Once a stock bounces strongly with 2x the normal volume, and I confirm that there is a strong catalyst, I use the Elliott wave analysis to see if an important bottom was made, and to establish some targets. BUT what if the jump was too large? let's say 20 to 30%, would that be a risky situation? what if the stock overextended in the jump? well it is common to get cold feet right after a trade is place, with any unexpected move against us. This is where I use the Fibonacci ratio. At the very least, it is a way to set some points at which I either abandon the trade or even cut my losses.
I use the Stockcharts.com to set my Fibonacci limits. Note that with every new high, repeat this process, as the limits will change. Open the following chart in a separate window and follow along my explanation.
http://stockcharts.com/def/servlet/SC.web?c=FDX,uu[w,a]daclyyay[db][pb50!b200!f][vc60][iUa12,26,9!Lp14,3,3]&pref=G
Taking the FDX example, simply click the hypertext "Annotate" right under the chart. A new window will open with the chart and you will see a toolbox. The 10th icon represents the Fibonacci tool. Click on it to select it. Then drag the mouse from the lowest point in the chart (bottom at $76.81) to the most recent high, in this case, $84.18. The critical limits here are:
1. $84.18 = Top. Keep updating as the stock rises.
2. $81.31= 38.2% retracement. Once this point is met, you need to wait for a buy signal from your favorite oscillator, I use the Stochastics and the MACD. You may use what you like.
3. $80.43= 50% retracement. Avoid entering the trade IF the stock has pulled back below this point before a buy signal has been issued by your favorite oscillator.
4. $79.54= 61.8% retracement. Stop loss point. Close your position if this point is exceeded. I put my contingency orders here.
Let's take the case of AMLN. After a strong rally to 33.1, AMLN went sideways and made a bottom near the 38.2% ($28.91). The bottom was actually $29.99. The target was approached, but since the stochastics oscillator gave me a buy signal, I quickly reentered the trade. As you can see, both the stochastics and the MACD are low right now, but they are rising. I consider AMLN good to go now and would not hesitate in placing a trade even now.
Because the rally was reinitiated at $29.99, that is my new critical bottom. This time I am less tolerant and would exit the trade if it fell to $29.85. Why? becuase that would be 100% of retracement of my recent rally. Once the stock exceeds the previous high ($33.10), I will redraw the Fibonacci and once again use the 61.8% limit to exit my trade.
With AMTD, I had to go back to the begining of the rally in June and draw my Fibonacci retracements to the top of Sept. highs. AMTD made a recent higher low at $20, and this is where I place my stop loss. If I was looking to reenter the trade, I would wait for a buy signal once the stock price had approach the 38.2% retracement at $19.20. It seems to me that AMTD is about to do just that. A buy signal is inminent.
10 comments:
Intersting thoughts and I enjoyed reading your views and observations on the current situation and potential movement.
DE looks as if it is going to go against the direction we want it to go.
ADX (14) has just crossed above ADXR (14). -DI (14) at 31, is still above +DI (14) at 13.
Just a warning.
Fortitude, please check my last article on DE, or at least check this chart:
http://homepage.mac.com/paperprofit1/.Pictures/Search/DE.jpeg
I understand that the stock is bouncing in a corrective mode. I have my stop loss order to protect me. However, my target is well below $60. I am willing to tak the risk and wait to be exited by my order.
It is OK to take profits too. Look what I did with AMLN. I took my profits and reenter later. Thre are always other opportunities.
Juan,
Thanks for reminding me. DE has turned today anyway, ADX was providing some cautionary signs.
I 'missed' the FDX and PALM trades, by shaving 'too much' ~ perhaps, now apprehensive of getting into them as they have already moved. To be honest I expected a pull back in FDx for some reason and it hasn't happened. I recall your comments about not wasting time entering and you were correct.
Currently, in DBD, DE and AMLN. All going in the right direction.
DBD- Looks like it is loosing momentum
PALM- Is still looking good.
