Stock Chart Reader

NFLX, TRS, APKT Stock Charts Worth Watching, Even After Heavy Institutional Buying

Bob — Sat, 06 Nov 2010 22:33:18 +0000

I’m consistently on the lookout for stock charts that are showing better price strength than the general market. People sometimes ask why I’m tracking stocks that have already been heavily bought. In my experience, that kind of solid track record of institutional buying shows that even if the stock corrects at some point, it has a good chance of regrouping and climbing higher still.

Generally, the institutions return to a company with excellent fundamental strength, so that’s another element to screen for. Current stocks on our watch list include three that have that potentially winning combination. I want to take a look at the companies’ fundamentals, as well as their stock charts.

The first is a well-known consumer brand, Netflix (NFLX), which notched profit growth of 52% in the most recent quarter, on a sales increase of 27%. Like many growth stocks, it has a P/E ratio that may seem high to many investors. At 55, that may scare off some buyers, but many growth winners historically have shown higher-than-average P/Es.

Netflix’s streaming video service has been a growth driver, and it hasn’t hurt the stock that the company is continually the subject of acquisition rumors. There’s been plenty of good support from investors lately, so I’m keeping an eye out for the next buy point on a consolidation.

Trimas (TRS) is an old-school-style conglomerate that makes packaging and dispensing products for consumer goods, and gear used in the energy and aerospace industries.

This company, too, sports some outstanding fundamentals, in the form of triple-digit earnings growth recently, albeit against some easy comparisons. Sales growth has been accelerating lately. The company has a return on equity of 25%, showing good operational efficiency. Analysts have good profit estimates for the next two years, 142% and 21%, respectively.

Trimas is on the smaller side, with a market cap of $487 million, and moving about 209,000 shares a day. It’s been trending higher after rebounding from its 10-week line. As with Netflix, Trimas is a fundamentally strong stock that bears watching, to see if it offers an alternate buy point going forward.

Here’s a look at its stock chart, showing the bounce off the moving average.

Finally, we’re tracking Acme Packet (APKT), which makes communications equipment used by cable, wireless and telecom customers. The company has an outstanding history of profit growth since 2008, and sales increases to match. This is another growth stock whose P/E ratio, 67, may be offputting to some. But as noted earlier, we’ve often found growth stocks continue to notch hefty price gains even with an above-average P/E.

After jumping off its 10-week line the week ended September 3, Acme Packet pulled back slightly last week, in lighter volume. Take a look at its stock chart, which shows the recent support.

Trading On Momentum, Part 1

Samuel Smith — Tue, 02 Nov 2010 13:52:19 +0000

Momentum traders run with the herd. That’s not a bad way to run, because all stocks tend to move in line with the DOW on most days. Another way to look at it: Three quarters of stocks typically move in the same direction as the general market.

Fundamentally, there’s usually no rhyme or reason to these kinds of strong bull markets. After all, how can we assume that some clothing manufacturer from Hong Kong is more valuable as a company simply because Boeing and McDonalds had a good quarter? For this reason, momentum traders get in and out of trades on a short term basis in order to exploit the inefficiencies of this very type of market.

In Part 1, I’d like to look at a few stocks that are in the midst of a strong bullish movement, and in Part 2, I’ll reanalyze these stocks and see if the bullish movement has stopped, indicating that it’s time to sell or even short the symbol.

SSYS – The bullish movement of Stratasys, Inc (NASDAQ: SSYS) is confirmed by a look at the 9-day and 21-day moving averages.

Since its crossover on the 1^st of September, the 9-day moving average hasn’t slowed down to match the 21-day moving average. This is a strong charting indicator of a bullish trend.

LVS – Also showing a bullish trend, you can see here where the Las Vegas Sands (NYSE: LVS) stock corrected on the 1^st of September as well.

For the simple moving average chart, the indication that a bullish trend has begun is the crossover of the 9-day moving average. If you want to get really accurate, you can also take a look at a 3-day moving average or a Heikin-Ashi candlestick chart (pictured) and look for an even better buy point. The Heikin-Ashi candlestick is an excellent chart for short-term traders, because it helps visualize the best trends earlier than a traditional candlestick.

Kronos’ Stock Chart Reflects Newly Available Shares

Bob — Thu, 28 Oct 2010 19:49:29 +0000

Chemical stocks tend to be disrespected, especially when it comes to media attention. Even when they sport strong stock charts and outstanding fundamentals, chemical companies can seem like boring businesses, whose inner workings aren’t readily apparent.

But Kronos Worldwide (KRO) shows why it’s a mistake to dismiss less sexy industries, and focus solely on more glamorous techs or retailers.

