Articles from Mar 2008

Risk management is critical

Comment posted by Chad on 3/25/2008 1:06:00 AM EST
Article: Getting ready for the upcoming earnings season
Hi Pradeep, Thanks for sharing all your wonderful insights. I'm very glad to have found you.

Please tell me, you say on earnings plays you put the stop at the 3 day low or at gap bottom if it's gap up. If the stock gaps up 100% or 200% on earnings day, that means your stop would be at 50% - 66% below your buy price. That seems a lot to me. In those cases would you set a higher stop? How would you handle that?

Thanks!

Chad

This kind of question is often the most common question asked . The most critical thing to understand if you want to be profitable in the trading game and survive it in long run is risk management.

The most important section in The Trading Guide is below. If you understand this and internalise this one page it would go long way in managing risk.

How Much to Risk

How much should you risk on a trade? To manage risk, you should not risk more than 1% of your total equity on a single trade more.




Market Roundup

Market Monitor: Bearish

  • We are back in bearish territory.
  • Only energy sector is working currently.
  • It has been months since a good counter trend rally developed in this bearish phase.
  • While it is frustrating you have to give benefit of doubt to Market Monitor green signal. Catching a good counter trend rally can pay handsomely. A few weeks rally in September 2007 to November 2007 was one of the best in 4 weeks account was up 40%. Again a narrow set of stocks lead a big advantage during that period.
  • While the first quarter has not been good, this earning season will still offer opportunities. more

Energy sector leads in top 10 sectors

Market Monitor: Bullish

Market has managed to put together a good rally in last couple of days and breadth is showing signs of improvement. So there are opportunities in the top 10 sector. There has ben considerable sector rotation and the top ten sector has now transport and home builder sectors joining the long favorites like energy, metals, and agriculture.

Energy sector is where currently bulk of the breakouts are concentrated and the opportunities are.

Top 10 sector stocks with 4% plus moves

AEM,Agnico-Eagle Mines Ltd (Google Yahoo Earnings Chart)
AG,Agco Corp (Google Yahoo Earnings Chart)
AGT,Apollo Gold Corp (Google Yahoo Earnings Chart)
AGU,Agrium Inc (Google Yahoo Earnings Chart)
BEXP,Brigham Exploration Co (Google Yahoo Earnings Chart)
BVN,Compania De Minas Buena (Google Yahoo Earnings Chart)
COIN,Converted Organics Inc (Google Yahoo Earnings Chart)
CRK,Comstock Resources Inc (Google Yahoo Earnings Chart)
DNR,Denbury Resources Ltd (Google Yahoo Earnings Chart)
EAC,Encore Acquisition (Google Yahoo Earnings Chart)
FST,Forest Oil Corp (Google Yahoo Earnings Chart)
GDP,Goodrich Petrol Corp (Google Yahoo Earnings Chart)
GFA,Gafisa SA ADR (Google Yahoo Earnings Chart)
GG,Goldcorp Inc (Google Yahoo Earnings Chart)
GMXR,Gmx Resources Inc (Google Yahoo Earnings Chart)
GOLD,Randgold Resources Ltd Ads 1:2 (Google Yahoo Earnings Chart)
GSI,General Steel Holdings Inc (Google Yahoo Earnings Chart)
GSX,Gasco Energy (Google Yahoo Earnings Chart)
HK,Petrohawk Energy Corp (Google Yahoo Earnings Chart)
KGC,Kinross Gold Corp (Google Yahoo Earnings Chart)
KOG,Kodiak Oil & Gas Corp (Google Yahoo Earnings Chart)
KSU,Kansas City Southern (Google Yahoo Earnings Chart)
KWK,Quicksilver Resources (Google Yahoo Earnings Chart)
MFN,Minefinders Corp (Google Yahoo Earnings Chart)
MGH,Minco Gold Corp (Google Yahoo Earnings Chart)
MTH,Meritage Homes Corp (Google Yahoo Earnings Chart)
NG,Novagold Resources Inc (Google Yahoo Earnings Chart)
NGAS,NGAS Resources Inc (Google Yahoo Earnings Chart)
NOEC,New Oriental Energy Chemical Corp (Google Yahoo Earnings Chart)
NSU,Nevsun Resources Ltd (Google Yahoo Earnings Chart)
PAAS,Pan Amer Silver Cp (Google Yahoo Earnings Chart)
PETD,Petroleum Development Corp (Google Yahoo Earnings Chart)
PLLL,Parallel Petroleum Corp (Google Yahoo Earnings Chart)
PQ,Petroquest Energy Inc (Google Yahoo Earnings Chart)
SLW,Silver Wheaton Corp (Google Yahoo Earnings Chart)
SM,Saint Mary Land & Explor (Google Yahoo Earnings Chart)
SUTR,Sutor Technology Group (Google Yahoo Earnings Chart)
TMR,Meridian Resource Corp (Google Yahoo Earnings Chart)
TS,Tenaris Sa (Google Yahoo Earnings Chart)
WTI,W & T Offshore (Google Yahoo Earnings Chart)
X,US Steel Corp (Google Yahoo Earnings Chart)
XCO,EXCO Resources Inc (Google Yahoo Earnings Chart)
XEC,Cimarex Energy Inc (Google Yahoo Earnings Chart)

