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.

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. 

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.

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!

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"

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.

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.