Tuesday, January 29, 2013

Ford comes in, DDD gets hit, and Hain needs to hang on!

Ford announced Q4 earnings this morning, showing strong Sales and Earnings Per Share (EPS), but provided  caution on their European markets. it is now at our $13 level and I think its a decent stock here above 13.00. As long as its above 13.00 I think its a good buy.

DDD's hot streak came to an end yesterday selling off more than 11% on the day. Today shares initially showed more weakness only to rally hard into the close and managed to retake the 20 day moving average. The past two days have shown some violence (lots of price volatility)  in their trading action. We should let this one cool off a bit before we want to get involved. There is a saying that stocks form their tops in violence  and bottoms in silence.

This is not the kind of pullback we typically like to see. Usually what we like to see is a low volume, slight decline. A huge move on massive volume, followed by another surge in the opposite direction on similar volume, says that there is a large range of prices that buys and sellers are disagreeing on. I would rather not pick a side here, but rather join the side that comes out with control when the waters calm.

HAIN made a strong move last Friday breaking above key resistance and both the 50 and 200 day moving averages. Yesterday however reversed that move right away bringing us back under the resistance level. Today saw some early selling get bought and managed to hold above the 20 day average.

This reversal has the look of a bull trap. Having price break through resistance and the key moving averages only to reverse substantially, trapping all the buyers who bought on the breakout. If the support under the prior low fails ($54.20), there will be no trade here for now.

Sunday, January 27, 2013

Weekend Update

The markets closed higher again this week. The SP500 reached a new 5 yr high and closed at 1502. If we look back at the past 35 years for the SP500, we see we are now approaching the all-time highs. This should prove to be a stiff resistance zone. Although I think we will move to all-time new highs at some point this year, now is a time to be more cautious until we see a breakout or consolidation from this zone. That doesn't mean sit in cash, but it does mean we are at a higher risk for a downside move.

Part of the reason I believe we will reach new highs has to do with the sentiment behind this market (how people feel about it). This market is generally hated. The retail investors (all us little guys) have largely not been participating in this significant up move. Most feel the market is very risky and a suckers gamble. All the while stocks continue on to test new highs.

Remember back to the prior highs, 2000 and 2007; the dot.com bubble and the housing collapse respectively. In 2000 investors believed that stocks could never go down  and anything that ended in a .com was an automatic gold mine. In 2007 it was widely known that houses in America NEVER do down. Both symptoms of irrational euphoria. As you can see, irrational euphoria will end and panic ensues. The nice thing about where we are now is that most people feel that Europe is a risk, China's growth is slowing, the US has financial crisis issues, etc. Lots of fears! Fear is great for the market, it is what drives prices higher. Fearful investors are under-invested investors, with lots of money to buy more stock with, should the dangers clear.

Enough rambling, lets take a quick look at our top 10 picks after week 4 of 2013:


Price has broken out from its downtrend resistance and has gotten above its prior support/resistance level at 57.00. I am very constructive on this stock right here, with a stop below 54.00. They report earnings on Feb 5 and this could very well regain its upward trajectory. Also the volume has seriously picked up in the past 2 weeks. Investors are accumulating the stock.


Q4 Earnings disappointed the street this week and this stock remains in free fall. Stay far away for now. Always remember: its never too late to sell. If you set a stop, stick to it!


MOS on Friday broke and closed above the Inverse Head/Shoulder pattern on heavy trading volume. We want this to settle out here a bit and consolidate this recent gains between 60-63. Pullbacks into this price zone can and should be bought as long as price stays above $60.


Home Depot continues to make new all-time highs. You can buy this on any pullback. Just really strong action this week.


Cummins continues to see really strong action. With earnings in a week and nearing resistance levels I couldn't fault you for taking some profits here. But If the $118 resistance can be taken out, we could see new highs and a move to the upper end of the channel.

Ford pulling back here and testing the 20 Day Average. They announce earnings for Q4 this week. Any pullback to the 13.00 level is constructive consolidation and should be bought. Place your stop just below the 12.90 level.


Wells Fargo just chopping along right above the key long term resistance area. As long as we are above the $34 area, Wells is in fine shape. Just taking a rest here, lets see if if can continue higher. So far, so good


Our clean energy play has broken out of its flag pattern and we are expecting it to continue to trade higher. This is a strong buy above 4.25.


3d Systems continues to rip to new highs. I'm hoping we are seeing a short term top or consolidation here. I would love to get into this one on a solid pullback.


Enbridge pulling back here a bit. I would like to see this retest the 42.00 level. If that holds, expect a run to the upper trend line.

Friday, January 25, 2013

Whats the Plan?

Every trader/investor needs a plan. A plan is a must for success in the markets and managing your savings. An investing plan can be very simple or incredibly complex. I tend to prefer a more simple method to my investing, but everyone will ultimately have to find their own way.

Having a plan is necessary because of the emotional effects markets can have on our decision making. You need to make most of your decisions in a disciplined, unemotional state. Emotions will have you selling too soon or holding on too long. They will have you make buy and sell choices that you will look back on in disbelief. "How could I do something that dumb!" you will say, "what was I thinking selling there!". These thoughts will occur too often if you don't plan ahead. 

Therefore, we need a plan!

First and most importantly, we need to control risk. i.e. how much are we willing to lose by buying this stock? A general rule for managing risk is by using the 2% rule. Lets say, for the sake of discussion that we have a $10,000 account for investing/trading. The 2% rule states that the most you can lose on any one investment is no more than 2% of your total account balance. In this case 2% of 10,000 is 200. This means that the most you are willing to risk losing on one trade is $200. What this allows is for you to sustain a string of losses and not do major damage (blow up) to your account.

Which brings us to Stops. Stops must be your friend. Learn to trust your Stops and they will save your account. A Stop-loss is simply a price for the stock where your thesis for the trade is proven wrong. This could be a price just below a major support area, an indicator like Volatility Stop, or a moving average support area.

