Stop Loss

Text Box: Wiser Trader Stocks and Options Newsletter
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Issue No. 41 – August 29, 2005 Prescott, Arizona Systems@WiserTrader.com

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1.0 Trading

This week features an article from former exchange member, broker and floor trader, Al Thomas.

1.1 How to Place Stop Loss Orders – by Al Thomas

We have established why a stop loss order is a requirement for the successful investor. Now let’s look at some of the simpler methods.

There are 3 basic methods (and many more we will not discuss here) for stops that almost anyone can master. They are percentages of the price action, moving averages and support areas. These cannot be covered in detail here, but you can do further research on your own.

Any stock, fund or Exchange Traded Fund (ETF) you buy you think is going to go up, but there is the chance that it may go in the other direction. The stock you buy is $50 per share. You certainly don’t want to hold it while it goes to $25 or $10 as many did in 2000. Your first thought should be how much am I willing to risk if I am wrong and that is called your loss limit. Let’s pick an arbitrary amount of $5.00 per share. That’s 10%. If it goes down that is the maximum amount you will lose and you still have 90% of your money remaining to find a better investment. When it goes up you will want to protect your profit by moving the stop up.

When an equity advances to $55.00 your stop of 10% should be moved to $49.50 that is 10% 0f $55. When it goes to $60 your stop is now $54. Nothing complicated here. There have been many stocks that have gone from $20 to $250 and then down to $2.00. Think what a stop loss would have done for you in that case.

© 2005 WiserTrader.com, LLC. Members of wisertrader.com are neither licensed brokers nor licensed advisors. Trades discussed represent recommendations made by the editor for the wisertrader.com portfolio. The newsletter and web site are for information only and should not be considered as personal advice. While it is believed that the posted information is factual, mistakes can be made in transcription. Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser. WiserTrader.commarkets third party trading systems but has no other affiliation with trading system companies.

As I have said before never buy anything unless it is going up. That same $50 stock was moving steadily higher in a rather narrow trading range. If you decide to use a 20 day moving average you will have to do the calculations either daily or weekly. You add up
the closing prices for the past 20 days and divide by 20. This should be done once each week and the number calculated is your stop loss. Again nothing complicated. The steeper the advance the shorter should be the number of days for the moving average. If you are lucky enough to have one of those skyrockets you might even be down to a 5DMA. Some traders use a 50 day MA and others even a 200-day MA. Mutual funds lend themselves to the latter.

Finding support and resistance points require a more sophisticated approach. This is something you are going to have to study. There are many places on the Internet that have short explanations with examples of how to determine these points.

Briefly you watch a stock, fund, ETF run up and then you see it stop and set back like a stair step. It will rest for a while with a short up and down sideways pattern that forms before the next move higher. Your stop should now be down at the point the recent up move started. When it advances again this current formation becomes the stop loss point. This is not mechanical and requires a more experienced trader to determine these points. Once you learn this technique you will also begin to see the orderliness of the market.

The mastery of an exit strategy with stop loss orders will immediately put you in the top 10% of all investors. Learning how to sell is the key to successful investing.

Get F*R*E*E investment letter www.mutualfundmagic.com. Author of best seller "IF IT DOESN'T GO UP, DON'T BUY IT”. Never lose money in the market. Copyright 2004 Albert W. Thomas All rights reserved. Former 17-year exchange member, floor trader and brokerage company owner

2.0 Market Analysis

For the last 15 trading days the NASDAQ has alternated up and down on successive days with two exceptions that consisted of two down days in a row. The net movement has been downward to the tune of 4.5% for the month of August. The S&P 500 is down 2.3% for the month. Trading active typically slows in August which has historically been the third worst month of the year.

Little has fundamentally changed. What news there has been is being interpreted negatively. Durable goods orders dropped 4.9% after rising 9.2% the prior two months. Oil was up to $66.13 a barrel from $65.79 last week. The Fed chairman raised concerns about an imbalance in the housing industry as existing home sales are at their third highest level ever and new home sales rose 6.5% to reach a new record high.

Market analysts expect market sentiment to turn upward after Labor Day.

Figure 1 compares index tracking stocks for the major averages with Sector SPDR’s.

FIGURE 1

Relative strength is given in Table 2A.

Table 2A

Relative Strength

Index	5 Day RSI
DOW	Oversold
S&P 500	Oversold
NASDAQ	Oversold

Market sentiment is shown in Table 2B.

Table 2B

VTO Market Sentiment Indicators

Sentiment Indicator	Current	Last Week	2 Weeks Ago	Complacent	Cautious
VIX **	13.72	13.42	12.74	< 20	> 50
VXN ***	15.37	16.16	15.63	< 30	> 70
Put/Call Ratio	0.8.14	0.576	0.625	< 0.6	> 0.7
%Bulls - %Bears	31.9%	34.8%	39.8%	> 29%	< 20%
Above 20 day SMA = Sell signal. * At 20 day SMA = Neutral.

