Yale Short-Term Trading Group

ANALYSIS: msft, cenx, bab

2006-12-28T13:00:00.000-05:00

As I've said before, I try to combine both fundamental and technical investing together when picking which companies to invest in. These three companies have both a fundamental idea that drives the stock price and technicals that make it a good play at the moment.

MSFT

Fundamentals
Personally, I really like microsoft from a fundamental perspective, even considering its 30% gain since July. I believe their products are really starting to shine, especially with Vista coming out next month for consumers.

Let's first consider the XBox. The Xbox dominated this Christmas and the reason was simply because it had more available consoles for consumers to buy this holiday season. While all the hype may have been around the Wii and the PS3, it's a moot point if no consumers can actually buy one for their kids. Gears of War has also seen huge success, which will help spur Xbox sales. Looking further down the road, I think the Xbox is going to benefit from the one year advantage it has on the other consoles. This helps the producers of the videogames as they get used to the console and are able to better use the system resources. It also means that more people have Xboxes right now.

Another product they just released was the Zune. I don't have too much to say about this, personally I think it sucks. However, they are marketing it like crazy, and sales have met expectations (which have been low). I don't see much out of the Zune though, and I think Microsoft is mainly using it as a way of getting its foot into the marketplace for now.

Microsoft is also releasing Vista, which I'm sure everyone knows about. There's been a lot of debate about whether people will need to make the jump to Vista. I think people will simply because it looks better, it offers better security, and it allows for faster multitasking. Of course we also can't forget the Microsoft Office that everyone will also buy. Has anyone seen OneNote? It's an amazing note taking program by Microsoft but it's unheard of in the student population. I think it's gonna be in demand as more and more students learn about it.

Technicals
The stock is sitting near its 52-week high, which it set not too long ago. It has maintained a solid uptrend in the last 6 months. Recently the movement has stalled a bit in the 30 area, but I believe the stock is taking a breather from its large gains. I see this as a buying opportunity before it moves further up.

BAB

Fundamentals
I see three fundamental reasons to be in this stock. The first is dropping oil prices, which have stayed low throughout this mild winter. This will lower costs for airlines. The second reason is the gradual consolidation of the industry, which has long been overdue. With more mergers we can expect more control on prices, which will lead to higher margins. As some of you know, the industry is extremely competitive. The consolidation will help reduce the competition. Finally, the third reason is the overall economic look. This is pretty important in such a cyclical industry. US economy is doing well and many investors are optimistic about the Fed's ability to keep inflation in check without hurting the economy. The housing slump looks to be improving a bit, which will help increase consumer wealth. I know British Airways isn't based in the US, but the industry as a whole will benefit from all of these reasons.

Technicals
52-week highs, and you know how I love stocks hitting 52-week highs. Strong uptrend, but I'm keeping a tight stop-loss.

CENX

Fundamentals
CENX makes aluminum, and aluminum's prospects look great in the coming years. Originally I was in Alcoa, but I didn't like how I was so closely tied to the Dow. Aluminum looks great because of rising demand, especially in the emerging markets. Boeing has been doing extremely well because of the orders it was able to win in China and India, and it just so happens that aluminum is used heavily in the planes that Boeing builds. Aluminum will also be used heavily in construction as China and India continue to grow.

Technicals
CENX just recently crossed its 20 day EMA, a bullish signal.

ANALYSIS: hov, dhi, len, phm

2006-12-10T00:33:00.000-05:00

So I've been a little busy since this last summer, so I haven't updated in awhile. I've still been following the markets though! The last post on RRGB actually was a pretty good trade, and I was able to get a good 20% out of it. Right now I'm currently in MSFT, AA, and BAB. I'll make a post on why I'm in there a bit later. For now, I wanted to talk about home builders, which I've been keeping an eye on in the last couple of months.

Home builders have taken huge hits this past summer with the whole housing bubble burst; Hovnanian, Pulte, KB Homes, and DR Horton have all dropped anywhere from 30% to 50%.

However, you can also notice that after a certain period of flatness (I'm getting real technical here), the stocks have slowly started to climb back up. Technically, this looks a lot like a round bottom, which is just what it sounds like. Fundamentally, this pattern also suggests that the housing market has finally hit a bottom. Back in September and October, I repeatedly read about the lower-than-expected housing orders for the month, yet I never saw these stocks in the red following the news. It looks now that the housing market is slowly recovering from the exaggerated sell, and I would suggest looking into some of these homebuilders.

TUTORIAL: Shorts, Short Squeeze, and rrgb

2006-08-14T00:36:00.000-04:00

Shorting is basically the opposite of buying, or going long, on a stock. When you short a stock, the broker is selling its shares of the stock and giving you the money for it. When you want to close your position, you "cover" your short by buying back the shares that the broker sold. This way, if the shares drop in price, you'll be able to buy them back at a cheaper price, earning you some money. Because the broker also has to sell the stock for cash, a short position is made on margin.

