Trading High Potential Stocks

Decided it was about time to get rid of quite a few stocks on my public list and make room for new ideas. That’s what trading is all about. Being objective. Being open for new ideas. Leaving one’s comfort zone. Leaving one’s comfort zone is an important concept I will write about more in-depth in the future. The reason for it being so important is that it yields the best performance. Think ‘crowded trade’ versus buying ‘new stuff’ and being exposed to ‘information risk versus price risk’. Another topic I need to devote an entire post to… In the meantime you might want to review my post centered on embracing ambiguity.

Quick recap of the new additions and removals. It will take a few hours until the public list is up to date. I will start adding the new charts as soon as this post is published:

Removals:

• BGC.V – Brazilian Gold: Technically speaking the stock is dead. Too much technical damage.
• BIM.TO – Baffinland Iron Mines: Too much overhead resistance.
• BOW.V – Bowmore Exploration: Nothing happening here. Stock will only be back on the list if news is published and the stock reacts well to the news.
• CAN.V – Canaco Resources: Stock is trading in the middle of nowhere. No immediate pressure.
• CAST – China Cast Education: Not enough pressure. I am closely watching CAST and CEU in the background until the technical picture changes.
• FEED – AgFeed Industries: Too much overhead resistance.
• HEAT – Smartheat: Going nowhere.
• LSG.TO – Lakeshore Gold: Too much weakness. Better looking gold mining charts out there.
• SEED – Origin Agritech: Too much overhead resistance.
• SGG – Sugar ETN: Stock is breaking down. Not interested anymore.
• WEE.V – Wavefront Energy: I don’t like the stock’s personality.

I am still monitoring all those stocks along with several hundred other stocks in the background. The fact they came off my public list doesn’t mean I am not willing to put them on again. They simply need to convince me to do so. The only way to convince me is price action.

Additions:

• APKT – Acme Packet: Good looking semiconductor stock. Potentially a new leader.
• ARUN – Aruba Networks: Same here. New stuff. Potential to lead the markets higher.
• FBT – Biotech ETF: Biotech is the best performing sector. No overhead resistance. I am not exactly willing to play single biotech stocks. This ETF would be a way to mitigate risk.
• FPX.V – First Point Minerals: Nickel stock with the least immediate overhead resistance.
• RIO.V – Rio Alto Mining: Good looking chart. No immediate overhead resistance.
• SLI.V – St. Elias Mines: Good looking chart. No immediate overhead resistance.
• SPU – SkyPeople Fruit Juice: China food. No significant overhead resistance.
• SWC – Stillwater Mining: I prefer ELR.TO – Eastern Platinum which is showing a bit more technical strength. This one offers much better liquidity though.
• XRA – Exeter Resources: Not looking too bad.
• YUII – Yuhe international: China Food / Poultry stock. Not much overhead resistance.

Do the trade that makes you puke. – Paul Tudor Jones

Have a great evening!

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McMoRan – MMR my recent portfolio addition is starting to look very bullish. In my book it looks like we are about to witness a break-out to the upside. I described what I was looking for, why I was patient with MMR and what made me think the trade has great odds of working. I added a bit to my position today. A few reasons why I am bullish on the stock:

• After my entry the stock dipped but the very next day the stock went up. Great trades work right away the saying goes.
• The stock is behaving exactly like I expected it to behave. That is always a very bullish sign.
  
• The day after I entered news of significant insider buying was published.
  
• Picture perfect ascending triangle. We are about 2/3 into the pattern. That’s where the best breakouts occur.
  
• The stock closed near the high of the day.

Some characteristics and charts patterns I am typically looking for:

1. Rather long base.
2. Game changing news / fundamentals.
3. Abnormal volume surge.
4. Gap up.
5. Thrusting move.
6. Consolidation pattern. Preferably an ascending triangle.
   
7. Story stock potential.
8. Potential to attract the momentum trader crowd.
9. Market capitalization that leaves a lot of room for additional price appreciation.
   

MMR – McMoRan Exploration (NYSE) is displaying all those characteristics. It looks like trading above 17$ US Dollar will trigger stop buys. If the stock can break out, momentum traders will take notice and a whole new group of traders generating additional buying pressure will enter the scene. Let’s see what happens.

