A few stocks still worth watching

Posted by downtowntrader | 12/03/2010 12:19:00 AM View Comments

The markets have ripped higher the past two days and it has become increasingly more difficult to find stocks at decent buy points. Traders should always be leery of buying over extended stocks as an simple retracement could put them into a position of weakness. The last thing a trader wants is to buy a stock near a high, and then be forced to sell as the stock retraces in a normal manner. Usually, this is compounded by the stock turning right back higher.

The following are stocks that are still near decent buy points and are on my watch list for the next few days.

The Boston Beer Company, Inc. (Public, NYSE:SAM) is trading in a tight range after a sharp breakout. It is showing great strength by refusing to give up any of the recent move.

Blue Coat Systems, Inc. (Public, NASDAQ:BCSI) is still trying to recover from a correction that began in May, but has recently settled into a tight range above a possible bottoming base. BCSI has quietly begun to set higher highs and a move above this tight range could send it into a price void above. Notice the vast majority of trading volume has occurred under the current price.

Hersha Hospitality Trust (Public, NYSE:HT) is a cheapie and relatively slow mover, but this pattern looks really good. HT cleared its base in October and has settled into a tight range above the base. It looks like it is trying to breakout here and the whole REIT group may be ready to resume its run higher.
The three charts above have one important commonality. They all feature a tight range above a support level. Trading a move above these ranges would be much safer then trying to jump on some of the stocks that have recently broken out like RiT Technologies Ltd. (Public, NASDAQ:RITT) or Finisar Corporation (Public, NASDAQ:FNSR).

Good Trading,


Importing the Stocktwits 50 into Worden Telechart

Posted by downtowntrader | 11/21/2010 03:36:00 PM View Comments

The Stocktwits team introduced the "Stocktwits 50" a few months ago which is a weekly list representing the stocks with the strongest fundamental and technical characteristics. While their methodology is proprietary, they focus on earnings growth, relative strength, and other technical ratings designed to filter the strongest stocks. Because the list is rebalanced weekly, they consistently have great trading ideas.

Although I am primarily a technical trader, I've been a long time believer in following stocks with strong fundamentals and relative strength. Investors Business Daily has a similar list named the IBD 100 and I have diligently followed this list as well. The way I have used this list is by importing it into Telechart 2000 and then watching the stocks daily for technical setups.

Below I will show how I import the Stocktwits 50 into Worden's Telechart 2000 in order to have them in a custom list that can be reviewed daily. This tutorial will show you how to end up with a text file of the Stocktwits 50 that can be imported into Telechart. However, users of other charting programs could also likely import the text file into their package in a similar way.

The first step is to browse to the Stocktwits 50 and copy the Stocks. Because it is in a table, you will have to drag over the table and select all the data down through the end of the list. From there, right click and select copy. This will copy the table into your clipboard.
The next step is to open your spreadsheet software and then paste the information. In Microsoft Excel, I right click in the first cell and select paste special. From there I select HTML and click OK.
This should paste the table into your spreadsheet. Don't worry if its not formatted too pretty as the purpose of this exercise is to simply end up with a list of the stocks in a text file. Highlight all the columns to the right of the tickers and then right click and select delete.

After this, repeat the process and remove the column to the left. I also ended up with a few blank rows, so I deleted those as well. The point is to end up with only the tickers and nothing else.

Now that the spreadsheet is clean, you should have a list of only the tickers. The next step is to remove the $, because your charting platform will not otherwise recognize the stocks. To do this, click Edit and then replace.

From there enter $ in the "Find What" field and leave the "Replace with" field blank. Then click Replace All. This will in effect remove the dollar signs.

Once this step is done, simply click File, Save as, and select Text (Tab Delimited) in the Save as type field.

Now that you have a text file with the tickers, you can import it into Telechart. If you use a different charting package, check to see if you can import from a text file.
In Worden, you would first create a New Watchlist. Click File, Create New Watchlist, and select Import from a file. Then browse to your Text file and import it.

Now you should have the 50 tickers on the right and can now start browsing the list with Telechart. Everyweek, you can simply remove the tickers from the list and import an updated text file.

Simply monitoring strong stocks can greatly improve the quality of your trade setups, and by monitoring the Stocktwits 50, traders have a free list of many of the strongest stocks in the market. This is simply one method of utilizing this group of stocks and traders should consider other ways to mine this data.

