IMPORTANT! IDENTIFY STOCKS THAT DON`T WORK WELL IN
Contents
1. OR Opening Feature How To Identify and Delete Problem Stocks Sections Data Maintenance Learn Trend Analysis for Success in Trading 2000 Market Review S amp P 500 Changes s s s The Opening Bell Monthly is a publication of AIQ Systems David Vomund Chief Analyst P O Box 7530 Incline Village Nevada 89452 VoL 10 ISSUE 1 BEWARE OF TOO MANY STOCKS IMPORTANT IDENTIFY STOCKS THAT Don t Work WELL IN TRADINGEXPERT By David Vomund l T radingExpert comes with a Historical Stock CD that contains about 10 000 stocks New users often install all 10 000 stocks simply because they are there This can be a mistake We have found that there are only about 2 000 stocks that most stock holders might be willing to own Beyond that are stocks with insuffi cient volume or huge bid to ask spreads Installing too many stocks increases your data download time lengthens data maintenance and lowers the effectiveness of screening reports and Expert Design Studio models There are stocks that don t work well in TradingExpert Their Expert For technical analysis to work a stock needs to have a history of reasonably consistent volume Stocks that trade at very low volume provide inadequate data for the volume based indicators to give accurate readings Bell Monthly JANUARY 2001 Ratings and indicator readings2. the basics of futures and how futures can give a perspective of financial trends In this issue he covers analysis methods to identify valid trading positions for both stocks and commodities Important to Identify Trends and Themes Those new to trading should gain market experience by examining the markets that interest them In doing so they should learn to identify the kinds of trends that compose those markets Trends are among the first things you should study and comprehend Trends are almost always associated with some well publi cized theme If one looks at any kind of social or cultural trend be it fashion food transportation advertising or even politics there is always a thematic tone associ ated with it Shrewd and success ful people are quick to identify and act upon these themes and trends Themes and trends abound in the markets and being able to identify them is very important Knowledgeable successful traders are always the first to take posi tions at the onset of an identifiable trend or theme Conversely they are the first to get out when the trend or theme has been over played or has served its purpose Two Kinds of Trends There are two kinds of trends lateral and angular And there are two kinds of angular trends up and down In Figure 3 we see a bar chart of the Dow Jones Industrial Aver age Notice how the Dow swings in a noticeably wide yet precise trad
3. 1990 bear market low with the 1994 and 1998 lows De spite the 50 correction in the Nasdaq this support trendline has not been broken This is testimony to the ex treme run up we saw in 1999 This trendline represents important support as we move into the year 2001 For growth investors one of the best market timing techniques is to look at the relative strength of the Nasdaq versus the S amp P 500 In Figure 8 we see a chart of the Nasdaq in the year 2000 along with its weekly RSMD SPX indica tor This indicator rose in value for the first two months of the year implying the Nasdaq was outperforming the S amp P 500 The indicator then turned south from mid March until June During the summer months the indicator drifted sideways but fell once again during the fourth quarter Unlike in 1999 the RSMD SPX favored the Nasdaq over the S amp P 500 only a few months during the whole year Figure 8 shows two resistance levels on the Nasdaq The lower horizontal trendline connects the May and October lows In Decem ber the Nasdaq rallied to this trendline but could not break above the resistance An addi Market Review continued on page 8 JANUARY 2001 7 AIQ Opening Bell TREND ANALYSIS continued formed a trading range between 3240 and 3280 a 40 point range early in the trading session The dollar difference in this range is 800 per contract or 20 per point And as you can see fo
