DT Reminiscences of a Newbie Trader Ebook - Edited.pdf

[email protected] 03 J an 2018

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There are different trading systems and methods. Apply what is useful and most effective for your trades then come up with your own trading style. Feel free to share the contents of this e-book with proper citation.

To God be the Glory!

This e-book is a collection of my articles for the past two years, dedicated to all newbie traders. To my family, mentors, fellow traders and close friends who supported and guided me through my trading journey, thank you from the bottom of my heart.

DISCLAIMER:

The information contained on this e-book is for information/educational purposes only and does not represent the opinion and recommendation of other parties or entities. Always perform due diligence. Be responsible for your trades. There are no guarantees in the stock market. You have to define your own risk parameters.


Ves was already a project manager in the IT Industry working for eight years at HP and one year at Kaisa Consulting Company before launch ing her career in the stock market. With a passion for financial advocacy, experience in personal investing and trading, knowledge in fundamental and technical analysis under her belt, she earned

her

Philippine Securities Representative

Certification.

Ves

has

also

conducted various stock market 101 seminars to various events such as Lady Traders Confession, Swing Trading Insights and Strategies, Traders Apprentice Pilipinas (TAP) Backdoor Session on the Review and Technical Analysis of Specific Stocks, University of Caloocan Trading Insights and Basic Stock Market Concepts, TAP Backdoor Session Newbies Guide in the Stock Market on Holistic Approach in Trading – just to name a few. Ves also started The Divergent Trader Facebook page, an open source of different trading insights that she learned from fellow traders, books, seminars and her own trading experience. Recently, Ves signed onboard the Regina Online Investing Team as a full time stockbroker.


I. Divergent Trader Principles a. Can everyone be an independent trader? b. Ten Tips from DT c. For Newbies II. Trading & Market Psychology a. A Project Manager’s Perspective on Stock Market Trading b. Learning Stages of a Trader c. The Manipulation Game d. When It’s Time to Let Go e. Recognizing Scammers and Hypers: Train Your Brain to Trade f. Perception vs Reality g. Out of Pride and Prejudice h. Cognitive Biases i.

Are You Trading the Markets or is the Market Trading You?

j. Dancing with the Wolves k. Slow and Steady Wins the Race l.

A Tale of Aristocracy

m. The One Who Got Away n. A Bad Trade Does Not Mean a Bad Life III.Catalysts, Trends and Seasonality a. Get the Truth Behind the Headlines Using Major Corporate Disclosures b. Beware: Messages Can Move Markets, The Modern Market Manipulator c. Rumors as the Black Market of Information d. Leading Economic Indicators e. What Markets Do Today Determines Futur e f. Bonds that Matter g. Is Buyback a Good Thing? h. Fear Hungry Jockeys than Ghosts


i.

Importance of Institutional Sponsorship

j. Invest in A Sound Business and Good Corporate Governance k. The Global Market i. Crude Oil ii. Precious Metals IV. Order Types and Tape Reading a. All About Orders b. Bid and Ask c. What’s So Special About Block Trades? d. Ticker Tape Reading: It Speaks to Those Who Listen V. The Trading Action and Technical Analysis a. Looking Beyond Charts: A Holistic Approach to Technical Analysis b. Different Price Forecasting Approaches c. The Trading Action Behind the PSE Time Table d. Parabolic Movements in Stocks e. Speculative Trading in the Philippine Stock Market f. The Never-ending Speculative Cycle g. On Balance Volume h. Buy On the Cannons, Sell on the Trumpets i.

Redundant Indicators Keeping It Simple

j. Breakout Plays k. Hanging By a Momentum l.

Dead Cat Bounce and Reversals

m. Counter Attack Plan VI. Trading Setups and Case Studies a. $PX - A Momentum With Safe Haven b. $ISM – Spotting U nusual Volume c. $HOUSE – Disclosure as Catalyst d. $I - I-Remit: 10 Minute Gap e. $SUN – Trading Breakout f. $PRMX: Buying on Breakout


g. $NOW: Buying First Pullback After Breakout VII.

Study Notes a. Trends and Volume Spread Analysis b. Trend Channels and Trading Ranges c. Seven Zones of Activity by William Gann d. The Market Maker’s Campaign by Richard Wyckoff e. Befriending the Trend: Base Counting by Mark Minervini



1)

There are many ways to become financially successful. Trading is one. You can be a day trader, swing trader, position trader or a combination of swing and position. Find and develop your own trading style and system.

2)

Seek mentors and trading buddies who can help you in your trading journey. Read books, join forums, subscribe to newsletters and attend seminars.

3)

Be responsible and accountable for every decision you make. Never assume that the market will always act based on your best interests and expectations.

4)

Your stock analysis can be different from mine as well as w ith other traders.

5)

If you are a risk-averted person, do not trade. Trading is based on probabilities. Give yourself time to learn how the market thinks and works. Do not be in a hurry.

6)

Make the most of this site (e-book) and many other sources. Absorb whatever is useful. Keep an open mind to learn new things. Ask the right questions.

7)

Always strive to better yourself and always improve on your trades. Consistency is key.

8)

Pay it forward.


Some people rely on tips and inside info. Some people heavily rely on others' opinion. While it is true that big fishes have more advantage than smaller fishes, this does not have to be the excuse for not making an effort in studying the market. Since most already know when to buy, some people no longer bother knowing when to sell. Sadly, this is the reason why many of us newbies fall victim of hype or bash. Self-reliance eliminates the risk of being easily persuaded into a seemingly profitable trade or investment. Through discipline, the trader must reduce his risk. He must see and know, or he should not act. People get excited and pay attention only to concepts that teach them what and when to buy. However once the market experiences a downturn, the newbie loses his focus and starts hoping for a reversal instead of acting on it, while there's still time to preserve his capital. Easier said than done. We are intelligent human beings yet at the time it occurs, we become stubborn. It will take a huge amount of discipline. First to recognize one's emotions and knowing how to overcome them. It's situational; case-to-case basis for everyone have his or her own learning curve. One thing I know, it's easier to learn the technical and fundamentals than mastering oneself. Can everyone be an independent trader? Maybe not. It's all up to you. Of course, it is better if you can plan and execute your own trades.

!


1)

Never expect. Never assume.

2)

No certainties, just probabilities.

3)

Numbers don't lie, people do. If they tell you something that seems to be too good to be true, then perhaps it is.

4)

A professional trader does not worry about a bull or a bear market. He or she does not brood over losses. He or she sticks to the trading rules without emotional attachment whatsoever. He or she is quick to realize or admit mistakes and so the professional trader always strives for excellence not perfection.

5)

There are no shortcuts to success.

6)

You risk what you can afford to lose.

7)

Execute your trades as planned. No plan, no trade.

8)

Patience is rewarded. Stay in the game for as long as the trend remains intact.

9)

Do not overtrade. Focus on learning than making money.

9:;

You already have the key to the best trading system because it lies in your ability to control your emotions and adapt to changing situations. Knowledge is power but mastering yourself is true wisdom <


We often encounter the following questions in forums, discussion groups and chats especially from our fellow newbies:

Q1: “ Anong stock ang magandang bilhin?” “Which stock is a good buy?” Q2: “ Tumaas/Bumaba na ba ng stock na to? ” “Has the stock gone up/down already?” Q3: “ Pwede pa ba pumasok sa stock na to? Anung TP nito? ” “Can I still enter the trade with this stock? What’s the target price?” Q4: “ Risky ba tong stock na to? ” “Is this stock risky?” Q5: “ Lilipad ba tong stock na to?” “Will the stock go up?”

Stock Picking – You don’t have to be a CFA, MBA or financial investmen t expert to be able to distinguish good from bad stocks. There are good companies but their respective stock can perform poorly depending on market conditions such as increase in bank interest rates, unemployment rate etc. On the other hand there are companies with no operations but surprisingly end up as one of the top gainers for the day. The question you should ask yourself is: “Do you prefer to invest in a company that has good fundamentals?” or “Are you a type of trader who just wants to ride any stock that goes up?” For position traders, business value can be one of their priorities in stock picking. What can the company offer? How does the CEO envision the company 5 to 10 years from now? Plans for expansion or innovating their goods and services? Will the future generation still find this company and its goods and services valuable? And so on…


For some, stocks are seasonal – for example mining companies may not do well during rainy season. Remittances increase in December, balikbayans come home to spend

their

money

shopping

in

malls

and

playing

in

casinos.

Some are fearful in entering any trade during August for it has been known as the “ghost month”. For some, foreign inflows/outflows are important considerations. Who else is investing in this company aside from local investors? Bottom line: You need to be aware of your own investment objectives prior to selecting any stock. Do you want to invest in value? Are you patient? It’s not just a question on how much you can invest but how long can you stay (staying power). Not all expensive stocks have business value. Similarly, not all cheap stocks are candidates for growth stocks. Some stocks are seasonal. Pay attention to economic indicators. If you have time, check the global market indices and commodities.

Trend – the trend is your friend. Before you put your hard earned money in any investment or business opportunity, you need to know where your money is going and how you can profit from it. Know the bigger picture; you can use your trading platform to check the general trend of the stock. Select a broader range – 3 years to 10 years. From your online broker / trading software, check the stock chart to determine the price direction along with volume. Is it going upward, downward or sideways. Is the volume being distributed or accumulated? Yes - whether you like or not, you need to know how to recognize chart patterns (at least have a basic understanding). Otherwise, most of the time you will end up following false recommendations ! And it will be too late to save your capital.

Bottom line: Do not rely on spoon-feeding. Spend a few minutes or hours for familiarizing yourself with what you are dealing with. Be resourceful. The Internet can give you

it


lots of trading sources. Asking a friend is not a bad idea but don’t be too lazy to type or search a word in Google or forums to know what it means. Check the official disclosures from PSE EDGE. Attend free stock seminars from reputable brokers. The trend is your friend. Anyone can tell you that the trend is up or down. Trust experienced traders but verify!

Entry and Exit – You can buy any stock in anytime but the challenge is how to profit or close a position without losing at all (or at least minimizing your loss). You must also study volume spread. Be careful with bottom picking, what appears cheap may not always mean “bottom”. Check Daily Time and Sales information if you want to verify that the sellers have dried up or if the big brokers have started re-accumulating. Your target price may be different from fund managers. For fund managers, 3% gain is sufficient because they are managing big portfolios. For people with lesser capital, 3% gain is not good enough. If stocks are too bullish then you need to lock in some profits because you’ll never know until when it can go up. If the stocks are turning bearish you need to cut your losses (or lighten your positions) before you lose your entire capital! Bottom line: Your goal is NOT to enter & exit TOO early or TOO late but to buy and sell at the right price. Do not catch falling knives. Important things to learn: Support and Resistance, Pivots, Retracement Levels, Volume Analysis

Risk – If you are a risk avert, stock market is not for you. There are no guarantees. Nothing is insured. Those who risk are often rewarded IF they have planned their trades well. Again it all comes back to your personality as a trader. Risk appetite differs from one trader to another. It may depend on age, short term and long term plans and priorities.


Bottom line: A big company who managed to meet targets for many years is still susceptible to failure. Do not always equate big company with big earnings. There are other external factors to be considered like market sentiment, political and economic stability.

Stock Volatility – there are stocks that go up and down along with the market (PSEi). There are stocks that remain unchanged even if the market has gone up. There are stocks that have their own world – meaning they are not really affected by the market. This is what most stock specialists refer to as the beta coefficient. Again there are so many factors (internal and external) that can affect how a

stock

behaves. You must also be aware that some stocks are jockeyed especially for small caps. (Volume Plays, Ceiling Plays without any related company disclosures ) Bottom line: Stocks go up and down in cycles and waves. Oftentimes, they don’t go up or down in a straight line. Trade illiquid and highly volatile stocks with great caution.


For almost a decade, I’ve had the opportunity to work in the IT industry as a consultant and most of the years as a project manager. A simple project gets done in less than a month perhaps even in few weeks while complex projects takes months or years before completion. What’s in project management that makes it similar to stock

market trading?

1. Preparation and Planning - A project has a defined scope, timeline, cost and resources. All of these are documented in a Project Plan. It also contains the methodology or lifecycle that will be used throughout the project. There are so many factors that can influence the success of a project therefore risks must be identified as early as possible to prevent them from developing into issues that could impact project timeliness, quality and profitability. Similarl y, you cannot start trading without a trading plan. You have to define your own rules based on your risk parameters. Learning technical analysis will help you identify entry and exit criteria, recognize patterns and market behavior. There are different trading strategies available that you can adopt. You just have to keep an open mind in learning. 2. Execution and Monitoring - During project implementation, project managers monitor the status and progress of the deliverables. If an issue arise, he or she initiates the mitigation steps or corrective actions. In trading, you have to execute based on your plan. When a trade goes against your forecast, you have to cut your losses as early as possible. Setting trailing stops will help you protect your gains and capital. Remember, stock market moves in cycles not in a straight line. 3. Evaluation - After project completion, a closeout or retrospective report will be generated containing a collection of learnings and best practices. This can benefit


future projects. In trading, we also have to evaluate our trades to check the areas that we can improve on. We learn from our mistakes and failures. Learning all stock market concepts is easier than being able to apply them with consistent profits and minimal loss. It is very difficult to trade well but it is not impossible. Sometimes you get small, random and multiple roles without realizing their value in the beginning. It didn’t make any sense except for the fact that you have additional work. As you grow in your chosen path or career, you will understand that going an extra mile actually prepared you for a bigger and more challenging role. Being unpredictable, the market has always been preparing you for your own success. You don’t argue with the market, you learn from what it does.

