Updating/weeding out the list

Today the market had very respectable and possibly encouraging gains. But judging from the volume on the major index ETFs, trading was not heavy enough to look at the day's action as a convincing change of sentiment in the market. This images shows a daily chart of the three majors since November with a 30 day Moving average. All of them have areas of likely resistance to overcome before any serious bullish posture could be entertained again. In addition to resistance levels from price action, the descending 30 MAs might just might provide another influential nudge to the down side.
It should be noted that they all are in a double bottom reversal pattern, but there are a few things to consider. 1) The pattern is meaningless until the resistance from the high between the two bottoms is broken. 2) A bullish reversal should come at the bottom of a bearish trend. The recent bearishness is really just the first breakdown of a very bullish trend and not yet a trend with lower highs and lower lows(I'm looking at SPY on a daily closing basis). So, looking for an upward "reversal" seems a bit premature.
(Click for a larger view.)


While the market is sorting itself out, this is an ideal time to rebalance our lists. Everyone should be working on a bearish watchlist. Despite the current state of things, I think we should always focus on the primary watchlist for the group as a bullish watchlist. After all, that direction is the ultra long term bias and nature of the market. Besides, many people may not be interested in or comfortable with shorting the market or trading bearish. When the market does resume its strength, we want to be ready with a list of well chosen stocks that are likely to be among the first and strong participants of a new rally. But first we've got to get rid of the current stocks that are less attractive at this point.
I mentioned a few thoughts about trimming down our list a few posts ago. Here's a complete run down on what I think should go and what should stay.
First: here's a look at the list and how it scores in the Investools Phase 1 and Phase 2 analyzer.


The simplest way to start is by getting rid of KBH, UNT and ZMH because they have a combined F/E score of less than 3.25. I'm a bit sad to see ZMH go, particularly as it continues to work on a new 52 week high. But the growth estimates is less than our ideal 20% and it is estimated to grow at a pace slower than its group this year and also in the next 5 years.

Also, because the Estimates score is forward looking, we'd prefer for that score to be the stronger of the two, if possible. For that reason, I'd also like to see CRDN, WCC, and BHI leave our list.
CRDN - Growth estimates are a low 7.5%. Also estimated to under perform its group this year and next. Set an alert on this one for when it breaks 62.50 and forget it.
WCC - Growth estimate is less than 20% and it is estimated to under perform its group this year and next. It's been in a range between 55 and 70 for about 9 months. Set an alert to notify you if it goes above 70 and forget it.
BHI - It is actually very attractive from a valuation standpoint. PEG is .45 with a P/E well under its group. But the most recent earnings miss and the current and next year's estimates for earnings growth well below the group look like red flags. The chart is a mess with the gap down on the recent earnings announcement. It has also not participated in the latest rally attempt in the Oil Services.

The others:
ICE - Has had an incredible run and the trend has broken. PEG of 2.19 looks a bit overpriced. I'll be looking for potential bearish entries on this on a bounce down from 135 or a break of 125.

NTAP - It had a strong reaction to the recent earnings announcement in February but couldn't follow through and with the market selloff on the 27th, it gave back all the gains from the earnings jump. 36 remains important support, recently confirmed by a nice hammer formation. But once that breaks, things don't look good. Again, this has a high PEG of 2.24. Institutions own 87% of the shares outstanding on this stock. Once they start selling, look out below.


HWAY - This stock has just been boring! The fundamentals are still quite good, but I'd like to get rid of it if or no other reason than that it trades well below an average 1 million shares a day. As a result, there's not a lot of open interest throughout the options chain.

VSEA still looks to be a reasonable valuation with strong fundamentals. So I don't see great fundamental reasons to take it off the list. But I'm nervous about the chart. It has seen great gains in the last 8 months. More impressive is the strength of its chart compared to the SOX index in the last 4 months and it is now working breaking recent resistance to an all time high. But the chart looks like it could be ready to roll over. It broke a long term trendline in January and rallied back up to find resistance on the underside of that line. It now looks to be in an ascending wedge, which tends to resolve to the down side. With a big bearish engulfing candle strengthening resistance at 50, a reversal could be at play here.


CWTR - Though the fundamental scores are still pretty good and the valuation is actually quite attractive, I think this industry comparison chart says it all. GONG!

RIMM is pretty expensive, but it has held up impressively in the recent market selling. We should wait to see what happens at the earnings announcement on April 4. Or maybe we should not include stocks over $100. Thoughts?

In Summary, here is my recommendation for the list:
KBH Cut
UNT Cut
ZMH Cut
CRDN Cut
WCC Cut
BHI Cut
ICE Cut
NTAP Cut
HWAY Cut
CWTR Cut

Keepers(for now)
VSEA Give it the benefit of the doubt until it breaks down
RIMM Hold 'til earnings, at least
COH This actually has 3 green arrows right now
AAPL Apple rolls out a bright iFuture
CTSH Just ranked 15th in the Businessweek 50 best performing companies. Setting up for a new batch of green arrows.

