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No. of Recommendations: 15
Well, given the discussion today ... I thought I would post a best of INV44. Two or three months ago I went through this board and cut'n pasted into a WORD doc. what I thought were the best posts on this board. It is 31 pages long in that WORD doc., so we will see how long it is here. To be honest, it is the best of INV44 with some sprinklings of DbPhoenix in there, since INV44 was the main contributer of the board for the first 2/3 of this boards young life.

I just took a quick stroll through it and it looks like a combination of 29 posts by INV44, and 3 posts by DbPhoenix ... also, there is a discussion about 2/3 of the way through it between DB and INV44 on buying pullback bars ... so there may actually be a few more posts in there than what I documented. Unfortunately for anyone who wants to print this out, I do have all the post#'s, board, author, etc. in bold on my WORD doc., but it will not show up bold when I post it here.

I would recommend hitting the print button on this one. I hope it formats over nicely.

Prestone

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

83 – Weinstein – inv44 – (7/29/01)

To NewMBA (in response to your request): Thanks for asking. This will probably end up being a fairly long post. But if it helps you move in a direction which is profitable for you, then it'll be worth the time spent writing it.

My strategy for investing has four basic components. First, I do a detailed analysis of the economy, the major market sectors, and the stock groups that I follow. Second, I take a detailed look at stocks in order to make and execute trading decisions. Third, there is the mental side of things; by this I mean the emotional discipline to follow my strategy. Last, but definitely not least, there is the business side of things, which some writers call money management. I'll try to describe each of these components in this post, which may get rather long before I'm done. If your eyes start to droop, it won't hurt my feelings at all.

But first a brief bit of history may be needed. (Those who don't like personal historical perspectives should skip to the next paragraph). I spent years trying a number of approaches to investing, including dollar-cost-averaging, long-term buy-and-hold, market timing using the ideas in Martin Zweig's books, mechanical momentum investing, you name it and I've probably tried it. And yes, I spent my share of time looking for the magic algorithm which would put me in at the bottom and take me out at the top of any market move. I recently retired in my early 50's (on the verge of geezer-dom) from a career in the computer field, so I had lots of opportunity to use the latest computing power available to crunch numbers in every way I could imagine. I even did my Ph.D. dissertation in artificial intelligence, building neural networks to find a market timing model. This was an interesting academic exercise which delighted the dissertation committee, but it really led nowhere except to the degree itself. Finally, some years ago it became very clear, at least to me, that the flawed piece of the equation was me. And if I was ever going to be successful enough with my investing to retire early and enjoy the best part of life (I now teach at a university part-time, manage my investments, take a walk every morning, and spend lots of time with my wife of 30+ years), I needed to fix the flawed component – again, me. So I stopped trying to squeeze juice out of the data and started reading and learning. It was only after I realized that three university degrees and years of professional experience did not matter at all to the market (in fact, the market could care less about our qualifications), that I was able to approach things in a humble fashion, thus opening myself up to watch and learn. After a couple of years of looking at the market in a macro fashion and continual reading and learning, I started developing my own theories of stage analysis. Then I found the Weinstein book, which helped to clear things up and put me on a path toward developing my own strategy, which has lead to increasing success and profits over the past decade or so. Ok, enough of the history, now on to some of the details.

The economy, when viewed over a few decades, traces out a generally recognizable pattern of four stages. My names for these stages are “recession” (stage 1 bottom), “expansion” (stage 2 advance), “exhaustion” (stage 3 top), and “contraction” (stage 4 decline). Each complete cycle takes an average of 3-5 years, but sometimes more and sometimes less. While there are no simple indicators we can use to detect each stage, there are a number of economic indicators available which, when looked at in the aggregate, can give us a pretty good picture of the current stage of the economy. In the simplest form, the widely-reported and so-called leading, coincident, and lagging economic indicators can be used. I like to look at more detail, so I also look at individual indicators such as the work week (regular plus overtime hours), unemployment (new plus continued claims), industrial production, consumer confidence, consumer spending, the yield curve, the flow of money into and out of equity funds, interest rates, inflation, commodity prices and their relationship to bond prices, housing starts/permits, money supply (M2), sales activity, personal income, etc. All of these are available online at a variety of sites. The important aspect of this analysis is to do it weekly so you can start to see trends emerge. The result is a reasoned opinion about the current stage of the economy, which is important to investors. Certain market sectors tend to do well during different stages of the economy, which improves the probability of successful trades. So if we feel that we understand the current economic cycle and its trend, we stand a better chance of picking the right market sector for our investment decisions.

