egolinews.com

United Group (UGL) is bubbling with enthusiasm. Why do I think so?

Looking through the murky waters of a seemingly desperate market UGL has over the last two years developed an accumulation price structure as demand slowly weighs back into the stock especially since the 2009 low was hit with the selling resistance at $15.00 repeatedly containing price spikes.

Stockradar is a low transaction, conservative, weekly, long only trading methodology that maximises the potential of a naturally up trending market while insuring on dips of a certain size to avoid ever being caught in a bear market, which we’re not! I like the perspective distance gives me and this methodology offers just that vista devoid of the distracting short term “noise”.

This week I am looking at a simple reversal structure often labeled a head and shoulders (inverted) that represents one of those reversal structures that when it completes offers a high odds repetitive play that can easily shoot the price towards the highs at $21.00. $21.00 is purely a resistance level to aim for and is within reach but a rally can take us any distance and that is where the money management focus takes control. My tip is more like $30.00 but who follows tips! In the end it is the market action and our money management rules that will decide where and when we get out and how much we make or lose.

Below $15.00 the reversal can and does take any shape or form. What is important is the price volume relationship develops a demand bias, which it is. But what is really important is that we have a clear level where selling exists that has turned back the stock price repeatedly at $15.00. It helps but almost becomes of lesser importance the action below as we have such a key level that has been tested so many times over a long period of time and we know that if such a level is broken there is going to be many calls to action by the buyers and sellers and inevitably that is going to force prices higher under market imbalance conditions because all of a sudden we have a swathe of buyers as some protect shorts and others go outright long on the break. Those sellers at $15.00 suddenly become buyers when the price starts to move above and this has an unaviodable self propelling effect!

With such a trade opportunity the three outcomes from buying a weekly break above $15.00, that is confirmed by Stockradar Trend Intensity Indicator rating the stock at 4 or greater, are:
1. Our initial stop gets hit = small loss of 10% or 2% of portfolio value, or
2. The rally develops but falls short of a profit, = small loss less than 10% or less that 2% of portfolio value, or
3. The rally develops ensuring a profit and takes us to, or even past, the highs at $21.00. = Profit ??

The first step is to move the stop loss to breakeven which equals the entry point, anything greater than breakeven is a profit. If the stock reaches $21.00 at a realistic entry of say $15.75 = $5.25 of profit or 34% gain. Is this a good risk reward? For a 10% risk to make 34% on a repetitive setup – yes!

At any stage of the trade we know our potential risk, because we have preset stops in place, but being a repetitive price play it will more often than not develop into a rally to profit from so I know if I play each one with a consistent approach based on money management rules it will make me some money. Now it’s about how much and that is up to the market as to how much it will give me.

I will play with a decisively consistent approach. I may have more than one trade in the rally and in this individual instance it doesn’t actually matter if I make money on this one (although I hope so) because I know over time the same approach to a repetitive price setup such as this type of reversal will make money more often than not. If I run the ones that rally and cut short the ones that don’t on a repetitive setup with a money management plan that ensures the bigger profits come out over smaller losses, I will make money. It may seem a frustrating and almost futile exercise with a lot of hard work but it’s not.

Once the TradePlan is set up it is painfully automatic and gleefully rewarding but you have to get to that stage to find out. Why? Because it is easy build a simple workable TradePlan but you have to have the will to carry it out. That’s the catch!

UGL currently has been slammed by the current market weakness but is still bound by the highs at $15.00 and the supporting lows at $12.50. During this sideways action volume has become indecisive and momentum has waned to an almost neutral level and this is typically corrective / consolidation behaviour. More bouncing in this $2.50 range is thus likely. What I like about the larger volume picture is the expansion during the major part of the rally from $9.00 to $15.00. It doesn’t look like a break will happen tomorrow and we don’t really want to see it collapse back under $12.50. That would put it down but not necessarily out as it depends how far the stock falls from there. But while we remain in this band of $12.50 – $15.00 watch the stock with patience and see what develops. A break above $15.00 makes for an interesting setup worth a trade.    

To the novice the seemingly conflicting forces of a good result followed by a fall in the share price seems at odds just as a bad result is often followed by a rally, and there our stock market reality awakening begins. We all need to learn, gain experience, or find a mentor to help us trade the stock market successfully just as we would with any other field that requires expertise to achieve success.

With a dearth of opportunities jumping out at me it seems like a good point to distract you from a market that is presenting us with a high risk trade environment and dangling dangerously at a major support level and offering plenty of opportunities to lose your money so I’d like to discuss how the market and prices work in relation to new or unexpected news why we use charts to help us and use the recent Leighton (LEI) report and outlook as an example.

Buy the rumour sell the fact about sums it up or buy the expectation and sell the reality and this to a newcomer is difficult to comprehend as why would a stock’s price go down when it delivers a good result or rally on a poor one. The answer is that the market is in a hurry and can’t wait for you as it immediately discounts all known news and only responds to new information. So we all need to think about this as traders because what we know now is relatively useless information and has already been discounted by the market!  This implies that to trade the market successfully we have to look into, or try to look into the future. Impossible. But in effect we need to be able to find a way do that to successfully trade the stock market. That’s what we’re all up against. Now would be a good time to walk away if that seems too difficult and the current market is certainly making that an attractive option. But there is a way and if you’re prepared to learn and do the work you will succeed!