My earlier predictions on support and resistance was based on A Get MOB and Gann
Other:
Can anyone recommend a good technical book?
Overall the market indices are being poised to drop soon. Watch out if you are in indices.
Juan,
RE: “There are always other opportunities.”
Some other prospective stock picks, although I am sure you have probably already spotted them.
AHMC;
Stay on Top of the Marketat Motley Fool (Thu, Sep 8)
By Robert Brokamp (TMF Bro)
September 8, 2005
If you're a shareholder of American Healthways (Nasdaq: AMHC), you're to be congratulated. You found a company that was increasing sales and maximizing profits in a growing market, and the market has rewarded you handsomely for your foresight.
But be aware: It may not last.
Stay one step ahead
American Healthways was trading for a split-adjusted $9 per share in January 2003. Today, shares trade north of $45. The stock has risen 400% -- a truly remarkable performance during a time when the S&P is up just 35%. Those gains will help you achieve your retirement dreams, but only if you have a plan to make sure your savings and investments outlast you.
Because for every great success story in the market, there's a disaster -- or a growth stock that just plain, well, stopped growing. With shares trading north of $30 at the beginning of 2004, Odyssey Healthcare (Nasdaq: ODSY) shareholders were once where you are now. Unfortunately, Odyssey stock currently trades for approximately $15. Even Baxter International (NYSE: BAX) shareholders, who once counted on decades of explosive growth, have seen returns level off.
FIC;
Fair Isaac Shares Rise 6 Percent on JPMorgan Upgrade on Projected Earnings Growth in 2006
NEW YORK (AP) -- Fair Isaac Corp. shares rose 5.6 percent Wednesday after JPMorgan Securities upgraded the stock on projected strong earnings growth in fiscal 2006.
The Minneapolis-based maker of software that produces credit scores is expected to see a boost in profit during the year -- especially after scoring contracts with heavyweights such as Dell Inc. and BT Group. This led JPMorgan to upgrade the company to "Overweight" from "Neutral."
Philip Mickelson, an analyst with JPMorgan Securities, raised his fiscal 2006 earnings estimate to $2.11 per share on revenue of $885 million -- up from $2.06 per share on revenue of $869 million. Analysts surveyed by Thomson Financial, on average, currently project 2006 earnings of $2.06 per share on revenue of $882.2 million.
Mickelson also noted the company's aggressive stock repurchase plan from fiscal 2005 -- which reduced its share count by 10 percent -- will continue. The company approved an additional $200 million authorization in late August.
On Tuesday, Fair Isaac said it acquired certain assets of RulesPower Inc., a Massachusetts-based firm that makes software designed to help companies manage data. Fair Isaac said in a statement that it will integrate RulesPower into its Blake Advisory rules-management software unit.
Shares rose $2.37, or 5.7 percent, to $44.06 in afternoon trading on the New York Stock Exchange, above its previous 52-week high of $42.77, and is up about 29 per cent so far this year.
FORM;
FormFactor Has 'Best Growth Story' at Forbes.com (Mon, Sep 19
Maya Roney, 09.19.05, 3:36 PM ET
Piper Jaffray upgraded FormFactor (nasdaq: FORM - news - people ) to "outperform" from "market perform" and reiterated a $30 price target on the company.
"Given what is still the best growth story in our coverage and the stock price depreciation of more than 10% over the past few trading days, we feel that the current valuation justifies an upgrade" said the research firm, predicting continued NAND market-share gains as long as FormFactor gets most of the high-end Samsung business and keep its market share with the second tier NAND players.
FormFactor makes semiconductor wafer test probe cards.
Piper Jaffray also called concerns about the impact of the company's old factory on 2006 margins "overblown."
"We agree that management may decide to keep the old facility a little longer, but we feel that margins will return to historical levels" said the firm. "Our estimate for fourth-quarter 2005 was likely too high as we assumed most of the start-up expenses go away by year end, but our long-term margin assumption is still the same."