Up-to-date MMR McMoRan Exploration Chart on my public list.

You will notice I used the words: ‘Act accordingly’ in the chart annotations. I don’t do this very often. Relax, hold on to your position and be patient with your winners.

What you are afraid to do is a clear indicator of what you need to do.

Have a great evening!

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Just finished going through my public list and added annotations to several charts. The Light Crude Oil chart pattern is starting to draw my attention. Some 6 months ago I wrote about a false breakout move to the downside in oil. At that time I thought a 100 USD$ price target would be in the cards. Keep in mind this is a nice round number. From a psychological standpoint this is important as round numbers tend to act as price magnets. We are getting closer to a possible breakout and a 100$ price target looks quite feasible.

Price is holding up very well here. We witnessed a nice thrusting move that started last year and more recently the oil price consolidated forming a bullish ascending triangle pattern. A breakout would coincide with a separation move from the dotted black trend channel line.

Up-to-date Light Crude Oil Price Chart on my public list.

The shipping and oil tanker stocks are starting to look like they might move up soon as well. I am closely watching the whole sector. Check the Shipping Sector Overview Chart to identify leading stocks early on. Right now I like TK – Teekay Shipping. It looks like it is building up decent pattern pressure. The sector chart contains the following stocks:

• SEA – Claymore Global Shipping ETF
• FRO – Frontline
• TK – Teekay Shipping
• SFL – Ship Finance International
• OSG – Overseas Shipholding Group
• DRYS – Dryships

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. – Samuel L. Clemens

Have a great evening!

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It was about time I added a Gold Sector Overview Chart to my public list. This is a good way to gauge the strength and health of the gold bull market. The broader the move across a basket of currencies the healthier. In other words, the price of gold needs to move up in basically all the major currencies, not only the US Dollar. The reason why monitoring gold in various currencies is so important is due to the role gold is supposed to play. If it can move up against a broad range of currencies it is asserting its status as a currency, i.e. money, as opposed to being just another commodity. So far gold is doing well and going up denominated in all the currencies listed in the overview chart.

According to Jim Sinclair and Marc Faber, to name but a few, excessive money printing and competitive currency devaluation is what most countries are engaging in at the moment. The Gold Currencies Chart shows which ones are good at this game and which ones show somewhat fiscally more sound behavior. You can check the price of gold denominated in the following currencies:

UPDATE 02/23/10: Make that two overview charts in order to cover more currencies.

Overview Chart I.

• Gold in US Dollar
• Gold in Euro
• Gold in Canadian Dollar
• Gold in Swiss Franc

Overview Chart II.

• Gold in British Pound
• Gold in Yen
• Gold in South African Rand
• Gold in Australian Dollar

I’ve also added an Agriculture Sector Overview Chart as people like Marc Faber and Jim Rogers expect Agriculture to be the next big thing. Time will tell. These are the stocks I included:

• DBA – Powershares Multi Sector Commodity Trust Agriculture Fund (ETF)
• MOO – Market Vectors Agribusiness ETF
• ADM – Archer Daniels Midland
• BG – Bunge
• CPO – Corn Products
• BXI.TO – Bio Extraction

Not much happening today. A few things that caught my eye:

• NML – New Millennium Capital : (Iron Ore Stock) did well and closed at the high of the day.
• NXT.V – Natcore Technology : (Solar Stock) that was on my public list for quite some time came out with news of a joint venture with a Chinese firm and gapped up. There is still way too much overhead resistance but I am monitoring the stock in the background. It might find its way back on my list.

One man’s ceiling is another man’s floor. – Paul Simon

Have a great evening!

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A few thoughts on the state of the gold bull market. We are stuck between two important pivot points. I used blue circles in the chart to illustrate them. After taking out one of these levels my best guess is we will witness some decent follow through. As a technical trader you want to be cautious and wait until the charts confirm a hypothesis and then simply react to the chart’s message.

That being said I am starting to mentally prepare for a breakout to the up-side. The recent price action is bullish as lots of stuff suggested lower prices ahead:

• The dollar is moving up.
• Interest rates rise.
• IMF Gold selling announcements.