Kronos uses titanium dioxide to make colorings for plastics, paper, food and cosmetics. The stock boasts strong chart action these days. It’s trending steadily higher after retreating to an August low of 28.66, and getting renewed support at its 10-week moving average, after pulling back last week.

The stock got a boost on Oct. 18, when the company announced it would offer 7.8 million new shares, raising $317.5 million before fees. It gapped 4% higher on the news. That’s somewhat unusual, as stocks often trade lower when new share offers are announced. That’s because investors worry about their share value being diluted, and sometimes sell on the news.

Wall Street sees profit of $1.99 per share this year, with a decline to $1.69 in 2011. Declines don’t necessarily kill a stock’s upward trajectory, though, as long as they’re already baked into the price. Negative surprises, though, are often another story altogether!

Kronos pulled back in the days following that announcement, but professional investors began snapping up shares at the 10-week average, sending the stock higher again. Upside volume has been heavier than normal in the past four sessions, first after the company smashed third quarter earnings views, and investors piled in. Volume soared Thursday as the newly available shares came on the market.

You can see this movement on Kronos’ stock market chart.

Though the stock is performing well, fundamentally and technically, it’s extremely thinly traded, which warrants extra caution. It moves about 28,000 shares per day, making it susceptible to sudden sharp price swings. That works well when it happens to the upside, but it’s very easy for an individual investor to get caught in a downdraft when a thin stock sells off!

United-Guardian Poised To Set New Highs

Samuel Smith — Fri, 15 Oct 2010 05:28:46 +0000

One of my favorite micro-cap growth stocks is United-Guardian, Inc (UG), a research and product development firm from Long Island specializing in personal care and pharmaceutical products. With extremely solid fundamentals, like a P/E of 18, a net profit margin of 16-30%, a 4% dividend, and no debt, UG is an attractive long play on a well-managed company.

In August, the company said sales for the first six months of 2010 exceeded $7.3 million, the highest six-month sales period in United’s history and a 6% increase over the first six months of 2009. For the quarter ended in June, earnings were up 67% on sales growth of 25%. That marked a rebound after declines in the March quarter.

Unlike many other stocks with attractive fundamentals, United-Guardian has not seen triple-digit returns in 2010, instead, only returning about 20% to investors. This is likely one of the key reasons behind a May stock repurchase — executives felt the company was severely undervalued.

Being a micro-cap, it only trades a small number of shares – about 2,800 per day. That can make it a bit more risky than something with more liquidity, because if one or two big investors bail out, an individual investor can get slaughtered. Only eight U.S.-based mutual funds or hedge funds own shares. That’s a small number, but not surprising, given how few shares are available.

The stock made an 11% price jump in August, and has held above its key 10-week moving average since then.

Consistently trending upward since May, it’s been hard to select a buy point for the stock. A recent consolidation has brought the stock closer to my magical $13.50 number, which it closed at yesterday. For this reason, I can strongly recommend a position in a stock with favorable technical and the fundamental indicators.

Using China Solar Stocks To Grow Your Portfolio

Samuel Smith — Sat, 09 Oct 2010 20:11:41 +0000

Green industries like Wind, Solar, and Sustainable Energy are growing across the globe, but perhaps none so fast as in China.

After all, China is a BRIC nation, which means that it’s not a fully developed economy, but it’s not a third world country either. It’s for this reason that every China stock is a growth stock. Even Baidu, the search engine giant with over $34B in market cap had only $208M in market capitalization five years ago. You don’t need to get out your pocket calculator to know that’s over 200% a year in growth.

It only stands to reason that other emerging industries in China will also see significant gains over the next five years. One of the strongest positions of the sustainable energy movement is in solar power. That is particularly true in the manufacturing industry. Companies that build solar panels and photovoltaic solar cells are poised to see extremely strong gains over the next five years. Companies like Jinko Solar (JKS), Trina Solar (TSL), and Solarfun (SOLF) are all dynamic stock picks to get exposure to the highly lucrative solar manufacturing market. Of the three, Trina Solar has the strongest showing in the past few quarters and the largest market cap.

Though these companies are based in China, the majority of their customers are in Europe and North America.

Solar energy has some risks associated with political adoption of environmental protection laws. This makes these plays very difficult to value, and for this reason, it’s important to set viable stop-loss points which take into account the volatility of these small caps while still allowing one to cut ones losses if a company was to severely devalue. For this reason, it’s important to find a good fundamental and technical entry point and set a trailing stop with a wider margin than you may be used to.

