Swing Trading Strategies & Stock Picks Since 2003

After much delay, lets take a look at the GENZ trade from beginning to the present time.

After much delay, lets take a look at the GENZ trade from beginning to the present time.

GENZ is the symbol for the stock of Genzyme Corporation. These trades are shown as examples of objective analysis and are not always perfect. My job here is to show you how I analyze trades to minimize risk and hit targets. It is not any sort of holy grail and should never be considered as such. :)

GENESIS of the Trade:

These trades are all long (bullish) trade set ups.

On the evening of January 13 (after market close), I did my usual daily scan of 11,000 securities and ETFs to look for key criteria for pattern completions.

The screening criteria I use are these:

1) I scan the entire universe of U.S. equities for stocks with price greater greater than or equal to 10 dollars.

2) I also scan for stocks with volume greater than or equal to 100,000 shares daily on a 50-day simple moving average basis

3) I look for the propietary momentum indicator to cross above its 3 period (in this case 3-day) simple moving average.

4) I also look for the price bar for which the close is greater than the open (meaning that I have bounced off of a resistance level and moved higher on that day.

5) I identify patterns that are consistent with the model that I use. The basic pattern I look for is here. That is not the absolutely perfect pattern, but it is one that the nets can analyze statistically. In another blog sometime this week, I will attempt to explain the difference. For now, let us run with what you have just seen.

What did the GENZ patterns look like? Take a look at these charts:

Daily with Fibonacci patterns

A longer term intermediate long (which ultimately will end in a bearish pattern):

The final chart to note is the combination of the bullish bar and the momentum crossover. If those two conditions do not exist simultaneously, I DO NOT TRADE IT. Why? because my rules of entry and engagement are ALWAYS the same. There must be consistency in the trading approach, or one is taking the bus to Vegas and pulling the arm of the one-armed-bandit. What is important to note in a future discussion of neural net pattern identification is that the nets likely see BOTH of those patterns if it focuses on a 0.618 retracement as a primary factor (which about 70% of the time, it does). If it sees both of them, it gives greater weight to that pattern repitition in its statistical analysis.

When I am done with observing the patterns visually, I rank them by the process below. I take note before ranking them, however, for the number of stocks that show up in a given sector. If I see a given sector show a lot of strength on any given day, the stock with the stronger patterns will have a higher chance of making the final list.

It had just so happened that in the last few days, other biotech drug stocks like GILD, ILMN, ISIS,REGN, ALNY were also hitting the screens. The biotech drug sector had been and was still undergoing accumulation at that time. 

Typically after that screen, I will list the stocks that show a given pattern and then I rank them by value (price/near Free Cash Flow fair price), safety of earnings (somewhat subjective, but ranked in order), and a ratio of change in price to change in price of the Russell 5000 index.

From that each stock that ranks in the top 10 of that list gets a point.

 GENZ was one of the top three in that category. GENZ had a near free cash flow value of  approximately $115 (this value is one I purchase, but it is close to revenues less relevent debt and overhead expenses divided by the shares outstanding). Does that mean that GENZ is guaranteed to run to $115? Are you kidding me? In this market, probably not, BUT, it is a realistic estimate of what could happen if earnings continue along at the given pace used in that model based on estimates of earnings growth.

If a rational money manager is going to attempt to be long something, the manager has to have an objective at which he or she takes a profit. My goal is using these numbers is to find something cheap enough to be comfortable enough holding long over an extended period of days. If I am right and I continue to hold a fractional position, I want to have a decent shot at getting an extraordinary return for my time. If I am a trader, I just want to know that I have a shot at reaching my target, any target, in a reasonable period of time. If I am long, I want to be long and cheap. If I am short, I want to be short and know that the stock will crater like a lead ballon.

QUICK ESTIMATE OF TARGETS AND FINAL TRADE SET UP:

The final set up is shown here for January 14 (entry day)

Note that the first target is the 0.618 retracement of the last down leg (66.11)

The second target is the next resistence level at the swing high after the November low (69.14).

The final target is the 1.27 (roughly 1.272) extension of that last odwn leg at 70.24. If there is real price symmetry from the November low to the December high (as shown by that farthest left up-sloping arrow) and extended target of 74.35 is possible. There is real price resistance very near that extension price (so there is real market evidence that such a target exists, beyond momentum and pattern analysis).

How did we do? Let's take a look. Here is the post mortem chart for January 30, 2009.

As it turns out, we hit all three targets. At the present time, however, it looks like bullish momentum has died and that a double top price pattern has formed. Regardless of that, would it be a bad thing to hold onto a piece of it assuming that you have a break even stop at the opening price on January 14 of 63.62. No, of course not, you have a profit (without removing commissions) of 8.3%. If the stock has a chance of blowing out its extended target objective and you have taken profits at the three target levels, you are basically playing with the house's money with the rest of the position. At that point, your trade plan would determine for you if you would close or maintain the position.

One of the things I learned from a technician I have met and admire tremendously, John Murphy (whose books are listed here) is that technical analysis that is not driven by determining price objectives is pretty useless. You should at least read Technical Analysis of The Financial Markets and own the book if you can. It is a pillar of modern technical analysis.

All of his books, however, are an invaluable resource for technical analysis, geared toward profitable trading. 

CONCLUSION:

What I have shown you today is basic price objective analysis. The screening process I use includes value and sector analysis also. I am trying to find the cheapest stocks in the strongest sectors to be long. If I were shorting, I would be trying to find the most overpriced stocks in the weakest sectors.

If you are not doing price objective analysis, in my opinion, you are going to Vegas. Vegas has been designed and financed to make you LOSE MONEY.

Moral of the story: DON'T GO TO VEGAS! Have a plan in mind when you trade that has a rational entry and rational exit.

Using this example over the next few days I will discuss how to move stops and be prepared should a trade work against the trader.