Using the 2% rule and support Stop-loss, how do we enter a position in ATT? Based on only risking 2% of our total 10,000 account (200), we buy T at today's closing price of 33.75 and our stop for ATT is just below 32.75. The difference from the price we bought at (33.75) and the stop price (32.75) is $1.00. Meaning we stand to lose $1.00 per share by triggering our stop and having to sell. If we can lose $200 on a trade and stay within our risk parameters, we can buy up to 200 shares of T on this trade.

Ideally you would like to buy the stock very near to the support area so you can risk even less than 2%. The less you risk the better. If you are buying right on the support area you will know very quickly if you are right or wrong.

Risk management is the single most important aspect of your trading plan. It will keep you in the game by cutting your losses short and not letting them turn into large losses.

A breakdown from a support area can create a huge loss. Here is a recent example of that in AAPL:

If you chose to not obey your support stop here because you like Iphones or think Apple's stock should never go down, well you sure got a groin kick of reality.

No matter how good you think a company is or how groundbreaking a product is, a stock can always go lower and lower. This is why you must NOT go with your "feelings" and must stick to your Stops.

Having a simple understanding of risk management puts you ahead of most investors and will keep you relatively safe from the dangers of the markets. The only thing we can control when investing in the markets is how much we are willing to risk. We can't control if it goes up or down, but we can control the parameters for where we are still correct in our ideas or where we have been proven wrong. The very first thing you must consider when you want to buy a stock is where your stop-loss will be. Where is the support? Where would support be broken? Those are the questions that need to be in your head when you are considering entering into a new position.

Next time we will discuss simple trading strategies and how to implement them into our risk management plan.

Wednesday, January 23, 2013

Market Check 1/23/13

Yesterday was a good day for the markets. Google and IBM beat analysts expectations for 4th Quarter earnings, the SP500 closed at a new 5 year high, and our prospect PBW broke out from its flag pattern.

PBW breaks out!

This is a text book breakout. The price range expanded on the breakout day, volume spiked showing lots of interest from traders, and today we are seeing positive action following through the breakout. As long as this can hold above the lower support of the flag formation ~4.30, we will likely see higher prices.

SP500 closes at a new 5yr high

This of course is very positive activity. What we have seen since the low in 2011 is steadily higher highs and higher lows. Perfect uptrend action! Yes its possible that we could see a bit of a pullback from here, but as long as we stay above the previous low at ~1,350, this uptrend will remain intact; any significant pullback would be a solid buying opportunity. Pullback targets to watch would be 1,460 and 1,400. A break below 1,400 would create a significant warning sign.

On deck for today is the Q4 earnings report for Apple. Apple has lead the tech sector for years and after the recent correction expectations are low. Low expectations create opportunities for positive surprises, but we will have to wait and see. They announce after the close today.

Since our watch price triggered on AAPL, the stock has held up well. I have a feeling after today's earnings report we will see a breakout into a buy or our price level will fail. This is most likely the biggest report AAPL has ever had! should be exciting.

Tuesday, January 22, 2013

Don't Fight The Fed!

Something every investor/trader needs to be watching and following are the current inflows of liquidity(money) coming into the stock market via the Federal Reserve; tracking the Fed's POMO Buy and Sell days is extremely helpful for traders. In early 2012, the Federal Reserve launched a stimulus program called Operation Twist. Operation Twist basically was the purchase and sale of long and short term bonds designed to keep interest rates near zero for borrowers. The reason we were interested in Operation Twist is because there was a direct correlation with the reaction in the markets with the actions of the Fed. They would have certain days during the month that they would be buying treasury bonds and the stock markets would get this boost to the upside. On days where they would sell treasury bonds, the stock markets would be weaker and have more selling pressure.

Operation Twist ended on Dec 31st 2012, but the Fed has moved forward with a similar program. The new program is essentially Operation Twist without the Twist, meaning they are only buying bonds now and not selling any to balance. What this creates is a flush of liquidity into the markets with zero selling pressure to counteract its effect. You see, with Operation Twist roughly 3/4 of the days would be "Buy" operations and 1/4 would be "Sell" operations. This would create a positive effect on the markets, but it would end up muted because of the Sell days. However if you looked at the POMO schedule released by the Fed (here), you would know when the Buy days and Sell days were planned. This allowed us to position around the Buy days and consider taking profits before large Sell days. 

With the latest program in place it is simply a matter of looking to see how much is coming into the market in any given day; they have small purchase days and large purchase days. What this creates in the market is an environment where it is difficult to see any sustained selling pressure on stocks. The liquidity programs are designed to "buy the dips" and will look to put the money to work on most any pullbacks. Needless to say, this is extremely bullish for stocks and until this is ended or slowed, it will be a very good wave for us to ride. To put this new wave of liquidity in perspective, during Operation Twist the Fed was Buying roughly $20 Billion more treasuries than they were selling, creating a net $20 Billion injection into the markets per month. The new plan has the Fed purchasing just about $85 Billion per month with zero selling. That's 4 times as much liquidity and we are seeing the direct impact on the markets. Until this stimulus stops, we need to be aligned with it. Don't fight the Fed! its a cliche now, but it is absolutely the case.

It is so simple to follow the buy operations. All you need to do is click the link above and you will be taken to the New York Fed webpage into their "permanent open market operations" schedule.

It will be to your detriment if you aren't taking advantage of this opportunity that is being presented here. For example Thursday and Friday this week are "Large" buy days and would be a great opportunity to snag some of that free cash out there. Thank you Ben Bernanke!

Monday, January 21, 2013

10. Proshares Clean Energy Fund (PBW)

10. Proshares Clean Energy Fund (PBW)

#10 on our list is Proshares Clean Energy Fund which holds roughly 50 different clean energy related stocks. I have written previously about this Fund in detail that you can find in the post archives; if you want more information about this, feel free to check out that earlier post. Today I am going to talk specifically about the technical picture and what has developed since our first post.

Since breaking above long-term downtrend resistance back in early December 2012, price has rallied up to test the most recent high at $4.50. We want confirmation that this trend is reversing and taking out that prior high will be a key step in that process. When a stock is in a down trend (lower highs/ lower lows) we want to see the stock move above the prior high to break the pattern of lower highs. That is the first step.