Good Trading,


Review of One Good Trade

Posted by downtowntrader | 10/24/2010 10:10:00 PM View Comments

I have been a big fan of SMB Capital and Mike Bellafiore for several years after watching them on Wall Street Warriors and then following their trading blog, twitter account, and ultimately their shows on Stocktwits TV. I have always admired how well they are run as a prop firm and the dedication they show towards enabling the success of their traders versus the approach of other firms who are more concerned with generating their cut of commissions and simply recruiting more bodies once their traders fail. They are consummate professionals and actually quite innovative in how they have introduced tools like film review and simulators into the prop trading world.

Beyond the obvious success as a firm, they are also one of only a handful to provide outsiders a glimpse into the prop trading world which has remained foreign to the vast majority of retail traders. I had been eagerly awaiting Mike's book "One Good Trade: Inside the Highly Competitive World of Proprietary Trading" since he announced it, and finally had the pleasure of reading it recently.

Mike starts by bringing us into his desk to meet some of his superstar traders. In profiling several individuals, he shows us the common traits they have and more importantly, how each trader became successful by adapting their trading to fit their personality. Later on, Mike reveals several traders who for some reason or another were unable to make it as traders. Most books only focus on traders who have made it, or the techniques the author believes will make a trader successful. However, this is the first book I remember that walks through real life examples of the traits that will inevitably lead to a trader's failure.

Some people may be disappointed in what they would see as a lack of an "A to Z" trading system revealed in the book, but the most important factors for a traders success are clearly laid out in the book. While Mike discusses some of the techniques they use to trade, the clear message of the book is how important it is to work hard to develop specific trading skills which can later be used to help a trader adapt to any market. The idea of developing specific skills is an interesting concept, and one more commonly seen in the sports world. The title of the book is One Good Trade, and you get to one good trade by developing specific, repeatable trading skills.

It also wouldn't be practical to attempt to cover all the material it takes months to cover in a class, and then years to refine, into a book. However, this isn't to say that nothing is revealed. The book does reveal many of the specific setups SMB uses on a daily basis to make money in the market, and highlights how important it is to trade "stocks in play" and rely on tape reading skills. In fact, if you combine everything in the book, along with the several blogs and video shows, a trader would have a very good idea of how SMB trades on a daily basis.

The idea of sitting on a desk with so many other traders who are just as committed to the markets as you are is incredibly enticing, and this book provides much insight into this environment. While Prop trading is definitely not for everyone, the approach laid out in this book is the basic groundwork for any successful trading methodology. Beyond this, there is much to glean from a trader who has adapted to several markets over the years and not only survived, but improved along the way. I highly recommend this book as an addition to any traders Library.


Stocktwits 2010 Charity Poker Tournament

Posted by downtowntrader | 10/17/2010 12:02:00 AM View Comments

Get ready for the Second Annual Stocktwits Community Members Charity Poker Tournament benefiting the Tuberous Sclerosis Alliance. The Tuberous Sclerosis Alliance is an organization dedicated to finding a cure for tuberous sclerosis while improving the lives of those affected. Tuberous sclerosis complex (TSC) is a genetic disorder that causes tumors to form in many different organs, primarily in the brain, eyes, heart, kidneys, liver, skin and lungs. This charity hits home for me, as I have a friend who has a child with this disease and the child has already had several surgeries despite being a toddler. As a fellow parent, I could never in my wildest dreams imagine having to struggle with watching my children suffer through a disease like this. One problem with this disease is that it is relatively unknown, so hopefully we can also raise awareness while also raising funds. Last year, as a community we raised over $3,000 and hopefully this year we can top that number.
This years tournament will be held on November 7th at 6:30pm EST on FullTiltPoker.com. Last years tournament was a blast and this year should have even more of your favorite Stocktwits community members participating. This will be a great chance to compete directly with Howard Lindzon, Phil Pearlman, Brian Shannon (@alphatrends), John Lee (weeklyTA), Jim Gobetz (aiki14), Mike Bellafiore (@smbcapital), @stockguy22, and others. In addition to the cash prize pool, there will also be Stocktwits prizes awarded for knocking out certain players, as well as being able to talk some smack on the stream throughout the evening.

If you are interested and want to learn more, please visit our site dedicated to the tournament.

