As long as the general market is trading below key moving averages on the longer weekly timeframe, the bearish case takes precedence.  For now, we are stalking and awaiting precise signals that follow our trading plan. There are a number of stocks meeting multiple time-frame trend conditions on the short side that could be approaching higher reward-to-risk entry points. The same holds true on the long side for a very select few names. The path of least resistance we believe, in the short term is lower.

In establishing short positions, one thing I have learned is that the analysis setting reward-to-risk targets for potential winning positions needs to be strict in terms of meeting the correct parameters of our system. As a general rule we need to be choosier for short trade candidates than a corresponding long. When it comes to trading on the short side, our timing needs to be more accurate and one will not get away with sloppy trading execution as much as we would in a bull market. My mantra is to be as disciplined as possible with following our plan and signals. Results will take care of themselves if a sound disciplined investment and trading process is followed.

When a market is much oversold, as it is now, it would not take much to get some follow through and for the rally to continue. Below is a daily chart of AMZN (top of chart) with the Market or NASDAQ Index (bottom of chart). Our job on the long side is to ferret out true potential leadership that is acting better than the market. Big institutions are usually supporting and increasing positions when stocks hold up better. Amazon (AMZN) so far is exhibiting this strength with a much higher high and higher low. We want to find long stocks where we can begin to establish positions when a sweet spot like this begins to present itself.  As a general rule a “sweet spot” is always preceded by a rally stronger than the market and a pullback that is not as deep or severe during a correction.  You can see the market in early October actually undercut the prior low of late August. One caveat is very short term: AMZN is rallying off its higher low around early October a bit weaker than the market and this must be watched. Today the action and spread in the stock is much better.

Trading Journal 10-7-2011

Each investor must evaluate any stock carefully for their own tastes and investment decisions. We are only showing a front-end process to how we begin to find possible candidates, should a sustainable rally continue.

Have a good weekend!

Michael Doran

President, Managing Director
This material presented here has been obtained or derived from sources believed to be accurate, but we do not guarantee its accuracy and it may possibly be incomplete and condensed. The opinions expressed are based upon our study and interpretation of available data. This is not a prospectus; no effort on our part with respect to sale or purchase of any securities is intended or implied. Any stock noted herein is not, and should not be construed as a recommendation or rating to buy or sell any security. Such stocks are intended for illustrative purposes only. It is possible that at this date or some subsequent date the officers, directors and/or shareholders of Sierra Capital Investors, Inc and its affiliates may own securities or buy or sell securities mentioned herein or those not so mentioned.

CAN SLIM® and variations are marks of Investor’s Business Daily, Inc. and affiliates (‘IBD’). The CAN SLIM® Certified mark is licensed by IBD only to signify successful completion of IBD’s CAN SLIM® Training program. IBD does not license, review or approve of, and is not responsible or liable for any investment advice or other services provided by the user. The user is not an agent of, sponsored by, affiliated with, or owned by IBD and is   not authorized by IBD to make any representations, warranties, or promises.

All commentary is Copyright 2011 by Michael A. Doran. Unauthorized redistribution is prohibited.

Most Investors are mainly concerned with preservation of capital at times like these.  This is accomplished by a steel focus and flexible approach to how we are trading our plan.  I have arranged position sizing and net long and short exposure in such a way that we can tolerate strings of whipsaws in tough markets like these. Then when good markets that trend come along, we are willing and able to adjust our sizing and exposure take full advantage of them.

The market will be very challenging and our intention is to make money in a focused consistent way.  My mind is clear and my spirit is buoyant.  In part this is because our system is not reliant on causal thinking.  When it comes to reading the condition of the market we certainly don’t rely on analysts to come up with various reasons like the Fed is – out of bullets driving a market decline. Let me explain through an example why reliance on causal thinking is not always helpful.

Fundamental analysts generally start looking at a stock and making up reasons for its rise when he learns that some Trend Traders are already profiting from it and his customers want know what is happening. The customers want a causal reason for the stock to go up before they can buy it, so the fundamental analyst provides one.  Although I filter investment ideas through an initial macro screen to find fundamentally sound ideas, it is not the only important tool we have available.