Next we want to see some bullish price action develop as we approach those previous highs indicating that we still have enough strength to break through the resistance level.

What I have been noticing over the past 2 weeks is that since moving from a low of $3.46 to a high of $4.48, price has consolidated into a very positive pattern known as a Bull Flag or Bull Pennant. Typically with a flag type pattern price will rally strongly then move in a narrow trading range for a period of time. Then the trading range will narrow considerably before breaking out hard in the same direction as the current pattern trend. A Bull Flag is known as a continuation pattern as it indicates price is just taking a breather after a sharp up move before continuing higher. This is positive action.

Price consolidation is a huge part of technical analysis. There are a few general rules:
1. After a strong up or down move, the short term trading range will narrow as traders take profits and others who missed the rally look for a pullback to enter the stock.
2. From tight consolidation comes expansion. Price tends to tighten and expand in a trend, and this is something we always watch for around these tightening areas.
3. Typically you like to see the trading volume decrease as price consolidates. This indicates that the sellers are not aggressively dumping shares and that a more orderly profit taking is under way.
4. We need to see the trading volume expand once the consolidation breaks out. Its important for the pattern probability to see lots of buying interest once the pattern begins to break the tight range.

The next thing I notice here is that the price has held above its 200 day moving average (the dark blue line). This represents the average price over the past 200 trading days and is a strong area of resistance/support. The fact that it has held above during this consolidation is very positive for the stock.

Lastly and one of my key indicators I use for short term trades is that we are seeing the 20 day average (green line) uptrending and above the 50 day average (red line) which is also uptrending. What this tells me is that both the short term (20 average) and the intermediate term (50 average) are both trending in a positive direction. I have found that your probability for success in a trade is greatly increased when these two averages are showing this positive trending action.

As for my recommendation of what to do here is I am looking just a couple more days at the most of consolidation before this continues its rally higher. I will be looking to add to my current holdings once this touches the 20 day moving average. That I believe will be the end of the tightening and hopefully will lead to a price expansion in a positive direction. Bottom line is everything is shaping up here for higher prices and this fund seems to be a good value with all the correct momentum in place to move higher.

 If this in fact moves against our plans (which can often happen) I will be looking to exit this trade if it breaks below the rising 50 day moving average (red line). Remember a small loss is much better than a big one! Never let a trade get away from you and always have a point (a Stop-loss) where the market will prove your thesis wrong. For me, my plan would be proven wrong with a breakdown of the rising 50 day average. That would mean that the 200 day average would fail, the 20 average would fail, the prior consolidation area (near $4.10) would fail to hold as support and finally the 50 average would fail...I would say those all together would make me think I was wrong.

Good trading!

Sunday, January 20, 2013

9. Enbridge (ENB)

9. Enbridge (ENB)

Sector: Energy- Oil/Gas Pipelines

#9 on our list of 10 is Enbridge.  Enbridge is the largest North American Oil and Gas Pipeline manufacturer and maintenance company. I know, i know, oil pipelines are not the cleanest of businesses and there has been a lot of debate about the construction of the Keystone Pipeline. But, as an investment, Enbridge is a safe and stable high growth position to add to a portfolio. They pay a 3% annual dividend and their stock continues to make all-time news highs almost weekly.

The reason I like Enbridge vs a Conoco Phillips, Chevron, or Exxon, is the fact that the pipeline companies are not directly effected by the fluctuations in the price of the actual commodities (oil and gas). The way that oil prices swing from high to low has a direct impact on the stock performance of the oil producers and since oil inventories in the US are at seemingly high levels, the oil companies are having a hard time moving higher on their own growth prospects; If oil prices get hit, so do these oil producers. But not Enbridge, the fact that the US seems to have discovered more oil/gas and has larger reserves only helps a company like Enbridge. More oil and gas equals more need to build and transport through pipelines.

Understand though that pipelines don't come without their share of risks also. For example, if a pipeline leaks or breaks, the pipeline manufacturers will be responsible for the damages. Having a pipeline malfunction can hit the stock pretty hard. But, if you like steady stock appreciation, a solid dividend, and a very stable business model, Enbridge could be for you.

With a stock that climbs like Enbridge's does, you must be patient when choosing an entry point. I have been watching this stock for about 3 years and I have only made purchases twice as shown by the green arrows. Its true that any point along this trend would have been a successful purchase, but as prudent investors/traders we want to be looking for the most low risk/ high reward opportunities to be putting our money to work. When dealing with a trend like this you want to make your purchases just as price touches and bounces off of the lower trend support. I know looking back this looks like a perfect trend, but just remember that a trend can always change. We don't want to just throw our hard earned savings at a trend hoping that it continues; we want to assume the trend continues higher but we also don't want to be buying near the upper boundaries of the trend channel. As you can see, buying this stock after a sharp gain (like we have seen recently) is not the lowest risk or most profitable time to do so.

All in all, this is a very strong stock representing a stable and growing company. This isn't what I would call a "fast money" trade, but as a way to grow your savings consistently, you would be hard pressed to find one better.

Friday, January 18, 2013

8. 3D Systems

8. 3D Systems (DDD)

Sector: Technology/Computer Software and Services

#8 on our list for 2013 is 3D Systems. This is purely a look to the future of technology and is a hunch that I have that 3D printing will have a large influence in our future daily lives. The company's stock is not cheap by traditional standards but if this technology becomes a household product, there will be lots of growth opportunity in the stock.

As you can see this stock has been a big winner over the past 2 years, going from $6 per share to now over $60! Also the Volume has increased dramatically which shows very strong interest from investors. Something to remember here is that its not important where a stock has been, its important where a stock will go. Yes its up a ton, but these products are still only available to a select few, for a high price tag. My thinking is that, just like personal computers, 3D printing technology will soon be readily available to the general public. And how useful will this tech be? Well just imagine you are hanging shelves and you lose a couple screws. You can just create an exact duplicate with your printer. What if you need a certain size wrench but live 30 minutes from the nearest hardware store? Make one yourself with your 3D printer. Need a trophy for your fantasy football team? There you go!