But firstly the discounting process goes something like this. When we buy or sell a stock we don’t actually buy or sell the fact of what the stock has done up to now as any upcoming “old news” reports will reflect. No we are buying/selling an expectation that the price will move in a certain direction because of what we think is going to happen next be it based on your gut, price information, fundamentals, or the big one the “rumour” or unsubstantiated report. So do we need a crystal ball to foretell the future so we can trade on that? Yes but we don’t have one so we have to find another way.

If the stock we have bought on our expectation doesn’t rally that’s a disappointment and we usually, or should, then reverse our position by selling, because others will! The reason we buy is what we think is going to happen and what has happened won’t do it because we all know it and have bought and sold accordingly. So by the time a report reaches the market the consensus is usually well and truly discounted by the market in that anyone who was going to buy into the expectations of (good) report will have done so before the report reaches the market and thus all that are really left are sellers. With no buyers left to react to a good report the price inevitably then falls.

The opposite price effect is, and this refers to the LEI case, when the report doesn’t come in to a consensus or expectation range and thus is delivering bad news that has yet to be reflected by the price. The result, the price will move to reflect that new information. LEI’s reported outlook had a few surprises but ultimately was far worse than expected or hoped for and in this case adversely affected the price because the expectation was for a fair result and it came in a lot worse based primarily on the forward outlook. The price thus moves down accordingly. An upside surprise can just as easily occur because it is new information the buyers and sellers can respond to and the releasing of reports and more importantly the outlook is always a critical price point because you have a focus on one event at one point it time that allows investors to make a move, and they often do. That’s why volatility often rises sharply at these times.

An above expectations result will attract a scramble for stock because at this point in time the wave will be strong one way, in this case buyers, with little resistance from the other side, the sellers, because they too are surprised by an out of consensus range result and probably step back clearing the way for the price to rise.

Alternatively a downside surprise i.e. the report is worse than expected will bring a swathe of selling and the price drops like a stone which LEI’s has done. The stock market is a funny old game but the basic premise to work on is that the stock market discounts all known news and is always looking ahead as to what might happen next and thus only reacts to new information. That makes it seem hard because we have to try and read or foretell the future which of course we can’t. It goes some way to explaining why we can’t always be right and of course why the experts don’t know as they profess. Why they set themselves up with this presumption is a wildly extraordinary need. (Something to do with making money, but not from the stock market, from you!).

The only saving grace is that the market does go one way the majority of the time but this can lull us into thinking we are infallible experts as we gear up to the hilt – until the bear market arrives. The stock market’s actually a game of odds based on reading the demand and supply equation and that is the greatest attribute of what a chart presents us with. We all need to take another look at how we trade the stock market because many of the irrelevant tangibles we hang on to most of the time are poppycock and the recent bear market should reinforce that in your minds. We all need to be constantly prepared and there are common sense ways to beat a stock market and the highly useful and effective first premise I base my trading on is that I have no idea what is going to happen next because none of us actually do. But it makes my life an awful lot easier not having to answer that interminable question and to make money on the stock market you simply don’t need to know.

What gives me a clue is price behaviour because it has repetitive demand and supply connotations that precede predictable price moves that we can base trades on. Those that decry this method that is gaining growing acceptance as a highly useful trading tool simply don’t know how to do it or accept the underlying premise that price behaviour is based on repetitive human behaviour and that’s what drives the stock market. Bear markets and their extent are driven by you the human not the stock itself. We look at simple demand and supply of a stock and this in itself has great predictive qualities. What price analysis can do is not provide a crystal ball but a very strong and educated assessment of what is more likely to happen thus providing a odds case of one thing (up or down) being more likely to happen than another and we can all trade on that basis successfully. And therein lies my crystal ball or market edge and that’s what I trade repetitively just as a casino plays its market edge – repetitively and we all know how much money they make!

LEI fell out of bed just after our stop loss was hit. We won this round as the market reacted to the poor outlook statement by LEI which the market obviously was not expecting! Thus the price movement. And by winning here I mean protecting capital, which is just as important as making profits. And don’t we all know that now as cash has been my major profit generator over the last 6 months while stocks flounder lower. When stocks start to pay more I’ll switch back. As to LEI’s future direction well now it has fallen out of the big sideways trading range it enters a supply controlled environment from a relatively balanced one which means rallies should be sold into until we get evidence of demand returning. 

The market mire we have entered into now offers a rotten foul smelling mix of uncertainties, divergences, poor and good performances leaving us short of a rudder of certainties and trends to take comfort in. There is a message in there. Take the market on if you want but historical odds and current market sentiment says be careful hold plenty of cash and if you really need to buy something the banks probably offer the best and safest route with at least some yield return to offset any share price contraction and at least you are in a known solid business supported by the government. And by the way they ARE trending higher and that’s a strong argument in itself.

Miners can “wipe out” as we know so the resources tax on top of Chinese uncertainty is driving investors from what has been action central to never, never land but again interestingly enough it is the major miners that seem to be the “losing less” winners.

And yes we started the week yesterday with exactly that. Big miners weak without a major sell off, stocks such as the banks attracting attention again, but the body of the market is in bad, bad shape. Yes spikes of joy will appear and be short lived but it really is about the biggies now and that is a symptom of the uncertainty surrounding the stock market.    

