Sunday, June 29, 2014

Active Trader - Range Expansion

Welcome back Active Traders and Wealth Builders.

Many of the posts in this blog talk about active trading.  Truth be told, I find investing much easier.

As an Active Trader, if I could make say $1000 a day, I could pay all of my bills and live a pretty good life. But what are the chances I could make $1000 a day, day in and day out without a big losing day to come along and set me back?  Less than certain to be sure.

We don't want to hitch the wagon of our financial future to anything less than a highly reliable probability of a positive outcome over time. So we are led to the inevitable question, what does work?   Probably a more relevant question is - What works for you?  That's up to you to answer.  Here's what works for me - after all, that's why you are reading this blog, right?

1) Excellent 5-year earnings history as measured by a 5-year earnings growth rate of greater than zero.

Anything less than zero is good and rates in the 10-20% are pretty common.  Only a handful of stocks have 5-year earnings growth rates greater than 50% and one of them is TARO.

2) Reasonable valuation as measured by the PE or Price to Earnings Ratio.  TARO has a PE of 16.

3) New all-time in price.  Bingo for TARO.

4) Range Expansion - The High-Low for a given bar must be greater than those that came previously.

I got to thinking about this last one, and figured it might be a good criteria to add to my favorite scan New High, Low PE, High Growth.  So I took a look around TC2000 and found the following built-in scan called Range Surge with the following built-in formula:

(H - L ) / (AVGH60 - AVGL60) >3

I ran that against the SP-500 and got only one hit, DG or Dollar General.  Then I ran it against all 8000 US Stocks and got 85 hits, and TARO was among them.  So should I add Range Surge to my list of criteria for breakout stocks?

I thought about it and decided against and here's why.

Range Surge is an excellent entry signal and often signals a huge change in the underlying prospects for the company.  But there are many excellent stocks worth buying that are not necessarily having a range surge.

Range surge is instead a flag to alert you to the chance in prospects for a stock, and therefore it deserves to be run independent of the above criteria.  If it happens to overlap (in the case of TARO), that's even better.

Range surge is also good for finding strong continuation candidates.  You might look at a chart like TARO and say that's not a good entry point and you should wait for a pullback.  I would tend to disagree because in my experience, I find that the best stocks take off and never look back.

Have a great trading week ahead and watch for Range Expansion.

Saturday, June 21, 2014

Active-Trader - Flip at Extensions

Welcome back active traders and loyal blog readers.

One of the things I found difficult in my early days of trading options was when to take profits.  Its a completely different mentality from stocks where - when a stock goes up - the last thing you want to do is sell it.  Instead you want to hold onto it for it to go higher, right?

When trading options, you need to have a different mentality as follows.  Once a setup occurs and you enter a position, you need to pick a target and take profits when it gets there.

Case in point is Zillow.  Recall the week before I took profits from the move up from 118 when it hit the fire at 124.  The stock quickly pulled back from there.  But just a day or 2 later, the stock was right back up to the fire line so I went long the following Friday 120 calls at 6.20.  I figured the stock would make it at least up to the 128 area so I took profits when the option reached 9.0 which was well short of the snow line at 132.76 but still a decent profit.

As it turns out, Zillow went much higher - further and faster - than I expected.  And notice how it ran right up to the snow line at 132.76 (almost to the penny) then pulled back.  It close out the week at a new all-time high and I would have gone out long some calls but I was too busy doing my regular job to be on the case at the time.  As for further levels in Z, we have the next snow line up at 137.89 and the next tree line up at 147.54.

SCTY was another case in point.  I got involved on Tuesday this past week after that huge bull elephant bar.  That bar was the largest daily range and daily volume in months.  So I went long the next Friday 50 call at 14.95 which corresponds to a stock price of about 65.  The stock sold off the next day and stalled a bit, but eventually headed higher and I took profits when the option hit 18.  I did not expect the stock to reach the tree line by the end of the week, but it did and almost to the penny!

You might look at that chart and say - what's the big deal - you drew these lines in retrospect right?  Wrong - I knew these levels ahead of time and that's the whole beauty of voodoo.  You know where to take profits on spikes into extensions.  It is at these moments of maximum exuberance and confidence by the market participants that you want to unload your positions.

