The main advantage of the Point and Figure methodology is that it clearly displays support and resistance levels. The most important signals come from breakouts and breakdowns from these levels and from breakouts and breakdowns from the bullish or bearish trend lines. In my experience, the most successful trades were initiated from these signals.
The following Canadian securities that I monitor had a change in their Point and Figure chart as of the close last night:
There are two breakouts, both from a long term downtrend line. This is a reversal of the main trend and merits investigation especially given the fact that relative strength is at the highest level of Buy in a column of X. Cdn Nat Resources and Sunopta.
The breakdown of the long term uptrend line for Encana might be a good short opportunity.
The star of the day for Income Trusts was Eveready following good financial results and guidance. It was up 17%, a very competitive return.
If there are any securities that you want me to include in my universe, please comment or e-mail me and I will try my best to do so…
The Word
Therealword@gmail.com
Friday, August 10, 2007
Point and Figure Monitor – August 10, 2007
A tale of two markets– August 10, 2007
Did you notice that we have a divergence between the Dow and the TSE composite index? The TSE (in blue) has been going downhill continuously (lower highs and lower lows) since achieving a top on July 19th. On the other hand, the Dow Jones industrial (in red) had a bounce establishing higher highs and higher lows. Students of the market will have noticed that the bounce was achieved on lower volume and that the top of the bounce reached the 62% retracement level from the previous downtrend.
The Word
Therealword@gmail.com
Thursday, August 9, 2007
Point and Figure Monitor – August 9, 2007
The following Canadian securities that I monitor had a change in their Point and Figure chart as of the close last night:
The Word
Therealword@gmail.com
Wednesday, August 8, 2007
Something “got to” to give…
As the summer days come and go, the markets are moving towards the day of reckoning. It feels like it is entering a funnel with very little room to maneuver. The volatility is moving the Point and Figure chart closer to the long term trend and very soon now, reality will catch up and we will see a resumption of the bull market or the beginning of a bear.
Since last week-end’s market review, the TSX broke support at 13,550, traded down intraday and reversed itself with a new column of Xs all the way to 13,800 which happen to be the new resistance. It closed at 13,750. If it breaks 13,850, the bull market will still be alive and a lot of people will be happy! If however, it trades back down to 13,650, it will have generated a new column of Os and the next step will be a test of support at 13,500 which also happens to be right on the long term uptrend line. If that breaks to 13450, the bear will begin.
Market internals are useful in proofing the market’s action. Bullish percent since the last update continued to deteriorate after the breakdown of support at 60%. There are now 50% of the stocks which are in a P and F bullish pattern. This is a divergence which I can see in the universe of Canadian stocks that I follow. Many of them are now in a bear market even if the TSX composite is holding on to the bull.
But then again, the TSX is a market of large caps. Small cap Canadian stocks have deteriorated significantly in the past few weeks and that is not good for the Canadian market. Get your guns ready, because we are on the verge of pulling the trigger one way or the other.
The Word
Therealword@gmail.com
Income Trusts – NAL Oil and Gas – Part II
Warning: Buying a security in a long term downtrend is quite different than buying in an uptrend. NAL Oil and Gas is in a downtrend and therefore the probabilities that the trade fails are higher. Readers beware.
The Plan
As you know by now, I believe in having a plan for every stock I intend to own. The creation of such a plan starts with a Point and Figure chart analysis. That allows me to forecast a target price objective, evaluate when I will be wrong, and thus estimate a risk reward ratio.
NAL is clearly in a long term downtrend as shown by the red downtrend line. In April 2007, it reversed into a column of X establishing a support at $11.00 and a short term uptrend line (purple 45 degree angle line). It traded up to $13.50 and then backed down to the current price of $13.00.
From here, the price objective is a return to the downtrend line at $16.00 and it needs three resistance breakouts to get there (horizontal orange lines). The risk is a break of support at $11.00 to the red square of $10.50.
If this evaluation is correct, we have a return of $16.00 - $13.00 = $3.00 on a risk of $13.00 - $10.50 = $2.50 or a ratio of 1.2 to 1.
On the surface, the return to risk ratio does not appear that great, especially given that I require a minimum of 2 for 1 and prefer a ratio in the 3 to 1. I will address this problem when I discuss the trading tactics later on. But first, I want to evaluate the “fundamentals” of the company.
For this I use a long term monthly chart of all the securities that I follow. I believe that the long term trend line of prices is a good approximation of a companies’ growth rate over the cycle. Above this trend line I draw a parallel trend line in order to create a channel where most market prices should trade. There are times when a stock gets overvalued (see the over valued zone in red) and times when it comes back to the growth line (we are there now). My $16 price target appears conservative as it is within the expected trading band.
Finally, I also use the Fibonacci tool to evaluate the critical support level following any major correction (purple oval = $12.18).
The second factor that I consider important is that a stock must have a relative performance better than that of the market. In order to evaluate that, I also use a P and F chart of the stock divided by the TSX index. The number therefore means absolutely nothing. There are two things that one must monitor with relative strength:
-1- Is the relative strength in a column of O or a column of X. NAE.TO = X
-2- What was the last event a breakdown or breakout? NAE.TO = Breakout
NAL Oil and Gas is therefore one of the rare income trust that I follow with a Breakout in a column of X.
The Trade
Converting a longer term plan into a trade becomes somewhat of an art and it always requires the identification of a stop loss if you are wrong in your assessment of the trade.
