Stock Trading Basics to Swing Trading

[LiveLife]

=mid-term template update =

Good evening,

For the past few weeks, I've continued to look at what indicators could be used for the "mid-term" swing trading template.  Believe me, it's been harder than I originally thought.  I figured that if I looked hard enough, "obvious" longer-term indicators would make themselves evident.  I was wrong. 

When I thought I found an indicator that would work, I applied it to 6 month and 1 year charts.  What I found was that it did not consistently "predict" the movements of stock prices on a longer term.   

So far, I have tried 3 month average volume versus current volume, various combinations of moving day averages, different stock filters, and numerous technical analysis tools.  All with little success.     So, now what?  Back to the drawing board? 

Well, I do have some good news.    And that's the reason for this mid-term template update.  Some years ago, I started my introduction to stock trading by studying Elliott Wave Theory.  Those not familiar with this stock trading theory can read more about it here: (You can see the sample pictures below)
http://www.stockcharts.com/education/MarketAnalysis/elliotwavetheory.html

As I did some review of the Elliott Wave Theory, I realized something.

1)  If the short-term stock trading template represents the groupings of the smaller waves,
2)  then could we develop a representation of the larger wave grouping?
3)  So I kinda applied the Elliott Wave Theory concept to the 1 year chart as a test.

If you look at the two charts of NVAX below, top chart is drawn with daily stock price activity.  The bottom chart is drawn with weekly stock price activity, 5/10 MA and I drew the volume separately for more clear viewing.  RSI (14) and MACD remains the same.

The daily chart appears chaotic, yet the weekly chart seems to show a "broader" stock price trends.  Do you see what I see? 

I am going to spend a little more time reviewing the Elliott Wave Theory this week and weekend.  I believe we may have something here. 

[LiveLife]

Good morning,

Back to short-term swing trading.  GNBT continuing to gain, and as I posted last night, NVAX looking positive also.

Now, let's take a closer look at RHEO.

I have been watching RHEO since the "big drop" and RHEO doesn't have all the buy indicators, but is extremely oversold (RSI below 30) due to recent drop based on a single bad news.  Because nothing else about this company has changed (fundamentals, balance sheet, etc.), I believe the large price drop was due to panic.  If you look at the 1 year chart, RHEO has been trading in the $6-$8 range with recent gain to $12 on anticipation.

With such a large drop from $12 to $3.50, many that bought at $8+ range may hold to recover their loss and new buyers may be buying in anticipation of "normalization" of the stock price after the panic sell off (not back to $8, but perhaps to $4-$6+ range short-term?).

Because of the large drop, any increase in price and volume will improve the technical indicators (RSI, MA and MACD) and make RHEO an attractive buy.

[LiveLife]

Another point to consider is this.  Institutional/Manager activity has been active for RHEO for the past month and I wonder if they even had a chance to sell.  Probably not.  Looking at the one week activity chart, there appears to be a lot more of buy requests than sell requests.

Lycos I-watch is not a true indicatior of institutional/fund manager activitiy, but does provide some insight into their activity.

http://thomson.finance.lycos.com/lycos/iwatch/cgi-bin/iw_ticker?ticker=rheo

[LiveLife]

Current resistance is at $3.65 with support at $3.35.  Breaking through this resistance will be significant and may lead to true "rebound" activity.

[LiveLife]

Nice rebounding day for RHEO! 

Late in the trading day, the resistance of $3.65 was broken to $3.68 and pushed the price up in after hour trading to $3.73!  1.3 mil shares traded was more than the 3 month average volume of 1.0 mil.  New resistance is at $3.84 with support at $3.32.

Lycos I-watch showed more institutional/manager buy requests today.  A nice confirming indicator.
http://thomson.finance.lycos.com/lycos/iwatch/cgi-bin/iw_ticker?ticker=rheo

As you can see from the template, if the rebound continues, RHEO may be a good mid-term stock to hold for a steady gain up.

[LiveLife]

Gain day for GNBT and NVAX.

New resistance for GNBT is at $1.71 with support at $1.49.  As to NVAX, new resistance is at $4.88 with support at $4.30.  Technicals are very bullish for both of the stocks, but as a short-term swing trader, I would caution that they need to be watched on a day-by-day basis as RSI levels are approaching previous profit taking points.

[LiveLife]

Has SPEX done falling?

[LiveLife]

I am doing my review of Elliott Wave Theory and technical indicators.
http://www.investopedia.com/university/technical/
http://www.investopedia.com/articles/technical/111401.asp

While reading on RSI (Relative Strength Index), I came across another definition of oversold.  I believe RHEO definately qualifies as being oversold. (see definition below)

If you look at the "bad" news that caused the massive panic sell off more closely (as it's been addressed at Yahoo finance MB), it DOES NOT indicate that RHEO treatment did not work for Macular Degeneration (often called AMD or ARMD for age-related macular degeneration).  http://www.allaboutvision.com/conditions/amd.htm

In fact, IT DID WORK!  Here's the quote from the link: "As expected, the treated group demonstrated a positive response."  The problem was that the control group also showed improvement.  So the problem is with the control group, not with the RHEO treatment.  http://biz.yahoo.com/bw/060203/20060203005252.html?.v=1

I anticipate a clarification PR from the company after they examine what caused the improvement in the control group.  The next PR should have a signicant influence on the stock price (up if good, down if bad). 