Trading a Narrow Range Setup

Posted by downtowntrader | 9/29/2010 10:25:00 PM View Comments

As many of you who read my posts regularly know, I love trading narrow range setups. The primary reason for this is that I can greatly reduce my risk by stopping out as close to my entry as possible. This allows me to increase my risk versus reward as a multiple. In other words, if you are trying to limit yourself to trading opportunities with a minimum of 3:1 risk versus reward, it is much easier to shoot for a $1.50 gain while only risking $.50, than it is to shoot for a $15 gain while risking $5. While keeping your risk tight may expose you to more whipsaws, by waiting patiently for these narrow range setups to develop and then pouncing as the range is cleared, a trader can keep their win rate at acceptable levels.

Another important note is that a narrow range setup is not a trading system. It is a trading technique that can be applied to any setup or system. Traders can adjust this technique to their system by applying it to intraday time frames, or by using it as an entry technique for their own trading methodology. Not all stocks will provide a perfect entry with minimal risk, but traders should always be looking to be as efficient as possible in setting their risk.

The following setup is one example of how I trade using a narrow range to base my trading decision from. American Capital Ltd.(Public, NASDAQ:ACAS) had more than doubled in price between January, 2010 through May, 2010 before settling into a consolidation. This type of rally typically needs some time to absorb profit taking, and ACAS has been building a base since its May peak. Notice how the trading range was wide and volatile in the beginning of the base and has slowly narrowed in range as buyers and sellers reach an equilibrium. This is healthy behavior as shares exchange hands among market participants. The first positive step in this pattern is when ACAS cleared a descending trendline in September while also setting its first higher pivot high in months. It had also started to set progressively higher lows since June showing that buyers were slowly increasing their bids.

While the breakout from the triangle it had formed was a possible trading signal, the risk versus reward was not that attractive after a 3 or 4 day rise. However, ACAS has since settled into a very tight range while maintaining above its August high. The current trading range is only about 35 cents wide, which would leave a trader with a very small risk on a break above this range, assuming a stop out on a move back below the range. A trader could possibly tighten the stop even more, using the bottom of the candle used for the trades entry. So assuming an entry near $6.00, the most conservative target would be taking profits near the prior high near $6.65. While this works out to roughly 2:1, this setup actually has the potential for a much bigger gain. The measured target for the triangle breakout is closer to around $8.00. While I would likely be more conservative an eye the January 2009 peak just above $7, the potential for a surge does exist.

So this setup is attractive to me based on the fact that ACAS is starting to emerge from a base and has exhibited signs of accumulation. The narrow range that has formed as it consolidates is simply offering me a possible low risk entry for the thesis that ACAS will breakout from the overall pattern. While it would be tempting to cheat and buy before ACAS picks a direction, it is usually a better idea to wait for it to move out of the range. While sometimes you won't get stopped out, these stocks will often remain in a tight range much longer than you wish to wait.

While this trade is not fool proof, it is a trade I would take based on the small amount of risk involved. Traders should always keep an eye on how much they are risking first, and then the possible reward. If the setup fails, it's fine because the risk was limited and will be made up by the gains on the successful trades. If the markets cooperate, then ACAS may soon emerge from this tight range and possibly offer a trading opportunity.

Good Trading,


What Traders can learn from Rafael Nadal

Posted by downtowntrader | 9/15/2010 10:13:00 PM View Comments

As I was watching Rafael Nadal put away Novak Djokovich this Monday night to win his first US Open, I couldn't help but compare the qualities he has leveraged in improving his game to that of an aspiring trader. Nadal has literally willed himself into becoming the best tennis player in the world, amazingly enough, at a time when the best player possibly in history (Federer) is still in his prime. I was at the US Open earlier this week and marveled at how easy Federer positioned himself for each shot, and the best word I could use to describe him is efficient. Nadal however, can be best described as a machine that doesn't quit. As I broke his game down, I realized that so many of the qualities he possesses have a corollary in the trading world.