The interesting thing about covering your position is the fact that you have to buy back the shares. When a lot of people are short on a stock and good news comes out, shorters are forced to cover their position, which generates buying pressure on the stock. This buying pressure can create big upward price movements. This is called a short squeeze.

I spotted a good candidate that looks like it's about to have a short squeeze the other day. Red Robin Gourmet Burgers has been beaten down for quite awhile. Its large debt, increasing prices, and the economic slowdown brought on by gas prices and rate hikes have made many people bearish on this stock. In fact, 33% of rrgb shares were short as of July 11th.

However on Friday the stock surged up 8% on a better-than-expected earnings report. The large move was supported by huge volume as well. This type of news is the type that would cause many to cover their shorts. With 33% of the people short on RRGB, I think the 8% gain on Friday is not quite finished. I've bought into RRGB and if I'm correct, it should have some nice gains in the coming days as shorts scramble to cover.

ANALYSIS: hov

2006-08-11T23:58:00.000-04:00

Hovnanian Enterprises is a home builder like KB Homes and Pulte. Basically, it's been tanking along with the rest of the industry. It actually reached $70 at one point back in July of last year, but after a head and shoulder formation, it's been on a downward trend since then.

I'm short on HOV because fundamentally it's lookin bad, and technically it's lookin bad. Fundamentally, the housing market has been slowly deflating since the start of the year. Analysts have been cutting back price targets and orders have continued to decline. Technically, HOV has been in a strong downtrend and the stochastic and macd has recently shown a bearish cross.

HOV has some good things going for it as well. It has been dropping for a long time, and some might think that the slowing house market is already priced into the stock. Also, the short interest, which shows a percentage of the outstanding shares that are short, is at 33%. On one hand, it shows that a lot of people are bearish on the stock. On the other hand, it also means that there are a lot of people ready to cover, which would generate buying interest and cause a dramatic increase in the stock price. I've read of an entirely separate strategy where a position is entered into a stock with a 40% short interest and positive relative strength. Finally, the downtrend is gradually straightening.

Personally, I still think it's got some ways to go down. The housing market just sucks and there's been nothing but bad news about it. Also, the macd and stochastic cross, along with the downtrend, is a strong enough sign for me. However, I'm keeping a tight stop-loss just in case.

Another note: MSN Money had these grades for HOV:
Factor Grades
Fundamental D
Ownership NA
Valuation A
Technical F

I thought that summed it up pretty nicely.

I've been short since 27.20, and although the rise about 5 days ago really scared me, HOV has dropped about 12% in the last four days.

Quick update, LH has been looking pretty hot lately. Even after friday's bear market where i believe 9 out of the 10 major sectors were down, LH showed relative strength with only a .32% drop. It's been up about 6.5% since I posted about it.

ANALYSIS: lh update

2006-07-10T05:49:00.000-04:00

Lab Corp does blood tests, hiv tests, urine tests, dna tests, basically every test you can think of that's used at a hospital. Here's the chart.

If you were to look further back on LH, you'll notice that it has a history of making large moves after consolidating for a certain period of time. As you can see, until mid June, LH has traded in a very narrow range. Yes, the move was made almost a month ago, but I see it as a move that should last longer than its previous moves largely for one technical reason; its move upwards has been much more gradual. Its past moves were huge moves that lasted at most one month, but each time the rise was meteoric.

Again though, following my momentum strategy, the main reason I'm in this stock is because it is trending well in an industry that is also trending well in the last couple of months, the medical laboratories and research industry.

A word of caution: there was previously a case pending on a patent that Lab Corp was infringing on. It was thrown out by the Supreme Court in favor of the other company in late June. The news stopped LH at its 52-week-high, dropping it back to the consolidation resistance where it found support (resistance turns into support) on around June 28th. After people began to realize that the case would not hurt the company, the stock has begun to climb back towards the high set before the case was thrown out ( a bullish sign). Even still, with bio companies, it's always important to keep up on company lawsuits, patents, etc.

Update: LH is looking more and more like an ascending triangle with declining volume to strengthen the formation. This is a bullish chart pattern, one that you should trade on the breakout above the resistance line.

ANALYSIS: deo

2006-07-10T05:17:00.000-04:00

While I was looking through the brewery industry, I noticed the chart of DEO.