It just so happens that as the market tested 5000, and retreated, 3 of the 4 major banks “broke up and out” of the rotating trading range price structures that have dominated their trading action since last October and have now made New Highs since we touched the market lows in early 2009.

Can these breaks by the 3 banks be sustained?

CBA and WBC are indicating their intention to test highs as they are just below there, ANZ is a far cry from its highs above $30.00 (read opportunity), and NAB remains a lowly valued basket case with a penchant for shooting itself in the foot. There may be some leadership issues there that need to be ironed out. The market is about risk at the moment and NAB may be undervalued but are you willing to take on that risk? It seems not is the answer from most investors and traders. Interestingly it is our Leader’s portfolio that is one of the strongest performers this year and is recording positive returns despite the market being down for the year.

For the mining sector to recover there needs to be more certainty again and or a new commodities run neither of which are jumping out at me right now and that probably hinges on what the US dollar is going to do an it is still reacting up on good volume. Gold is probably the best prospect but is worryingly close to its highs and the game of NCM/LGL still being resolved. A strong Aussie dollar will and has hampered opportunities in the locally based miners but there may be some value in the offshore ones. 

As I scour the market the real opportunities are limited and thus the demand has been maintained for the banks and this has been flowing through to some other leaders with WDC finally gaining some recognition, NWS has been piling on the gains for some time, MAP keeps bumping up the moving average road, ORI and AMC are steady achievers and I expect the better and steadiest performances to keep polarising around the leaders if for no other reason than the money has to go somewhere. Outside the leaders performances have become to flighty especially after some confidence was restored last year as we raced to 5000 but alas there we have stopped 3 times now and that exuberance is now waning.

Despite the resilience of the Dow Jones price analysis would suggest the odds are high now for our local market drift to at least the 4500 level and there we take stock again with a drop below 4500 sending the odds up for a further market fall.

But then there are the banks! How much support can they, and will they, offer the market? Status quo encourages that drift to 4500 but a search higher by CBA and WBC for those ultimate highs may yet offer another twist in the tail.

The important thing is they have broken higher which means demand is quite solid and this may be because they are “the” banks but also as a reaction to what is not going up and the money flowing out of those other stocks, especially those in the body of the market, may be finding its way back to the banks. 

Let’s examine the CBA chart and see where probabilities of risk and opportunity lie and this analysis is the face value of what the price action is reflecting from a demand supply perspective and is devoid of the market “noise”.

The prevailing trend is at odds with the market as the CBA and WBC charts are both in defined up trends leaving the rest of the market floundering in a corrective circle since last October. 3 of the 4 major banks have done what the rest of the market couldn’t which is break to new highs!

So is the consolidation period over as CBA breaks above the trading range high opening up better odds of a test of the highs at $62.00 now and of course potentially above? It may be hard to imagine the CBA share price with a $60.00 in front of it again but volumes are steady; momentum has remained positively above the key zero level helping to define the price action as a consolidation, and at not one stage throughout this entire up move have we seen and danger of the stock making a trend threatening lower low. 

I’m not entirely convinced yet of a sustainable breakout as market risks are clearly evident but the sheer weight of demand just keeps edging CBA higher and the rules of my TradePlan say buy this stock now. As to my perception of risk well that occurs when the stop loss is violated and I then simply move to back cash!

Despite a flat market for six months we’ve had plenty of opportunities to make money.  So what’s our “edge”?

Our “edge” may be considered the use of price as the chosen analysis tool or that I follow the natural long term trend of the market and only buy stocks. Or possibly the simple four entry and two exit rules or perhaps it is the consistency of employing the methodical approach to analysis or that strict  money management rules are employed.

It could be one or a combination of all of them to help move those odds nicely in my favour that this will happen rather than that to create that small edge that may be the difference between success and failure. The trading edge is the consistent employment of 4 price signals to take advantage of the natural long term up trend of the stock market. The money making edge is the employment of 2 simple money management rules to exact the best result.

Then consistency, discipline, and focus unravel the mystery of finding a psychological “edge”.

We need all the help we can get to become consistently profitable. So what has this approach unearthed for us recently?

What are some of the stocks we have bought in March?

RHC OST MAH TPM IIN AGO and RIV.

What gains have they made so far?

Over 16% absolute or better than 200% annualised

ILU was added last week and is already up 7.3% or annualised at 244% as at yesterday’s close. Breakouts and Trends are what I track and as the majority of trades are less than a year I annualise all returns as they compound during the year! In fact our current 40 selections as at today are showing a whopping annualised return of 44%. I could sell pack up and go home and be happy with that result for the year, but I won’t, because I love the challenge will strive to improve it as the year goes on.

So how do we do it? Stock specific analysis is the first clue with simplicity and consistency the next two clues.

Welcome to Stockradar’s totally independent contribution to Egoli’s Off the Chart column designed to give you a special insight into the workings of the stock market and Stockradars common sense, weekly, long only strategy that educates and helps hundreds of clients generate consistent above market returns.  

Stock entries, exits, stop losses, education, trade plans, analysis, portfolios, real live trading examples, and our commentary is challenging, rightfully cynical, but also honest and it’s all there in a simple easy to read and understand format.

Today I look at the Iinet (IIN) example, what triggered it, and why, as it rallies 12% from our entry point and offers a 181% annualised return so far.

