VIP Buy signal

When we came up with the first five stocks in our new list, VIP was one of them and quickly gave a buy signal according to our group rules. I emailed the group asking how one might view this and place an order to buy. I failed to specify that I meant it in the context of our group rules. Nevertheless, I was a bit disappointed to get only a few responses to the question and none that answered according to all of the work we had done lately on developing a group system dissecting the Investools method. I know that we had yet to "officially" start paper trading the group list, but still the exercise is a good one.

So here is the question from August 31 and roughly what I was looking for:

Q: Would anybody venture to explain why VIP should be a buy today? And to set up how the trade would be sized for 2% risk on a 100K portfolio? How many shares would you buy and what would the order to be placed look like?

A: VIP is in a group ranking in the green on the big chart and one that showed sideways to upward movement. The stock was in a long term uptrend but had recently pulled back from a potentially strong resistance point and even formed a short term downtrend with a lower high and lower low as outlined the in the downward channel on the chart. It gave 3 green arrows, but in the context of a sideways to downward moving stock(with the MA moving downward), it should be considered not buyable. However, on 8/30 it broke out above resistance with double the average volume. This qualifies it as a breakout buy.
(Click on images to see them larger.)

One of the rules we had come up with was to not buy stocks that were more than 10% away from the MA. This would disqualify this stock, but my feeling is that that would prevent a buy of almost any breakout buy. So I think it is appropriate to apply that to breakouts as "no further than 10% above the broken resistance level/expected new support level." This is an example of the type of thing that will show up and need discussing/deciding in the process of trading and refining our system(or any system). (I now look back at the rules and see that it does include specification of 10% above the MA OR BREAKOUT SUPPORT LEVEL. Perhaps it could be worded more clearly, but that does give the go ahead like I just described.) The official group rules can be found in the "Files" section of our Yahoo group.

The resistance line as I've drawn it was 23.41. (Remember that these are areas, not exactly lines. Part art, part science.) With a close on 8/31 of $24.73, it is about 5% above the breakout level/former resistance/assumed new support level and well within our 10% requirement.
Now to figure out how much to buy and place the order.
With a $100,000 account and a risk tolerance of 2%, we are willing to lose $2,000 in this trade. To figure out our position size, we must first figure out where we'll put our stop loss (stop sell) order. We will use 3% below the assumed new support level. To use a simple round number and to give it just a touch more room due to market volatility, I'll use 23 as the new support level. To easily find 3% below support , multiply that level, 23 x .97. That gives us $22.31.
So now we know that we're going to place a buy order at a limit of $24.73(the closing price on the breakout day) with a stop loss order at $22.31. 24.73-22.31 gives us total risk(potential loss per share) in the trade of $2.42.
We then take our acceptable portfolio loss amount of $2000 and divide it by that number representing the risk in the trade. $2,000/2.42=826. We can buy 826 shares and be perfectly positioned for our calculated portfolio risk as tailored to the risk in this particular trade.
But because I would prefer to deal in round lots because it's simpler and matches up nicely with potential hedging with options(buying puts or selling calls) I'll round down to the nearest hundred. So 800 shares it is. This will use $19, 784, under our limit of 25% of our account.

For market open the next day, I place an order to buy 800 shares of VIP at limit of 24.73. Using a "1st trigger sequence" order on Thinkorswim, I line up a second order to be triggered upon filling so that there is instantly a standing "stop sell" order to sell 800 shares of VIP if the stock goes to or below $22.31.


Here is what the order should look like. Notice the GTC(Good 'til cancel) on the stop order. The buy order has a day order, meaning that it would expire if not filled that day. Upon expiration, it would also cancel the stop order.

The next morning, the stock gapped higher at the open and then came down to fill the order at $24.72 at 9:55 AM. The level has held and the position is showing a profit of 1.82%, which is encouraging considering the carnage on Friday in particular.

I hope this has been clear and helpful to those who are still uncomfortable with how to setup a stock trade and place the appropriate orders. Please feel free to chime in in the comments section with any questions or comments.