This doesn't even scratch the surface for the uses of 3D printing technology, but the idea does seem to have interesting prospects for our future convenience.

As for the stock, its a bit too hot to go jumping into right now. The way I am looking at this is as a "fear" stock I want to buy during times of market panic. When the market gets hit by debt ceiling concerns, Europe fiascoes, or other fear inducing news panic, I want to be a buyer of DDD. All the pundits on CNBC etc are calling for a big panic sell off as we approach the debt ceiling debates in March; I would welcome this as it will hopefully provide an opportunity for me to buy into this wonderful tech company.

There are a few stocks that I want to buy if the market crashes hard and DDD is one of them. This is the type of stock that I wouldn't even have to look at it, I would just buy a bunch. Its always a good idea to have a list of some of the strongest stocks in the market and when they get hit by a general market sell-off, you want to be a buyer of those particular stocks. Because when things improve they will likely be the first and the strongest to bounce back.


Tuesday, January 15, 2013

AAPL Update!

Apple's stock has hit our watch target at $485 this morning and now we will look for some price firming to initiate a position.

The negative news is swirling, CNBC is freaking out, everyone is talking about how Apple is failing and expectations are coming down fast. The $500 price level is very important to me because that symbolizes a major psychological level for traders and investors. There are a lot of people that bought at $500 and now that the price has decisively broken below, those trades will be looking to cut their losses short and sell.

What we are looking for here is what is called a "capitulation" moment. This sort of sentiment indicator can mark a significant bottom for a stock. Capitulation means that essentially everyone that is going to sell has done so; we will notice the "moment" with a spike in the daily volume (total number of shares traded in the day). We will be looking to see above average volume on a down day for the stock. Today I am hoping we will see it. The break of $500 should create a flush of sellers, leaving only buyers looking for a bargain remaining.

The other thing I am noticing with AAPL is that momentum is still pointing in a positive direction while price has been dropping. Remember that when momentum is showing strength and price is showing weakness, it can be a signal that strength is building under the surface.

We are close here folks. What we will ultimately need to see here is for price to hold the $480 level and stay within the long-term yellow trend support. If price stays above the support, we will be buyers once price then breaks back above the key support turned resistance @ $500 and breaks the intermediate down trend resistance line (long white line). This would signal that price has found a bottom and is looking to reverse course.

Monday, January 14, 2013

6. Ford (F)

6. Ford (F)

Sector- Consumer Discretionary/Automotive

Ford is another household name on our list of 10. Its about as American as baseball and apple pie. They have always been known for their trucks, but recently they have been moving to fit the current consumer demand, and that is for more fuel efficient vehicles; I personally have been impressed with the looks of the new Fusion Hybrid.

As an American consumer myself I tend to notice changes in trends and styles; a big part of investing is simply using your eyes to identify what people are buying and using. Something I have noticed recently are a ton of Ford Fusions on the road. Now, I like to have my hunches backed up with data and Ford offers me that in spades. Just taking a brief look at their recent financial performance I can see a company that is paying down debt, has high growth potential and record sales. These stats tend to point toward higher prices in stocks and Ford is moving right along as expected.

After a massive rally from 2009-early 2011, the stock has gotten whacked and lost more than half its value from $19 down to $9. Recently however we have begun to see a swing to the positive for Ford. Not only are they producing record sales but their stock has been going through a major trend reversal.

The shorter term picture looks incredibly strong. Ford has recently broken out of a great Inverse Head/Shoulder base and has exploded to a new 52-week high. The most important thing for me to see here is the fact that price has recently taken out the prior 52-week high resistance and continued to move higher. That is very bullish activity.

The fact that it has overtaken the $13 level and sustained has lead me to believe that a trend change has taken place and this stock could easily test its 5-yr high at $19. However, this breakout has been furious and I would be hesitant to jump on board right here. I want to see this consolidate these large gains a bit. I am looking for an entry at the $13 level; remember prior resistance becomes new support. So the $13 level should provide a launch point for the next move higher and that's where I will look to get involved.

Patience is key when you are trading, I have struggled with it the whole time. But you will find that your worst losses occur because you took on a little too much risk and didn't let the game come to you. Trying to force a trade is one of the quickest ways to lose money. You won't catch every move and you will have to watch as some big winners fly right across your watch list. But if you plan your move in advance, you will know exactly what to do when the right moment presents itself; you won't freeze, you will act. And you will know exactly what to do. That is how you win in the markets. Let other traders make the mistake of being over eager, we simply sit back and catch the best risk/reward we can. There will always be another big winner, the market will continue to create opportunities for us, and we will need to be prepared when it does.

7. Wells Fargo Bank (WFC)

7. Wells Fargo Bank (WFC)

Sector: Banking/Money Center Banks

Wells Fargo Bank is the leading mortgage lender in the country; they buy roughly 1/3 of all home loans made today (they own my loan!). This is a great example of buying low and selling high, investing for value. Wells has been buying  home loans hand over fist at historically low interest rates. What this allows them to do is later sell them to other investors as interest rates begin to rise to more typical levels. The bank will profit on the difference between interest rates on loans they purchased and then sold. At these low rates and the quantity that they hold, Wells has exceptional potential if the housing market continues to improve. 

The price trend we are seeing over the past 3 years is beginning to look strong and is on the cusp of breaking out. 

  Generally when price is stuck in a range like this you will see it bounce from top to bottom. As we can see, price did just that between 2010 and early 2012. What was different this last time was that when the price pulled away from the upper resistance line, it didn't sell off to the lower end of the range, price created a higher low. It then turned and broke through the resistance area briefly only to come right back below. However, price has once again made a higher low and is now breaking above the resistance for a second time. 

A general rule about support and resistance levels is that the more times a price level is tested, the more likely it will fail. As we can see above, the lower support area ($23) was tested twice between 2010 and 2012. The upper resistance level however has been tested 5 times in the same period. This kind of action leads me to believe that the upper level is about to be broken for good. As long as it can hold above the most recent higher low ($31.25), this looks like a great way to position yourself for a market rally and the improving housing market in the US. 