Figure 2 compares index tracking stocks with five leading ETF’s for the week. It was a declining week.

FIGURE 2

In Table 2D, the broader market moved downward for the week.

Table 2D

Index Tracking Stocks, Key Industry ETF’s and Sector SPDR’s

	1 month	1 wk ago	2 wks ago	3 wks ago	4 wks ago
SPY (S&P 500)	-2.4%	-1.4%	-0.5%	0.1%	-0.7%
DIA (DOW)	-2.6%	-1.7%	-0.3%	0.3%	-0.9%
QQQQ (NASDAQ 100)	-2.8%	-0.9%	-1.0%	-0.7%	-0.3%
IWM (Russell 2000)	-5.0%	-0.9%	-0.6%	-0.7%	-2.8%
GLD, GOLD	1.8%	0.0%	-2.0%	2.0%	1.8%
RKH, Banking	-2.9%	-2.4%	0.6%	0.2%	-1.3%
IYT, Transportation	-3.2%	-1.1%	-0.9%	0.5%	-1.8%
SMH, Semiconductors	-2.9%	0.1%	-0.3%	-1.5%	-1.2%
BBH, Biotechnology	-1.2%	-0.3%	-0.3%	-0.3%	-0.3%
IYR, Real Estate	-5.9%	0.4%	-0.8%	-0.9%	-4.7%
OIH, Oil	-0.2%	-0.1%	-3.5%	1.2%	2.3%
XLE, Energy	0.8%	-0.4%	-4.0%	3.7%	1.7%
XLU, Utilities	-0.4%	1.6%	-0.3%	-0.5%	-1.1%
XLB, Materials	-4.8%	-3.0%	-2.7%	1.0%	-0.2%
XLI, Industrial	-2.9%	-1.4%	-0.7%	0.8%	-1.6%
XLK, Technology	-2.1%	-0.8%	-0.1%	-1.7%	0.5%
XLV, Healthcare	-2.2%	-1.2%	-1.1%	0.6%	-0.6%
XLF, Financials	-2.6%	-2.1%	0.1%	0.2%	-1.0%
XLP, Consumer Staples	-2.3%	-1.0%	0.4%	-0.3%	-1.4%
XLY, Consumer Discretionary	-3.4%	-1.2%	-1.7%	1.0%	-1.5%

3.0 Procedure

The following watch lists contain stock candidates for consideration. They are not necessarily trades. Categories include check lists for insider buying and cash rich companies, as well as, those that employ stock picking methods of six important master traders. Stocks are ranked by where their current price falls in the range defined by their 4 week highs and lows. Stocks at their 4 week highs are ranked 100% while those at their 4 week lows are ranked 0%.

The “Reference” is the date that a stock passed the indicated filter and was added to or returned to the list. The “% Change” is how the price has changed since the reference date. Stocks that are down 10% or more after being listed are removed. The “% from Max” is the percentage the price has declined from the maximum price reached since the reference date. Stocks that are down 8% from their highs after being listed are flagged in yellow. Stocks that are down 15% from their highs after being listed are removed. More information on filters is available on the web site.

A performance summary of filtering techniques for check lists and master trader selection methods is given in Table 3A.

Table 3A

Stock Filter Summary

Filter	Avg. % Change Since Listed	Avg. % Change Friday	1 Month	1 Week Ago	2 weeks Ago	3 Weeks Ago	4 Weeks Ago
Net Insider Buying	7.2%	0.6%	9.6%	6.4%	1.6%	-1.6%	3.4%
Cash Rich Companies	-1.5%	0.0%	7.2%	0.3%	5.4%	2.3%	-0.9%
Growth Momentum Stocks	7.9%	-0.9%	-3.2%	-1.7%	-2.5%	1.0%	0.1%
Lynch Stocks	8.2%	-0.8%	0.2%	-0.5%	-2.2%	1.7%	1.3%
Buffett Stocks	19.2%	-0.7%	-0.5%	-0.8%	-0.7%	1.5%	-0.4%
Graham Stocks	8.9%	-0.2%	-1.2%	1.2%	-0.5%	-0.6%	-1.3%
Templeton Stocks	7.6%	-1.5%	-3.6%	-0.5%	-0.8%	0.1%	-2.4%
Zweig Stocks	8.1%	-1.0%	3.7%	4.1%	-2.7%	2.0%	0.4%
Average	8.2%	-0.6%	1.5%	1.1%	-0.3%	0.8%	0.0%

Key

Passed Recent Filter

Companies that have experienced net insider buying within the past 6 months of 5% or more of issued stock are listed in Table 3B. These stocks should also appear in one of the master trader screens or meet additional screening criteria before being given serious consideration. This list is a mixture of stocks that are optionable and those that are not.

Table 3B

Net Insider Buying Check List