These are called oversold rallies. If you can learn how to predict these counter-trend moves, you could book significant gains in just one or two days.

Here’s what you need to know…

First, you should keep a close eye on a weekly sentiment reading, such as the AAII US Investor Sentiment bullish and bearish readings. Sentiment indicators like the AAII gauge how market participants view stocks. For the bullish sentiment chart below, a higher reading indicates investors are more optimistic about the market’s prospects, while a lower reading indicates market pessimism:

As you can see, the sentiment reading is a fairly straightforward look at how investors are feeling about the market on any given week. But it’s important to note that extreme readings on any sentiment indicator should be viewed as a contrarian signal.

Think of it this way: when the crowd alligns itself on one side of the market, chances are very good that you will see a strong move in the opposite direction.

The peak in these recent readings occurred around mid-February. Investors had already watched the market’s strong start to the year. They were feeling more confident since the turmoil from the eurozone sovergien debt crisis had slipped from the headlines. Stocks were moving higher — and investors were convinced that it was safe to buy.

We now know that the market’s upside move was running out of steam exactly when the majority of investors were becoming bullish. And if you turn toward the moments of extreme pessimism, you can see that the current reading on the far left is even lower than bullish sentiment readings from back when the market was in free-fall in August 2011. This alerts us to a possible bounce in the making…

Now let’s take this data and see where these extremely low bullish readings appear on a chart of the S&P 500:

The red arrows on this S&P chart link up with the red arrows on our sentiment reading. Now, we can use a momentum indicator (in this case, RSI) to act as confirmation for our sentiment readings. Extremely bearish sentiment readings coupled with extreme oversold levels will give us a higher probability of a bounce.

In hindsight, you can see that the first low sentiment reading from July 2011 would not have offered a significant bounce. Our momentum indicator was still bullish (above 50; first blue circle). It did not confirm the necessary oversold conditions.

However, the second low sentiment reading coincided with an RSI reading below 50 (center blue circle). Our momentum indicator was just coming off an extremely oversold reading (below 30) in August, making this a slightly better confirmation than our July signal. It’s not perfect, but it did coincide with the October bottom that began an impressive move higher. If you bought in late September, you had the chance to have a very nice fourth quarter.

Fast-forward to present time and you will see the strongest buy signal on the chart. The sentiment reading is at its lowest level in months. And RSI just bounced off extreme oversold conditions during yesterday’s rally.

Since sentiment and momentum confirmed a potential bounce early Monday, the S&P has risen nearly 2.5%. I’m not predicting an extended move higher just yet. But with these readings, it’s entirely possible that the market continues to push higher in the short-term to alleviate oversold conditions.

Sincerely,

Greg Guenthner
for The Penny Sleuth

How to Predict an Oversold Bounce was originally featured in the Penny Sleuth.

It takes guts to admit you are wrong. As a trader or investor, you will take losses. If you understand that you won’t book profits on every single trade, you will be better prepared when the time comes to part with a loser.

Remember, the deck is stacked against you. The market is not a level playing field. You are an individual investor going up against Wall Street professionals armed with massive amounts of cash, superior tools and access to endless research. You have to plan ahead— and you have to think like a skeptic in order to survive.

That’s why I helped you develop a basic trading plan last week. Since I published the column, I’ve received countless e-mails asking about losing stocks. You recognize that you’re in a bad spot. Or something about one of your investments just isn’t right. But you’re not sure what to do next.

Today, I’m going to use your questions to reveal three critical investing traps. If you learn to avoid these situations at all costs (or sell out and move on to your next idea) I all but guarantee you will quickly become a more successful trader.

Let’s go to the first question:

What do you think about Radio Shack?

— C.P.

Radio Shack (NYSE:RSH) continues to push to new lows. And I’m not just talking about lows on the year. Shares of Radio Shack are actually trading lower than they have in 30 years…

Any way you look at it, this chart is ugly. From a technical perspective, I wouldn’t touch Radio Shack stock with a 50-foot pole. If you ever pull up a chart that looks like this, just run away.

Here’s the trap: an untrained eye might consider Radio Shack to be a “cheap” stock worth a second look. It’s a recognizable brand that’s down big, so it has to recover at some point, right?