Sunday, January 13, 2013

5. Cummins Engines (CMI)

5. Cummins Engines (CMI)

Sector- Industrial/Manufacturing

The 5th stock on our watchlist for 2013 is Cummins. Cummins is a state-of-the-art, large equipment engine maker. They are a leader in the Natural Gas engine transformations for big-rig trucking and industrial equipment. They have a very strong fundamental structure with very low debt and solid growth potential. As for the intermediate catalyst for this stock, Cummins would benefit from the recent resurgence of China's growth economy. Cummins receives over 30% of their sales from China and overseas markets. This positions them for a nice recovery in 2013 and beyond.

Cummins is a play on domestic and international industrial production. If the US and other large global economies continue to improve, Cummins will be a big winner. If however, growth slows and one or more of these economies slip into recession, Cummins will likely suffer more than most. I am a believer in the continuation of the economic improvement and therefore like Cummins' prospects going forward.

The stock has lagged the overall market this past year, but has recently been showing signs of strength.

This is once again the Inverse Head and Shoulders formation that we like to see when a stock is beginning to reverse its prior downtrend.

If we look at the longer term picture we can see that the trend is still up despite the weakness we have seen in the past year. Actually we are just bouncing off of the lower trend support and this looks like a solid risk/reward.

Since its low in 2008 the stock price increased by 5x over the next 4 years, setting a new high early in mid 2011. Just to be clear, a rally from $24 per share to over $125 in 3 years is a monster gain! After that huge move in the stock, price has remained fairly strong since and has moved sideways for a year and a half.

When a stock rallies like this one has it will try to find equilibrium and it will consolidate the large gains. Stocks consolidate in two ways, sideways through time or by pulling back to a key support area before regaining the upward momentum. From a strength standpoint we like to see the consolidation sideways; a sideways consolidation shows very strong underlining interest in the stock.

I like the strength we have seen in CMI both in the shorter term and the longer term. I currently own this stock and will look to add to my position as long as it continues to cooperate. As for warning signs, I would begin to worry if price slips below $100 in the short term. And I would have no interest in being in the stock below the key support at $80. That would signify a break in the long term trend and also create a lower low in the stock. These would both be bad signs for the intermediate term and I would look elsewhere for lower risk ideas.

Friday, January 11, 2013

4. Home Depot (HD)

4. Home Depot (HD)

Sector: Specialty Retail-Home Improvement

My 4th pick is a household name, Home Depot. Home Depot has shown exceptional price performance over the past year and a half. Most investing books will tell you to buy low and sell high. This is not generally bad advice, but there is some thought among traders that those stocks are low for a reason. The stocks that are performing the best and have the most buy support surrounding them are the ones making new all-time highs. The more progressive idea is to buy high, sell higher; the thought that buying strength is better than buying weakness. Now, I tend to feel that there are opportunities for both of these mentalities in our plans. Some set up nicely after moving lower and some are just so strong that there is no stopping them. Home Depot falls into the freight-train category. This thing has been ripping for over a year and so far has not sputtered much along the way. This is another stock I currently own and have just purchased more shares in the past week.

The reason behind Home Depot's surge has to do mostly with the improving housing market. New homes are being built at the highest rate since the recession in "08 and consumers are turning to Home Depot for their improvement needs. The healing housing market theme will resurface within our studies as I feel it is going to be one of the primary drivers to bring the US economy around.

However, the main reason I am invested in Home Depot is because of that stellar price performance!

The key to watch here is to see price stay above the lower trend line. As you can see price has tested that line 5 times in the past 1 1/2 years, the most recent test coming just a few days ago. When a stock is in such a clean trend channel, you can feel very confident about buying it when it touches the lower trend support. Our plan with this stock is to hold it as long as it stays above the lower trend support, adding to our current position each time it touches the lower support. And because the channel is so well defined on the upper end, we would look to take some profits any time it touches the upper resistance line. So you would buy shares on the lower trend line and trim off some at the upper trend line. As soon as price fails the lower trend support, we are done with it; exit the full position.

The reason we like to buy when the stock hits the support line is because that offers us the best possible risk/reward. We buy the stock and if the price just below where we bought fails, we can easily exit without taking much of a loss at all. That folks is the name of the game. Try to gain maximum reward while taking the smallest risk possible. The market will not always be so cut and dried, often times it will throw a curve ball just to mess with you. But that is when you revisit your trading plan and simply control your risk.

There are not too many stocks that come along and act perfectly for you, but when one does you must be prepared to take action. Home Depot is one of those stocks; enjoy the ride and follow it as long as its cooperative.

Thursday, January 10, 2013

3. Mosaic (MOS)

3. Mosaic (MOS)

Sector: Basic Materials
Producer and distributor of concentrated phosphate and potash

The third stock on my list for 2013 is Mosaic. Mosaic is a fertilizer producer, one of the largest; this is probably my favorite pick for 2013. The reasons are both fundamental ( actual business environment) and technical ( price).

Fundamental- 2012 in the mid-western US saw possibly the worst drought in generations. Crops were destroyed, corn prices went through the roof as crop yields were barely existent. Farmers will be looking to take advantage of higher prices this year and will be looking to produce larger yields than normal to offset losses incurred last year. How does a farmer increase their crop production? Plant more and fertilize more.   Mosaic is not only positioned strongly in the US; Canpotex, who just completed a deal for 1,000,000 tonnes of potash with China's largest agricultural company Sinofert, is 1/3 owned my Mosaic. This deal will largely be in effect for the first half of 2013. Mosaic also just announced their 4th quarter earnings results and beat analyst's expectations, causing investors to buy up the stock.

Technical- The technical picture, in my opinion, looks quite promising.