As you can see, it looks like it has formed what is called an (a)symmetrical triangle; the highs are getting lower while the lows are getting higher. This is generally a sign of investor indecision, but they also tend to be followed by a break towards the direction of the preceding trend. In this case, it would be an uptrend. Does this mean you should bullish on the stock? Personally, I’d say no. Although the brewery industry has been on a tear lately, there is no reason really to go long on the stock now while it’s stuck in this symmetrical triangle. Instead, it might be better to wait ‘til the triangle is broken, and then make your decision on the break (short if it is broken to the down side, long if broken to the up side). Keep an eye out on DEO.

ANALYSIS: nvda

2006-07-04T16:45:00.000-04:00

Nvidia is a producer of computer graphics cards. I've actually got a card of theirs that I just bought recently. They've been hit hard by slow demand recently, but it looks like they might be emerging from a bottom. Here's what I saw:

The first thing I noticed was a "double bottom" formation, or an "Adam and Eve bottom", or a "W formation", or whatever you want to call it. I wrote a post earlier about double bottoms here. It looks like a double bottom has formed, which would be a bullish signal.

Another bullish signal I noticed was an MACD cross. The article on MACD crosses is located here.

The third positive sign was what looked to be a move north on the RSI. Basically, when the RSI is in the 20 area, it is a signal that the stock is oversold. When it's at 80, it's overbought. Right now, NVDA looks to be moving up from oversold territory.

Finally, NVDA has crossed its 20 day ma. Any time the price of a stock is above a major moving average (20, 50, 200) it is a bullish signal. NVDA just recently crossed its 20 day ma.

Based on all of these signals, it looks like NVDA could possibly have found a bottom, and may be moving up from here.

Market Update 07/03

2006-07-03T16:28:00.000-04:00

The market has calmed down a lot in the last couple of days. After the huge sell offs in May and the back-and-forth trading in June, market volume has begun to slow and the dramatic swings of the market have turned into consolidation. With the 4th of July just coming up, everyone on vacation, and the Fed decision past us, volume will be pretty dead.

For me, I like these conditions much better than what has been going on in the past couple of weeks. Before, macroeconomic news was affecting every stock. If you look at the charts of the industries, you'll notice that almost all of the industries followed the huge drop in May. Now, with the market calm, I can get back to my old strategies, such as the one I outlined here.

However, it is important to remember that this is historically one of the worst performing times for the market. I mentioned this in my last post; we are currently in the summer doldrums as well as the midterm of the presidential cycle. A lot of people have entered cash positions, which isn't too bad an idea right now.

Sorry I haven't updated the site too often, but the market has been a little boring. Right now I'm long on Google and short on GNSS, I'll get a post up on why I'm in them a bit later. For now feel free to check them out.

Overall Market Analysis 06/20/06

2006-06-21T02:58:00.000-04:00

When I last made a post on the overall market sentiment, things were looking bearish. Today, things continue to look bearish despite a small rally today. Here's a quick look at the Dow's chart:

Technically, things aren't looking too great. It looks like the Dow Jones has formed a top in early March and has started to develop a downtrend. Even worse, the 20 and 50 day moving averages, which have served as support levels, are now resistance. The market has now failed to move above these levels twice. Also, what looks to be a small double top has formed. This occurred in late May, and the subsequent drop followed.

Fundamentally, things are still looking bleak. It is almost certain that the Fed will hike rates up again in the next meeting (next week I believe). Bernanke has made comments about the Fed's responsibility to maintain a reputation as inflation fighters, and other Fed members have described the current inflation as unacceptable.

Also, historically the 2nd and 3rd year of the presidential cycle (so for Bush that would be 2005 and 2006) are almost always the worst years for investing. Furthermore, the months from May to September are historically bad months for investing as well.

Technically, there are some positives. If you look at the chart again, you can see that the MACD and the Full Stochastic are both showing some signs of a reversal. The MACD is on the verge of crossing the signal line, and the full stochastic is slightly starting to turn upwards from oversold territory. However, none of the data is conclusive. Also, the market is going to need some big strength in the coming days to break above the resistance. With the fed hike looming, I can't see this happening.

Fundamentally, there was good news today with housing construction coming in well above expectations. Some investors believed this to be a sign of continued strength in the economy. Even still, the housing market is expected to dramatically slow this year, and the sharp rise for last month's construction was followed with a bleak forecast for June.

Ultimately, I think you should remain short on the market. Technically there is a chance of a turning point in the coming days, however none of it is too convincing yet. Also, fundamentally, things look pretty bad with the upcoming fed hike. Until the market shows more signs of a bottoming, I would remain short.

One more thing. If you want to go long on stocks, look into Japanese stocks. The Japanese economy is coming out of a deflation crisis, so some inflation could be good for the economy.

Simulated Portfolios

2006-06-19T16:33:00.000-04:00

Hey all,

The simulated portfolios ended a week ago. Due to some errors at the site, I couldn't really tell who won the contest (somehow, some fake stock that doesn't exist was added to Henrique's portfolio, and it added like 25% to his portfolio gains). If you're still interested in doing this, you can join a public investing contest. I'm in the one called "Beginners Game for Investing". I'm also planning on starting up a new one when the school year starts.

