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A Potpourri Of Trade Ideas and Setups

Archive for December, 2010

The Justin Mamis Sentiment Cycle – Every Trader Needs This On Their Wall Over Their Desk

Posted by lasertrader on December 28, 2010

Back on December 13 my friends who like to like to classify stocks as “leaders” were telling me to buy CMG. “Its a leader” they said. “and its right at support. You can’t go wrong. The indexes will not go up without the leaders and everything looks nice for a continued move up”. When I said I wouldn’t touch it they argued with me that the furthest down it will go is the 50ma on the daily chart and will springboard from there. I still insisted that I wouldn’t touch it and told them I would tweet out the reason why. That evening I posted the following chart to chart.ly.

The chart in the inset is The Sentiment Cycle first described by Justin Mamis in his book titled ” The Nature Of Risk”, 1991. A more detailed description of  The Sentiment Cycle is provided at the end of this article but for now I just want to mention that it is one of the few pictures I have on my wall in front of me over my trading desk all the time. As I look for pullback buys I am constantly watching the charts to see where it is in this cycle. Over the years it has amazed me how many times I have seen it played out over and over. Here is a better look.

When I looked at CMG that day I couldn’t help but think that it looked like it had just passed the “Enthusiasm” stage and was ready for the drop that it might not recover from for a long time. This is what the CMG chart looks like today.

See how the cycle is playing out? Nothing is a given, but because experience has taught me that this cycle is seen more times than not I will always give it the benefit of the doubt so I am not the bagholder that buys into the “leader” just when it decides it isn’t going to lead any more.

Just for fun, lets look at some that may be following the cycle so we can track them over time.

AEM

NFLX

RIMM

OK, you have the picture now. Print out a copy of  The Sentiment Cycle and put it on the wall over your trading desk. I can assure you that it will keep you out of trouble more times than you can imagine during your trading career.

Here is a more detailed description of The Sentiment Cycle for those of you who would like to understand the psychology behind it. ( From a presentation By  FuturesTechs.co.uk here )

Returning Confidence

By the time confidence is fully restored, the markets have been rallying for some time. They start to get choppy and retracement moves get consecutively more fierce, each one more intimidating than the last.

Buying the Dip (The Big Dip)

A huge pullback now gets underway, even larger than the scary one you may have witnessed last month or so. After such a dynamic bull run, investors are willing to take on a phenomenal amount of risk, and the smart money buys the big dip. Also, money is still flooding in from the general public, who likely read in The Sun that stock markets will remain strong for all eternity.

Enthusiasm

At this stage, all economic data still supports the idea of higher prices. Traders who didn’t get involved in the last-dip buying opportunity now have hard evidence that it worked before. All of the traders who wanted to be long are now long (there are no more buyers), causing prices to decelerate. Distribution starts to take place, i.e. stocks transfer hands from smart money to stupid money—strong to weak.

Disbelief

Traders start to get that gut-wrenching feeling that something may be changing, but the fundamentals still don’t back this up, and people cling onto hope alone. Analysts start to get subtle warnings. Maybe previous market leaders start to break below important support levels or moving averages.

Overt Warning/Panic

Typically there’d be a catalyst here (i.e. big banks like Lehman Brothers start to file for bankruptcy… sound familiar?). The index will break below a previous reaction low or maybe the 200-day moving average. News readers will be telling the world that the fun is now over. Intelligent investors start to sell rallies, giving stock prices little or no chance of any recovery.

Discouragement and Aversion

Prices have been rattling off for some time now as the general public starts shedding stock and the short sellers are stronger than ever. There’s no good economic news flow and everyone thinks that stock markets will go down forever.

Wall of Worry

Certain market sectors will now start to bottom out as everyone who wanted to sell has done so. The smart money now starts to move in slowly, resulting in the market pausing for breath or drifting along sideways for a few months. There are no sellers left; so despite the bad news flow, markets start to creep higher. Short sellers start to cover their positions, adding fuel to the fire.