There are lot of opportunities in this for short term traders. If you expand this universe to top 20 sectors you would find lot more short term opportunities.

Quarter end effect

Market Monitor: Bearish

  • As expected the market continues its rally however volume was low.
  • Some of the IBD kind of stocks have started breaking out. However in many cases convincing volume is not there.
  • Month and quarter end dynamics should keep rally going for sometime.
  • Soon we will be in to pre announcements and earnings season, so more EP opportunities of right kind will present themselves.

Large caps are in the play

Market Monitor: Bearish

  • We are at a stage where a reflex rally is distinct possibility.
  • On the MM four things indicate this: # of stocks up 50% plus, # of stocks down 50% plus, number of stocks up 100% plus , and 500 plus up days on 4% in last three days.
  • The spread between the 4% plus breakouts is around 500 and if market puts together a one week rally, we might be in green in a weeks time.
  • However on individual stocks the breakouts are concentrated in large cap stocks. Number of DJ components had EP in last 2-3 days and most have followed through on them.
  • The IBD kind of stocks and small caps stocks which make the explosive moves are not yet in the play. more

A filter to reduce number of stocks in IBD 200 and DT

It is spring cleaning time and so during cleaning , I found some old notes on some of the filters I used or researched in the past to reduce or anticipate breakouts on IBD 200 and Double Trouble. This filter can also be used on stocks up 25% plus in 65 days. That is how I have used it in past with great success. This filter I used to run in night and then calculate buy points and volume triggers for next day entries. It is a very good way to reduce the IBD 200 universe to 5-10 best opportunities to watch for next day entry. Incorporating this simple filter and doing some pre planning can vastly improve your efficiency while trading these two things. The following example will illustrate it more

A hedge fund and the modern day version of bank robbery

The Telegraph out of London has this fascinating story about how a hedge fund spread rumors to aid in short selling. Pretty interesting stuff. Scandals are always been part of the street.

A hedge fund based in London set up a "dirty-tricks unit" to manipulate share prices and get illicit information on companies in an attempt to make millions on the stock market, an insider has revealed.
Private detectives were allegedly employed to hack into executives' emails and telephone records.

Front companies were set up to allow the hedge fund traders to pose as independent researchers or journalists.

Negative information on companies was then distributed to leading investment banks in the hope that rumours would spread and some share prices would fall.

The hedge fund, which cannot be named for legal reasons, stood to make millions from "short-selling" the shares as they fell in value.

The document alleges that:

- Employees of the hedge fund ordered an American-based private detective to hack into the corporate email systems of two firms in which the hedge fund had an interest.


- A bogus firm — with a phoney internet address — was established to allow employees to pose as independent researchers and approach company executives to garner information on their firms' future financial prospects. The firm was also used to gain access to industry conferences.

- A false website — with a bogus address — was also registered to allow hedge fund traders to pose as journalists. The offices of American politicians were approached by people claiming to be journalists to obtain information about potential new laws banning internet gambling that would hit British firms.