Bonanza

ANALYSIS: Overall Market, Commodities, Bird Flu

2006-05-24T06:02:00.000-04:00

The market has been doing pretty badly lately. There is a strong sense that the market is oversold, having dropped so many points in the last week or so, yet even still the market finished down for another day. The market shouldl rebound in the next couple of days, but I don't think it will last very long. The concerns that I mentioned in my last post are still lingering, and it appears more and more likely that the Fed will raise interest rates yet again.

Commodities have followed (or maybe lead?) the drop in the market. Steel, silver, copper, aluminum, and many other commodities have all seen huge drops in the last week. It seems that many on Wall Street (from what I've read and heard) believe that this is just a healthy correction in their meteoric rise this year, and have made predictions that it will continue to rise later (maybe after summer). However, I'm going to stay out of it for now. The drops have scared me a bit, and some think that they have reached a top. It is generally believed that the time around the beginning of Summer is always a bad time for the market. People go on vacation, taking their trades (volume) and their money (selling) along with them. Because of this, I am going to stay out of them for awhile until more data is available.

Consider taking a look at life insurance, which continues to do really well. The Entertainment - Diversified industry also continues to do well. This industry includes companies such as Disney, Time Warner, and Vivendi. DIS, V, and NWS are all showing relative strength.

One last thing, bird flu-related stocks may be a good play. It's been a hot topic for some time now, and it has gotten worse now that some scientists are worried that the virus has evolved into a new strain that can be transmitted from human to human (dang, that's pretty scary). Cases are also being investigated in Indonesia. Also, there are some reports that Australia is not well equipped to handle a bird flu outbreak. MedImmune (MEDI) is one company that has signed a contract with the US Government to produce an inhaled vaccine.

Overall Market Analysis

2006-05-16T05:29:00.000-04:00

It looks like now is time to be short on some of your positions. The market has shown strength in the last couple of weeks, but it appears that it is now correcting itself. After dropping 260 points on Thursday and Friday, the market recovered a bit today. However, it appears that this rally will be shortlived; there are still oil concerns (problems with Chavez and in the middle east as usual), and with the increasing gas prices comes concerns of inflation and another upcoming rate hike by Bernanke. Also, the Hurricane season is coming up as well, which could be further bad news for the economy and for gas prices.

Technically, the Dow Jones appears to be ok. You can see that the uptrend is still in tact and the Dow remains above the 50 day moving average.

However, the fundamental news suggests that the drops are not yet finished. Because of this, I would suggest having at least one short position in the weeks to come.

TUTORIAL and ANALYSIS: Double Bottoms - AAPL and GOOG

2006-05-02T23:31:00.000-04:00

A double bottom is another chart pattern. It basically should look something like a W with a large drop in price, a small rebound, another drop that stops at its previous drop, and an eventual climb back up to high prices. It's a bullish chart pattern that usually will climb after the W pattern has formed.

GOOG

Google formed a double bottom not too long ago. You can see that after it had a huge drop from missing earnings expectations, it formed the double bottom pattern. After forming it, it climbed back up to 450 before settling down again. Yes, as of today Google is looking a little bad. Even still, if you had gotten in after the W had formed and you used tight stop losses, you could have gotten out with a good gain.

AAPL

It looks like after today, Apple has formed a double bottom as well. This W pattern is a little smaller, but it is still legitimate. There's heavy resistance at its current price, and I would wait for a break of this resistance to get in. If you do get in, I think a stop loss at just under 70 would be good.

UPDATE: msft

2006-05-02T22:52:00.000-04:00

MSFT missed profits, and as a result the stock plunged huge on Friday. The post I had made on Friday was actually meant to go out on Wednesday, but I had accidentally posted it on a different site and this blog was also having some problems.

As I had said, most investors had stepped to the sidelines to watch MSFT; the price had been trading in a very narrow gap. When the news of the profit miss came out, the buy side was overwhelmed by the sell side. Once the news came out, with the buy side already weak, the stock was bound to take a nose dive. The profit miss by itself was a large part of the 10% drop, but it wasn't all of it. The narrow trading channel that had been created prior to the news I feel played a large part in the drop.

ANALYSIS: msft and intc

2006-04-28T02:21:00.000-04:00

Intel and Microsoft are followed by a crapload of people, so I thought I'd do a real quick analysis on both of them.

