We’ve entered a high-stakes election year, where the market should cycle into strength as those in power attempt to win the hearts and minds of the electorate…

The slow-burn of the Eurozone crisis is also beginning to fade. Negative headlines and poor economic data — the exact same information that paralyzed investors just a few weeks ago — just don’t seem to matter anymore…

Some analysts (including a few of my colleagues) are attributing recent market strength to the Facebook effect. But I’m not completely sold on this explanation at all. Your mom and her friends talking about the Facebook IPO does not trigger a broad market rally. Sure, stocks in similar sectors will see some buying. But no one is bidding up shares of Waste Management in anticipation of Facebook going public.

However, Facebook’s impending offering is a symptom of the market rally itself. The billionaires and soon-to-be billionaires behind the IPO weren’t going to float this stock to the general public while the rest of the market was having a fire sale. That’s not good business. Waiting until the market has its legs back will always trigger a rush of offerings that have been patiently waiting in the wings — this one just happens to be a biggie.

But it doesn’t matter who is right — it all comes down to this: the bears might win today or tomorrow, or even most of next week. But ultimately, they will suffer as stocks continue to rally, sparking short-covering that will push the market up even faster…

That’s the thing with early-stage market rallies. Buying is contagious. And when it spreads, those on the wrong side of the coin are unceremoniously slaughtered. The euphoria of stocks moving higher after months of declines lobotomizes traders. They will jump on the big move, shoving aside anyone who gets in their way.

Of course, this is not a friendly game. At the beginning of a new trend, there are winners — and losers. If you don’t properly position yourself in the early stages of a rally, you will lose. It’s a simple as that…

If you’re buying stocks that are the strongest movers off the market’s lows — with the intention of holding them — you could be setting yourself up for failure. These stocks that catch fire and outperform during an initial broad rally are usually the most heavily-oversold names on the market. Most of the time, it’s because these stocks don’t have the fundamentals to backstop any intense selling pressure.

To put this into perspective, take a look at this chart of Response Genetics Inc. from 2009:

RGDX is a micro-cap biotech with no earnings and very few assets. The stock jumped big in March 2009 as the broad market put in a bottom, but the rally couldn’t hold. Investors moved on to other stocks that offered a stronger financial cushion.

Fast forward to present day, and we’re seeing similar action in RGDX:

After a sharp selloff in 2011, RGDX is roaring back to life. But while this stock might make a fine day-trade, I don’t see it holding up as a viable medium- to long-term investment. History could very well repeat itself here — with RGDX ending up back at $1 before the market runs out of steam.

On the other hand, the stocks you can find that will ride this emerging rally will have the backing of solid fundamentals and tangible industry trends. You’ll still have the upside of an in-favor stock — but your risk will be mitigated by revenue and earnings growth and the powerful economic conditions that drive the particular sector or industry.

The week before Christmas, I laid out three major stock trends that I believed would shape the market in 2012. The first major trend revolves around a slew of pharmaceutical patents that are set to expire this year. That means Pharma stocks that are favorably positioned in the generics business should easily outperform the market.

Here’s one of the fastest-growing, profitable small-caps in the generic drug industry:

Akorn Inc. (NASDAQ:AKRX) might not be one of the best performing stocks so far this year. However, the stock continues to build on its market-beating trend from 2011 while the business consistently grows its profits and raises guidance. That’s why I recommended this stock to my readers last year — and why we’re still holding the stock today.

If you continue to seek out stocks like AKRX that have strong fundamentals and a steady, rising trend, you should have no problem avoiding the garbage stocks that sucker in so many investors during the early stages of a bull market rally…

Sincerely,

Greg Guenthner
for The Penny Sleuth

Finding an Edge When the Market Moves Higher was originally featured in the Penny Sleuth.

I know that it’s been a scary couple of months. The floor fell out of stocks at the beginning of August, and the S&P 500 index went from modest gains to double-digit losses in 2011. Not surprisingly, investors are still anxious about putting their cash back in stocks.