Stock specific analysis provides the starting point to my approach and this is followed closely by simplicity of rules and consistency of actions so now I want to take you through an example of the Stockradar trading process.

1.      STOCK SPECIFIC                   IINET
2.      SIMPLICITY = Automated rule based criteria based on demand and supply
3.      CONSISTENCY of

a.      Analysis
b.     Trade Management
c.      Taking each qualified signal from a basket of  stocks

We all have varying views on entries, time frames, instruments etc but to get back to the real basics of Dow theory price analysis and the simple demand and supply equation we use a logical flow of evidence that builds a tangible case for entry and I analyse price because that’s what we trade – not the fundamentals. In the end nothing matters as far as what instrument is traded be it shares, commodities, FX, options, CFD’s or EFT’s we all still have to find a way of qualifying, entering, managing, and profiting from our trading.

For most the simplest and most basic “cut to the chase” route is working out whether a stock is in demand or not and this is depicted by the fundamentals of price analysis – a chart. A rising price on rising volume simply means the stock is in demand so I buy it on that basis. When that changes I sell on that basis and that is how Stockradar works.

Instrument of choice – Shares.
Time frame of choice – Weekly.
Trade type – Long Only
Analysis type – Demand and Supply equation
Demand and supply evaluation – Price chart

Why a price chart?

It offers an easy to read graphical display of demand and supply.

It is a complete reflection of ALL buying and selling actions.

It thus becomes the perfect source of information to determine the demand / supply balance.

On the IIN chart we can see the smaller ups and downs of demand and supply within the bigger picture of a demand dominated stock and it is those smaller waves of breakouts and trends I trade and make profits from.

Of the three trades you can see we began with one sharp profit, a small loss, and now one big profit that is growing each day and now we have “got one” the key here is to manage this trade to its optimum conclusion to eke out the best result and as such money management must now take control of this trade which means a profit will be made because my stop loss is now higher than me entry. Now it is just a matter of just how much I can make.

The entry is based on a simple price based equation of when demand overtakes supply and as price analysis is NOT a perfect science we defer to what is, and what we can make a perfect and a very real science, and that is rigid and strict money management.

To generate consistent profits on the stock market consistent actions are required and that entails taking all signals (both buy and sell) generated from a defined and manageable basket of stocks to make it work. Just as a casino repetitively plays its 2% “edge” to make its pots of money. The process becomes automatic, simple, and stress free. Once the entry criterion is set those boxes are all ticked until entry, (support, price and volume rise, trigger point is set, entry executed) and once the trade is entered all those boxes are ticked (money management rules – lifting your stop loss) until the exit is triggered.

Consistency means to me that I WILL trade every breakout and thus I MUST get on to any big trend that develops from my portfolio of stocks as we have with IIN TPM and others and as mentioned in the opening statements as the market has moved strongly over the last month suddenly my annualised returns are hitting the 40% mark – now to manage them all to that optimum conclusion and that can only be done by managing the money risk and exposure via money management rules that reflect and respond to that. Money management rules also enforce me to take losses but provided I limit them to a small set amount that is totally acceptable to a trader. What is not is to let them get big! There is the killer just like IIN is becoming a winner. It’s OK to let profits grow but not losses.

And as to where the stock market is headed, I have no idea and I have absolutely no need to know because my approach only cares where specific stocks go. If I want to trade the indices I analyse and trade the SPI or EFT’s. It is a nice logical and comfortable way to analyse stocks from top down but unfortunately the market is not logical or always comfortable and in our often one stock dominated industry groups it makes completely no sense. Just look at TLS and IIN or TPM! 

There are many market misnomers such as this that lead us to ruin or missed opportunities as we blindly accept them. So be smart, individual, approach things simply using common sense, take control of your own trading, and you’ll reap the benefits.

“As a weekly long only equity trader my foremost rule is to protect and preserve while profiting from the uptrend cycle of the stock market and this WILL happen if I follow the rules and that’s why I don’t fear losses.”

– Richard Lie

Who cares what the market thinks!  My take is that CSL shares are back in demand!

In our last Off the Chart report we looked at Seven and the demand criteria required to buy the stock for a trade and as SEV now launches itself higher we turn our attention to CSL and use the same “market edge” (everyone needs one!) technique to open up a high probability trade on CSL. This will be the first “glance” at CSL for nearly two years as uptrend qualities have been muted – until now!

To trade the odds that a market edge offers we must take all generated signals as by definition of “the odds” it tells us that not all signals will evolve into a profit and of course we don’t know exactly which ones will and which ones won’t. Yes I know, tough but true, and for those stocks that don’t rise as expected we cut them short and for those that do rise we run them as hard as we can thereby making a profit.

A consistent profit can be generated by buying with a market edge and then selling within a controlled environment of money management rules. And the reason we have money management rules is to bring about the best outcome – making money – so the selling rules need to be robust, smart, and able to turn a profit. The selling is about you taking control of the trade yourself. Something many of us fail to do or fail to think we can. No we should not be the mercy of the market and if you are you’ll lose. Respond to the market yes but our responses should be carefully crafted and acted on thereby taking that control of your trading actions and in turn your destiny.