Some traders who describe themselves as Fundamental Analysts do seem to do very well. If you examine their methods however, you will see they actually do follow strong trends in price, earnings and market share.  Our re-engineered approach   gets us in earlier to capture the meat or bigger middle of a trend. We will never get in precisely at the bottom or get out at the exact top. However we can find what we refer to as “sweet spots “   which signifies a high reward-to-risk area to build a position in the leaders and signifies the readiness of a stock to move.  Over time I believe this will enhance and generate results.  For me, it is all about focusing on the process of our investing methods.

Kindest regards,

Michael Doran

President, Managing Director
This material presented here has been obtained or derived from sources believed to be accurate, but we do not guarantee its accuracy and it may possibly be incomplete and condensed. The opinions expressed are based upon our study and interpretation of available data. This is not a prospectus; no effort on our part with respect to sale or purchase of any securities is intended or implied. Any stock noted herein is not, and should not be construed as a recommendation or rating to buy or sell any security. Such stocks are intended for illustrative purposes only. It is possible that at this date or some subsequent date the officers, directors and/or shareholders of Sierra Capital Investors, Inc and its affiliates may own securities or buy or sell securities mentioned herein or those not so mentioned.

CAN SLIM® and variations are marks of Investor’s Business Daily, Inc. and affiliates (‘IBD’). The CAN SLIM® Certified mark is licensed by IBD only to signify successful completion of IBD’s CAN SLIM® Training program. IBD does not license, review or approve of, and is not responsible or liable for any investment advice or other services provided by the user. The user is not an agent of, sponsored by, affiliated with, or owned by IBD and is   not authorized by IBD to make any representations, warranties, or promises.

The last few days the S&P and NASDAQ indexes are attempting to rally on extremely anemic volume. So far this remains suspect for a reversal and very possibly could retest the 1100 low on the S&P 500. The debt related issues facing Europe, and weakening economy have not gone away. The immediate term rally shows lack of any real institutional buying conviction. Yesterday’s move up on the S&P and NASDAQ impressive on a point basis was on the lightest volume for the month. It is probably end of month window dressing at best.

Although the market has technically followed through August 23^rd, it was not that forceful enough to signal a move that has power and is sustainable.  For one thing, more selling swept over the market as a big sell-off Thursday August 25^th and represented a distribution day for the S&P 500 and NYSE composite. A distribution day involves a loss in rising volume and points to institutional selling. Historically this is not good news for increasing long exposure or higher trending prices. According to Institutional research at Investor’s Business Daily, when a distribution day occurs on the first or second day after a follow through day, the uptrend fails 95% of the time.  It is important to remember that the rally beginning around mid 2009 is long in the tooth now and recent action and break of trend signals would point us in the direction of a corrective or possible short term Bear Market.  From a slightly more intermediate perspective we may be entering into a consolidating larger trading range and sideways market. History supports this view as I will cover below, especially after a severe short term selloff like we have seen this month.

Given the shortage of legitimate buying candidates for Intermediate timeframe systems like CAN SLIM® and the lopsided history of failures after an early distribution day the market is still far from providing the level of conviction to increase our long exposure using CAN SLIM®. This type of market historically can go on for a year or more.  

Roman Bogomazov a good friend, Trade coach and instructor of advanced Wyckoff technical analysis at Golden Gate University is working on an interesting study regarding correcting volatile markets like what we are seeing now. The condition examines  markets that have shown  a sharp swift  sell off  from intermediate high and how that relates to the needed consolidation after that. This consolidation is required   to absorb the energy of the selloff. Although the research is still ongoing, there are some interesting aspects that can be incorporated into our templates and parameters for trading.  

