Newsletter

March 11, 2006

Stand Aside or Give Up?

Market & Sector Review
What's New!

Largest Changes This Week

This Week's Economic Reports

Stand Aside or Give Up?

Have you ever heard a market trader state: "It's all a sham; there's no way to make money in the markets. There are just too many roadblocks. The odds are against you all the way?" If you have stated this or something similar to yourself it's apparent you are ready to quit, find a new profession. However it's at times like this that you must be resilient, it's not a time to brood.

If someone tells you that trading the markets is easy, they are kidding you or themselves or both. Trading is not easy; there is no Holy Grail, no quick and dirty way to make profits. If there were everyone would be trading the markets, now wouldn't they? Who would be left to do all the rest of the worlds work? If you want to become a successful trader it's going to take sacrifices, commitment, and just plain hard work. Until you have become skillful and experienced the odds are indeed against you. If you approach trading as an amateur hobbyist you will come to believe it is all a sham. You'll begin to convince yourself that trading just isn't worth it; you'll be finding reasons to just give up. If this is the way you are approaching trading and you are experiencing setbacks; it's decision time. Are you going to commit to doing the work required? If not then it is probably wise to give up and walk away.

That said, it is often hard to stay upbeat. There are times when nothing seems to click. Your trading strategies are not working, or you may have trouble getting an accurate read on the markets. This is a very common ailment. Depending on your past experience, there are times when the market doesn't seem to behave in the way you anticipate. Market conditions change, and unless you have a wealth of experience, you may simply not be familiar with the factors that are driving market action. It may just be a matter of standing aside until market conditions change. It is necessary to weather the storm.

Winning traders view unfavorable market conditions as a learning opportunity, a time to gain even more market experience. They objectively study the markets, trying to understand how the market moves and why. It's a time to think creatively and hone trading skills. It's at times like these that it is time to stand up and cultivate a fighting spirit. Instead of quitting why not just rest awhile. It's all right to take a break. Even the most successful trader feels a little burned out at times. By resting, relaxing, and rejuvenating, you'll find the strength to muster enough enthusiasm to tackle the markets again. And this time, you may find that the obstacles that once seemed insurmountable are now just minor bumps in the road to success.

After you have taken your rest, review your plan and your risk management techniques, build up enough trading capital: only then should you address the psychological side of accepting losses. Begin to refute assumptions about risk and loss. Make a list of justifications that you can read after you have lost: "Losses are a business expense. It's like a personal investment in your trading business. It's like paying tuition in order to learn important trading lessons." These sayings may not work at first. It's hard to change over night. Practice! That's why you should actually write down these sayings about losses, and read through the list when you feel guilty about a loss.

Trading often is emotionally draining, and if you aren't careful, you can feel beaten and ready to quit. But rather than search for a way out, remember the reasons to stay. If you persist, gain as much experience as possible, and hone your trading skills, you'll achieve enduring financial success.
Market & Sector Review
What's New!

This past week we introduced several new additions to the Prudent Trader site, in case you hadn't noticed. For this week's newsletter we will look at some of these changes, additions, and what is soon to come. We'll introduce you to a faster, easier way to understand what is really happening underneath the surface of the major market averages and hopefully aid you in making quality decisions to make money. After all that is the objective is it not?

The first change I'd like to discuss; came as a suggestion, an outstanding one I thought, from one of our members, Kelly C. The suggestion had to do with the Hot Market Scans. She noted in the suggestion that placing the industry group name made it cumbersome scrolling through the list of industry names when she wished to compare other stocks in that industry. Sometimes we are just too close to the forest to see the trees. Now instead of the industry group name, the Hot Market Scans contain the sector name and the industry group number. In this way when you wish to compare stocks within an industry group you already have the group number, no scrolling is needed. Thanks K.C.

As an example, above is a portion of the Elder triple screen scan (from Wednesday 3/8/06). Note the new headings Sector & Group number. I selected Amgen for absolutely no reason, it's just an example. You can either hit the link on the scan; which will bring up the search page in the top frame, or simply hit your browser's back button and click on compare component stocks by industry group to get a full page view.

In this example we are using Amgen a member of MG516 - Healthcare - Drugs - Biotechnology. We type in 516 and hit submit.

The component stocks of MG516. From the relative strength data and depending upon your style there are probably better choices within biotechnology. Soon this comparison will be updated and contain various trend and technical information in addition to what you see above. We are in various stages of program development at the moment but look for it soon.