INTC

INTC has been in a strong downtrend. As you can see, the price has been declining ever since mid January when I believe it missed earnings expectations by a lot. However, it does appear that the price may be slowing in its decline. The MACD, which basically measures momentum, has noticeably slowed and is moving towards zero, and the downtrend has become more drawn inwards. As of now, it looks like INTC has just about reached the bottom of its fall. However if I was thinking of getting in, I would definitely wait until this downtrend is broken just as confirmation.

MSFT

Microsoft is in a somewhat similar situation as INTC. It's not in a downward trend, but at the same time I can't recommend a buy or sell signal on it either. Since January, MSFT has been forming what's called a symmetrical triangle pattern, which is where the stock reaches lower highs and higher lows. Basically, the price begins to narrow into a small channel. This pattern is a sign of investor indecision; investors are unsure of where the stock is going, and until big fundamental news is released that changes investors' view on the company, it will stay in a tight range. However, once that news does come out, MSFT will have a huge move in price. During that moment, both the bullish and bearish investors will agree on the direction of the company, and the stock will move largely into the direction of the news. So basically, with Microsoft, I would stay out until the triangle is broken on big news and big volume.

ANALYSIS: slw

2006-04-17T17:34:00.000-04:00

SLW is one of the stocks that I got into along with WON, and it was found using the same strategy that I had discussed before. I was looking for exposure to the metals industries, and Silver Wheaton looked like a good candidate; it's one of the few companies where all of its revenues are from silver. Technically, SLW had a couple of things going for it; it had a tendency to bounce off 20 day ema as support, and it had formed a bull flag. A bull flag is another chart pattern, and it's basically the same thing as waiting for a pullback in a stock that is hitting new highs. A bullflag should look exactly like what SLW looks right now:

Notice the "pole" is the run up in price, and the "flag" is its recent consolidation. Also notice the touch of the 20 day ema, and the declining volume (in bull flags, volume must decline during the creation of the "flag" in order to show that the stock is only taking a breather to prepare for its next big move). A breakout was imminent, and it seems that it may have started today after commodities made large gains. SLW followed the industry with a 5% gain of its own.

So basically bull flags require a pole and a flag component, and they require declining volume during the development of the flag. The 20 day ema support is just something that can help you time trades better, but is not necessary for a bull flag.

Bull Pennants are very similar to bull flags, the only difference is that instead of moving horizontally after the "pole," the price may drop a little, forming the "pennant." Again, volume should be declining during this period.

STRATEGY: Buying and Selling Stocks

2006-04-12T03:31:00.000-04:00

There is more to being successful in the stock market than just correctly predicting whether a stock will rise or fall. I think a lot of people don't realize this. Correctly timing when to enter and when to exit might be the main factor in determining how successful you are in short-term trading.

Say you are about 80% sure that a stock will go up in the next couple of days. The next day, the stock drops 3%. That 20% uncertainty grows larger. Were you wrong? Should you get out now? What if the day after that, the price doesn't move? All sorts of emotions come into play, and it can really screw with your head. For a trader/investor, this is very very bad. Emotions cloud your logic and judgment, and you'll make decisions that you may regret later. I actually read an article not too long ago showing that people with brain damage in the areas responsible for emotion (the amygdala I think) turn out to be better investors than perfectly healthy people.

To fix this, you should always try to set rules for your trading and make them as objective as possible. When you first enter a trade, the first thing you should do is set a price at which you'll sell no matter what if the stock reaches this point. This is EXTREMELY important, and you MUST stick to this as often as you can; these "stop loss" prices will help limit your losses in case your prediction is wrong.

The second thing you should do is set some objective way of selling the stock for profits. I can think of two ways to do this (there could be more): setting a certain price or % gain target to sell at, or using trailing stops. Picking which one depends on the type of trader you are, but personally for myself I like the trailing stops more. Selling at % gains or certain price targets are good in that they will guarantee that gain as long as the price gets there. The disadvantage is that sometimes the price could get to within a percent of your target, but not reach it. You could also be missing out on more profits if the stock were to go up an additional 10% above your target price/percentage gain. Using trailing stops will capture the additional profit and also guarantee that you leave with at least a little profit, but since it trails, you will always be a bit short of the peak. If you can predict what price the stock will peak at, it may be best for you to just set a certain % or price to sell at. Here's a nice-looking picture I drew of the two sell methods.

So how do you pick price targets? Picking price targets is hard, and that depends on your analysis. You can base it on resistance points, or you can base it on trend levels, or you could base it on targets that come provided with chart patterns (a lot of chart patterns will have a price that it will expect to reach). You can always skip all of this guess work and use a trailing stop method as well.

