't guarantee I will hit every trade, I can guarantee that I'm not under prepared. More often enough, this is enough to provide me with a good risk to reward opportunity and an edge.

Good Trading,

Joey

I recorded a video for Stocktwits TV's "Talk your Book" show this week and the stock I chose was Silvercorp Metals Inc. (USA) (Public, NYSE:SVM). I mentioned on the show how I've been bullish on Gold, and Gold did in fact run to new all time highs today. While I've been bullish on gold, and own a gold miner, I also think Silver should begin playing catchup. The gold/silver ratio is still relatively high due to the financial crisis of 2008 and now the mess in Europe. The ratio spikes on the headlines as the flight to safety trade takes hold, but silver then plays catch up the following weeks.

One stock I like in the silver mining space is Silvercorp Metals Inc. (USA) (Public, NYSE:SVM). Below is the video I recorded for the show with my analysis.



Here is the chart as promised.



Good Trading,

Joey