First of all, this stock has been crushed over the past 5 years. After reaching an all-time high of $168 at its peak just before the financial crisis of 2008, MOS now trades at $58. It has been in a steady down trend since early 2011 and seems to be forming a massive reversal setup over the past year. The price pattern we are looking at is known as an Inverse Head and Shoulders Bottom. The name speaks for itself. There are 2 peaks (shoulders) on either side of a lower peak (Head). The Head and Shoulders pattern is one of the most reliable and strongest price patterns in technical analysis and this one is setting up magically! Now this pattern is not yet confirmed, price will have to move up and hold above the Key Resistance area of ~$62. However, if this comes to fruition, I am expecting a trade up to the $80 area; that would be a gain of roughly 30%! As long as price can stay above the right shoulder low of $48.25, I will be very interested in this setup.

This is a stock that I have been buying over the past month. What I really like to see is the larger reversal setup forming and smaller bullish (positive) patterns forming along the way. I have been trading this stock based on those smaller patterns and am anticipating the larger setup sometime this spring.

Price patterns are a very important part of following price action and are leading tells as to what a stock is setting up to do in the future. They are not perfect and often fail, but they tend to reflect the psychological aspect of investing and trading. Once we get through our top 10 stocks, I will take some time to cover some of the most common price patterns and what they represent. 

Wednesday, January 9, 2013

2. Apple (AAPL)

I know, I know, Apple eh? The stock everyone loves soooo much! Well I don't love it that much, but its hard to ignore a company that has over $50 Billion in cash just waiting to develop the next "cool" product. The other thing that's hard to ignore is the fact that Apple's stock has lost nearly 1/3 of its value over the past  3 months. I am not a fan (at this point at least) of Apple's long-term stock growth, I feel that most of the goodness has come and gone. But that doesn't mean we can't squeeze a little more blood out of this turnip.

The Good:
The company is a monster. They make cool products that are easy to use and fun to play with. They have massive amounts of cash on their books and zero debt. The Iphone, Ipod, Ipad were all revolutionary media consumption products that many people love. Steve Jobs was a visionary, how far out into the future he planned is the only thing holding them back. Their stock hit an all-time high in September 2012 and has potentially created a nice entry point for new investors to get involved.

The Bad:
Well, if you are an Iphone user, the maps are first. The actual map function is not my concern; the concern is that up until the map breakdown, AAPL was more or less flawless. Nothing they made had bugs or glitches, the products were durable and reliable, and the vision of the company was impeccable. This level of perfection is not sustainable in my mind. What happens if more of these "mistakes" continue in the future? Next would obviously be the passing of Steve Jobs. He was the visionary behind the key Apple products,  can his predecessors continue this innovation? I don't believe you can make AAPL a $1,500 stock by simply kicking out an Iphone 12. They are going to need to continue to lead in their industry to maintain their already impossible stock trajectory.

All that being said, I am a trader and don't need AAPL to double from here; I would be fine with a couple hundred dollar gain. If it could retest its all-time highs, I can guarantee you we will make some coin.

The lines I have shown here indicate a new type of support line. The yellow line is called a "trend support". The purpose of a trend support line is that if price is moving higher steadily, it will continue to do so in a somewhat orderly manner. Typically a line drawn along continually higher lows will create a support effect when the price returns to the general trend. As you can see above, the price for AAPL has stayed elevated for some time and is just now coming back to its main trend support (this trend support actually extends to its low in 2008).

This is a significant sell-off and nothing materially has changed with the company. They still make great products and still have excellent financial stability. The primary reason for the large sell-off was due to the fear of higher tax rates because of the Fiscal Cliff nonsense. Many long term investors that had made significant gains in the stock sold before the new year to lock in their lower gains tax These are the buying opportunities we like to look for. Strong companies that have come down in price to provide us with a much cheaper entry point.

What we are watching for is to see price firm up a bit, we don't want to buy this thing in free-fall. However, now it appears that investors are beginning to accumulate the stock. This is another one of those "under the surface" indicators we look for near a potential turning point. We will get into how we analyze accumulation in a stock down the road. I think a perfect place to look for support would be at the trend line ~$500-495. If this continues lower to about $500-495 and holds up, I will be buying. The risk is least right at the trend support because if price doesn't hold there we will simply sell and lick our small wounds. You must be able to sell for small loses if your ideas don't play out. Under no circumstance can you let a stock get away from you. Selling for a $100 loss is much different than selling at a $1000 loss.

Monday, January 7, 2013

1. Hain Celestial Group (HAIN)

To begin reviewing each of the top 10 stocks on our list I thought I would start with my favorite. Now, its not generally a good idea to have a "favorite" stock. The likability of a company or stock can create poor investment decisions and can cost you money. But how are we ever suppose to choose a stock to follow if we don't like any of them? Also I need to clarify that my reason for liking a stock will vary depending on the issue we are looking at. Some I will genuinely like the company, others will just have outstanding looking price charts. What is important though is making sure you stick to your trading/investing rules regardless of how much you "like" a stock.

We will talk all about building an investment plan in future posts, for now we want to simply get used to the basics and learn to watch the price movements of a few stocks. The terms and concepts will take care of themselves once we are familiar with listening to the price.

Hain Celestial Group (HAIN)
Sector: Consumer Products

Organic foods/products producer and distributor

The Hain Celestial Group is a producer and distributor of organic and sustainable products. They own many products I use in my daily life such as Garden of Eatin' chips, Alba and Jason brand products, Celestial Seasonings tea, Arrowhead Mills, and many more. Since I have a 1 year old baby at home now, I use a ton of Earth's Best baby products as well.

There are not many stocks I would consider holding forever (I tend toward trading more than investing), but HAIN is one that I do like for the long haul. As I posted recently, I feel the sustainable and organic movements are here to stay. People will continue to seek out healthier food options for their families and I also believe we will choose toward a more energy efficient future. And HAIN has done nothing but grow at a rapid pace over the past 10 years. The stock has grown as well; after the crash in 2008, HAIN has gone from a low of $11.18 to a high of $73.72 in September 2012. This has been a big winner for me personally as I jumped on board early last year around $39 in February. I have since sold my position and am currently waiting for a new opportunity to buy back in. I believe that time is approaching, but not just yet.

