From the Bull market report. Nice discussion on Stops at the end.
- bull-market.com
THE BULL MARKET TECHNICAL INVESTOR
Wednesday, May 17, 2000
Volume 2, #8
"Off The Charts"
By Barry Habib and Art Adams.
OVERVIEW
Thank you Mr. Greenspan. The Fed issued a stiff half point hike in both
the Discount and Fed Funds rates today. This was on the heels of a good
CPI report. WE think the economy is slowing but the Fed still sees
"inflation risks".
In our last letter we had thought that if the CPI number would come in
tame, we felt the market would rally even if the Fed hiked rates by 50 BP.
That's just about how it played out. We made smart gains on all four of
our picks in the last issue. We hit our target on RFMD at $110 for a
quick 13.4% gain in 3 trading sessions. RMBS hit its target of $215 as
well, resulting in a 13.2% profit in 3 trading sessions.
Here is a list of our picks from Monday along with the targets and stops
we had promised you (note RMBS already hit the target set in the 5/12
issue):
1. Aether (AETH) Purchased at $151, Target $176, Stop $136
Chart: bull-market.com
2. Exodus (EXDS) Purchased at $77 Target $81, Stop $75
Chart: bull-market.com
3. PMC Sierra (PMCS) Purchased at $156, Target $180, Stop $140
Chart: bull-market.com
We have now been successful on our last seven picks. After one month our
portfolio is up over 8% (in a tough market). Here are today's selections.
Let's hope the streak continues.
SELECTIONS
1. AT&T (T, $39)
Chart: bull-market.com
2. Molex (MOLX, $51)
Chart: bull-market.com
3. Sun Microsystems (SUNW, $87)
Chart: bull-market.com
4. METHODS FOR PLACING PROTECTIVE STOPS - PART III
DISCUSSION
1. AT&T (T, $39) provides voice, data and video telecommunications
services, including cellular telephone and Internet services, to
businesses, consumers and government agencies. We like AT&T's current
chart and price level. We have a BUY signal from Stochastic Divergence
and RSI Crossover trading systems. We feel this is a good long-term buy
and hold opportunity and are setting a target of $60, a 50%+ return if
met. This won't be a quick mover but 12 to 24 months from now, you'll be
happy you bought some T at this price level.
ACTION: BUY T at or anywhere below $39. Our 12-24 month target is $60
with a protective stop positioned at $35.
Chart: bull-market.com
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2. MOLEX (MOLX, $51)
Molex, Inc. (MOLX, $51) manufactures electronic, electrical and fiber
optic inter-connection products and systems; switches; and application
tooling. Molex shows a very good chart pattern and we have a BUY signal
from Trix Momentum Divergence, Kirshenbaum Band, Money Flow RSI Crossover,
and Trading Band Crossover trading systems. Our target is $55, just below
the short-term resistance level located at $56.
ACTION: BUY MOLX if the Nasdaq futures are positive before the open.
Otherwise, look for an entry after any early morning pullback. We have a
target of $55 with a protective stop positioned at $47.
Chart: bull-market.com
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3. SUN MICROSYSTEMS (SUNW, $87)
We have a BUY signal from Relative Strength Index Peak, Price Rate of
Change Crossover, and Trading Band Crossover trading systems.
Additionally, there is a positive MACD Crossover. We look for Sun to
trend higher, up to its short-term resistance level at $94 where we have
our target.
ACTION: Buy SUNW if the Nasdaq futures are positive before the open.
Otherwise look for an entry after any early morning pullback. We have a
target of $94 with a protective stop set at $83.
Chart: bull-market.com
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4. SPECIAL REPORT - METHODS FOR PLACING PROTECTIVE STOPS - PART III
We have received numerous questions regarding the use of protective stops
here at The Bull-Market Technical Investor. While we endeavor to answer
every question submitted in a timely fashion, we thought it would be
beneficial to all of our subscribers if we wrote a series of brief
articles describing different methods for setting initial protective
stops. Today we will conclude with part III of "Methods For Placing
Protective Stops". This is the final part of the three part series
written by Dr. Art Adams.