After looking at the economy, I then look at the major market indexes/sectors. From my perspective, each major index/sector that I follow is a market of its own. I follow the DJIA, S&P500, and Nasdaq indexes, and the Technology, Energy, Healthcare, Finance, Cyclical, Consumer, Transportation, and Utilities sectors. The objective is to determine the current stage of each index/sector as well as the strength or maturity of that stage. I do this by looking at the charts of the indexes/sectors, examining price, volume, relative strength, and a few indicators. Everyone has his/her own favorite indicators, I guess; for me, the MACD, RSI, ADX, OBV, and ROC work the best. Even though I use TC2000 for chart analysis, I don't spend much (if any) time looking at their proprietary indicators. I tend to look at indicators in the aggregate, looking for a consensus rather than trusting any one of them individually. The important thing with the market analysis is to accurately detect each market's current stage and trend strength. As with the economy, I look at the markets weekly. I'm looking for agreement between the theoretical opinion of which markets should do well at this economic stage and the empirical results of which markets actually are doing well. One final thing to remember is that the markets tend to anticipate the economy. This means that if a market sector tends to do well during an economic expansion, then it will usually start moving up prior to the economy itself.

This takes me to analyzing groups. TC2000 includes the 200+ Media General industry groups. I don't look at all of them, but I have about 75 or so that I follow closely, so I do the same process as described for market analysis in the prior paragraph. The goal is to determine the stage and trend strength of each group that I follow. However, one important thing to say here is that while I let the market analysis take precedence over the group analysis, I look at the groups for early indication of a trend change in a market. For example, if a group (such as Diversified Electronics) starts looking good, that will give me a possible clue that the Technology market may be improving, but I won't make a move in the group until I see evidence of a trend change in it market. Sure, this keeps me out of early-moving groups for a while, but it also reduces the number of false signals. Once again, this is done weekly.

I guess a brief word about charts is necessary at this point. I use weekly charts covering about two and a half years as my primary stage analysis tool. Daily charts covering about a year are also useful, but only to supplement the weeklies.

After looking at the economy, the markets, and the groups, I'm ready to get to the second part of my strategy – the trading rules for stocks. Let me say here that I won't take a position in a stock, either long or short, without confirmation that its group is already moving in the same direction. That is, for long positions the group must already be in a stage 2 advance, and for short positions the group must already be in a stage 4 decline. I start my search for long positions with companies that have decent earnings growth – at least 25% for the most recent quarter over the same quarter last year. Acceleration of earnings growth is a bonus. I also limit my search to stocks selling for at least $10 per share, and which trade at least 100,000 shares per day. Then I look for stocks that fall into my buy or short categories. For long positions, I only trade two situations: a bounce up from a pullback after an initial breakout from stage 1 into stage 2, and a move above a flat consolidation base in the midst of a stage 2 advance. I used to try to trade the initial breakout, but found that my success and profits were greater by waiting for the pullback. If it doesn't happen, I don't trade that stock at that time. I set initial stops just below support in both cases. The pullback/bounce situation has a stop just below the new support level (the old resistance level at the top of the stage 1 base), and the consolidation situation has a stop just under the top of the prior resistance top of the flat base. I also do some fairly extensive analysis of the chart, looking for the upside potential compared to the downside potential. If I can't find at least a three-to-one upside/downside (potential profit / potential loss) quotient, I don't trade the stock. For this analysis I use daily charts (candlesticks). Then I use support levels and trendline analysis for trailing stops, with some additional sell rules I've developed over the years. The central idea behind the sell rules is that I look at the various possible alternative things that can happen after I buy stock, and then develop a primary hypothesis regarding what I anticipate a stock will do, based upon historical analysis. If and when it proves me wrong, I close the position. But as long as it proves me correct, I hold the position.

