ParkTwain's Parlor

For my approach, the "pivot" would be the highest price at which there is previous resistance (which for me, or you might say, by definition, must also be at or very near the stock's previous all-time high), as best as I can determine it. For my recent buy of TWGP, the pivot would be about 21.00/sh:

http://stockcharts.com/def/servlet/SC.web?c=TWGP,uu[h,a]daolyyay[dc][pb50!b200][vc60][iUb14!Ll14]&pref=G
(paste this entire URL into your browser URL field)

For TWGP, this previous high occurred only a few weeks ago. Very often for other stocks, that point could have been reached many months, or even several years, ago.

I made this pick to participate in this week's POTW but not after doing my complete round of chart research, so I don't consider this setup to have the strongest probability of success (5% to 10% gain) within a short timeframe (1 to 2 weeks) because the pps didn't spend more than 1 to 2 trading days at that previous all-time high. As for any area of resistance, when the pps has spent more time at or near that previous high, there is more bullish energy required in the market to get the price above that point later in the stock's life. That's why the breakout past that point can be so powerful and the subsequent rise more brisk. That would be the case for any breakout above established resistance. What I like about a breakout above an all-time high is that there is no further "friction" from sellers against the stock's rise after the breakout has occurred. This kind of breakout can result in a rise that can continue literally for months and with good downside safety because the previous resistance is now support.

Because of this approach, I won't get interested in even monitoring a new position until the pps has reached within about 3% to 5% of the stock's previous all-time high.

I use this URL to watch for new candidates at end of each trading day:

http://www2.barchart.com/high.asp?=&sort=8&what=ALL&force=high%2easp

Among these, I look for new watchlist candidates (I also keep a "disqualifieds" list) whose new high is also an all-time high. I can set price-based alerts on the stocks that I am watching, then let the market tell me which ones to buy as they "pop". For one of these new candidates to join my watchlist, there must also be corroborating evidence from the RSI and Wilder's DMI plots, which I run using stockcharts.com. I prefer a stock whose RSI is already uptrending for about the previous 30 calendar days but is currently around 60 to 70. That tells me that I have a robust-acting stock already but one that also has room to strengthen further. A more robust-acting stock has a better chance of breaking through that previously established resistance.

If I get low on new candidates, I can also use the Java-based stock screener at MSN Money to find stocks whose price is no more than x% lower than its 52-week high. That search parameter is very valuable to me and is not found on the other widely used stock screeners, AFAIK.

What's interesting is that there are always at least 2 dozen stocks for me to choose from, based on my preferred criteria. I am not giving up opportunities to trade from using more stringent entry criteria. At least that's been the case for the last 3 years or so. I expect that the mix of microcap, mid-cap, and large-cap stocks that get found using my criteria will change as the bull/bear market cycle changes. Of course, to the extent that these breakouts fail (fall back to the pivot support), I can get a sense of the strength of the broader market. Or sometimes it's just luck to be in the right one that really rockets up past its pivot. That happened a couple of times in 2005.

How to calculate pivot price?

Great commentary Park. Quick question, can you elaborate on what you mean by pivot price? How is that calculated/defined/determined? Thanks

Hi ski,

This year especially I focused on setups involving stocks making breakouts to all-time highs. I have a particular set of technical indicators and measures that I scan for almost every day in the market. My rules call for buying only after the breakout and within 5% of the pivot.

Amazing drama taking place on a daily basis with SFCC, as documented in the comments of the participants on the Yahoo board for SFCC. Indications of massive naked shorting, an "activist" (short selling-oriented) hedge fund CEO (Dan Loeb of Third Point in NYC) who verbally slams the company during a recent conference call, "expose" articles at Bloomberg.com. Like a slow-motion documentary playing right before your eyes. Among the forum's messages, look especially for those by *aldigit01*, who claims to have witnessed similar stock takedowns on OSTK and NFI.

Bot TWGP this morning on the breakout. Other open positions: OXPS, STGN, DDD.

Opened a position yesterday in DDD, maker of technology for delayed release of medication in the body. Stock is up today on announcement of deal with Wyeth, with more announcements of more deals expecting going into the new year. Check out the DDD board on Yahoo.

OXPS has perked up a little today, but yesterday was a disappointment on an up market day. Significant near-term appreciation expected going into New Year's, but might see some tax-related selling in January.