This may seem simple and yes it sounds simple enough but at any point in time we still don’t know what is going to be a profit and its size and what is going to be a loss until that profit or loss is crystallised. There is always a mental tussle in our minds thus my definition of the stock market being likened to a horse race that has no end – until you sell. Thus there is always a battle in our mind, up or down, of in the case of a horse race, first past the post. The sentence above is the old age question which is unanswerable now but always eagerly answered in hindsight. So can we take that unanswerable question out of the equation and turn a consistent profit? Unequivocally yes!

I play a market edge that tells us the stock market trades higher for the majority of the time so I base all my buy signals on simple soundly based demand weighted price actions that repeat themselves just like trends do, over and over again! How often have you looked at a chart of a stock you have bought and for the life of you, you can’t work out why the hell you got out of it when you did because in fact it was still trending  beautifully, as we now know. Trends in stock prices are so prevalent that we should all do better if only we knew how to control ourselves. We need to learn to follow rules and the answer to doing that successfully is to take “us” out of the equation and let the things we know like trends, stop losses, and money management rules takeover thereby gaining the control essential to successful and consistent trading.

Base your trades firstly on entering using a market edge, whatever that may be, to give yourself every chance of turning a profit and those entries should be simple and rule based and then let your money management rules take over to ensure you cut any developing losses and maximise the opportunities any developing rallies offer. Once you’re in a trade the brutal fact is that it is now about making money and not any stock picking wits or glory.

On the money management and selling side we can have risk assessment, volatility, position size and many other conditions as a part of it. My approach is to use a simple stop loss strategy worked in with buy signals which is then limited by a certain amount of risk to each trade. Some large trends are made up of lots of smaller trend moves so if a stop loss is hit, which protects me against calamity and losses, any subsequent New High, if it occurs (if not I stay neutral), is bought to ensure exposure to any new trends and inevitably using this approach I must then capture the big ones. Recent examples include TPM and CBA. Again not able to lay claim to picking the ones that will take off I simply take all signals. In order to do that you must control the amount of stocks you cover so as your money doesn’t run out when a roaring bull roars loudly and buy signals are in abundance.

Let’s now run the simple “buy” template over CSL which has now swept through the criteria ticking each and every box (rule) to enable me to make a sound “odds on” buy recommendation based on changing demand and supply indications of the CSL share price and this has zip to do with fundamentals or what anyone else thinks.

Key Low Reversal Description: Clear evidence of support at a Trading Range or Key Low that must followed and enhanced by evidence of a increased demand taking on the form of a reversal price structure. (e.g. Candlestick Engulfing pattern)Detailed steps using weekly only data:

1. Key Low price level is hit and it holds.
          - Support for CSL is strong at $29.00/30.00

2. Volume rises in response to new buying.
          - Steady increase in volume since lifting off $29.00/30.00

3. Follow through buying
           - CSL share rallies from the support to $35.00

4. Reversal price action breaks identified trigger point on a weekly basis i.e. Fridays closing price.
            - Predefined “buy” trigger was set at $35.00

5. Stockradar then adds a further filter using Stockradar Trend Intensity rating to give confirmation.
            Trend Intensity rating rises to a qualifying 8 out of 10.

6. Buy the open the following Monday and set stop loss
            Stop loss set at a maximum 10% risking 2% of capital = $32.50

What do I do in bear markets?  Contract to cash and preserve my capital.

To uncover more about the Stockradar strategy and now it works go to Stockradar.com.au

“As a weekly long only equity trader my foremost rule is to protect and preserve while profiting from the uptrend cycle of the stock market and this WILL happen if I follow the rules and that’s why I don’t fear losses.”
– Richard Lie

There is really only one outcome from such a flat price action that Seven (SEV) is displaying and that is an explosion in volatility and price so let’s examine the odds of which way that will direct the price.

SEV has endured a classic period of deflated expectations brought about by the overblown response to the big recovery in its fortunes by the share price (2003 – 2007) which is quite a normal excess however this has now corrected and alas exacerbated by the bear and has thus brought SEV’s share price back from $15.00 to $5.00 – a hearty correction! Now as the market recovers SEV has so far been left behind in a strengthening market and recovering Media sector.

However I don’t buy just on that basis but it does set good foundation and heightened odds that any move from here is more likely to be up than down and this is again supported by the stock market cycles of trend, distribution, trend, and accumulation, and the fact the market trends higher over time. A sound basis for beginning my simple process of assessment of a down trodden stock (read opportunity!) and approaching SEV from the long side should we be given the right price action that supports this repetitive historical behaviour.

So now let’s look at the price since I last reviewed it on the 19/12/2009 in Stockradar’s Weekly Sector Update on the Media sector. The same holds true now as it did then as the stock is still within the trading range boundaries and all I’ve really changed on the chart since then is to add a couple of self explanatory text annotations to underline my point. There is a unique simplicity about using charts and price analysis in reducing the myriads of complex fundamentals, and SEV isn’t getting any easier, and the points of significance on the chart are remarkably simple and easily identified.

A Gann or Elliot Waver may have an opinion on when a break will occur but I’m not overly concerned about knowing when I just want to play when it does and for sure the price will tell me when the time is right to have a go.

The SEV share price is simply being strangled by the trading range boundaries of $5.00 to $7.00 with $5.00 being a high odds low point for reasons mentioned above. As to the explosion well that is likely once the upper band of this constraining trading range is violated to the upside. Down I simply don’t care as a long only trader. SEV goes on watch primarily because the odds are escalating of a break because SEV is now trading in the upper echelons of this trading range and the period in the latter part of last year saw the volume (demand) expanding holding the price up a level from support at $5.00 to support at $6.00 – constructive and positive.