- Jurors and their families in a sensitive legal case into whether a firm had exclusive patent rights in which the hedge fund had invested were "tapped up". Money was allegedly paid to jurors' families for information about jury-room deliberations.

- Hedge fund staff gathered "sensitive" negative information on firms in which they had an interest in the share price falling. This information was distributed to leading investment banks whose experts were encouraged to take a dim view of the prospects of the company's shares. A German "media consultant" was also used to disseminate information.

- A safe containing large amounts of cash was installed in the hedge fund's office. Money was paid to "sources" providing valuable inside information. On one occasion, an anonymous informant was paid $50,000.

The hedge fund at the centre of the allegations has offices in London's West End and traders spent their staff Christmas party on a luxury cruise.

It was set up by former senior executives from a blue-chip investment firm. However, from 2005, the "dirty-tricks unit" was staffed by former corporate investigators and investigative journalists hired from newspapers.

Rotation out of commodities

Commodities got hard hit yesterday. Top 10 sectors till now were dominated by these sectors. Several stocks are breaking down from these sector. Where will the money coming out of commodities go. If you are tracking sector regularly, you will know. New sector themes are starting to emerge.


Stocks from top 10 ranked sector witnessing heavy selling today:

ABX,Barrick Gold Corp (Google Yahoo Earnings Chart)

AEM,Agnico-Eagle Mines Ltd (Google Yahoo Earnings Chart)