 In more volatile sideways markets, and provided one has a viable swing base trading system, there will be what we refer to as “sweet spots” to enter high probability winning trades.  The main tactics in play are to find stocks on a very short term relative strength basis that are stronger/weaker than the market. These need to generate a “Change of Trend” signal and what we terms as a “strong reversal bar close”.  We basically start by filtering through screens of strong fundamental and composite rated stocks using weekly charts. Then I use a template to compare the stock against the strongest related index usually the NASDAQ to identify where a sweet spot is emerging for optimal entry.

Our next journal will show you some chart examples of these setups and how we are trading them. It does require a level of patience to find a true sweet spot. They will show up and we will be diligently be working to find these opportunities both long/ and short.

With kind regards,

Michael Doran

President, Managing Director
This material presented here has been obtained or derived from sources believed to be accurate, but we do not guarantee its accuracy and it may possibly be incomplete and condensed. The opinions expressed are based upon our study and interpretation of available data. This is not a prospectus; no effort on our part with respect to sale or purchase of any securities is intended or implied. Any stock noted herein is not, and should not be construed as a recommendation or rating to buy or sell any security. Such stocks are intended for illustrative purposes only. It is possible that at this date or some subsequent date the officers, directors and/or shareholders of Sierra Capital Investors, Inc and its affiliates may own securities or buy or sell securities mentioned herein or those not so mentioned.

CAN SLIM® and variations are marks of Investor’s Business Daily, Inc. and affiliates (‘IBD’). The CAN SLIM® Certified mark is licensed by IBD only to signify successful completion of IBD’s CAN SLIM® Training program. IBD does not license, review or approve of, and is not responsible or liable for any investment advice or other services provided by the user. The user is not an agent of, sponsored by, affiliated with, or owned by IBD and is   not authorized by IBD to make any representations, warranties, or promises.

Friday going into a long weekend experienced further selling on light volume. This was to be expected as traders exit into the long weekend. It always amuses me when the market is in midst of a correction and the expansive amount of various pundits jawbone that investors should “expect increasing volatility”.

Let’s cover where we might we be headed in June and what are some things we need to consider to develop a plan. In order to do so, first we have to look at the general market.

THE GENERAL MARKET

From a technical damage point of view the market has been in a somewhat serious correction for most of May. Our 4/30/10 Market Pulse Blog Post – http://www.physiciansmoneydigest.net/blogs/market-pulse/04-2010/stop-look-listen-market we showed you a chart of the S &P Index. We were correct in predicting this correction and it was almost textbook at the level it occurred. I actually thought that the market could be grinded a bit higher to fool the market technicians.

What we expect going into June: The major stock market Indexes are fighting to reclaim the 200 day moving average which large institutional traders pay attention to as a key technical level. Many traders believe markets and stocks trading below the 200 day signals, an oncoming or resumption of a longer term bear market. When a break of a major trend begins to occur, large institutions or “the composite Market operators” don’t want extended downward selling pressure until they can more profitably unload positions. In my opinion, what we are seeing now is a real Battle Royale to keep stocks and the general market above the 200 day Moving average. Fortunately we have tools such as our breadth indicator tools to look under the hood and will help us decipher in the weeks ahead the true “quality” of the attempted rally.

One scenario we will watch for in the upcoming weeks is a bounce and weak rally attempt , which could form a right shoulder on a larger head and shoulder type pattern in the major S&P 500 index. This pattern began forming in October of 2009. What we may see is a low volume price recovery through part or most of June or so, and then sell on the earnings news into August. Volume is usually always weak during the summer. Combined with negative investor psychology and macro events like the Europe financial mess and gulf cleanup, a wait and see attitude may take us through part or most of summer making it easier in the short term to create the impression of a rebounding market.

Keep in mind recent economic news is not that positive. However, the low bar on earnings revisions could begin to show signs of crumbling as 2nd quarter earnings come out. This plausible scenario of a weak rally attempt in the weeks ahead could be buttressed on expectations of continued good top line and bottom line growth and then sell off into that expectation. If early short sellers can be run in there should be some evidence of this over the next few weeks and would help a weak rally. Time will tell but this could present a very good shorting opportunity.