This doesn’t mean it’s going to break but it is solid evidence of demand as the potential trade looks more interesting and I know then there is a very high odds chance that should the stubborn selling be taken out at $7.00 then the buyers can easily swamp the sellers and in their absence or retreat and run the price higher. A common price affliction! I look for volume expansion to validate a break with level up around $9.00 a likely target for a market imbalance of buyers and sellers to take the price too initially. This is arrived at by focusing on the most recent overhead selling level and by extrapolating up the height of the trading range ($7.00-$5.00=$2.00) from the potential break point at $7.00.

A breakout sees SEV escape free from a long term accumulation pattern and when this happens after a downtrend the next phase is to trend higher and as the SEV business seems to be running hot and Stokes who always keeps us guessing is behind its fortunes then it seems too good an opportunity to ignore as the stars align and the odds skyrocket to just where I want them, firmly in my corner. Until $7.00 breaks then……………..   “As a weekly long only equity trader my foremost rule is to protect and preserve and this WILL happen if I follow the rules and that’s why I don’t fear losses.”
– Richard Lie

Has anyone looked at the Amcor chart recently? The rally from $4.00 to $6.00 has shown us a remarkable change in the demand supply equation for Amcor shares – finally! 

After many years of battering by the sellers and a distastefully declining share price Amcor (AMC) is at last ringing the bells of opportunity as utter despair engulfs frustrated shareholders. Put simply a rising price and expanding turnover from recent lows tells of a share price beginning to define up trending behaviour with the chart depiction of fresh demand a key change in the share price behaviour.

If this an opportunity how do we play it?

Now we have valid evidence of a confirmed change in the demand / supply equation we can focus on buying signals.

There have been events lurking in the background that were primed to trigger a change in sentiment and now as we detect price confirmation of that we also have a clear price level at $6.00 where the next challenge for this renewed zest marks a pivot point in AMC’s future. A 30% rally this year still slightly underperforms the general market but it is the largest rally AMC has put in for some time and definitely not the hallmark of a bear rally. If AMC can successfully navigate through this price level at resistance of $6.00, the renewed strength will be further confirmed and paves the way for price to advance again under a new demand controlled environment for the AMC share price. A break through $6.00 has the potential to catch other traders and investors eyes and then the old “fear of missing out” syndrome is one of the many driving forces that will attract new buyers like bees to a honey pot propelling AMC on the next leg of its up trending phase. I like AMC because at this stage no-one else seems very interested in it, apart from a few! This is typical of the early stage of a new uptrend.

From the desperation stage AMC will have very few sellers left leaving the common affliction of a bottom; a scarcity of sellers and the potential for a whole new wave of fresh buying. This doesn’t happen overnight this inevitably changes over time and has in fact been building clearly since the lows at $4.00 were hit earlier this year it’s just that a lot of investors don’t believe it yet. This is another common psychological state attached to a budding trend. As the rally develops its “soul” we bide our time, watch the reversal of fortunes develop, and once we have enough evidence and confirmation we then zero in on the opportunities as the market presents them to us and jump on them with the odds of a continuing rising price is firmly on our side.

Confirmation comes from having put together the appropriate evidence that supports a reversal based on our preset TradePlan criteria, which is primarily based on price / volume action. I then focus on the levels that are likely to trigger upward price movement – my primary focus – and this comes from 4 simple predefined entry signals. A New High above $6.00 for this trending move, up from $4.00, is one of them. So as I stand neutral on the stock now resistance at $6.00 stands out like a blinking beacon of resistance for me to focus on as a trigger for a market imbalance and an upward move in price.

Where to?

Resistance at $7.20 offers the next challenge and we assess price and its behaviour when we arrive there rather than prognosticating on targets and this process goes on for each step higher until our Stop Loss, which follows closely behind the rising price, is hit. 

How do I manage the trade?

Every week (I am a weekly trader only) I assess Fridays close against the last Fridays close and from there I calculate the Trend Intensity rating which is Stockradars unique trend measuring tool that assesses a trend state from a weighted basket of four indicators and rates a stock between 10 and -10.

The four indicators used:

1. Price action = Trend
2. Price/Volume association = investor participation/non participation
3. Moving Average = averaging probabilities
4. Price Momentum (MACD) = the power of the crowd behaviour

Movement in the Trend Intensity indicator offers a guide as to the strength and compelling nature of a trend and if this indicator sinks to a rating of 3 out of 10 or lower the stock is disqualified under the auspices of a weakening demand profile. The indicator is an added filter used to confirm buy signals and the violation of stop loss levels – sell signals. This also directs my stop loss setting which are bound by the rules of being a maximum of 5-10% away from last Fridays close and it is never moved backwards – ever!

That provides absolute safety for each trade and is how I manage them but a longer term prevailing weekly up trend can be made up of many uptrend trade opportunities and that makes up the complete Stockradar trading strategy which can be viewed at Stockradar under About Us and How We Work menu items on the home page.

Suffice to say when one trade finishes that is the past, and it is put in the past, then we can clearly focus on new entry signals devoid of recency or anchor bias, be it on AMC, or any other stock. 