The art part is a function of the tools you use. It can be a screening system or a set of indicators which you monitor in order to time the trade to the best of your ability. I personally use the combination of an oscillator, volume indicator, and a non conventional convergence divergence indicator on different time frames as a confirmation for a trade.
In order to determine the right stop loss, I use a P and F chart with a 25 cents box size which I feel is more appropriate to the shorter term horizon of a trade. The chart below looks at NAL from that perspective.
Notice that the price column now increases by $0.25. Notice also that the resistance and support levels are different. Buying at $13.00 puts me in the middle of a trading range limited by support at $12.50 (green horizontal line) and resistance at $13.50 (purple horizontal line). The logical stop loss point on this trade is just below support at $12.25 (orange square).
So we now have a return of $16.00 - $13.00 = $3.00 on a risk of $13.00 - $12.25 = $0.75 or a ratio of 4 to 1.
If I hold this stock for one year, I will get a 14%+ return as income plus any variation from the price of the security in the marketplace.
An investor might evaluate his risk differently by evaluating the 0% return price which on this trade is around $11.00. That’s the price where, for the year, the total return would be $0 ( Price – Dividend or $13.00 - $1.92).
The Word
Therealword@gmail.com
Tuesday, August 7, 2007
Income Trusts – NAL Oil and Gas – Part I.
In turbulent times, investors have a propensity to avoid volatility and find the security of assets which exhibit lower price fluctuations. In times of uncertainty, investors become more risk adverse and move from greed to prudence. Fear comes later at market cross points.
Speculators and traders just love volatility because it provides opportunities for large gains in a very short period of time. The Market’s evaluation of risk quickly moves “on the other side” and soon enough the prevalent short term market trend becomes expensive. For example, if you were looking to short using puts today, you would find the premium quite expensive. When the trend was bullish, they were giving them away…
As I write this, it is clear to me that the long term trend is still bullish and the short term trend is bearish. As a general rule, I do not short a long term bull market. There will be a lot of opportunities later if the larger trend does reverses. But I do time the market in the sense that I did take my profits when it was clear to me that the market psychology was reversing. I showed some of the indicators I watch in previous posts. As markets correct, I transform into a different being. From a short term trader, I become more and more an investor with a longer investment time horizon with plenty of cash to re-invest when the time is right.
Having taken profits, I was then confronted with the question of where do I park my money? Cash currently yield 4.75% at my broker. Once I give the governments its share, there is not much left. If this is a correction, (and that is all I can assume right now) why not find high yielding securities whose correlation with the market is low and whose market price is at more attractive valuation levels. Income Trusts may fit the bill.
But there are a lot of risks to Income Trusts. I will highlight a few of them:
-1- Liquidity risk – These companies do not trade many shares during a day. For example, NAE.TO has traded an average of 230,000 a day over the past 60 days which is good. But many trade below 40,000 shares a day…
-2- Small capitalization risk – Being small, they will tend to be influenced by what happens to smaller cap stocks. It also means that institutions might avoid owning these stocks. As an example, there are 49 institutions which hold about 2.1% of the shares outstanding at NAE.TO. A corollary is that if institutions do no hold the stock, then the sell side research will be low to inexistent. There is currently no broker covering NAE.TO for example (coverage: provide an earning estimate). There lies an opportunity. If you can do your own research, you might have an edge before the crowd discovers a situation.
-3- Commodity and Currency risk – Many will experience financial results dependant on the price of commodities like natural gas, oil , iron ore and so on. As most commodity are priced in $US, they will experience exchange rate risk as well. For example, the rise of the $CDN has been detrimental to revenue growth, cash flows and earnings this year.
-4- Government Intervention risk – Income trust generate distributions (dividends) to their shareholders which are in a form of deferred capital gains, dividends and interests for a taxation purpose. Halloween 2006 was a day when the Federal government decided to change the rules of the game, and income trusts crashed and have been weak ever since.
-5- Economic and cyclicality risk – All companies are sensitive to contractions and expansions in economic activity. Income trusts are not immune.
-6- Stock market risk – When markets are in bear mode, all stocks are affected by the tide.
Many Income trusts will be reporting earnings between August 7 and 9, 2007. You can expect fireworks near the end of the week. Although, I see an opportunity in natural gas in the foreseeable future, it would be unwise to make any commitment before one has had a chance to evaluate the impact of the 2nd quarter on the various investment opportunities.
As a general rule, I find it too dangerous to purchase positions before a company has released their statement during earnings season. So what am I to do?
NAL Oil and Gas released their earnings report last week and it was generally quite good. Fundamentally, it has a good balance sheet, a low payout ratio (pays a low % of cash flows as dividend). On an annual basis, it pays $1.92 on a market price of $13.09. That’s a current yield of 14.67%. Usually that is a yield level associated with companies which are in trouble and where the market estimates that the distribution may be cut in the future. But that’s not the case for NAL especially given their recent financial results. I believe the reason is that 100% of this trust’s distribution is taxable as interest income. If you give 50% to the government in taxes, that means the after tax return is more in the 7.3% in my pockets.
Full Disclosure: I own a position in NAE.TO and my position can change anytime without notice.
Absolute Price Chart
Relative Strength Chart
I leave you with two blank Point and Figure Chart of NAE.TO. Tomorrow, I will discuss the Plan, the strategy and tactics for this stock.
The Word
Therealword@gmail.com
Monday, August 6, 2007
Income Trusts – Addendum to Natural Gas
This is a follow-up to the “Investing in Canadian Securities – Consider Natural Gas” post of about a week ago. First of all, let’s make one thing very clear. I am not suggesting you should buy anything. I am only proposing that, if the circumstances are good for you, there might be a place in your portfolio for natural gas stocks some day, and if that is the case, look at the income trust asset class as a means to get there.