Earnings Growth Driving Sonosite’s Chart Strength

Bob — Thu, 23 Sep 2010 17:59:45 +0000

Medical gear maker Sonosite climbed 7% last week in heavier-than-normal volume. As you can see on its stock chart, it’s holding onto its gains this week, a sign of strength.

This is a stock that’s shown up on our radar screens periodically, though its fundamentals made it less than ideal in late 2008 and early 2009.

The company makes bedside and point-of-care ultrasound systems. Last month, it got FDA approval for a new catheter system using fiber optics and a technology similar to infrared to replace a traditional guide wire, allowing for easier tracking of a tracking of a catheter tip as it moves through a vein.

Earnings growth was erratic until the quarter ended in December 2009. Year-over-year sales were declining until the quarter ended in March.

The stock went public a decade ago, in September 2000. Most of the growth names on my screens tend to have gone public within the past 15 years or so. That’s generally the time in which a company shows the most innovation, which drives sales and earnings.

Yearly earnings declined slightly in 2009, profit grew again in the past three quarters

After declining for four quarters in a row, sales grew at a rate of 8% and 18% in the past two quarters.

Wall Street sees profit up 148% this year and 72% in 2011. One possible area of weakness: Its return on equity is just 2%. On our screens of the best growth names, ROE is generally around 15% or higher. That’s a measure of operational efficiency that often has an effect on the company’s ability to drive earnings growth.

Consensus estimates for the third quarter call for earnings of 11 cents per share, more than double the year-earlier figure of five cents. Sonosite’s continued emphasis on research and development could play a key role in driving growth ahead – again, that’s a hallmark of growth winners that pop up on our research screens.

When earnings and sales growth outpace the general market, it draws the attention of fund managers and other pros. It’s their institutional buying that sends a stock’s price higher – and individuals would be wise to follow in their footsteps.

Technical Analysis And Fundamentals Go Together

Bob — Mon, 13 Sep 2010 17:23:37 +0000

As an investor who relies heavily on technical analysis, I’m constantly on the lookout for stocks that are showing better price strength than the general market. But I don’t ignore fundamentals.

People sometimes ask why I’m tracking stocks that have already been heavily bought. In my experience, that kind of solid track record of institutional buying shows that even if the stock corrects at some point, it has a good chance of regrouping and climbing higher still.

And spotting institutional favorites usually means checking elements such as P/E ratios, sales growth, earnings growth and return on equity.

Generally, the institutions return to a company with excellent fundamental strength, so that’s another element to screen for, even if you use technical analysis. Current stocks on our watch list include three that have that potentially winning combination.

The first is a well-known consumer brand, Netflix (NFLX), which notched profit growth of 52% in the most recent quarter, on a sales increase of 27%. Like many growth stocks, it has a P/E ratio that may seem high to some investors. At 55, that may scare off a few buyers, but many growth winners historically have shown higher-than-average P/Es.

Trimas (TRS) is an old-school-style conglomerate that makes packaging and dispensing products for consumer goods, and gear used in the energy and aerospace industries.

After jumping off its 10-week line the week ended September 3, Acme Packet pulled back slightly last week, in lighter volume. Like the other stocks mentioned, this is one we’ll keep following.

NFLX, TRS, APKT Stock Charts Worth Watching, Even After Heavy Institutional Buying

High-Low-Close Price Bars On Stock Charts

Bob — Sun, 12 Sep 2010 04:53:19 +0000

Andrew Lo, Nicholas Darvas, Jesse Livermore, Jack Dreyfus, William O’Neil, John Murphy. You may not recognize those names, but they’re like charter members of the Technical Analysis Hall of Fame. Through their work — either academic research or hands-on investing — all have proven that stock charts are real, not hocus pocus, and are necessary tools for the best possible investing results.

So let’s jump in, and start to see what makes charts so powerful. And I have to put in a little caveat here, in these early lessons: Even if this beginning part seems a little self explanatory, it’s really important to master these key points before you can move on and spot winning chart patterns. Fortunately, this content is pretty easy to learn, and you can probably move through it fairly quickly.

Price bars: In this book, we’ll focus on a type of price bars called “high-low-close.” There are plenty of other variations of stock charts, but to learn the basics, high-low-close gets you the relevant information in the fastest way.

And many of the world’s best chartists use high-low-close bars. Super-investor William O’Neil has emphasized their use for more than 25 years in his newspaper, Investor’s Business Daily. And in his book How I Made $2 Million In The Stock Market, Nicolas Darvas also used high-low-close bars. So don’t fall into the trap of thinking you need something that seems more “sophisticated.” I have used high-low-close bars for years, and I can assure you: It’s a no-frills way to spot the market’s best names.