4. Vomund arket historians know that 1973 74 1982 and 1990 were very bad market years We can now add 2000 to that list From its high to its low the once invincible Nasdaq Composite fell over 50 Drops of 50 or more in major markets are historic events The Nasdaq fell 59 9 between January 1973 to October 1974 but it has never had so steep a fall since It took until 1979 for the Nasdaq to recover those losses The sharp selloff was mostly limited to the Nasdaq growth stocks For the year the S amp P 500 fell 10 Simple trendline analysis tells a lot about the market In Figure 6 we show a weekly log scale chart of the S amp P 500 along with its support trendline This trendline began at the 1994 low and acted as support through the rest of the decade This is a very strong trendline since it was successfully tested on several occasions In September 2000 the support De Wes pue opie Paget aia Hia oiala m alf elel E g Ses VAA ro pep up ii enfm a m o O EP A AA A AE T N T PA E N E A e a SSS as ii ra z H iz ms z E i waz D S j DA gcp m trendline was finally broken A break of this support trendline didn t necessarily mean that the market would go lower but it did imply that the uptrend is over The S amp P 500 fell a quick 10 once the trendline was broken In Figure 7 we show a log scale weekly chart of the Nasdaq Composite A ten year support trendline connects the
5. JBL replaces Coastal Corp CGP JBL is added to the Manufacturing Specialized MANUFACS group Applied Micro Circuits AMCC replaces J P Morgan JPM AMCC is added to the Electronics Semicon ductors ELCTRONS group Kinder Morgan KMI replaces Nabisco Group Holdings NGH KMI is added to the Natural Gas NATURALG group Flour Corp FLR replaces Massey Energy Co MEE FLR is added to the Engineering amp Construction ENGINEER group Noble Drilling NE replaces Time Warner TWX NE is added to the Oil amp Gas Drilling amp Equipment OIL amp GASD group 8 JANUARY 2001
6. MANY STOCKS continued click the mouse alternatively you can click on Reports and then Global Properties The Global Properties dialog box will appear To have reports generated only on stocks greater than 10 and vol ume greater than 200 000 enter 10 next to Price gt and enter 2000 next to Volume gt If you have installed too many stocks in your database and want to reduce the database size use the Advanced Ticker Delete function in the Data Manager see page 64 of the User Manual If you are installing stocks from the Historical Stock CD you can use a minimum price and minimum volume filter Start out with a minimum price of 10 and a minimum volume of 200 000 shares volume is listed in 100s so enter 2 000 as the minimum volume instead of 200 000 The system will tell you how many stocks pass the test before install ing them If you want more stocks then loosen the param eters Conversely if you want less stocks then tighten the param eters The process of installing stocks from the Historical Stock CD is described in the User Manual on page 42 E David Vomund publishes VIS Alert a weekly investment newslet ter For a sample copy of the newslet ter call 775 831 1544 or go to www visalert com The following table shows past and future stock splits Trading Suspended Name Ticker Changes Approx Approx Stock Ticker Split Date Stock Ticker Split Date U S P
7. a few stocks that are If you are reluctant to delete stocks from a large database you can generate AIQ reports don t work with low price low volume stocks That s not entirely true It isn t the Expert Ratings that are faulty it is the indicators that the Expert Ratings are based on that don t work Most technical indicators won t work with low price low volume stocks no matter which software package you use The low priced stocks can hurt the calculation of worth consid only on stocks with sufficient dustry ering d vol f groups as Te price and volume Fo Eee Weighted stock closes at Action List isn t the only report that will be dominated by low priced low volume stocks Low priced stocks will dominate the top of the Relative Strength report because they went from 1 to 2 Stocks that always close on their high or their low price will domi nate the Accumulation Distribu tion report Some say it is a problem that TradingExpert s Expert Ratings its bid of 0 25 one day and then closes at its ask of 0 50 the next then a 100 price gain is factored into its parent group That makes the group look more bullish than it actually is If you are reluctant to delete stocks from a large database you can generate AIQ reports only on stocks with sufficient price and volume In the Reports module highlight Stock Reports and right JANUARY 2001 AIQ Opening Bell BEWARE OF TOO
8. are meaningless It is important to be able to identify these issues For technical analysis to work a stock needs to have a history of reasonably consistent volume Stocks that trade at very low volume or have frequent zero volume days provide inadequate data for the volume based indicators to give accurate readings DAVID VOMUND Volume is not the only consideration The price level of a stock is also important Low priced and penny stocks often close on either their high or their low prices every day The closing price from one day to another varies very little in actual terms however the percentage change can be very large Beware of Too Many Stocks continued on page 2 AIQ Opening Bell BEWARE OF TOO MANY STOCKS continued Stocks that don t work well are easy to identify In Figure 1 we see JPE Inc JPEI The first problem with this stock is its low price of less that 1 Partially because of the low price the stock s price bars appear blocky Notice that at the start of the chart all the price bars have the same high price and the same low price In addition the stock always closes on either its daily high price or its daily low price Rarely does the stock close in between its high and low prices That s because its closing price is simply its bid or its ask price When a stock always closes on its high or low value it will have invalid Money Flow Volume Accumulation Percent a