  • Expand your playbook: When Nadal burst onto the scene, he was a dominant clay court specialist. Despite the incredible success early in his career on clay, his game needed improvement if he wanted to duplicate his success in other venues. He worked very hard to not only improve his serve, but also his net game to the point each of these areas are now pluses, on top of being the top baseliner in the game. He eventually won Wimbledon which is an incredible accomplishment for a player groomed as a baseliner. With the US Open under his belt, he is also one of the few to accomplish a career grand slam. A trader should not get too comfortable with only one setup, as the market will eventually change and render that setup less effective. Traders should constantly look to expand their playbook in order to have options in adapting to the markets. Being great at one play is very important, and should not be minimized, but traders should be willing to stretch themselves in order to improve as a trader.
  • Eliminate Mistakes: As I was watching the final set on Monday night, they mentioned that Nadal hadn't made a single unforced error in the final set yet. I think he ended up with a single error in the last set when it was all said and done. This is flat out ridiculous. Nadal was playing someone who was at the top of their game and slugging it out toe to toe for many 20 plus shot rallies. This is probably one of the biggest reasons he is at the top right now. He doesn't give away points; he makes the other player earn it. As a trader, you must eliminate needless mistakes. It is hard enough to take money consistently from the markets, let alone if you are struggling with mistakes. Common mistakes could include, trading sub par setups, letting stops slide, or not sizing a position properly. Make sure your trading methodology is clearly defined, and then trade it well.
  • Plays every single point: Another amazing quality Nadal has is the unwillingness to give up on a point. I've seen Nadal up 40-Love, standing 3 feet behind the baseline when his opponent hits a drop shot. This is a scenario where many players would concede the shot, content to be up 40-15 on the next point. I don't think I have ever seen Nadal concede the shot. He hustle's for every ball, which forces his opponents into more errors as they try to hit perfect shots. As a trader, you certainly don't want to overtrade, but your job as a trader is to take advantage of opportunity when it is presented. You can't do this if you are not at your desk waiting for each opportunity. Beyond just being there, you must be prepared, whether that entails pouring over charts before the markets open or running through potential market moving news events. It takes a high level of concentration to be able to sit and watch the markets for hours on end, especially when it is dull and lifeless, but all it takes is one single opportunity to make a traders day.
  • He is in excellent shape: Nadal may be in the best shape on tour. He slugs away for hours on end, and may hit the most balls overall on tour. If you think about it, his game is predicated on prolonged rallies which he usually wins. You must be in excellent shape in order to withstand 4 or 5 hours matches several times in a 2 week period. While a trader doesn't have to be in the same physical shape as a world class athlete, being in good shape helps a trader remain balanced through the day and traders should definitely be well rested. One of a traders most important qualities is the ability to stay focused. Remaining focused is much easier when a trader isn't dealing with ups and downs of a high sugar diet or dealing with only a few hours of sleep. While a trader can certainly deal with being tired once in a while, they will surely have frequent concentration lapses if they are in a constant battle with their diet and rest schedule.
Traders who are not happy with their performance should take a hard look at themselves and ask are they working hard enough. Nadal could have been content to win a few French Opens and hang around long enough in other tournament to get some decent payouts, but he kept working at improving his game. He has managed to become the best player in the world, and is already on his way to becoming one of the all time greats. When someone is this successful, it is never simply from talent alone. The Michael Jordan and Tiger Woods of this world do happen to be talented, but they also outwork their peers and are never satisfied.

Traders should constantly be looking for ways improve their game as the markets are one opponent that is also constantly evolving. It's also worth noting, that a traders biggest adversary is themselves, much like any athlete who performs in a non team sport. It is not that easy to have lasting success in this field, but the ones who do have certainly adapted by constantly improving themselves.

Good Trading,


Some Bullish REIT's

Posted by downtowntrader | 9/13/2010 12:18:00 AM View Comments

I've written a few times over the past few months about how the REIT sector has continued to defy the bears by outperforming the general markets. As I was reviewing one of my bullish scans tonight I noticed these stocks continue to litter the top of this list. Despite the markets approaching some stiff resistance pretty soon, I continue to keep an open mind on stocks following through to the upside. This group would be as likely as any to lead the way if the markets manage to head higher. If the markets fail then at least this group has pretty well defined support levels to watch making it easier manage your risk.

Essex Property Trust, Inc. (Public, NYSE:ESS)
ESS recently set a higher high and appears to be pulling back for a retest of prior resistance near the low $108's. Watch ESS for a pause in this area and a possible turn higher back above $111. A break above this area would likely lead to new highs.

Vornado Realty Trust (Public, NYSE:VNO)
VNO has developed a steady pattern of flagging and then having an impulse move. The flags have been getting tighter as it progresses through its consolidation and VNO already set a new high. VNO is currently basing at an important level and would be very attractive as a long candidate if it holds its ground here and then turns higher.

