What NOT to Look For

Energy still looks lousy

Last week I posted what to look for when buying a stock. These were high probability setups for strong upside with limited risk.

Oil and Oil Stocks look about as opposite to that as possible. Today we're looking at the Top 10 holdings of the Energy etf, XLE and Lumber Liquidators.

WEEKLY CHARTS

XOM

CVX

SLB

KMI

EOG

COP

OXY

PXD

APC

WMB

With the exception of KMI, which is still in a manageable uptrend, the entire Energy group looks weak and in a clear downtrending cycle. I know this is the area most people are focused on and trying to call the bottom in oil. But this trading behavior is the best way to implode your account equity.

Oversold can become more oversold and cheap can always become cheaper. These are not reasons to own downtrending stocks, they are excuses for losing money

Energy will present a fantastic opportunity, eventually. But we must be patient until the trend begins to turn in favor of the Bulls.

Garbage IN, Garbage Out

Lumber Liquidators (LL) Weekly chart

The big story in the news this week was the investigation and obliteration of Lumber Liquidators. A 60 Minutes expose discovered some major health and quality violations and the stock is currently down -45% from last Friday's close. That's horrendous.

What's more horrendous is that people are actually Long this stock!! 
I mean...WOW! Really?! What possible reason could people have to own this stock at any point in the last year?

As you can see LL has been trapped below a declining 20 WMA since the end of 2013 and is down more than 66% from the initial violation of the 20 WMA on 11/22/2013. Each attempt at a rally has failed at or near the declining 20 WMA.

Momentum (a lagging indicator) has been in a bearish range since April of 2014. That "lagging" signal still came at a weekly closing price of $85.68...Still a 61% markup from today's close.

If you had disregarded all of that prior decline and sold at the close LAST WEEK, you would have saved yourself 45% of your position equity.

Its never too late to sell, but the point is you should never be in a situation like this to begin with. The time to exit this stock was in early 2014 after seeing lower lows and lower highs while Momentum broke into a downtrending environment.

If you adopt a trend based approach you won't pick the bottoms and get out at the tops, but you will also never implode your account by falling into the trap of buying a meltdown. Most advisors will talk about compounding returns and long term results. But research has shown that avoiding negative compounding is much more beneficial in the long term.

If you lose 50% of your money it will require a 100% gain just to break even. Avoiding losses is the #1 thing you can do to improve your long-term returns. To do this you need only to identify highly probable situations and have the discipline to stick to a consistent strategy of buying winners and not buying losers.

"Temptation is always present for us to fight the overall trend no matter which direction that trend may be." -Charles Kirk