For short positions, the situation is a little different. I'm looking for groups that have already started a stage 4 decline. I still limit myself to the same starting pool of stocks because there are always plenty of candidates. I then look for stocks that are either just breaking down into a stage 4 decline or that are in a flat consolidation area after already declining from a top. I like to short stocks just as they drop down below support in either case. I set initial stops just above the new resistance areas (prior support) and follow them down with trailing stops using trendlines as a basis.

The third part of my strategy is the mental side. Controlling my emotions is probably the biggest (and hardest) part of investing. We are humans and as such are emotional creatures. My research (both into the investing public at large and into myself) has found that there are four prevalent emotions which most investors tend to exhibit at various points in the cycle of a market. At a market top, the prevailing emotion is greed, and everyone seems to believe that things just can't do anything but go higher. As the top gives way to the initial decline, greed gives way to hope; that is, hope that prices will come back up. Then, further into the decline, hope finally starts to give way to fear, which takes over at the bottom – fear that prices will never stop going down. Then, as prices start to move back up, fear slowly gives way to doubt – that is, doubt that things will keep going up. From my own perspective the only emotion which I ever want to feel while trading the markets is satisfaction – that is, the satisfaction that I'm following my trading rules and not deviating from them. Most of my mistakes over the past several years have come at times when I tried to outsmart my strategy, usually driven by one of the four emotions I mentioned earlier. So every day I ask myself “what emotion is driving me to take or maintain this position?” If the emotion is not the satisfaction of following my rules, then I don't take or maintain the position. Sounds a little like a robo-investor, but it works for me. We just have to learn to think for ourselves and trust our own judgment and not be swayed by the news or the opinions of others. Another other important part of the psychological aspect of investing is personal goals. If we don't have goals, we don't really have a reason for investing, and the results have no meaning. These goals need to be personal and internalized. Basically we need to know where we are going, when we want to get there, and then commit to doing what we need to do to make that happen. We also need to look at investment timeframes and determine which is the most suitable to us. I've tried everything from day-trading to long-term buy-and-hold, and I have come to the conclusion that intermediate/long term trends as identified using stage analysis (as I define it) constitute the best time horizon for me – they just seem to make sense and I understand them. Finally, there's the issue of what we focus on when we're trading. It is so very important to focus on making successful trading decisions and not on making money. Good decisions and thus good trades will bring monetary results if our method is a proven one and if we follow its rules. Make no mistake about it – this is a highly personal issue, and one each of us needs to work in privately. Some references I'll recommend on developing the mental side of investing are Sperandeo (“Trader Vic”), Pring (“Investment Psychology Explained”), Douglas (“The Disciplined Trader”), and Neill (“The Art of Contrary Thinking”).

The last part of my strategy is the business side – actually managing the trading activity. It helps to think of myself as having two roles – one as the investor, and another as the CFO of my investment account. This involves how many positions I will hold at a time, the size of each position, how I divide money between initial and follow-on positions, how much margin I am using, the percentage of my account each position can be (the amount of the account at risk with each position), etc. I've spent considerable time researching and applying topics like profit/loss quotients (sometimes called reward/risk), win/loss quotients, expectancy, and the like. All of these are important and worthy of study if we want to mature as investors. The basic message with this part of the strategy is to operate it like a business, not like a hobby. I've found that the more time I spend on this, the better my results have been.

One final comment is that each of us must come up with a strategy for investing which fits us. Trying to use my approach – or anyone else's approach – is a mistake. We all need to personalize what we do in the markets to how we think and work. That way the rules are easier to follow and the decisions are more natural.

I guess that about sums it up. I hope you're not sorry you asked for this. If you've read this far, I must commend you for your patience. I am open to comments, criticisms, suggestions, and even the occasional “geezer” remark.