As an addendum to that previous post, I wanted to show you the price relationship between oil and natural gas. The chart below shows the ratio of the price of oil to that of the price of natural gas over the past 10 years. Based on that history, we can calculate that the average ratio was 8.5 times (the green horizontal dashed line). We can also calculate the standard deviation of that relationship (a statistical number which measures the volatility around the average) and project two numbers which will help us better understand the history. These numbers are the blue line at a ratio of 10.8 and the black line at around a ratio of 6. The science of statistics now allows me to say that 2/3 of the time, the ratio was between 6 and 10.8. It also means that 1/3 of the time, it was outside of that volatility band. Now look at where the ratio is currently, 12.63 times. It is a law of nature that the relationship will eventually “revert back to the mean” and could even drop back below the black line as it did in 2001 2003 and 2006.
The probabilities for a return to the mean are quite high. It’s only a question of time. We just don’t know how we are going to get there. We can build different scenarios:
-1- The price of Oil drop precipitously and the price of Natural Gas is stable or up
-2- Or the price of Oil stabilizes and the price of Natural Gas rises.
-3- Or the price of Oil keeps rising but the price of Natural Gas rises even more.
-4- Or …
On the one hand, if you believe that generally oil service stocks in the US lead the price of oil, then the following chart suggests that oil may go down.
One the other hand, the US Oil fund is at a critical stage, smack on its long term downtrend line (S-18). Will we have a breakout or will that be too much resistance (remember, the pro usually start selling short right at the downtrend line)?
Nothing changed with Natural Gas prices this week, so there is not need to update the charts.
However, if we look at a monthly chart of Natural Gas and Oil, as many fundamental analyst might postulate, it is in our rights to assume that the price of a commodity follows its long term growth rate in consumption, subject to some cyclicality due to seasons, weather, brightness of the moon (?!) and so on.
If we draw a long term trend line as shown below, and then a parallel line above which contains most of the price action (the art part of technical analysis), besides finding patterns, we can evaluate the position of the current price with respect to the long term growth rate.
I will let you draw your own conclusions.
Natural Gas
Oil
Finally, I have drawn the Fibonacci retracement lines if only to confirm a point. The standard interpretation of these lines goes like this follows.
When prices correct, they usually move down to the minimum 38% line. Most of the time however, price move down by about 50% of the previous up move (the $51.03 December 07 was slightly above the $48.49 projection for Oil). Finally, the 62% price line is generally considered as the “make or break” line. It is the ultimate support line. If that breaks, then it is expected the stock/commodity will continue downwards towards the initial price ($17.12) or a 100% correction which then puts in jeopardy the trend because the previous low may be violated.
The lines are a nice tool to use. However it must be used with a grain of salt. For example, does anyone believe Natural Gas could go back to the summer 2001 low of $1.88? I just don’t think so. But there again, I did not use the Fibonacci retracement lines as prescribed by pure technical analysis doctrine. I cheated a little bit. Do you know why?
The Word
Therealword@gmail.com
Sunday, August 5, 2007
The Canadian market – Week in Review 30
Last week, the TSX composite had just broken down below support at 13,750 and was in a column of O after consolidating in a trading range between 14,000 and 13,750.
This week, it bounced off support at 13,550 (purple line & arrows) which was the previous June 27 low, and established a brief column of X before closing the week with a new column of O at 13,565.24.
The TSE Bullish % gave a serious warning when it crossed the 70 level downward and established a new column of O. This was a signal to change our strategy from capital appreciation to capital preservation. It gave a second signal when support at 60% was broken (red square with an 8 inside). This is a preliminary sell signal suggesting raising additional cash or hedging your portfolio.
Nowhere to hide.
We present below, an evaluation of all the sectors of the Canadian market. Columns E to H evaluate the absolute trend for each sector:
-1- Health care is in a bear trend
-2- Consumer Staple, Technology and Utilities are in a bull trend and still rising (in a column of X).
-3- All other sectors are in a bull trend, and correcting (in a column of O).
-1- There are only two sectors with a Buy in a column of X or a score of +2. They are Consumer Discretionary and Materials.
-2- We have one sector with a Buy in a column of O or a score of +1, Industrials.
-3- All other sectors have rolled over with the worst score, -2, not very encouraging…
What precipitated the “correction” in the US is the relative weakness of small cap stocks in that market. The Russell 2000 index broke its long term uptrend line in July after a double top at 855 and is now trading at 755. Looking at the Canadian MidCap and SmallCap markets, we do not have the same situation.
In conclusion, I hope this review of the Canadian market from a Point & Figure perspective will complement the information you typically use to make up your mind on the future course of the market. That is the only objective.
The Word
therealword@gmail.com
Friday, August 3, 2007
Panic?
Here is Cramers take, one thing for sure, he is passionate.
Meanwhile, back at the ranch, the stocks I (Another Brian) purchased (TSX) on Monday July 30, NEM, TKO, QUA, EQN, are holding up pretty good with all this panic going around.
For another look at where the market sits, visit Stockbee and check out his market monitor.
Thanks to "The Word" for his recent posts.
Income Trusts – Suggested week-end reading.
Next week I intend to start covering Canadian income trusts. However, I will assume you know the basics and so here are my suggested readings for the week-end:
-1- A quick primer can be found here at Wikipedia
-2- Here is a free web site which does a good job of covering income trusts.
-3- And finally, a list of income trusts which are part of the TSX income trusts index.
