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Newsletter June 17, 2006 A New Day - A Fresh Start Market & Sector Review Finding the Right Stocks to Trade in the Next Bull Run Largest Changes This Week This Week's Economic Reports A New Day - A Fresh Start I haven't made enough winning trades, what am I going to do? I'll never make it back! Does this describe how you are feeling now or have felt in the past? The worry can get to you, but winning traders have a trick. They take things one trade at a time. They view each trade as a fresh new opportunity. There is a strong psychological urge in all of us to mull over the past while worrying about the future. While this may seem the prudent (no pun intended) thing to do, mulling over the past other than to learn from our mistakes will get you nowhere. If you're mulling or worrying you are not focused on the present. You aren't preparing for future opportunities. Worrying about the future is in all probability a complete waste of time; planning for the future is not. Winning traders while learning from there losses, with each new trade they make a fresh start. They don't worry about their past trades or how bad they will feel should this trade turn out to be a loser. Instead they focus their energy on the immediate experience, the moment, and what they will do next to implement their trading plan. If you focus solely on the present, you'll stay calm and relaxed. This is no different than an ballplayer concentrating on the play at hand, not worrying over the last play or whether this one will work out. If you are in a serious drawdown and unsure of how to get out of it, instead of worrying about it, get out of your own way and make plans. Don't worry about these issues during trading hours while you are attempting to execute your plan. If you must worry, do it after hours, not while you are trying to execute. Treat each trade as an emotionally independent event. If you think about your string of losses you'll begin to feel upset and this will impact your ability to make future winning trades. If you have been on a roll, relinquish the glory or you'll be thrown off track when that unexpected loss happens, and happen it will. There is no right way to trade. Some strategies will work for some traders but not for others. There are probably as many strategies as there are traders. You must learn to pick the strategy that works for you, not necessarily what works for another. The other in all probability has different goals, finances, and psychological make up, than you. The important point today is simply that seasoned, professional traders start each new trade as if it were a new day. They think positively, as if anything is possible. Your next trade may be a winner or a loser, whatever the outcome; celebrate a victory and take a loss in stride, move on. Each new day is a fresh start where new opportunities may appear. Market & Sector Review Finding the Right Stocks to Trade in the Next Bull Run Bear markets should not be a frightening experience. In fact it should be just the opposite once you realize there will be an outstanding buying opportunity some time in the not to distant future. I salivate when the bear growls knowing opportunity is approaching. Hopefully all of you raised a good deal of cash over the last month or so and if not short, have that cash earning interest in a money market account while you wait. Just how long and how far this bear market will carry? While I have my suspicions (for another letter), the only honest answer is I just don't know, it could be next week but perhaps not for months or even a year. The important point this week: wherever and whenever, we reach a tradeable bottom - the time to prepare is now. Over the last few weeks I discussed sectors that may trade opposite any bear market and some tools to help you find them. This week I will extend last weeks letter on Accumulation/Distribution days and how to find the best stocks if and when we get a rally confirmation. Remember when looking at the Accumulation/Distribution days data on the index and sector charts, the calculations are based upon a 1.4% increase in price, the only volume consideration is that it was higher than yesterday so an infinitesimal amount qualifies in the program. However, as noted last week, I.B.D. adjusts that percentage based on volatility. With the inreased volatility we have seen recently when you see that green bar appear make sure the rally qualifies (1.7 percent+), has a decent volume increase and occurs within four to ten business days of any bottom. Note: Since we are attempting to learn Bill O'Neal's philosophy it should be noted; Thursday's sharp advance will show some green bars on some index charts, however, Thursday did not qualify as a rally confirmation day. The simple reason is that the volume was only slightly above the previous day, the volume should have been greater. The market remains in a downtrend but in a rally attempt, if a rally confirmation day is to occur, ideally it will be on the fourth (Monday) through the tenth day after a bottom has been made. It could possibly happen this week! As previously stated this is a subjective approach to the markets but one that has an outstanding track record. Learn to deal with the subjectivity when analyzing Accumulation/Distribution days, in no time at all you'll become an expert. As we wait and watch this is a good time to build and adjust watch lists in order to maximize our future bull market profits. When you learn to maximize your gains