Wrong. You can’t assume a stock presents some sort of value opportunity just because its shares have taken a beating. In the case of Radio Shack, the company appears to be in trouble. It’s sales are dropping. The business is under a ton of pressure from online retailers such as Amazon. And the only products the stores seem to be selling are lower margin items.

In short, this “cheap” stock is a trap. Avoid at any price.

I work for a living and I can’t be glued to a computer during the day. So can I purchase a penny stock and put a stop order in and if so what percent would you suggest?

— M.C.

When you are dealing with smaller stocks, stop losses can be tricky. I’ve always recommended “mental stops” instead of a hard and fast stop order. Here’s why…

If stocks have a volatile day, you might get stopped out of a position that immediately recovers from its initial drop. Usually, smaller stocks are not as heavily traded. So shares tend to suffer from large temporary price swings.

That’s where the trap lies.

If a smaller stock drops on lower volume anywhere near your stop loss, chances are it will be taken out, only for the stock to recover and move higher.

As long as you’re not daytrading or dabbling in very small names, you should be able to rely on closing prices for your stop losses. If you have a predetermined mental stop based on where the stock closes, you can easily check the market in the evening. If you have to sell, you can have an order ready to go for the next morning.

There is one tiny company that I’ve been watching for months and while it has won awards and even huge contracts, this stock still sits below 10 cents a share and just seems to sit. Sometimes I’ve seen it jump 20-30% then fall right back down.

— M.R.

The problem here is lack of volume. A stock isn’t going to move if there’s no one interested in buying or selling shares.

Lack of trading volume can trap you in a stock with no way to get out at a reasonable price. I don’t care how well the company is performing — or how nice its chart looks. If no one is trading it, there’s little to no chance of it breaking out.

When you’re looking at smaller stocks, one of the first things you should note is the average volume. I like to see at least 100,000 to 200,000 shares traded every day. And that’s on the low end. Anything less than that can get you into trouble. If you do get trapped in a low volume stock, try to sell at the best price and move on to your next idea.

Sincerely,

Greg Guenthner
for The Penny Sleuth

How to Avoid 3 Critical Investing Traps was originally featured in the Penny Sleuth.

If you can find patterns, you can make predictions.

And with predictions, you can make winning trades…

The trick, however, is to understand that correlations can change. This is one of the shortcomings of relying on conventional wisdom.

For example, it’s conventional wisdom that currencies are highly correlated with commodity markets and key indices. And it is true that the currency-commodity connection is a major driver of market movements.

So it makes sense that oil prices mirror the value of the Canadian dollar, since Canada is a major oil exporter. Changes in the price of crude oil will impact the demand for Canadian oil, and therefore the demand for its currency.

And then there’s gold, which acts as a safe haven basket. When the equity markets tank, people retreat to the safety of gold. When people are optimistic, they jump back into stocks, abandoning gold. Therefore, gold reacts inversely to major stock indexes.

However, the problem with these enduring assumptions is that they can be misleading and are too general. Correlations are dynamic and endure many deviations during the year. So before you make a judgment about the market, it’s critical to update and confirm the latest correlations…

The direction of the correlation is equally important. A currency-commodity correlation could be low but turning back upward. Or it could be at a high but turning down.

The direction of the correlation trumps the actual correlation because it reflects the prevailing sentiment in the market.

A correlation that is increasing or decreasing means that expectations are changing in the relationship.

With that in mind, let’s explore some of these putative correlations.

We’ll start with the Canadian dollar and oil. Its correlation with U.S. crude is wide ranging. In this past year it has experienced a high 95% correlation before weakening to a just above 40%. Then it went back to about 80% levels in October and November, only to sharply descend below 0 correlation and was even inversely correlated for a while.

Today it’s back to the 74% level.

When we examine the JPYUSD and gold relationships, we can see how gold movements become critical in understanding market sentiment. When the yen increases in strength, so does gold. Both are acting as risk havens to market fear. The correlation reached its peak of 88% on Sept. 21 and then became 0% correlated in February.

As you’ve seen, there are times when a correlation flips into the opposite direction. This is a key inflection point and can be a leading indicator for expecting major changes in the currency price levels and directions.

The bottom line is that correlations are important to monitor and can become useful tools for detecting the shape of market expectations.