While it is important to keep an open mind in learning, it is equally important to know that there are certain levels to go through before becoming consistently successful in trading. The transition from one stage to another depends on the individual’s personality, skills and priorities. Level 0: The Starting Point Most traders start having very limited knowledge on stock market or investing. Looking at a stock chart brings back your dreaded subject: Calculus. This person does not take any risk at all. Level 1: The Curious Trader You want to know what you do not know. Usually by word of mouth or by social media, a curious trader is someone who intends to enter the world of

stock market.

He starts to join forums and ask various (sensible and insensible) things about trading or the stock market. Level 2: The Impulsive Trader


You

thought

you

already

know...

but

then

you’re

wrong.

Testing the waters. Since this trader is not knowledgeable, he buys/sells based on hype and recommendations. He is eager to make a profit but too lazy to make his own analysis. He usually ends up losing a lot of his capital. In his thoughts: "It’s a scam!" - very emotional and egoistic. Most traders at this stage no longer come back or developed a negative bias towards trading.

Level 3: The Chosen Few Education starts after accepting the fact that you need to know what you do not know to be successful in trading. Even after losing, the chosen few choose to reflect on their trades to identify what went wrong and how it could have been done better. They start to commit towards learning what should be learned. They read books or attend seminars to increase their understanding. Level 4: The Novice Trader Although the novice trader is already knowledgeable on basic fundamental and technical analysis, his stock selection and analysis could be strongly influenced by the crowd ("herd following”). Sometimes he is profitable but most of the time suffers losses due to switching of stocks without having strong knowledge on its business and a good base. He tries to apply what he has learned but because there is no mentorship or guidance, the trading plan is not well defined and established. He

breaks

his

own

rules

when

greed

or

fear

steps

in.

He is still easily swayed by market movements and often ends up overtrading. He buys high and sells low.

Level 5: The Experienced Trader About a year or two (or earlier), the newbie trader evolves into an experienced trader who has developed his own trading strategy and technique. Through his previous mistakes and failures, he is able to refine his trading strategy. An experienced trader can mentor others by sharing his learnings and insights. He is


already

able

to

identify

which

stocks

are

volatile,

illiquid

and

attractive

(technically/fundamentally). He is familiar with various stock patterns and has developed an instinct to assess whether a stock has a high probability setup. He knows the importance of building a strong base. He has more control over his emotions and understands market psychology. He has a more disciplined understanding

of

the

market

including

cycles

and

seasonality.

The experienced trader knows how to balance between technical and fundamental analysis in stock selection. He can manage some of the risks. Level 6: The Skilled Trader Mastered one or more trading techniques and has been consistently winning in his trades since he is strict in applying the rules. He has also mastered his emotions. He does not like chasing stocks. He knows that preparation for a big price movement takes time. He does not overtrade. He can be a stock trading mentor. He makes money in a bull or bear market. Strong risk management skills. Which stage are you in right now? Perhaps this is a wake up call - a challenge to move you out of the comfort zone.

“The element of manipulation need not discourage anyone. Manipulators are giant traders, with deep pockets. The trained ear can detect the steady “chomp, chomp”, as they gobble up stocks, and their teeth marks are recognized in the fluctuations and the quantities of stock appearing on the tape.” - The Day Trader’s Bible

Beyond chart patterns and candlesticks, Technical Analysis also involves human psychology. Chasing the stock to a higher price allows the market manipulator to succeed in his intention to tease and lure you until the fear of missing out on seemingly profitable trades kicks in. Market manipulators believe that the fools will always buy at a high


therefore, you will see more hyping campaigns and good news as the stock climbs to higher highs. Then one day, that spike on the chart will become a turning point for distribution. Of course, only the minority will notice it. And just when you’re about to let go of the huge losses, the manipulator steps in and starts reaccumulating. Have you ever wondered why a stock takes off even with little volume? Volume is a simple indicator and yet many newbies ignore its purpose. When the stock starts to trend up or triggers a parabolic ascent, you need to watch the trading volume. The first sign that can warn you against a potential reversal is when the trading volume tends to dry up as it moves to higher highs. This means that there are lesser or no more buyers willing to pay for higher prices. Some manipulators will urge newbies to stay at higher levels. There’s nothing wrong in selling on the way up. In the market anything can happen thus stocks do not go up or down forever. They move in waves or cycles. Complex indicators can create more confusion as they overwhelm newbies. Stick to basics and keep it simple. Ideal scenario has always been price and volume moving in the same direction. When volume increases without causing sudden increase in price (or price is just moving sideways) it could indicate that buyers are slowly taking over the sellers. Experienced traders also use OBV (On-Balance Volume) to detect this movement. Meanwhile, the worst-case scenario that you wouldn’t want to be left with is increasing

volume

on

falling

share

prices.

Even

companies

with

strong

fundamentals experience sell-off, which may transform into capitulation. Catching falling knives is as dangerous as picking the bottom during sell down. Wouldn’t it make more sense to buy or enter a trade after the sell-off? The only stock traders that made any decent money are the small minority of traders that bought the stock right after the sell-off - when the stock looked the worst. Would you lend your money to the good guys or the crooked manipulators? Take caution in trading speculative stocks with sharp price movements because most of the time, whether it’s upward or downward, one or more manipulators are


behind it, waiting for the best opportunity to sell to you at higher prices and buy from you at a discount. Find good companies. Complete your due diligence. Avoid speculative stocks when you do not have any idea of what’s really going on with the stock. Are you ready for the next play?

•

According to Richard Wyckoff, one of the great traders and pioneer of technical analysis, a trader must close a trade: 1) When the tape tells him to close 2) When his stop is caught 3) When his position is not clear 4) When he has a large or satisfactory profit and wishes to utilize those funds for better opportunities


You can only lock in your gains when you sell. Otherwise you are holding on to unrealized gain s. Nothing wrong with that if you are an investor. Why do most experienced traders sell then? To protect capital and gains. Anything can happen. Daily fluctuations brought about by internal and external factors can influence profitability.

When is a good time to sell? Selling is subjective because it depends on one's risk tolerance and objectives. Generally, experienced traders consider the following: 1)

Resistance levels

(if you are using trailing stops) Stocks may lose

momentum as it tries to breach resistance zones. 2)

In case of False breakouts and dead cat bounce (to find possible re entry points) In short, when the forecasted price movement based on technical analysis does not materialize

3)

Rebalancing portfolio - cutting losers and going long on stocks with intact trends and good volume spread

4)

Some traders set specific profit percentage for each type of stock depending on market data

5)

Changes to underlying company fundamentals

(financial statements,

earnings) 6)

Changes to money flows - foreign funds taking profits could lead to stock decline

7)

Taking profit during rallies (selling on strength) and positive disclosures

8)

When the stock fails to make a higher low reverses.

after a previous rally and


Try to determine and weigh your own reasons for selling. Check if the strength is sustainable. Trade with the trend. Avoid hyping campaign. The greater fool

is still a

fool.

The social media is the new arena for the old manipulation game. Sadly, most of the millennials are lured into different scams and eventually become victims of hype. Common Characteristics of Scammers: 1)

Anonymous - most scammers and hypers use fake profiles, most do not show up or leave any paper trail.

2)

Great pretenders - Some show up disguised as market experts. They pretend to share the same sentiments and concerns.

3)

Inconsistent - actions contradict words, they actually sell when they tell you to buy and they actually buy when they tell you to sell.

4)

Absence or lack of basis for analysis - are you going to believe a hot tip and execute a buy order immediately just because the “insider” or “informed trader” said so?

5)

Masters of Reverse Psychology - Whether directly or indirectly, they tell you to do the opposite of what you’re supposed to do and to see the opposite of reality. If a stock rises and they are not yet done warehousing, they would emphasis that the move was due to temporary reactions, point out low

volume

or selling instead of actual rising interest towards the stock. Conversely if they want to start accumulating a particular security they can initiate bashing activities to spark fear. They know how to take advantage of a trader's emotions.


6)

Multiple False Identities - Imagine someone delivering a monologue. Yes sometimes scammers and hypers own more than 2 accounts to carry out their manipulation game similar to a good cop bad cop scenario.

7)

They are excellent in playing with words, using questions to trigger critical thinking and statements to influence your decision. Some would use technical terms which a newbie trader wouldn’t spend time verifying because the usage itself already adds "credibility" to the analysis.

8)

Unpredictable - they move like speculative stocks, sometimes you feel their presence through active participation in forums then one day, they just disappear.

Responsible and experienced traders admit and show their mistakes so that newbies can benefit from their learnings. They do not conceal truths. They know that the market can always go against their best analysis and methods. In trading, you will learn who your real friends are. Real friends will stick with you through bull and bear markets. My friend - don’t get left holding the proverbial bag. Your brain is the greatest trading tool that you have. Train your brain to trade. Start and keep on learning.

Most of us witnessed how news and rumors attract market sentiments (PSEi reaching new highs and lows). A new truth emerges from the real truth until it becomes fiction. Regardless if it’s a bull or bear market, herd mentality influences the wisdom of the crowd. How safe is safe enough? As of this writing: China announced a GDP growth of 6.9% for 2015, which fell below government expectations, lowest in 25 years. Crude oil has been falling near $30 level. Corporate bond market in EU is at recession levels.


The stock market is a “safe haven” at least while the Fed and Central Banks are on its side, maintaining the “Wall of Liquidity” through QE and other aggressive monetary stimulus policies. According to Bert Dohmen, “As Europe and China struggle with recessions, or at least weakening economies, their central banks will only become more aggressive.” Stock market analysts see growth potential in emerging markets. In fact, the Philippine Stock Exchange was cited as the Best Stock Exchange in Asia for 2015. However, nothing stays the same. Everything changes. Market and business cycles. Traders and investors cannot afford to be complacent about financial security. There should be a continuous and proactive effort to manage one’s exposure to different investment vehicles especially when economic conditions change. If you are willing to accept the risks involved in stock market, be prepared to learn how the market works. It will not happen overnight and learning must not stop even after you earn. Aside from your money, it requires commitment and passion.

Some tips for Traders & Investors: 1)

Diversify your investments.

2)

Always compare the recent and historical trading pattern to a broader market index.

3)

Never rely on unsolicited and false recommendations. You see this phrase all the time: Do your o wn research. You really have to.

4)

The security must have ample liquidity on a daily basis. (Check daily traded volume

and

value

turnover).

Penny

stocks

are

more

susceptible

to

manipulation. In the absence of news, a volume play can be funded and triggered for as low as 1-2M.


5)

Do not follow what the “media” wants you to see. Read official company and financial disclosures. Listen to volume and price action. At the same time do not ignore global market conditions.

6)

Aside from the moving averages, pay attention to trading ranges. What is the buying range of the institutional traders? At what price does the stock experience a surge in volume? Frequent trades (often with

volume) happen on

a specific range when: a) the stock establishes a new support/low or resistance/high; b) the stock is about to make a reversal/bounce; c) the stock has a pre-arranged deal (cross-transacti ons, block sale). 7)

Volume always precedes price. Stock prices follow the path of least resistance.

8)

Have enough disciplin e to stick to your trading plan.

Trading is not about "taking sides". Focus on learning and respecting differen t views while not losing your character. Nobody has the same experience from Day 1. We all started somewhere, got burned and lost in the middle but the desire and commitment to move forward is always up to you. Criticize how you trade. Criticize how you make your decisions. Critici ze how you react to uncertainties. That's how a mature person learns and grows.

Out of pride and prejudice, it’s easier to judge others simply by the words they utter and how others speak of them through:


•

Selective Perception - on the basis of our own interest, background, experience and attitude

•

Halo Effect - making a general impression based on a single characteristic

•

Contrast Effects - comparison with o ther’s characteris tic (superior or inferior)

•

Projection - attributing our own characteristics to other people

•

Stereotyping - judging based on the perception of a group where the individual belongs to

Do we know who they really are when nobody is looking? What if… The boy who you called “idiot” was always beaten by his parents for every little thing that he couldn’t do right? The girl who you accused “flirty” have been cheated many times? The man who you called “insensitive” was spending half of his salary to feed street children every month? The woman who you accused “liar” was anonymously helping the old sick strangers on their medical treatments? Everyone has a story to tell. A story of hope, fear, anger, love. People love talking about different stories day by day. In the world of trading, we meet trolls. There are good trolls (like my previous mentor) and there are bad trolls. Good trolls keep their identities either for security or personal reasons and most of the time is simply lurkers trying to learn in silence without making a scene. Bad trolls often engage in trolling. There haven’t been many studies in the act of trolling. However I was able to

find a

good explanation from Urban Dictionary: “The act of DELIBERATELY, CLEVERLY and SECRETLY pissing people off, usually over the Internet, using dialogues…Trolling requires deceiving. As such, victim must


not know that you are trolling; if he does, you are an unsuccessful troll…The most essential part of trolling is convincing a victim that either 1) truly believes in what you are saying, no matter how outrageous 2) give your victim malicious instructions, under the guise of help.” Psychologically speaking, bad trolls are impulsive and charming manipulators with narcissistic motives (status-enhancing activity). Bad Trolls and Their Stories It’s inevitable to stick with conventional ways to quench the never-ending thirst for money, power and fame. That thirst makes stories so complicated, unbelievable or twisted. Some developed a necessity for being right while finding faults in others. Sometimes stories are used to gain sympathy - an emotional weapon that will penetrate and influence your thoughts, decisions and later on, your

actions.