Piper Jaffray lowered its fiscal 2005 earnings estimate for FormFactor to 66 cents per share on revenue of $224.8 million, down from earnings of 73 cents per-share on revenue of $226 million. The firm but raised its fiscal 2006 estimate to earnings of $1.15 per share on revenue of $278.9 million, up from earnings of $1.05 per share on revenue of $238.3 million. FormFactor shares are currently trading at 21 times its new calendar EPS estimate.
LIFC
MarketWatch (Wed 12:02pm)
MarketWatch
Market Pulse: LifeCell shares tumble on Piper Jaffray downgrade
Wednesday September 28, 12:02 pm ET
By Mark Cotton
NEW YORK (MarketWatch) -- Shares of LifeCell Corp. tumbled $2.13, or 9.2% to $21 Wednesday after brokerage Piper Jaffray downgraded the company to market perform from outperform, citing potential competition for AlloDerm and GraftJacket, its line of skin graft products. Analyst Raj Denhoy said Derma Matrix, a new skin graft product from the not-for-profit Musculoskeletal Transplant Foundation may offer the first 'credible competitive threat' to LifeCell's main product line. Synthes, the medical devices company, will distribute Derma Matrix and expects to launch the product in select geographic markets for use in soft tissue augmentation in the head and neck region. Denhoy however said he has not yet determined if there is a company that is planning to offer Derma Matrix for complex hernia repairs, which currently make up over 75% of LifeCell's revenues. Nevertheless, his downgrades reflects his belief that the overhang of potential competition may curb the stock's appreciation until a clearer picture emerges.
MYL;
UPDATE 2-Mylan wins dispute over J&J incontinence drug
Wed Sep 28, 2005 05:17 PM ET
(Adds more analyst quotes, Alza appeal, updates stock price)
NEW YORK, Sept 28 (Reuters) - Generic drugmaker Mylan Laboratories Inc. (MYL.N: Quote, Profile, Research) said on Wednesday it won a patent dispute with Johnson & Johnson's (JNJ.N: Quote, Profile, Research) Alza Corp. over a generic version of Alza's urinary incontinence drug, helping to send Mylan shares up nearly 7 percent.
Also driving Mylan shares was a separate decision by the U.S. Food and Drug Administration to reject Noven Pharmaceuticals Inc.'s (NOVN.O: Quote, Profile, Research) generic pain treatment. The rejection saves Mylan from competition to its generic version of J&J's Duragesic pain patch.
Mylan said the federal district court in the Northern District of West Virginia held that Mylan's unique delivery system did not infringe Alza's patent and declared the patent invalid.
Alza said it intends to appeal the decision.
Analysts expect Mylan to launch a generic version of Ditropan XL, a once-a-day treatment for overactive bladder with annual sales of around $440 million, during the first quarter of 2006.
But they note that final approval from U.S. regulators will likely not come before they resolve a petition J&J filed in August to block the generic.
There is more to read here, but I don’t want to C&P the whole article as it is too long.
STZ;
Vincor looking for a sweeter bid
Unsolicited offer from Constellation Brands is spurned
By William Spain, MarketWatch
Last Update: 3:58 PM ET Sept. 28, 2005
CHICAGO (MarketWatch) -- After rejecting Constellation Brands Inc.'s unsolicited $1.2 billion buyout offer, Vincor International Inc., Canada's largest vintner, on Wednesday left open the possibility that a sweeter bid might prevail.
Vincor said Constellation's proposal was "inadequate and not in the best interests of shareholders in light of the future earnings prospects for the company and the significant synergies that Constellation would enjoy" from an acquisition.
In trading in Toronto, shares of Vincor (CA:VN: news, chart, profile) shot up 54% to C$36.18. After an early slump, U.S.-based Constellation (STZ: news, chart, profile) saw its stock gain almost 4% to $26.50 in late trading.
Vincor also said it has adopted a limited-duration shareholders-rights plan designed to ensure that directors have the time to consider alternatives.