But that’s exactly what they should be doing. Let me explain…

There’s been a whole lot more to stock picking than just “picking stocks” lately. Instead, portfolio management has become one of the most important contributors to actually seeing meaningful growth in your account. That’s why, in the face of so much uncertainty, it pays to be tactical in this market.

That’s easier said than done…

In the pages of Penny Stock Fortunes, fundamental factors are the basis for the stock recommendations that my colleague, Greg Guenthner, and I put out. But as I told you last month, fundamental value just isn’t in synch with the market anymore. You see, despite the facts that corporate profits are at all-time highs, earnings are beating Wall Street’s estimates and stocks are already trading at crisis-level discounts, market participants continue to drive share prices lower. When fundamentals decouple from market prices, the world suddenly becomes a scary place for most investors.

So, to combat that, we’ve ramped up the technical analysis that we use in our short-term decision-making.

While fundamental factors (like profitability, book value and product lineups) are our basis for deciding whether or not to recommend a stock, technical factors (like supply and demand levels in the market itself) are dictating our entries and exits in positions.

Those factors are the reason we’ve been taking profits on so many highflying positions in recent months. A few examples include:

• The 205.8% gains that we closed on shares of KapStone Paper and Packaging Corp. (NYSE:KS) back in late June.
• The 113.2% gains we booked on Advance America (NYSE:AEA) last month.
• And the 13.3% we netted on shares of Boise Inc. (NYSE:BZ).

In all three of these cases, it wasn’t the fundamental reasons for owning the stock that changed. Instead, it was the technical weakness in the market that prompted our selling.

As the market continues to churn, we’re continually reassessing our open portfolio — and you should be doing the same thing. Now, though, it looks like a good time to buy.

That’s because stocks are still trading at a discount to their “real values”. On a relative basis, corporate fundamentals are currently priced the same way they were back in October 2008.

In other words, stocks are cheap.

At the same time, we’re finally seeing the technical cues that indicate bulls are coming back into the market. The bottom appears to be set in stocks (for more on why, check out this article), and until the S&P 500 falls below the 1,120 lows that got set in August, that’s not changing.

In other words, the market’s selling appears to be over.

That doesn’t mean that stocks are going straight up, or that we won’t get another correction in the future. Even so, the alignment of fundamental value and technical strength is noteworthy right now — and we’re taking action as a result.

As I type, Greg and I are putting together our analysis for two new names that we’re recommending to our members. We think they’re prime candidates to take advantage of the current scenario in stocks. (To get those names, click here.)

If you haven’t bought the market bottom, maybe you should…

Cheers,

Jonas Elmerraji
Penny Sleuth

Did You Buy the Market Bottom? was originally featured in the Penny Sleuth.

Surging stocks are attracting sold-out bulls to some of the most beaten-down names one the market. But it can be dangerous to swing trade an oversold stock— especially if you end up chasing the price during a melt-up move. If you’re looking to pad your portfolio by trading stocks on the rebound, just follow these three simple rules:

1. Don’t try to catch a falling knife — This is one of the simplest rules of trading any stock, not just bottom-bouncers. Inevitably, an inexperienced trader will find a beaten-down chart and proclaim that the stock couldn’t possibly go any lower.

News flash: it can go lower, and it probably will until the chart tells you otherwise.

You could even justify your speculation with an absurdly low RSI or even fundamental metrics. None of it matters. When investors want to sell, they will sell.

$8.86 and maybe lower — you don’t want to try your luck with this stock…

2. Learn how to spot a Key Reversal — Once you become familiar with bar charts, you should learn crucial reversal day patterns. A reversal day is defined as a day where a stock posts a new low followed by a higher close.

By itself, a reversal day is inconclusive. You would need additional evidence before entering a trade on the long side after identifying a reversal day. A key reversal day, however, is a clearer signal that a change in trend is near.

