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Stockscores.com Perspectives
For the week ending January 3, 2004

In this week's issue:

Weekly Commentary
Strategy of the Week
Stocks That Meet The Featured Strategy

January is the month for resolutions, and February is the month to break them. I have assembled a short list of resolutions that all traders should take to heart. My hope is that we hold to them beyond Valentines day, and make them part of our investment and trading strategies.

1. Plan Your Losses
When most of us buy a stock, we think about the money we will make. No investor wants to think about losing money when we buy a stock, but our long term success depends on being able to control losses. The best way to control losses is to plan them. When you buy a stock, pick the price where the market will prove you wrong and you will take a loss. If the stock gets to that price, sell.

2. Let Profits Run
It feels good to make money. As human beings, we love to feel good, so it is no wonder that so many of us sell winning stocks too early. However, to maximize our long term profits, we have to sell stocks when it is probable that they are going to go lower, rather than when it feels good to lock in a profit. Let profits run until the market indicates the run is over.

3. Don't Fall in Love
Love is blind. If you own a stock after studying its business a good deal, chances are you are buying it because you like it. Unfortunately, liking a company can be a problem because it may create an emotional link to the stock. Don't believe what anyone says about a stock, the only thing that never lies is the market itself. If the stock chart looks like it is more likely to go lower, sell it.

4. Don't Chase
You pick a stock that looks like it is going to go higher, but you don't buy it. Over the next week or two, you watch the stock go higher. Recognizing that you were right about the stock, you finally decide to buy. Unfortunately, you are buying the stock after it has already priced in the reason you selected it as a buy in the first place. Buy stocks when they give buy signals and don't chase them upward.

5. Be Selective
It is easy to find good looking stocks on a regular basis. I have found better success if I am patient and wait for great looking stocks. Trading marginal opportunities ties up capital and can be frustrating. Get picky in 2004.

6. Get Educated
I learned how to trade the market by making a lot of mistakes. With hindsight, it would have been a lot quicker and cheaper if I had hired a pro to show me how to do it. If you are going to trade stocks, find someone that has made money in the stock market and is a good teacher. If they have not made their own money in the stock market, don't waste your time. There is a big difference between developing trading systems and making money in real market conditions.

There you have it, 6 simple resolutions to guide your trading in 2004. I assure you that following them will allow you to do better in the market. Of course, the hard part is sticking to them. Best wishes for a prosperous New Year.

A look at the major market indexes is a good way to start a New Year. We can learn from what has happened, and consider where the overall market may go to establish our strategy for the coming year. This week, I look at two year charts of the Dow, Nasdaq and TSX markets and provide some comentary for things to think about as we enter 2004.

1. DIA
The Dow has had a great run, and is not yet showing any signs of weakness. The rally got started when the market made a head and shoulders bottom (which I have highlighted on the chart) and then broke through the neckline of the pattern in the Spring. Notice that just before that breakout, the Sentiment Stockscore line had broken above 60, and has stayed above 60 since.

There is no sign of weakness in this chart yet, but there are two things that are of concern if you are a buyer of stocks. First, the market has come up a lot in a relatively short period of time, and is due for some profit taking. As an investor holding a few stocks that have nice profits, I avoided selling them in December as I would rather wait till a new tax year to lock in the gain, and avoid paying the tax for another year. I don't think I am alone in this fact, and we may see profit taking pick up soon.

The other concern on the Dow chart is the long term resistance that the market is just short of now. Investors remember psychological swing points like the one I have drawn in in red on this chart, and it may bring out some sellers.

I think the short term upside potential is limited for the Dow, and we may spend some time going sideways or lower to start the year. However, the longer term outlook for the Dow remains good, and we should be able to end the year up after a slow start.

2. QQQ
The Nasdaq had an even better year than the Dow, although it spent the last quarter of the year lagging the more established companies of the Dow. The rally got started when the market broke through resistance from rising bottoms, which it had not been able to do for a few years. The Sentiment Stockscore was in the "60 or higher" zone at that time, and has stayed there ever since.

The fact that the Nasdaq has been quiet for the past few months means it is in better shape than the Dow. It has been able to form a base that can be used to move up from. Resistance levels are not that far away, so I don't think we should be too excited about another 50% gain this year. However, I do expect that the Nasdaq will outperform the Dow this year, and end up again. This market should generate lots of opportunities in individual stocks that have stories which capture investor interest.

3. T.XIU
The TSX did great too this year, and has been in a strong up trend (as characterized by rising bottoms on the stock chart) since late last year. My concern with this market is two fold; the gains made make it likely that we will see profit taking to start the year and this market has just broken through long term resistance that may pull it back in January.

Those who have read this letter for some time will know that I like it when stocks or indexes break through resistance, and may wonder why I would be worried about the TSX when it has just been able to break the long term resistance at the red line that I have drawn on this chart.

There is a difference between breakouts from low volatilty chart patterns than out of steep and volatile up trends. It is often the retail investor who is jumping on late that causes a stock to break through resistance from an uptrend, and the pros will tend to bring the market back as they have a lot more stock to sell and take profits on than can be absorbed by the retail investment.

The TSX remains strong technically, but I would be cautious as it is susceptible to a pull back led by profit takers. Don't run for the door until there are signs of weakness, but certainly keep an eye on the exit sign.

References

Get the Stockscore on any of over 20,000 North American stocks.

Background on the theories used by Stockscores.

Strategies that can help you find new opportunities.

Scan the market using extensive filter criteria.

Build a portfolio of stocks and view a slide show of their charts.

See which sectors are leading the market, and their components.

Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don't consider buying or selling any stock without conducting your own due diligence.

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