Aversion to Denial

Markets start to trend upwards. Short sellers start to get concerned that sentiment has changed. With no sellers above the market, these sorts of moves can be fast and sharp and tend to leave people behind.

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How to find good setups before 4% breakouts by Lasertrader

Posted by lasertrader on December 19, 2010

I have the ultimate respect for Stockbee and his service. I have learned more from him to give me an edge than any other “mentor” in all the years I have been trading. Here is a copy of a post I made in his private subscription blog that has been made permanent in his Trading Guide. If you haven’t heard of Stockbee, you should check out his free blog and consider subscribing to his service. Its not a stock picking service. He teaches you how to do it yourself. You need to make a commitment to change if you want to profit from his teachings.

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How I get the jump on getting into stocks that end up in the Stockbee Trend intensity Scans.

I thought I would share my methods on how I get into stocks earlier that end up in the Stockbee Trend Intensity Breakout list. As an example I will use BRKR which showed up on last night’s Trend Intensity video. If you look at my twitter stream you will see that I tweeted that out on Saturday and was able to enter it yesterday at 15.58. There is no doubt that the stocks that end up in the Trend Intensity scan can run for 2 to 3 days but with Telechart delayed scans and scanning intraday, the stock has already run 4% by the time you see it and by the time you put the buy order in it often has run a lot more.

Stockbee has trained us to quickly recognize chart patterns that lead to good moves. Contrary to what is discussed here, Dan Zanger only uses the $1 move strategy for intraday scalping. The way he makes his money is scanning a list of charts each night looking for specific patterns, deciding on buy points and during the day when the buy point is hit and the pattern is playing out he checks volume and buys if volume is supporting the pattern play. This takes some elbow grease but if you are willing to do it you can get into the Trend Intensity plays 4% or more earlier than the Telechart scans will get you in.

To do this I go through this process. Each weekend I load the following lists into Telechart.

From Bluefin: Post Earnings Surprise, Sector 50, Emerging 50, Short 25 From IBD; IBD100 and a list of “New America” stocks that I manually keep updated.

The key to this strategy is having the best list of stocks that are strongest in the stronger sectors. Thats how Bluefin and these lists come into play. There is a lot of overlap in these lists but thats fine with me.

I then visually click through the lists looking at the charts. As Stockbee says, after you do this enough, you can recognize a good setup pattern in less than a second. Since you know what setups can create powerful moves, you can see potential breakouts before they occur. Here is the BRKR chart after the fact  BRKR came from the IBD 100 list.

On Saturday I saw the long horizontal consolidation and in Freestockcharts I drew the trendline across the highs of that consolidation. Then I put an alert on that line so that if price crossed it I would be told by Freestockcharts that a breakout is occurring. After I got the alert, I quickly look at volume and volume buzz to see if there is very good volume supporting the breakout and if so I push the buy button.

Another example was ZUMZ that I got off the Sector 50 list with the trendline I drew and alerted. I got the alert, checked volume and bought right away. Here is the ZUMZ alerted line I had set up.

Scanning all the charts and setting up the alerts takes me about 30 minutes. Then each day I all I do is sit there and wait for Freestockcharts to tell me what is breaking out and what I should trade. These alerts were set over the weekend and they may not have triggered on Monday, it may have been a few days or maybe even never that they trigger but they are all “probable” setups that I have Freestockcharts monitoring for me. I have nothing to do all day other that wait for alerts to trigger then to quickly decide if I want to get in the trade. I play a few more defined patterns than are discussed here but horizontal consolidations and flag pullbacks are the most profitable. Again, the key is to have the right list of “Trend Intensity” strong stocks as your basis.

I know this is more of an elbow grease method but in reality it takes an hour or so on the weekend to set up the lists and do the first review setting alerts and then each night it takes about 30 minutes. The end result for me is that I get in sooner and grab even a good portion of the first 4% move.

Thought I would share how my day to day plan goes. My work is done at night then I wait for Freestockcharts to tell me what to trade each day.

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