POSSIBLE TACTICS

The CANSLIM® method of which we trade intermediate term will be much more feasible upon a more discernable uptrend and technical follow through.

For right now, this is a traders market and you must be very quick on your feet to make any money. I would even go so far as to say this last week has been really a scalpers and much more random trading environment.

Powerful short covering rallies can surface like yesterday when the DOW S&P and NASDAQ were up 2.8 to 3.5% in one day. If you must trade short or long it is best be prepared to do so in a much smaller time frame. The first few days after an attempted rally, as we saw Tuesday May 25th, can be big point spreads accompanied by lighter volume signals short covering. It is not a good idea to trade randomly which is very low Reward to Risk. Our plan is to increase exposure when we can determine lower risk entry points. Sometimes that is not possible with increased randomness as we saw this week. So any positions are generally held for a day or two, scalp some profits where you can and see what develops overnight.

I believe it is important to let things set up properly and only trade for 3:1 reward to risk trades no matter what time frame you are in. The beauty of following a more intermediate time frame style of investing like CANSLIM® is to wait for the market to properly set up and follow through. This should be accompanied with being able to find potential leading stocks forming proper chart or basing patterns. Remember, you don’t have to be in the market at all times. If you insist on trading short term realize you are really only scalping or short term swing trading. It is critical not to lose sight of the time frame you are trading and investing.

Our next journal and post will address the concept of being “Snake-bit” and investor psychology affecting the market. We will also peel back the layers on a few stocks that could be setting up for possible short or long entry.

Have a great Memorial weekend!

CAN SLIM® and variations are marks of Investor’s Business Daily, Inc. and affiliates (‘IBD’). The CAN SLIM® Certified mark is licensed by IBD only to signify successful completion of IBD’s CAN SLIM® Training program. IBD does not license, review or approve of, and is not responsible or liable for any investment advice or other services provided by the user. The user is not an agent of, sponsored by, affiliated with, or owned by IBD and is not authorized by IBD to make any representations, warranties, or promises.

This material presented here has been obtained or derived from sources believed to be accurate, but we do not guarantee its accuracy and it may possibly be incomplete and condensed. The opinions expressed are based upon our study and interpretation of available data. This is not a prospectus; no effort on our part with respect to sale or purchase of any securities is intended or implied. Any stock noted herein is not, and should not be construed as a recommendation or rating to buy or sell any security. Such stocks are intended for illustrative purposes only.

The ferocity of the sell off yesterday was a bit of surprise as it appeared that the market would attempt to bounce off the 200 day moving average. Instead the sell off was more intense clearly establishing a foothold below the 200 day moving averages on all major indexes. This usually can signal a major break of a trend.

This would add more potential evidence that the market may be entering a more bearish phase than a garden variety correction. My view is that there will be some attempt to rally the market over the upcoming several days. Another possible scenario would be to crash the low of today and take out the February correctional low.

Obviously there are a number of macro economic factors with Europe and China’s slowing growth that is creating some panic. The best course of action to manage risk is to lean on the pure technical aspects including price volume action of both leading stocks and the major market indexes to guide trading decisions. At this juncture, trading and investment poses more risk and should be for experienced professionals. An intermediate bottom cannot be a certainty at today’s levels. If deleveraging and margin calls were to impact the market on Monday, this could be pouring more gasoline on the fire.

-Michael Doran

This material presented here has been obtained or derived from sources believed to be accurate, but we do not guarantee its accuracy and it may possibly be incomplete and condensed. The opinions expressed are based upon our study and interpretation of available data. This is not a prospectus; no effort on our part with respect to sale or purchase of any securities is intended or implied. Any stock noted herein is not, and should not be construed as a recommendation or rating to buy or sell any security. Such stocks are intended for illustrative purposes only. It is possible that at this date or some subsequent date the officers, directors and/or shareholders of Sierra Capital Investors, Inc and its affiliates may own securities or buy or sell securities mentioned herein or those not so mentioned.