Sincerely,

Abe Cofnas
for The Penny Sleuth

A New Look at Currency Correlations was originally featured in the Penny Sleuth.

A financial crisis brewed on Wall Street. No investment was safe from the carnage. Chris — who happens to be an old college buddy of mine — struggled to understand where he went wrong.

The next time we spoke, he recounted the horror of seeing his investment disappear in the blink of an eye. I did my best to commiserate. But I didn’t have much to say. After all, no one was safe from falling stock prices in 2008.

Chris wanted to know how to cope with such a big loss.

“What happens now?” he said.

I responded with a simple question: What are your investing goals?

Chris didn’t have an answer for me. He knew he was interested in the markets. He also knew he wanted to make money. But he never considered the specifics — or the process. Instead of fine-tuning an investment strategy, Chris was throwing darts. It only left him confused and unsure about his next move.

To be clear, Chris’ first mistake wasn’t investing in stocks in 2008. His mistake was that he did not have a plan. He never even considered it. He liked the idea of the stock market, but he didn’t know how to get started.

It’s absolutely crucial to trade with a plan. You have to set goals. And you must know how to achieve them. I receive countless e-mails every day from novice investors just like Chris. They want to get involved in the markets, but they aren’t sure how…

I have no idea how to develop a trading plan. I subscribe to several newsletters which recommend specific stocks, and then I choose ones that fit my values.

How does one develop a trading plan?

— M.S.

I understand that investors have many styles of trading plans. Are you able to share a simple but safe stock trading plan for the novice investor in your newsletter?

— R.P.

Today, I want to show you how you can avoid starting off your investing career on the wrong foot. I have an easy-to-follow plan that will help you dominate the market’s steep learning curve, giving you the confidence you need to invest in a way that works best for you.

Your journey will begin with the simple question I asked my old friend: What are your investing goals?

It’s a short question that requires a detailed answer. The first part of this answer is a litmus test that every new investor should consider…

Personality is Key

What are your investing goals? Are you interested in growing your account or preserving wealth? Do you like taking risks or do you play it safe?

This is how you begin to find out what part of the market you should concentrate your efforts. In truth, there are many ways to make money and protect your investments. Individual investors have made fortunes buying stocks, shorting stocks, buying options, dabbling in commodities and even investing overseas. The key is finding a niche that works well with your personality.

If you don’t want to actively manage your account every few hours, you probably don’t want to be a day trader. The same goes if you can’t sleep at night knowing that a chunk of your money is tied up in a riskier growth stock.

It’s all about your comfort level. When you figure out your acceptable investing risks, you will quickly narrow down your choices. Then, when you’re comfortable with your expected risks, you need to gravitate toward your interests.

Do you like looking at stock charts? If so, maybe technical trading will appeal to you. If you’d rather sift through financial statements, value investing might become your preferred game.

As with most choices you make, you’ll have a much better chance at success if you pick the techniques that best fit your interests. It’s that simple.

Who Has Time For Stocks?

The second piece of the puzzle involves the amount of time you can dedicate to the markets.

One of the biggest mistakes that beginners make is jumping into new investments without a set routine. If you’re working a high-demand job 60 hours per week, you won’t have time to make trades on your computer during the middle of the day. And if you can’t dedicate a few minutes on the weekends to keep up with the latest market-moving news, you’ll want to explore more longer-term investment options.

Conversely, if you have plenty of free time during the day, maybe actively trading stocks is right for you. But I must caution you — short-term trading of any kind requires research and discipline. Day trading is an especially risky proposition for a newcomer. Don’t jump into this discipline expecting to win right away!

No matter what your strategy, I urge you to paper trade before putting your hard-earned money on the line. Some online brokers even offer paper trade accounts to help you practice. These resources can be invaluable. I also recommend you keep a journal of your winning and losing ideas. This will help you begin to fine-tune your strategies. When the time comes to put real money on a trade, you’ll be confident and prepared.

Find the Right Resources

Finally, you need to know where to look for quality resources and tutorials. Find blogs or e-letters that offer impartial ideas and advice — like this one! Learn from more experienced traders and investors. And be sure to read the great standards of your chosen discipline.