So how does that strike you? Please let me know if this assessment of things is agreeable or if you see certain stocks differently than I and would like to take different action. Once we agree on the stocks to get rid of, we can begin to find replacements. We still have over a week until our next meeting, but perhaps we can get some ideas flowing between now and then. If you respond with ideas, I'll try to respond and include charts. If you want to mock up a chart with what you're seeing, I'd be happy to post that too on that blog.

Market Posture and a few ideas

Greetings! Sorry for the long period of inactivity on the blog. I've been very sidetracked with my career pursuits. I'm thinking that may be more of a norm in the coming months, but I'll try to keep this alive if I can.

It was great to be back at the meeting tonight and see a great group of core regulars there. Good energy!

Though it may be obvious to most, I'll post our reading of the market posture having gone through the Market Posture grid.



The SPX itself gave quite an intra-day scare but didn't close with a lower low just yet, so there is not yet an official down trend begun. The rally in yesterday's action was pretty impressive, still that's just the action durin one day. The past two weeks have been decidedly bearish and abrupt. That this should just smooth over and resume a nice steady uptrend seems unlikely. In any case, we're cautiously bearish because we don't have the lower low yet.
(Click the image for a large view.)



Ray made the good point that just because the VIX is high doesn't mean the market will go down further, nor is it necessarily "time to buy." Unless it continues to go higher, than we should read it as neutral and wait for a turn back down as a bullish indicator. If it continues higher, that will be with further bearish action in the market. But the real value in this indicator is when it turns from being low or high.
At this point, we have a higher low, but not yet a higher high after the break above the 12.50 area. I think Ray's probably right that the VIX will form a new range roughly where it has been in the last two weeks. That doesn't really give us much to work with other than the knowledge that the market is now a bit more volatile than before. So it might be fair to read this indicator as neutral to bearish.


We talked a bit about the group list but didn't get to really dig into it. I want to get rid of a majority of the list. In fact, many of them might be good bear watch-list candidates now.

KBH, UNT, and ZMH need to go if for no other reason because they don't have an F/E score of 3.25 or higher. And have you seen the chart on KBH? OUCH!
With a move up to and bounce down from resistance at 37.50, that might be a nice entry for a bearish play. I'd look for a shorter term quick profit, though, because this stock has been beaten up for a long time. I think it is severely undervalued at this point. PEG of .67. And look at its P/E compared to its group. But the chart is what it is until it isn't anymore. It had an intermediate uptrend going, but that was obliterated a few days ago on the break of 47.50.


CRDN should probably go because it's 5 year growth estimate is only 7.5%. Remember that we're looking for a minimum of 20%.

ICE is quite overvalued with a very high P/E and PEG. It looks like its great run is over and if it breaks support around 127, there looks to be nice room for profits in bearish plays even with multiple stops for support along the way.



NTAP is also perhaps overvalued with a high PEG above 2. Looks pretty toppy as well with what looks like a relatively orderly turning over. A break below support at 36 would negate the hammer candle yesterday and be a nice entry for a ride down to 33, 31 or 29(two former areas of recent horizontal support and one diagonal support line from the low in 2004.)


More thoughts on what should get booted from the list soon.

For the long side just in case the market does look strong from here. NTRI is a potentially nice entry here with a higher low after being beat down by silly analysts changing with the wind. On strong earnings the recent gap up and low volume pullback seems as if people are ready to start buying this stock again. Fundamentals are very strong and the valuation is quite low. Look at the P/E compared to its group. PEG is .77. Very low, which is good. If you don't know what PEG is, do a search on Investopedia for the short and quick answer. But here's a more in depth presentation PEG from thestreet.com that is pretty good. Notice the date on the article and Cramer's mention of how undervalued MA was given its PEG. And look what happened to the stock shortly thereafter: It was up 160% at its high last month!

It's been a wide ranging year for NTRI, but more or less sideways. We're now at the bottom of that range with a symmetrical triangle that seems likely to break to the top side given the volume on the recent earnings announcement and gap up. An entry on a break above the resistance line or 47.50 seems pretty reasonable with a target of 60 or so. It's a touchy call with the state of this market right now, but with a conservative position size the potential reward may just justify the risk.


That's all for now.

Feel free to chime in in the comments section here.

List Performers

Since this post followed so quickly after the last one, I just wanted to point out that Jim left an insightful comment in the comments area for the last post on Oil. Check it out. And don't be shy about leaving your own.