Simon Property Group, Inc (Public, NYSE:SPG)
SPG continues to be one of the strongest in this sector and has actually started to trend into a pattern of higher highs and higher lows. SPG is currently in a small bull flag and could be close to a breakout.

AvalonBay Communities, Inc. (Public, NYSE:AVB)
AVB is another one to watch in this space. AVB recently emerged from a base it has been building but has quickly come back for a retest. AVB is pulling into a support level near $105 and should be watched to see if buyers support the stock in this area. A move back above $110.50 should definitely catch your attention.

Good Trading,


Who Sets The Price Of A Stock?

Posted by downtowntrader | 9/02/2010 01:17:00 AM View Comments

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 20th century. The historically unprecedented rise in the United States economy and equity markets during the last half of the 20th 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.

Focus on Strength

Posted by downtowntrader | 8/25/2010 11:36:00 PM View Comments

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,


Some Stocks Close to All Time Highs

Posted by downtowntrader | 8/08/2010 11:58:00 PM View Comments

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,


From Stalking to Buying

Posted by downtowntrader | 7/22/2010 10:53:00 PM View Comments

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,


TheStockBandit University

Two Stocks I am Stalking

Posted by downtowntrader | 7/16/2010 12:12:00 AM View Comments

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,


3 Stocks off the beaten path

Posted by downtowntrader | 7/07/2010 11:17:00 PM View Comments

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,


The importance of a trading thesis

Posted by downtowntrader | 7/07/2010 12:58:00 AM View Comments

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,


Talk Your Book - SVM

Posted by downtowntrader | 6/17/2010 09:40:00 PM View Comments

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,


Stocks Trending Higher

Posted by downtowntrader | 6/10/2010 11:01:00 PM View Comments

The current market has been punishing the vast majority of stocks as it corrects a rally that stretched over a year in length. Corrections are healthy for the markets and there is no denying that they were getting ahead of themselves a few weeks ago. While the chance for a much longer and deeper correction exists, there is no evidence yet that this is nothing more than a typical run of the mill correction. Unfortunately for swing traders, there really has been little to trade on the long side, and even shorting opportunities have been difficult with the constant ridiculous gaps every morning in both directions. Many former market leaders have been punished, and the majority of stocks are trading below some major averages. Currently only 50% of stocks are over their 200 day moving averages and only 20% are above their 40 day moving averages. With that in mind, I decided to run a scan to find the few stocks that are still trading above these moving averages as one way of finding stocks showing relative strength in this environment.

Rubicon Technology, Inc. (Public, NASDAQ:RBCN) is one of these stocks and is looking pretty decent as it consolidates in a triangle near all time highs. This is one of those charts that you could find all the time a few months ago, but have all but disappeared recently. If the markets can find some support here, this could end up clearing this base.

Funny enough, plastic shoe maker Crocs, Inc. (Public, NASDAQ:CROX) is another stock that has held up very well through the past few months after a brutal correction through the bear market. Maybe it was unfairly beaten down before, or maybe plastic shoes are back on the upswing, but this stock has respected $8.50 as support after clearing a long base back in March.

Sapient Corporation (Public, NASDAQ:SAPE) is another stock that has managed to stay in a consolidation throughout the recent market weakness after clearing a base earlier in the year. SAPE has found support near $9.00 on a few occasions and just reclaimed its 20 and 50-day moving averages. It looks like SAPE is on its way to testing its recent highs and top of the range. SAPE is actually trading at multi year highs and above a very long base on the weekly charts. Any move above these levels could lead to a squeeze higher.
While the market is not out of the woods, focusing on the strongest stocks will often pay off for traders. It's one thing to buy beaten down stocks as investments in long term accounts, but for swing trading, its a very difficult game to catch falling knives. These stocks have held up through recent weakness, and could benefit from a market bounce.

Good Trading,


TheStockBandit University

All it takes is one bad trade

Posted by downtowntrader | 5/31/2010 11:29:00 PM View Comments

I received an email from a reader asking for advice on a position that got away from him and he was commenting on how overall, he was trading very well, but this one stock set him back several weeks. One of the first thoughts that came to my mind is how important it is to be consistent as a trader. All it takes is one blow up to damage a trading account, reverse several good trades, or even ruin a traders year. This is a lesson every trader must learn and even experienced traders can fall prey to holding on to stock or idea against their better judgment.