As of the close of trading Friday Jan 4 HAIN is attempting to jump above its support zone after buyers have shown an interest in the stock again around $50. The lines I have drawn above show my best representation of the intermediate term support area. Between the $57 and $50 price range. What we would like to see happen here is for the stock to move above $57 and hold (not just fall right back). That would show that the price has found support in the zone we were targeting and seems to want to push higher. Having a well defined "line in the sand" is very important when buying a stock. You cannot control what the market does, but you can control how much money you are willing to risk.

In this case I think its ok to buy the stock if it can retake and hold above $57. However if the stock continues to move lower (below $50) we would not want to be involved until we found another significant area of support.

 The reason I am not currently in this stock is strictly due to my risk tolerance and the near term price action.
The way support and resistance work is a big part of my reasoning here; once price finds a support area and moves higher, it will challenge a resistance zone. If it breaks above that resistance, the resistance will then act as support for the stock in a new, higher price range. This may seem confusing at first, but let me explain with this chart. If you look back at the stock in the middle of 2012, after its long move higher, the price began to flatten out. It was caught under $57, but always seemed to hold up around the $50-$53 area; in this instance $57 was resistance and $50-$53 was support. However, once the price broke above the $57 resistance, it shot up to $73. From a strength perspective we wanted to see the price hold up at $57 if and when people decided to sell; we wanted to see the prior resistance become the new support (this is called "polarity" in Wall Street lingo). As you can see above, the $57 level did act as support for about a month or so, but eventually broke down back below. When this type of price action occurs the support area now becomes resistance again.

 I know, I know, your head is probably spinning a bit! Thats ok, its tricky stuff at first.
Just remember that this is all trading is. Once you figure out how to identify support and resistance areas you will have almost everything you need to make educated, high probability purchases or sales.

This is just the first example of our 10 picks. I am willing to bet that after we cover all 10 stocks, you will have a firm grasp on how to identify support and resistance. Be patient, its a learning process!

Sunday, January 6, 2013

10 For 2013

Welcome back! Its a new year and its time to begin setting out our plan for 2013. At the end of every year its a good idea to look back at what we have learned from the past year and what we hope to improve on in the coming year. Since we have just begun we don't have much to go on from last year, so we will just jump into how we want to plan for 2013. First and foremost, I want to say that this is not a recommendation to buy or sell any of these stocks or in any way guarantees their future success. But we do like to look around the markets for possible opportunities and take advantage of good risk/rewards that come our way.

This will be the beginning of building a watch list of notable stocks we would like to follow for the year; some of these may do well, some may do poorly and others may likely not do much at all. With these 10 stocks I would like you to take some time within the price charts and see if and where you would consider buying them. And thus begins the introduction to supply and demand.

-Demand occurs when the buyer feels that the price of an object is a bargain vs. its true value.
-Supply occurs when potential buyers feel that the price for an object becomes too expensive relative to its actual value and decide not to buy.

What then happens during each of these instances is that when buyers feel like they are getting a good deal on the merchandise, they buy some. As more and more do the same and the availability of the product becomes less, potential buyers will be willing to pay more than they did previously and prices go up.
The opposite it true on the other end of the spectrum, when prices go up to a certain point the new buyers lose interest and move onto the next deal. What then happens is that the price for the original product begins to decline until a fair price is decided upon where the buyers regain their interest. This is how the stock market works in a nut shell. Traders are constantly speculating on the future values of stocks and deciding if the value is a good deal or if it is overpriced; thus we get what is called support and resistance for price.

Support and resistance is just Wall Street gibberish for supply and demand (the other way around actually).
Support = Demand
Resistance = Supply

How it works within the markets is that there are prices for a stock that act as a floor or supporting area and higher prices that act as a ceiling or place new buyers are resistant to buy. The support area for a stock is a lower price that many have decided is a good deal for the stock's company value, and they buy it there. The resistance area is a higher price that new buyers have decided is overvalued for the company it represents and don't wish to buy. As you can guess when buyers are interested in a price and buy, the stock goes up.  When they are not interested in a current price, they don't and the stock goes down. Therefore support levels are good areas to buy a stock and resistance levels are good places to sell a stock.

We will get into more concepts that involve support and resistance levels in later lessons, but I just wanted to give you something to think about when looking at these 10 stocks. I want you to look at the charts, preferably going back 1 year. Try to identify where the price seems to stabilize and where price seems to fail.; these will be your support and resistance areas. Your plan will be to buy stocks at support levels and sell them at resistance levels.

Without further ado here are my top 10 stocks to watch in the new year:

1. Hain Celestial (HAIN)- Organic foods producer
2. Apple (AAPL)-  If you don't know what this one is then I will have trouble helping you ; )
3. Mosaic (MOS)- Fertilizer and Potash producer
4. Home Depot (HD)- Home Improvement stores
5. Cummins Engines (CMI)- Industrial Engine producer
6. Ford Motor Co. (F)- Auto Maker
7. Wells Fargo Bank (WFC)- Banking
8. 3d Systems (DDD)- 3d Printing manufacturer
9. Enbridge (ENB)- Canadian Oil Pipeline builder
10. Renewable Energy Fund (PRW)- Fund containing 51 energy efficient companies

Well, that's my list as of the beginning of 2013. I could go into great detail as to why I feel the way I do about each stock, but I will spare you the reading for a future post. For now take a look at each of these stocks (the ticker symbols are in parenthesis) and try to get some idea for how the stock seems to be moving (higher or lower). Next try to identify the main support area and resistance area for each stock; I will post over the course of the next week about each one and show you my support and resistance areas.

Welcome aboard! This will mark the beginning of your journey to successfully managing financial markets.

For further reading on support and resistance (Highly advised!) check out Investopedia.com and search "support and resistance"

Friday, January 4, 2013

PBW is a Buy

Thanks to my wonderful wife I have discovered a possibly hidden gem. Renewable energy investments have been absolutely clobbered since the market crash of 2008-09. PBW is a fund of environmentally sustainable companies, most of which are largely hated on Wall Street. Names like Tesla Motors and First Solar, stocks that have been largely held down because of pro fossil fuel energy policy.