As for next week, I have long positions in NFLX and CMG and I am expecting to see higher prices ahead in both positions now that we have cleared monthly options expiration.  Recall that option expiration tends to keep a lid on things and once the expiration passes, stocks are often free to run up to the next level.

Have a great weekend and a great trading week ahead.

Sunday, June 15, 2014

Active-Trader - 5 Days of Fib - Day 5

Welcome back loyal blog readers.

This is the last in our series 5-days of fib where we cover fib levels for many popular stocks. Since we started at the beginning of the alphabet, its only fitting that we start with end in this wrap-up post.

We start with real estate giant Zillow.  Considering this company still hasn't earned a profit, the stock has been a success rising to a new all-time high this past week after an IPO at $40 back in 2011.

Regarding fib lines, you may ask, do the lines provide an actual usable information when trading?  I can tell you that they do here's how.  This past week, I was fortunate to get long the Jun 21 100 calls at about on 6/10 at about 18.60.  2 days later we had a major breakout and the stock shot up to all-time high territory at about 124.  As this point, confidence was high, the position was well in the money.  But noticing major voodoo resistance, I sold the option at 24.00 on a spike up to resistance.  It wasn't the high of the move, but it clearly formed an area of resistance.  Like magic the stock sold off from those levels and found some support in the low 120's.

As for the voodoo wave 1 levels, Thinkorswim has a handy feature where you can hold your mouse cursor over the 100% area of the Fib retracement and a box pops up showing you the price levels.  Using that, we can see that wave 1 started at about 24 back on 11/15/2012 and ended at about 62 on 5/10/2013.   Once you know that, all of the other voodoo levels are easily calculated using the Fib-Retracements tool.  Using that, we can see that we have some resistance to get through at the 261% line here at 124, but we are still well short of the 423% line up at the 186 price level.  I expect further upside in the shares and went out long the June 21 120 call looking for a spike up this coming week.

Next and last up on our 5 days of voodoo series is restaurant review site YELP.  Cramer calls this company the 'holy trinity' of tech - social/mobile/cloud.  Unlike Zillow, I don't use the service myself, but the stock took a major pop this past week when travel giant PCLN announced it would acquire restaurant reservation company Open Table (OPEN).  I don't use that service either, but I was long YELP and made some money on the pop in the stock.

As for the Fib levels,  wave 1 started at 13.28 on 5/29/2012 and ended at 6/23/2013.  I don't have complete confidence in these levels, but notice how the 161% line - easily penetrated on the way up, became support just being breached to the upside.  For even more convincing evidence, notice how the recent low in the stock (at 49.11) was just pennies below the 161% line at 49.33.  You can't make this stuff up and is further evidence of the power of fib lines in action.  BTW, I went out long the next Friday Yelp 70 call at 6.28.

Looking back at the fib series in retrospect, I didn't even get to the major indices, DIA, QQQ, SPY and IWM.  I expect to cover those in a future post.

Happy Father's day to all the dad's out there and enjoy your day and the rest of the weekend.  And have a great trading week ahead.

Sunday, June 8, 2014

Active-Trader - 5 Days of Fib - Day 4

Welcome back Active Traders and Wealth Builders.

In this post, let's tackle the voodoo lines for Tesla (TSLA).  I struggled mightily to come up with levels that corresponded to a screen shot I picked up in a free video from John Carter from Simpler Options which showed just 2 lines at 274 and 169.  I didn't know which lines these were in the sequence and could not figure out anything obvious from the chart that correlated with these levels.

To unravel this mystery, I put together the above table that shows the different levels in the fib sequence along with relationships between the levels. The sample column shows an idealized wave 1 move from 10 to 20 and the resulting prices for the subsequent levels.  The % Up column shows the percentage change between the prices at that level from the 1.0 level at the end Wave 1. Given that, can you fill in the remaining levels for TSLA?

To figure it out, I took the difference between 274 and 169 and came up with 105.  Note that percentage up between the 4.23 line and the 2.61 line is double (16% to 32%).  So divide the 105 by 2 and you get 52.5 which is the height of Wave 1.  Subtract 52.5 from 169 and you get the 1.61 line at about 116.5.  Now subtract 31.5 (0.61 times 52.5) from 116.5 and you get the top of wave 1 at about 85 and the bottom of wave 1 at about 32.5.  Fine, but do these associate with actual chart levels?