If you want to get into trading, you should check out the personalities profiled in the Market Wizards series by Jack D. Schwager. If you fancy yourself a value investor, you should pick up a copy of The Intelligent Investor by Benjamin Graham. These great works will lead you toward new ideas and sources that will help you develop the strategies you need to find success…

One More Thing: Ask Questions!

Never hesitate to ask questions. You always drop me a line at editor@pennysleuth.com. Feel free to send me your questions, tickers, and charts. I can annotate the charts for you and give my honest feedback, tell you if a penny stock looks like a scam, or even offer some insight into different investment philosophies. I’ll compile the best questions into a “mailbag” section every week. This way, we can all benefit from the discussion.

Sincerely,

Greg Guenthner
for The Penny Sleuth

Winning with Stocks Begins Here was originally featured in the Penny Sleuth.

This market is a minefield. You must prepare to deal with unpredictable prices, panic, and disorder. Ever since stocks began to sputter, investors have frantically jumped back and forth between long and short positions. Most of the time, the crowd has been dead wrong.

You cannot afford to be a delirious stock-chaser. In fact, your actions during the market’s most turbulent weeks will ultimately determine whether you will hang onto first quarter gains — or lose everything because of a few poor decisions.

MacNeil Curry, head of foreign exchange and interest rate technical strategy at Bank of America Merrill Lynch, offers the perfect explanation of the market’s mob mentality. “We lose our minds collectively, but we come to our senses individually,” he said.

These words of wisdom are especially true today. The market’s quick drop has punched unsuspecting investors in the face. Now, as we struggle to get back up and regain our senses, it’s important to use the market’s collective insanity to your advantage.

Here’s how:

Wait for confirmation before you act.

There is no prize for someone who guesses on a trend early. This rule is especially true when the trend is changing in the blink of an eye.

It’s never smart to guess on a breakout (or a breakdown) before it happens. You’ll be right sometimes, but wrong enough to offset any of the gains you booked when you got lucky. When the market is coming back to its senses, stocks will suffer from countless false moves. Breakouts will fail. Or a stock will break above a key moving average and then promptly fall below it the very next day. Indecision reigns supreme right now. Many traders will shorten their time horizons, meaning they will take profits almost immediately after a trade turns green.

That’s why waiting for confirmation is so important. If you’re attempting to trade a breakout, wait for the stock to retest the breakout zone and move higher before buying. Once the traders with shorter time horizons have been flushed out of a trade, additional buyers stabilizing the stock and sending it higher signal that the breakout was real. A retest of the initial breakout is additional confirmation that resistance has turned into new support. Buyers are willing to pay higher and higher prices for the stock, allowing the new trend to develop.

Avoid crowded trades.

Twitter has become a fascinating hub of stock market opinions. Every day, millions of market watchers share trade ideas, brag about their winning moves, and argue with those posting dissenting opinions. It’s the perfect place to go to see how investor psychology shapes the markets.

Take Apple Inc., for instance. As the most popular publically traded company in the U.S., Apple elicits strong opinions from longs and shorts alike. On Twitter, these opposing forces battle in real-time. At any given moment, you can unearth thousands upon thousands of tweets about Apple stock. It’s an epic argument with no end in sight.

The Apple saga came to a boil yesterday just before the closing bell. The stock had dropped in ten of the previous eleven days. Shorts positioned themselves for a weak earnings report, while longs scooped up shares at a discount from recent highs. So when Apple announced spectacular numbers last night, the squeeze was on. Shares immediately rocketed double-digits, trapping shorts and rewarding anyone who bought before the bell (at least for today).

However, Apple is one of those stocks traders should have avoided — long or short. There’s too much attention on the company and too many predictions and speculation as to where the hottest stock in the world will finally land. It’s a crowded trade that has become more of a gamble than a safe bet.

When everyone’s eyes are glued to a stock, it’s best to stay away. The obvious play can easily turn into the wrong play. A far as I’m concerned, betting long or short on a crowded trade is gambling. Any surprise information can cause wild price fluctuations. If you’re caught on the wrong side of the coin, you stand to lose big.

When in doubt, stay out.