A key reversal day is identified when a stock makes a new low on the day, then moves to close higher than the previous day’s high.

3. Identify resistance areas — So you’ve found a stock that has shown evidence that it’s ready to bounce off a bottom and move higher. Now, you need to identify where the stock’s new-found trend will most likely slow — or even turn back. Resistance can occur at round numbers, trend lines, or near areas of congestion on charts:

Notice the gap down in early August. This marks an important area of resistance. If you were long this particular stock, it would be wise to watch how the stock reacts to the blue line. If it fails to attempt to fill the gap, it would be wise for the short-term trader to sell and move on to other opportunities…

Simply put, if a stock bumps into resistance and fails to move higher, it could be a good time to take profits off the table.

Sincerely,

Greg Guenthner
Penny Sleuth

3 Immutable Rules for Buying Rebounding Small Caps was originally featured in the Penny Sleuth.

Meanwhile, the NASDAQ has been holding much stronger. While it too has pulled back, it hasn’t done so near as much as the other indexes. But then again, the NASDAQ doesn’t have the toxic waste the other two indexes have either. Also, the NASDAQ has formed another bullish pullback off highs pattern (POH) as shown below:

But What About Gold?

About the time you hear everyone on TV pounding the table on gold and you start to hear the words: Safe Haven Buying for days on end you know you’re near the end of the run. Why? Its emotional money saying “UH OH– the sky really is falling, I gotta get some of this” (AFTER The fact of course).

This tells us we are near a stall point. There is an old adage that has served us technicians well over the years and that is:

“More often than not when everyone is talking about it, that’s about the time it rolls over…”

Don’t follow the herd! We all know what happened to those who followed the conventional Wall Street herd right? They added 7 years to their time horizon window just to get back to where they were in 2007.

While Gold MAY be working its way higher over time, technically it’s overbought and at resistance. While we’re not saying sell it, we are saying expect a pullback. Take a look at the chart below:

Notice how it is bumping up against resistance. Also, notice that the full stohcastics are overbought? Not time to jump on the bandwagon for now.

Just remember the market has a funny way of letting those who have to have it actually have it — in more ways than one, we might add.

Sincerely,
David Grandey
AllAboutTrends.net

February 23, 2009

Is It Time for a Breakout? was originally featured in the Penny Sleuth.

In technical analysis, stock chart patterns are used as tools to determine where a stock’s price is going. Even if you’re a fundamental investor – someone who invests based on a company’s business and financials instead of stock charts alone – taking a look at technicals can be incredibly useful… and profitable.

After all, even when you find a stellar fundamental play, the technicals can help you get in at the best price.
So, what patterns should you be watching for?

Double Top and Double Bottom

The double top (and its bullish cousin, the double bottom) is one of the easiest technical patterns to pick out. It happens when a stock’s price bounces off the same resistance line twice in a short period of time (or in the case of a double bottom, it bounces off support), and gives strong evidence that the stock is having serious trouble breaking through that barrier.

The double top is usually not a good sign, because it represents a limit on a stock’s upside potential – at least in the short term. A double bottom, on the other hand, is a good thing because it means that there’s a strong support level that the stock’s price will have trouble falling below.

Trading Channel

Another simple pattern to pick out is a trading channel. While a trading channel is any range in which a stock’s price is fluctuating, a horizontal trading channel (like the one above) is a lot more interesting. It could mean that the stock is consolidating – trying to regain its footing after a big drop-off, for instance – and gearing up for a breakout either up or down.

When you see horizontal consolidation, especially on lower-than-normal volume, keep your eyes peeled.

Head and Shoulders Pattern

The head and shoulders pattern is a bearish trend that usually means that a stock is headed downward. When you see two “shoulders” with a taller “head” in between, watch out, a head and shoulders pattern may be forming. Take note, though, that within the head and shoulders pattern itself you’ll find a strong support level (called the neckline).

