PSARman

Musings on the Stock of the Week

2008-04-20T02:50:55Z

Every week we are asked our opinion on a certain stock. It's my opinion that this is a more difficult task for the fundamental analyst than the trader who relies on technical analysis. The "fundies" may vary widely for the first but the "techies" basically rely on what they perceive to be interchangeable truths, be it certain indicators, support and resistance lines, etc. It doesn't matter to me whether it's SIRI, TSO or WB, the indicators and the chart will tell me most of what I need to know to make my decisions. That doesn't mean I tune out everything else. In fact, I am especially watchful for earnings dates and mark them in red on the daily sheets I've made up to track my portfolios. Even a great-looking chart can turn to garbage on these dates if earnings expectations or guidance isn't up to snuff and vice-versa. I think the best way to handle earnings announcements is by using options, either a protective put for long positions, a protective call for short positions or a straddle if a huge unpredictable move is anticipated.

A day before SLO2 started my computer crashed. It took a couple of weeks to get it back and it still wasn't right. Finally, I got things back to normal but in the interim I thought about improvements to what I had been doing. My favorite indicator, the parabolic stop and reverse (PSAR) still left a lot to be desired. I was also using the MACD, stochastics, RSI, and momentum indicators but found more redundancy than enlightenment. I was also using the directional movement index (DMI) but more as an afterthought than anything else.

The DMI is made up of three lines. If a stock is in an uptrend, the +DI (green) line will be above the -DI (red) line and the ADX (black) line will denote the strength of whichever is on top. Simple enough. I arranged my chart so that I could watch all these indicators at once but keeping the DMI intact.

Then it dawned on me that maybe if I rearranged my chart so that the green line, the red line and the black line were plotted separately as well and their values taken every day as I had previously done with the PSAR, it might be of more value.

Early returns are encouraging. Usually these lines only change, if at all, by a point or two each day but Friday, a lot of what I follow made huge moves. DE's +DI went up 5 while it's -DI went down 2 and the ADX went up 1. Similarly, did JOYG except its ADX went up 2. I wish I could say it predicted GOOG's remarkable move but it didn't. It takes a day or two of changed direction to move the DMI but at least it records the change. On Friday GOOG's +DI went from 19 to 41 and the -DI 26 to 18 while the ADX advanced from 19 to 21. I'll be watching the DMI closely for my positions in SLO2 and sell them when they start showing signs of weakness, remembering that the green line might start to wane but the black strength line can keep going up causing a divergence that can't last forever.

Now to WB, the stock of the week. This past week the +DI numbers waned until Friday: 18, 18, 17, 17, 23 while the -DI numbers are steadily falling: 31, 33, 30, 27, 26; and the ADX (strength of the top line [-DI]) was mushy: 16, 17, 18, 18, 17. With the MACD and stochastics giving "buy" signals and the nice move of the +DI from 17 to 23 on Friday and the downward PSAR possibly changing direction, I'd rate it a buy. But there are a lot of other stocks flashing "buy" signals that might be more exciting.

What about last week's stock of the week, TSO. Here are this week's DMI numbers: +DI: 13, 13, 20, 21, 20; -DI: 31, 33, 30, 27, 26. The ADX showed a slight loss in strength of the -DI: 26, 27, 27, 26, 25. The downward PSARs appear to be close to changing direction and the MACD and stochastics are giving "buy" signals. My take is TSO is trying to put in a bottom and some nibbling would be OK with a tight stop. Monday's action is critical.

Catching Falling Knives

2008-03-30T02:17:11Z

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.

Don't Fall in Love With Sirius

2008-03-06T17:04:01Z

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!

Some Thoughts on Getting In and Getting Out

2008-02-28T15:48:15Z

We are bombarded with thoughts from all manner of media as to what to buy and why. Most cite fundamental reasons which I'm sure will try to seek out good companies given what is available to the public. But I want more than that. I want a good stock which I define as one whose direction has some predictability, be it up, down or sideways. They may or may not be good companies but who cares? We just want to make money.

Stocks in an uptrend tend to bounce off their lower Bollinger Band at the same time their MACD and stochastics are turning up preparing to give a "buy" signal. The PSAR dots will be getting close to changing direction from down to up. The DMI may be positive or negative. If positive, all the better. If negative, it must be at an extreme or show signs of heading in a positive direction. Be sure to check the ADX for strength, whether rising or waning.

What was all that gibberish, you say?

Go to www.stockcharts.com. It is an excellent free website that has a lot of good information and the ability to draw basic charts. At the top of the page is a tab labeled "Chart School." It contains a wealth of information and a glossary of all the terms I used.

If you have no interest in charting but would still like to get a feel for it, go to the "Tools and Charts" section at the left middle of the home page. The fifth item down is "Stock Scans." They will list all the stocks that come under several technical and fundamenal categories. It is updated daily a couple of hours after the markets close. I look at several of these categories daily and make a list of stocks I want to research further. It also is a good source for candlestick and point and figure charts, each adding value to your analysis.

To go short, do the opposite of going long and look for stocks that fit that criteria.

Buying seems to be easier than selling. I've been a student of many Strategy Labs and one thing I noticed is quite often a very good stock picker will not maintain his portfolio. That is, large gains will turn into small gains or even losses and small losses will turn into devastating losses. I've done it and I bet most investors have, too. I think the key is you have to take the emotion completely out of exiting a position, long or short.

A lot of technicians use J. Welles Wilder's Parabolic Stop and Reverse (PSAR) "dots" to do the job. I do, too, but maybe a little differently than most. The common thinking is that you place a sell stop with your broker at the last upward dot and follow it up on the daily chart until the dots catch up to the price or vice versa and the dots reverse. I don't do that. I put in an alert with my broker on the last dot and a sell stop order on the penultimate (yesterday's) dot. Too often, I've been whipsawed out of a good position because the first dot was taken out and the stock rebounded. It's probably because so many of us use this method.

This takes care of the most basic of needs of an investor--preserving capital, limiting losses and locking in gains. But what if we were wrong to get out? After all, aren't we unhappy if the rebounded stock goes even higher? Sure we are but we haven't lost our discipline and we can still get back in given low online brokerage commissions. Again, use an alert set just above the high before you got out. If it is triggered, reassess the technicals and make a decision to get back in or go elsewhere. The major thing I'm trying to stress is to have a plan in place to sell because you don't have any real money made until you do so and you cannot do it effectively when ruled by emotions.

For anyone wanting more information on technical trading, I have three books to recommend that have been helpful to me: Technical Analysis A to Z by Stephen B. Achelis, New Concepts in Technical Trading Systems by J. Welles Wilder Jr., and Technical Analysis for Dummies by Barbara Rockefeller. I use an online discount bookseller to get the best price. Happy trading!

Late Starter

2008-02-17T02:22:51Z

Due to computer problems, I'll be getting a late start. I hope to be up and running next week. I'm retired and have been a student of technical analysis for a while. Nothing fancy. Pretty much what most technicians use: Parabolic Stop and Reverse, Bollinger Bands, MACD, Stochastics, Directional Movement Index, Support and Resistance, 30-, 50- and 200-Day Moving Averages. I try to keep my focus on not more than ten positions at a time and I like to examine each over different time spans.