9. e a position which is in itself a natural mecha nism of risk control With this analysis you have automatically and without much conjecture let the protocol of the definitive trend determine what your action should be in accord with your personal sense of risk We might add here that had you taken a long position on or around July 17 your stop should have been moved up to the level of the last down swing on July 19 from g AVS 6 GMR E na the July 11 level To be successful with short term trading it is important to make daily observations and make daily adjustments to your posi tions when needed Even if you only have one day to make the adjustment it should be done Day Trading Let s take a look at the fastest growing market for day traders the E mini Nasdaq 100 This contract is an index futures con tract and is traded at the Chicago Mercantile Exchange Figure 5 is a four minute bar chart of the December 2000 con tract on October 16 This short term time frame is about as fast as any trader can analyze and ex ecute You have to be quick to figure and act Yet using only four minute intervals does some what diminish your risk in ex tremely active markets This kind of trading however is only for those who crave extreme action The December 2000 contract Trend Analysis continued on page 8 6 JANUARY 2001 AIQ Opening Bell MARKET REVIEW 2000 IN REVIEw By David
10. gth of one of these swings becomes greater than the lateral trend s power then it will break through the trading range in either an up or down direction Looking again at Figure 3 the upper boundaries of the Dow s trading range was broken in August At that time an up swing with enough strength behind it broke through the resistance level at about 11 880 The Dow moved higher for several weeks after the breakout Incidentally at this time another trading range of greater magnitude and power than the one we have been reviewing was becoming apparent The top or resistance level of this trading range is the all time record high of the Dow Jones Industrial Average which was set in April of this year In Figure 3 we see that the ability of the overall trend to contain any rally is greater than the power of minor uptrends i e the lateral trend is of greater 4 JANUARY 2001 AIQ Opening Bell TREND ANALYSIS continued magnitude and power than the minor up and down swings Recognizing Trends A market is likely to reverse its trend at or about the old sup port or resistance levels After reversing it swings towards the opposing side of the trading range This leads us to two important trading rules Always take profits no matter how small the first time a previ ously identified support or resis tance point is tested Profits can be taken the second third or fourth time that they are
11. hysical Ther USPH 2 1 01 08 01 Scholastic Corp SCHL 2 1 01 17 01 Sanmina Corp SANM 2 1 01 09 01 IDEC Pharm IDPH 3 1 01 18 01 Home Fin Bancorp HWEN 2 1 01 11 01 Gallagher AJ AJG 2 1 01 19 01 Green Mount Coffee GMCR 2 1 01 12 01 TALX Corp TALX 3 2 01 22 01 Forest Labs FRX 2 1 01 12 01 Southwest Water SWWC 5 4 01 22 01 Direct Focus DFXI 3 2 01 16 01 Duke Energy DUK 21 01 29 01 Brinker Int l EAT 3 2 01 17 01 Applied Biosystems ABIO Biomatrix Inc BXM Cobalt networks COBT Cooker Restaurant Corp CGR Florida Progress FPC Fort James FJ Lilly Industries LI MotherNature com MTHR National Discount Brokerages NDB Rainforest Caf Inc RAIN Seagram Co VO Simpson Ind SMPS China Broadband Corp CRBC to China Convergent Corp CVNE CNF Transportation CNF to CNF Inc CNF CP amp L Energy CPL to Progress Energy Inc PGN Flour Corp FLR to Massey Energy MEE PE Corp PEB to Applera Corp Applied Biosystems ABI Sybron Int l SYB to Apocent Technologies AOT JANUARY 2001 AIQ Opening Bell TREND ANALYSIS LEARN To IDENTIFY TRENDS To FIND VALID STOCKS AND COMMODITIES POSITIONS By Bobby Florez Editor Edward Robert Bobby Florez a financial professional for almost three decades retired from the Chicago Board of Trade in 1996 and now devotes his time to helping others learn how to trade In the October and November 2000 issues of the Opening Bell Mr Florez discussed