Good Troll Gone Bad Before making any conclusions, there must be a deeper reason why good people turn into bad trolls and eventually trolling. I couldn’t speak on their behalf -

I don’t

even know most of them personally. Life is a struggle to be good and fend off evil ways. There’s a constant battle of light and darkness within us. What Newbies Can Do It’s difficult to be caught between two great walls that are leaning towards yo u. It’s even more difficult to choose between two truths. It’s not about taking sides. The challenge is in going out there ourselves to find the answers to our questions. If you want free and instant information, try Google. We cannot do what we do not know. We have to educate ourselves with the resources available to us (from ebooks to hard bounds). Do not rely 100% on mentors and gurus. They are still people and nobody is perfect. There’s no perfect system either. It’s a series of trial and error. You do not only manage money, you manage risks. It’s not prediction but probabilities that will determine your chances for a successful trade. Keep the


motivation and energy until you feel comfortable in a strategy. Preparation. Execution. Evaluation. Repeat. Consistency is key. Which story do you w ant to believe in? The choice is yours. All I know is that real stories are always better than made up stories. Sometimes even the simplest stories could bring great inspiration. It won’t only be as how as it is told but how it was actually lived. How you live or lived is your story. “Educating the mind without educating the heart is no educating at all.” - Aristotle

We make a lot of decisions everyday from as simple as choosing the food we eat or the clothes we wear to more complicated decisions of choosing the right career or partner in life. We have our own "predefined standards " based from experience. We may develop presumptions or hunches towards people we haven't met or events before it even occur. Cognitive biases are common and inevitable. Sometimes we encounter situations wherein we are forced to think fast but end up confused or lost. In trading, it's also important to watchout for cognitive biases that could prevent us from seeing and recognizing what is real vs perceptions and facades. Image credit: Samantha Lee and Shana Lebowitz/Business Insider



Everyday we see a lot of stock picks, opinions and analysis in social media, in our own news feeds. There’s obviously a high level of hype all over the Internet. It’s tempting you to trade now and frequently to be an active trader. Long term has shorter time frame in a millennial’s mind. Remember: Everyone has an agenda/objective (mostly to make money in stocks trading), everyone is trying to sell/tell you something - whether it’s the market, false guru or other traders. Stop playing the blame game just execute the trading plan. Because once you have given others the right to fool you, you already lost the chance to learn. There's no such thing as to learn by being foolish. Blaming others is like hiding the bad habit of "bahala na", blindly following recommendations and then you'll probably end up irrationally thinking of something that would justify this behavior. “It was sort of like a game of Poker. You play your opponents, not your hand. At times intuition played a part. You learnt how people would move and you had to act fast but the most important attribute was neither instinct nor patience. It was, KNOWING when to be instinctive or patient.” Excerpt from "Deadstock: The Story of a Wall Street Trader" By Tom Robertson, Antony Hammond

At this time the PSEI is a make or break at 7200, check your positions. Watchout for opening gaps and thinning volume on uptrend. Trade the range if you don't have a good base, remain liquid and reserve fund if you cannot monitor your position(s). Use fill or kill orders to find icebergs. Locate the brackets / intraday limit orders to identify temporary support and resistance. Know when to go long or short.

There is subjectivity in the interpretation and inference of potential future price action based on historical price behavior because each analyst will interpret and infer future price action based on his or her own experience, knowledge, objectives,


beliefs,

expectations,

emotions

or

temperament,

psychological

biases

and

sometimes personal interests.

The strongest instinctive force in humans is to fight for survival. In the stock market, most people strive to make a profit. Regardless of how many stock market trading books one reads, it will always be about the same old game. They will play with your emotions; they will mess up your logic. You will be tempted to break your own trading rules. It is impossible to discern the ulterior motive behind every trade. However, one can already learn a lot by observing. For example, how market operators use sentiment or volume to drive stock prices up or down. This can be done by finding a group of participants (or brokers) that trade actively and act similarly. You just don't make analysis based charts and financials. Study local and foreign investors' behavior and activity. You have to be aware of the manipulation that is currently taking place. Is it informational

or

transactional?

Informational

manipulation

involves

market

participants/operators who spread false rumors or misleading information to influence stock prices. Transactional manipulation is also referred to as the volume play wherein market participants/operators creates an illusion of market activity by increasing trading volume and liquidity. Will the market always be manipulated? Yes, probably in the short term but not perpetually. At some point in time there has to be a check and balance in free markets thus some securities cannot remain overvalued or

undervalued forever.

Will the market makers always manipulate you and operators like how a predator hunts its prey? Or are you willing to learn how to dance with the wolves?


It seems that most people today are in a hurry. Rushing to get ahead everybody else. Rushing to get early to the office to avoid a memo. Rushing for promotion at the shortest time possible. Rushing to settle down and have a family. Rushing to look more matured by imitating trending styles from head to toe. Rushing to get things done according to plan. In the world of stock trading, newbies aggressively aim for quick profits. Newbies are lured into different investment scams. Newbies are slaughtered like hogs by the pack of wolves. It happens all the time because of greed. There is absolutely nothing wrong with the goal: "to make money in stocks in the short-term or long-term." However trading should be treated as a process and not as a race. One way or another, you will outgrow other people who do not exert much effort in studying and developing their skills. Since it is a process, there has to be a system because this will provide a balance between the normal life and

your

(hidden) addiction in trading. Remember 3Ps – Purpose, Patience, Perseverance . Lacking of any of these three qualities will make you more susceptible to greed. Do not be envious or jealous of other people’s success. Instead, focus your energies in finding better ways to overcome your own weaknesses. You can be a good and successful trader but do not forget that there are also other aspects in life that can make your learning process more meaningful. A good character is better than a famous title and a good heart is always better than recognition.


When two to three DUKES meet, they do not spend (or waste) whole day or weeks or months talking, arguing and knowing about charts and indicators. Perhaps a little bit on global markets. Unlike the PEASANTS who sweat all day long to feed a hungry family. It's usually fast transactions - and by fast, they only need to agree on buy and sell price, most of the time without paper trails. Then they summon the WOLVES who will hunt in packs to work on the "how" and "when"; the PAINTERS who will bring their visions to life; the SCRIBES who will write the "present" and history. And when the bell rings, the story shall be known, fools will be thrown into the cliff and the hogs will be slaughtered one by one. Unfair advantage? Naahhh. It is just the way it has been or maybe you haven't noticed yet. Be careful, the WOODS is a dangerous place. Come prepared.

As indices and prices swing back and forth with the media broadcasting positi ve and negative press releases, we tend to overlook simple but effective ways of minimizing loss. The trend should be our friend but sometimes we ride what's trending in social media not what is technically sound. Hype built on rumors, seemingly positive or realistic figures and stories carries us away. The sad part is we are the ones left hanging on stocks with so much paper loss. Our failed momentum trades transformed into "long term investments".


Recognizing our emotions can help us manage our risks. It's not enough to know the logical side of trading, there's also much to learn on the psychological aspect. Opportunity knocks only once. Twice, if you get lucky. Next time it does, be wise enough to do what should be done. Otherwise you will be among the herd who's always left with nothing. The one who got away (profitable) should've been you.

With the market volatility due to global conditions, it's inevitable that we as newbies get caught in the "bull trap" and end up cutting huge losses or worse hoping for a major reversal of our favorite stocks. Most of us who will be whipped out of the market may no longer get back as an investor or trader because of the "trauma". Only few survive the unforgiving correction and unpredictable movement. Is

there

really

something

good

left after

getting

burned

in

our

trades?

Well it depends on your attitude, on how you'll take and handle the loss. Perhaps it's the best time to do a reality check: What went wrong? Why it went wrong? Maybe there's a lack of preparation and proper knowledge. Maybe it's hype or bash. Maybe it's emotional panic. Warren Buffet said, "Unless you can watch your stock holding decline by 50% without becoming panic-stric ken, you should not be in the stock market." What can you do about it? Although it won't happen overnight, you have to do what it takes to control your emotions. You can attend stock seminars to gain proper knowledge but more importantly, you will need a mentor. You also have to invest time and passion in


learning about the stock market. Learning includes making expensive mistakes. You need to have your own risk management strategy becau se only you can define how much loss or profit is good enough. Next time follow your trading rules.


Forget about “hot tips”. Today, most of the vital information that can help investors makes sound decisions can be viewed online. Go to http://edge.pse.com.ph/ Listed companies in the stock exchange are obliged to comply with reportorial requirements governed by Securities and Regulations Code, Corporation Code of the Philippines and Investment Houses Law. Whether it’s good news or bad news, they need to update stockholders periodically. To avoid penalties, companies need to comply and submit applicable reportorial requirements promptly. Here are the important and “most awaited” corporate disclosures for investors: 1)

General Information Sheet

– this is required annually for all stock

corporations within 30 days from the date of annual stockholders’ meeting .

2)

Financial Statements – Audited financial statements (income statement, balance sheet) are submitted on a quarterly (within 45 days after end of quarter) and annual (within 105 calendar days after end of fiscal year) basis.

3)

Material (Public) Information

– this information could affect a stock’s

market value and influence decision of existing and prospective investors such as earnings results, merger activity, acquisition, bankruptcy, changes in control and press releases. Trading while in possession of material non-public information is considered as illegal insider transaction.


4)

Ownership Filings – certain investor groups have a special obligation to disclose their relationsh ip and ownership in terms of the number of shares and market value especially when there are changes to their current holdings. These include insiders, beneficial owners and institutional investors or qualified institutional buyers (QIBs).

a.

Insiders – corporate officers, directors and owners who buy and sell stock in their companies

b.

Beneficial Owners

– An individual or group having at least 5%

ownership of a company’s shares. c.

Institutional Investors - Qualified buyers such as banks, insurance companies,

mutual

funds,

pension

funds.

Ownership Filings include: 1.

Initial Statement of Beneficial Ownership of Securities (within 10 calendar days after the effective date of the registration statement or after becoming an officer, director or 10% holder)

2.

Statement of Changes in Beneficial Ownership of Securities (within 10 calendar days after the close of each month thereafter)

3.

Report of 5% Beneficial Ownership (Within 5 business days after acquisition)

4.

Report of 5% Institutional Buyers (Within 45 calendar days after end of fiscal year in which such person became obligated)

5.

List of Top 100 Stockholders (disclosed quarterly) contains specific list of individual stockholder names (sometimes including citizenship), Top 100 Philippine Depository and Trust Corp. Participants – investor type, country

6.

Public Ownership Report (disclosed quarterly) contains stock holdings of directors, officers, principal/substantial stockholders, affiliates, government, banks, employees (stock options) and lock up shares


Sometimes there are hidden gems in these disclosure s that other investors haven’t discovered yet. If you want to find out the “real story” behind a company or a unusual stock price/volu me movement, it might be w orth your time to dig up. Want to know more? You can download the Citizen’s Manual on Reportorial Requirements

from

SEC

website

through

this

link: http://www.sec.gov.ph /…/Citizens-Manu al-on-Reportoria l-Requ…

Who would think that technology will dramatically transform the classic game of pump and dump or painting the tape? Several decades ago, it would take enormous time, effort and

resources to initiate a

market manipulation campaign. Today, even a computer and finance literate can already contribute to market manipulation through message boards and groups in various social media sites using the Internet. Contrary to what most people think, even major companies are not spared from

the

misuse of Internet for disseminating false information. Telecoms network giant, Lucent Technologies and computer network hardware vendor Emulex suffered major stock price values in a matter of hours due to bogus press releases. This proves that cyber-crime poses a grave threat to market integrity. The underlying motives could stem from financial and political interests . The Short's Handbook: The Modern Market Manipulator 1)

Be anonymous, of course.

2)

Use 10% fact and 90% suggestion in one's posts. Facts give credibility, while suggestion does the "sell".


3)

Let others "help" you learn about a stock, thereby developing rapport and a support base.

4)

Use multiple handles, but develop a unique style for each.

5)

Use multiple ISPs.

6)

Start each new handle slowly to build acceptance.

7)

Occasionally, use two handles to "discuss" an issue.

8)

Do not show all your cards at once when slamming a stock. It's a war - it's ok to lose a battle as long as you save enough ammo to win the war.

9)

Know your enemies - they w ill end up being your best weapons.

10) Only slam until the tide starts to turn. Let doubt carry the stock back with the tide. 11) Maintain an appearance of being open-minded, but slant in either direction is acceptable. 12) Don't appear meek. No one follows the meek. 13) Strike just as your opponent starts to gather momentum but not before, or you lose your sting. 14) Don't worry if people peg you for a slammer. The doubt will remain, and that's what you are after. 15) If pegged, put up a brief fight, then let them feel they've won. This makes them drop their guard within a few days, and your other handles can take o ver from there. 16) When slamming a stock, the intent is to minimize its rise, not to create an instant plunge. 17) To slam a stock requires you only to kill the dream not the company.


