Looking for the right time frame

Money can be made in various time frames and I continue to experiment with time in search for the time frame that best suits my skills and life style. The equity selection approach is the same, but each time frame has its own risk management specifics. I start the day by scanning for unusual moves. By unusual I mean remarkable price and volume. Any stock that is up more than 10% on at least 300k volume, which represents 3 times its average daily volume, is worth my attention. There are too many stocks in the scan every morning, so to limit the list to 3-4 stocks that I will be watching during the day I look for the catalyst behind the move. Is it earnings’ related, industry related or is it a biotech company? The higher the volume and the longer the stock has been neglected, the better.

Here it is a look at two trades that I took today:

ino

1) Running scans and watching the market during the fisrt 20-30 min

2) Waiting patiently for the stock to climb back above its daily VWAP. It did so at 11:40am on its 13th bar (10 min). I saw a tight consolidation (2.05-2.17) above the VWAP over the next 50 min.

3) The entry was on the 12:30 bar (18th) at 2.18 with a stop at 1.93

4) Total risk: $200; Risk per share: 0.25; Position’s size = 200 : 0.25 = 800 shares

5) Initial target was the high of the opening range or 2.50 ( I know, terrible risk/reward of 1:1. This is the main reason I am grading this trade with B- )

6) I could have sold 1/2 position at the initial target, but I didn’t. This is also a weakness I acknowledge. Once the initial target was passed, I used a 15 cents trailing stop. I was stoped at 3.07 for a gain of 0.89 per share.

cno1) Nice bullish wedge consolidation above the daily VWAP during the 5th to 8 th bar.

2) Enter on the 9th bar at 2.45 with a stop at 2.35 (2 cents below the daily VWAP and 3 cents below the consolidation area)

3) Total risk of $200; risk per share was 10 cents; Position size = 200 : 0.10 = 2000 shares.

4) I used a trailing stop and got stopped at 2.75 for a gain of 30 cents per share.

5) I grade this trade with A, since the entry was above the opening range; it was a break-out from a bullish pattern above the daily VWAP; the stop was relatively tight, which allowed bigger position’s size.

Sometimes day trades could be really profitable, but I still feel more comfortable playing in longer time frames, where the stops are wider and therefore the positions’ sizes are smaller.

Best performing stocks YTD – part 1

ddrx

vnda

dtg

car

smrt

What conclusions can we make about some of the best performing stocks:

1. Pay attention to enormous one day price expansion. Something like 20%+ one day gain. Don’t be scared by stocks that rise 50% or 100% or even more in a day. This might be the beginning of a big trend. Look between the lines. What stays behind that move.

2. The stock was neglected for a long time. It was tiny traded in tight range. Nobody cared about and as a consequence its graph looked like the EKG of a dead man.

3. There was a gigantic volume behind the sudden price growh. An all time high volume, which is 10-20 times bigger than the average daily volume for the last 100 days.

4. The initial move raises to the stock to a 6 month high. It is either neglected or it has high % of float sold short.

5. There is a clear catalyst behind the move. It is always earnings’ related. When it is not about monstrous current earnings’ growth, it is about expectations of such growth in the future.

6. Stocks move in groups. If there are other stocks from the same industry group that are also showing impressive momentum, concentrate your attention to that group. Look at all stocks in the Autoparts and coffee related industries. Such moves in whole industry groups are not caused by few grandmothers, trading their 401k. It is funds’ money behind them. And when they start buying, they do so for months. The nature of their size prevent them to acquire all stocks they want for several days or several weeks. This is why they patiently wait for slight pullbacks to rising 20 day MA to add or just start building positions in similar stocks from the same industry.

7. Momentum works – screen for the top 30 best performing stocks for the last 3 months. When you notice in your list, several members from the same industry, concentrate your efforts there.

8. Market always provides plenty of opportunities to make money on the long side. Even in one of the worst year in the recent financial history of the world – 2008, there were opportunities. During the first 6 months of 2008, while everyone complained about the high price of milk and gas, smart investors made fortunes riding stocks from the basic materials and energy sectors. I remember how in April and May of 08, some small cap, highly speculative oil stocks doubled every two weeks or so. The experienced investors know that every trend ends some day and this is why they always have an exit plan in mind.  They didn’t hesitate to exit their positions in July, when market action told them to do so and to go on a long vacation until the market told them that it’s time to come back. I know that it sounds much easier that it actually is. Let it be no confusion – trading/investing is the hardest way to make a buck in life and it offers everyone what he/she deserves. The purpose of this last paragraph is not ot motivate or scare, but to point out that most of us overtrade  and don’t concentrate efforts on a single market approach that has proven its validity and that suits our skills.

Does momentum work?

McclarenF1At the beginning of the year I posted the 10 best performing stocks for 2008. The list included the following stocks:

Best performing stocks in 2008

EBS +413% / Biotechnology
STSI +345%/ Cigarettes
CRD – B +258% / Business services
GAI +245% / Appliances
AIPC +224% / Processed and Packaged goods
MXC +210% / Independent Oil and Gas
DARA +194$ / Biotechnology
KIRK +173% / Home Furnishing Store
FINL +151% / Apparel Stores
GBR +147% / Oil & Gas exploration

Let see what happened 6 and half months later:
EBS = -50%
STSI =-73%
CRD-B =-69%
GAI = -17%
AIPC = +30%
MXC = -17%
DARA = -22%
KIRK = +308%
FINL = +32%
GBR = +40%

An equal weighted percentage portfolio of all the 10 members and without using any stops would deliver 16.2% YTD. Another example of the real investing world, which confirms that 10% of our trades usually account for 80-90% of all the profits.