during a bull run, bear raids no matter how long they last and how deep they fall will take on a completely new meaning - opportunity is coming once again. Let's go over what is currently available on the Prudent Trader site that will help you find the next bull move leaders whenever that next bull move occurs. Beyond analyzing sectors which may contain hundreds upon hundreds of stocks we want to move down to the industry groupings (or if you desire utilize the ETF and Index data instead or in addition to). It is possible to have a hot industry group within a so-so performing sector. Prior to any general market buy signal we must have watch lists, a plan of how we will execute should that event occur. Usually in bull moves only five or ten industry groups will lead, but some related industries may also do well. For example if there is a building boom under way all the home building stocks are going to go up, but so will mortgage financiers and makers of household goods. What you're looking for is the strongest segments of the market. If your watch list stocks are not in a top performing group, at least one or two other stocks in that industry group should have high relative strength rankings as well as high earnings per share growth. Sixty percent of the best winning stocks historically have been a part of a strong industry group move. So let's begin to prepare for that general market buy signal, remember we never know exactly when it will occur. A good exercise is to review on a regular basis the industry group (or if you prefer the ETF and Index) ranking reports, making sure that your watch list of stocks are part of the top 20 or so industry groups. First step, simply go to the Members' Section: Notice under theSECTOR ANALYSIS Heading - ETF Reports, Industry Group Reports, and Index Reports; Relative Strength Tables, Technical Indicator Tables. For example this week we will use the Industry Group Report Relative Strength Tables: Click on the link and the output is: The initial display will be ordered by Symbol and contain the following data: Today’s Close Change Year-to-Date percent change Relative Strength Blinkers -> Developed and explained by one of our members (Blinkers Explained) Relative Strength (Six month’s) Rank of 209 Groups 1-Strongest 209-Weakest Rank two weeks ago Rank one month ago Relative Strength (Twelve month’s) Rank of 209 Groups 1-Strongest 209-Weakest Rank two weeks ago Rank one month ago If you click on any heading the report will be re-issued and sorted in ascending order by that column, so let's click on RS-6 Rank Today. Notice that as of last Monday the strongest group by this measurement was TRANSPORTATION - Major Airlines; it not only had the top ranking on that date but was also number one two weeks ago and number four one month ago. A relatively strong group, did it decline over the last month like just about everything else? Yes, but certainly not as bad as many, hence strength relative to the overall market. If the market were to receive a buy signal at this time this should be a leader. When we do put in a bottom and experience that confirmation rally the picture may and in all probability will be different. Remember we are attempting to build a watch list at this point; nothing more. It might behoove you to visit this or the other reports a couple of times a week and make note of changes. I use a columnar pad and just write down the top 10 numbers which makes it easy to see changes as they are occurring. Now go back up to the first picture above, notice below Index Reports a heading: Compare Component Stocks and the sub-heading by Industry Group, let's click on that link and compare the members of group 771 TRANSPORTATION- Major Airlines. Clicking on the link Compare Stocks by Industry Groups, brings you here: Hit the submit button and the following output appears: This display contains: Symbol Company Name Sector Name Industry Group Today's Closing Price Relative Strength Percenitle Rank Industry Group Rank Short, Intermediate, Long-term Trends Accumulation/Distribution - Based on PT model algorithm Today's close as a percent of stocks 52-week High Possible Return to 200-Day Moving Average Relative Strength Blinkers vs. NYSE and Sector (in this case 770)-> See link above Links to Charts and Company Fundamental Data Note: three major airlines Amr Corporation (AMR); Continental Airlines (CAL); US Airways Group (LCC) all rank higher than the 90th percentile of all stocks trading above 10. At this point you may wish to include these three stocks in your watch lists for the next bull move. Would never own an airline you say? Not a problem, just move on to the next group and then the next and see what, in your opinion, is cooking. What you have just been exposed to I believe to be a quick, simple, and very effective way to find quality stocks to trade. As we all know, or should know earnings eventually drive stock prices. For your convenience and in case you do not have a chart service the last two columns contain links to charts, courtesy of StockCharts.com as well as a link to the company's fundamental data position courtesy of MSN.com. I am well aware that most if not all of our members claim to technical analysts but my friends here is where fundamental analysis comes into play. Ignore it at your own risk. Next week I will go over some of the fundamental data you want to look at in order to determine whether or not your stocks should remain on your watch list. Happy Hunting! 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.