2-DAY MARKET SELLOFF SPOOKS SOME INVESTORS

Technical analysis is a wonderful tool and has led Company Invest stocks to some wonderful gains over the past several months.

But the last two days have been big selling days on high volume.  What does that mean and how do you prepare for a large correction or an outright reversal?  That’s the even better thing about technical analysis:  You can make money when the market goes up or down.  But more on that later.  First, I want to address the recent pick, HOV.

HOV, A FAILED TRADE

HOV was an excellent trade setup and had a symmetrical triangle pattern on its price chart.  Company Invest recommended it over the weeked for a possible buy this week.  However, since we had a long weekend (market closed Monday) and with the unrest in Libya, the market gapped down on Tuesday morning, and with it, HOV.  Thus, I never entered a position in HOV, which is a good thing because it sold off big-time.  The thing about symmetrical triangles is that usually they are continuation patterns (they are a “breather” before a continuation of the previous trend, which was up).  However, they can break either way, and in this case, Tuesday HOV broke down out of the triangle (see below).

Although I’m glad I wasn’t able to enter the trade because it failed, it was still a good Company Invest pick based on the charts and offered good risk/reward.  As with all trades, you should always use a stop loss order every time you place a trade.  And, in my last post, I suggested a stop loss on the trade at $4.29, which would have been triggered.  This is important because if you do this all the time, you limit your losses, but let your winners run.  It is in this manner that you can lose on 3 out of every 5 trades and still make a nice profit at the end of the year. Of course, we shoot for a higher win percentage than that, but the fact is that with a disciplined strategy you can make money winning on only 2 of every 5 trades.

COMPANY INVEST CURRENT MARKET TAKE

Currently, the only long position I hold is penny stock Liquid Metal (LQMT).  It just looks and smells like a 10%+ correction in the broader market here, so we recommend either staying in cash while this correction plays out, or trying a “short” ETF, which gains value when the market goes down.

I opened a position in MWN (short ETF for Midcap stocks) on Tuesday and we’ll see how that plays out.  So far so good.

The Russell Index broke it’s long term trendline earlier this week (see below chart) and also broke out of a rising wedge pattern, which is also bearish.

Some options for being short small and midcap stocks incude:

• SDD
• MWN
• TZA

Company Invest will continue to monitor how this plays out, but there will be more company stock picks here when the setups indicate it’s a favorable trade opportunity.

Good luck to all, and remember we made LOTS of money from December 1 all the way through Tuesday.  A correction is a good thing and will give us the opportunity to find good stocks on sale.

It’s been a crazy week on Wall Street.  The move has been mostly down with the exception of yesterday’s tremendous rally because of the GM IPO and a better than expected economic report (Philadelphia Manufacturing).  But all week the retail sector has been strong, and today’s Company Invest pick, Lowe’s (LOW) in particular looks poised for a big rally.

COMPANY INVEST TECHNICAL ANALYSIS

Looking at the chart “A” is the 3-day Relative Strength Index.  As you can see the momentum is positive and it is about to break through 50.  RSI readings above 50 are considered quite bullish.

“B” is the price chart.  Notice, instead of the usual candlesticks, I chose to display a line chart.  This is good for seeing certain patterns.  There is a powerful bullish pattern called the “W” pattern.  Essentially it is a double bottom pattern where the stock sells off, rallies, then pulls back again before really taking off, thus forming a “W” shape.  Two keys to this pattern:  #1 the second “V” of the “W” should not dip as low as the first.  What this says is that after a rally, there was just some normal profit taking (not a heavy selloff).  #2  The most powerful occurrence of the “W” pattern is when you see it occur right under a major moving average.  That’s because many short sellers place their stops right above moving averages.  So the theory is, if the stock price breaks through the moving average, those shorts will be forced to cover and buy back shares they sold, thus making the stock move even higher.  If it sounds confusing, don’t worry.  Just look for the W under either the 50 day or 200 day moving average with the right side higher than the left and you’ve got a winner.   And look at Thursday’s chart of LOW.  BINGO!

“C” is the MACD histogram.  Yesterday we got a bullish pPp reversal on the chart.  This is a 3-bar reversal where you have a selling bar, a deeper selling bar, then a shallower selling bar.  Confirmation of this pattern will occur when LOW closes above $21.64 (yesterday’s close).

“D” is the slow stochastic momentum indicator.  Notice the nice higher low the stochastic put in (green up-sloping line).  Also, we got a bullish touch of the signal line (black) with the stochastic line (red).  Look for a solid cross of the signal line to the upside for confirmation.