Pavarotti - Nessun Dorma

Luciano Pavarotti (1935-2007)

R.I.P., Pav

Thank You.

New Group List! HOOOOORAY!

After going through the search process and narrowing it down over two meetings, we now have an official new group watchlist. It's surely not perfect, but I'd bet it's as good as any. As always, I firmly believe that the real challenge is not finding good stocks, but trading them well and consistently.
If nothing else, notice that all of the stocks are moving sideways to up over the last year. The Trend is your Friend!

Drum roll please........
(click list to see it bigger)



Now with the list in place, we can progress further with our process of developing a system of rules and trading using the Investools method.

I thought it might also be of some interest to those who didn't and even those who did attend, to see my little writeup on how to go through this process. I know there are many ways to build a list and some might spend much more or much less time and scrutiny in the process, but this is just how I've done it when approaching this kind of list making. Remember the list I made in April and have referred to in recent posts. As a basket of stocks, that list is up 28% from that day in early April to today's close. So I believe it is a good approach. Of course, that came out right as the market was about stage a major rally. But it seems that this could also be the beginning of a new rally, so being prepared would be a good thing, just in case.

Building a watch list of fundamentally strong stocks with relative strength, both technically and fundamentally.

Goal: Build a list of stocks that are fundamentally strong from a diversified selection of groups and showing relative strength to their groups and the market. This is intended as a bullish watchlist for intermediate to long-term trading/investing.

Most general requirements for doing a Power Pro Search:
F/E – 3.25+
Price Pattern – 2.5+
Minimum Price of stock – $12.50
Average shares traded daily – 500,000
Group chart sideways to up

(What I forgot to do, but intended to do, was to include a search parameter in our PowerPro Search to require a minimum of 3.25 for the Estimates score. That way, we know that the weaker of the two scores going into F/E would not be the forward-looking score. Something to keep in mind for the future and your own searching.)

Ways to search for stocks for a diversified list:

• Do a PowerPro Search with the above criteria. In case it doesn’t result in a sufficiently diversified list, look to the following search methods.
• Look at the sector and group indexes for ideas where to drill down. This is easily done from the “Market Posture” link in the left column of the Strategies tab page.
• Look at Big Chart for groups moving up the ranks. Going from red to yellow to green is ideal. This helps to find the groups coming into favor before they’ve already made their runs. Drill down in the appropriate groups.

Narrowing it down: PRICE IS KING!

Look for a healthy looking chart for the potential stock. Most general rule is that it should start in the lower left corner of the chart and end in the upper right corner. Pretty simple, huh? ☺
Compare the stock’s technical performance with its industry group and the market. We’re looking for relative strength, meaning that the stock is leading its group and the market.

Narrow it down further by looking at the fundamental components and the valuation. Again, we're looking for relative strength. Note the P/E in relation to that of its group. If it’s cheap, great. If it’s trading at a premium to the group, that might be a good sign. Whatever the case, be aware of it.
Look at the PEG – P/E divided by the growth estimate. It should be lower than 2. 2 or above is considered expensive. Under 1 is considered quite attractive. You can also find the PEG on the “Valuation” page found from the left column of the corporate snapshot page on the Investools toolbox. This is not so much an Investools taught approach, but it can only be helpful to use. Think Warren Buffet. He does allright with the value approach.

Big picture posture

I don't normally look at the Dow too heavily, but with all of the talk about global expansion and the industrials outperforming due to their exposure to overseas growth, it's interesting to consider the Dow in addition to our normal go-to indexes.
Though the breakout to recent highs did breakdown and ultimately "fake out" fairly quickly, there is still a strong and in tact long term uptrend with a trend support line just below us. If that doesn't hold, the next likely area of support would be 12,750. After the recent craziness and fear as high as I can remember in recent years, is the Dow really likely to fall another 500 points in the coming weeks? Remember, the crowd usually gets it wrong, or so they say. I suppose it's possible this level will break and the quick drop to 12,750 could happen. After all, it's really only 4% and would actually finally achieve the 10% correction that so many have longed for. But again that is a strong and healthy long term uptrend in 30 mammoth stocks that don't just get going or turn on a dime. Even if we are destined to test that area for an "official" correction of 10%, the past two weekly candles are pretty major inverted hammers, showing an inclination to bounce. We shall see.