For each stock in the index, you will have access to some very interesting fundamental information. My favorites are:
(a) The company’s profile
(b) News
(c) Insider’s trading – late but still useful.
(d) … and for entertainment only the forum…
Using technical analysis alone is not enough. At the very least, you need to follow the fundamentals of any company you are considering investing in. Many people only use one or the other. My training has taught me to use both.
The Word
Therealword@gmail.com
Thursday, August 2, 2007
Knowing when you are wrong.
A few days ago, I read a piece by a fellow blogger who is extremely bullish on silver. When you read his arguments, he is very convincing and he makes a lot of sense. However, at the end he writes:
“To me it is just mind boggling how cheap silver is right now and nobody can seem to see it. Well I for one see it. I don’t give a damn if silver drops $2-3 tomorrow. All that means is it’s more of a bargain.”
That brings me back 20 years ago when I listened to this kind of discourse from many Value Managers. These days, value managers are smarter than they were then. These days, they realize that “reversion to the mean” is not immediate. A cheap commodity or stock can get a lot cheaper before its real value is arbitraged by the market. Actually, this is the greatest risk of a value manager. Buying too soon. If something is really cheap and its fundamentals strong, and you buy too early, fortunately time will be the manager’s friend. Eventually, the security will get re-evaluated upwards. But I’m digressing.
I wonder if this blogger has a plan. Does he really listen to what the market has to say? Does he realize that should silver drop $2-3, the game will have totally changed? Having a plan means that for every position that you take, you know when you will be wrong and you know when you will be right. If you don’t do that exercise for every stock you trade, whatever your investment timeframe, you are a fool and over time the market will punish you.
Point and Figure charts allow you to design a plan. You know in which playing field (price zone) you will play and you know when your strategy will succeed or fail. Let’s look at silver:
-1- Silver is in an uptrend as shown by the dark green line sloping at a 45 degree angle.
-2- Three times it rebounded from a price of $12.50, a triple bottom formation which is clearly a strong support zone (green horizontal line)
-3 – However, the last “O” at $12.50 happens to be right on the long term uptrend line, making this support zone even more formidable.
What could go wrong?
Should the price drop to $12.00, it will have violated triple support AND the long term uptrend line and we will be officially in a bear trend (red square). Given the significance of the support zone configuration, the message would be terrible. It would be time to short.
The price needs to breakout from three resistances starting at $14.50 all the way up to $15.50 (green rectangle) and then watch out above for blue sky.
Are you starting to like P&F as a tool to quantify your intuitions?
I present below the traditional chart equivalent for silver. I wonder if you would have made the same analysis. The key support and resistance zones have been identified in green and red. I also show in the lower panel one of my favorite indicators called relative strength. A short discussion of this concept follows:
The name of the game is to outperform the market. If all you want or need is to perform as well as the market, then just buy an index fund or an ETF that mimics the market. XIU.TO is a good candidate for that. In this example, relative strength compares the price movement of silver to the TSX index. When the slope of that ratio (line) is up, silver is doing better than the market, and I probably want to own it (blue line). When the slope is down (red line), silver is under performing the market. When that’s the case, why own it?
Here is a word of caution. You always have to be aware of what the market has been doing when you look at relative strength because you want to own outperforming stocks in an up market. In a down market swing like that of the present, the stock might be out performing the market but in absolute terms, you are losing money, just less money than if you were invested in the market.
In conclusion, I want to stress how important it is for you to have a plan. In my previous posts, I had a plan. For every situation I presented, I identified not only the potential profit (the reward) but also the exit point should I be wrong (the risk). Suffice to say that I use P&F because although it is very difficult to forecast anything, history has proven that your chances of success are higher if your forecast over a longer time frame. P&F is the perfect tool for that. Trading then just becomes a shorter term implementation of that plan.
The Word
Therealword@gmail.com
Wednesday, August 1, 2007
The World is not collapsing – yet!
Did I mean The Word (me!)? And I said I would not do any market timing…!
Pursuant to two requests, I am showing today the TSX composite from a Point and Figure perspective. I use this tool in order to determine the road map to my daily trading. So understanding where the Canadian market is at any given time is important. But being able to rationally make a forecast of future pressure points is also of great value to me.
First off, we are still in a bullish market as shown by the green 45 degree up trend line with the last observation on that trend line being 13,300, a very important number to keep in the back of your mind. We had a recent breakdown of a triple bottom at 13,750 (red arrow) and that is scaring a lot of people because it does confirm a short term downtrend. Technical analysis is a great tool to gauge the psychology of market participants. When we have such breakdowns, the level of anxiety goes up and investors/traders are searching for answers if not outright guidance. Such is not my purpose here. What I do know however is the following:
-1- The next level of potential support is the purple line at 13,550. It is a “weak” support zone however because it is only supported by a spread (far away) “O” which occurred in June of this year (see the 2 purple arrows).
-2- If that does not hold, we have potential support at the next purple line which is 13,350 on the chart, just 50 points above the long term up trend line level of 13,300 mentioned previously.
-3- Finally, and most important, the red square at 13,250 is the critical level. If the market trades at that level, we will have a reversal from a bull market to a bear market, and then watch out below.
How can this be used by shorter term traders in a short term downtrend? Well it’s actually pretty easy. You short at support breakdowns and ride the wave until the next support line below at which point you need to be more cautious and use your traditional decision tool to decide if you should cover or not.