Picking stop loss points may be even more important. These points, and how well you stick to them, are really what separates the successful traders from the crap investors. To pick them, you should always be aware of the risk/reward ratio. Everyone knows that you should always seek to find the stocks that have high reward with a low risk. However, with short-term trading, it is easy to forget this. For example, you might expect to get a nice 5% gain from a stock, but at the same time hold on to it if it were to drop 5%, thinking that it will eventually rebound. Instead, the ratios should always be greater than 1, and you should always be looking for setups that involve tiny risk. This would mean that your stop loss point, whatever it is, shouldn't be too far from the price it's at right now. Of course if it's too tiny, you'll end up getting stopped out of all your trades and you'll end up with more stopped losses than gains. However, if you time things right and use just the right set ups, it is possible to really keep your losses at a small amount. For example, here is an ascending triangle set up that I had mentioned previously, and the risk/reward ratio on it:

Knowing that the top of the triangle in an ascending right triangle set up is a key support line, you can set a stop loss point right below this. If the support here is blown, chances are it will continue to drop. With the entry at 26.1 on breakout and a 25.5 stop loss, you are risking 2.3% for a reward of greater than 15% (depending on what you set this at).

So that's the gist of it. There's two type of orders that can help you time your buy/sell points better, stop and limit orders. For selling for profits, limit orders are placed at a certain price and they'll sell when the stock hits this price or anything above it. For selling to stop your losses, stop orders will sell at a certain price or anything below it. For buying, limit orders are for buying at a certain price or lower (15, or anything lower than that for example), and stop orders are for buying at a certain price or anything higher.

Knowing buy and sell points are extremely important. I suck at this stuff, and although I think I can make pretty good calls on stocks, I usually always get screwed by either selling too soon with profits, or selling too late with losses. Because of this, my two or three bad calls have almost outweighed my six or seven good calls. So the lesson to learn from all of this is to make sure you set objective stop loss points!

ANALYSIS: won

2006-04-12T02:33:00.000-04:00

WON

Westwood One Inc. looks horrible. I found it using the strategy discussed here, and WON just happened to be one of crappiest looking stocks in one of the worst industries right now, General Entertainment.

I suspect the industry's current crappiness has to do with interest rate worries stemming all the way back to the last rate couple rate hike announcements. Since entertainment is so sensitive to oil prices and rate hikes, and with oil prices rising and the economy still looking strong, I thought the General Entertainment industry would be a good short-term industry to short.

Out of all the stocks in General Entertainment, WON has particulary looked unattractive as it has been hitting new 52-week lows consistently (in fact, today it hit a new 52-week low) while maintaining a strong downtrend. I had a few concerns getting into the stock today; the full stochastic is still showing oversold (I'll explain this more in a future tutorial... for now and for those who don't know, all you need to know is that 20 is oversold while 80 is overbought), the stock took a 5% drop today, and the market will most likely recover a little after the beating it has taken in the last couple of days. However, with the concerns over oil prices, Sharon's death, and the strength in the economy (which will lead to higher interest rates), I think there will be enough bad news to sustain the downtrend. Also, it appears that the 20 day EMA, which as I've talked about can act as support in uptrends, has provided strong resistance to any upward price movements on WON.

I entered at 10.49 and I'll be getting out if it ever closes the day above the 20 day EMA.

TUTORIAL: Ascending Right Triangles

2006-04-09T18:41:00.000-04:00

An ascending right triangle is one of many chart patterns that technical analysts look for. For those who don't know, chart patterns are basically patterns that will give hints to where the stock is going next. An ascending right triangle is a very bullish, fairly reliable chart pattern that should look something like this:

So an ascending right triangle is composed of two parts:

First, there's the right triangle. The idea is that there's a certain price that the stock cannot get over but has repeatedly attempted to break (resistance). After each failure, it has a small pullback that gets smaller in size and higher in price.

The other part is the breakout, which is absolutely needed to confirm the ascending right triangle. This is basically the day that the price breaks out of the top of the right triangle and into new highs. The top of the triangle, which was previously resistance, is now support. If the price ever gets to this level, chances are it will recover. You'll want to buy in either the day of the breakout or at the new support line if it pulls back after the breakout.

You'll also need to look at volume to confirm the pattern:

Ascending Right Triangle: Volume here should be declining as the price narrows in at the tip of the right triangle.

Breakout: Volume should be large with the breakout to show that buying pressure is strong.

Recent Examples

ISV

28.3% gain since breakout

TEK

9.2% gain at it's current price since breakout

NVDA

18.8% gain since breakout

ENG

6.96% gain since breakout
Note that ENG made huge gains and followed it with huge drops. However, we would expect the top of the triangle, or the $11.00 range, to be support in case it does continue to drop.

And finally, one that I'm thinking of getting in...
Q

However, you probably shouldn't get in now. The first part of the pattern has been completed, but you'll need to wait for a breakout. If this thing hits 7.10 or so, then you should look to get in.

Descending triangles are basically the same as ascending except they are hitting lower highs instead of higher lows (descending). They're a bearish signal.