89 – Weinstein – inv44 – (7/29/01)

To NewMBA:

You're quite welcome. It's was a beautiful morning and I spent an enjoyable hour sitting on my porch with a cup of coffee and writing the post.

For the books, I'd recommend that you start with the Pring book ("Investment Psychology Explained") and then go with Sperandeo ("Trader Vic"). The others could come later.

When you ask about profitability, I assume you're asking about annual returns and that sort of thing. I'll answer your question this way. I have two overall investment goals:

1. I will never have more than one losing month in a row or more than three losing months in any one calendar year.
2. The net return for my investment account will be at least 25% for each calendar year. (This may sound a little low to some, but it's just a yearly minimum, and it applies to every year, not just the "up" years. Also, I'm at a point in life where I'm as interested in wealth preservation as I am in wealth generation.)

To answer your question, rather than give exact percentages, I'll just say that I have been able to accomplish these goals for the last eleven years in a row, and plan to keep accomplishing them for as long as I choose to stay active in the markets. Beyond these general terms, I would not feel comfortable discussing my returns. Some years (such as 1999 and 2000) have certainly been better than others.

I'm personally convinced that there is always enough movement in the markets for my yearly net goal to be feasible. For example, during the first half of this year, the Automotive, Health Services, Construction, and Leisure groups have started or continued some pretty nice stage 2 advances, with plenty of stocks to buy on the long side, while the Energy and some Technology groups have moved down, giving us some excellent short opportunities. And that was in a pretty dull overall market climate. It's just a matter of staying on top of things and then executing when your rules tell you to.

99 – Weinstein – inv44 – (7/29/01)

[Any chance you could elaborate on how you might anticipate a stock's behavior based on historical analysis?]

Sure. Whenever I consider taking a position in a stock (either long or short), I look at the recent history of what's been happening with similar stocks (that is, other stocks in this group or stocks in similar groups in the same market) which have already started moving. Since I am hardly ever looking at the first stock in a group making a move, then I have usually have a good bit of data for consideration. For example, if a high percentage of stocks already moving up in the same group or in similar groups have broken out, then pulled back, and then bounced up from the new support area, I will expect the stock I'm watching to do the same. Even though stock patterns and cycles tend to repeat, each new market cycle is a little different from the past. Just look at the number of failed breakouts and short-term rallies we've had this year in some of the tech sectors. Anyway, if the stock does what I expect it to do (breaks out, pulls back, and then bounces up), then I'll go ahead and take a long position. Following this pattern, if similar stocks have then continued with a strong upward move, I'll expect my stock to do the same. This will constitute my primary hypothesis for this stock. Other alternative hypotheses will include such scenarios as (1) the stock may not continue up after the bounce, but rather just sit there; (2) the stock may falter after the bounce and break below support; (3) the stock may move up a little and then break back down; (4) etc. I'll come up with a response (basically a trading rule) for each hypothesis in advance. If the stock proves my primary hypothesis right, my trading rule will tell me to stay in the position. If it proves me wrong, meaning one of the alternative hypotheses came to pass, or something else entirely different and unexpected happened, then I'll sell out and look at another stock. If my primary hypothesis is correct, then after a move is underway I'll again look at what other similar stocks have been doing, and come up with another set of hypotheses, from which I'll derive trading rules for the open position. These basically become the sell rules for this position as it progresses. (I do this every day for every open position).

After I close a position, I look back at my hypotheses. If I was correct, then it reinforces the primary hypothesis for the future. If I was not correct, then I need to study my reasoning to see where it was flawed.

102 – Weinstein – inv44 – (7/29/01)

To NewMBA:

You asked about indicators. Let me first suggest that you look at a copy of John Murphy's book “Technical Analysis of the Financial Markets” (my favorite book on the subject). He's also written a shorter version titled “The Visual Investor” which is pretty good, especially for new investors. Two other books you might look at are Pring's “Technical Analysis Explained” and “Technical Analysis of Stock Trends” by Edwards and Magee. And I'm sure there are others just as good. My suggestion is that you go to the bookstore and look at all of them, and then select the one that makes the most sense to you.