Stockradar’s trading support provides:
In addition to our new Stock Picks each week Stockradar monitors on a weekly basis the status of all the stocks in our stock pool including our 5 smaller portfolios of 20 stocks, with the release of Sundays Stock Pick and Trend Intensity Report. This report updates entry levels, stop loss levels, any relevant comments, and an updated Trend Intensity rating (TIR) is calculated for each stock. Stockradars TIR is used as a confirmation filter for price signals and assesses the trending attributes of a stock based on four simple sentiment measuring tools; trend, volume, moving average, and price momentum indication.

A bull market propels our knowledge and understanding of the stock market to expert status and then a bear market highlights swiftly the reality of that misconception. The sermon of a bear market is that we should always be learning to trade to make money, not become stock pickers, which are two entirely different things! We should never become too greedy or fearful of the market because that is where the big opportunities lie. Learn to gain perspective so you can sell greed and buy fear and don’t ever make the same mistakes again. Seems simple but we all need a little help and guidance getting there. Stockradar is here to help.

Once you have accepted the reality of the fact there are no guarantees on the stock market and that in fact you or the experts don’t know what’s going to happen next we become free of the heavy weight of expectations and can more capably move forward in developing a profitable stock market trading strategy. 

What does the longer term investor do now? Should you buy or should you sell? By using four simple tried and tested criteria it will open up a new world of opportunity you though didn’t exist!

BACKGROUND:
Qantas (QAN) suffered a huge post Allco hangover exacerbated by the bear market which to the dismay of many shareholders has brought the stock from all time high to all time low in just over a year (Where’s your broker now?). These price swings can be devastating to the buy and hold investor but it is not difficult to ride these swings profitably with some simple common sense know how.

CRITERIA:

The focus of using the new Stockradar Aggressive Long Term Portfolio (ALTP) to make money over the longer term with little hassle is driven by four main influences.

1.       Interest Rate cycle
2.       Stock market cycle
3.       Price / Volume relationship
4.       Trend status and Stop Loss positioning

Nearly all forms of effective stock analysis are encompassed by these four areas. Stockradar’s contribution to Egolis “Off the Chart” is to educate and promote the idea and benefit of a simple price analysis approach and this week we highlight the aggressively managed Buy and Hold portfolio whose entry and exit decisions can and should be based on the above criteria. We make an educated assessment of the balance of these four areas and what it tells us about a stocks longer term up trend potential. Aggressive Long Term Portfolio (ALTP) is a slight misnomer as it is really only more aggressive than buy and hold which makes it smarter rather than aggressive. But then our trading portfolios themselves are very conservative as well as they are based only on weekly data to capture weekly trends and on average over the last 6 years have only traded 20 times in a year. Hardly aggressive. A shorter time frame doesn’t, as many think, speed up the pace of the profits it just means you work more for them. Working in such a long time frame we have the luxury of sitting back and thinking about these four areas objectively with the timing not really a special issue here give or take a few weeks. And that is sometimes all some investors want.

QANTAS:

I am talking about QAN today because it is a blue chip company operating in a tough and competitive market that requires a certain alignment of influences to get it moving, as they apparently are now. Let’s look at the four areas. The interest rate cycle we know is at a sweet cherry picking low and what the RBA is telling us is in fact that they are probably too low now. There will be some upward space for them to move before any hampering of the recovery occurs and the RBA again will not be in any special hurry to lift them “too high” So the interest rate story is in a very stock market friendly place right now and has been for months. Secondly the stock market cycle which has had a mammoth swing from bull to bear and back to bull again (for some stocks) and as the long term trend of the stock market is up again we have a plethora of accumulation phases below, like QAN has, who have mostly preceded new and budding trends that have entered the (up) trend stage of the stock market cycle. This stock market cycle simply moves from (up) trend to distribution at the highs, to (down) trend, to accumulation at the lows, and back to (up) trend again. Having said that we are a bottom up specialist and find that individually some stocks are still accumulating, some are trending and some may be nearing a distribution phase.

Could CBA be now ready to top out again near its old highs at $62.00 Were almost there believe it or not but our ALTP stop is in place to protect gains made this year and more if the highs were to be toppled! So stocks will be in different stages of the overall stock market cycle so it’s not necessarily an across the board decision and that is clearly shown by the third contributor where we analyse the price and volume relationship of a stock. Again like Stockradars Trend Intensity indicator we are not basing our decision on any one area but rather the best consensus rating we can get from these three areas of analysis to create a “good odds” case. Fourthly, and as is always the case, the overriding factor is the Trend and Stop Loss.

You set a stop loss to allow for the normal trending swings within a prevailing trend to occur thus it will be a reasonable distance from price but it will prevent the evaporation of profits and curtail the possibility of any big losses as occurred during 2007/08.

The philosophy is the same as the trading portfolios we have just overlaid a different objective and TradePlan to absolutely prevent the debacle for buy and holders that 2008 brought on for QAN. If we can win this simple battle we’re as good as home. Buying is easy it’s the selling that’s hard!

DECISION TIME:

QAN has just bounced off an all time low as the interest rate cycle hits a nadir as has the stock market. Now QAN and the market are climbing again under the auspices of a bullish price and volume relationship. Note the two up legs since the lows have been on expanding volume and the pullback on contracting turnover. That’s a bullish price / volume relationship. What’s your decision? The next decision you’ll have to make is when do you take profit, and why!