[Gatorman]

Similar System

Park:
I use a system somewhat similar to the one you outlined with a few differences. Mine uses an IRA account but I try to hold to a 15% gain although I am able to watch the stocks more closely than you are able to do so I can adjust more quickly if I see a reason to either exit the postion or add to my position. I solved the problem of having to settle one transaction before entering another by maintaining a 10% cash balance in the portfolio that allows me to enter a new position earlier. I find this cash balance to be the hardest to maintain because I have always liked to be 100% in stocks in each portfolio. I also have been known to exit at 10-12% gain if I am approaching earnings dates or other circumstances such as downgrades. Ski is right about the discipline aspect that he mentioned. Whatever the plan, discipline is the key to success but, at the same time, is very hard to follow in practice.

[skiracer]

Park,
Sounds like a plan viable plan to me. If it is working, which it seems to be, for you an you're satisfied with the results that's all that matters. I know several people that adhere to the same type of philosophy regarding entering after a proven breakout to gleen 10% or so off the ensuing uptrend. My opinion is that any well thought out plan is 100% better than no plan or a half-baked plan. Knowing your parameters and staying within them for your investing needs takes self-control and not deceiving yourself into believing you can accompolish things that will put a strain on other areas in your life is something many people involved in trading can't do. That alone is a big accompolishment. Good luck.

Hi ski,

I do my trading in an IRA account on E*Trade, so it's a cash account. No short positions at all. My "days in market" figure includes only market session days, not calendar days.

This year especially I focused on setups involving stocks making breakouts to all-time highs. I have a particular set of technical indicators and measures that I scan for almost every day in the market. My rules call for buying only after the breakout and within 5% of the pivot. I know that, in fact, I didn't achieve that in a majority of my trades. Last year, I had found that I had some success in identifying a combination of setup measures that anticipated these breakouts, but this year that approach didn't pan out with a regularity that I have come to prefer. Also, as my account grew during this year, I was able to take on positions of greater size, thus making it more acceptable to take a profit at a lower % gain, such as closer to 5%. Earlier I had been oriented to holding for a 10% to 15% gain per long position. Also, given that I use an IRA account, I am restricted to waiting for the closing of a position to clear before I can close another position that uses those proceeds.

Until late in 2005, E*Trade provided a chart that plots the history of my account balance. I could see that my balance showed a good rate of growth with relatively short durations of drawdown that rarely exceeded 10%. That suits my goals in this account, given that I can't watch the market from open to close every day.

About choosing a typical stop loss %, that is a function of the reliability of one's setup criteria combined with the inherent volatility of one's targets. By sticking to entry points at prices within a few % points above true support prices, the inherent volatility can be kept pretty low, such as my goal of an entry no more than 5% above a pivot price. Because I am buying only stocks making an all-time high, I don't have a "built-in" (such as from looking at upcoming resistance levels) max gain per position, so the return side of my risk/return target isn't hard and fast but rather is driven by a desire to be able to turn over the "inventory" of my account's funds within no more than about 10 market days.

But of course the tradeoff is, the higher you allow your stop loss % to be, to grow one's account then the higher the average gain that must be achieved per position per time period to offset it, and/or one must improve the win/lose ratio.

In my research, I had come to believe that my approach should lead to a kind of "one-way valve" phenomena (price tends to rise with a substantial built-in safeguard against downside risk), and given my account's low drawdown history, it has been borne out during 2005.

I have found that a breakout to an all-time high provides these characteristics. So I have learned to be more patient and wait these stocks out, even when they have taken a long trip up from a reversal. I have learned that it is the downside risk that is important and that a price move above an all-time high provides substantial risk protection. Yes, I am buying higher than some, but I get stronger downside protection and can exit after gaining that 5% to 10%. After gaining an all-time high, stocks very often increase the slope of their existing uptrend, allowing me to get that 5% to 10% gain faster that one would have expected from looking at the chart up to that point in time. I attribute this phenomenon to the absence of overhead resistance in the stock after the breakout.

[skiracer]

Feeling good about reaching 100% YTD gain in my trading account balance as of market close on Dec. 14th. As of Dec. 14th, I have 3 open positions.

As of Dec. 7th, I had these YTD figures:

58 total closed positions
33 winners: avg gain ~11% (>10% gainers: 15, >20% gainers: 3), avg days in market per position ~9 days
25 losers: avg loss ~5.5% (>10% losers: 6), avg days in market per position ~6 days

So I have realized YTD only a 2:1 return/risk ratio on my trades. I want to improve that figure significantly in 2006.

I plan to use the guidance found in Van K. Tharp's "Trading Your Way to Financial Freedom" to fine-tune my trading performance in 2006.