Any time you use an indicator, it is very important to understand what it is and how it was developed. Most indicators are derived from price and/or volume. So before you start believing in an indicator, understand what it is saying. Then it's important to get lots of experience interpreting indicators in different situations. And I must stress that I have never found one single indicator to be worth following exclusively. I look at the indicators that I understand and try to find some sort of consensus of opinion; I also give no greater importance to any one indicator over the others, but see them as fairly equal. It's also important to state that I'm looking at intermediate/long term trends, using weekly charts. These same indicators can give different readings when looking at daily charts. In addition, some indicators give what I call an “early” indication, while others give a “confirming” indication. Finally, and this is of the highest importance – I never (repeat, never) make a trading decision based on indicators alone – even if all of them are singing the same song and in key and in three-part harmony. I always wait for the price and volume action to confirm what the indicators are saying before taking or closing out a position.

With all that said, I will try in this post to give, in brief fashion, a quick description of how I use indicators. This is certainly open for much debate; what I have to say here is what works for me and may not work for you.

MACD: I use a 12-26-9 setting (simple). Early indications are given by the MACD line crossing the signal line (crossing above when both are below zero, crossing below when both are above zero). Confirming indications are given when the MACD line crosses the zero line after having crossed the signal line in the same direction. I also look for MACD to diverge with price, and for MACD trend reversals.

RSI: I use a 14-9 setting. Early indications are given by a move away from an extreme reading (down from overbought, up from oversold), and confirming indications are given by crossing zero in the same direction. As with MACD, I also look for divergences and RSI trend reversals.

ROC: I use three ROC charts – 6wk, 13wk, and 26wk. (A note for TC2000 users: TC2000 does not support ROC on price – who knows why - but if you set up an invisible 1-day moving average on price, you can then set up the ROC on the 1d MA. Silly but it works.) Early indications are given by a move up or down from an extreme reading, and confirming indications are given by crossing zero. I usually look at these three ROC charts together for agreement. I also look at divergences with price and ROC trend reversals, but the crossing of zero seems to be the best signal here. I've also tried a few moving averages on the ROC lines but didn't get worthwhile results.

ADX: This measures the strength of a trend. It's not available in TC2000 but is at Stockcharts.com. I use ADX for early warnings of the weakening of an uptrend or downtrend. A crossing above and below 20 is also important, but I usually just look at the slope of the ADX line for early signals.

OBV: I set up OBV with a 30wk MA (simple). Early signals are given by a cross of the MA and from trend reversals of the OBV line. Confirmation signals come from crossing the zero line and a direction change of the MA line. I also look for divergences with price.

RS: I set up RS based on the S&P500 and use a 30wk MA (simple). Early signals come from the RS line crossing its MA and from RS trend reversals. Confirmation signals come from the MA changing direction. RS also tends to agree with price, so divergences are meaningful. I don't give much weight to the relationship of the RS line to the zero line. (For TC2000 users, RS itself doesn't have a zero line, but if you set up an invisible MACD graph on the same chart, you'll get a zero line. Another silly work-around for an otherwise excellent product.)

I hope this post accomplishes two goals: (1) answering the question about my use of indicators; and (2) initiating some in-depth discussion about how indicators can be used in concert with stage analysis. I have spent many dozens of hours looking at charts and trying to see how the indicators could have helped to give either advance warning or later confirmation of a trend change. The above summarizes what I found. I'm sure there's more to know and I'm looking forward to the opinions and findings of others.
145 – Weinstein – inv44 – (7/31/01)
To Jean:

["You don't happen to have a copy of this "Cheat sheet" in word you could copy and paste to the board? It would be nice to see what other people think are important indicators."]

Here's the basic information. For each indicator, I've included what I look for and whether it's an early or confirming signal. Most of this is pretty obvious stuff but it might be helpful when you look at it in the aggregate.

