Sell Signals
Stockscores.com Perspectives for the week ending February 27, 2011
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In this week's issue:
Live Alerts
Those who would like to join me in the Live Alerts chat room can do so this coming week from Tuesday to Friday (the markets are closed on Monday). I provide my entry and exit signals for day trades in this room, it is a great way to learn about how to day trade with the Stockscores Approach. The fee for participating in the chat next week will be $149 plus tax. To sign up, first log in to Stockscores, then click on this link, https://www.stockscores.com/cart.asp?caction=add&prodid=2200
Stockscores Live Classes
I am teaching two StockSchool classes this spring. Vancouver March 13 and 14 and Calgary May 1 and 2. For information or to register, go here. If you have attended one of my paid live classes in the past and would like to attend again, you can do so for $995. Email me if you have an interest in this.
We are also planning an Advanced Trading Class for those interested in making a career out of stock trading. Let me know with an email if you have an interest in that and I will make sure you get updates once we have more details.
Sell Signals
I think selling at the right time is the most difficult skill for a trader to learn. It is unrealistic to exit every trade at the market top so we should instead aspire to maximize our profits over a large number of trades. Having a well-tested set of rules to achieve this is important, but every trader needs to remember that trading is an art. This means there are times when the rules need to be bent. Here is a list of things to consider when looking for the exit door:
Market Conditions
All stocks have some correlation to the overall market making analysis of the stock indexes a must for every trader. An upward trending market has the ability to lift otherwise marginal stocks because up trends create optimism in the minds of investors. It may be worth ignoring short term exit signals on stocks if the overall market remains in an upward trend. In a bull market, the profit is in the patience.
Sector Conditions
Within the overall market there are sectors which will outperform or underperform the index. In the past, we have seen Gold stocks do well while the overall market was suffering. In this recent bull market, the Utilities sector has been an underperformer and best avoided.
So, if you own a stock in a strong sector, be more patient with them during periods of short term weakness. If you are riding a hot stock in an otherwise weak sector, take an aggressive approach to exiting the trade, selling on early signs of weakness.
Distance From the Trendline
The shape of the upward trend tells us a lot about the market's emotions. Chasing emotional buying is dangerous because it usually results in suffering through a sharp pull back. Therefore, we need to apply a more aggressive exit strategy when the market is showing irrational exuberance.
Draw a line across rising bottoms on the chart and you have defined the upward trend line. If the stock is trading far above that line, you can assume that the buyers have been acting emotionally. There is a good chance that prices will pull back to the upward trend line so you should either plan to sell on the first sign of weakness or be willing to ride out the pull back in favor of riding the long term upward trend.
Liquidity
The less actively a stock trades, the greater the potential for a pull back. With less liquidity, large sellers can move the market lower. These pull packs often shake out nervous stock holders who take the brief price spike lower as a sign of a problem. More than anything, these drops are just a function of a lack of liquidity and not an exit signal. With less liquid stocks, you have to look at a longer term chart to get an accurate picture of the market's opinion.
With less liquidity, you also have to be more aware of a valid exit signal. You don't want to be the last person to the exit door. I often exit in to strength if the stock is running away from its upward trend line rather than wait for a break down.
News Expectations
I don't read news releases for what they say about what has already happened, but I do like to know what they tell us about when future news is due to come out. The market will often move in anticipation of news and there is a good chance the market will be able to predict what the news will be.
If I know a mining company is supposed to announce results next Tuesday, and I see on Monday that the stock has run sharply higher and is far above its upward trend line, I am apt to sell before the news because the market has built in high expectations. The same approach can be used for companies that are set to announce their earnings. I don't like owning emotional stocks in to news but will stick with them if they are stable and have a good base of support.
Time of Day
Day traders need to pay attention to the time of day because the market tends to get quiet through the middle of the day. If I buy a stock on the open and it rallies quickly higher, I am going to be more eager to exit on a breakdown that comes sometime after the first hour of trading. This is because there is a good chance that the stock will pull back through the middle of the day and I will get a chance to buy it back at lower prices a few hours later for a run back up in to the close.
If the stock is holding up well and showing some optimism as it goes in to the last hour, I will stick with it and ignore minor weakness. This is because strong stocks tend to close strong and I can get out on that buyer push in to the close, or even hold overnight to exit the following morning.
The Big Picture
It is easy to get caught up in the short term gyrations of the stock, getting emotional with short term drops in price. However, as long as the motivations for the original trade remain valid, it is best to stick with the trade.
To avoid getting whipsawed out of a position because of short term weakness, look at the big picture. A day trader who is focused on the 2 minute chart should look at the 15, 60 or even daily chart to see if the trade is still valid. A position trader who has to endure a few days of downward price movement may want to look at the weekly chart to make sure it is still showing a positive picture.
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Chart patterns tell us a lot about a stock's fundamentals, or more specifically, the market's perception of the fundamentals. Sometimes, I just go through and look at stock charts without filtering for anything specific. This not only allows me to find trading opportunities, it also helps me get a feel for the market and where it is likely headed.
With regard to the market's short term direction, we remain in a bull market. This past week saw losses as investors used the crisis in Libya as an excuse to take profits, but that pull back did not break the upward trend and so, we can say that the buyers remain in control. Until that upward trend line is broken, we must remain bullish of stocks.
When I go through individual charts, I see a lot of stocks that are in good long term upward trends. However, like the overall market, many of these stocks pulled back this week before bouncing back on Friday.
How do I look at a lot of charts? First, you can do a Market Scan on Stockscores, filtering for very simple things like price and number of trades. Want to see the more liquid stocks trading on the TSX Venture? Filter for TSX Venture, Number of Trades > 200 and you will get a list of stocks that have enough liquidity to move in and out of.
The Chart Watch tool on Tradescores is another way to look at lists of stocks based on sector groupings or liquidity. Log in to Tradescores, go to Chart Watch and you will see a list of sectors in the right hand sidebar. I like to look at the most actives or stocks that are in strong sectors. Once you have brought up the list, choose to view the charts with the Slideshow viewer.
This week, I used this process to look at a lot of stock charts and found quite a number which have good potential to make upside moves in the short term. Here are some of them:
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1. T.CNR
T.CNR is in a long term upward trend but had been in a sideways range for about four months before it broke out seven days ago. This week, it pulled back after that breakout but now looks like it is ready to continue higher. This is a more long term trade for those who are looking for a stock that has a good chance of being a slow and steady gainer.
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2. T.UUU
T.UUU has been moving higher since July but tends to go through up and down cycles along that general up trend. This week, the stock broke its short term pull back, indicating it has a good chance of continuing to the upside in the next few weeks. Support at $5.80.
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3. CEPH
CEPH is the opposite of what I usually look for as this stock has good potential because it has been weak lately. The stock fell last week and is now at a support price that has been held 5 times in the past year. This is more of a swing trade as the stock should bounce off of $56 and perhaps rally up to $59. Watch the 15 minute intraday chart for confirmation.
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4. INTU
INTU made a big break to the upside five days ago but then pulled back all of this week, until Friday when it was able to stop the downslide and close up and above its open. This is a good sign that the buyers are ready to come back to the stock after the recent profit taking. Support at $50.68.
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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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