Volatility Based Stops
A third method used to determine an initial protective stop is through the
measurement of a stock's market volatility. A stock's current volatility
is measured and then the initial protective stop is set just outside the
price range defined by the volatility. By doing this, a trader will avoid
getting stopped out due to a stock's trading within its normal volatility
range. For example, if a particular stock had an average intra-day
trading range of five points, it wouldn't be a very good idea to place an
initial protective stop two or three points below the current price. This
is because the probability would be high that the position would be
stopped out due to market fluctuation that is "normal" for that particular
stock.
There are a couple of ways Volatility Based Stops can be determined
through the calculation and use of Average True Range (ATR) and Historical
Volatility (HV).
Average True Range (ATR)
Legendary technician Welles Wilder developed the concept of Average True
Range in his book, New Concepts in Technical Trading Systems, and it has
since been used as a component of numerous indicators and trading systems.
Volatile markets often gap higher or lower one day to the next and True
Range takes this volatility into account in its calculation. True Range
is the greatest absolute value of:
1. The distance from today's high to today's low
2. The distance from yesterday's close to today's high
3. The distance from yesterday's close to today's low
The Average True Range is a moving average (typically 14 days) of the True
Ranges. By averaging True Range over time, a better feel for volatility
is realized. Once you calculate the ATR for the time interval you are
interested in, you take a multiple of the ATR and subtract it from the
current closing price for a long position or add it to the current closing
price for a short position. Usually, short-term traders will calculate
the ATR over several trading days to a week and use a multiple of 1.0 to
1.5. Intermediate-term or longer-term traders will use an ATR over
several weeks with a multiple of at least 2.0.
For example, let's say stock MSFT has a 14 day ATR of three points and we
want to trade with a longer term trend in mind, so we choose to use a
multiple of 2.0. We would then multiply the ATR of 3 by 2 to yield a
value of 6. We would then subtract a value of 6 from the current closing
price of MSFT for our initial protective stop for a long position and
would add six to the closing price for a stop with a short position.
Historical Volatility (HV)
Historical Volatility (HV) measures the actual volatility of a security's
price using a standard deviation based formula. Usually, HV is based on a
one standard deviation move that suggests statistically that a security
will trade within this one standard deviation range 66% of the time,
assuming a normal distribution and present volatility. HV shows how
volatile prices have been over the last "X" number of time periods. The
advantage of historical volatility is that it can be calculated using
readily available historical security prices.
A computer does the calculating of HV, as it is too laborious to calculate
by hand. One way to calculate HV is to use the following formula:
If T = time interval or length of volatility to be calculated
And NL = natural logarithm
Then HV(T) = standard deviation (NL (closing price/yesterday's close), T)
* 100 * Square Root (256). The value of 256 is used because there are
approximately 256 trading days in a year.
Larry Connors in his book Connors on Advanced Trading Strategies states
that HV can be used to calculate stops as follows:
1. Divide 265 trading days by the number of days you intend to hold a
position
2. Take the square root of the resulting number in step #1
3. Divide the HV by the resulting number calculated in step #2
4. Take the stock price and subtract the resulting number in step #3 from
it for a long position and add the number to the stock price for a short
position.
The advantage of using Volatility Based Stops is that they take into
account the "normal" fluctuations or "noise" of a stock's market enabling
a stop to be placed just outside the "noise" level, thus reducing the
likelihood of being stopped out. The disadvantage is that Volatility
Based Stops can often end up being quite large as in our recent trade of
the very volatile Aether Systems (AETH) where we had about a 20 point wide
stop.
Summary
We have briefly presented three different methods for calculating
protective stops. Which method is the best one to use? It depends on the
type of trading you do or your trading "style" and also on how much risk
you are willing to assume. If you are a daytrader or very short-term
trader, you will most likely make use of Dollar Based Stops to keep losses
at a minimum and will risk enduring numerous smaller losses until a large
winning position presents itself. Longer-term traders will make more use
of Pattern Based and Volatility Based Stops to help reduce being stopped
out by "market noise." Pattern Based Stops to some extent make use of
market volatility as part of the technical analysis they are based upon.