Take a look at this sample chart.

This is a daily chart for Salesforce.com (CRM), from the summer of 2009. You’re seeing the price movements the stock made each during day, during the time shown here.

We’ll look at chart patterns later, but for now, we’ll just focus on the price bars.

See how I’ve marked the high price of each bar? That’s the highest point it reached that day. I’ve done the same for the intraday low price, and its closing price.

Each of these price points gives you valuable information.

Daily High Price

The daily high price shows you how far buyers were wiling to bid up the stock. That’s good information. Not only does it give you an indication of where investors are putting a value on the stock, but it also can help you spot a trend that may be headed higher or lower. We’ll look at trend lines in a later chapter.

Daily Low Prices

The daily low prices also give you excellent information. That’s the price where selling stopped for the day. Usually, that means buyers stepped in, bidding the price back up. But if a stock closes at its daily low, that can sometimes be an ominous signal that nobody else wants to buy shares, and the stock could continue dropping.

Conversely, a finish at the session’s high can be a bullish sign, that demand for the stock remained strong throughout the session.

Prices are part of the supply and demand equation at work in the market. As demand grows, the price rises. As demand falls, the price drops. For example, if a tech company releases news about a game-changing new software, you might see great demand for its shares that day, and the price will rise.

But a few weeks later, an analyst at a brokerage “downgrades” the stock because he or she believes sales might decrease going forward. You might see the share price plummet that day, as demand for the supply of shares evaporates.

Closing Prices

Finally, let’s discuss the importance of closing prices, where the stock settled for the day. This can also give you outstanding information about the price trend. If stocks close in proximity to each other for several days in a row, than shows you that investors are holding shares at that level. That’s a sign of confidence in a stock. Even though investors may be taking a breather from buying shares, they aren’t selling, either.

A sequence of higher closes means, of course, that investors have enough confidence to keep buying shares. A series of lower closes indicates the opposite — that demand is drying up.

Here’s a chart that saw two big waves of selling, with a succession of increasingly lower daily closes. When that happens, it’s a very clear signal that big investors, like mutual funds and hedge funds, are bailing out of the stock because they see possible trouble ahead.

In our next post, we’ll look at how volume works in tandem with price to complete the supply/demand equation.

Reading Stock Charts Makes You A Better Investor

Bob — Wed, 08 Sep 2010 04:03:29 +0000

It’s funny when you see presentations by many so-called stock gurus. A lot of them seem to have the idea that people read stock charts as a hobby. Now, I have to admit, it really is fun to spot a bullish-looking pattern, buy the stock, and watch it run higher! And over time, I’ve been able to do that more and more. I can also spot patterns that look weak and bearish.

But I remember how tough it was at the beginning. All those bars and squiggles — and people telling me I should be seeing an upper channel line, or a cup and handle or double bottom, or that darned ascending base!

But your goal isn’t to read charts.

Your goal is to make money in the stock market.

It’s been challenging in the last few years, to say the least. Even so, plenty of investors have made money by getting into the best stocks at just the right time. Here are just a few of the many that I was able to spot and ride higher.

Green Mountain Coffee Roasters — up 259% in 14 months

SXC Health Solutions — up 250% in 16 months

Home Inns — up 165% in 13 months

Those aren’t exactly household names. So how did some investors recognize these stocks early and make such big money?

They had an ability to spot something — and that ability literally paid.

What was that ability? Knowing how to read stock charts.

But a lot of investors are scared about charts — and I understand that. It’s often called “technical analysis,” and that makes matters even worse! It sounds like something you need two engineering degrees and a Ph.D. in finance to understand!

The truth is, anybody with a working brain can learn to read stock charts. And we already know your brain is working, because you’re interested in the stock market!

I was no math geek when I first began learning charts. I was an English major in college. I had written for the literary magazine, and appeared in theatrical productions. As an adult, I became a writer, and many of my early assignments focused on the entertainment industry.

When I first became interested in the stock market, about 20 years ago, the phrase “technical analysis” scared me.

But I couldn’t help noticing the success many of my friends were having in the market, and I realized they were doing it by identifying buy points on charts. I’d been a skeptic, but when I saw how much money they were making — in stocks I’d never heard of! — I became a believer.

So I began reading books. It was hit or miss. Most technical analysts were happier to show off how smart they were, and weren’t concerned about cluing in a newbie. Others seemed like they were trying to help, but they showed pages and pages of charts from 1962 and said I should study them. It was too much for a newcomer to learn.