So far, the 40/45 March Bull-Put spread on COH I suggested a few posts ago is looking good. I'm not going to claim victory just yet, as there's plenty of time before expiration, but it's nice confirmation when things begin to work as predicted from the start of a trade. (I'm paper trading it, so I'll let you know how it comes out.)
COH has put in a new high now and while it may keep firing higher, it would be prudent to look for a cleaner entry. The MACD and Stochastic have yet to turn lower, but I would imagine one or both will in the coming week as the stock regroups for further upside. With 5 up days in a row, it is reasonable to think there might be a bit of a healthy pull back needed. Also, I like to keep old trend lines on charts for a while to see how the stock reacts to the backside. You can see that the stock is coming right to the underside of the recently broken 5 month trend support. Given the angle of the line, I don't see it as some scarey point of reversal. It just seems a healthy reminder that stocks aren't supposed to go Parabolic and this one could use a few days rest. If it pulls back toward the MA and puts in a higher low, that would be a great entry. I will look to 45 for new support.
(Click for a larger view)


CRDN is in a group seemingly trying to fight its way out of the red. Notice that the Group Rank in Phase 1 is showing 64. After not a lot of follow through on selling after an analyst downgrade, we see a potential double bottom reversal pattern which would give a nice buy signal in a move above 55. This would also be very close to a fresh third green arrow on the MA. With earnings on Feb 26, this could be a nice short term trade up to 60 or so.


Earnings coming out tomorrow on CTSH and the chart looks very healthy. Of course buying on a pull back would be ideal. There's very nice, clear support at 82.50. Use this to define your risk and position size.


I'm feeling good about replacing ISE with ICE. Friday marks a new high for ICE on above average volume while ISE had a down day to erase much of its rally attempt the prior day. We'll see what earnings this week bring for these stocks.


The homebuilders have been doing very well lately and our KBH has been moving right along with the pack with a new high for the last 8 months on Friday. It's not quite ideal to buy after a week of very strong action. But the strength serves as confirmation that people are continuously embracing these stocks again. A target of 60 seems inevitable in the coming months. The trick is to get the entry correct.



RIMM has been moving sideways lately with some very toppy signals to it. The recent earnings announcement was met with a heavy volume and huge bearish engulfing pattern. Then a rally attempt at new highs was harshly batted down from resistance on big volume again. A few noticable up days this week look like another attempt is being made, but the volume has been less than average on those days. I won't have a whole lot of hope for this stock until it can convincingly break through the 140 area. Until then I will be looking more closely for a potential bearish position here. Obviously a bounce down off the 140 area for a triple top pattern would be a nice entry.
Paper Trade: On December 22, the day after the earnings announcement, I used the bearish engulfing as a signal that sentiment on this stock was changing. With a lower high also in place, I sold a January 140/145 Bear Call spread for a credit of $1.47. It expired worthless for a return of 41% in 4 weeks. The first week of January was a bit worriesome, but I held because it had not broken the resistance yet.


WCC had a stellar earnings announcement accompanied by news of a $400 Million stock buy back program. The market obviously liked this with some heavy volume gains. Notice that the day before earnings were announced was already an optimistic move. At this point a pullback would be a better place for an entry. 62.50 would be a good support level or maybe the MA will come up to provide support somewhere else. A move above the 69-70 area will be the real signal that this stock is going places.



ZMH is pulling back for a nice entry. 80 would be the most obvious, perhaps strongest support to look for now. But an entry on a bounce of the 82.50 level, the low of the day it gapped up, would be nice and clean. Don't forget the big volume spike that accompanied the gap. This is a major sign of sentiment on this stock.



But don't forget to look at the long term chart on ZMH. The 90 area appears to be potential resistance. What I'm thinking is that it might be nice to buy stock or a deep ITM, Long term call option here around 80 or 82.50 and then sell 90 calls as it approaches that level if it struggles with resistance there.


Have a great week.

ICEy Hot

(No this isn't a commercial for the Ben-Gay alternative. It's about our first change to the list.)

I hope everyone has had a good weekend. Are we getting our heads on straight for the coming week? It is a tough time to know what to do in the markets at the moment. In addition to the commencement of the unpredictable earnings season, we seem to be getting quite a dose of mixed signals between the SPX and Dow holding up nicely(even if at resistance) with potential support from the Transports, while the Nasdaq took back most of the promising strength it showed two weeks ago. Much worse is the SOX index at a two month low and in an intermediate term downtrend. It may find support on the backside of the old downtrending resistance line, but if it takes out the 445/450 area in a meaningful way, that will be a very bad sign.
(Click it)


