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Newsletter March 25, 2006 Quotes from Jesse Livermore Market & Sector Review More New Stuff & Creating a Shopping List Largest Changes This Week This Week's Economic Reports Quotes from Jesse Livermore Reminiscences of a Stock Operator "...it is what people actually did in the stock market that counted — not what they said they were going to do." Livermore studied his mistakes objectively.. ."the only way you get a real education in the market is to invest cash, track your trade, and study your mistakes!" It is emotionally difficult to review your mistakes, since the speculator must wade through his own bad trades and blunders. And these are not simple blunders; these are blunders that cost money. Anyone who has lost money by investing poorly knows how difficult it is to reexamine what occurred. The examination of a losing trade is tortuous but necessary to ensure that it will not happen again. Livermore was brutal in self-analysis. He told his sons his conclusions: "Successful trading is always an emotional battle for the speculator, not an intelligent battle."... He knew that his biggest enemy was his own emotions. "We are the sum total of our experience." When asked what makes a good stock speculator, Livermore replied "...it's an aptitude for the game, a stomach for the ride, and the ability to see what is happening without emotion. The ability to make observations that others don't and a good memory... .Only speculate if you can make it a full-time job. don't take tips of any kind, no matter where they come from. don't worry about catching tops or bottoms, that's fools play. Keep the number of stocks you own to a controllable number. It's hard to herd cats, and it's hard to track a lot of securities. Take your losses quickly and don't brood about them. Try to learn from them but mistakes are as inevitable as death. And only make a big move, a real big plunge, when a majority of factors are in your favor....every once in a while you must go to cash, take a break, take a vacation. don't try to play the market all the time. It can't be done, too tough on the emotions." "The unsuccessful investor is best friends with hope, and hope skips along life's path hand in hand with greed when it comes to the stock market. Once a stock trade is entered, hope springs to life. It is human nature to be positive, to hope for the best. Hope is an important survival technique. But hope, like its stock market cousins ignorance, greed, and fear, distorts reason. See the stock market only deals in facts, in reality, in reason, and the stock market is never wrong. Traders are wrong. Like the spinning of a roulette wheel, the little black ball tells the final outcome, not greed, fear or hope. The result is objective and final, with no appeal. "I believe that the public wants to be led, to be instructed, to be told what to do. They want reassurance. They will always move en masse, a mob, a herd, a group, because people want the safety of human company. They are afraid to stand alone because they want to be safely included within the herd, not to be the lone calf standing on the desolate, dangerous, wolf-patrolled prairie of contrary opinion." "First, do not be invested in the market all the time. There are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move....Second, it is the change in the major trend that hurts most speculators." "The last gasp of heavy volume provides a great opportunity to sell out any illiquid large holdings. I knew it was foolish to ever catch the tops or the bottoms of the moves. It is always better to sell large holdings into an advancing market when there is plenty of volume. The same is true on the short side; you are best to cover the short position after a steep fast decline." "...the market will often go contrary to what speculators have predicted. At these times, successful speculators must abandon their predictions and follow the action of the market. Prudent speculators never argue with the tape. Markets are never wrong, but opinions often are." "All through time, people have basically acted the same way in the market as a result of greed, fear, ignorance, and hope. This is why the numerical formations and patterns recur on a constant basis." "Every stock is like a human being: it has a personality, a distinctive personality. Aggressive, reserved, hyper, high-strung, volatile, boring, direct, logical, predictable, unpredictable. I often studied stocks like I would study people; after a while their reactions to certain circumstances become more predictable." "I believe that having the discipline to follow your rules is essential. Without specific, clear, and tested rules, speculators do not have any real chance of success. Why? Because speculators without a plan are like a general without a strategy, and therefore without an actionable battle plan. Speculators without a single clear plan can only act and react, act and react, to the slings and arrows of stock market misfortune, until they are defeated." "If you miss sleep at night because of your stock market position, then you have gone too far. If this is the case, then sell your position down to the sleeping level." "I believe that anyone who is intelligent, conscientious, and willing to put in the necessary time can be successful on Wall Street. As long as they realize the market is a business like any other business, they have a good chance to prosper." "Remember, it [the market] is designed to fool most of the people most of the time." "...I have always fully understood that I am not the only one who knows that the stock market is the world's biggest gold mine, sitting at the foot of the island of Manhattan. A gold mine that opens its doors every day and invites anyone and everyone in to plum its depths and leave with wheelbarrows full of gold bars, if they can — and I have done it. The gold mine is there all right, and every day somebody plums it's depths, and when the bell