Both Pattern Based and Volatility Based Stops have the advantage of
reducing the chances of getting stopped out with the added cost of
assuming more risk.
Please remember that using any one of these methods is not an exact
science. Also, you can use these methods in combination with one another.
For example, if you are uncomfortable with the width of a particular
Pattern or Volatility Based Stop, you could reduce the size of your trade
to decrease the dollars at risk. If you're a short-term trader using
Dollar Based Stops, you could also incorporate the Pattern and Volatility
methods using smaller intra-day patterns and time intervals.
We hope you found this series informative and also hope it answered most
of your questions concerning the determination and use of protective
stops. Remember, you should always make use of an initial protective stop
with every trade you place.
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OUR PHILOSOPHY
THE BULL MARKET TECHNICAL INVESTOR is designed for savvy, active equity
traders and those investors wanting to identify opportune times to buy or
sell high performance stocks based on technical analysis. The primary
objective of our technical analysis trading system is to maximize trading
profits by identifying key reversal points and breakouts of stocks as they
move in and out of their trading ranges. Our computer-based trading
system generates buy and sell signals for selected stocks by applying over
125 trading systems to the historical prices of each stock. The signals
generated are based on daily stock price data, the use of which most
accurately discovers shorter-term trading opportunities. The end result
is a trading system that is very sensitive to patterns in the way stocks
trade in the markets. However, quick reversals can and do occur in
response to unexpected buying or selling of any given stock, such as might
result from the release or expectation of news.
Subscribers who are long-term investors in any of the stocks mentioned in
THE BULL MARKET TECHNICAL INVESTOR need to understand that this system is
designed to allow trading of these stocks as they reach levels of support
and resistance, as they travel along or break out of their trading ranges.
It is for short-term traders.
A "Sell" signal, when it occurs, does not necessarily mean the stock is
not a good long-term investment, just as a "Buy" signal does not
necessarily mean it is a good long-term investment.
It is our intention to publish The Bull Market Technical Investor at least
three times per week and to keep it FREE as long as we can, supported by
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we feel will provide you with high performance trading opportunities.
Barry Habib & Art Adams
Contributing Editors
TechnicalInvestor@Bull-Market.com
Todd Shaver
Editor in Chief
The Bull Market Technical Investor
Washington, DC
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BIOGRAPHIES
Barry Habib is president of CMA; a New Jersey banking, insurance and
financial planning firm that manages over $400 million per year. CMA
employs over 40 people.
Mr. Habib, age 40, holds a degree in finance and economics and is
regularly featured on the CNBC television network. His monthly report
airs live on CNBC the first Wednesday of each month at 8:40 AM ET.
Additionally, Barry is often featured on NBC, FOX, CNN, Dow Jones and
Bloomberg television for his market forecasts, technical analysis and
general market expertise. Barry is a regular guest on Business News
Network radio where he applies his technical analysis to stock selections.
You can tune in live over the Internet at 3:40 PM ET every Friday at
www.businesstalkradio.net/. Barry also provides stock picks for The Bull
Market Report, which has a readership of over 100,000 subscribers. A
nationally recognized speaker, Mr. Habib is also a licensed member of NASD.
Art Adams has a strong background in mathematics, statistics, and research
methodologies and was formerly the Vice President of Technical Services
for Capital Markets Communications where he edited and produced a weekly
trading newsletter featured on Telescan's WallStreetCity web site. He was
also a former broker with Merrill Lynch specializing in technical analysis
of securities. Art is presently the president of a private investment
company. He has a doctorate, and is an active stock and options trader.
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Disclaimer: Barry Habib, Art Adams, Todd Shaver and other contributors to
this newsletter hold long positions in some of the securities mentioned
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The Bull Market Report, LLC is not a registered Investment Adviser or a
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