All that is nice if you are a longer term investor right? But what about the “attitude” one should have in this short term downtrend especially if you don’t short? An indicator that I use to stop me from making any major mistake (it is a game where not making any major mistake will see you surviving) is the TSE bullish Percent Index.
A quick tutorial on this indicator is available here
In early July, this indicator went from a column of “X” to a column of “O”. That signals that one should be cautious and as Tom Dorsey says in his book [Point & Figure Charting], it is time to bring the defensive team on the field. The idea is that the time to be offensive and go for capital appreciation has been replaced by a period where you should focus on preserving capital. That’s were we are right now.
So why am I so calm right now with lots of time to write? Because I have my defensive team on the field, with plenty of cash to spend if and when the time is right.
The Word
Therealword@gmail.com
Tuesday, July 31, 2007
Scans - Aug 1 2007
Here is the scans spreadsheet for Aug 1, 2007.
I'm still working on the Stockbee scans, a few are done but all are not finished yet. I may include some component of his "market monitor". The market monitor is used to determine if it is appropriate to enter long or short or stay in cash.
In addition, I am starting to code the back testing for all these scans. My goal is to use the market monitor with the scans to find the best combination for the market at any given time. This will hopefully keep me in long trades for bull market, short trades for bear markets. What about sideways markets? I just finished reading about pivot points and it looks like a good method for sideways markets. Weekly pivots seems like a sound approach but testing should give me more insight. Once done some testing, I'll post the results.
More to come later...
Investing in Canadian Securities – Consider Natural Gas
I believe that market conditions dictate the longer term strategy one must orchestrate independent of opportunistic (perhaps momentum driven) daily trades that we must execute in order to make a living every day. This bull market has been alive for a more than 4 years now, so that there will be a time it moves into a decelerating phase Three to six months later, it will be confirmed by an economy that is “contracting”. We may be in that higher risk zone right now. But market timing is beyond the scope of this article. Besides, the “market timing” community is so full of “experts” that I prefer to avoid that crowd and focus on something else.
Investing in Canada means that you are investing in natural resources. Natural Gas is such a resource which is very different from most others because its price is not determined by World consumption but by North American supply and demand. Fundamentals may not be favorable to higher prices in the very near future (the storage count is up, where are the hurricanes and major heat waves this year?), but technicals do lead you to think outside that box. When I reviewed commodities this week-end, I came across this old friend who had a story to tell me.
Legend:
Dark Green line = Long Term Bullish Up trend line sloping upwards at a 45 degree angle
Light Green line = Short Term Bullish Up trend line sloping upwards at a 45 degree angle
Red line = Bearish Long Term Down trend line sloping downward
Light green horizontal line = Support line
Blue horizontal line = Resistance line
The price of gas is trading around $6.00 right now and that is a very important price for a Point and Figure (P&F) analyst. It establishes a double bottom, but wait a minute, perhaps it’s the right shoulder of a Head and Shoulder (H&S) pattern with a neckline of $8.00! The three green arrows depict de S/H/S formation. If this is true, then the price must not trade at $5.50 or below because that would be a breakdown which would negate this H&S formation. However, we know that two specific events could happen. The first one is that if the price trades at $7.50, we will have a “Reversal into a column of X”, a suitable entry point for an investor. Next, if the price hits $8.50, we then have a H&S neckline breakout and P&F measuring techniques would provide for a minimum target price objective of $12.50 (Orange lines). As of today, that looks like a nice “Value” proposition.
Now that I have identified a longer term potential investment, the next step is to look at a traditional chart. Below we have a weekly chart. You should not be surprised that it also shows the H&S formation. But for me, it is clearer on the P&F chart. Using traditional price objective techniques, a breakout would project a price of $12.52, the same as the P&F projection.
The second most important factor that I use in my investment process is relative strength. Typically, I will own a security only if its performance is better than that of the TSE Composite Index. I may write about that in a forthcoming article. In this chart, I use relative strength (see low panel of the chart) to be aware of the critical natural gas to oil price relationship. As shown on the chart:
-1- Natural gas has been underperforming Oil since December 2005 and,
-2- The relationship is currently at a three year low!
We are smack in the middle of earnings season, so we must address the “fundamental risk”. There are two that we must be aware of.
-1- The first is earnings surprise risk for gas companies. The best way to evaluate that, is to use a 12 weeks moving average of price in order to figure out the average price companies received during the past quarter. The blue vertical lines correspond to the end of the quarter for most companies. The intersection between the vertical lines and the blue moving average (blue arrows) is a good guesstimate of the price companies received during the quarter. It appears to me that the average price was higher this quarter compared to the 1st quarter. If the cost structure has not increased, other things being equal, earnings should at a minimum be equal to last quarter or slightly better. In fact, natural gas prices increased 16% while oil prices decreased 9% during this 2nd quarter.
-2- But we all know that the market is looking at future earnings. It is clear that the average price this quarter is lower than the second quarter and that is what the market is focusing on right now. The right shoulder needs an urgent upswing from now to September 30 in order to reverse the average price received by companies. If that happens, on volume, hang on to your hats because both fundamental and technical analysts will identify the opportunity at the same time!
Earlier I mentioned that the investor’s entry price might be at $7.50. If you are more short term oriented, then you should use other “techniques” to figure out your entry price. The legitimate question might be: How do you participate in such a potential recovery? That should be the subject of a forthcoming post. Let me give you a hint: Income trusts anyone?
The Word
therealword@gmail.com
Monday, July 30, 2007
Buys
I decided to make some small purchases in the following, on the TSX;
NEM, TKO, QUA, EQN.