Our three key indicators suggest we are or have been in a rare sweet spot since March and the addition of 39 of the Top 50 stocks into the ALTP portfolio this year is our response to that. Don’t wonder, when the stars align, act!

What is it we are buying when we buy a stock? Are we buying a stock, a company, a fundamental, an expectation, or a price?  The bottom line is that we are buying an opportunity to make money.

This question highlights the importance of education and setting an objective of what we are trying to achieve when trading on the stock market.

Fundamental analysts talk about a company with long term prospects and then we go out and buy the share and find the price swings up to $100, down to $15.00 and back up to $50.00 all in the space of 2 years?  Which blue chip stock is that? This is not an unusual event on a percentage basis so is there a valid correlation between the fundamentals and price movement, and is it of use? For the most part no as traders and investors buy an opportunity of making money, and the dreams of a better lifestyle that go with that, and a stock such as MQG who mapped out this trading pattern from a long term perspective has delivered little over the last six years but from a trend trading position using price as the guiding tool to capitalise on those wild swings it has been a very profitable exercise. It is important to have a simple measure of “cheap” and “expensive” so we can respond and take advantage of the inevitable price changes so we can not only buy the opportunity of rising prices, but more often than not get them.

How do we do that? We love big price swings because we can take advantage of them by using price and trends and simply jumping on and off them. Sure a company can be soundly based from a fundamental point of view to underpin a trend so why not just go out and buy the top 20 stocks? They are all good stocks aren’t they? Then along comes an event like an unforeseen financial crisis and suddenly we are floundering for help and stock fundamentals seem a distant and uncorrelated perspective. It only takes one little bear market every 10 years to cause serious capital decimation to the long term holder and it is that bear state that’s hard to pick before it happens. Then of course it’s too late but the necessity of picking bull and bear turns, which most can’t, is not necessary if we are to make money. Far from it.

For the bulls its easy because that’s what the market spends the majority of its time doing – going up – but where are they when we really need them? These experts are just as influenced by greed and fear as anyone. The top 20 stocks are all good companies and any “model” portfolio will have about 60% of its value in the same stocks, you know the old candidates like the banks, BHP, TLS, WDC, QBE, SHL, WOW,  LEI, CSL, and a WPL. So why aren’t we getting what we want – consistently outperforming profits? Firstly because the fund managers with the model portfolios don’t sell when they should (a moving average is often worth more than 10 business of mathematical degrees when analysing stocks) and TLS provides a clear example of one that has been going down for years and destroying shareholder wealth, but it still retains a big weighting (drag) on any fund managers portfolio. Why hold a falling stock?

Yes I know the income is a big thing as any TLS investor will quickly point out to justify their exposure but when balanced with the capital decimation it is hardly worth it so they are really peeing in the wind! There are simply better bets that will sate our desire for making money as even the leaders come and go on a trend basis. Part of the trick in generating consistent returns and outperformance is capital preservation and that means don’t hold falling stocks. The research offered by fundamental analysis if it is positive suggests you can buy the stock and it will endlessly go higher because they have no other way of assessing price movement but the reality is for many other reasons than fundamentals, good fundamental stocks can swing wildly. So rather than fight and dislike that behaviour, let’s use it to our advantage, but you need a method.

So that provides one reason why we aren’t getting what we want because we hold such stocks that have share prices going down and despite great fundamentals many of those stocks have simply not performed (nor been in our sights) take TLS, CSL and WOW for example since March. Great stocks but where is the price trend and why buy them if our aim is to make money? No their trends aren’t up, although WOW may have finally turned the corner. Still when we see the trends delivered by SFH DJS PBG etc who needs a WOW?

This is not a difficult exercise. To win you not only buy the expectation of making money but you need to fight the prevailing wisdom and drop underperforming stocks, or simply stocks that are not going up, so your chances of making that money is far greater. So we all buy to win and make money and that means buying smart and there are many simple measures out there to use whether in conjunction with fundamental analysis or not. The only problem with using them together is what happens when they make different statements as happened in 2007– What do you do and why did so many get caught? And a simple measure, well that could be the simple higher highs and higher lows trend definition, or simply a moving average, one of the best trending tools available.

Let’s take the example of Aristocrat Leisure (ALL) as its share price recently hit our stock radar back in July as it began to rise on solid volume. Now that is of interest and we can now buy that opportunity on the development of some well founded price evidence as not only is the price rising again but we have able support from history and a resurgently bullish demand / supply profile. The odds now favour the fact that the impasse has been broken and the price is mapping out a classic return to a demand dominated share price. In the time frame we work with (weekly) the price has returned to a higher high and higher low structure with new and increased participation supporting the continuation of this trading action.

Then let’s look at a 28 day exponential moving average which is the one I use all the time. This shows the price moving above the average for the first time in 2 ½ years after breaking broke below it at $16.00 issuing a sell signal on that basis alone but you will note you don’t get the highs of $18.00 nor the lows of $3.30 we just escape a big chunk of capital decimation so we can invest our sales dollars from $16.00 back in at $4.30. Now to really boost those returns by stealing some chunks on the way up! Yes the simple measures can work and work very well and then we can more confidently buy that opportunity of making money and make it consistently!