RS: Cross its 30wk MA (early), Diverge with price (early), MA change direction (confirm), RS trend reversal (confirm)

MACD: Crossover after moving back toward zero (early), Diverge with price (early), Cross zero (confirm), Trend reversal (confirm)

RSI: Reversal from extreme (early), Diverge with price (early), Cross zero (confirm), Trend reversal (confirm)

ROC: Sharp reversal of direction (early), Diverge with price (early), Cross zero (confirm)

ADX: Change direction (early), Cross 20 (confirm)

OBV: Cross its 30wk MA (early), Diverge with price (early), Cross zero (confirm), Trend reversal (confirm), MA change direction (confirm)

Beyond these simple uses of the indicators, there are a few more sophisticated things you can do. For example, some of them actually form trendlines and chart patterns, which can be helpful when looking at price trends.

You should probably build your own reference table once you decide which indicators you trust. For example, you don't see Stoc listed here, since I don't use it. Once again I must stress that these indicators are only secondary to price and volume.

106 – Weinstein – inv44 – (7/29/01)

You are correct in that I see price and volume as of primary importance, and the indicators as secondary. Often, the indicators will give an advanced, early signal, and I always wait for the price and volume to make their move before making a decision. That's what I meant by waiting for price and volume to confirm the indicators. So I guess it could be said either way. In any case, price and volume are the final determinants of an investment decision which I make.

As regards TA books, I forgot about Schabacker, and it's sitting right on my shelf as I write this. Agreed - it's an easier read than Edwards and Magee. I still prefer Murphy, but that's a personal opinion.

One thing I probably should have said in the earlier post is this: If someone is just starting out looking at indicators, it's tempting to look at all of them. My suggestion is to look at one (and only one) until it is fully understood, and then add a second one, and then a third, etc. Much the same as looking at chart patterns.

120 – Weinsteing – inv44 – (7/30/01)

To jitterbug81:

["My biggest question right now though is how do you keep track of all this research? Do you keep a raft of notebooks, like, one for each indicator, or one for each stock, or what? I don't know how to get organized here, and I am swimming in data."]

You're on the right track. It's a matter of getting and staying organized. This answer may ramble a bit (remember I'm approaching the geezer stage of my life cycle).

I used to keep track of much of my stuff manually. Then, a few years ago I created an automated and very personalized system which I now use to collect my weekly analyses of the economy, the markets, and the groups which I follow. I have a similar system to keep track of stocks I'm watching; I also keep a watchlist on yahoo which I can look at during the day to see if something has happened of interest. I created these systems using Oracle on my PC and they do a fine job for me. For current positions, I keep all relevant data as well as my working hypotheses in a spreadsheet. At this point there are no automated links between the databases and the spreadsheet. In fact I'm not sure that will ever be needed.

For the indicators, I put together a single-page "cheat sheet" which lists the indicators and what early/confirming signals each of them might give. I keep this near my computer so I can reference it often. Even though I've become very familiar with the indicators, it's still important to check the sheet from time to time.

I also use the "notes" feature of TC2000 to make personal comments on the charts I look at. I can then sort the charts by personal note date to find charts which I thought were interesting. I know a few people who really use this feature of TC2000 and they swear by it. I just use it for random comments which come to mind while scanning charts.

One other thing that's helped is keeping a weekly schedule of what needs to be done each day. For example, on Mondays I update the economic, market, and group analysis data.

Finally, I keep a detailed daily journal of my trades, emotions, decisions, and anything else that I'm doing. This has become very important to me over the years, and I regularly go back and read over past months to make sure I'm on track with my rules.

My advice is to understand yourself and how you work. Find out what type of organization would fit your personality. I know some investors who use 3-ring notebooks, and others who use automated systems like Quicken, and others who like myself have built their own automation, and even one guy who keeps his ideas on paper napkins in a shoebox (no kidding). Once you know how you work, then find ways to build some organization into your workflow. I don't think it's necessarily required to change how you work as long as you can organize yourself.

433 – Weinstein – inv44 – (8/23/01)

To Jitterbug:

[In your chart stage analysis, where do you look for resistance, how does resistance figures into your analysis?]

Actually, I don't look for resistance (or support). Rather, I look at the charts and see if resistance (or support) is evident from the price and volume action.

