PSARman

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.