18) Use questions to invoke critical thinking, and use statements to reinforce. 19) You can be liberal in your questions, but be specific and precise in your statements. 20) Don't lie but bend the truth. 21) When you are slamming, encourag e research beyond calling the company. You know people are far too lazy, and it's only doubt you are after, not confirmation. 22) When you are slamming, discourage people from taking the company's word encourage them to seek outside proof. If the company's history is bad, point them there. 23) When you are slamming, refer to missed deadlines and weak financials. 24) When you are slamming, if the price rises, blame it on a temporary mass reaction to a press release rather than real interest in the stock. Point out low volume and emphasize the selling. 25) Pretend to share the same concerns by learning what they want to

hear.

26) And above all else, be unpredictable.

Mergers, acquisitions, takeovers, backdoor listings, bankruptcy, resignation of a CEO…. the list goes on regardless of the season.

Despite having the primary

characteristic of unverified information, rumors excite traders in the absence of news.


Spreading false information is clearly illegal. However, rumors are everywhere and it is normal to read or hear about it in a financial market where people heavily rely on news. The rumors fill the gap or the lack of verified information. What makes it illegal is when it is used for insider trading and price manipulation. The distinction between the two: 1)

Price Manipulation : Insider takes a position (Trade) and spread the news

2)

Insider Trading: Insider receives verified information and acts upon the private information. Inside information can be disguised as rumors.

In both cases, the insider closes his position making a profit. Note that either an individual or group of people may be involved in such acts. Trading Strategies: 1)

Be careful what you read or hear. Verify the source and the information itself. What was the context used for the claim? Did it come from a reputable source?

2)

Observe brokers’ trading patterns if possible especially when you suspect that price manipulation such as pump and dump scheme is under way (i.e. speculative stocks). Identify unusual transactions. Volume is key. a.

During a period of consolidation (defined narrow trading range), there are less broker transactions. The smart money accumulates without causing much price movement. Most of the time, the volume and number of trading transactions increase as the price goes up.

b.

Which broker(s) frequently tra des this particular stock? Does the broker only buys or sells on a given day? Does the broker reverse this the next day he traders or does he buy or sell exactly the same number of shares on a single day? Who is acting as the intermediary broker (buy and sell


transactions done on a single day)? Who is acting as the principal buyer or seller? It becomes tricky with done thru transactions. c.

As a stock moves nearer to its breakout point, expect a lot of hyping campaign in the social media (or through rumormongers). Check who among the brokers are getting out (selling their positions ) if a stock price move is significant.

3)

Fear is more powerful than greed as it raises more uncertainty. Negative news will have more adverse effect on stock price movement and investor sentiment than positive news. (Example: WEB). In some cases, even though the news is bad, stock prices remain unaffected or don’t go very low.

4)

Even though the local headlines or news are positive, global economic news can also affect the Philippine Stock market.

5)

As you plan your trades, think about liquidity. For most illiquid or thinly traded stocks, it’s easier to buy than to sell. When the price spread becomes too wide intraday, it will be difficult to trade without having a

good base.

And since it's still the Ghost Season I’ll be reminding you again... Watch out for: Pump and Dump Whipsaws One Day Wonders Dead Cat Bounce False Breakouts / Head fake Misleading Posts o f Hypers & Bashers Iceberg Orders Wide Spreads Gap Ups/Gap Downs Falling Knives Rumors


Leading Economic Indicators (Inflation Rate, GDP, Labor Market Data and Interest Rate) Leading economic indicators (LEI) are market movers. Earnings and other corporate disclosures may only have a short-term effect on stock prices. However, economic conditions tend to have a greater and longer impact on the market movement. Leading Economic Indicators (LEI) determine whether the economy is starting to recover or when there is an upcoming bull or bear markets. Inflation rate - How much of the real value of an investment is being lost? Our 100 pesos today may not buy as much in the future (purchase/buying power). When inflation kicks in, it has the tendency to decrease the corporate earnings due to higher costs. Gross Domestic Product – How much finished goods or services are produced within the country on a yearly basis? If the economy is growing then it would drive positive sentiment from the investors. Labor Market Data (Employment and Unemployment Data)

– A rise in

unemployment generally signals a decline in interest rates (good news for stocks) and a decline in future corporate earnings and dividends (bad news for stocks). Bottom line: Even if a company has good fundamentals, various external forces such as economic condition can affect it. Given the correlations between stock prices and economic conditions, it’s best to consider leading economic indicators in your investment decisions. How to access the information? You can visit Bangko Sentral ng Pilipinas to view the real time Economic and Financial Data for the Philippines: http://www.bsp.gov.ph /statistics/sdds/sdds.htm


Or search BSP statistics database: http://www.bsp.gov.ph /statistics/statistics_key. asp What’s up with INTEREST RATE ? One of the most influential indicators that affect the consumers, businesses and stock market is the interest rate. How does interest rate affect the consumers? Higher interest rates tied up to special deposit accounts means higher returns for savers. On the other hand, interest rates for credit cards and loans may rise or fall depending on the prime rate used (lowest rate of interest at which money may be borrowed commercially). Higher interest will make it difficult to avail

car or housing

loans for a typical employee. How does interest rate affect the businesses? When interest rates fall, it will be easier for businesses to finance their expansion and operational activities. At the same time the economy could benefit from increased spending. This generates a positive outlook on the economy and eventually, stock market. How does interest rate affect the investors and stock market? As an investor, the interest rate is the amount you earn, but as a borrower, it's the amount you have to pay. When interest rates fall, the stock market rises and when interest rates rise, the stock market falls. Stocks appear more attractive compared to bonds when interest rates fall. For example, a 5% return on bond is lower than capital appreciation derived from stock trading. When the buyers for stock market increases, the demand also moves the prices higher. Who decides on the interest rates? In the Philippines, BSP (Bangko Sentral ng Pilipinas) provides policy directions in the areas of money, banking and credit. The powers and function of Bangko Sentral


are exercised by its Monetary Board such as the conduct of monetary policy and supervision of the financial system. As of the latest Monetary Board Meeting at Bangko Sentral ng Pilipinas last month, it has been decided " to maintain the BSP's key policy rates at 4.00 percent for the

overnight borrowing or reverse repurchase (RRP) facility and 6.00 percent for the overnight lending or repurchase (RP) facility. The interest rates on term RRPs, RPs and special deposit accounts (SDA) were also kept STEADY. The reserve requirement ratios were left unchanged as well." (Source: http://www.bsp.gov.ph/monetary/monetary.asp )

"Artificially" keeping interests low no longer have much effect on stimulating economy growth. That's clearly a manipulation. EU is still facing migrant crisis. China's economy is slowing down for years. At the start of 2016, China’s exports and imports fell substantially. Crud e oil moving below $30. And so on.. Observe real market trends. Go beyond what theories and conventional wisdom teach in textbooks and universities. Experience it for yourself because stock trading is not an ordinary game. It goes beyond disclosures. It is not enough to distinguish what is bearish from Bullish but also crucial to understand what professional market participants do in any given sentiment especially during Capitulation. Methods are also evolving. Study how the market moves today because it is a survival skill - if you want to achieve financi al freedom, retire young, send kids to school 5-10 years from now... Bring reason to chaos, a reason that is developed with one's ultimate desire and passion to learn through time with consistent efforts despite the odds. Brace yourselves for another bumpy ride.


In basic terms bonds issued by corporations are like IOUs. Issuing bonds is another way of raising funds wherein investors agrees to lend corporations specific amount of money for a specific period in exchange of periodic interest payments until the investor's loan is repaid at it reaches the maturity date. Instead of borrowing from banks, bond issues can provide more freedom to operate, invest in its growth, infrastructure and other development or expansion projects with no strings attached. This attracts investors. What compels companies to issue bonds than stocks? 1)

Protection of Ownership - the bondholders remain creditors and not owners rather than issuing additional company shares that spread ownership and earnings across a larger pool of investors.

2)

Simple Record keeping because every investor gets the same deal.

3)

Aside from that it also reduces the tax liability just like every other type of corporate debt.

4)

Bonds have maturity dates too unlike stocks, which investors can hold forever. By the time the company owners intend to buy back shares, they have to offer a premium price.

Most of the time people see stock buyback as positive news especially when indices start to decline and major correction is anticipated. When a publicly listed company buys its own stock in the open stock market, it is considered a "stock buyback" and


the shares purchased are re-classified as "treasury stock." Simply put, it is a company re-investing in its own business.

What happens when a company initiates buyback program? 1)

Increase Shareholder Value – It reduces the number of outstanding shares, which makes the stocks more valuable and attractive to investors (earnings per share) – yes even if the earnings are flat.

2)

Increase Stock Prices – Attractive earnings per share will result to an increase in demand

3)

Increased Float – The remaining shares now represents a larger portion of the float (outstanding shares minus insiders’ shares and treasury stock)

Other important considerations prior to “riding” the buyback program:

1)

Volume / Quantity of the Buyback – Millions or billions worth of shares means the company has substantial cash reserve to make the repurchase. However, don't assume that a large number of shares is actually equivalent to a large percentage.

2)

Buyback Price – How a buyback is executed can make a difference. Large buy orders at market or even at premium price have stronger impact. There is also a possibility that a portion of announced buybacks are not executed.

3)

Reason for Buyback – It’s not enough to know that a company has cash to reinvest. An investor should also verify whether the repurchase will be used to facilitate the growth of the company, acquisition or other expansion plans. While there could be positive effects of buyback program, one should not overlook the other factors. Sometimes buyback program fails to save a declining stock. Always perform due diligence.

At this point in time, many of the investors especially those who are just about to enter the stock market may ask: “Should I buy stocks during the ghost month?”


The sudden changes in stock market prices from August to September have been attributed to the traditional Chinese superstition. Here's a snapshot of

the Philippine

Stock Exchange Index (PSEi) in case you're wondering how the market performed for the past nine years.

Investing and Trading Strategies for August For Investors: Majority of the index stocks experience "correction" from August to September. Long-term investors like those who practice peso cost averaging take this opportunity to buy at a discount. They are the ones who are after intrinsic value than price movement. For investors with lesser risk tolerance, some can lock in profits and re-enter the market once the reversal is confirmed. Others switch to defensive stocks wherein there is steady demand for goods and services. Experience d investors also perform portfolio rebalancing. For Traders: Before riding the hype and momentum of third liners, make sure that you can monitor this trade. Short term plays are prone to pump and dump scheme. Yes,


there are stocks that can rise as far as 50% only to fall the following day. Don't get caught up holding the last bag. Others are told not to buy or sell during this period. While most investors who believe in superstition tend to stay away, newbie traders must beware of the hungry jockeys who feed on third liners or speculative stocks. Speculative stocks and ceiling plays become attractive and tempting. Adjust your trading and risk management strategy depending on the kind of season you’re dealing with. Equip yourself with basic knowledge technical analysis. Know the type of play Is the active stock being traded near 52wk high for a potential breakout play? Be careful if the stock is sitting few points above the 52wk low as the reversal is more prone to failure once a strong shakeout or sell down is initiated by the operator. Do not catch falling knives. No one can always predict the bottom. Is it a sleeper stock that has completed a long consolidation phase? It is important to recognize the patterns but always remember that even tough the exact patterns do not happen, a resemblance of the BEHAVIOR will always be prominent. Historical Price Charts Check the historical price charts look for buying and selling patterns. Is this stock being played on a certain year or month consistently? Support and Resistance Check the ceiling and floor price. Support and resistance levels could be influenced by the rule of round numbers. For example, if the target is 5. Check how the stock will trade between 4.80 – 4.99. Resistance levels must be broken with good volume to become sustainable. Previous resistance should become the next level of support. If it does not hold above this level, then a failed breakout is more likely to


happen. Catching up with breakout plays without having a

good base also increases

the risk. Wait for a healthy pullback after the breakout as long as it is above 3050% of the previous high. Price and Volume Watch out for bullish and bearish volume. When price and volume goes up OR price and volume goes down together, it is considered bullish. If price goes up but volume does not follow, supply may be thinning out indicating a declining interest to buy at higher levels. If price goes down and volume increases, the sellers are dominating and therefore considered bearish. If stock closes forming doji patterns, check the volume for buy and sell orders. Wait for the next candle that will confirm a bullish or bearish movement. If stock is in a consolidation phase, look at the range (if it is moving sideways or forming an imaginary rectangular box). Always buy near support and sell near resistance levels. Use trailing stops. Bid-Ask Spread Don’t get burned by chasing specula tive stock movements having very wide bid-ask spread if you do not have any base. Instead you may opt to wait for pullback or place buy orders near support levels. Gains are Gains Once satisfied with profits, lock in. Sell in tranches if possible. Upsize only when there is clear sign of continuation supported by volume. There are also additional technical indicators that can complement and make your analysis more accurate such as moving averages, divergences and crossovers, RSI, Stochastics. Just remember to keep it simple. Will the ghost month effect this year? Let's see... are you

prepared?