SPX is also still in good looking long term uptrend, though the breakdown after the fake out of the trading range at the top does seem a bit more severe. The trend line from the mid '06 lows is pretty much broken. But there is almost surprising support from the old channel resistance line in blue. Also the weekly candle shows an inverted hammer like the Dow. If this area doesn't hold, the next likely area of major support is 1,380. After that, all the way down to 1,325. The first level would be roughly an 11% correction from the top, the second would be almost 15%.


For a closer look at the SPX, I'm going to be a bit obnoxious and put up a chart with way too many indicators and lines. Basically, I just don't want to do a third SPX chart. One thing that I think is quite interesting, though I'm no Fibonacci pro, is that the low from last week that provided intraday support again this week is right on the 38.2% Fib retracement line, the first of the most significant retracement levels. The 200 MA is also providing support in addition to the diagonal and horizontal support lines present on the weekly chart. In total, there are 5 support lines of one kind or another, including the fib line, around the current price.
The Market Forecast indicator is actually quite bullish, save for the longer term sentiment indicator, which is heading down with plenty of room to go. But after last week's cluster, the intermediate term green line has exited the lower reversal zone for the official green light on playing the cluster. To strengthen the bullish argument being given there, the momentum and near term lines are lining up for a nice "Intermediate term confirmation" signal, another of the signals Investools teaches on these indicators. In short, the two shorter term indicators line up to be the wind at the back of the intermediate term line.
In short, I'm expecting a bounce here. But the real test will be when the index tests the bottom side of the old support and recent resistance line at the 1490/1500 area. If that holds as resistance, we'll likely see some serious sideways choppy action for a while or possibly another leg down and potential beginning of an intermediate term downtrend.


I think I showed VIX with a weekly chart last time, so I'll just stick to the daily. It's rocketed only higher and seems very likely to come in some. Even if it is destined to go higher, there needs to be some kind of retest of the new range support. I just can't imagine the VIX going parabolic without a true market crash happening. Regardless, it is clearly telling us that fear is high right now. It's also telling us to be on our toes for a peak, as once it is high and then turns, THAT is the time to buy. So my take is that this is very close to being a bullish indicator right now. One point of interest from this past week is Wednesday's action. Though the SPX had a big strong up day, the VIX did not have an impressive down day and actually couldn't break below the recent support/old resistance level at the 20 area. I took this at the time to mean that the up day in the SPX was not to be trusted because people were still buying puts heavily. But really, just look at that Doji star hanging up there. Can it really go higher in the next few days? Of course it can. But is it likely? I doubt it.


The Russell 2000 small caps index has shown much relative weakness in recent weeks, but this week was quit strong. With what we could call a bullish engulfing weekly candle, it seems to not want to give up these support lines, both diagonal and horizontal.
With all the talk about how strong the Big Caps are, could this be the time to get into small caps? The long term view seems to indicate so.


Again, I'll leave the Nasdaq up to you. But here's my thinking. The Dow still shows the most relative strength. The SPX, with many more components to it, is still strong in a long term sense, but the short term is looking a lot more shaky. If the Russell and the small caps bounce from here, the small caps may finally wake up and actually provide a bit of support to this market. I would think that would only help the SPX regain its composure next to the Dow.
Take a look at the Nasdaq versus the Nasdaq 100(NDX). The NDX looks stronger than the composite as a whole, which makes sense considering the NDX is the 100 big boys. If the smaller guys, many of which are surely in the Russell 2000 can get it together, perhaps the Nasdaq composite can work its way through the congestion of "overhead supply" it has to deal with.

Any comments? I dare you.

Bueller?