I like the renewable energy space for many reasons. First, I think its an absolute necessity for the future of the world's and our health to encourage the use of renewable resources. Potentially favorable future policy by governments should encourage more investment and growth throughout the industry. Ok, enough with the pie in the sky, touchy feely stuff! The other part of my interest in renewable energy investments is the investments!

Just looking through the top 10 holdings within the PBW fund I can see that the names are heavily shorted(being bet against) by investors. This negative positioning by a large number of investors could create a huge upside move should this fund get some buying momentum behind it. Speaking of momentum, this is another huge plus for this space. Two widely used momentum indicators MACD and RSI are showing whats called a positive divergence. This is where the price of the fund has continued to make new lows but the momentum has not. Basically momentum is hinting that a possible change in trend is building under the surface.

Now, a divergence by itself does not guarantee that the stock will go higher but it is a good sign of strength building. This is a chart showing weekly price bars, so you can see that this is a long term development and will require some patience to play out completely. It is generally not a great idea to try to bottom pick a falling stock, known as "catching a falling knife", you usually end up getting cut.

However because of the divergences present and near term relative strength I dont feel like we are not trying to bottom pick this too much. Also important, price has retaken the 200 Day Moving average(price average for the past 200 trading days) for the first time since the crash in 2008.
Plus other moving averages (20 and 50 Day averages) have begun to flatten out and turn higher indicating the beginning of a trend change

All this being said, I think it is only reasonable to look at a pick like this as a LONG term investment and make sure you don't blow your whole wad in one purchase. You will want to spread out your buys of this stock over time. The renewable energy movement will not explode overnight and neither will this investment. But it is important to look around and see all the sustainable changes going on all around us. The gas-hog loving, mainstream auto industry is making hybrid cars at the highest rate ever. Solar and Wind renewable energy farms are growing and gaining popularity. Even through our daily diets we are moving toward more sustainable, organic foods.

This is a hated investment space and since the funds inception in 2005 the current value of the fund is down roughly 70% and more than 80% from its all-time high in 2007. Remember what I said about everyone leaning in the same direction in the market? The market rarely rewards that type of behavior for long. And when the trend change does come you get a huge tailwind due to all of the under-invested and wrongly positioned players who have to reverse their position. 

While an investment can always go lower, I feel that the hate is overdone in renewable energy and we could be seeing a generational buying opportunity unfolding right now. I am buying this fund and will continue to do so for the future. Now, I don't want you to make this holding your entire portfolio or even too large of a percentage of your total holdings. But I do think its prudent to begin looking at the renewable space for profits now and in the future.

Tuesday, January 1, 2013

Tools I Use

Now that we have begun to discuss the recent past of the markets and briefly prepared for our investing future, we need ways to follow and navigate the daily and/or weekly happenings of the market action. The most important part of my market analysis involves following the price action. This is not nearly as complicated as it seems and i will show you the tools i use to track the market progress.  To effectively follow the markets you don't need a 24 news feed from CNBC, you need a charting program available on the internet. The charting program I use and recommend is FreeStockCharts.com. This is the best free charting program I have found and is very easy to customize your company's stock charts. Here is a quick screen shot of a chart I have made from my watch list:

This is a saved chart but rest assured that they appear much clearer and larger when you make them yourself! This is a chart of a big winner this year, Home Depot (HD). Very basically the lines that I have drawn indicate that the stock is in a steady uptrend and the price bars are approaching the lower trend line (this indicates a nice risk/reward opportunity to buy the stock). The arrows I have added for my own reference to where I have bought and added shares or sold shares.

The point is that this is a very easy to use, free program you can get online. We will be referring to a stock's price chart very often in our studies, so it is important that you familiarize yourself with them. We will begin looking at what these lines (trend lines, support and resistance areas, etc) mean and how they are used in a near future post.

Other tools (All Free!) you will like to reference are:
-Investopedia: this is essentially a dictionary and educating site that will explain any investing term or concept.
-StockCharts.com: this is another charting site (free) that also shares a blog with frequent updates on market happenings
-Google.com: simply search any term, company name or concept in Google Search and you will find tons of information.
-CNBC/Yahoo Finance: Sometimes we need news. Just make sure you don't get too much of it. Breaking news is fine, trading the ideas on CNBC is not.
-Finviz.com: This is another charting and information website. I mainly use it to track the Futures, Currency, and World Markets.

Blogs I Like:
-JoeFahmy.com: Joe is an experienced trader who has a very good sense of market sentiment and offers excellent general trading advice.
-AllStarCharts.com: Excellent trade setup and watchlist site. J.C. Parets frequently discusses trade ideas and many notable stock charts.
-TheKirkReport.com: This is actually my favorite site and is the site that exposed me to the other blogs I like. Unfortunately this is a subscription based site ($100/year) so you need to be a member to see new content. Although I will say that if you take your personal trading/investing seriously I would consider the small yearly fee to subscribe. Mr. Kirk has helped improve my trading more than any other influence. This is an education based site and does not offer direct buy/sell advice.
-bclund.com: This is a very well written and humorous website, but still with lots of good trading advice and setups as well.

That is it. The list I reference when I need market information. I really only want beginners to focus on FreeStockCharts.com and Investopedia. Bookmark these into your browsers and get familiar with the layout. You will find most of the information you need to invest successfully in these two sites; Investopedia for questions and concepts, FreeStockCharts for streaming price action.

In our next post we will talk about building a list of stocks you will want to follow. This will require the FreeStockCharts program, so go ahead and sign up for it (they require your email and name, really though they rarely send me something and its very legit). Once you have the charting program, take some time to think about a few stocks you may be interested in. Think about the company you work for (AT&T, Costco, etc) or companies whose products you use (Apple, Buffalo Wild Wings, Home Depot). Write a couple down and type the stock ticker symbol into your charting program (you can find the stock symbol for any company from Google) and just take a look at the price movement in the past year or so. Is it generally going up, down, sideways? These are the first observations you will need to pick your stocks to watch. We will look into some specific companies from my list in the next post to give you some idea of what we will be searching for.

Thanks for reading. I will see you in a day or two.