(Later, I’ll review some of the books I read. Many have valuable points and pieces of advice that were quite helpful. But no single book had the right recipe to teach me stock chart reading.)

I also went to seminars, paying anywhere from a hundred dollars to several thousand. I really wanted to learn, but it wasn’t easy! Everybody was trying to sell me their system, and all of them assumed I wanted to spend every waking hour poring over stock charts. Hey, I have a busy life, and I just wanted to learn chart reading so I could make more money in the market, not as a hobby all by itself!

So I regrouped, and began to look at the times I had made money by spotting a winner on the charts. What had I done right? And where had I made mistakes, causing me to lost money?

I repeated this evaluation process with every stock I bought — whether I made money or lost it. And after awhile, and with the help of many expert teachers I personally worked with, I was able to identify not just any chart patterns, but the ones most likely to result in big price gains.

It’s been more than a decade since that happened, and as I continue to coach investors at all levels, it’s more and more apparent that technical analysis is where people have the most trouble. And I understand that! Too many so-called “gurus” want to show you how smart they are, loading every indicator under the sun onto the charts, making them completely incomprehensible.

Or others are genuinely trying to be helpful, but they still confuse people with picture-perfect examples of charts from decades ago. What happens when a stock chart isn’t so perfect, and shows some ambiguity? That’s usually the case — but the gurus like to show you the stocks that meet every definition of perfection. Real-life stock charts aren’t so perfect.

So the next post here will give you the best way to start out to learn chart reading skills. I know you ultimately want to become a better investor, not a better chart reader, so that’s what’s behind these lessons.

And we’ll start with the basics, and get you ramped up as fast as possible, so you can spot the companies that may be setting up for big price gains — the next batch of winners like Green Mountain, SXC and Home Inns!

Stock Charts Can Improve Your Investing Results

Bob — Sat, 04 Sep 2010 04:57:21 +0000

Have you ever noticed that a lot of investment advisors like to show you stock charts. They use charts to show you if a stock is likely to up or down, whether it should be bought or sold.

But they don’t always do a good job of explaining how to read the charts. So even though the information may be helpful, it’s not doing you any good, because it’s cloaked behind a bunch of incomprehensible lines and jargon. Ascending base? Upper channel line? Three weeks’ tight? Support at the 10-week line? What does all this mean? And how should all these bars and squiggles be interpreted?

I’m going to speak personally: There’s no question that knowing how to read charts has made all the difference in my success as an investor. Without chart reading, I honestly can’t imagine how I would have spotted my big winners, like Apple (AAPL), Green Mountain Coffee Roasters (GMCR), Salesforce.com (CRM) or Baidu (BIDU), as they were poised to break out and make huge price moves.

Fundamentals alone just won’t get you there. In my experience — and the experience of many, many others — stock charts are the only thing that will do the trick.

A chart will show you, instantly, if a stock is being bought in heavy volume, a sign that institutional investors, like mutual funds and hedge funds, are grabbing up shares. Also, it will show you if it’s being sold heavily after a big run-up, a signal that the pros are bailing out.

And yes, the classic patterns most certainly are indicators that a stock is digesting earlier gains, and may be preparing for another run. I’ve made so much money from stocks coming out of sound patterns, that I don’t even bother with those who scoff. In fact, I kind of feel sorry for them.

But I absolutely remember how I felt in the beginning, before I knew how to read charts. People around me were seeing cups and handles, double bottoms, flat bases, three weeks’ tight.

I didn’t see any of it. I just saw a bunch of price bars on a chart. If someone showed me a breakout, I couldn’t tell how it differed from anything else on the chart. I was sure they were making stuff up, like when a little kid gazes up at the clouds, and insists she sees animal shapes!

But I knew people were making money. I knew they were buying stocks that went up — and isn’t that why we’re all investors? So I decided to stick with it. When I read a chart analysis in an investing newspaper or on a Web site, I made sure I understood everything about it. I began to actually see those coffee cups with handles, and could identify a stock that might be ready to run higher. It was pretty exciting — and I became convinced that not only did it work, but it was completely learnable, without sacrificing every precious hour of free time!

So in this series of posts, I’ll show you the process I used, step by step, to master chart reading, or technical analysis.

By the time you’re done reading this series, you will have the tools you need to identify the basic chart elements and spot chart patterns that can signal a run-up may be near.

Of course, stock chart reading is a skill that you can continue fine tuning, even after you learn the basics. But without knowing how to interpret a chart and understand some of the most simple patterns, you can’t go on to higher-level skills.

In the next post, I’ll tell you how I came to the point of believing that stock chart analysis was they key to better investing results — and how I was right! I’ll share that process with you.