Company Invest Bottom Line: Looking at the black parallel lines in the price chart it looks like LOW could easily gain 10% in the near future and move to the $23.25 area for a great trade.  Start with 50 or 100 shares and put a stop in at $1 below the purchase price.

Company Invest Recent Picks:  Still holding ERY and QID despite a rough day yesterday.

MARKET STUTTERS DESPITE QE

Despite the implementation of Quantitative Easing (QE2) this week by Ben Bernanke and the Federal Reserve, there was a swift selloff in the market today.
Very few stocks closed in the green with the exception of Home Depot (HD) and some others in the retail sector.

Gold, oil, and most other commodities sold off hard as the dollar rallied fiercely despite the daily buying of US Treasuries by the Fed through Permanent Open Market Operations (POMO). Speaking of Quantitative Easing, for those of you who don’t know exactly what it is, check out the entertaining video below today’s trade update; it’s priceless!

COMPANY INVEST TRADE UPDATES

ERY: ERY is a triple levereged (3X) Bearish Energy Sector ETF. We suggested getting in last week and got stopped out. We then Re-entered the trade on Monday at $29.25. Since then, ERY has gained a nice 8.25%, closing at $31.67 today. What to do now? This trade is doing fantastic! We believe it has much upside to go. Hold your shares and look to add to your position on any slight pullback (possibly tomorrow). We put a 6% trailing stop in today. That way, worst case we’re still ahead on the trade.

QID: QID is the Technology sector Ultrashort ETF. We recommended QID in last weekend’s post for purchase on Monday morning. We got it at $12.60 on Monday and since then it has gone up nearly 5%, closing at $13.20 today — Not bad for two days! What to do now? Hold and buy more on a pullback (when the market bounces in the next trading day or two).

QE VIDEO

Despite Ben Bernanke and the Federal Reserve’s $600 billion effort to prop the stock market and economy, it looks as if a correction is in order now.  Now would be a good time to pause, take profits and sell a portion of your long positions, or, if you are aggressive, why not make money when the market goes down?   You can do that by shorting stocks, buying put options, or, our preferred method, buying inverse ETFs.

We know that the market goes down much faster than it goes up because fear is a powerful thing, especially when coupled with money.  Right now the early signals indicate a 5 to 10 percent correction looming in the S&P 500.  And when the S&P 500 goes down, 3/4 of all stocks go down with it so take heed.  If you want to stay in your long positions, that’s fine.  Use a 5 to 8% trailing stop (whatever you are comfortable with).  A trailing stop is a wonderful tool offered by most online brokers.  It is a variable selling point and is great when you’ve already made money and want to lock in your profits.  If you put a 5% trail in, your selling point is always 5% lower than the current bid for the stock or ETF you are in.  That way, if the price keeps going up, so does your stop, however, once it corrects 5%, your shares are automatically sold, and your profits are locked in.

Today’s pick is QID.  QID is a reverse ETF which moves in the opposite direction of the QQQ’s (technology ETF).  That is when the technology sector is going down, QID is going up.

Looking at the chart there are several encouraging signals:

“A” is the slow stochastic momentum indicator.  It has been oscillating in oversold territory since early September!  We think this time the stochastic line has a great shot of going all the way up to 80 (overbought).  If that happens, QID will rally bigtime!  There is a powerful divergence between the stochastic and the price channel.  Look at the severely downsloped price trendline (red), compared to the stochastic lows (green line).  The stochastic line is flat to slightly sloping upward, indicating a change in trend.

“B“is the price chart for QID.  We had a powerful white candle on Friday (typically a selling day) and QID had a positive week overall.  More importantly, are the 3 and 10 day Exponential Moving Averages (EMAs).  The green and red arrows in the chart indicate buy/sell signals generated when the 3 day EMA (blue line) crosses up or down through the 10 day EMA (red line).  As you can see this technique gives wonderful stock trading signals.  The last signal (SELL) occured at the beginning of September.  Since then QID has gotten a 36% haircut! As of Friday’s close the 3 day EMA is EXACTLY the same as the 10 day and is just about to cross to the upside.  Monday could be an EXCELLENT entry point.

“C” is the MACD histogram.  Look at the massive bullish divergence between the histogram and the price channel.  This is a powerful buy signal.

“D” is the ADX indicator.  You get a buy signal when the green line crosses up through the red line (heading that direction but hasn’t happend yet).  However, the ADX line (black line) gives early signals.  The ADX line measures trend, and the trend has been up since early September, however that line is now rolling over and sloping down.