-Bonanza

TUTORIAL: An Alternative, Riskier Way of Reading the MACD

2006-04-08T16:54:00.000-04:00

In the previous tutorial on moving averages, I talked about how to produce buy/sell signals on the MACD. Basically, the signal was a crossover of the 26-12 line with the signal line.

However, there is a better way of reading the MACD. Rather than waiting for the crossover, you can instead look for bottoms and tops (reversals) of the 26-12 line, and using the crossover of the signal line as confirmation. So basically, you're looking for a rounding off of the 26-12 line. Here's an example:

Here, you would have made a little extra profit by having earlier entry and earlier exit points. You can see that in late October produced a buy signal with this alternate method, and in early December it produced a sell signal. Similar signals were produced in late December and mid January. These signals showed signs of the 26-12 line reversing their current trend.

The advantage of this method is that you get earlier entry and exit points. This way, you are less likely to miss out on big gains. However, this method can also produce many false signals. It's also much less objective, which only increases the error rate. Therefore this method is riskier, but also produces a slightly bigger reward.

-Bonanza Chalaban

TUTORIAL: Moving Averages and the MACD

2006-04-08T16:01:00.000-04:00

Moving averages are just another tool that can be added to a technical analyst's charts. Moving averages basically give you the average of the price in the specified amount of time. It doesn't seem too great, but it's actually a pretty useful tool.

By the way, if you're wondering where to get access to charts for technical analysis, this StockCharts is free and pretty good.

There are two types of moving averages:
Simple Moving Average (SMA): Just the actual average in the specified amount of days. This is just the mean of the price.
Exponential Moving Average (EMA): A tad different in that the price of the stock in the last couple of days has more weight placed on it than the price of the stock 15 days ago. In other words, there's a little more emphasis placed on more recent price movements.

There's a lot of uses for these moving averages. For instance, they can smooth out choppy price movements and reveal the current trend of the stock:

This is the chart of MSFT in the last 7 months using a 20 day EMA, a 50 day EMA, and a 200 day EMA. The price movements have been up and down, but as you can tell by looking at the moving averages (the 200 is probably best in this case), the trend has been slightly upwards.

Moving averages are also used a lot in indicators. Perhaps the most commonly used indicator using moving averages is the MACD, short for Moving Average Convergence/Divergence. It usually uses a 26 day EMA, a 12 day EMA, and a 9 day EMA. The 12 day EMA is subtracted from the 26 day EMA, and this difference is plotted as one line. The 9 day EMA is plotted as another line and used as a signal line; when the 26-12 line crosses the signal line, it marks the end of a trend. You would then short/long according to the situation.

As you can see, MSFT produced some big buy/sell signals from the MACD a couple of months ago. However, it also produced some false buy/sell signals. Sometimes, if the price gains a huge amount in one day and produces a steep cross of the signal line, you may get a buy signal, but you may have also missed out on most of the profits. For this reason, you usually want the 26-12 line to gradually cross the signal line instead of plowing straight through it.

Moving averages are also used to measure momentum of the stock. If the price of the stock is above the MA line, it generally means that the stock has strong momentum. Sometimes, as I mentioned previously in my strategy on momentum stocks, the MA lines can also act as support lines. STX is another good example of this.

Having recognized its history of bouncing off of the 20 day EMA as support, you could have entered STX in early February or late February as it was beginning to touch its 20 day ema. STX then followed each touch with a week of gains. Of course, this predictability was broken in early March when it dropped below the 20 day ema and stayed below for some time (in fact, the 20 day ema then transformed from support to resistance, as support/resistance lines often do). I happened to buy in at this time and got burned pretty badly. This is why it's important to have stop loss points, and to actually stick to them. If I had done that, I would have settled with a 2% loss instead of a 10% loss. You should be ready just in case the support line doesn't hold.

-Bonanza Chalaban

STRATEGY: Momentum Stocks in Strong Industries

2006-04-08T03:00:00.000-04:00

Here's a strategy that I'm currently using in my simulated portfolio at virtualstockexchange. I actually got this strategy straight out of a book on swing trading that I read (I can lend it to anyone who wants to read it), and it was explained by Bert Dohmen, a famous investor that's often mentioned in Wall Street Journal. You can find more info about him here . However I've also seen this strategy explained at other sites, such as marketwatch. I really think its strength lies in its simplicity.

So the strategy is based on the idea that even under bear markets, there is at least one industry doing really well. It could also be a strategy that momentum traders would use. The main advantage of this strategy is that any drops in the stock price will probably be temporary; the stock has the strength of the industry and the strength of the market to fall back on and to help pull itself back up. The strategy is:

1. Determine the overall state of the market (bullish or bearish). It is always ideal to short in bear markets and go long in bull markets.