Park,
What was the % of longs vs shorts. Do you go short very often? That's an impressive % overall considering the 58 closed trades average about 1 per week. I'm averaging between 3 and 4 per week but my average holding time has increased this past year because I've been taking positions in the strongest sectors/groups with ETF's more often an sometimes I will stay in one of those positions a few weeks which increases the holding period % somewhat. Normally 7/10 days in a stock position. I generally use 7% as a stop but have been thinking of loosening that up by going more with specific resistance or fib lines as opposed to the standard 7% stop. I see where you've had several losing positions greater than 10%. So to average 5.5% over the 25 trades you must have stopped the others close. I don't know for sure if it's just general circumstances but it seems that lately a number of my positions have been getting stopped out more often at 7% and then rebounding. It's something I have been studying with my own trades. I'm running somewhere around 5/6 out of 10 losing positions a few of which I have cut off under 7% for whatever reasons at the time. I haven't gone over the numbers completely but I'm up around 30/35 % on the plus side this year. I haven't looked at the r/r on a total basis but I would think that on average it would be under 2:1, but not a whole lot, an if your operating at an average 2:1 ratio and you're up 100% then at least your picking strong setups. My own personal feelings are that you will begin to lessen the number of setups, decent setups, by trying to lessen the r/r to much. It's a good thought an always worth trying to improve, but you're up 100% ytd that's kind of hard to beat as it is. Great work.

Feeling good about reaching 100% YTD gain in my trading account balance as of market close on Dec. 14th. As of Dec. 14th, I have 3 open positions.

As of Dec. 7th, I had these YTD figures:

58 total closed positions
33 winners: avg gain ~11% (>10% gainers: 15, >20% gainers: 3), avg days in market per position ~9 days
25 losers: avg loss ~5.5% (>10% losers: 6), avg days in market per position ~6 days

So I have realized YTD only a 2:1 return/risk ratio on my trades. I want to improve that figure significantly in 2006.

I plan to use the guidance found in Van K. Tharp's "Trading Your Way to Financial Freedom" to fine-tune my trading performance in 2006.

[Lyehopper]

I'm thinking that I don't want to be long any consumer goods companies, especially anything higher-end that folks typically use credit to purchase, after January 1st, 2006. After this point, all minimum payments on consumer credit cards will be doubled, due to new Federal law. I'm expecting that this is going to put a crimp in consumer spending that will begin to show up on Wall Street by end of January.

Higher-end?.... I see people at MCD buying dollar value double cheeseburgers with a credit card dude!....

I love those $1 double cheeseburgers.... From the time I pull away from the drive-thru and before I pull back out into traffic.... I can eat two of those darned things!.... No better value in fast food.

I'm thinking that I don't want to be long any consumer goods companies, especially anything higher-end that folks typically use credit to purchase, after January 1st, 2006. After this point, all minimum payments on consumer credit cards will be doubled, due to new Federal law. I'm expecting that this is going to put a crimp in consumer spending that will begin to show up on Wall Street by end of January.

Here's part of a post I placed today on the Yahoo OXPS board:

Observe this chart:
http://stockcharts.com/def/servlet/SC.web?c=OXPS,uu[h,a]daolyyay[dd][pb20!b200][ vc60][iUb14!Ll14]&pref=G

The stock's pps has been in an uptrend since mid June. The pps has touched the 20DMA only twice since Nov 1st. Otherwise the stock is tracing its 10DMA.

Observe the green and red lines in the ADX plot. This is showing what I would call a "buyer's strike" (that is, very little selling pressure, and pps rises each time buyers reenter the market) rise in the pps. In this case, since July 1st the red line (selling intensity) has not moved above the 20 level for more than a very few days in a row. The red line has recently been as low as it has ever been, especially since June 1st. The green line (buying intensity) has continued to hover between 20 and 40 since June 1st. Since June 1st, the stock's pps movement (including pullbacks) basically corresponds to the movement of the green line. Or, when the buyers show up, the stock rises. RSI and ADX for OXPS are still in an uptrend since mid-Oct and Nov 1st, respectively.

The best recent example I've seen of a "buyer's strike" rise in a stock is RIV between about July 1, 2004 and about Sept 10, 2005. In the chart below, notice in the ADX plot that the red line almost never moves above the 25 level and that the green and red lines move almost totally complementary to each other. This stock was in a strong uptrend for over 12 months. Like OXPS, RIV is/was a low-float specimen.

http://stockcharts.com/def/servlet/SC.web?c=RIV,uu[h,a]daolyyay[de][pb20!b200][v c60][iUb14!Ll14]&pref=G

[Lyehopper]

That, my friend, is a portrait of Nicolas Darvas, author of "How I Made $2,000,000 in the Stock Market."

hmmmmmm.... If I made W.J. O'niel my Avitar, wonder if I'd get a letter like Doug's.

That, my friend, is a portrait of Nicolas Darvas, author of "How I Made $2,000,000 in the Stock Market."