Bottom Line: Look for an entry point Monday and buy 50-100 shares of QID with a stop $1 below your entry point.

UPDATE: We had two wonderful stocks here in X (US Steel) and DGP (Double Gold ETF).  Hopefully you took profits and sold all of your shares now.

ERY:  We recommended it last week, but our stop of $29.20 was triggered.  However, ERY rallied hard on Friday and we really like it again as a trade.  Look to re-enter on Monday.

WHAT IS A MUTUAL FUND?

A mutual fund is an open-ended fund operated by an investment company, which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. Mutual funds raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public. Mutual funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and, in effect, in each of its underlying securities. Benefits of mutual funds include diversification and professional money management.

Our Take: Recent studies have concluded that the over 85% of mutual funds CANNOT beat the annual return of the S&P 500.  So much for professional money management.  In addition, mutual funds are expensive, with front end commissions and several “hidden fees,” that the average Joe has no clue about.  And your performance is dependent on the fund manager buying and selling the right securities at just the right time.  And fund managers do not get bonuses due to good performance; they get bonuses only based on the amount of dollars coming into the fund.  So all their efforts go into getting as many people to buy into their funds as possible.  Also, very few of the strategies on this site can be applied to mutual funds.

WHAT IS AN EXCHANGE TRADED FUND (ETF)?

An ETF is a fund that tracks an index, but can be traded like a stock. ETFs always bundle together the securities that are in an index. Investors can do just about anything with an ETF that they can do with a normal stock, such as short selling. Because ETFs are traded on stock exchanges, they can be bought and sold at any time during the day (unlike most mutual funds).

Their price will fluctuate from moment to moment, just like any other stock’s price, and an investor will need a broker in order to purchase them, which means that he/she will have to pay a commission. On the plus side, ETFs are more tax-efficient than normal mutual funds, and since they track indexes they have very low operating and transaction costs associated with them. There are no sales loads or investment minimums required to purchase an ETF.

Our Take:  We love ETFs.  ETFs charge a fraction of the fees of mutual funds and can be traded just like a stock.  And online broker’s offer very reasonable commissions ranging from $4 to $10 per trade.  Additionally, ALL of the trading strategies you read about on CompanyInvest.com can be used on ETFs.

MORE REASONS TO BUY ETFs

There are two main reasons we love ETFs at CompanyInvest.com:

#1: ETFs have much lower fees than mutual funds.  Over time this can be very significant.  Consider the following example:

Investor A has a portfolio of four of the leading mutual funds with an average expense ratio of 2.16% (Typical of a mutual fund portfolio).  He initially invests $1 million.  His  portfolio yields a 10% annual return.  After 30 years, his portfolio grows to $9.6 million.  Not bad right?

Investor B has a portfolio of four of the leading ETFs with an average expense ratio of 0.19% (Typical of an ETF portfolio).  He also initially invests $1 million.  Let’s assume his portfolio also yields 10% a year.  After 30 years, investor B’s portfolio grows to $16.5 million!

So over a 30 year period, with identical annual rates of return, Investor B has accumulated nearly $7 million more dollars than Investor A.  And that is ALL due to higher fund expenses and other fees over time.

#2 ETFs can be traded just like a stock. This means you can buy and sell them whenever you want, and you can also short them (and make money even when the market is trending down).

ALL of the strategies we suggest on Companyinvest.com can be used with ETFs; but very few with mutual funds.  Once you learn to trade and incorporate trading strategies such as the ones taught on this site, you can beat the S&P 500 100% of the time; not 15% like the mutual funds.

Bottom Line: Participate in mutual funds if your company offers a matching contribution to your 401k program.  But consider opening a ROTH IRA (all the major online brokers such as Scottrade, Etrade, Tradeking, and Sharebuilder) offer them.  You will get much more bang for your buck and if you use the strategies discussed on our site, your annual return can be more like 20% per year, instead of the 10% used in the example above.

WHAT IS THE VIX?

 We strive to introduce new trading strategies at companyinvest.com.  Today we talk about a contrarian indicator, the VIX index.

 The VIX is the symbol for the Chicago Board Options Exchange’s volatility index. It measures implied volatility (not historical or statistical volatility) of a wide range of S&P 500 options. It is often called the “investor fear gauge” because it reflects investor’s best prediction of near-term market volatility, or risk. In general, VIX starts to rise during times of financial stress and lessens as investors become complacent. It is the market’s best prediction of near-term market volatility.  The good news is we can use the VIX to forecast the future direction of the market.

 HOW CAN YOU VIEW THE VIX?