Volume represents the buying and selling transactions in the stock market. Higher volume indicates greater liquidity. Liquidity pertains to how quickly you can get your money for investment or spending (ex: selling your “x” shares of” ABC” company). A thinly traded stock lacks both institutional sponsorship and market liquidity. Investment houses, mutual funds, pension funds, banks, insurance companies are the common institutional buyers. As an investor you need to be careful because these institutions support not all stock picks that appear in the newsletters. Aside from the technical trend of stocks, one must also monitor the quality and quantity of institutional sponsorship. According to William O’ Neil’: “ It’s less crucial to know “how many” institutions own

a stock than to know “which” of the limited number of better-performing institutions own a stock or have bought it recently.” As wise traders, remain cautious because the same institutions can provide a good support (huge source of demand) which will push prices higher OR trigger a sell-off when fundamentals weaken and if a bear market begins. Which institutional buyer(s) are you following? Does it help you with your investment/trad ing plan? Feel free to share your thoughts and experience.

Today, it’s not enough to have a popular brand or various advertisements and other kinds of publicity to make a company attractive to potential investors. Strong stock price do not always equate to strong management. When you select a stock, remember that apart from the business, you are also investing in the people who own and run them. Know the key people (CEO, COO, CFO, Board of Directors etc).


What kind of businesses are they involved in? How long have they been working for the company? What are their vision, mission and plan for the company moving forward? Are they innovating their products or services? Are they meeting or exceeding market expectations? Are they only concerned whether the company’s shares are over or undervalued? Or, they take a step further and use market signals to compare and evaluate their expectations with that of the market?

The effectiveness of the organization does not only rely in its ability to generate revenue and profits over the short-term. Look for leaders who consistently demonstrate their commitment in providing business value to customers and investors. Participate in annual stockholders meeting or

in Investors’ Briefing.

At this moment, crude oil is one of the most present and essential resources in everyday life. The oil industry is one of the most powerful branches in world economy. More than four billion metric tons of oil is produced worldwide annually. Nearly one third of this amount is generated in the Middle East region. Saudi Arabia and Russia are the world’s leading oil producers, each responsible for around 13 percent of the total global production. The United States is the third top producer, generating nearl y one tenth of the world's total oil production. What drives crude oil prices? Volatility explained... 1)

Many types of crude oil are produced around the world. Variations in quality and location result in price differentials but because markets are integrated globally, prices tend to move together.


2)

Crude oil prices are the primary drivers of petroleum product prices like gasoline and in some cases gasoline breaks away due to refinery outages or other downstream events.


3)

Crude prices react to a variety of geopolitical and economic events, which disrupt supply or increase uncertainty about future oil supplies - this tend to drive up prices. Once the problem s ubsides and oil a nd product flows retu rn to normal, prices usually return to previous levels.


Dynamic relationship between Crude Oil (OIL) & Global Steel

Index (CRU)

The impact of crude oil prices and the global steel price index on the economy is closely related to the sh ipping industry. Marine transportati on is heavily depend ent on the supply of crude oil, and crude oil costs account for a significant portion of operational costs. A study has been conducted to establish the dynamic relationship between the Crude Oil and Global Steel Index. The results indicate that: 1)

A unidirectional relationship exists between the crude oil price and the global steel price index, which means that crude oil price is only be affected by its own price movement. On the other hand, both its own index movements and crude oil price volatility affect the global steel price index.

2)

Crude oil price moves prior to the global steel price index, which means increases in crude oil price will increase the global steel price index.


In Philippine Context: Peso - Dollar Rate: Stronger peso means more barrels for major oil importers like the Philippines Supply and Demand: Discovery of new sources and technological developme nts led to new producers and eventually caused an increase in supply which means more barrels for oil importers and dropping oil prices. However if the demand is not able to cope with supply due to global and local economic conditions, there will still be an oversupply. Philstar Columnist Gerardo Sicat provides a detailed historical perspe ctive on Crude Oil prices from the rule of economic and political empires, the aftermath of World War II and state diplomacy. Overall, crude oil prices are greatly affected by politcal and economical conditions.

For further reading please refer to the citations below: http://www.statista.com/topics/1783/global-oil-industry-and-market/ http://www.bapress.ca/Journal7/A%20Study%20of%20the%20Dynamic%20Relationship%20between%20Crude%20Oil% 20Price%20and%20the%20Steel%20Price%20Index.pdf http://www.eia.gov/finance/markets/spot_prices.cfm http://www.philstar.com/business/2014/11/03/13873 09/falling-oil-prices-boon-philippin eeconomy http://www.philstar.com/business/800023/crude-oil-prices-historical-perspective


Going Short or Long? Long Trade = profit from a rising market Short Trade = profit from a falling market Buy or sell? At which price — the current price, a higher price or a lower price? Types of Orders : 1)

Market

Orders

(TRADE

NO W

AT

THE

CURRENT

PRICE)

–

executed

immediately at the prevailing rate (Buy/Sell) 2)

Limit Orders (TRADE AT YOUR PRICE OR BETTER) –guarantees the specified BUY/SELL price but NOT the execution. It may be executed immediately or not at all.

3)

Stop Market Orders (PROTECTS AGAINST BIG LOSSES) - This is a market order that is triggered once your stock reaches a specific target price, the stop price. IF Buying or Covering a Short: Act. Price must be higher than current price. IF Selling or Shorting: Act. Price must be lower than current price.

4)

Trailing STOP LIMIT – Same as stop loss BUT when it is activated (your stock reaches a specific price) instead of becoming a market order, it becomes a limit order.

5)

Trailing STOP ORDERS (MAXIMIZE PROFIT, MINIMIZE LOSS) – stop order based on a percentage change in the market price basically a dynamic price


that adjusts to the current market p rice of the stock. When a trailing stop is triggered is become a market orde 6)

Sell Short – Betting that the price will fall so you are borrowing the stock at its current price and selling it immediately, come back at a later time, hoping to get it at a cheaper pr ice. SEC only allows for se lling short to occu r on an uptick or a zero-plus-tick. Therefore, you cannot sell short a stock that is in the process of plummeting (dropping signific antly)

7)

Buy to Cover – After selling short, you buy back the shares you borrowed and return them to the market

8)

Order Fill Amounts - All or None (AON) – broker will only fill your if the full amount of shares desired can be bought.

Order Durations: 1)

Day Order - An order that lasts until the market close

2)

GTC Order (Good ‘Til Cancelled) - An order that lasts until the trader cancels it. (ex: valid until 60 days)

3)

Fill and Kill Order – If order is not filled at the desired price, it will be cancelled automatically


A block trade or block sale corresponds to a very large volume of securities, which does not go through the automated order matching system, but instead, it is directly entered into the trading system. The price is usually pre-arranged (“done deal”) between the brokerages and its clients (usually large institutions or private investors). The investing public is informed of these transactions through their respective stock brokerage. In the Philippine Stock Exchange, the minimum value for a regular block transaction is P20M, the block price typically range between +/5% from previous close. Block trades can be used to maintain market liquidity especially when they are executed properly. If not handled appropriately, it can trigger a sudden rise or fall in stock prices. Sometimes traders use the block sales as indicator when executed at higher prices because it “might” be motivated by good news (buying large block). Conversely, selling large blocks “might” indicate that institutional investors anticipate (or has seen) bad news about the company therefore unloading shares.

Will it move the market? That would depend on the size of the transaction compared to the typical volume of shares traded on a stock in any particular day (average volume traded). The price impact will also depend on the stock’s market capitalization, liquidity and if it is part of a major index that most fund managers and investors watch.


The ticker represents the “present”. It tells you three things:

WHO is in control WHAT stocks to buy, hold or sell WHEN to buy, hold or sell.

Ticker tape reading technique may not be applicable or preferred by most traders. Based on my experience so far it’s been very helpful in my intraday trades since I only use mobile phone for trading and most of the time I don’t have access to charts (even intraday). Ticker tape reading is a good mind exercise. It's somewhat similar to “database” concept wherein you try to remember the previous/current price and volume of a stock you are monitoring making sure you secure a good spot within the intraday trading range. It takes a lot of patience and experience to develop a ticker tape reader instinct. In fact I am still learning and unlearning. Sharing some tips - it’s up to you if you want to try. 1)

FOCUS (it’s just between you and the ticker), the ticker will tell you if a bad/news came out anyway.

2)

Distinguish the market makers or big brokers from retailers. Research about big brokers (ex: those that are driven by foreign investors/traders). For me the first 30 minutes or hour has always been crucial because it can already tell you which stocks are leaders and laggards. Check which sector and stock(s) in that sector is/are also leading.

3)

Limit your picks - you cannot trade/monitor 15 stocks and expect to gain from all of it. As a starter choose only 1 or 2. You can add later on when you developed the instinct.


4)

Volume is the engine of the trade. Pay attention to supply and demand (bidask spread).

5)

Paper trade or simulate to avoid/minimize losses before actual trade. Start with low priced/penny stocks (0-10).

6)

Ticker can be tricky – watch out for cross sale transactions, false rallies , stock transfer from strong to weak holder and jockey plays. These can give you false assumptions

that

a

stock

can

sustain

its

upward

momentum.

Beware of fake bids which appears/disappears from time to time. Check the bid-ask spread. Some jockeys tend to buy up to catch your attention. Some brokers may buy in consecutive batches (with not much volume). Some just buy a board lot and minutes later you’ll be surprised that the stock price has started to jump. Check time and sales transaction. 7)

As a starter, try to avoid very volatile or highly fluctuating stocks. Select a stock that has moved 2-3 points right after opening. Buy when there’s enough bid volume. Only initiate a panic buy if the momentum is sustainable. Likewise initiate panic sell when momentum significantly go against upward trend.

8)

Hold if the stock is still moving in an upward trend at least every 3 to 5 minutes with good volume. If stock goes down 2-3 points don't sell immediately,

the

market

maker

may

only

be

testing

your

loyalty.

Sell if the stock starts to pullback and buy back only if there is enough volume to push the price up again. Sell if it the price remains unchanged with very low volume (again, check bid-ask spread). Sell if you have already met your target. 9)

If possible, use other tools and indicators such as Intraday Charts, RSI, Stochastic, Standard Pivot, and Fibonacci Retraceme nt Levels.


10) Be quick. Buy and sell at will. Don't argue with the ticker tape. If you entered a trade and start to lose about 3-5% in a matter of minutes - get out, wrong entry. 11) Recognize the general trend before testing the market. You don't do intraday trading in a crashing market. 12) Ticker

tape

reading

works

best

in

a

bull

market.

What goes up today may not go up again tomorrow especially for stocks without an established fundamentals. That's why I trade penny stocks intraday. I don't care about fundamentals in this case since I o nly trade by the numbers shown in the ticker. 13) Intraday trading requires time. If you cannot monitor, don't even attempt. Most of the time I do intraday trading in the morning. 14) This is one of the skills that I would like to develop as I spend time and effort in studying the market (especially how the market makers operate).

The art of ticker tape reading is most effective with the help of time sales; Use mental stops, support & resistance, volume and price spread. The tape tells whether you need to buy hold or sell at the current situation and you must be able to determine if the operator is accumulating or distributing as soon as it is manifested. However, not all stocks that pass in front of you are w orth trading and must end up in your Watch List. Do not be tempted to ride these stocks especially when you are lacking knowledge on their businesses. Do your research. While it is true that you should never argue with the tape, you must not allow it to fool you either.


Don't worry, you can still make time for trading and investing. Your trading profile and objectives will dictate how much effort and commitment you need to put in. You don't necessarily have to start trading full time. It is an ongoing process of learning and unlearning.


Give one stock chart to 10 different chartists and you could have 10 varying interpretations. This is because there are biases unique to each analyst. Each has developed his or her method(s) of judging or evaluating stocks including risk parameters. What appears attractive to a swing trader might not be acceptable for a position trader, vice versa. A lot of traders think that Technical Analysis is just merely reading or interpreting price charts and patterns. In reality, technical analysis can also include statistical, sentiment and behavioral analysis. Classical technical analysis

use basic indicators such as chart/bar patterns,

candlesticks, support and resistance, oscillators, market breadth and cycles. Statistical analysis involves quantitative methods. Sentiment Analysis includes psychology of market participants like inside r trading and seasonality of stocks (based on macroeconomic indicators or global market conditions). Behavioral Analysis studies market reaction like herd behavior everything that is related to emotions, expectations and biases of other market participants. One can combine the methods mentioned above. Every

bullish

interpretation.

interpretation

can

have

a

corresponding

contradicting

bearish


Remember that there is no perfect system. It is the market that decides the overall direction and therefore as a trader, you have to be prepared for both positive and negative scenarios. Risk management is vital.

"Speculation is only a word covering the making of the money out of the manipulation of prices instead of supplying goods and services." - Henry Ford

For the past three ghost months... In 2014 I missed a lot of profitable trades because I got too scared of the correction. In 2015 I spotted some speculative stocks, which I was able to trade but I got whipsawed in some trades.


Now

in

2016,

I've

been

observing

how

speculative

stocks

are

traded.

I'd say each year offered different lessons.