AGU,Agrium Inc (Google Yahoo Earnings Chart)
AKS,Ak Steel Holding Corp (Google Yahoo Earnings Chart)
APA,Apache Corp (Google Yahoo Earnings Chart)
APC,Anadarko Petroleum Corp (Google Yahoo Earnings Chart)
ARD,Arena Resources Inc (Google Yahoo Earnings Chart)
ATPG,Atp Oil & Gas (Google Yahoo Earnings Chart)
ATW,Atwood Oceanics Inc (Google Yahoo Earnings Chart)
AUY,Yamana Gold Inc (Google Yahoo Earnings Chart)
BBL,BHP Billiton Plc Ads (Google Yahoo Earnings Chart)
BHP,BHP Billiton Limited ADS (Google Yahoo Earnings Chart)
BPT,BP Prudhoe Bay Royal Trust (Google Yahoo Earnings Chart)
BVN,Compania De Minas Buena (Google Yahoo Earnings Chart)
CCJ,Cameco Corp (Google Yahoo Earnings Chart)
CF,CF Industries Holdings Inc (Google Yahoo Earnings Chart)
CHK,Chesapeake Energy Corp (Google Yahoo Earnings Chart)
CLF,Cleveland-Cliffs Inc (Google Yahoo Earnings Chart)
CNH,Cnh Global Nv (Google Yahoo Earnings Chart)
COG,Cabot Oil & Gas Corp (Google Yahoo Earnings Chart)
CRZO,Carrizo Oil & Gas Inc (Google Yahoo Earnings Chart)
CXG,CNX Gas Corp (Google Yahoo Earnings Chart)
CXO,Concho Resources Inc (Google Yahoo Earnings Chart)
DD,E. I. du Pont de Nemours and Company (Google Yahoo Earnings Chart)
DO,Diamond Offshre Drilling (Google Yahoo Earnings Chart)
DPTR,Delta Petroleum Corp (Google Yahoo Earnings Chart)
DROOY,DRD Gold Ltd Adr (Google Yahoo Earnings Chart)
DVN,Devon Energy Corp (Google Yahoo Earnings Chart)
EAC,Encore Acquisition (Google Yahoo Earnings Chart)
EOG,Eog Resources Inc (Google Yahoo Earnings Chart)
ESE,Esco Technologies Inc (Google Yahoo Earnings Chart)
FCX,Freeport Mcmoran C&G B (Google Yahoo Earnings Chart)
GDP,Goodrich Petrol Corp (Google Yahoo Earnings Chart)
GG,Goldcorp Inc (Google Yahoo Earnings Chart)
GGB,Gerdau Sa Ads (Google Yahoo Earnings Chart)
GOLD,Randgold Resources Ltd Ads 1:2 (Google Yahoo Earnings Chart)
HERO,Hercules Offshore Inc (Google Yahoo Earnings Chart)
HL,Hecla Mining Co (Google Yahoo Earnings Chart)
HMY,Harmony Gold Mining Co (Google Yahoo Earnings Chart)
KGC,Kinross Gold Corp (Google Yahoo Earnings Chart)
KWK,Quicksilver Resources (Google Yahoo Earnings Chart)
LIHR,Lihir Gold` Limited ADS (Google Yahoo Earnings Chart)
ME,Mariner Energy Inc When Issued (Google Yahoo Earnings Chart)
MFN,Minefinders Corp (Google Yahoo Earnings Chart)
MMR,Mcmoran Exploration Co (Google Yahoo Earnings Chart)
MOS,Mosaic Company (Google Yahoo Earnings Chart)
MT,Arcelor Mittal (Google Yahoo Earnings Chart)
NE,Noble Corp (Google Yahoo Earnings Chart)
NEM,Newmont Mining Corp (Google Yahoo Earnings Chart)
NFX,Newfield Exploration (Google Yahoo Earnings Chart)
NSC,Norfolk Southern Corp (Google Yahoo Earnings Chart)
OXY,Occidental Petro Cp (Google Yahoo Earnings Chart)
PAAS,Pan Amer Silver Cp (Google Yahoo Earnings Chart)
PCU,Southern Copper Corp (Google Yahoo Earnings Chart)
PETD,Petroleum Development Corp (Google Yahoo Earnings Chart)
PLLL,Parallel Petroleum Corp (Google Yahoo Earnings Chart)
POT,Potash Cp Saskatchewan (Google Yahoo Earnings Chart)
PQ,Petroquest Energy Inc (Google Yahoo Earnings Chart)
PTEN,Patterson-Uti Energy Inc (Google Yahoo Earnings Chart)
PXD,Pioneer Natural Rescs Co (Google Yahoo Earnings Chart)
PXP,Plains Exploration & Prod (Google Yahoo Earnings Chart)
RDC,Rowan Companies Inc (Google Yahoo Earnings Chart)
RGLD,Royal Gold Inc (Google Yahoo Earnings Chart)
RIG,Transocean Inc (Google Yahoo Earnings Chart)
RIO,Companhia Vale Do Rio Doce ADS (Google Yahoo Earnings Chart)
RTP,Rio Tinto Plc Adr (Google Yahoo Earnings Chart)
SGY,Stone Energy Corp (Google Yahoo Earnings Chart)
SID,Companhia Siderurgica Nacional S.A. (Google Yahoo Earnings Chart)
SLW,Silver Wheaton Corp (Google Yahoo Earnings Chart)
SM,Saint Mary Land & Explor (Google Yahoo Earnings Chart)
SMG,Scotts Miracle-Gro Company (Google Yahoo Earnings Chart)
SWN,Southwestern Energy Co (Google Yahoo Earnings Chart)
TCK,Teck Cominco Limited (Google Yahoo Earnings Chart)
TOC,Thomson Corp (the) (Google Yahoo Earnings Chart)
TRA,Terra Industries Inc (Google Yahoo Earnings Chart)
TS,Tenaris Sa (Google Yahoo Earnings Chart)
TXCO,Txco Resources Inc (Google Yahoo Earnings Chart)
UPL,Ultra Petroleum Corp (Google Yahoo Earnings Chart)
X,US Steel Corp (Google Yahoo Earnings Chart)
XTO,Xto Energy Inc (Google Yahoo Earnings Chart)

New sectors are emerging

Market Monitor: Bearish

  • Some of the indicators in MM have been in green territory for last few days. Typically indicating short term rally potential.
  • As expected the reflex bounce arrived . The fact that Bear Sterns trouble did not lead to major down move indicated a possibility of bounce.
  • The Fed action was another catalyst.
  • So again market is back in the range.
  • With 1000 plus breakouts in scans, you would expect lot of high volume breakouts, but most of the breakouts are on low volume.
  • Only 24 out of 1002 breakouts have 3005 plus volume surge.
  • IBD 100 has 22 qualifying breakouts, IBD 200 has 33 and Double Trouble 22.
  • Top 10 sectors is where the current focus should be and there are 40 breakouts in among the top 10 sector stocks.