All of these have held ground on the recent puke by "Mother Market". Some even advancing while the market was tanking. I'm looking at these as longer term hold than a swing trade, so this is the time to pull the trigger.
Is anyone interested in a "Short Interest" spreadsheet for the Naz? If I get enough comments, I may post it. You can see a previous spreadsheet I posted for the Naz short interest here.
Why you need Point and Figure Charts as an essential tool of the trade
The answer is because the long term trend matters. Knowing where you are on the road to prosperity is the first step to any strategy. Whether or not you are a long term investor, a daily trader or a swing trader, you need to know how the fundamental law of supply and demand is influencing the price of any stock you wish to trade. If you believe that you can make decisions using price and volume as the main ingredients for your technical analysis, then you must believe that they are caused by simple supply and demand pressures.
Once you know “the condition” of the stock you wish to trade, you will have a different strategy based on its current status. I decided to use two securities picked from Another Brian’s Canadian screen. They are Miranda Techno (MT.TO) and Mega Uranium (MGA.TO). Why? Perhaps I like to be in the Middle of the alphabet. Or maybe the recent uranium price collapse is of interest to me.
I have to assume that you know the basics of Point and Figure Charting (P&F). If you don’t, I strongly suggest you Goggle it. I know that Stockcharts has a good tutorial written by Arthur Hill on that.
Click here for this tutorial
Also, Dorsey Wright & Ass have made it a business and they have some free information available on their web site.
Click here for this tutorial
The advantages of P&F are numerous:
-1- There is no guessing as to what the appropriate trend line is.
-2- The supports and resistances are easy to identify.
-3- Some techniques can be used to make price objectives, but that’s beyond the scope of this article.
Miranda Technologies (MT.TO) is the first stock that I want to review.
Here is the Legend:
Dark Green line = Bullish Up trend line sloping upwards at a 45 degree angle
Red line = Bearish Down trend line sloping downward
Light green horizontal line = Support line
Blue horizontal line = Resistance line
X in a green square = Breakout
O in a yellow square = Breakdown
If your prefer an Excel version to download, here it is
In my experience, drawing trend, support and resistance lines is very straight forward with P&F. Doing the same with a mainstream chart is more of an art and often subject to your interpretation. I prefer the objectivity of P&F. That means that my emotions will not enter into the equation when I must make rational investment or trading decisions.
There are many stories illustrated by this chart. But the main one is shown on the “H10” and “H11” squares. First we had a breakdown from support of $16.50 which put the stock right on the up trend line. Then we had another and more significant breakdown of the up trend line of $16.00. The bull market for this stock was over. That meant that the game was over and from that point on, bull market tactics had to be replaced by bear market strategies. A wise trader would have put a stop loss at $15.50, regroup and realizing that the game is going to be different, take out the bear book and apply the recipes for such an environment. As soon as the breakdown occurred, a new long term trend line appears. It is the Red bearish trend line which will be the new line in the sand. I could go on with this story, but suffice to say that later on in column “I” and “K”, wise traders recognizing the bear would twice short the stock as it attempted to touch and exceed the red down trend line. Yes, shorting at or near the down trend line is often executed by the pros.
So if you trade MT.TO in the near future, please be aware of its current trend. For example, buying into a bear rally is quite different than buying into a bull trend.
Finally Mega Uranium (MGA.TO) is quite a different sight.
If your prefer an Excel version to download, here it is
This stock is still clearly in a bull market trend, so bull market strategies are still in force even after a drop from a top of $8.50 to its present price of around $5.00. Depending of the type of trader that you are and of your risk aversion, there are different trading strategies available to you at this point. Whatever your choice, I find it comforting to know the following points before I trade this stock:
-1- Because we are in an uptrend, I generally should not try to short this puppy until the price has broken the uptrend line at $4.00, the suitable stop loss price for the long term investor by the way.
-2- The stock is currently at double support at $5.50. This is a very likely spot for buyers to come in. Depending on the way you evaluate a target price for this stock, it may be a low risk/high reward trade at this point given that the logical stop price is just under support at $5.00 (T11 is the red square). We could have a loss of $0.50 for a gain of $(...put your estimate here…). I typically require a minimum of 2 for 1 ratio to be worth my while. But 3 to 1 is more to my liking. Of course if we have a breakdown from support the next logical support would be the up trend line at $4.25.
So the moral of the story is that P&F analysis allows you to identify the prevalent trend and using support and resistance it also allows you to evaluate the most likely trading ranges within that trend. I could not do without it
The Word
therealword@gmail.com
Sunday, July 29, 2007
News - The Word
A new contributor is on his way. Once we work out some details, "The Word" will be posting on TSXTrends blog. The only thing I can tell you right now is that he has long term induustry experience and is eager to share his experience.
I'm trying to create a blog that traders can come to and contribute without all the sign up, advertising, and crap that seems to be present in most web sites out there (except blogs). To me, it appears that Canadians are more greedy than Americans when it comes to "free" websites and data access. I use the word "greedy" because everything was free at one time, on the net. I was cruising the interent at a time when the typical internet access was to phone the local library to get an interent connection, or "freenet" as it was called. It sucked. Remeber Win 3.1?
Are there any readers that are daytraders on the TSX (or other CDN markets)? If so, spit me a comment. Would anyone find a chat window on this blog of any use?
UPDATE: "The Word"may be posting "Point and Figure"charts, among other traditional types of technical analysis. In addition, we may be reading something on Income trusts in the future.