rings at the end of the day they have gone from pauper to prince, or gone from prince to supreme potentate, or gone stony broke. And it's always there waiting." "I believe that uncontrolled basic emotions are the true and deadly enemy of the speculator; that hope, fear, and greed are always present, sitting on the edge of the psyche, waiting on the sidelines, waiting to jump into the action, plow into the game." "These words [bullish, bearish] are not in my vocabulary because I believe they can create an emotional mind-set of a specific market direction in a speculator's mind. "I never try to predict or anticipate. I only try to react to what the market is telling me by its behavior." "I believe there are no good stocks or bad stocks; there are only money making stocks. So there is no good direction to trade, short or long; there is only the money-making way to trade." "Greed, fear, impatience, and hope will all fight for mental dominance over the speculator." "My satisfaction always came from beating the market, solving the puzzle. The money was the reward, but it was not the main reason I loved the market. The stock market is the greatest, most complex puzzle ever invented — and it pays the biggest jackpot... .it was never the money that drove me. It was the game, solving the puzzle, beating the market that had confused and confounded the greatest minds in history. For me, that passion, the juice, the exhilaration was in beating the game, a game that was a living dynamic riddle, a conundrum to everyone who speculated on Wall Street." "Always remember; you can win a horse race, but you can't beat the races. You can win on a stock, but you cannot beat Wall Street all the time. Nobody can." Market & Sector Review More New Stuff & Creating a Shopping List For the most part market averages are continuing to advance in the face of deteriorating internals. . A lot of traders I know are frustrated, and I am talking about some very good experienced traders. If this describes you, it may be a good policy to back away for awhile or perhaps just trade relatively small positions, I don't believe this is the time to be overly aggressive. This is the way the market makes a top by fooling the majority and often the experienced as well. Unlike bottoms this process can take a long time to complete. On March 31 Google will be added to the S&P 500 replacing Burlington Resources and while I have not as yet read about any changes in the weighting's or calculations, on the surface it would seem to suggest more volatility for this particular index. I am well aware that most of you work 40 maybe 60 hours a week at your career and are looking to the markets to build a nest egg for the future. Working that many hours, spending quality time with your family and friends, does not leave a great deal of time for market research. That is why there are so many sites on the internet attempting to sell you the "holy grail" in order to make you money without thinking. It is generally that lack of time, in some cases unwillingness to think, plus your desire to have more, that these sites feed on. I am sure there are a few good ones, but also quite a few charlatans. Basically I am saying when it comes to subscribing to a site that claims they will make you rich it should be: "Buyer Beware". That being said: my personal goal for this particular site is to make your research and searching easier and faster, not necessarily the decision making process. Only when you learn to think and do for yourself, will you experience long lasting success. With that said and in mind, this past week we introduced new data for your stock comparisons, be they by industry group or index. I have as yet to write definitions for the new features therefore I'll define them for you now. Added to the comparisons are trend definitions: short-term; intermediate term; long term. These are only definitions and not buy sell or hold signals or recommendations. After numerous back testing operations I settled on the following definitions: short term or very short term is the position of Welles Wilders Parabolic SAR (If you are not familiar with this technique go to the site's learning center, click on Step 4, then click on Parabolic SAR); Intermediate term is UP if the 50 day simple moving average is rising and DWN if it is declining; Long term is UP if the 200 day simple moving average is rising and DWN if it is declining. The next three columns contain: the Prudent Trader Accumulation/Distribution model applied to each individual stock. Basically if the moving average of accumulation is rising and the accumulation number is above that moving average Accum is printed in the column; conversely if the moving average of accumulation is declining and the accumulation number is below the moving average then Dist is printed in the column. Next is the percent of the trailing 52 week high the stock closed at today. For example if the reading is 88 then today's close is 12% off that high, 98 just 2% off that high. The final additional column added is the same as the RTN column in the daily ETF, Index, and Group reports. In this output it is entitled possible return to the 200-day moving average. There is a tendency, repeat tendency, for a stock or market to move back towards the 200-day moving average if it reaches a level of 20% above it or 10% below it. Another way to look at this, is as an overbought/oversold indicator; the column will read sell if the stock is 20% or more above its 200 day moving average and buy if it is 10% or more below its 200 day moving average. The purpose of all this is not to inundate you with information, its intent is to make your analysis a bit easier; let me explain. As and example one of my longer term bullish scenarios pertains to gold and gold mining stocks. While I do not believe the time is quite right as yet, maybe in 2 or 3 months, allow me to go through how I will pick stocks within the sector when I believe it's time. In addition to the