Hope these insights can provide you guidance. *Speculative stocks in this article pertains to shell companies (no operation), small to micro caps (most of them priced below 1 Php), there is price movement in the absence of disclosures. 1)

Trading Volume / Value turnover - Ghost month is usually characterized by thin trading volume (overall market). During this period, do

not be surprised if

a shell company awakens and suddenly hits the ceiling or floor price. One or two day wonders are rampant. Prepare your eyes and ears for rumors. Speculative stocks move even without disclosures. Recently despite the ghost month, we've seen stocks that broke out of the previous 52wk high (MAXS, PRMX to name a few). The same thing can happen to speculative stocks. 2)

Use Multiple Time Frames

- There have been several cases wherein

speculative stocks got mixed technical indicator signals. Using multiple time frames can increase the accuracy of yo ur trading analysis. 3)

Liquidity - It seems that the best time to buy illiquid or thinly traded stocks is when you can wait. Sometimes they are "sleeping" above support levels and/or moving averages for days, weeks or months. The last thing you'd want to happen is to be forced to sell at lower prices just because there are no ready buyers.

4)

Mind the gap - Stocks can open higher or lower than previous close. Once momentum steps in, watch the spread (difference between the highest bid and lowest offer) and the intraday trading range (difference between intraday high and low). Most of the time, thinly traded stocks have higher or wider spreads. Each stock has a corresponding fluctuation/tick for example increments by 0.05, 0.02. To illustrate this, let's use FJP when it was trading between 6.62 7.25. The bid and ask table shows you 7.05 | 7.19 in the first row. Obviously this is a wide spread. Imagine that the operator is tempting you to buy at an expensive price of 7.19. And when you fall for this, he will sell some of his


shares at 7.05. Since you do not have a good base, you already have a paper loss of 0.14 points. Emotionally or psychologically if you are not used to this setup, it will immediately hit your stop. Only to learn that the operator continued to buy and mark up even after you sold your position. You just got whipsawed. 5)

Use protective stops and limit orders - Think of limit orders as [brackets]. Market makers or operators usually place a huge order quantity near support and resistance levels. Since you are trading speculative stocks, setting stops can

help

you

protect

your

capital

gains.

Speculative

stocks

are

not

recommended for long-term investors with low risk tolerance. 6)

Set aside a portion of your capital for speculative stocks

- Limit your

trading budget i.e. 5-10% of capital especially if this is your first time. Better yet, do paper or virtual trading. It's all about Risk vs Reward. 7)

Watch the volume - Don't be deceived by stock price alone. Remember that speculative stocks having wide spread can rise significantly even with less volume.

8)

Recognize Iceberg Orders - Sometimes there are small order quantities posted at the sell side that seems to be "refilled" every time another trader buys up - the tip of the iceberg. It is actually a large order.

9)

Avoid overtrading - As much as possible choose 1-2 stocks and stick to your trading plan. Switching between different stocks increases the risk of losing.

10) Knowing When to Be patient - If you have a trading plan for a speculative stock, wait until your order gets filled. Do not buy at an expensive price. Similarly do not chase a declining stock unless there is clear sign of reversal or bounce.

One of the most difficult things to learn is how to trade the gaps on illiquid stocks. It's not just about timing but being able to recognize its behavior. The next two months can either break or sharpen your trading skills. Opportunities are disguised as challenges and sometimes by fear. Choose your "battles" wisely.


Philippine Stock market opens at 9:00AM and closes at 3:30PM from Monday – Friday (excluding holidays and weekends). Brokers, traders and

investors can enter

their orders from 9AM until 9:29AM but there will be no matching of orders yet. Trading hours will commence at 9:30 wherein matching of orders will be done by the system. There will be continuous trading between 9:31 until 11:59AM. Market recess is from 12NN to 1:29:PM. Continuous trading resumes by 1:30PM until 3:16PM. Stock closing prices are set between 3:17-3:19PM and orders cannot be cancelled or modified. Orders are matched based on the pre-close from 3:203;29PM. (See image below courtesy of Regina Online Investing)


For most of the position traders and investors who have a long time frame, the daily fluctuations do not matter as long as the price is within the major trend and the company is performing well fundamentally.

For short to medium term traders, it is important to recognize the phases to every trading day. They key is to monitor a few stocks very well in order to determine how current global and local economic conditions affect price movement. Price and volume analysis will also help understand why some stocks encounter failed breakouts and how speculations influence investment decisions.

Here are the phases of the trading action (with samples below on BLOOM and WEB): Phase 1 (9:30-10:00AM): The Hype is On (Expect high volatility, breakouts, breakdowns,

reversals,

gap

up/down)

Phase 2 (10:01-11:00AM): The Real Deal (Breakouts won’t last until this phase unless

it

is

sustained

with

volume

Phase 3 (11:01-11:59AM) & (1:30-3:00PM):

or

follow

through)

Make or Break - Range Trading,

support and resistance will be (re) tested. If a breakout fails in the morning, the market maker may attempt to do so before market recess or during the afternoon session (at least 2-3x within the trading day). Some stocks remain flat during this period. This could also be the turning point after a downtrend during Phase 1 & 2. Sometimes the trading range becomes narrow making it more challenging for traders. Phase 4 (3:01-3:29PM): The Final Judgment (At this point only one side of the market will win – the bulls or the bears) During window dressing period, this is when the “magic” happens.

In the stock market, everyday is not the same. There are various factors that can influence price stock movement that is why it is important that you know the type of stock and the season you are dealing with. There can be quick stock plays that can be done in 5 minutes. There can be uptrend or downtrend that can last the


whole trading day (for the index or a selected stock). When an institutional order needs to be filled, the operator can knock the stock back down before buying at lower prices with volume. The overall market condition also influences the sustainability of the trading action.

As a trader, you must learn how to take advantage of these phases to maximize your profit and minimize your loss.


Many traders are lured into buying stocks as they ascend. Who wouldn’t be attracted to an upward price action chart? When stocks go parabolic, it is usually a warning that a potential reversal is foreseen like overbought or oversold condition.

As

ascent

becomes

more

parabolic, the sooner you have to plan for an exit strategy. If you think you’re too late, or may not have ample time to monitor the price action,

do

not

risk

your

money

immediately. You have to check and study the quality of the trend before entering any trade. Remember, trade based on probabilities. It’s also better to monitor few stocks very well and wait for the right moment to act. Because when the time comes and it is too late, there is only one way to correct the mistake of buying or selling a stock against its trend, and that is to place and execute a stop loss order.

Generally, our understanding of the market cycle is associated with the long-term price movement of a specific index, which includes complete uptrend cycle, or bull


market and complete downtrend cycle or bear market. In between, we have shorter primary market cycle, which is known as the secular trend. This article aims to explain the existence and significance of interdisciplinary studies such as Philosophy and Psychology in stock market. It also describes how perception affects the way an individual understands reality and the challenges brought by logical fallacies and illusions resulting to individuals inverted reasoning and poor emotional intelligence. Altogether, these concepts form the Never-ending Speculative Cycle. The way we perform reasoning is highly dependent on our understanding of perception and reality. Plato, one of the great philosophers established the theory of forms. According to his theory, reality is based on two levels: visible world and intelligible world. He encouraged readers to have the ability to form their own opinions instead of being told how to think. In short, be a freethinker. Plato also came up with the allegory The Cave echoing that knowledge gained through senses and perception is not knowledge at all, but opinion. Similarly perceptual relativism defines perception of a situation based on pre-conceived ideas as a result of the beliefs and expectations from the srcin of a group or individual. In a practical example, let's say most of the people Manila speaks Tagalog while some groups speaks

different

dialects.

The

differences

in

cultural,

scientific

and

moral

foundations result to different perceptions. Thus we have unique traditions. The Psychology Behind Stock Market: Fluctuations in the stock market, regardless of the prevailing trend, is highly attributed to various sentiments from short-term traders. On the other hand, broader movements in the market (in a

span of months

or years) are dependent on the general financial and economic conditions. Therefore, short-term traders have different perspective from long-term traders. If majority of the market is composed of short-term traders who decided to go long, many will be provoked to sell on any sign of weakness. This leads to market decline.


Another interesting point of discussion is how perception affects success rate of an individual. The Speculative Cycle can explain this. The participants in Speculative Cycle include the Big Speculative Capitalist (Smart Money), Big Capitalist's Advocates (Friends of the Smart Money) and Small Traders (Suckers). In planning your trades it is important to identify the phase and participants to gauge if you can still play their game.

According to Joe Granville, “Stocks do not rise in price unless demand exceeds supply. Demand is measured in volume thus volume must precede price.”

Can you really catch the top or bottom? Most of the time you can spot the tops and bottoms if you will use the right indicators. It’s easier to spot the top and bottom if you can identify the trend and pattern of the stock. I avoid highly volatile and illiquid stocks since these can mess up my readings and analysis. If you want to do this, choose a stock with an established pattern. Since I am mostly fond of volume and price analysis, aside from the daily traded volume I also look at Volume at Price and On Balance Volume. Volume at Price Most of the online brokers have the Intraday Volume at Price in their consoles. It shows you which price attracted high or the highest volume (and the opposite). From here, it can give you a perspective of where support and resistance lie. A reversal or breakout can be triggered when the price action rejects the zone/range where there is high volume.


On Balance Volume Aside from momentum indicators like Relative Strength Index, there’s also a volume indicator counterpart called OBV to identify bottoming or topping formations. It’s best used with Weighted Moving Average for a 21-day period. This can be applied in any time frame (ex: daily, weekly). Positive Divergence often happen at the bottom wherein demand gradually exceeds supply as a stock reaches a (major) low point. Volume rises. Even though the price may not breakout immediately, the increasing OBV can indicate an accumulation point. Validation point: OBV shows clear uptrend followed by price. Negative Divergence often happen at the top wherein fewer buyers attempt

to push

the price higher. Volume decreases. To keep it simple, it’s best to watch stocks with long rallies or breakouts to be able to take profit before the upcoming reversal. Validation point: Even though the price establishes a higher high, the OBV moves lower or drops to a new low. When OBV and Price remain flat for some time (flat volume), it can also signify an accumulation. You can check the broker transactions to get

your initial entry and let

the succeeding price action confirm this. If OBV remains flat but the price action continues, then it’s more likely that the stock is looking for a potential breakout/breakdown. Can you spot the o ther divergences (+/-) in the chart?


Using redundant indicators can cause other variables appear to be less important than they really are. To avoid this technical indicators should be arranged and used according to

specific

categories (Just pick one of the indicators from each category and do not use the others): Momentum

TRIX

Rate of Change (ROC)

Ultimate Oscillator (ULT)

Stochastics (%K, %D)

Aroon

Relative Strength Index (RSI) Commodity Channel Index (CCI) Williams %R (Wm%R) StochRSI

Trend Moving Averages Moving Average Convergence


Divergence (MACD)

Chaikin Money Flow (CMF)

Average True Range (ATR)

Volume Rate of Change

Wilder's DMI (ADX)

Volume Oscillator (PVO)

Price Oscillator (PPO)

Demand Index

Volume Accumulation Distribution

On Balance Volume (OBV) Money Flow Index

If this is your first entry, it’s better to be conservative with your criteria before considering a breakout play. Before Trading… 1)

Do you have a base or is this your first entry?

2)

Do you have time to monitor your trade?

3)

Do you have your trading plan and risk parameters? Have you identified the support and resistance levels? Have you set your trailing stops?

4)

Have you checked the chart pattern and volume?

5)

What is the overall market condition for the previous days? Is it bullish or bearish?

6)

Is there a prior consolidation? It’s better to have a breakout after successful consolidation than a series of breakouts without a healthy pullback. Is it in a trading range?

7)

Is there any disclosure?

During Trading… At market pre-open, check the bid and offer. Is there a gap from previous close? Is the opening intraday average greater than previous close as well? Normally if the


smart money is extremely bullish towards a particular stock, it should manifest within the first hour of trading. Observe the price and volume spread. Check overall market condition since a reversal in the index could also influence the movement of any given stock at some degree. (beta coefficient) The Breakout Checklist 1)

How far is the stock price from the 52-week high? Is it moving into another high? A good breakout forms long bullish candle s with small to almost no tails. Remember, the larger the bar, the better.

2)

Is it sustainable? What is the trading volume? Is the volume greater than the average traded volume for the previous days? It takes a significant volume to make a significant move. This increases the chance of follow through. Check the volume spread. Are there any price gaps or all prices on bid and ask are filled?

3)

Check for pullbacks and potential sign of reversal. At the early stage, it may not have sign of pullback. If it is sustainable, a pullback may never come intraday. Be watchful as it moves nearer to the breakout point. Anticipate a pullback. If it happens, the previous high should serve as support. Move your stops accordingly.

4)

If you have decided to make an entry, use intraday chart to monitor the price and volume action.

5)

Check

buying

and

selling

pressure.

Is it trending up? Is the stock trading above the short and long MAs? 6)

Can you spot the support and resistance levels? Normally, smart money would put large limit orders in the bid and ask. This is where you can adjust your trailing stops. Remember to raise your stops whenever the stock moves upward.

Upon successful breakout, you may opt to leave your base and add on the first pullback after the new high and support are established. Don’t chase a stock that has moved up so high.


Santa Claus got stranded somewhere. Since the start of the year, most index stocks went down, shaken by the global economic and political tensions along with other commodities.


Some even dropped to new lows….or maybe trying to find its true bottom ...



