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The Best Buy Signal IN 104 years!. By Doc Brown. 6 Reasons Most Investors Fail. Problem #1: No Selection Criteria Problem #2: You Buy When Wall Street Sells Problem #3: You Quickly Cut Profits but Slowly Cut Losses Problem 4: You willingly Accept Too Much Risk
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The Best Buy Signal IN 104 years! By Doc Brown
6 Reasons Most Investors Fail • Problem #1: No Selection Criteria • Problem #2: You Buy When Wall Street Sells • Problem #3: You Quickly Cut Profits but Slowly Cut Losses • Problem 4: You willingly Accept Too Much Risk • Problem 5: You Never “Get” It • Problem 6: You Engage in Lifestyle Inconsistent Trading
Solutions To Each Problem • Solution to Problem #1: Adopt a Long Term Trend Following Criteria • Solution to Problem #2: Watch the Trend and Use Stops to Exit Falling Markets • Solution to Problem #3: Learn to Cut Losers and Hold Winners • Solution to Problem #4: Limit Risk by Limiting Position Sizes • Solution to Problem #5: Learn From Your Mistakes Through Careful Record Keeping And Review • Solution to Problem #6: Develop a Lifestyle Consistent Approach to Stocks and Stock Options
I Ignored It… • For years I ignored this signal. • I did so despite what I can only call cosmic rebuff… • COSMIC REBUFF #1: Timing with this signal allowed retired engineer Joyce to turn about $20,000 into over $1,000,000 combined with LEAPS in less than a decade. • She left my presentation disappointed for my not having discussing it or its power. • COSMIC REBUFF #2: My own academic research showed the prescience of this one critical signal. • COSMIC REBUFF #3: Nicolas Darvas used this as his first and most important signal in his stock system that turned $36,000 into $2,500,000 million in just over 6 years.
Stock manipulation • Is good business on Wall Street. • American Robber Barrons maintained vast fortunes manipulating the stock market through “accumulation” and “distribution.” • JP Morgan was the greatest stock market manipulator of all time. • In numerous stock manipulations before 1868 Cornelius Vanderbilt hammered thousands of investors quietly “accumulating” stock cheap and “distributing” dear to a frenzied uninformed public. • His upins’ were a comin’ • In 1868, Cornelius Vanderbilt quietly attempts to take over rival Erie Railroad by clandestine accumulation. • He confidentially instructs his brokers to buy every Erie share they can find.
Stock Manipulation • Daniel Drew, Jay Gould, and Jim Fisk had “accumulated” most of the Erie shares outstanding already - dirt cheap - in the quiet months before when nobody was looking. • The Commodore’s buying pressure squeezes Erie stock to astronomical prices. • Drew, who was Erie's treasurer, responded by printing up more Erie shares. • The three “scoundrels” sell into Vanderbilt’s buying. • The Commodore loses a small fortune as the stock price churns at apogee then crashes.
Jesse Livermore • Jesse Lauriston Livermore is born July 26th, 1877. • He kills himself on November 28th, 1940. • This American stock trader known as the “Boy Plunger” and the “Great Bear of Wall Street” used this signal intensively. • He was famed for making and losing large fortunes. • He short sells during crashes. • Livermore’s short profits in 1907 and 1929 were legendary; the later landed him in front of a Congressional hearing.
Richard D. Wyckoff • Wyckoff enjoyed close contact with the most important pioneering traders of Wall Street. • He studied the market operations of Jay Gould, Jesse Livermore, J.P. Morgan, and Andrew Carnegie. • He learned an incredible secret through his friendship with Livermore. • 104 years ago Richard Wyckoff was the first to document the most powerful buy signal in 1909.
Ted Warren • Ted Warren was a sixth grade educated common laborer who wrote the book, • “How to Make the Stock Market Make Money for You” • He retired early on a fortune from trading stocks starting in 1928 through the early 1980s - his premise was that. • Insider groups manipulate stock prices. • The manipulation’s first phase discourages outsiders as prices channel sideways while insiders slowly accumulate. • The next phase is a slow unnoticed price markup. • As the share price rises the public gradually jumps back in. • The stock price moves up substantially on increased volume. • Insiders then sell (distribute) their accumulated shares back to the unsuspecting public for a windfall profit. • Ted Warren made a fortune applying Wyckoff’s writings in his youth.