Let me again urge you to watch Peter Reznicek's weekly ShadowTrader video. You can find it in the center column at redoption.com.
I also encourage you to visit the home page for BigTrends.com. There you will find four regular columns for which you can read through the archives. Their Weekly Outlook is always worth reading, if a bit heavy in indicator talk. I received my free membership email today for their Daily Trend Watch which focuses on different subjects from day today. The one I received is not yet posted on their site, but will surely be there by tomorrow, Monday. It is a good discussion of earnings expectations and reactions. Meanwhile, the most current topic is Using the Right Tools at the Right Time. In it they explore the application of different indicators in different environments including a focus on the MACD and Stochastic like we use with the Investools set. The application of the teaching in that article to today's environment might be that we could start looking a little more strongly at the Stochastic as our strong trend seems to be flattening out and we're looking more range-bound.
I know that it is very frustrating that there's always something new to consider which may refute our technical indicators and whatever combination we may use for buy/sell signals. But when it comes down to it, there is not "right" or "wrong" set of indicators or signals. The undisputed common denominator between any and all successful traders can no doubt be that they have rules with regard to money management, position sizing and controlling risk for the times that they are wrong.
We've talked about a trading plan and rules lately. I myself have wrestled with this one and get the sense that many of the members of our group are doing without them. I would agree that it is very difficult for a new trader to establish a plan or approach they're comfortable with, particularly with little knowledge of the market, much less which strategies they like. But there is no question that everyone, especially the new trader, should have rules for handling their money and managing the risk in any trade. PLEASE! If you have no other rules for the time being, at the very least, make rules regarding money management and position sizing.
On the Investools site now there is a section on the top right corner of the Online Home page that shows a scrolling, clickable list of the 10 mistakes new investors should avoid. There is a reason we hear these same tidbits over and over. Make the effort to put something in place.
The challenge will not only be to put some kind of rules in place, but even more so, to follow them.
I bought a LEAP many months ago on JLG. I won't go into the details of the trade, but since I had so much time in the option and the company had such strong fundamentals, I ignored the clear technical breaking down of the stock and watched the option lose all of its value. ALL of it. My rules told me clearly to get out of it, but I didn't follow them. So now I have been looking at this worthless option in my portfolio for months as a reminder. Thank God it finally expired!
Here is another good article from IBD which discusses cutting losses short and letting winners run. Investing Success Doesn't Require Perfection.

OKAY. Enough of that. I have mentioned wanting to reshape our list a bit. Starting most obviously with the stocks that no longer match up to the Investools recommended minimum number of an F/E of 3.25, ISE is one that is looking pretty weak. Though still clinging to a 3.25, the forward looking Estimates score of 3 is the weaker of the two and we would rather see that score be the higher of the two. But more than anything, it is the chart that is most unappealing, particularly in the face of great strength of its group.


Even through the dialy look at the chart with the Investools study set, it doesn't look good at all. Three red arrows with the stock bounding down off a declining MA and it is once again pushing the pivotal support level which, if broken, would confirm the double top pattern. If it does break 45, this would call for a move down to 35. I must say, though, that I am a touch hesitant to cut this one loose because there are positive things to see here.
At the last earnings announcement, the stock gapped up strongly with high volume. Though it did immediately pullback almost 20%, the rally into the second top shows quite higher volume than the sell-offs surrounding it. With earnings coming out again on Feb. 5, that could be the catalyst for the next leg up. So continue to keep an eye on this one at home.

Just to give some perspective of what the industry group is doing, check out this index.


In the meeting last week we walked through the process to find a replacement for ISE and agreed that ICE was a good choice. Remember, in searching for something to represent this group, I want to keep dealing with stocks scoring 3.25 or higher and trading somewhere around 1 millions shares a day or higher for purposes of liquidity, a tight options chain, and more reliable technical analysis.
Look at this comparison of relative performance among top scoring and top performing stocks in this group over the past 3 months as the XBD index put in two new higher highs. ISE underperformed the pack while ICE has clearly outperformed by a mile.

I should mention that for the year ICE is up about 150%, by far the biggest gainer of the bunch. Here is the weekly chart of ICE since it's IPO in late '05.

Looking at the daily chart with the Investools set, it looks like we're pulling back a bit to digest some of these major gains. We want to be very careful to not be the last people to arrive at the party and leave unhappily. I would look for support right around 115 at the MA and the potential horizontal support from the old high. If that is broken, it would be a likely end to the long term trend, for a while at least.
What I find really interesting is that this last leg of the upward push comes after a relatively uneventful earnings announcement that was followed by a couple down days.


We looked at the F/E scores at the meeting and found them to be to our liking. The one shocker was the PEG of around 5, WAY higher than the ceiling of 2 we're looking out for. But Jim helped me realize that this was using the trailing P/E with earnings on the past year. Looking at the Earnings of the current year 2007 we find that Price(126.91)/2007 Earnings eastimes(3.36)=P/E(37.77). So we divide that by 5 year annual growth estimate of 24% and we get a much more digestible PEG of 1.57.
The P/E of 38 is still at premium to the group(23), but that is the price for being in a leading stock.
This stock has its next earnings announcement on Feb. 06, the day after ISE. I sure hope I don't wind up with egg on my face to see ISE take off and ICE fumble. ;-)