PSARman

Don't Fall in Love With Sirius

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A lot of great ideas have come down the pike attached to great expectations and mass appeal but it appears that satellite radio isn't one of them just yet. As an amateur technical analyst, I try to screen out as much "noise" as possible and just let the charts and indicators tell me the story. To answer Uncle John (thank you for the kind words), the charts don't reflect so much what people think but what they do--where they put their cold, hard cash. Unless we're insiders, we really have no idea what is going on inside a company. Look at how many CEOs (Company Employees--Overpaid) that were much heralded a couple of years ago that are now "spending more time with their families."

Let's look at Sirius seriously from some technical perspectives: 1-year trend, DOWN, 5-year trend, SLIGHTLY UP to FLAT, Total History from January 2000, DOWN, after hitting an all-time high 69.43 in March, 2000. In a downtrending stock, the MACD and stochastics are not very good indicators, so we'll leave them alone for now. Let's look at the Bollinger Bands, PSAR, and DMI over three time spans. The italics are quotes from Stephen B. Achelis book, Technical Analysis From A to Z.

Bollinger Bands: Developed by ex-CNBC analyst John Bollinger based on a standard deviation above and below a moving average, they can tell quite a story.

1. Sharp price changes tend to occur after the bands tighten, as volatility lessens.
2. When prices move outside the bands, a continuation of the current trend is implied.
3. Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend.
4. A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets.

Here are the numbers for SIRI as of today:

Monthly high and low, 4.83-2.55; Weekly, 3.79-2.64; Daily, 3.30-2.71.

As I write this, SIRI is trading at 2.82, closer to its BB bottom than top, and unless it bottoms below 2.71 and then makes a bottom inside the band (whereever that'll be on that date) it is likely to stay in a declining trading range.

Next we'll look at the PSARs (Parabolic Stop and Reverse) or as I like to call them, the "dots." Developed by J. Welles Wilder, you should be long when the dots are below the price and short when the dots are above the price. Beautiful simplicity!

Now for SIRI's PSARs:

Monthly: 3.91, Weekly, 3.29, Daily, 2.96.

All the dots are above the current price indicating you should be short on all three time frames.

Another indicator developed by Mr. Wilder is the Directional Movement Index or DMI. It is one of the best indicators to determine a trend and its strength.

I'll quote Mr. Achelis:

The Directional Movement system is composed of 5 different indicators:
1. Plus Directional Indicator (+DI).
2. Minus Directional Indicator (-DI).
3. Directional Movement Index (DX).
4. Average Directional Movement Index (ADX).
5. Average Directional Movement Index Rating (ADXR).

Bear with me. It really is quite simple. On the color-coded DMI chart, only the +DI (green line), -DI (red line), and ADX (black line) are used.

Wilder has what he calls the "extreme point rule," designed to prevent whipsaws and the number of trades. Briefly, when the green line crosses above the red line, note the high price for the day. It is not considered a true "buy" signal until the price rises above the high (extreme point) the day the lines crossed on a following day. If the opposite happens, the green line falls below the red line, the extreme point is the low for the day and a true "sell" signal isn't generated until a lower price on a subsequent day occurs. If this doesn't happen, ignore the signal.

This is my own take on this terrific indicator: Consider the green line strength and the red line weakness. When the green line is above the red line, you probably want to be long, when it's below, you probably want to be short. I've noticed that when the green line gets above 40 and the red line below 10 at the same time, look carefully at the black (ADX) line as it is signifying the strength of the move. Quite often the green line will start to decline but the black line will continue to rise. I'd stay long but make my exit stops tighter. When the black line starts to decline, it often happens in nosebleed parabolic territory and a sharp decline can occur.

Just reverse everything for short positions. A word of caution: Always use more than one indicator for your entry positions but the PSAR can be used by itself for exiting.

So how does SIRI fare here? The following is ADX, +D, -DI or simply Black Line (strength), Green Line (bullish), Red Line (bearish):

Monthly, 11-17-22, Weekly, 25-12-23; Daily, 14-17-26.

Pretty pathetic, I'd say. All three time frames show the red line above the green line and the strength as weak. On a strong move the ADX can get above 50.

You could probably trade it between 2.75 and 3.10 but there are better trades out there.

When you find these and other indicators all giving the same signal, you have a very profitable opportunity.

Happy trading!

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Catching Falling Knives

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We've all been warned to avoid trying to pick bottoms but if done judiciously, it can be profitable. I recently realized a four-week, 18% gain in on Amylin Pharmaceuticals (AMLN) which had previously been declining for nineteen weeks. Nineteen has no magic in itself but watching several of my favorite indicators, the PSAR, DMI, Bollinger Bands, MACD and Stochastics, it appeared that AMLN could be ripe for a counter-trend rally.

First, the PSAR dots were starting to lengthen and approach the top of price lines on the weekly chart. Second, the +DI (green) and -DI (red) lines were moving toward an extreme reaching 41 for the red line and 12 for the green line on March 4 (I use 40 and 10 as a rough benchmark for the daily chart, a little less stringent for the weekly and monthly charts and seeing hourly charts get to extremes of 60 and 5 on occasion for possible reversals), while the ADX (black) line denoting strength of the move started to roll over.

At the same time, the MACD and Stochastics indicators were turning up poised to give a "buy" signal. These two indicators are useless on their own for a declining security but when used with the two aforementioned indicators, give added assurance that at least a bounce is coming.

To top it off, the lower Bollinger Band had been penetrated by the price bar and then contained the next downturn. This had happened several times before in this decline but with the dots way above the price bars and the other indicators nowhere near giving a buy signal. Obviously, you want to use a fairly tight stop when trying to catch one of these "knives."

I mentioned in a previous post that I daily peruse www.stockcharts.com and click on their "scans" icon in the left menu. The second one down is "new lows." I keep a daily log of new lows of stocks that might interest me on a simple form I made and blacken any previous record of that stock so that when it no longer makes a new low, it stands out like a sore thumb.

I subscribe to www.prophet.net charts and I have used their Java charts for several years and really like their clean, uncluttered appearance. I believe you can register with them and get a limited free version. When I quote figures, it's from these charts. They also have a newer "prophet charts" with all sorts of bells and whistles but I don't care much for them and some of their figures don't match the Java charts and I like to be as consistent as possible.

I take the stocks I've selected from the "new low" list and chart them on a daily, weekly and monthly basis to get a feel for where they're going. Most often it appears they're headed lower whereby you could decide to sell any rally. However, when the "stars" (PSAR, DMI, MACD, Stochastics and Bollinger Bands) align, it increases your chances for success.

So why did I sell? Because the MACD and Stochastics indicators had risen to "oversold" levels and started to roll over and volume was anemic. At the same time, the price bars had pierced the upper Bollinger Band and started to retreat. In a down-trending security, it's best to take profits when you have them and not overstay your welcome.

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