Nicolas Darvas • Documents turning $36K into $2.5 million in 6-½ years in the 1950s. • Factor 1: Four centuries after Wyckoff he documents volume as the most important first signal that a stock might be rising. • Factor 2: He recognizes that the stock must have rising share prices on increasing volume. • Factor 3: He recognizes that the stock must have a rapidly rising earnings trend. • Factor 4: He looks for sideways “boxes”. • Factor 5: He is right only half the time
Nicolas Darvas • Factor 6: He starts with a pilot purchase that is 1/5, ¼, 1/3, or ½ of his maximum potential position. • Factor 7: He adds an initial stop-loss that he adjusts upwards while using profit to add to the pilot purchase. • This is Sheer Genius… • By (1) testing the waters with a small portion of his trading capital and (2) setting an initial stop based on the prior accumulation pattern he is able to protect himself from price reversals that killed Jesse Lauriston Livermore. • He precisely documents the process in his book “How I Made $2,000,000 in the Stock Market” • The Nicolas Darvas book is highly recommended by Ted Warren.
William J. O’Neil • Turns $5,000 into $200,000 in 1962 & 1963. • Factor 1: Buys stocks coming out of broad bases beginning new highs relative to a preceding price base. • Factor 2: Looks for a high EPS Rating. • Factor 3: Looks for a relative strength rating above 87. • Factor 4: Watches indexes because he notices that most stocks follow a general trend. • Factor 5: He ignores P/E ratios.
William J. O’Neil • Factor 6: Sets his initial stops such that he never loses more than 7% on any trade. • Factor 7: Eschews diversification as a “hedge for ignorance” in favor of focused money management. • Factor 8: Looks at losing streaks as a sign of general market weakness. • Factor 9: Averages up in his buying NEVER down. • Factor 10: He cuts his losers and holds his rising stocks. • The opposite was shown to be the norm by O’Dean, Terrence (1998) Are Investors Reluctant to Realize Their Losses?, Journal of Finance, Vol. LIII, NO 5., October
David Ryan • Is William J. O’Neil’s best student. • He reads every book he can on stock investing before being hired by William J. O’Neil & Company in 1982. • Applies Wyckoff’s teachings 7 decades later in the 1980s. • Enjoys a 3 year portfolio return of 1,379%. • Scans 4,000+ price charts per week looking for… • Factor 1: Stocks rising out of accumulation bases on high volume. • Factor 2: Relative Strengths as high as possible where 99 is better than 95. • Factor 3: An exit point on existing positions where relative strength tapers off.
David Ryan • Factor 4: Group Strength rating should be B- or better. • NOTE: Darvas also recognized the importance of industry strength. • Factor 5: Few Shares Outstanding < 30 million; 5-10 million is ideal. • Aggregate shares outstanding from 1990 to 2010 increased 6.03 fold → 30 million x 6.03 = 180.9 ≈ 180 as upper limit today. • Factor 6: Low Institutional Ownership where 1% to 10% is ideal. • Factor 7: Sells half of his position if the stock price falls back into the prior base. • Factor 8: Looks for decreasing volume as the rising stock enters into a new higher base. • Factor 9: P/E ratios as low as or up to double the S&P 500 P/E ratio. • NOTE: He disagrees with O’Neil who says P/E is useless.
My Momentum Selection Criteria • Key #1: High volume. • Key #2: Prior sideways accumulation base patterns. • Key #3: Share Prices that are rising above prior sideways accumulation base patterns on increasing volume where the Relative Strength (RS) Rating > 87. • Key #4: Rapidly rising earnings trends -- EPS Rating > 80. • Key #5: A stock only pilot purchase of ½, 1/3, ¼, or 1/5, of the maximum potential position (Refer Back To The O’Neil Money Management Slide) with a market order (O’Neil & Ryan) or buy stop order (Darvas). • Key #6: Set Initial Stop below the mid point of the prior base making sure it is never wider than 9% (Darvas), 7% (O’Neil & Ryan) or set one stop for half of the pilot position at the top of the prior base and another stop for the rest at the mid point of the prior base.
My Momentum Selection Criteria • Key #7: Only add to the position if the stock price continues to rise. • Key #8: Lock in profit by adjusting trailing stops relative to the technical support of new rising bases. • Key #9: After my -- stock only -- pilot purchase I use long expiration DITM call options for leverage rather than margin. • Only buy call options once the position is profitable & the trailed initial stop-loss has locked in profit. • Buy options cheap at low implied volatility levels using Ivolatility.com as a guide (free). • Never buy calls on stocks with high dividend yields – or you will erase the yield on dividends. • Key #10: When profitably knocked out of the trailed initial stop on the pilot purchase of the stock I liquidate calls. • Key #11: Watch the general market trend via the Vanguard 500 S&P Fund (SPY) trend, and institutional nervousness via the VIX.