And then some. George Soros being quoted calling gold the ‘Ultimate asset bubble’. Then followed by an announcement he doubled his gold (GLD – ETF) holdings. I’ll spare you the details. This is the usual blah, blah, blah, deception, lies and crap served on a daily basis. If you want to know the truth my advice is the following: Learn to read the charts – forget everything else. I haven’t drawn in the obvious bullish wedge like everybody else. The pattern is valid but my focus is on those horizontal lines delineating the levels the gold price has to take out.

Up-to-date Gold Price Chart on my public list.

As mentioned in a previous post describing the various scenarios I see going forward the most prudent thing to do is to wait until the Gold highs get taken out. I used a red circle in the idealized chart below. You will have to pay more but you will get additional confirmation. Odds the bull market in gold has come to an end will then be very low. New all time highs should always be interpreted as very bullish action. Winners like Ed Seykota are known to be more than willing to buy new all time highs.

Up-to-date Weekly Gold Price Chart on my public list.

Keep in mind Gold is trading less than 10% below its all time high. We have a situation with extremely low overhead resistance. That means the potential for explosive price moves to the upside are a high probability outcome. The charts will tell me what to do. You may want to review Jesse Livermore’s advice on what to do in a bull market.

Experienced traders control risk, inexperienced traders chase gains. – Alan Farley

Have a great weekend!

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Interesting chart development with WLC.V – Western Lithium Canada. Technical damage is huge and the stock has built up massive overhead resistance. The reason I am stating we are witnessing an ‘interesting chart development’ is not meant to describe a buying opportunity. The exact opposite holds true. A perfect chart example for a case study. You guessed it. I am going to talk about Overhead Resistance. As you might know by now this is the number one performance killer. Assume you have found a sector that you want to get exposure to. You do your due diligence and end up with a few stocks. Your job is to identify the strongest stocks within that sector. The strongest stocks obviously have the strongest charts. Going forward the best performance is usually achieved when you buy into the ones with the least overhead resistance. I am not saying to blindly buy new highs. But if you can find a stock with some kind of consolidation and somewhat decent pattern pressure that is trading near its all time high or its 52 week high, odds are you found a extremely promising candidate with the potential to significantly outperform its peers going forward. You might want to add fundamental analysis to the mix in order to find appropriate candidates. In the end though your buy decision should be solely based on the technicals.

That being said most of the Lithium Mining Stocks are not looking too good right now. The Lithium Sector Overview Chart makes it easy to compare the technicals of some of the Lithium stocks I am watching. WLC.V – Western Lithium is now hitting support but it has trapped all the traders that entered the stock above 2.00 CDN$. Looking at the volume this has the looks of serious distribution and could be blow-off type volume encountered at tops. The stock has now also trapped all those that went bargain hunting around the 1.80 level. The stock has to regain the 1.80 and then the 2.00 level to restore confidence. The terms ‘confidence’ and ‘overhead resistance’ are closely related concepts when it comes to trading. The more overhead resistance a stock has, the less confidence within the shareholder base is to be found. It’s really that simple.

Up-to-date WLC.V Western Lithium Canada Chart on my public list.

Right now the two Lithium stocks with the least overhead resistance are RM.V – Rodinia Minerals and PL.V – Pan American Lithium. From a purely technical perspective they should outperform going forward. Let’s see what happens.

Go for stocks that have low overhead resistance.

Have a great evening!

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Just finished updating my public list and updated quite a few sector overview charts.
A few noteworthy changes and additions that I implemented over the last few days:

• Argentina Sector Overview – Added XRC.TO XRA – Exeter Resource Corp. and COP.TO – Coro Mining
• Semiconductors Sector Overview – Replaced KLAC – KLA Tencor with SIG – Silicon Graphics
• Royalty Companies Sector Overview – New addition. A great way to add FNV.TO – Franco Nevada and ALS.TO – Altius Minerals to my list without actually increasing the number of charts. Removed RGLD – Royal Gold and SLW – Silver Wheaton and included them in the overview chart instead.
• Fertilizer Sector Overview – As Yara International is buying TRA – Terra Industries I replaced it with AMZ.V – Amazon Mining a very interesting potash play in Brazil that has been on my list for quite some time.
• Peru Sector Overview – Replaced PCU which changed its ticker to SCCO – Southern Copper with RIO.V – Rio Alto Mining.