Surprisingly, some have an intact short-term uptrend despite the bearish sentiment over the past weeks...not to mention consistent foreign buy transactions


Some have well-guarded bases or support levels (in the long/short term)….


Some have high liquidity to push prices up or within a specific range......


Or still going sideways....

Some are still sleeping and waiting to be “discovered”…

........... you have to find them.......


Learn to wait for the right moment, and then act on it. RULE

OF

TWO:

“Generally,

no

one

candlestick

should

be

judged

in

isolation.

The general principle is even if you see a key reversal candlestick; you should wait at least part of one more day before acting. If for example, you spot a candle called a doji, seek verification from the action of the next trading day. If there is a down gap and prices begin to decline then it is prudent to take your position.” - Dr Melvin Pasternak

Bottom Reversals The following rules are applicable for a bottom reversal: •

A bottom reversal is only possible AFTER a downtrend.

•

A confirmation must appear one up to three candles after the pattern.

•

This confirmation is a big white candle, high volume with the new up-move, a rising window, or breaking a resistance.

•

A reversal pattern during price reaction must be considered a continuation pattern.

Top Reversals The following rules are applicable for a top reversal: •

A top reversal is only possible AFTER an uptrend.

•

A confirmation must appear one up to three candles after the pattern.

•

This confirmation is a big black candle, high volume with the new down move, a falling window, or breaking support.

•

A reversal pattern during price reaction must be considered a continuation pattern.

Reminders:


•

AN UNCONFIRMED PATTERN HAS NO FURTHER MEANING.

•

Most of the patterns need a confirmation.

Source: Stocata.org

Dead Cat Bounce It's important to determine whether you are an aggressive trader or a conservative investor. It's even more important to know if your emotions can affect your trading and investment decisions.

What's the point of having or adopting a system if you're the first one to break your own rules? On anticipating stock bounce or reversals - you'll never really know

until it happens.

Use the stops as part of your risk management strategy. Whether you like it or not, regardless if there are news or none, stocks would continue to move up and down. It's part of the normal cycle as buying momentum increases and weakens (law of supply and demand). However this doesn't mean that you discard the bigger picture like global economy especially for commodities and cyclical stocks. Select one of the few stocks that you've been following (yes, observation is critical ticker tape, charts, transactions). Check the stock, which shows a steady, trending price movement. Locate the support and resistance levels or the "psychological barriers". Where to find them? Use Moving Averages, horizontal lines, trend lines, and Fibonacci retracement points. When and where to enter?


The specific price point depends on your time frame and risk tolerance. Stock specialists love trading volatility (upward or downward) because they know their trading setup and trigger. Just because a stock drops down to support level and slightly below the support temporarily, doesn't mean that bounce entry is already invalid - that's why a lot gets whipped in the end. Stocks may bounce at different support levels.

What could convince you that it's a "real bounce"? If it begins to move higher even before it reaches the support level followed by volume. Always refer to previous price action to determine your bounce / reversal zone. Contrary, it's a head fake when it fails to close strong on the upper price range. Lastly, don't play with "unpredictable " stocks.

Disclaimer: I hope this article will not be misinterpreted. I’m not saying that market makers or floor traders are bad. The word opponent symbolizes the Stock Operator who is in control or has taken control of the stock.

We’re often told to plan our trades accordingly – we select the stocks based on fundamentals or technical indicators and set our entry exit and cut/stop loss level. In reality, the unpredictable market movement, strings attached to each stock’s operator(s), can sabotage our trading plans.

Entering a trade is like entering a battle. We can only prepare based on what we know and how we know ourselves. Sometimes we overlook the importance of preparing by studying the movement and strategies of our opponents.


We must also have a counter-attack plan. Think about the possible scenarios that can happen while you are fighting on the battleground. Think about how your opponent can deceive or manipulate you. Think about surviving rather than falling for the trap.

Unlike the floor traders and other market participants, we do not have the advantage of seeing the whole picture – market breadth and depth. Our online brokerage may be limited to 5 or 10 order flow. But this shouldn’t hinder us from reading our opponents actions.

The market will always be right. The goal is to trade at the right side of the market. Stock operators can draw charts. They are not concerned whether we win or

lose in

a trade. They are there to do their jobs – to fulfill contracts and to provide market liquidity.

Now how do you make a counter-attack plan? You study the Stock Operator’s movement. This is something that you can do on your free time if you are not a full time day trader. Just try to observe the price and volume for a given stock – which broker(s) is/are control, at what price range did they buy or

sell and so on…

Here are some scenarios that you have to prepare for: Setup 1: Stock Operator initializes buy orders at previous close having no effect on stock price. The uninformed trader barely notice, stock not included in the “stock screener” or watchlist. Price spread 0. Stock Operator continues until supply is fulfilled. (Intraday line chart remains flat).

Setup 2: Stock Operator buys up during or near the end of trading hours or at market close within 1% markup and does this until the pattern is established and uninformed traders begin to notice, price spread remains narrow during consolidation.


Setup 3: Stock Operator initializes shakeout while forming the base or cup pattern to weed out weak holders depressing the stock price to a certain level -3% to -5% or even more, intraday. Price spread is wide. Just before the trading hours is completed, the Stock Operator buys up/back at previous close.

Setup 4: Stock Operator sells down to uninformed trader who assumes the pattern and attempts to join the accumulation. Being a retailer, the uninformed trader is forced to cutloss in the hope of buying back at a lower price.

Setup 5 (Opening Gaps): At pre open, Stock Operator (with existing stock supply) fills the gaps with fake bids and sell orders at trailing stops to narrow down the bid and ask spread. At market open, buys up at a % that appears to be bullish. Uninformed trader falls for the bait and buys up as well raising stock price until it hits the stock operator’s stop(s). Stock Operator sells down at retracement level, the uninformed trader’s stop is hit (due to higher average) and decides to sell his shares. Before market close Stock Operator initializes buy up orders and the stock closes at upper price range.

Setup 6: Padding & Iceberg Orders - Stock operators fills up price gap with bid usually in small quantities until the spread narrows down at a specific range. When other traders get in and stock rallies, operators lock in and distributes all the way back to day's low.

Do your homework. I’m sure there are many other ways the Stock Operator can mislead or fool you. Be responsible for your trades.


Trigger/Catalyst: Precious Metal Gold as "Safe Haven" while global market indices are bleeding Methods: Momentum Trading, Tape Reading, Time & Sales Considerations: Frequency of "Buy" orders placed in a specific time frame, for example every minute or every hour Price & Volume Spread - the lesser the gaps, the lesser the risk (Check intraday range. Check the quantity of orders placed. Are there more bulk buy orders at higher prices? Refer to Volume at Price) Rate of Change - how quickly does the price change on a specific time frame? Trading Volume - consistently rising with higher volume Relative Strength Index - check the historical pattern. At what price is it usually oversold/overbought? Intraday pattern/chart forms a “stable” uptrend with obvious support (bracketed support and resistance, by 5s or 10s, rule of round numbers, psychologi cal support & resistance) Remember: Establish an entry or base below the intraday average in case of sudden pullback.





The problem with trading based on news from the media (tv, radio, social network) is that most of the time it's already too late because the stock operators and insiders have already prepared ahead of the crowd hence the saying " buy on the cannons, sell on the trumpets". Usually, the insider buys in anticipation of good news and sells in anticipation of bad news. Who is an insider? How are insider transactions reported? An insider is defined by the Securities and Exchange Commission (SEC) as an officer or director of a public company or an individual or entity owning more than 10% of a company's stock. Take a look at the firm's annual report, Top 100 Shareholders or proxy to identify the insiders. Insiders are required to report their transactions in the company's shares to the SEC. Both acquisition and disposal of shares are reported. These filings are usually done electronically - in PSE, through EDGE. This is documented using SEC Form 23-B: Changes in Beneficial Ownership. What can help newbies identify insider transaction s? While it is not a perfect system, this strategy can help pinpoint insider activities prior to press releases or announcements: 1)

Spot unusual volume (easier to do with non-active or illiquid stocks) Ask yourself: Is this stock ranging on a certain level? What support/resistance level is being "guarded"? Is the pattern established? Does the historical pattern resembles previous trend? What is the average traded volume / turnover of this stock? Caution: Do not trade unpredictable stocks especially when you cannot understand the chart patterns or monitor it properly.


2)

Check SEC Form 23-B: Changes in Beneficial Ownership and compare against

the

actual

completed

transactions

through

your

online

brokerage. Ask yourself: •

(Price) At what price range did the insider acquire or dispose shares?

•

(Volume) How much shares were acquired or disposed? Do the basic price and volume analysis

•

(Time) When did the transactions occur? At what frequency did they occur? Did the insider acquire shares during market correction? Did the insider dispose at market tops?

Illustration: To plan your trade, check EDGE for SEC Form 23-B and other documents showing beneficial ownership of shares. In the picture below, the disclosure shows that the director/owner acquired 6000 shares on Sep 7 at the price of 1.34 and 159,000 shares on Sep 10 at the price of 1.39. This will give you an initial range (possible entry and target price). Reminder: Skip the stock if the insider disposed shares. It's easier to spot unusual transactions in thinly traded stocks.


To further verify this, proceed to actual completed broker transactions. Look for the exact quantity. This can also help you identify the brokerage used for the insider transaction.


Once you have identified the broker(s) used for the transaction, check the completed historical transacti ons using the longest look back period possible (or use a start date on the 1st candle of the established trend if known). Ideally your average should be equal or less than the insider's. In the example shown below, an average of 1.30 below should be able to cover your trade. This somehow minimizes the risk of incurring huge losses. As always, use trailing stops. Identify your setup (ex:

breakout

play,

cup

and

handle

formation,

earnings

play,

div

play,

bouce/reversal play) and triggers (ex: support/resistance level broken, unusual volume, volume or price spikes).


Update 11/3/2015: Here's the latest disclosure on insider transaction (Nov 02, 2015 11:12 AM):


At 9:26AM on October 29,2015, a disclosure was uploaded in EDGE.PSE.COM.PH regarding the purchase of P1.0 Billion of 8990 Contract to Sell Receivables. This has triggered a positive sentiment as shown in the price action (intraday).

While the PSEi started to drop few minutes before 10AM, the informed traders refueled the price action with a buy up and series of orders initiated by brokers of CLSA, UOB and Angping. Clearly, the stock started to move against the market index as if it has its own world. Notice the increase in momentum and wide price spreads (differenc e between bid and ask). Started to build volume at 6.45 followed by 6.50. From the open of 6.30, stock was already up by 3.50%.



After bottoming out at 6, the stock managed to establish a higher low above 6.20. With the disclosure and price action earlier, we have a cross (MA).



Will it be sustainable in the next trading days? Is HOUSE ready to

fly again?

Will the position traders at 6-6.30 range be able to maximize their profits given the potential reversal? As always, we wait and let the market decide…


An opening gap on a daily chart does not seem to be as exciting as it looks from a 5-min chart. In fact, this movement could lose momentum along the way especially when volume does not follow. In this case it could be that the stock has been thinly traded even before ex-date. Gaps must not be ignored but one should be careful in trading them. For the next days, if this is a breakaway gap we should see rising volume (interest) in the market considering the disclosures as well. Otherwise, it proves the opposite. Parameters used for this trade: Entry 2.21 Exit 2.45 *This is not a recommendation to buy or sell.


October 7, 2015 Was there really a catalyst to cause this breakout? Or was it just result of a syndicated trading - traders accumulating in the morning session?





PRMX must have been one of the favorite stocks of breakout traders ever since it reached 9php. I usually buy near the breakout rather (lower risk) than during breakout but it seems PRMX is an exception as it is still able to make higher highs towards 12. A pullback after trading near (and at) 11 did not pierce through the short term moving averages.

Swing (Breakout) Enter 10, sell 11, reentry 11 sell 12, and even those who just entered 12 have gained 0.20-0.50 cents per share intraday and I wonder if they

will

sell at 13 as we see volume diminishing on its way up at least for now. For position traders, a good entry point is near 7 or 8 level. Set your stops or sit o n it.


Parameters used for the latest trade: 3.63 - 4.11 (note the opening gap earlier) Reasons for Exit: Failure to hold support at 4.10 and 4. Price went

below short term

moving averages with increasing volume. Retesting a higher low near 3.60 level. Let's see if it can revisit trading range above 4. It seems that it's better to enter when a pullback (after the breakout) also reaches selling climax. Pullback from All Time High must also not exceed 50%.

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The trend is your friend: •

Timing your moves

•

Maintaining

your

awareness

of

the

underlying

flow

of

the

market

Trend Lines are important because: •

They show the DIRECTION of the trend

•

They establish points of SUPPORT and RESISTANCE at some time in the future

•

They identify BREAKOUTS and changes of direction

What is the correct way of drawing trend lines? 1)

If the market is in UPTREND the convention is to use 2 LOW POINTS and 1 Intervening HIGH POINT

2)

If the market is in DOWNTREND the convention is to use 2 HIGH POINTS and 1 intervening LOW POINT

Bottoms and Tops 1)

Consecutive highe r lows/bottoms = medium term sign of strength, where each significant low point in the chart is higher than the previous one.