 You can access the VIX index using your stock software or any major online trading platform software such as www.stockcharts.com or Yahoo Finance.  Enter the symbol “$VIX”. 

 USING THE VIX TO TRADE

 There is an old clichéd saying about the VIX index that goes:

 ”When the VIX is high, you buy… When it’s low, you GO!”

Looking at today’s chart of the VIX, “A” is the 3-day relative strength index (RSI).  Look at the past 3 times the levels were this oversold (green circles).  They all led to rallies in the VIX, while at the same time corrections in the S&P 500.  Here’s how they played out:

• June 21-Jun 30 VIX rally =     10.67% Correction in S&P 500
• July 12-July 18 VIX rally =     3.93% Correction in S&P 500
• October 19-20 VIX rally =       2.6% Correction in S& P 500
• November 5 to ? =                  3 to 10% S&P Correction on the HORIZON!

 ”B” is the price chart.  Right now the VIX is approaching a several month low, so if the saying rings true, you should sell some of your long positions or consider going short for the impending correction.  Also, today’s candlestick is a doji, indicating a probable change in trend.

 ”C” is the MACD histogram, a wonderful forecaster of trend change.  It looks like a bullish divergence is forming, meaning the VIX price made a LOWER low, while at the same time the MACD is forming a HIGHER low.

 Bottom Line: Position yourself for a 3 to 10% market correction.

 RECENT COMPANY INVEST PICKS

 We found some hot stocks recently!

 US Steel (X).  We said to buy shares at the $40 level on October 28, and since then the stock has rallied over 21%!  Many investors don’t get that kind of return in a whole year.  What to do:  Take 3/4 to all of your position off and put the profits in your pocket.

 Double Bull Gold (DGP).  We said to buy shares at the $39 level.  The trade is currently up 6.5% and still rising.  What to do:  HOLD or put a 5% trailing stop in.

In today’s environment where Central Banks are intervening, Quantitative Easing is the buzzword, currency manipulation is ongoing, there is much volatility in World currencies.  Should you trade currencies? How can you?  One way is to use ETFs.  The following is a short list of currency ETFs you can buy/sell:

• US Dollar                              UUP
• Australian Dollar               FXA
• British Pound                      FXB
• Euro                                        FXE
• Japanese Yen                      FXY
• Chinese Yuan                      CYB
• Canadian Dollar                 FXC

Forex Trading is another option.  Forex trading online is a fast way to use your investment capital to it’s fullest. The Forex markets offer distinct advantages to the small and large traders alike, making Forex currency trading in many ways preferable to other markets such as stocks, options or traditional futures. Here are seven reasons why you’ll want to look into Forex Trading online.

1 – Forex is the largest market.
Forex trading volume of more than 1.9 billion, more than 3 times larger than the equities market and more than 5 times bigger than futures, give Forex traders nearly unlimited liquidity and flexibility.

2 – Forex never sleeps!
You can execute forex trading online 24/7, from 7AM New Zealand time on Monday morning, to 5PM New York time on Friday evening. No waiting for markets to open: they’re open all night! This makes Forex trading online a very attractive component that fits easily into your day (or night!)

3 – No Bulls or Bears!
Because Forex trading online involves the buying of one currency while simultaneously selling another, you have an equal opportunity for profit no matter which direction the currency is headed. Another advantage is that there are only around 14 pairs of currencies to trade, as opposed to many thousands of stocks, options and futures.

4 – Forex Trading online offers great leverage!
You can make the most of your investment resources with Forex trading online. Some brokers offer 200:1 margin ratios in your trading accounts. Mini-FX accounts, which can typically be opened with only $200-300, offer 0.5% margin, meaning that $50 in trading capital can control a 10,000 unit currency position. This is why people are flocking to Forex trading online as a way to highly leverage their investments.

5 – Forex prices are predictable.
Currency prices, though volatile, tend to create and follow trends, allowing the technically trained Forex trader to spot and take advantage of many entry and exit points.

6 – Forex trading online is commission free!
That’s right! No commissions, no exchange fees or any other hidden fees. This is a very transparent market, and you’ll find it very easy to research the currencies and the countries involved. Forex brokers make a small percentage of the bid/ask spread, and that’s it. No longer any need to compute commissions and fees when executing a trade.

7 – Forex trading online is instant!
The FX market is astoundingly fast! Your orders are executed, filled and confirmed usually within 1-2 seconds. Since this is all done electronically with no humans involved, there is little to slow it down!

Forex trading online can get you where you want to go quicker and more profitably than any other form of trading. Check it out and see what Forex trading online can do for you!