Top 10 Sector Breakouts
AA,Alcoa Inc (Google Yahoo Earnings Chart)
ACO,Amcol International Corp (Google Yahoo Earnings Chart)
AG,Agco Corp (Google Yahoo Earnings Chart)
AKS,Ak Steel Holding Corp (Google Yahoo Earnings Chart)
BDE,Bois d'Arc Energy (Google Yahoo Earnings Chart)
BNI,Burlington Nth Santa Fe (Google Yahoo Earnings Chart)
CLF,Cleveland-Cliffs Inc (Google Yahoo Earnings Chart)
CLR,Continental Resources Inc (Google Yahoo Earnings Chart)
CNI,Canadian Natl Railway (Google Yahoo Earnings Chart)
CR,Crane Co (Google Yahoo Earnings Chart)
CSL,Carlisle Companies Inc (Google Yahoo Earnings Chart)
CXO,Concho Resources Inc (Google Yahoo Earnings Chart)
ESV,Ensco International Inc (Google Yahoo Earnings Chart)
ETN,Eaton Corp (Google Yahoo Earnings Chart)
FSS,Federal Signal Corp (Google Yahoo Earnings Chart)
FST,Forest Oil Corp (Google Yahoo Earnings Chart)
GE,General Electric Co (Google Yahoo Earnings Chart)
GFF,Griffon Corp (Google Yahoo Earnings Chart)
GWR,Genesee & Wyoming Inc A (Google Yahoo Earnings Chart)
HERO,Hercules Offshore Inc (Google Yahoo Earnings Chart)
HK,Petrohawk Energy Corp (Google Yahoo Earnings Chart)
KAMN,Kaman Corp (Google Yahoo Earnings Chart)
LNN,Lindsay Manufacturing Co (Google Yahoo Earnings Chart)
MOS,Mosaic Company (Google Yahoo Earnings Chart)
NSC,Norfolk Southern Corp (Google Yahoo Earnings Chart)
NUE,Nucor Corp (Google Yahoo Earnings Chart)
PDS,Precision Drilling Corp (Google Yahoo Earnings Chart)
RAVN,Raven Industries Inc (Google Yahoo Earnings Chart)
REXX,Rex Energy Corp (Google Yahoo Earnings Chart)
RIG,Transocean Inc (Google Yahoo Earnings Chart)
RRC,Range Resources Corp (Google Yahoo Earnings Chart)
SFE,Safeguard Scientific Inc (Google Yahoo Earnings Chart)
SM,Saint Mary Land & Explor (Google Yahoo Earnings Chart)
STLD,Steel Dynamics Inc (Google Yahoo Earnings Chart)
SXI,Standex Internat Corp (Google Yahoo Earnings Chart)
TG,Tredegar Corporation (Google Yahoo Earnings Chart)
TRS,TriMas Corp (Google Yahoo Earnings Chart)
UNP,Union Pacific Corp (Google Yahoo Earnings Chart)
WLT,Walter Industries Inc (Google Yahoo Earnings Chart)
WRES,Warren Resources Inc (Google Yahoo Earnings Chart)

There are 3-4 good opportunities for short term traders in this list.One of the most surprising candidate in this list is more

Waiting for Fed

Market Monitor: Bearish

  • Market is in Fed anticipation mood and can go either way . Not a time to play aggressively. So no new long or shorts at this stage.
  • Considering the carnage in overseas market and Bear Sterns news, the market has withheld well.
  • Since the beginning of this bearish phase , there has been no washout move, which can set us up for a tradable bounce.
  • Large caps lead by Dow Jones members are showing divergence. The Dow stabilisation at this level is good sign. For those wanting to play reflex bounce, that is where action might be.
  • For all the bearishness and constant negative news and chatter , the low on 1/22/2008 is still more or less intact. Something to keep in mind.
  • A reflex bounce is a possibility at this stage more

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