One valuable aspect of the Sector Overview Charts in addition to being able to compare the strength of a specific stock with its peers, is that due to the fact the charts are compressed noise is reduced significantly. This is a huge time saver and it increases odds of making rational and objective buy decisions. Always try to buy the strongest stocks that have no overhead resistance issues.

Tonight I added a Nickel Sector Overview Chart as FPX.V popped up in my scans. Right now it is obviously one of the strongest charts within the nickel sector. The Nickel Overview Chart contains the following tickers:

• JJN – iPath Dow Jones AIG Nickel Total Return ETN
• FPX.V – First Point Minerals
• DM.TO – Duluth Metals
• FRA.TO – Franconia Minerals
• ANF.V – Anfield Nickel
• NI.TO – Victory Nickel

Overall the Nickel stocks do not look that compelling. ANF. Anfield Nickel is a stock Ross Beaty has significantly invested in. So that makes it something worth watching. Technically speaking FPX.V is the strongest one. Instead of chasing the stock let’s see if it offers some decent trade entry point after a consolidation period.

From FPX.V – First Point Minerals website:

First Point Minerals Corp., is a Canadian exploration company engaged in the acquisition and development of economic base metal, mainly nickel and precious metal minerals deposits in the Americas. First Point holds six nickel-iron alloy properties in Canada and the USA, as well as several gold and silver properties located in Mexico and Central America.

First Point first recognized the potential exploration and processing characteristics of a nickel-iron alloy target in 2007 and viewed this new style of nickel mineralization as a viable economic mine deposit. The recently completed Decar Nickel Property Option/Joint Venture agreement with Cliffs Natural Resources, a major mining company, has been very favourably received by the investment community as Cliff’s metallurgical and operating experience with large scale magnetic separation may have direct application to the Decar project. First Point’s exploration expertise and Cliff’s significant metallurgical and operating skills will be a powerful combination to advance this exciting nickel project toward development. Cliff’s private placement in First Point will allow First Point to deploy its proprietary knowledge of this mineralization to identify other nickel-iron alloy properties around the world.

The significant impact of this nickel alloy target at Decar on reducing mining and environmental costs can not be understated when compared to conventional sulphide and oxide (laterite) nickel deposits. The absence of sulphur in the nickel-iron alloy will not only eliminate smelter costs as the processed product can be sold directly to the steel mills, but mitigate the harmful environmental effects usually associated with the characteristics of traditional sulphide deposits.

The First Point team has over 120 years of exploration and management experience in over 30 countries and is led by Dr. Peter M.D. Bradshaw and Dr. Ron Britten who collectively have been instrumental in the discovery, exploration and advancement of seven major mines in various parts of the world.

If a man empties his purse into his head, no man can take it away from him. An investment in knowledge always pays the best interest. – Benjamin Franklin

Have a great evening!

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It looks like some new leaders in the semiconductor space are emerging. Whenever semis lead or at least don’t lag, market moves should be considered healthy. The problem though is we are reaching a state I would label ‘maturing bull market’. There are great trading opportunities to be found but I would be extremely selective and stick to a capital preservation mindset. Most of the semis are not compelling. Household names and former leaders are displaying much less strength than the emerging leaders. Examples for big cap laggards with lackluster performance would be:

• SMH – Semiconductor HOLDRs ETF
• INTC – Intel
• AMAT – Applied Materials
• NSM – National Semiconductor
• KLAC – KLA Tencor
  

Those are old stories and established companies. They are still trading below their December highs. On the other hand a few select newer stories have emerged and are already trading above their respective December highs. Always go for the new stories as new leaders more or less always outperform their sector peers. It should come as no surprise the new leaders are part of very innovative subsectors like:

• Broadband Mobile Internet Access
• Fiber to the home
• Networks for multimedia applications
• VoIP – Voice over IP telephony technology

I have added a Semiconductor Sector Overview Chart to my public list including some of the new leading stocks with high potential for the future:

• SMH – Semis ETF
• ARUN – Aruba Networks
• APKT – Acme Packet
• KLIC – Kulicke and Soffa
• ISSI – Integrated Silicon Solution
• SGI – Silicon Graphics
  

Overall the markets are not as healthy as a few of those emerging semis suggest. Volume has been weak and serious signs of distribution are abundant. For now I am still sticking to my conservative approach and am maintaining a low overall market exposure.