12. ies Once the market broke below its previous lows professional and institutional traders were not only dumping shares from their portfo lios they were probably also initiating bearish trading strate gies Traders who neglected these signals were subject to a profound plunge in the market and a re sounding deflation of buying power in their portfolios The purpose of the point we are making is to encourage you to pay attention to the market s trend its definitive trend If you do you will always be able to fix your position risk at an objective point no matter what market you trade And you can do this before actu ally taking a position in the mar ket For example let s say that you wanted to buy a stock index future but wanted to limit your risk exposure in case the market reversed its trend Where would you place your protective sell X RAUZ preme A Lda Liei F Ai a eo i u rea stop An objective stop could be placed just below its last down swing You would not want to maintain any bullish positions below that point In other words you should not maintain any bullish posture in this market if the last down swing is broken by any future down swing When you look at the price differential where the market is compared to its last down swing you may get cold feet because the difference may be more than what you want to risk If it s more than you want to risk then you prob ably wouldn t tak
13. indication that the trend may be changing You must be prepared to act if the prevailing trend does not resurrect itself right away I can reveal countless examples of major trends that began when a defini tive trend violation like this oc curred The S amp P 500 On Friday July 17 the S amp P 500 made what appeared to be an upside breakout from a torturous month long lateral trend Figure 4 However instead of maintaining its upward momentum it abruptly reversed The question to ask when viewing price activity at the time of a breakout is what is the precise position risk To answer Trend Analysis continued on page 6 JANUARY 2001 5 AIQ Opening Bell TREND ANALYSIS continued that question let s recount the activity from July 17 the day the market actually attempted to break out Notice that on July 19 two trading days after breakout the market incurred a normal down side reaction The next day the market rallied and attempted to resume its upward trend But this rally lasted only one day Thereaf ter not only did the market fail to rally and regain its up trending momentum and make another new up swing above the July 17 high but it also declined below the last down swing that occurred on July 19 Thus in one fell swoop the market gave two negative signals These were signals that would have prevented the bullish but prudent trader from maintaining or initiating any bullish strateg
14. ing range since the middle of April Consider its tendency to want to hold above 10 112 support and below 11 880 resistance It Knowledgeable successful traders are always the first to take positions at the onset of an identifiable trend or theme Conversely they are the first to get out when the trend or theme has been overplayed or has served its purpose wasn t until August that a success ful upside penetration breakout of the resistance level at 10 880 occurred Thereafter for a few weeks the market successfully tested its all time record high above 11 520 in early April Lateral trends are very impor tant market phenomena for trad ers and analysts to pay attention to The lateral trend or trading range is the womb from which a majority of up and down trends usually come This action which we have identified since April in the Dow Jones Industrial Average is called a major lateral trend Within its upper and lower boundaries of resistance and support there were many up and down swings or angular trends each one lasting for at least a week Although a lateral trend may stretch sideways for weeks or even months you will always be able to identify minor up and down swings within the confines of the lateral trend As long as the lateral trend remains in place the strength of these up and down swings is considerably less than the power of the lateral movement How ever if the stren