With the dollar rallying most of the past week, materials and commodity stocks have consequently sold off hard and US Steel is no exception.  Since October 11 (in just two weeks), the stock has pulled back 13.51%.

Trading is all about finding the right time to buy.  Many investors strictly look at company fundamentals (earnings, cash on hand, debt, price to earnings ratios, etc) to place trades.  Problem is fundamentals will tell you WHY to buy a stock, but not WHEN to buy.  That is where technical analysis comes in.  Using chart patterns and momentum indicators, we can tell when the highest probability of a good trade will occur.  And at Company Invest, we think right now is a great time for a US Steel trade.

COMPANY INVEST TECHNICAL ANALYSIS

“A” is the 3-day relative strength index, a favorite swing trading indicator at companyinvest.com.  As you can clearly see, this indictor is WAY oversold (brown area). Look at what happened the last 5 times the RSI was this oversold (green circles).  Now look at the corresponding green arrows on the price chart that indicate trade entry points.  Each entry point resulted in a minimum of a 10% gain!  And here we are again…

“B” is the daily stock pricing chart (going back to mid May).  “Support” is very important in technical analysis.  Support happens when the big investors (pension funds, hedge funds, 401k fund manager) come in and buy.  We’ve illustrated two key levels of support on this chart (S1 and S2).  US Steel has been trading right at the S1 support level for the past three trading sessions without falling below it.  In this case it means buying the stock at $40 and change is a great entry.  Notice how the $40 level was also key support back on June 7.  And should the S1 support break, the next support level (S2) is the $37 area.

Also, the red selling volume bars have been getting shorter over the last 3 trading sessions while the stock has been basing.

“C” is the MACD histogram which gives nice advance signals for stock directional change.  Although you can see selling momentum has been occurring (stair step down blue bars), it looks as if a bullish divergence is occurring between the MACD histogram and the price chart (green line in “C” Vs. red line in “B”).  Simply put, it looks as if a higher low is setting up on the histogram, while at the same time a lower low has occurred on the price chart.

“D” is the slow stochastic momentum indicator.  At 8.88, it’s also deeply oversold.  Look for the signal line (black) to cross up through the MACD line (red) in the next day or two.  Multi day rallies in the stock occurred the last 4 times this signal was triggered (green circles).

Company Invest Bottom Line:   Grab US Steel (X) here and point your stop loss order in just below support at around $39.95.  A $44 price target could be hit in just a few trading days.

Today’s Company Invest pick is Bank of America (BAC) — another selection from the financial sector.  At CompanyInvest.com, we will only select stocks for trades that are not overbought, but right now most of the market is terribly overbought so it becomes a challenge to find stocks to trade.  Think of buying at wholesale and selling at retail.  We’re always looking to buy stocks when they are on sale.  In just two weeks time, BAC has pulled back 11%.  Now could possibly be a great time to enter a BAC position to the long side.

COMPANY INVEST TECHNICAL ANALYSIS

Looking at the daily chart, “A” is the slow stochastic indicator which measures buying/selling momentum.  A reading of 80 is considered overbought, while 20 is considered oversold. Today’s reading is at 7.30, way oversold.  Also, BAC has moved into oversold territory and out twice prior to now.  You should always buy when the stochastic indicator is on the bottom, so the extreme oversold status here is bullish.

“B” is the daily price chart of BAC going back 6 months or so.  The first thing to look at are the red and gray volume bars below the pricing candlesticks.  Look at the selling volume (red bars) that occurred last week. Those high volume bars could suggest “capitulation,” which occurs when panic selling happens and everyone is selling the stock.  A shakeout of sorts. Since then the red bars have been shorter indicating the selling is slowing down.

Next. we drew parallel red trend lines illustrating the downtrend that has occurred in BAC since last April. From these trendlines it looks like we have a low target of just below $11/share, and a high target somewhere between $13.30-$13.40.  So if you buy BAC near $11 and it runs to $13.40, there is a possible 21.81% gain to be made on the upside here.  We like that number!

Finally, “C” is the 3-day Relative Strength Indicator (RSI).  The 3-day RSI gives great swing trading (2-3 days to 2-3 week hold) signals.  Right now the RSI is way oversold (note the brown areas).  If you look at the last 8 times the RSI was this oversold, there was a rally of some magnitude ALL 8 times (The green arrows in the price charts indicate the trade entry points based on the RSI buy signals).

Company Invest Bottom Line:  Buy BAC here and put a stop loss order in at $10.47.  That way your risk is very low, while the potential reward is quite high.