2. Find the industries that are performing the best or worst, depending on the state of the market. I always get this info at www.prophet.net, Explore, and then Industry Rankings. However you can find this info at places like yahoo or at our virtual stock market site as well.

3. Find the stocks in these industries that are performing the best (or worst) and are trending the best (or worst). By trending I mean you should try to find stocks that are hitting new 52-week-highs, and that are in an established uptrend or downtrend. The easiest way to do this quickly is to find the industry, click on the chart image under charts, click on chart controls, then change "dur" to 1 year. Now, all you have to do is look at the stocks in the industry and find the ones currently at a price that is higher than at any other point on the chart (and with a strong trend).

4. Pick a stock, buy in (preferrably at a pullback), set a stop loss point. A stop loss point is just a price you set to sell the stock at in case it starts to drop. This minimizes your losses.

That's the gist of it all. The reason why you want stocks at a 52-week high is because there is absolutely no resistance (if you don't know what support/resistance is, I can send you the TA presentation I did on April 5th) to slow down the price. The sky is the limit. Usually however the price can't accelerate too quickly or there will be quick profit taking. Because of this, there are often a lot of pullbacks in these stocks that provide great entry points. Many stick to buying in pullbacks, whereas others (such as Bert) like to buy as soon as it breaks a new 52-week-high, saying that people tend to miss the biggest moves when trying to get the timing exactly right. However, you have to be careful if you buy at pullbacks; if the stock hits its ceiling and starts to reverse, you may not recognize this and instead believe it to be another pullback. To protect yourself from this, you need to set specific stop loss points and stick to them.

Examples
Here are two stocks currently in my fake portfolio (and in real life I actually have money on ROK).

ROK

As you can see, ROK has a strong upward trend (connect the highs and lows in short timespans) and has been continually hitting new 52-week-highs in the last couple of months. If you see this at any point in the upward trend and start a long position on ROK, you'd make some big ass gains. Also, Rockwell Automation is in the Conglomerates industry, which has gained over 6% in the last month. This isn't exactly the best industry in the last month, but it is still a solid gain. What really made ROK stand out was its predictability; its entry points are easily timed. As you can see, each ROK pullback has ended at roughly the time that the price has touched the 20 day EMA (a moving average that can be graphed, I will get into this some other time), or the green line. With some stocks, moving averages can act as support lines and resistance lines as well, not just specific price ranges. I bought in at this point because it was near the 20 day ema and as of Friday I'm up about 2.5%.

LFC

LFC is a Chinese life insurance company. It satifies the rules of the strategy because it is in a strong industry (life insurance industry in the past month has gained 17.5%), and because LFC is clearly in a very strong uptrend. I bought in at $49.4, and I'm up about 9% on it.

One more thing: This strategy works for shorts as well, just flip everything. Look for stocks in downward trends and look for industries doing horribly. 52-week-lows is also a good thing.

-Bonanza Chalaban

Yale Short-Term Trading

2006-04-06T01:04:00.000-04:00

Ok so I tossed the newsletter idea, and I decided to post a blog. With a blog, I think we'll be able to update quicker and we'll all be able to see each other's ideas in one place. It seems a bit slow and outdated to be meeting in person once a week when news is coming out every hour. I understand that a lot of you aren't really quite sure where to start or what to do, but I will post all that I know here so that you can get started. If you want to add anything, don't be afraid to post on this site as well. What I'm planning now is that we can all update the blog every so often with strategies or tutorials, and we all can just come visit the site as often as we feel like to get investing tips. Create an account here and let me know when you're done so I can get you on as a member of the blog.

When you post, you can post about any of these things. Try to stick to the format so the blog stays organized a little.

Strategies
Whether they deal with TA or not does not really matter as long as they are strategies for short term trading.
Format Title - "STRATEGIES: How to Make Money"

Analysis
This is if you want to post your analysis of any stock that you're watching right now. It could be a real quick paragraph and image just to let us know about it.
Format Title - "ANALYSIS: msft"

Tutorials
If there's something that you think members of the club don't know about, and you want to share the info.
Format Title - "TUTORIAL: Indicators"

Portfolio Updates
This is if you want to write about your current portfolio and let us know how you're doing on them. You can write about the stocks you're in and why you chose them, your gains and losses, etc.
Format Title - "Portfolio Update: Bonanza Chalaban"

If you're wondering how to get images on posts, you'll need to upload your pictures somewhere (ImageVenue is good), and then you can just copy and paste the html code into here.

If you want to write about anything else, I'm sure you can figure out a good title for it. Feel free to write about anything you want. You can also comment on posts if you disagree or if you have questions. I encourage you to do this because it's our way of talking to each other about what we think about each other's ideas.