Friday, July 27, 2007
Scan for July 30 2007
Given the recent activity, I'm taking the advice of AlphaTrends and sitting on the side for the most part. If I trade I'll put in a tight stop and profit target, and i won't hold overnight until things get less volatile.
So, I thought it would be interesting to run the scan this weekend and see what comes up.
Here is the spreadsheet for the NASDAQ for those of you who want to see results of a market that you are familiar with. I don't usually post scans of this market but it is interesting to see the results since the market has been hit by a freight train.
Here is the scan results spreadsheet for the TSX.
If you are interested in contributing to this blog, send me an email. Click the envelope at the bottom of this post.
Wednesday, July 25, 2007
Today's trades
I didn't make any trades today, other than selling some of a position on the NASDAQ that still had some profit left. I need to raise cash for making trades on the TSX now. This blog is basically marking my switch to the TSX as a higher percentage of my trades. I think I will still trade the US market for longer term stocks since the day trading rule wont have any negative impact on those trades.
Tonight I evaluate my other positions and shoot the losers in the head and sell them tomorrow. I came to this realisation today while reading another blog. It was nothing new but reinforced the point. The advantage we small investors have is that we can bail out in a whisper, and nobody notices. we can be in and out of a stock as we like, and don't have to explain it to anyone. Since I use Interactive Brokers, the commission is not even worth thinking about. If a stock breaches my stop, I'm out. Maybe I'll buy it back the next day. I don't really care what these companies do, the short term holders anyways, as long as I can take some many out of the trade.
I wonder if professional traders ever have thoughts like they are legally stealing other peoples money? Crazy.
The market is still churning right now, so I am taking a time out to work on another scan that I recently discovered that looks like it has potential. it finds stocks for longer term growth. I have to program it and back test it. Then I will expose it to the world via the internet.
Is anybody reading this blog? Spit me a comment.
I am looking for someone to do some commentary or provide some other content. If you have ideas and want to do some blogging, I'd pay you the same as I pay you right now, status-quo, nothing, which is more than some made in the market today!
Tuesday, July 24, 2007
Today's trades and a list
I set entry triggers for AEN and HF and did not buy due to the stocks dropping. The whole market shit today, except for MVIS, which I own stock and options (NASDAQ). It took off after a deal with Motorola was announced.
Sunday, July 22, 2007
Scan Results for 7/23/2007
The scan results are available in spreadsheet format, you can get the spreadsheet here. The volume filter is set a little high for this exchange to limit the number of hits I get.
Let me know what you think, comments please.....
Filter details, and explanations
Many of the filters / scans listed and described below are taken from authors of other blogs, in the public domain. These blogs typically apply the strategies to the US markets. The results of the ‘TSX Trends’ filters are for stocks listed on the Toronto Stock Exchange (TSE). Care should be taken when trading these stocks as some can have very choppy volume, although I do use a volume filter to some degree. It should be noted that inter listed stocks exist and have higher volume that is spread out over many markets, due to higher participation that includes US markets. These stocks are not great in number though.
The spreadsheet has many columns. Each column has a ‘1’ or ‘0’. A ‘1’ indicates that the stock meets the scans criteria for the day. Here is a brief explanation of what the scans are looking for.
Up Trend – This is not actually a scan but an indication of trend. It uses the 10, 20, and 50 day MA’s. On a weekly time frame, the 10 must be above the 20, the 20 must be above the 50, and the close must be above all MA’s. On a daily time frame, the close, 10, and 20 must all be above the 50 in any order, and the 50 must be rising. The purpose of this is to indicate that the stock is in a clear trend, this may or may not be relevant to the type of trade you are looking for. Using just the price squeeze, for example, looking for a quick price move, the direction of the move would most likely be in the direction of the main trend. I also use this to identify stocks to trade similar to the way AlphaTrends trades.
Down Trend - This is not actually a scan but an indication of trend. It is the opposite of the Up Trend description above.
Price Squeeze – This is a comparison between Bollinger Bands and Keltner Bands, as a ratio. The ratio has to be greater than 2 to trigger this. Price usually moves strong, short term, once the range is broken.
The Rocket – This is a bounce off the bottom filter. Looks to buy stocks that have come down hard finding buyers to quickly take it for a ride up. This scan is from Stockmonster. Basically it looks for a low rsi(2) after an 8% decline over 2 days. The blog has descriptions and results of trading with the results of this scan.
The Crash – This is the opposite of the Rocket, you could say this is a bounce off the top filter. From Stockmonster.
BOBv32x – This filter finds pullbacks, go long. BOB = Blow-off-bottom. There is a good post at Woodshedder’s blog on this filter.
3C – This uses a custom cumulative TSV indicator thought up by Bull Trader of Trade Guild. I only use it as a confirmation of money flow into a stock. TradeGuild uses his 3C indicator in other ways. I have attempted to copy the indy since he will not give out the formula, it is close but not quite there yet. Don’t bother asking me for my version, until Bull Trader releases his.
MA Crossover – This uses a 4, 8 and 21 day EMA. The filter looks for stocks that hove crossed all three in one day with the close above all 3 EMA’s. The MA cross was posted on FilteringWallStreet. The link above gets you to a post where he explains how the cross over works.
Filter 1 – Read about it here. A high Average Day Range 30 (ADR30) and a low rsi(2) works best. Muddy also tells me that a very high rsi(2) also works well. He buys as soon as the price “goes green” which means above the close of the prior day.
Filter 4 – Read about it here. This looks for an 8% rise in price, then waits for the price to pull back into the “Muddy Zone” which is the area between the SMA10 and EMA30
Wait for green and put in a 3% stop, you don’t get taken out too often, according to Muddy.