15. nd On Balance Volume indica tors JPE Inc has short periods of volume over 100 000 shares but notice that its volume is typically less than 50 000 shares a day The biggest problem with having stocks like JPE Inc in your system is that they make the AIQ reports and Expert Design Studio screenings difficult and time consuming to use In Figure 2 we ve run the Weighted Action List report on a database of 10 000 stocks Notice how many low PLEASE SEND CORRESPONDENCE TO Opening Bell Monthly G R Barbor Editor P O Box 7530 Incline Village NV 89452 AIQ Opening Bell Monthly does not intend to make trading recommendations nor do we publish keep or claim any track records It is designed as a serious tool to aid investors in their trading decisions through the use of AIQ software and an increased familiarity with technical indicators and trading strategies AIQ reserves the right to use or edit submissions For subscription information phone 1 800 332 2999 or 1 775 831 2999 1992 2001 AIQ Systems pA ara Cherie Da Yea pues pe Taam yika Hei aala wa hee Be Eal Et 10 ee i i priced stocks appear on the report Of the top 10 stocks on the report all but one have a price less than 2 These are low vol ume stocks as well If someone were to use this report hoping to find a good stock he would have to sift through a bunch of stocks that aren t worth analyz ing in order to find
16. ontinued tional resis tance trendline is drawn con necting the July and September highs While the S amp P 500 and the Nasdaq Composite were down on the year several sectors posted strong returns Looking at the Fidelity Sector funds the year s biggest winner was Medical Deliver which primarily invests in HMO stocks Medical Delivery rose 68 Finan cial sectors also performed well Insurance rose 53 and Home Finance rose 50 Energy Service rose 50 m Changes to the S amp P 500 Index and Industry Groups Robert Half Int RHI replaces Associates First Capital AFS RHI is added to the Services Employment SERVICEE group Alleghany Energy AYE replaces Bethlehem Steel BS AYE is added to the Financial Diversified FINANCID group Symbol Technologies SBL replaces W R Grace amp Co GRA SBL is added to the Electrical Equipment ELECTRIE group Intuit Inc NTU replaces Owens Illinois OD INTU is added to the Computers Software amp Services COMPUTES group Qlogic Corp QLGC replaces Polaroid Corp PRD PRD is added to the Electronics Semicon ductors EQUIPSEM group Vitesse Semiconductor VTSS replaces Springs Industries SMI SMI is added to the Electronics Semiconductors ELCTRONS group Stryker Corp SYK replaces Russell Corp RML SYK is added to the Health Care Medical Products amp Supplies HEALTHMP group Jabin Circuit
17. r nearly three hours the market swung several times from one side to the other before finally making up its mind to rally But once it did the market rallied about 1600 per contract over the next 40 minutes This was a short hard swing with only one noticeable correction that lasted less than five minutes In addition notice that from the time of breakout no prior down swing was violated Thus a successful day trade could have been made if the trader entered at the market breakout and placed a sell stop at or about the bottom of the last down swing This demonstrates that the protocols of the definitive trend method work as well for day traders as they do for longer term traders Again once you are convinced that a breakout from a trading range has occurred take a position in accord with the trend with an initial stop at or about the extreme of the last reaction against the trend Thereafter take profits or at least adjust your protective stop in accord with the tenets of the definitive trend Every successful trader must know the difference between lateral and angular trends and how to identify each one When an angular trend begins either up or down traders must also know how to apply the definitive trend protocols for positioning Other wise they may be incorrectly positioned in the market and that can be very costly W Mr Florez offers free training online at www synchronomics com MARKET REVIEW c
18. tested as well Never anticipate breakouts You should always wait for the actual break of the lateral trend These rules sound simple but the majority of traders do just the opposite They would rather wait and see what the market will do rather than exit their positions whenever a market tests a key support or resistance point Or they initiate a position in anticipation of either an upside or downside breakout of the market from its prevailing trading range CEEL a FaF E i SE ss f Tojar ki kiil De i mwee Eaa eae A e Daaa enaa Gis ECHE iy M l ai ih M A we Test dl oe ol eo Gor ao 1 ag A a Me ool ornin Pakan lg iia bump a J J i z Fer Halepa FI een eens armas Cones al eS spel Ee w f RES Pi ATER ELISAN e Trading within lateral trends is difficult and only for short term traders A simpler method of making money is to play the breakouts from the lateral trends The Definitive Trend A Position Entry amp Exit Signal If a market is trending up it slal E abi a pakili CAA hnali d A aT E 1 Il en thal ral i al J zis Fa Hanm FI S Mat hn Rte ae fs fa e EEEN BIN Taru will trend in higher up swings and higher down swings For down trending markets the market will make lower down swings and lower up swings Whenever a market violates its last corrective swing in its prevail ing trend it is an
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