My Momentum Selection Criteria • Non Key #1: Few Shares Outstanding < 5- 180 million. • Non Key #2: Sell when relative strength tapers off. • Non Key #3: Low Institutional Ownership between 1% to 10%. • Non Key #4: Decreasing volume as the rising stock enters into a new higher base. • Non Key #5: P/E ratios on par or up to double the S&P 500 P/E ratio. • Non Key #6: Group Strength rating B- or better.
Complete Momentum Toolbox • #1: ChartMiner (Required). • #2: Track N’ Trade High Finance (Required). • #3: Online Subscription to Investors Business Daily for the EPS and RS Ratings (Required). • #4: Online Subscription to Barron’s (Optional). • #5: Weekly Print Edition of Barron’s (Optional). • #6: Subscription to I-Volatility.com for over or under pricing of long DITM call options (Free). • #7: Yahoo Finance for Institutional Ownership (Free).
How to Find Volume Percentage Movers • Source #1: Ted Warren & David Ryan scanned thousands of charts weekly for stocks moving up on volume. • I use ChartMiner as my starting point. • Source #2: Nicolas Darvas found hot stocks by looking at the “Winners and Losers” tables in Barron’s weekly print edition. • Source #3: This can also be done using the Investors.com IBD E-Tables & sorting on “% Volume Increase” which should be above 50. • You should employ all three methods in your Sunday & Daily Trading Routines.
Source #1: ChartMiner • I wanted to scan thousands of charts the way Ted Warren & David Ryan did. • I found just two alternatives but they were way too expensive and way too complicated. • MarketSmith ~ $1,000 per year. • Panaray ~ $25,000 per year. • I begged Lan Turner, “Give me a stock tool with just two things; price and volume. Make it really fast like a chart Roll-O-Dex. • ChartMiner was born.
Source #1: Chart Miner • This tool was custom made for my first pass search for volume moving momentum stocks. • It allows you to scan 1,000+ stocks (and growing). • It’s as fast as flipping through a Roll-O-Dex. • It catches stocks that have prior volume spikes that have pushed prices up that I would have missed on Barron’s or the IBD E-tables. • Go to ChartMiner.net for more + Replay. • I make nothing on Gecko sales.
Source #2: Barron’s • Weekly Search • Print Edition has two sections that track equity trading volume. • Section 1: Winners and Losers • NYSE Biggest % Movers – Winners • NYSE Market Biggest % Movers – Winners • NASDAQ Biggest % Movers – Winners • NYSE Most Active - Volume Percentage Leaders • NYSE MKT Most Active - Volume Percentage Leaders • NASDAQ Most Active - Volume Percentage Leaders • Section 2: Charting the Market • Look at the volume pattern under the price graph in the charts. • Daily Search • Barron’s Online has the Volume Percentage Movers section updated daily.
General Market - VIX • VIX is an index, like the Dow Jones Industrial Average (DJIA). • It was intended to provide a benchmark of expected short-term market volatility as reflected in the S&P 500 index. • A HIGH VIX says that institutional fund managers consider a stock market crash MORE likely. • A LOW VIX says that institutional fund managers consider a stock market crash LESS likely. • There is no other interpretation of the VIX.
Option Stop-Losses • TDAmeritrade or OptionsXpress allow you to set an underlying stock price at which an option stop will sell your option at market. • Only trade options that have a least 10,000 open contracts in the front month. • This ensures a tight bid-ask spread. • If you don't see a good bid-ask spread up front, don’t take the trade. • Make sure you calculate your total risk factoring in Delta. • Risk is always much higher than on stock.
Track Your Stocks • Set up 3 Track N’ Trade High Finance Chartbooks. • Chartbook 1: Watch List • Tracks stocks you are watching but have not yet bought or culled. • Chartbook 2: Active • Tracks stocks you already own. • Chartbook 3: Cause of Error (COE) • Tracks stocks you have exited.
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The Benefits of Joining my Program • Benefit #1: Best Selection Criteria • Benefit #2: Develop Market Wisdom. • Benefit #3: Best Investing Practices. • Benefit #4: Clear Risk Limits. • Benefit #5: Organization, Record Keeping, and Review Practices. • Benefit #6: Lifestyle Consistent Trading Approach.
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