My final tip may seem simple. But it’s one of the most difficult pieces of advice to heed…

If the trend is volatile and sideways, it’s usually best to say on the sidelines. Remember, cash is a trade. When you are in a cash position, you’re effectively betting that market conditions will change to a strong up or down trend at some point in the future. It’s a strategic, defensive move. You don’t always have to be “in” the stock market.

One of the main reasons investors buy into stocks at the wrong time is because of fear. They are afraid they will miss out on a new trend if they stay on the sidelines. But more often than not, always taking either long or short positions is not always best for your portfolio. And if you do end up sitting on your cash for several weeks, you will be better positioned than many of your trading peers. You won’t be stuck paying commissions on several stopped-out trades. You’ll also be mentally refreshed and ready to take advantage of the market’s next move.

Sincerely,

Greg Guenthner
for The Penny Sleuth

3 “Turning Point” Trading Tips was originally featured in the Penny Sleuth.

In the process, they have done very well.

This sort of investing is not “trading” in the sense that the word is used to describe efforts to beat the market. Traders normally try to anticipate trends and act before the market moves. Trading the channel is the opposite strategy. Those who utilize this technique buy a stock that they would like to own more of after an event pushes a stock down. Channel traders buy for the long run, but often take profits when the stock goes back up.

For that reason, I’ve been talking to some of the other analysts at Agora to devise a strategy to help investors recognize channel trading opportunities. This will probably take the form of a ranking of companies in my portfolio based on my degree of certainty and/or urgency.

Here’s a great example…

I’ve written often about BioTime because of a string of important developments. These developments include the addition of Dr. Andrew von Eschenbach, ex-FDA head and noted cancer fighter, to the BioTime team. His confidence in BioTime’s recently announced pan-cancer diagnostic technology, a simple blood test that could easily replace dozens of separate and expensive tests, has to be seen as an important event.

Similarly, the announcement that BioTime, in conjunction with the Wistar Institute, has cracked the DNA reprogramming code, via the SP100 gene, is huge news. Not only will this discovery give BioTime the ability to safely reprogram cells for use in regenerative medicine, I believe most other stem cell companies will eventually have to pay BioTime for the right to use the technology.

There are other developments in the BioTime stable of subsidiaries as well. Today, however, my interest has been peaked by a blatant short attack on BioTime…

So-called analysts are doing everything they can to paint the company as a hollow shell. While such unscrupulous tactics make life uncomfortable for the executives of the companies under assault, they do provide opportunities for investors to increase holdings.

BioTime is the only stem cell company with a Big Pharma deal, the Teva/Cell Cure Neurosciences collaboration for macular degeneration in Israel. BioTime subsidiaries are also established in Singapore, Shanghai and Hong Kong. Because endothelial precursor therapy would involve a simple transfusion after the cells are prepared, it is a perfect candidate for health tourism.

This is why I believe that BioTime, at current low prices, is a perfect channel trading opportunity.

Yours for transformational profits,

Patrick Cox
for The Penny Sleuth

Finding Your Best Opportunities Right Now was originally featured in the Penny Sleuth.

Forget buy and hold. Trading is all about quick, repeatable profits. Forget balance sheets or income statements. Trading focuses on technical analysis instead. But just because the old rules no longer apply doesn’t mean that no rules apply to successful trading.

In fact, following a specific set of principles could mean the difference between racking up substantial trading profits — and suffering sizable losses.

Follow these three rules and you’ll quickly see bigger trading gains…

1. Paper Trade Your Way to Profitability

As with anything worthwhile, there’s a learning curve to technical trading. That’s why it’s so important to hone your abilities before you invest your first dollar in a technical trading opportunity. The best way to do that is by paper trading.

Paper trading is essentially simulated trading that uses hypothetical money instead of cold, hard cash. When you trade on paper, you get to see what your trading would have yielded without worrying about succumbing to costly rookie mistakes.

That’s because — believe it or not — there’s a whole lot more to successful trading than buying the right stock. Even with guidance from professional research services, there are variables you’ll want to get a handle on before you put your cash on the line. Lots of factors can cut into your trading profits: broker commissions and your position sizes are just a couple of them…

Paper trading also does one other important thing: It builds your confidence as a trader. When you see your hypothetical trades booking profits, you’ll become more comfortable holding out for bigger gains and cutting your losses on the odd trade that goes against you. That’s an essential part of becoming a successful trader.