All of us at one time or another have fallen in love with a stock or idea and held it despite the tape telling you in black and white that you were wrong. Trading requires the discipline to adhere to a set of trading rules 100% of the time, because the bottom line is that markets are not always rational and every trader is and will be wrong a healthy percentage of the time. It reminds me of a quote from Jesse Livermore, and I'm paraphrasing, that "getting mad at the markets for being irrational or for disagreeing with you was like getting mad at your lungs for catching pneumonia". You will be wrong in this game and it doesn't matter how good you get as a trader, there will always be times when the markets don't make sense and don't agree with you. The characteristic that separates the good traders from the failed traders is the ability to minimize the damage when they are wrong and to maximize the reward when they are right.

One way that being consistent with following your rules helps a trader is it allows them to conserve their mental capital in addition to their monetary capital. The trader that minimizes damage from a move against them is in a much better position to weather the storm when they hit a cold streak both mentally and fiscally. Also, many people don't mention this, but it is a simple fact of life that traders (especially holding overnight) will be hit with a surprise move against them every so often. The trader who minimizes their risk consistently is in a much better place to absorb these unavoidable setbacks, and because they have conserved mental capital by not having to agonize through a pullback below their risk threshold, is often invested long enough for a positive surprise that evens out the setbacks.

While not all traders use stops, all traders should have an exit plan and a level where they acknowledge that the market does not agree with their thesis. While some fundamental traders have a very good idea of why their are buying a stock and therefore don't use a stop based on their strategy, the simple fact is that the vast majority of traders should be employing some sort of stop loss. Even more important than having an exit plan is the consistency of following it every time.

The current market environment remains unhealthy and traders need to be cautious. There are several stocks that have been market leaders that have begun to falter. These are the stocks that often lure a trader into thinking they are getting a bargain only to slowly continue to correct with the markets. Often a trader will even double up or worse as it corrects. The best advice I can give, and the advice I gave this trader is to draw a line in the sand and refuse the make the hole any deeper. There are plenty of stocks out there and the only way to trade them is to survive with some trading capital. All it takes is one bad trade to undo several good trades, or worse, exacerbate a losing streak into a full blown blowup. If this issue hits home with you, follow the same advice and don't continue to dig a hole for yourself. No one knows if this market is headed lower from here or not and the most important thing for a trader is to protect their bankroll.

Good Trading,


TheStockBandit University

Overheated Solars

Posted by downtowntrader | 5/19/2010 11:39:00 PM View Comments

While I'm not convinced the markets have bottomed, the conditions are starting to become ripe for some short squeezes. Sometimes a short squeeze only lasts for an intraday spurt and other times it can last a few days. Although I don't often day trade, I will be more than happy to exit intraday if I can catch a quick move.
One group that may be setting up for a short squeeze opportunity is the solars. I think many of these stocks have had their backs broken and I don't think there are any in this sector that I would find attractive as intermediate term long plays right now, but I noticed that some of these stocks started rebounding ahead of the indexes today. These stocks have been beaten down the past few days and are really extended from their 20-day moving averages. Even though a stock can remain oversold for an extended period, the fact that these have been sold into oblivion, combined with how they rebounded early today has me thinking they could experience a retracement move back into prior support levels.

Trina Solar Limited (ADR) (Public, NYSE:TSL) is one solar that caught my eye today as it rebounded 2 points from its intraday low. Volume was very high on the reversal and this stock could easily bounce back to near $20 a share and still be "broken". One word of warning is that these types of trades are more advanced and traders need to understand that they are swimming upstream so to speak. While the opportunity exists for a quick move, risk needs to be controlled and more importantly traders can't get greedy and think they caught a bottom.

Yingli Green Energy Hold. Co. Ltd. (ADR) (Public, NYSE:YGE) is another Solar that has been hammered lately and started to rebound today. This is actually a stock I took today into the close on the possibility of an overnight gap or follow through in the morning. The initial target would be near $10 with an optimistic target near $11. Again, this is an aggressive play and by no means am I suggesting that YGE is bottoming.
Overall, the markets remain in a trading range and there really haven't been too many opportunities for my typical trading style. I've been patiently waiting for better opportunities and hopefully this is a good one.
Good Trading,