The name of the game is capital preservation.

Have a great evening!

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The focus of tonight’s posting will be on indicators. The debate among traders over advantages and disadvantages of using indicators will never cease. The purpose of this post is to offer you additional insight into my trading philosophy. The term trading philosophy is indeed the most appropriate one as there is no correct answer or absolute truth regarding the use of indicators. It all comes down to your personality and the way you see the markets.

In my FAQ section I state I do not use any indicators. The only exception would be the occasional use of moving averages. My whole focus is on price and volume. This is a decision I made early on in my trading career. I used to plot Bollinger bands, OBV (On Balance Volume), plenty of moving averages and Fibonacci retracements on my charts. Then I tried to be even smarter and every now and then added MACD, Stochastics, RSI and ADX to the mix. You get the picture. I ended up with what I call ‘Spaghetti Charts’. You take a clean chart and literally throw spaghetti onto the chart until it becomes completely unreadable. The result is the well known ‘analysis paralysis’.

One could argue wise use of indicators won’t clutter the charts as to make them indecipherable. I won’t argue with that approach. But as I outlined above I made the decision to go with completely uncluttered, clean and clear charts a long time ago and have never looked back. The reasons why I made this decision are manifold and are deeply rooted in the way I view the markets.

The main reason has and always will be my desire to ‘keep it simple’. Dennis Gartman is a well-known proponent of the ‘keep it simple’ theory. Contrary to popular belief ‘keeping it simple’ is not easy. Quite the opposite is true. One of the reasons is the inability of market participants to:

• Embrace Ambiguity
• Embrace Uncertainty
• Embrace Doubt

The nature of the markets is by definition uncertain. The outcome of a single trade can’t be predicted. Novice traders wrongly assume losses can be avoided. Nothing could be further from the truth. Losses are an integral part of trading. Traders can’t control the fact losses will occur. What you can control though is the size of your losses. Once you firmly grasp this concept you will understand and willingly accept working and trading in an environment characterized by ambiguity, uncertainty and doubt.

The understanding of what markets really are and what they are not will then lead you to abandon the search for the elusive holy grail. The perfect indicator. The perfect chart set-up. The stuff dreams are made of. Real trading is different. You put on a trade. You don’t expect every trade to work. (Some great traders even go so far as to recommend expecting every trade to fail. They do so because they understand what trading is all about.) You always accept losses gracefully. Then you move on and find the next great trading opportunity.

Here is a list of additional advantages that come to mind and will pay off in the long run if you make it a habit to look at charts without using indicators:

• Less procrastination
• Eliminating the need for additional confirmation
• Keeping it simple, clean and organized
  
• More focus – less noise and distraction

The last two points are the main reason why I decided to write this post. Being focused, organized and seeking a deep understanding of markets and price movements is what I devote my time to. My job is to listen to the charts and to reduce noise. One way for me to reduce noise is not to use indicators as indicators are derived from price and volume. The are price ‘derivatives’. The underlying psychology is that indicators therefore can’t possibly lead price as the are only a ‘representation of reality’. Hence my all time favourite quote is from Jesse Livermore:

‘Everything you need to know is right there in front of you’.

Something else to ponder on is the fact great traders isolate themselves from others, Linda Bradford Raschke Trading Rule Number 9. It is basically their way to reduce noise. That includes turning off the TV and spending too much time reading news releases. The need for a ‘reason’ or to ‘understand’ why something happened is due to the fact most traders do not understand the concept of ‘Price Risk vs Information Risk’ Justin Mamis wrote about extensively in his book: ‘The nature of risk’. That’s why I include that one in my recommended books section. I will write more about that topic at some later point in time.

Be objective. Is a stock moving up or down? Focus on reality. In the markets price is reality. When all is said and done, focusing on price and volume exclusively will drastically increase your understanding of the markets, how pressure builds and how price movements are structured. Over time that will make you a better trader.

Embrace ambiguity, uncertainty and doubt.

Have a great weekend.

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