Like most patterns, the head and shoulders has an opposite – in this case, the inverse head and shoulders. This bullish pattern looks the same as the regular head and shoulders, except it’s flipped upside down. When an inverse head and shoulders is on your chart, it could mean a rally is coming up.

Descending Triangle

The descending triangle isn’t a pattern you’ll want to find on a stock chart in your portfolio. It’s a bearish signal that usually results in price movement downward.

A descending triangle occurs when a stock’s downward trend intersects with a strong level of support. Again, its opposite, the ascending triangle is a bullish signal.

Hammer and Hanging Man

A hammer is a single candlestick that might mean a bottom is in sight. It’s formed when a stock trades in a wide range downward during the day, but closes near the open. It’s opposite, the hanging man, happens at the end of an uptrend, and signals that the trend is likely to resolve downward in the near future.

Start to Chart

While this is by no means an exhaustive list of the types of charting patterns you’ll see when you enter the wild world of technical analysis and technical trading, it is a starting point that can help you set off in the right direction. We’ll keep filling you in on technical analysis tips to make sure that you can make the most of your investment dollar.

Cheers,
Jonas Elmerraji

February 19, 2009

Five Charting Patterns You Need to Know was originally featured in the Penny Sleuth.

We know who is going to get our economy out of this funk and get us on to the next bull market cycle. It’s not the government, it’s not some stimulus package — IT’S YOU!

The way you are going to do that is by taking control of YOUR destiny and by having a plan and trading that plan. It’s ALL ABOUT YOU and empowering you to be the best that you can be regardless of what the market throws at you.

It’s our job to get you to the point where you no longer have to ask “is the market going higher or lower? You won’t care because you’ll just trade what you see, not what you think, hear or fear and you’ll do it according to a plan.

Instead of listening to what all the hoopla herders on TV are saying about it, we’ll revert to our tried and true — that being we let the market tell us what to do by the action it exhibits…

In the really big picture sense as you can see the overall trend is down. Now you know why they call bear markets the “Slope Of Hope.”

By the same token however, within the triangle we are at trendline support so we could make another run for the triangle resistance at 8700. However, before we do that we need to get through the shorter-term resistance level of the chart below.

Moving on to the NASDAQ 100 index, we’ve got more of a stair step downtrend in place.

Nothing new here — just more of the same old same old…

What can we say? It’s all about the green line. A break below it and it’s time to go short on this index. Just remember the following with regards to TRENDS. All downtrends break to the upside and all uptrends break to the downside eventually.

So you see, even if the herd runs the market on the stimulus news, it’s still going to be all about the charts and the charts are telling us we still need to get through resistance levels. And let’s face it — there are a lot of them all the way up.

The big question then becomes what happens after the dust settles? What happens after the stimulus news wears off? That’s where the turning points are assuming a gap up on Tuesday. Remember, the market is the boss.

Notice in the 60-minute chart the full stohcastics are back to being overbought. If this index is going higher, it must break thru the 1280-1300 level — that is resistance. The real key clue as to how far (if at all) this index can go may be to look at (and watch) what some of the kingpins of this index are doing — AAPL and GOOG.

Speaking of kingpins of this index, don’t waste your time looking at MSFT, CSCO, INTC, ORCL as they haven’t gone anywhere in eight years and they are also favorites of the “Managing To A Benchmark” crowd.

When these names break down, the market breaks down. The only difference between these two names and the NDX 100 is that they have both followed through with higher highs year to date vs. the NDX 100 having a hard time breaking through the highs of January.

Dont forget about QID (the NASDAQ short ETF). When it triggers, it usually ends up being a big trade. While we don’t know when or if this will ever trigger, we still need to keep it on the burner. A break above the pink line will likely occur should the market break down.

We’ll let the market guide us by the action it exhibits at key technical analysis levels. So you see whether the market is going up or down, it really doesn’t matter. All that matters is what the charts are telling us.

Regards,
David Grandey

February 17, 2009

Does It Really Matter Where This Market Is Going? was originally featured in the Penny Sleuth.