Rise – This one looks for a 25% increase in price in the last month. These stocks can be held for the longer term. When used in conjunction with another filter, it gives a good entry for a long term hold for your portfolio. Muddy, Green on the Screen, used this and I understand he originally got the idea from Stockbee.
Total – A tally of all the other filters.
Monday, July 16, 2007
Another filter to add from "Filtering Wall Street"
Another scan I will include is the MA cross over offered by FilteringWallStreet, now retired, who post(ed) on the cross over and the BOB (bounce off bottom). The link above gets you to a post where he explains how the cross over works.
Basically, it uses the 4, 8, and 21 EMA. When the open is below all three and the close is above all three, it's a buy signal, with the stop below the trigger candle.
Bullish Jim commented "I've been spending some time this weekend on backtests of a bunch of filters over the past two years. Your EMA 4, 8, 21 crossover is the only one worth beans over the two year period. Incidentally I'm starting to think the past six months is too low a hurdle for testing. It seems like everything I come up with tests well over that period."
Here is the stock fetcher code;
show stocks where close is between 15 and 35
and average volume(90) > 500000
and open <> ema(21)
and close > ema(4)
and close > ema(8)
and close > open
and close 3 days ago < ema(21)
and close 5 days ago < close 3 days ago
and close 5 days ago < ema(90)
and add column atr(10)and sort on column 5 ascending
Saturday, July 14, 2007
Short Squeeze on the NASDAQ, what about the TSX?
Wednesday, July 11, 2007
Stockalicious
Stockalicious allows you to enter your trades and monitor your portfolio on the web as well as some other nice features. They do not currently support options or Canadian markets. I emailed them asking if and when they plan on supporting the TSX. The end of August is their target. When they provide this service, I'll put the link up for my portfolio, much like Woodshedder has done on his TradeWhileWorking blog.
They say options support is on the "to do" list but no date for implementation at this time.
Monday, July 9, 2007
Additional Screeners
I'm working on incorporating a few new scans. Some of these are based on scans described on "Green on the screen" blog. Once these are done I'll post some results. If you have any screeners you find profitable, I am willing to include them if they make sense. I'm also looking at adding a weekly screener for longer term hold. This would be posted on the weekend.
Sunday, July 8, 2007
Risk Management
Risk management is a big part of trading, after all, if you lose your capitol, you don't have anything to trade with. Brandt over at Trade-Guild has a great blog entry on methods of managing risk. There are books and resources available on the net that you can also read on this topic. The Canadian markets are not as liquid as the US markets, so extra care should be taken.
I was entering my trades as Stockalicious but they don't allow options or Canadian markets so I don't have much use for it since I have now begun to incorporate the Canadian markets. It's great for us "at work" traders since it allows you to quickly check your trades performance, even from your blackberry.
BTW, if you read this blog and you think you might find it useful, please drop me a comment.
Saturday, July 7, 2007
The Post's - What to expect ....
Here is an example of the scans I'll post. Each column is a separate scan, all but one is from some other blog (Price Squeeze).
A '1' in the column means that the stock met the screening criteria.
The "UpTrend" and "DownTrend" are my take on what AlphaTrends looks for in a screen. Apex Trader is another blog that looks for similar set ups.
I created the next one called the "Price Squeeze". It compares bollinger bands to keltner bands as a ratio. See the example chart, the red area is the price squeeze.
"The Rocket" is a scan that Stock Monster came up with. It looks for stocks that have suffered a rapid dive, he looks to enter on the bounce. Read about it at his blog, "What is the Rocket?".
"The Crash" is basically a reverse "Rocket". This one looks for rapid increase, looking to profit on the quick pullback. The code for both rockets is run on StockFetcher by The Stock Monster. The code for both is also available on his blog so you can run your scan yourself, or do as I have done, use it for your at home scans for whatever market you want, and make any adjustments you want. I have my own back tester that I use as well, since you need to subscribe at StockFetcher to run back tests.
The next column is the BOB by FilteringWallStreet who is not blogging any longer but Bullish Jim is still blogging about this screener.
The last column is just a total of the number of screeners the stock has met. At this point I don't know how useful it is but it was easy enough to code.
To find out details on how to trade these set ups, you'll have to read the blogs and do your own homework.
Here is a sample showing the Price Squeeze:
And here is a sample of the scans I'll post. Click the image to get the latest excel spreadsheet for Monday's trading session.
Thursday, July 5, 2007
Something new in Canada
Why?
I decided to do this blog after I got frustrated with the pattern day trading rules that govern the US markets. Basically, it does not allow excessive day trades for account under $25,000. I'm not there yet so I decided to stick to the TSX. Canadian markets are not faced with such craziness.
Who?
I'm not a big time trader expert trader but my belief is that emotions drive the market and the individual. Technical analysis can be done by anyone with a monkey brain. My approach to this blog is not as eloquent as "The f'n Fly" or pornographic as the Trading Goddess, or as technical as Alpha Trends, or as insightful as Trade Guild, or as torturous as Suck My NASDAQ. Don't get me wrong, I read all this shit every day.
What?
I'll post a screen shot of my scans every night. You do the thinking. I'm not providing target or stops, just the stocks that fit the criteria. Why is this of any value to you, the poor trader who doesn't have 25K? Because there is limited resources on the net to scan the TSX. You can't scan for "The Rocket", "The Crash", the MA breaks without passing out money to some billionaire firm.
Even Stockolicous doesn't allow Canadian stocks, what are we, the USA's red headed step brother?
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