gold futures markets there are various indices containing gold mining stocks as well as the Media General group 135. There is the Amex Gold miners index, the Amex Gold Bugs index, the CBOE gold index, and the granddaddy of them all, the Philadelphia Gold and Silver index. For today's exercise and for those that have access to media general charts let's first take a look at MG135 with the new trend definitions on the chart. If you do not have access to the media general charts then one of the gold indices should suffice for your analysis and you can also compare stocks within those indices on this site with the exception of the CBOE gold index. Outlined on the above chart is the Parabolic SAR (purple dots) which is used to define the very short term trend; the 50 day simple moving average used to determine the intermediate term trend - dark blue line; and the 200 day simple moving average used to determine the long term trend - green line. Note the green arrows showing when those trend definitions changed from down to up and also note the red arrow showing how the intermediate term trend has now turned down. The long term trend, green line, is still in fine shape. The bottom window shows the Prudent Trader accumulation model which currently shows this group to be under distribution. I have also outlined the Fibonacci correction levels for the May 2005 to January 2006 bull move. Although this market can turn at any time due to international shocks I fully expect this correction to continue until we retrace towards and perhaps a little below the 200 day moving average. However for purposes of this exercise suppose we suspected the gold correction was over? What would we buy? Go to the members' area and click on compare component stocks within groups. Enter 135 for MG135 Gold and submit. For purposes of this letter and to make a picture that fits I have copied and downloaded that data into Microsoft excel then copied the data to Microsoft paint to make the picture. The data is as of Wednesday evening 3/22/06. When relative strength ranks are calculated only stocks selling for more than $10 are considered so as not to skew the data. Approximately 30% of the almost 7,000 stocks in our database sell for less than $10. It should be no surprise that this group contains quite a few that sell for less than $10. Just because they are not considered in the relative strength calculations should not be construed as a comment on their investment or trading worthiness although as a general statement stocks selling as inexpensively as these are probably doing so for a very good reason. The first column I will look at is relative strength percentile rank over that last 6 months, I am only interested in those with a rank of 80 or more - they are highlighted. Of the 55 stocks in this group 13 or 23% have a ranking better than 80. When looking to put on a trade you need to look one time frame above your desired time frame. In essence what I mean by that is short term traders begin by looking at the intermediate term to define how and on which side you enter your short term trade. You will want to be on the side of the intermediate term trend. If like myself you are interested in the intermediate term for trading your first step is to analyze the longer term trend then choose your entry point in line with that trend; hence the trend definitions. Of the 13 stocks listed with a relative strength percentile ranking above 80 all are in long term up-trends by our definition of a long term up trend. Now however it begins to get interesting, of the 13, 7 or about half are still in intermediate term up-trends and the remainder are in intermediate term down trends. We must understand that stocks that are in long term up-trends suffer corrections and by our definition will enter an intermediate term down trend this is actually a good thing. It means that assuming our long term projections are correct opportunity is approaching. For this discussion I will ignore the short term trend definitions but if you are a short term trader you should be able to extrapolate its usage within the overall picture. Moving over one column to the Prudent Trader Accumulation/Distribution model note that 7 or again about half are showing distribution 4 that are still in intermediate term up-trends the remainder are those in intermediate term down trends. Finally of the 13 stocks, 10 or 77% remain overbought being at least 20% above their 200-day moving average, another indication this correction is not as yet over. The final columns show the relative strength blinkers which are simply the direction of the relative strength line for each: against the NYSE index and then against it's sector, as measured by the slope of the linear regression line for the various periods mentioned. This is a great tool for timing entries when you get your signal. Perhaps this is a good time to review this particular data's usage: Click Here! The important point I am trying to make is simply you can save oodles of time by following selected sectors and sector indices instead of hundreds or thousands of individual stocks. A good place to start is with the largest changes report below, often impending moves appear here first and most often with a 2 to 6 week lead time (in light of this weeks discussion take particular note of the gold activity below). Then when you receive a signal or see one approaching, simply follow the steps outlined above to find the strongest and best stocks in that sector. Personally I will be looking at: First, relative strength rank; Second, long term trend definition; Thirdly, accumulation/distribution; And finally when I feel the time is right the relative strength blinkers. I sincerely hope everyone is taking advantage of all the new features on this site, it can make your life and market research a lot easier and with the added benefit of saving a good deal of time, at least in my humble opinion! 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.