2)

Consecutive higher lows = short term sign of strength, where the low of each daily bar (or whichever time frame used) is higher than previous one meaning professional money is supporting the move


Higher high, higher low = upward trend

Lower high, lower low = downward trend

Change in trend = 1st lower top in a bull move and 1st higher bottom in a bear move

Tips:

Old trend lines from the past may be used with some success to locate areas of support

and

resistance

especially

when

grouped

together

(trend

cluster).

Compare 2 or more timeframes, looking for trending across a longer and shorter timeframe.

Do not interpret trend lines mechanically.

Trend lines represent potential resistance. The market always wants to take the path of least resistance. The existence or lack of effort will determine if it will hold or not.

If the trend channel is NARROW STEEP or BROKEN by a counter-trend in the short term then it is a SHORT TERM TREND.

If it exhibits resistance characteristics in the medium term, it is an INTERMEDIATE trend.

Why do Trend Lines Appear to Work? Where there is a mean gain or loss in trending data, there may also be a tendency to return towards the mean. Where a sharp rally occurs and moves well above the mean gain slope, it is often followed by a reaction back down through the mean and


below it, automatically compensating for the up move. This is the property of the mean NOT the data.

Market index moves up and down because of an imbalance between supply and demand in stocks.

The market is in a never-ending cycle: Trend > Trading Range > Breakout in Either Direction > Trend If Trend = Strong = Breakout = Spike If Trend = Weak = Channel If Trading Range = Small/Narrow Range = Pause in a Trend If Trading Range = Big/Wide Spread = Breakout in Either Direction

*All Trends Begin with a Spike (Strong Trend) >> Momentum slows and a Channel Begins (Weak Trend) >> Channels evolve into Trading Ranges - As the Momentum in opposite direction increases, a trading range forms

Drawing Channels - Draw lines using Highs or Lows


- Draw 2nd line using a Parallel of 1st Line - After Every Breakout Below a Bull Channel - Draw a New Trendline - the New Channel is Broader and Flatter - Channels in the Opposite direction control the market

Channels Offer Trading Opportunities - When Market Tests the Top or Bottom = Breaks Out / Reverses ---- It Creates Trades where Reward > Risk - Strong Channel is a Spike on a Higher Time Frame

Here are some possible reasons for entering a trade (remember, you need two or more):

Good signal bar pattern, like a good reversal bar, a two-bar reversal, or an ii. Moving average pullback in a trend, especially if two-legged (a high 2 in a bull trend or a low 2 in a bear trend). Breakout pullback. Pullback in a clearly always-in market

(a strong trend).

Test of any kind of support or resistance, but especially trend lines, trend channel lines, breakout tests, and measured move targets. Dueling lines. High 2 buy setup in a bull trend or at the bottom of a trading range (whenever you see a double bottom, it is a high 2 buy setup). Low 2 sell setup in a bear trend or at the top of a trading range (every double top is a low 2 sell setup).


Most bull reversals (bottoms) come from micro double bottoms, double bottoms, or final bear flag reversals. Most bear reversals (tops) come from micro double tops, double tops, or final bull flag reversals. Sideways to down high 3 pullback in a bull trend, which is a wedge bull flag. Sideways to up low 3 pullback in a bear trend, which is a wedge bear flag. High 4 bull flag. Low 4 bear flag. Weak high 1 or high 2 signal bar at the top of a trading range when you are looking for a short. Weak low 1 or low 2 signal bar at the bottom of a trading range when you are looking to buy. Failure of anything (the market reverses before going as far as expected): A breakout of a prior high or low. A flag breakout A reversal from an overshoot of a trend line or a trend channel line. A failure to reach a profit target.


There are different stages of activity in the stock market.

Some people call it

"(Four) Stages of Stock Prices" but William Gann came up with the seven zones of activity as follows:

Normal Zone – buying and selling is about equal and fluctuations are very narrow, no incentive or reason apparent (accumulation/distribution).

for

any

wild

speculation

up

or

down

First Zone Above Normal – quiet advancing prices, which attracts very little attention and it, can last for one month to one year depending on the cycle of the market.

Second Zone Above Normal – greater activity when pools begin marking up stocks, starts releasing reports of better business.

Third Zone or Highest above Normal – distribution period, great activity takes place and extremely wild fluctuations. Stocks are very feverish, reports of big earnings come in, dividends are increased and stock dividends are declared. In this stage, for weeks and months, every few days stocks will open up anywhere from 1 to 5 points higher and keep on going up without much reaction. After this has happened and the end is near, although no one can see it, traders all go home some night, hopeful with the sky clear and not a sign of disturbing cloud, and come down next morning and find stocks opening off anywhere from 1 to 5 points. There may be no news out or any reason at all for the decline, but the real cause of it is that the market has reached the stage where Supply exceeds Demand. Everybody has bought to full capacity and there not being any large amount of buying orders in at the opening to support prices, they open off. This is your first sign of the end. Take warning! Get from under, for with this first lightning strike, you may know that the storm is gathering, and it behooves you to protect yourself. After this first


sign of the end, stocks may go lower for a while and then rally up near the high points and hold for a time, but it is the warning that the “saturation point” is about reached, and the wise man will get out in time. First Zone Below Normal – quiet decline from high prices and what might be termed the first bad “ shake-out” of the weak holde rs. A rally follows but stocks become dull on the rally because the Supply is still greater than the Demand and distribution is still going on. A lot of people who miss th e market in the thir d stage above normal are wise enough to sell out in the first stage down, and professional traders, seeing that the bull market has terminated, go short of the market on every rally with the result that prices begin to work lower slowly.

Second Zone Below Normal – liquidation increases, breaks become bigger and rallies

smaller;

reports

of

falling

earnings.

People

are

less

hopeful,

more

conservative and stop buying. And without enough support, the prices gradually move lower.

Third and Final Zone Below Normal – exactly the opposite of the third zone. Panicky conditions, extreme pessimism; investors lose confidence and start selling out. Supply is unlimited. Everyone is a seller. In this stage, it may be necessary to watch and wait for several months until you see that liquidation has been completed and that accumulation is taking place, as there is always plenty of time to buy after the quiet advance starts.

Remember, it is always darkest just before dawn, and it is always brightest at noontime, just before the sun starts to recede.


There are diffe rent stages of acti vity in the stock market. Some people call HOW A CAMPAIGN IS CONDUCTED Section 9M by Wyckoff All stocks do not move in harmony with the prevailing trend of the market at all times. Stock market is like any other merchandising business. Those who understand it buy only when prices are low with the idea of selling when they are high and they operate only in the stocks or commodities which they can move best so they may secure the highest possible rate of turnover of inventories. A stock carries the earmarks of its chief sponsors. Its action usually indicates the CHARACTER, METHODS and ABILITY of those who operate heaviest in it. All the various stocks should be studied as if they were the RESULT of ONE MAN’s OPERATIONS – the COMPOSITE MAN. Not all of the manipulator’s moves can be detected. Manipulators make not all of the moves. In fact it does not matter to the tape reader of the chart reader whether the moves are real or artificial. Most of the important moves in the market are PREPARED, EXECUTED and CONCLUDED. PREPARATION Takes a lot of considerable time (MM buys 25,000 – 100,000 shares distributed in days, weeks or even months) MM prefers to do this while the market is WEAK, DULL, INACTIVE and DEPRESSED Accumulation of stocks at low prices EXECUTION When ready to go forward with the campaign, the MM waits for a favorable market and proceeds to mark the price up gradually or rapidly If he knows of some favorable announcement due in 30 – 60 days, his operations will be timed and the stock will sell at the highest price fooling the public or by inducing the public to fool themselves


Attracts buying attention by making many transactions, great activity and trading large number of shares as seen on the tape. When the MM wishes to accumulate a line, he raids the market for that stock, makes it look very weak and gives it the appearance of heavy liquidation by selling orders through a great number of brokers. As a rule: The MM DOES NOT go into a campaign unless he sees in prospect a movement from 10 – 80 points. The typical process of working a stock up or down within a certain range means nothing to most people, but to the tape readers and those who know how to interpret charts, it is evidence of important selling, marking the culmination of the move. CONCLUSION Operator disposes at the peak of the good news where everyone has already bought into the news Distribution to weak holders Operator makes a turn to short sell and cancels all buying orders Stock specialist tells floor traders that the stock is in a weak technical position and that there is no support for the next 8 – 10 points and they all get together and raid it down to a point which the Operator covers his shorts.


How Can the Trend Be Your Friend? Sometimes even a fundamentally sound company needs to meet technical criteria to be considered as “good buy”. Given this, it is also importan t to recognize at which stage the stock is, at a given time.

Mark Minervini discussed the Stage Analysis and Four Stages of Stock Price Maturation in his book Trade Like a Stock Market Wizard. According to Mark, “Virtually every superperformance stock made its big gain in stage 2 of its price cycle.” These are the 4 stages on the basis of what is happening with the stock in terms of price action: 1. Stage 1 – Neglect Phase: consolidation 2. Stage 2 – Advancing phase: accumulation 3. Stage 3 – Topping Phase: distribution 4. Stage 4 – Declining: capitulation Stage 1 Characteristic s: "

Stock price will move in a SIDEWAYS fashion with lack of any sustained price movement up or down.

"

The stock price will OSCILLATE around its 200-day (or 40-week) moving average. During that oscillation, it lacks any real trend, upward or downward. This can last for months or years.

"

This basing stage takes place after stock price has declined during stage 4 for several months or more.


"

Volume will generally contract and be relatively light compared with the previous volume during stage 4 decline.

"

NO BOTTOM PICKING – trying to buy a stock at or near its bottom will only be frustrating since it lacks momentum. Do not buy the lowest or cheapest price but at the RIGHT PRICE.

Transition from Stage 1 to Stage 2: "

Stock price is above both the 150-day and the 200-day moving average.

"

The 150-day moving average is above the 200-day.

"

The 200-day moving average has turned up.

"

A series of higher highs and higher lows has occurred.

"

Large up weeks on volume spikes are contrasted by low-volume pullbacks.

"

There are more up weeks on volume than down weeks on volume.

Stage 2 Characteristic s: "

Stock price is ABOVE its 200-day (40-week) moving average.

"

The 200-day moving average itself is in an UPTREND.

"

The 150-day (30-week) moving average is above the 200-day (40-week) moving average.

"

Stock price is in a CLEAR UPTREND, defined by higher highs and higher lows in a STAIRCASE PATTERN.

"

Short-term moving averages are above long-term moving averages (ex: 50 over 150-day moving average)

"

Volume spikes on big up days and big up weeks are contrasted by volume contractions during normal price pullbacks.


"

There are MORE UP DAYS and UP WEEKS on above-average volume than down days and down weeks on above-average volume.


Volatility INCREASES, with the stock moving back and forth in WIDER, LOOSER SWINGS. May look similar to Stage 2 BUT the price movement is much more erratic.

"

There is usually a MAJOR PRICE BREAK in the stock on an increase in volume. Often, it’s the LARGET ONE-DAY decline since the beginning of the stage 2 advance. (ex: largest weekl y decline since the beginning of the move with overwhelming volume.

"

Stock price may undercut its 200-day moving average. Price volatility around the 200-day (40-week) moving average line is common as many stocks in Stage 3 bounce below and above the 200-day average several times while topping out.

"

The 200-day moving average will LOSE UPSIDE MOMENTUM, FLATTEN OUT and then roll over into a DOWNTREND.


The vast majority of the price action is BELOW the 200-day (40-week) moving average.

"

The 200-day moving average, which was FLAT or turning downward in stage 3, is NOW in a DEFINITE DOWNTREND.

"

The stock price is near or hitting 52-week NEW LOWS

"

The stock price pattern is characterized as a SERIES OF LOWER LOWS and LOWER HIGHS, stair-stepping downward.

"

Short-term moving averages are BELOW long-term moving averages.


"

Volume spikes on big down days and big down weeks are contrasted by lowvolume rallies.

"

There are more DOWN DAYS and WEEKS on above-average volume than up days and up weeks on above-average volume.

The Base Count

Stocks need to res t too. After a run upward, th ere is profit taki ng, causing a temporary pullba ck, during which the stock build s a BASE. If the stock is trul y in the middle of somethin g significant, the longer-term tren d will resume. The shortterm pauses allow the stock to digest its previous run-up so that it can move even higher as it emerges from a constructive consolidation period. At some point, the upward momentum ceases; the stock tires and the top is put in. Generally this occurs after thr ee to five bases h ave formed along the way in a stage 2 uptrend. The later-stage bas es coincide with th e point at which the stock’s accumulation phase has become too obvious, tapping out the last of the heavy institutional demand. Bases 1 and 2 generally come off a market correction, which is the BEST TIME for JUMPING on board a new trend.

As the stock makes a seri es of bases along the

stage 2 uptrend, bas e 3 is a little more obvious but usu ally still tradab le. By the time the fourth or fifth base occurs (if it gets that far), the trend is becoming extremely obvious and is definitely in its late stages. By this point, abrupt base failures occur more frequently or it can turn up in a parabolic fashion and end in a climax run or blow-off top. By itself Base Counting will not tell you if a stock has topped or is about to move substantially higher but it is a great way to gain perspective on where you are within the stage 2 advance.

Combined with specific price and volume analysis

along with fundamental analysis, it can be a very powerful tool.


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DT Reminiscences of a Newbie Trader Ebook - Edited.pdf

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