So how do you paper trade?

If you’re using a broker whose trading platform has a paper trading feature (just call them to find out), I strongly recommend that you use that. By paper trading on the same platform as you’ll be trading your real money, not only will it be exceptionally easy to track your paper trades, you’ll also learn exactly how to best use your platform of choice.

Many brokers — like Scottrade, for example — let you open a paper trading account without actually having to fund it. That gives you an ideal way to test out whether or not their services are a good fit.

If you don’t use a broker that has a paper trading option, you can still paper trade. There are a slew of “simulated investing game” websites out there, and you also have the option to track your hypothetical trades yourself on paper or with a spreadsheet program.

2. Always Use a Limit Order

When it comes time to actually place your trades (either on paper or with real cash), the buying and selling terminology can be confusing. With market and limit orders, stops, trailing stops and a slew of other broker orders, pulling the trigger isn’t as simple as “buy” or “sell.”

For the most part, you don’t need to worry too much about the type of order you place with your broker to buy or sell shares of a penny stock. Complex orders (like buy stops, or market on close orders) aren’t something that novice traders need to be hugely concerned with.

But there’s one type of order you should avoid at all costs: the market order.

Market orders essentially tell your broker to “buy shares right now, whatever the cost.” While that’s not a terribly big deal when you’re buying shares of a heavily traded stock like Exxon Mobil or GE, it is a big deal when you’re trading penny stocks that have less trading volume and larger bid-ask spreads. When a stock makes a big move, it’s not uncommon for your actual execution price to happen at a less-than-attractive price.

Instead, always make sure you’re using limit orders when you buy or sell penny stocks. Limit orders tell your broker to buy (or sell) shares of a stock up to a certain price limit — they ensure that you have control over your buy and sell prices, not the market.

3. Avoid Extended Hours Trading

9:30 a.m. to 4:00 p.m. five days a week — those are the hours that make up the standard trading day. We’re talking about only 6½ hours per day, 32.5 hours per week.

For us, that’s plenty of time to take advantage of the market’s moves.

But not for everyone. That’s why the powers that be instituted extended hours trading. Extended hours trading gave investors the ability to trade stocks pre-market and after-hours (AH), making it possible to buy shares of a stock on most markets from 8 a.m. to 8 p.m…

As we all know, however, just because you can do something doesn’t mean you should.

There’s a reason that after-hours trading is called “amateur hour” trading in professional circles — extended hour investors often get their trades executed at poor prices. While extended hours trades are a viable tool for value investors looking to get into shares of a deeply discounted stock, they’re bad news for traders.

That’s because low trading volumes in the extended session mean that smaller positions can make a material dent in share prices. As a result, price swings before and after market hours are often poor indicators of how a stock will trade during the regular session.

Extended hours trading can be a good indicator of market sentiment before and after regular trading hours — but that’s about it…

Ultimately, you can’t guarantee investing success. Sometimes, trades will move against you. The key to successful trading, though, is to gain an edge to limit the number of bad trades you take on and maximize the good ones…

Following these three trading rules is just such an edge. Follow these suggestions for bigger gains and you’ll ensure that you avoid major trading missteps.

Cheers,

Jonas Elmerraji
for The Penny Sleuth

Tips That Guarantee Bigger Gains was originally featured in the Penny Sleuth.

Absolutely nothing.

But you wouldn’t know it to look at the Wall Street Journal on Friday…

After all, the lotto was featured as a major economic story in the WSJ this weekend. All told, I counted seven different lottery articles on the Wall Street Journal’s homepage.

Seven!

While I know yesterday was April Fool’s day, I only wish I were joking about that part. Of course, WSJ wasn’t the sole offender. You can also read about the lotto in CNN Money and Bloomberg. The absurdity is a little easier to spot because the lotto story is completely asinine. But the media does a much better job of disguising their bogus market attribution most days of the week.

For 95% of investors, major media outlets are the go-to place for understanding why the market’s moving on any given day. We’ve been programmed to turn to the news to understand why something’s happening. But today, I want you to see why it pays to be one of the 5% of investors that ignores the noise.

The “Mega Millions connection” isn’t the worst offender — it’s only the most obvious one.