Resistance is where the price has stopped going up in the past, and I usually look at resistance as more of a "zone" than a single price. I'm sure others have their guidelines for this; I usually consider any top that's within about 5% of a prior top to be in the same zone. For example, if a stock moves up and stops at 100, and then later moves up and stops at 103, and the once again moves up and stops at 98, it looks to me like there's resistance being encountered in the 98-103 range.

There are many factors which can influence the potential strength of a resistance zone (the likelihood that the price will stop in the generally same neighboorhood again), such as the number of times the zone has been touched and the price has bounced back down, the length of time since the last touch and bounce, the comparative amount of volume when the resistance held, etc. Many of the books on technical analysis cover this in detail.

Perhaps what's more important is to understand the reasons behind the resistance (or support). This involves a detailed study of the concepts of supply and demand as they relate to a company's stock. If there are a lot of shares just waiting to be unloaded at a given price level (also know as overhead supply), then resistance is likely to be encountered at that level. Likewise for demand which can result in support. Again, it's well worth the time to fully understand these concepts - make them your own, so to speak.

In terms of stage analysis, if you're looking at a stage 1 stock, you should look at the base carefully and think in terms of the "accumulation" process. Look to see if the stock is being slowly and quietly bought up (by institutions). To do this, you'll need to look at the price and volume very closely, because the signs of accumulation, although fairly clear, are often subtle. Also, in a well-behaved stage 1 base, there should be a fairly evident price zone at the top of the base which has turned back price advances a few times. This is the resistance zone that we want to see broken on strong volume in order to start a stage 2 advance. (This is way over-simplified, but it should get you thinking). This advance will often be accompanied by the price crossing above the moving average - nothing magic here, since if the stage 1 base has taken its time to form (and accomplished what it needed to accomplish), the moving average should be pretty closeby anyway. So, when the price moves up across resistance on good volume, and especially if it crosses above the moving average, which should now have flattened out, and (for me) if the relative strength is also moving up and crossing above its own flattening moving average, then things are looking interesting. Of course, the group and market charts should be moving up as well.

Per my earlier post today, the hardest thing is often having the patience to let this whole act complete before taking action. The temptation is strong to go ahead and buy a stock when it looks "ready to go". Most of the times I've done this, I've ended up either losing on the trade or tying up my money in a stock that just wasn't ready to move yet. It's sort of like waiting for cinnamon buns to bake - they can smell so good in the oven, but if we take them out too soon we just end up with a mess.

447 – Weinstein – inv44 – (8/24/01)

[And how would you evaluate the quality of the supply? By using historical volume? How far back in time would you take this analysis?]

Yes, I'd look at the volume which accompanied each test of the resistance, as well as the number of times the resistance held, how far back it held, the amount of time the price stayed in a range under the resistance, etc. The determination of how far back in time to go depends upon your investment timeframe and personal preferences. If I'm looking at stocks in fairly mature stage 1 bases, then I'll look in detail at any resistance areas which occurred since the stock started down from the stage 3 top. I might also look a little further back to see if there is some historical significance to a given level, but for me, the past year or so is enough. Sure, it's always possible to find stocks which have historic levels of resistance or support at some price, but it's just as easy to find examples which don't. My research into this matter indicates (at least to me) that the most important resistance is what I can find since the stock topped out and started down. That usually means about a year or so, sometimes more and sometimes less.

It's important to remember that this is more art than science, and there really aren't any concrete rules which apply to all situations. It all depends on your timeframe, how much discipline and/or patience you have, how other stocks are currently moving, how a given stock has moved in the past, how the group is moving, etc. Each time is a little different, but after a while some similarities start to emerge. That's why I continually read and interpret lots of charts - probably at least 100 a day - even if I'm not actively looking for a new stock. By reading lots of charts, and recording my observations in my journal, and then going back a week or so later and seeing what actually happened, I'm continually sharpening and refining my skills.

By the way, if you have a copy of John Murphy's book (Technical Analysis of the Financial Markets), there's a pretty good discussion of support and resistance (including the underlying psychology) on pages 55-65 of the 1999 edition. Your library or bookstore should have a copy for you to browse.

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