Next let's take a look at what I believe to be a truly exceptional analysis tool; the new Sector Charts. I really did not think we would be ready with this so quickly, a very pleasant surprise, I hope you agree. First let me say that in my experience most often charts and indicators are ambiguous; that is to say they do not tell a story. If there is no story in the stock or sector please just move on, do not attempt to force the story you'd like. It does not work, once in awhile you could get lucky, but it is nothing more than luck.

In our database there are approximately 7,000 stocks; 209 industry groups; but only 31 sectors. I personally find analyzing only 31 sectors much easier than hundreds of stocks or even couple of hundred industry groups. When I find a sector I really like (and we have talked about a couple so far this year), I've narrowed my search considerably. I can then move to the industry groups contained in that sector and then to the stocks contained within the industry group or groups of interest. Now with the new sector charts posted on Wednesday and Friday evenings I believe your sector analysis will become a lot easier.

In order, I believe, to see the value in the new sector charts I will look at one of the sectors mentioned in several newsletters; energy. As I mentioned back in early January, although I am a long term bull on this sector, it was indeed ripe for a good correction; even a shakeout. That correction as I am sure you are aware is underway. As a matter of trading strategy; if I am long a stock that has had a substantial move my tendency is to sell off a small piece or just sit through a good correction; not willing as yet, to give up my position. If I sell off a small piece I may look to reestablish that position on a suspected correction. If I am not long but wish to be I wait for a correction in order to position myself on a relatively low risk basis. I don't know about you but it seems that every time I chase a stock I get burned. Let's see if the new sector charts would have presented an excellent clue to the approaching correction (If you'll recall the largest changes report was warning of this in early January)?

Charts are as of Wednesday 3/8/06 close. Following a 15% correction during October this sector rallied substantially exceeding its October top by some 9.4%. However let's look at what was going on internally. First notice the 6 month relative strength. Remember this is comparing the sector to the entire NYSE index and then calculating the difference over the last 6 months. Notice how the relative strength continued to decline as this sector rallied; in essence this sector was losing its steam vs. the broad market, certainly not what you would expect from a sector being promoted by so many.

The next indicator on the chart is the advances minus declines for this sector (sector A/D line). While it is hard to tell from looking at the chart; so far during this correction a larger percentage of stocks have declined than in the October correction. Next indicator on this chart is the % of stocks within the sector that are trading above their respective 200 day simple moving average. Notice: in the period of July through most of September somewhere between 88% and 96% of this sector was trading above their 200-day moving average. Then on the rally to the 2006 high in this sector the % above the 200 day did not match its summertime highs; in fact it missed by quite a bit and is now lower than at any time since early 2003. The final indicator on this chart is the number of stocks within this sector that are within 2% of their respective 52 week highs and 52 week lows. The number of stocks in the energy sector within 2% of their 52-week high peaked in August with about 160 stocks within 2% of their highs. At the October high about 140 stocks were within 2% of their 52 week highs; and finally at the 2006 high less than 120. Internal deterioration was occurring while sector prices marched higher

The internals of this sector had been deteriorating for about 5 months prior to the sector average hitting its high in January. Remember internal always precedes external. I probably should have covered the weekly chart first (it's the proper order for me) but I am more concerned this week with presenting the new sector charts. Moving on to the weekly chart for the energy sector:

You can see clearly from the above chart that energy has been in a bull market for about 2 years now. Take note of how in October through January prices broke above the raff channel drawn from the 2003 lows. I then drew another raff channel from the mid 2005 lows. Both channels have come together here and are providing support to the sector price. The next indicator on the chart is the % of stocks in up trends. For now we are using Dr. Alexander Elder's definition of an up trend, which is a rising 20 period exponential moving average. This definition may be changed in the future. The important point to notice is that each time this indicator falls to approximately this level or a little lower; a rally ensues. It would not surprise me at the moment. For what it's worth I expect the price to eventually approach the yellow support area reverting back to the mean of the original channel. If I am correct in that assessment I would look for the internals to improve as the price of the sector average declined into that support area. For now let's see if any rally here improves the internals enough to support a large up move or if the current correction has yet to completely run its course.

Reviewing these charts once or twice a week will not give a buy or sell signal today. What they will do is give you advance warning that changes of character are underway. Heed the warnings and perhaps adjust your bias for the near term. Again remember most often the charts and the indicators are in ambiguous positions, do not attempt to force a story that is probably not there. Why not spend some time this weekend reviewing this exciting addition and see what you can find? Be it bullish or bearish!

Hopefully this coming week will appear this same analysis for most major indices. If this is ready the picture of the market and the ETF chart postings will be revamped. Oh, and one more change beginning this week, the largest changes report now includes indices in addition to industry groups and ETF's.
Largest Changes This Week

This Week's Economic Reports

Have A Great Week!

Bill

Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.