Here’s another:

“Investors flocked to consumer-oriented shares after data showed U.S. consumer spending rose by the most in seven months in February, even as personal income increased only modestly,” says an article that ran in Reuters on Friday.

How much “flocking” were those investors doing? They added 0.4% to the S&P Consumer Discretionary Sector Index…

As a trader, you’ve got to ask yourself whether investors were flocking to consumer stocks, or whether a Reuters journalist was looking for some reason to explain Mr. Market’s unimpressive trading. My guess is that example is a case of the latter…

I’ve said for a long time that Wall Street has an attribution problem. Investors see a big pop in stocks, and they look for the nearest headline as a reason for the move. It’s important to break from that frame of thinking if you want to find success in stocks.

More often than not, the headline being touted by Wall Street doesn’t matter…

To be sure, sometimes news really does move stocks. More often, a news blip is one of a thousand inputs that are pushing stock prices in a certain direction. For every investor who buys consumer stocks on marginally changed consumer spending data, another is buying because he thinks they’re cheap, and another is selling on a tip. But when real market moving news hits, you know it.

That’s why I rely on technical analysis…

At its core, technical analysis is the study of how supply and demand is impacting stocks in the marketplace — after all, supply and demand are the only two factors that actually impact a stock’s price. I don’t care what’s causing the supply or demand forces (it could be a news story or earnings improvements — heck, or even the $80 jillion Mega Millions drawing on the planet Jupiter).

All I care about is where those pockets of supply and demand are located, and how they can cue us to high probability trades.

If you’re new to technical analysis, I’d strongly recommend taking a look at the Penny Sleuth’s Research Reports section — there, you’ll find primers on putting technical analysis to work for your portfolio. It’s a starting point to help you ignore the daily noise — and focus solely on factors that actually move the market.

Happy trading,

Jonas Elmerraji
for The Penny Sleuth

What the Mega Millions Means for Stocks was originally featured in the Penny Sleuth.

Today I want to share with you the three strategies I use when choosing my currency plays every Monday morning for my premium readers.

All three of these strategies revolve around the fact that the crowd is often wrong on Monday morning…

As markets open, traders are still digesting news from the weekend and figuring out what to expect in the days ahead. The thing is, without any actual trading data to rely on, they’re pretty much making blind guesses.

My sentiment indicators zero in on this uncertainty, giving us a glimpse into how it could develop as the week goes on. That’s where the strategies come in.

1. The Momentum Play: Our most basic play is the momentum play. It anticipates a specific direction the market will go during the week, using a single binary to play it.

For instance, we can expect Germany’s DAX index to go up between Monday and Friday. Or we could anticipate the Japanese yen to lose value.

Sometimes we’ll do a momentum play if we think the crowd’s sentiment is on target — reality will meet their expectations.

In February, my readers had the chance to play binaries in oil. Crude was selling for close to $97, but I predicted a sharp spike. To play it, I recommended buying a crude oil 100.25 binary — meaning oil would have to jump over $3 a barrel to pay off.

Since it seemed like a long shot, the binary cost us just $12. Oil prices spiked overnight… and by Tuesday are binary was worth $21. The prudent thing to do was sell the position and collect our 24-hour gains of 68%.

2. The Breakthrough Trade: Sometimes my sentiment indicators predict a big move… but can’t be sure of which way the move will go. So we can “bracket” the market with a breakthrough trade.

To do that, we buy a binary with a strike price above the current spot price, then sell-to-open a binary below the spot price.

For instance, on the morning of December 5, 2011, the DAX was trading at 6130. But that week European leaders were scheduled to meet to discuss a solution to Greece’s debt crisis. So it was pretty clear to me that the DAX would react.

Of course, the outcome of the European meeting wasn’t clear. Leaders could agree on a plan… or go home after reaching a complete deadlock. Since the market would react violently in either direction, we put on a breakthrough trade.

3. The Range Trade: The markets are always moving… but they don’t always move far. During a slow news week, for instance, prices can keep on a steady track as investors seek to figure out where things will go next.

If my sentiment analysis reveals the indexes, currencies and commodities that are most likely to stay put for the week, we use that information to put on a range trade.