Huge moves, but no real  edge in either direction. You might try to create a portfolio with the top 10 best performing stocks of the last year and put a stop just below the last higher low on the weekly chart. Such an approach will guarantee you that you will ride the move as long as it continues and you will jump when there is a clear sign that the major trend is in trouble.

Biotech stocks proved again that they are rarely suitable for an investment. They are trades. Many double, tripple and quadruple and then go back to where they started. Using stop losses with them doesn’t really work, since in the majority of the cases they just gap down. One way to hedge your biotech bets is to costantly protect them by 90-day OTM puts. This will protect you from disasters on the downside and give you plenty of room to ride the upside. Another possibility is to sell every month OTM calls, that are about 15-20% away from the current price. Such an approach will allow you to gradually decrease your cost basis. It will limit your upside potential and it won’t provide too big of a cushion on the downside, but it is still better than not having an exit plan. If you get exercised, your profit will be more than 20% for the month. If trend is still looking healthy, you can always jump right back in. Keep in mind that many of those stocks don’t climb gradually. The bulk of their move is often congested within a week or a month.

Catching a trend and riding it is what all investors should aim at. The ones that make money consistently know that no trend last forever and they always have an exit plan.

Fasten your seatbelts

flight_attendantThere are not many industries, which stocks experience as much turbulence as the airlines. Airlines stocks are highly cyclical and their price moves are highly dependend on the price of oil. The past year was a roller coaster for many members of the Major & Regional Airlines groups. Many experineced moves from -80% to +300%, several times.

I know what most of you think. Why do I even bother spending time on these industries. Their business must be dead in times of risk-averse consumer and relatively high fuel prices. Well I don’t know if it is for good or bad, but  there is sizable difference between the business and the actions of the underlying stock.

I have the habit to follow earnings surprises and growth in the context of different industry groups. If only one or two stocks in a group reports big earnings surprise and growth, it usually doesn’t mean much for the industry. Those stocks might present good short-term trading opportunities, but nothing more. If I notice good portion of stocks within a industry to surprisingly start beating earnings estimates and to reveal impressive growth, I pay attention to that industry. A new powerful trend might be in its beginning stages.

Today I am looking at the Airlines’ industries. Nothing fastinating is happenning there, but the recent weakness in oil and comming earnings’ reports might fuel some gigantic moves. Certainly, this is only speculation and price action will dictate my moves.

airlines' earnings

Other people's money

opm

I judge for the current market sentiment by the way investors react to companies’ earnings’ reports. When risk-aversion is the popular theme of the day, speculators subconsciously look for a reason to sell. The slightest weakness in an earnings’ call will be exaggerated and extrapolated and the stock will be sold. It doesn’t matter if a company beats the analysts’ estimates or if it guides higher for next quarter. It matters how market participants react to the news. When “good” earnings reports are getting sold, market is in defensive mood and you should act accordingly.

The story is different when investors are confident about their own and the economy’ future. During such times, people are looking for a reason to buy. They tend to ignore any weakness and a single ray of hope in an earnings’ report is enough to get them excited and start buying like crazy. You know the spirit of Wall Street is high, when slightly lesser than expected losses are generously rewarded by double digit one day gains.

Earnings’ season is here and it will provide hundreds of good trading opportunities. I will illustrate a variation of what I am looking for through one of the good trades I had lately in American Greetings (AM).

am

1) Reaction to news is more important than news itself. I am looking for 10%+ gains on at least 5 times the average daily trade volume.

2) Stock beats estimates by wide margin and guides higher for next year.

3) The breakout is from relatively tight (preferably flat) range – the longer, the better. It is a sign of a neglected stock. Stocks that run up in front of earnings’ reports, tend to be sold on the news.

4) The stock finishes the day in the upper 1/4 of its  daily range. With other words, it forms a nice, long, green candle without too long shades.

5) The low of the first 30 min candle might be used as an initial spot to place your stop. The real winners rarely revisit that point. The best trades are profitable from the moment you enter. Along its way up, the stock will form several bullish flags and wedges and offer opportunities to raise your stops or enter if you missed the initial move.

American Greetings reported a profit after 2 consecutive quarters of losses. The reason behind the sudden green bottom line wasn’t higher sales or margins (typically what I am looking for), but lower expenses. The important part was the market reaction. AM went up 41% on the day it reported it EPS number.

On a side note, the company was paying 48 cents dividend, which before the earnings’ jump accounted for more than 7% annual yield. Dividend is usually the last thing I care about, but in this case it was notably good.

AM earned 25 cents  per share compared to a profit of 27 cents for the same quarter, last year. Normally I look for triple digit Q/Q growth, higher margin and at least double digit sales growth, but in this case we had a discontinuation of a losing streak and a promise of higher margins in the future. To be honest, you don’t even have to put so much effort analyzing those details. The important thing was that investors were buying AM’s shares like they’ll run out of fashion.

There was only one analyst, following the company and he expected revenue of 20 cents per share. Is it possible that a tiny 25% earnings’ surprise (25c vs view of 20c)  can cause an almost 100% move in a matter of a week? In general, anything is possible, but this was only one side of the story. AM has relatively small float – 36.7 mill. I prefer stocks with float below 25 mill or even below 10 mill shares as they tend to move faster. The evening before AM’s report was announced, it had over 20% of its float sold short and a short interest ratio of over 15. The last figure played an essential role in the AM’s gigantic move.