Well, back to my review of Elliott Wave Theory.


Oversold - What does it Mean?
http://www.investopedia.com/terms/o/oversold.asp

A condition in which the price of an underlying asset has fallen sharply, and to a level below which its true value resides. This condition is usually a result of market overreaction or panic selling.

A situation in technical analysis where the price of an asset has fallen to such a degree - usually on high volume - that an oscillator has reached a lower bound. This is generally interpreted as a sign that the price of the asset is becoming undervalued and may represent a buying opportunity for investors.

Identifying areas where the price of an underlying asset has been unjustifiably pushed to extremely low levels is the main goal of many technical indicators such as the relative strength index, the stochastic oscillator, the moving average convergence divergence and the money flow index.

[nata489]

could you take a look at PXT?

[LiveLife]

nata489,

Unlike RHEO, PXT's large drop (in history of PXT) is due to "actual" hurricane losses in the range of $700+ million.  The initial drop was from $25 to $13 the past few months.  After last week's increase in hurricane loss estimate from $400+ mil to $700+ mil, the second drop from $13 to $4 happened.  The huge loss will change company fundamentals, balance sheet, etc.  http://finance.yahoo.com/q/h?s=PXT

RHEO's  drop was due to one bad trial news that did not change company fundamentals.

With that said, time will be the judge.  You can follow PXT's technical indicators to see if it rebounds.

[rurouni]

Hi LL,

I am still following and enjoying your great posts.  I applaud you for your dedication.

I have been reading about 2006 economic forecast and apparently a lot of sources has been saying that we will be downturning by the middle of this year through next year.

Just wondering what is your opinion about the current economic condition and what do you use to select what stock to purchase in the case of current economic condition?  (E.G. the best company in the best industry, etc)

Thanks,

Wayne

[LiveLife]

Thanks rurouni (Wayne) for your comments.

Actually, it was easier for me to trade during the bear market of last summer/fall. 

But, like so many "investors" I used to try and anticipate the influence of the US and world markets/economy had on specific stocks.  I even followed the Dow/Nasdaq/AMEX daily to see if it had affect on the stock price.  I even did the "sector rotation" stock trading thing too, without much success.

That's why I've become an aggressive short-term swing stock trader.  Like David, I trade technically now.  No more sector rotation or long-term buy-and-hold (buy-and-hope) for me.

I will continue to trade short-term or convert to all cash if the market really turns bearish and wait for recovery.  (I am sure we will all see that if/when it happens)

When the mid-term template draft demonstrates effectiveness, I will start trading longer term (weeks instead of days).  Actually, I am thinking that RHEO may be my first mid-term candidate.   Time will tell.   

[LiveLife]

= Mid-term stock trading template update =

At last, here it is!  The first draft of the mid-term template!

Thank you for all of your support! (your positive emails of you making money using the template is my ultimate reward!)    And I thank David Randolph and Frederick Ramsburg for maintaining this public forum for us!  (If you benefit from this website, return the favor and donate or become a premium service member.  David and Frederick quit their jobs to support this site full-time last year!  They got to eat too, you know.  )

Below is the latest "revised" swing trading template with instructions for short-term and mid-term.  (For daily posting, I will use the templates only).

After examining many indicators to use for mid-term trading (more than 1 week), I have found that Elliott Wave Theory concept of using wave cycles was the key.  While doing the review of the Elliott Wave Theory, I realized that the short-term template was basically focusing on the smallest of the wave cycles (see wave cycle samples below).

To get a picture of the "grand wave cycles" I increase the charting period from daily to weekly, 3 months to 1 year, 5/20 MA to 5/10 MA (but for weekly charts, 5/10 stands for longer periods).  I have applied the mid-term template to various stocks and it seems to work!

Since I am a swing trader by heart, I recommend that short-term template be the primary tool to be used and mid-term template be used selectively for stocks that demonstrate longer-term gains.  I am still pondering where company fundamentals (P/E ratio, earnings, etc.) should fall in, but that's for later.  For now, we got something to work with.

So, we can start our trial period for the mid-term template.  Feel free to use the draft mid-term template and provide feedback as to how it is working for you.  I have reposted NVAX short-term and mid-term charts so you can see the difference.

Remember, that this MB thread is here to support the newbies to stock trading and traders seeking to become more effective.  All of our tools are work-in-progress.  The templates will continue to evolve (we are at version 6) to become more effective in time.  Don't rush your trades, do your practice of running charts and become familiar with the patterns (RSI, volume and MACD rise/fall cycles specifically).  A little time spent learning the charts/stock patterns will increase your probabilities of making profit stock trading.  So, let's do some stock trading!!!

"Give a man a fish, you feed him for a day.  Teach a man to fish, you feed him for life."   

[nica33]

Hi LL!!!!!!  Great job!!!!  

I'm wondering if you need to fix the volume for the long term template.  Since you are working with weekly chart, The vol. must be bigger (weekly) than vol. used in short term template?

[LiveLife]

nica33, thanks for the comments.

And nice catch!  I forgot to multiply the volume for the weekly chart.

I went ahead and multiplied by 5 for 5 days of trading days for the week.  Like I mentioned on previous posts, the templates are work in progress and we'll continue "fine tuning" them to make them more effective.

Below is revision 7 of the templates.