The mechanics are the exact opposite of a breakout trade. You sell a binary with a strike price higher than the spot, then buy a binary with the strike price below the spot.

For a range play, you want both binaries to pay out. That is, for the spot to stay below the upper binary and above the lower binary.

The interesting thing is that there’s almost zero chance that the position will expire completely worthless — if one side loses, the other side naturally wins!

These strategies give you the best chance to make big gains while keeping your risk firmly in check.

Sincerely,

Abe Cofnas
for The Penny Sleuth

Three Ways to Score Big Using Sentiment Analysis was originally featured in the Penny Sleuth.

Fundamental analysis digs into a company’s balance sheet, looking for clues to how much a stock is worth… and how much it could be worth.

What comes out is an alphabet soup of stats and ratios — P/E, EPS, ROI, EBITDA, etc. Analysts compare them against other stocks or their own projections to see if the stock is oversold or undersold.

Technical analysis, on the other hand, ignores all of that. It only cares about the stock’s price and volume. Using sophisticated charts, analysts look for certain price triggers. The terms that come out of this field are no less arcane than the terms you’ll find in fundamental analysis. Stochastics, Bollinger bands, MACD lines, etc.

But over the past few years, both fundamental and technical analysts have hit a wall. Their entire dogma is falling apart, and markets have stopped moving the way these analytical tools say they should be.

That’s because, thanks to the Internet, EVERYONE has access to this data… and everyone “knows” how the data is supposed to move prices. Free charting services not only draw technical charts for you, they also explain what the readings indicate.

Complete fundamental analysis is just a click away, too.

You can’t make money if everyone is acting on the same information in the exact same way…

That’s not to say fundamental and technical analyses are no longer valid — just that they are no longer absolute. If they were, everyone would be rich.

Instead, you have two choices — you can dig even deeper into the numbers, looking for telltale data or patterns no one knows. Or you can look at the existing numbers in a brand new way.

Sentiment analysis does both.

You see, at his core, an investor doesn’t care about a company’s earnings. Lines on a chart aren’t important to him, either.

The only thing an investor cares about is if he is making money or losing it.

And now, with everyone making decisions based on the exact same data, that emotional drive is the only thing that moves the markets.

So I’ve studied ways to literally measure emotion. I focus on two indicators — “risk appetite” and “risk aversion.” (You could also refer to them as “fear” and “greed.”)

Essentially, risk appetite / risk aversion is the root of all investment decisions. After all, there are very few safe investments out there. And the ones that are safe don’t offer big returns. As they say, greater risks mean greater rewards.

If people are feeling confident about the economy, they will feel confident buying riskier assets. That means things like stocks, foreign currencies and other volatile but lucrative investments. Greed sets in.

If there is a lot of pessimism in the air, people will likely get out of stocks and exchange their foreign currencies for things like U.S. dollars, gold or other “safe” investments. Fear takes control.

Obviously emotions can’t be tracked easily by fundamental analysis or conventional price charts. So I use some unconventional methods.

For example, I’m pioneering the use of “text mining” — analyzing the actual language used in economic reports and articles to detect potential economic trends. The result is a “word cloud” — a visual aid to how many times a particular word is used. The more times the word appears, the bigger it will be in the word cloud.

So if the word “crisis” keeps popping up in a speech — no matter the context — it will be noticeable in the word cloud… offering a sign that the policymaker wants to address investor fears. Overuse of the word “recovery” could be a codeword to spark optimism, or risk appetite.

Take a look at this word cloud I generated using a statement from Glenn Stevens, Governor of the Reserve Bank of Australia.

Notice how large the word “inflation” is, meaning it was used often. Clearly it’s a big concern… indicating that Australia’s central bank will keep a close eye on controlling inflation with interest rates.

Binary options are a powerful tool — offering one of the most direct ways to play market sentiment. They’re inexpensive, work quickly and offer strictly controlled risk.

Every Monday, I use my sentiment analysis to figure out if investors are being too optimistic or too pessimistic. I then send my elite readers the best binary trades of the week.

Binary option trading is very addictive. Once you have a few wins under your belt, you may not ever want to stop.

Sincerely,

Abe Cofnas
for The Penny Sleuth

This Powerful Tool Trumps Traditional Analysis was originally featured in the Penny Sleuth.