From the Analyst.
Available to individual subscribers at DWA.
This feature provides daily tips, whether market, trade or stocks from the DWA analysts.
There is an archive section and I would strongly recommend you getting yourself a cup of cocoa and a bag of Cheetos and make your way through each of the articles. Much information and thoughts from some of the best Piffers out there.
Here is an example of some tips you will receive...
From the Analyst 12/16/1999
On the Fourth Day & Market Update
DON'T FORGET ABOUT THE DWA POINT & FIGURE INSTITUTE - ON FEBRUARY 11TH 2000 - SEE "FROM THE ANALYST" ARCHIVES FROM 12/15/99
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THE TWELVE DAYS OF CHRISTMAS
DAY FOUR - THE FOUR STEPS OF ANALYSIS
On the fourth day of Christmas, Dorsey, Wright gave to me a four-step checklist for initiating positions. Okay, that one was a bit of a stretch; are you tiring of the Christmas songs already? Today we want to present guidelines on how to properly initiate new positions. Investors cannot simply jump into the stocks that sound good or that are all the hype in the media; they must have a plan. With no game plan its like trying to drive from Richmond, VA to Seattle, Washington with no road map. For us, we implement a four step game plan. That game plan is as follows:
Step 1: Overall Market (Offense or Defense?)
Step 2: Sector Rotation (Which Sectors Are Playing Offense?)
Step 3: Fundamental Sort (Build An Inventory of Stocks Which Are Deemed Fundamentally Sound)
Step 4: Technical Sort (Buy Only Those Stocks Controlled by Demand)
STEP 1: IS THE MARKET ON OFFENSE OR DEFENSE
We look at five main indicators to determine whether we want to be more bullish on the market or more conservative or defensive. There are two long term indicators, the NYSE and OTC Bullish Percents, and three short term indicators, the NYSE High-Low Index, Percent of Stocks Above Their 10 Week Moving Average, and the Optionable Bullish Percent. Let's discuss each of these and how to read the chart.
The NYSE & OTC Bullish Percents:
(all of the concepts apply for the OTC Bullish Percent too)
The way we look at the overall market is like a football game. Think about your favorite football team for a second. If they played offense 100% of the time, they would be marginal at best. It is the same way in the stock market. There are times to play offense and there are times to play defense. We use the NYSE Bullish Percent to determine whether the offensive or defensive team is on the field.
The calculation is quite simple. We take the number of stocks on Point & Figure buy signals (double tops, triple tops, etc.) and divide by the total number of stocks in the universe. This percentage is then plotted on a grid. The grid goes from 0% to 100%. Each box is worth 2%. Therefore, it takes 6% of the stocks to change from buy signals to sell signals to reverse the indicator into O's. Likewise, it takes 6% of the stocks to change from sell signals to buy signals to reverse the indicator into X's.
On the chart of the NYSE Bullish Percent, X's mean offense and O's mean defense. When the NYSE Bullish Percent is in X's expect to see rallies that are broad in nature and pullbacks as buying opportunities. When the NYSE Bullish Percent is in a column of O's expect to see declines that are broad in nature and to have a market where rallies are very select and limited. There are two lines of demarcation on the NYSE Bullish Percent. 30% and below is considered the Green Zone or low risk area while 70% and above is considered the Red Zone or high risk area.
The NYSE Bullish not only tells us whether the offensive or defensive team is on the field but it also tells us what the field position is. Let's say that the NYSE Bullish Percent was in X's but at 74%. While the offensive team is on the field, the field position is terrible and therefore may choose not to initiate new positions and think about how to protect the profits already made. Or another scenario might be that the NYSE Bullish Percent is in O's but down at 22%. Now is the time to get your shopping list ready so that once the indicators reverse up, you'll be ready to act. Yet another scenario might be where the NYSE Bullish Percent is in a column of O's at 40%. The field position is certainly not as bad as reversing down from 70% but the fact the NYSE Bullish Percent is in O's suggests that you at a minimum you keep some powder dry to take advantage of potential lower prices later down the road. Remember that with the NYSE Bullish Percent we are measuring risk in the mark et place and then adjusting the amount invested or the downside protection strategies to compensate for higher risk and lower risk in the market.
Symbols to Pull Up Charts: BPNYSE (NYSE Bullish Percent) and OTCNYSE (OTC Bullish Percent)
The Short Term Indicators
We follow three short term indicators, NYSE High-Low Index, Percent of Stocks Above Their 10 Week Moving Average, and the Optionable Bullish Percent, and like to see at least two of the three going in the same direction. The short term indicators are important because often times the short term turns into the long term. In other words, when the NYSE Bullish Percent is in O's, the short term indicators are usually the first to reverse up and that enables us to at least start toe dipping back into the market selectively, with at least partial positions, and with stop loss points. If the NYSE Bullish Percent is in X's and the short term indicators reverse to O's, it suggests you take a look at each position closely. If you are up 30% or more, consider taking partial positions off the table. Make sure you know where the trouble points are on your stocks so you don't ride them up and ride them back down again.