Based in Mississauga, Ontario, Vincor has wineries throughout Canada, with smaller operations in the U.S., Australia and New Zealand. Its brands include Toasted Head and Jackson Triggs
There is more to read here, but I don’t want to C&P the whole article as it is too long.
SWIR;
There are a number of good news stories about this stock, for sales of its products.
ADLR and AEA
An analysts upgrade
Finally AFFX;
“Fannie Mae (FNM ) shares were sharply lower Wednesday following an unconfirmed Dow Jones Newswires story that said additional accounting violations have been uncovered by investigators, including overvaluation of assets and underreporting of credit losses.”
AFFX has fallen hard, too much for your system, but perhaps this could fall even further.
Fortitude, thanks for your imput. I think that we need to be more selective, though. Instead of focusing on individual stocks, let's try to talk about systems. It is of little use to us to have picked the right stock with we do not have a system to pick it. We need to be able to reproduce good results.
In other words, tell us why you picked the stocks you picked and then simply list them. Then we can test your system first by paper trading and back testing and eventually with our own money, if we see great results in the paper trading.
If you are trying to apply my system and you came up with, it would help us a lot if you brought to our attention those who past the elimination. Specifically:
1. Avoid stocks that go up or down in no more than an analyst upgrade.
2. If your stock is reaching new highs, consider placing a PCRCC, rather than a CRC or PRC for this, volatility must be low, or you wait for it to go down.
3. Make sure that the stock is traded to >1M shares on the average.
4. Make sure that the stock is traded at >$12.5/share.
If you have another system, please DO share. There are so many great opportunities out there, having a way to detect them early is always good.
Thanks for all of your contributions.
Varum:
DBD went further down, when I saw it as oversold. Still, I am willing to wait to the next Stochastics cycle. I am hoping to see a bounce to back to $39-$40. When I get the proper signal I will take position.
If you already have a position, look for a candlestick reversal as an early indicator. The candles are still decidedly bearish.
Would you like to e-mail me your charts on PALM? I could post them it you'd like.
Varum:
The TA book I have is John Murphy's Technical Analysis of the Financial Markets. Take a look at it in your local Barnes and Noble. If it seems like too much to start with, take a look at The Visual Investor first. It is a lot simpler.
For Elliott wave analysis, read Beckman' The Elliott wave explained. This is one of the first books I read in the subject and it is fun to read. You can read Frost and Prechter's Elliott wave principle too.
On options, the most comprehensive book is Lawrence G. McMillan "Options as a Strategic Investment".
Hope this helps.
Juan,
RE: “tell us why you picked the stocks you picked and then simply list them”
This is the list of Option tickers which I believe fulfilled your ‘initial’ Sarmiento System 'sweep' using Platinum. This list was created using end of the day data from the close of Wednesday 28th September 2005.
SWIR
FDS
FMD
NOVN
FNM
PEC
PAYX
FORM
ADLR
SWN
STZ
LIFC
WC
AEA
WITS
AFFX
MYL
FIC
UNT
AMHC
I then review all the graphs I could load. Unfortunately my downloader could only get data for;
ADLR,AEA, AFFX,AMHC, FDS, FIC, FMD, FNM, FORM, LIFC, MYL, NOVN, PAYX, STZ, SWIR.
As far as I am aware these meet these meet the initial sorting for the Sarmiento Method, Anyway, so that is why I previously stated; ”Some other prospective stock picks, although I am sure you have probably already spotted them.”
What I did then was just look at the shape of the graph and eyeball the chart. From those which looked a promising ‘shape’ with regards to trend, support, resistance and possible break out, I then looked as you have advised on Yahoo.
From there I was hoping that they would stimulate discussion. I was hoping for your thoughts.
Of all the ones I can initially review with regards to Yahoo, I like SWIR, FIC and FORM. AHMC could be in line for a ‘correction’.
I shall evaluate all four later on Metastock. It would be interesting to read your comments.
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