Both Thinkorswim and TC2000 could not help answer this question since they could not provide clear daily charts at times in the past  However Tradestation came through like a champ and I was able to find levels which corresponded with these numbers as shown in the graphic. Using that, I estimate that Wave 1 began back on 3/15/2013 at a price level of 35 and ended at 85 on 5/15/2013.   Note how after a rest at the end of wave 1, TSLA quickly ran up to the 1.618 line and paused, further evidence that we have the correct levels.

Given all that, here is the complete set of Voodoo fire lines for TSLA. The all time high in price at 265 is just beyond the 423% line at 239.  Since then TSLA has been in retreat and the next major support is the 261.8% line at about 181.  That said, I hate TSLA stock on the long side since the valuation is ridiculous at these levels.

Overall, I spent about 4 hours trying to unravel this mystery.  But now that I understand the price relationships between the levels, it will be easier to calculate the missing lines when I just know 2 of the 5 line set.

Enjoy the rest of your weekend and have a great trading week ahead.

Sunday, June 1, 2014

Active-Trader - 5 Days of Fib - Day 3

Welcome back loyal blog readers.

In this post we're going to pick up the pace on our review of the Fib lines and cover all 'usual suspects'. These are the big tech names that get all press because of the high prices and big point moves.

Fib on these charts can be a challenge because the Elliot Wave 1's occurred several years back and many points ago.  To find the Wave 1, you need to go to a monthly chart which is not even offered by default on the Thinkorswim platform.  Not a problem, just add the 10 year monthly time frame.

First up is everyone's favorite search engine Google.  Wave 1 started at the low of the real body of the monthly candle on 12/12/2008 at a price level of 142 and ended on 1/26/2010 at a price level of 312 on 1/26/2010.  Note how the 100% level was resistance for the better part of 3 years and the price did not break about that level and stay above it until the breakout that occurred in 2012.  After that, the price sailed upward and first found resistance - then later support at the 161.8 line at a price level of 417.  Note that the stock has since split 2 for 1 but it doesn't matter since all the price relationships are intact.

How do you know the fib levels are correct?   You often get clues along the way and the way prices reacted to the 161.8% line is a solid clue that these levels are good.  As for more recent price action, the 61.8% tree line line proved to be a good support level and the next major upside target for GOOG is the 261.8% fire line at 587. With the stock price closing at $560, the 587 price level is just a chip shot away and we could see that level as early as this coming week.

Next up is social media stock LinkedIn. Wave 1 started at the low of 56 on 12/24/2011 and ended at 123 on 4/6/2012.  I'm not a buyer of LNKD shares since the valuation is excessive with a PE of 666 versus peer FB which has a PE of about 85 and whose shares are much earlier in the speculation cycle.  I will be looking for potential opportunities to sell call credit spreads when prices approach overhead resistance.

Next up is online travel powerhouse Priceline - PCLN.  Looking at this chart, its hard to tell where to start since the chart has been in an up-trend for so many years.  In fact the low of the chart was 17.42 set back in 2004 and now the stock is at at 1278. That comes to about a 50% per year compound rate of growth which needless to say is a spectacular performance.   In any case, the stock took a pause back in 2012 and went into a corrective 5-wave down pattern.

From here it gets tricky and I have to admit I had a hard time coming up with levels which corresponded to a clear beginning and end of Wave 1.  What I came up with is Wave 1 beginning at a price level of 646 back on 2/18/2013 and ending at 820 on 5/28/2013.  Only problem is that 646 does not correspond to an actual low on the chart. Putting that aisde, the 261% and 423% levels have proven to be excellent levels of support and resistance on the chart, so for now, we'll just go with it.

Bringing PCLN up to date, we have paused at the upper tree line right at about 1276 and after some after we get through that congestion, I expect we will eventually see a new all-time high in the shares.

I also meant to cover Tesla (TSLA) and Zillow (Z) in this review but ran short on time so we'll have to cover those in a separate post.

That's all for now, have a great week ahead and good trading.