All of the short term indicators are plotted on grids from 0% to 100%. Each box is worth 2% and it takes a 6% change to move from one column to the other. The two lines of demarcation at 30% and 70% still exist with 30% and below being consider oversold and 70% and above being considered overbought or high risk.
NYSE High-Low Index: Divide the number of new highs by the number of new highs PLUS new lows each day and take a ten day moving average. In very strong markets, it is not unusual for the NYSE High-Low Index to get up near 90% and can stay there for a while. Good buy signals occurs when the NYSE High-Low Index goes below 30% and reverses up. Readings below 10% are considered very oversold.
Percent of Stocks Above Their 10 Week Moving Average: Is a simple percentage reading of the number of stocks above their ten week moving average.
Optionable Bullish Percent: The universe here is those stocks which trade options so it is a universe of stocks that includes not only NYSE but OTC stocks. There are about 3,000 stocks in the Optionable Universe. Like the NYSE Bullish Percent, the Optionable Bullish Percent measure the percent of stocks that trade options that are currently on a point and figure buy signal.
Symbols to Pull Up Charts: HILO (NYSE High-Low Index), 10WEEK (Percent of Stocks Above Their 10 Week Moving Average) and BPOPTI (Optionable Bullish Percent)
STEP 2: SECTOR ROTATION
Determine which sectors suggest offense (and what their respective field position is). It is best to stay with those sectors that are bullish and below 50%. The bullish percent concept that we just discussed with the NYSE Bullish Percent also applies to 43 different sectors we follow too. These are updated every Wednesday afternoon on the website. The sector bullish percent charts can be found from the main page under a link entitled "Sector Bullish Percent Link."
STEP 3: FUNDAMENTAL INVENTORY
While our specialty is the technical side, we also appreciate that you need to understand the fundamentals. The fundamentals answer the question of "what to buy" while the technical answer the question "when to buy." We suggest you create and maintain an inventory of stocks to work from. Use any number of sources available to determine those stocks deemed fundamentally sound. S&P Outlook STARs or Value Line 1's and 2's are excellent sources. Also watch for upgrades and upward earnings revisions. Use the Portfolio function to put in your portfolio of fundamental sound stocks and then you can run technical searches and sorts.
STEP 4: Technical Analysis - Stock Evaluation
Review your fundamentally sound stocks on a technical basis to cull out those controlled by demand. This will narrow your inventory down to those issues with the best probability of moving higher. Here is some of the criteria we use when evaluating a stock on a technical basis.
Determine which stocks are in an overall uptrend, trading above their bullish support line. Flip through the charts you are keeping by hand (we always suggest you do this on at least 10 to 20 stocks so you get a good field for them) to quickly determine this or use the Search/Sort function on the Internet.
When sectors reverse (change status), especially from a low level, do a search/sort to cull out the best technical situations. This way you are getting in while the sector risk is the lowest.
Market Update
We wanted to take a second and update you on the market and make sure that you saw the changes in the technical indicators yesterday. Let's outline some of the things we see happening right now in the market.
All three short term indicators are on sell signals. The Optionable Bullish Percent reversed down with Tuesday's action. Because all three of these indicators are on sell signals it brings us the caution flag. At a minimum, those on margin should come off. Any new positions should only be taken on pullbacks to strong support levels.
The NYSE Bullish Percent is close to reversing down. It would not surprise us to see this reverse down next week. That would bring yet another red flag up for initiating new positions.
The technology sectors are at high risk levels. The Software sector is at 72% -- the highest level since 1996. The Computer sector is at 62%. The Internet sector is at 68% and close to reversing down. The Semiconductor sector hit 72% and then reversed down and is now in Bear Confirmed status at 60%. The Telecommunications sector is at 66%. This information tells us that if you are buying technology stocks here, you must do so with the understanding you are taking on a lot of risk. We prefer to buy when the risk is low. That means we wait on the sidelines for that opportunity to present itself in the future. We can always make up opportunity but its hard to make up money. Remember, when the sector is at 70% the financial headlines will always be the most bullish but don't abandon the game plan.
The Dow Jones 20 Bond Average (DJBB) remains on a sell signal and in fact reversed back down into O's. It has made us negative on bonds since February 4th of year. Until it gives a buy signal we will remain bearish on bonds. Right now the buy signal would come at 99.4. Interestingly enough, Electric Utilities are at their lowest level since 1987. In fact, Electric Utilities are lower today than in 1994. This group will present a good buying opportunity once bonds give a buy signal.
In summary, we are cautious here with three short term indicators on sell signals and the NYSE Bullish Percent close to a reversal down. The technology sectors which have been carrying the market are at very risk levels. That's the bad news. The good news is that the short term indicators are at relatively low levels with the Percent of 10 at 35% and the NYSE High-Low Index at 20%. If the NYSE Bullish Percent were to reverse down it would come at 36%, again a low level. We will continue to remain cautious as long as the short term indicators are in O's. If they reverse up, whenever that may happen - we don't know the length of time they will remain negative, then we will again become more bullish.
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