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| TheRumpledOne 6,411 posts msg #42389 - Ignore TheRumpledOne |
3/23/2006 4:10:04 PM This was in my inbox today: Gaining the Knowledge to Make the Big Money Volume 7 - Issue 13 - Circulation 70,000 Dear investor, You make big money in the stock market by being in the right sector and then by buying and holding that sector until its run is over. Over the past few years that meant oil and energy stocks. Now it means gold stocks. Right now gold stocks are in a correction. You know that, because we have been following it closely for the past few weeks. I'm personally waiting for what is going to be the trade of the year - buying gold stocks on their next intermediate-term bottom. I want you to be prepared for this opportunity. You can’t learn how to spot opportunities like this in school. I started investing in 1997 when I was in graduate school getting a Masters Degree in history. Over the years I had taken a few courses in economics. Nothing I ever learned in school has applied to successful investing. I had always been interested in economics and the stock market. I was going to college with the idea of eventually becoming a professor in history. I still read a lot of history and am in the process of writing a history book of my own. What had always interested me though was what happened behind the scenes – what were the real causes of historical events. Who were the real players behind the Presidents and politicians? How does power actually work and who really has it The book I am writing tries to answer those questions when it comes to the state of Virginia and the South after the Civil War until the 1950’s. But the answers to those questions no matter the time or place usually involve economics. The boom and bust business cycle has a habit of not only changing who is at the top but has an influence over the entire culture. Capitalism has been called "creative destruction" for a reason But the point is - my interest in history and economics trickled into an interest in the financial markets themselves. It isn’t a big step to go from studying the Federal Reserve, the stock market crash of 1929, and the Great Depression to wondering how you can make money in the market yourself And at the time I was in school we were living through a wild period in the global markets. We saw market crises in Asia, Russia, and the near blow up of Long-Term Capital Management. Emergency Federal Reserve bailout programs to stop these crises were followed by the greatest stock market bubble in world history in the Nasdaq. One needed to learn how the financial markets work in order to understand what is going on today Inheriting $15,000 became a further reason to begin to learn how to invest. I decided that instead of giving that money over to a broker I wanted to learn how to invest it myself. Over the course of several months I read what was probably three-dozen books about the stock market and investing The books all had a myriad of investment strategies, from people claiming to be Warren Buffett value investors - to the Investor’s Business Daily CANSLIM growth investing - to charting - to Pete Lynch platitudes about buying stocks of companies where you shop. I also read some classic books on trading such as the Livermore book, Nicholas Darvas’s How I Made a Million in the Stock Market, Wyckoff, Gann, and Edwards and Magee But out of all of these books there is one book that changed everything. And I have been reading it again over the past few days for the first time in years. It is Stan Weinstein’s Secrets for Profiting in Bull and Bear Markets. He is the author of the quote that started this month’s newsletter The book was written in 1988 and has a funny cover on it. Funny because the author has the type of hairstyle that people used to wear in the 80’s and makes the book look outdated. I can’t remember if I saw the book in a bookstore or if I bought it because it was mentioned in another book. I remember, however, that many of the people interviewed in Jack Schwager’s Market Wizard books talked about it I don’t know if I’d be here talking to you now though if I hadn’t read this book. If you haven’t read it then you should definitely pick it up With the use of the techniques in the book I turned the $15,000 into over $200,000 in the space of a few years and went on to come in second place in the 2003 Robbins Trading Championship. I now run a hedge fund with several million dollars in it that posted a gain last year, which put it in the top 10 percentile of all hedge funds – and I think this year is going to be even more exciting If you don’t act on anything else I say at least read the Weinstein book. Amazon.com lists the book here: http://www.amazon.com/exec/obidos/ASIN/1556236832/wallstreetwin-20 When I read the introduction to the book I knew I was reading what was a revelation for me at the time. He used a simple phrase "The Tape Tells All" which immediately made sense to me and summed up what I was trying to discover. Weinstein wrote the following "That’s more than a cute slogan, it’s a market philosophy that works. What it simply means is that all of the relevant information about a company’s earnings, new products, management, and so forth – the fundamentals – that is currently known and cared about is already incorporated in the price of its stock. It isn’t that I don’t care about an important piece of fundamental news such as a pending takeover offer: rather I learned long ago that you and I aren’t going to find out about that juicy news before it hits the broad tape – and by then it’s too late. Sure, we’ll hear rumors, but for every 100 that you’ll hear, no more than one or two really pan out. That is not a way to rack up a winning percentage in the market. So accept the fact that unless you’re willing to break the laws on insider trading you aren’t going to find out about that important piece of news ahead of time. And once you read the news in the paper, it’s too late to act on it profitably. The remarkable thing is that when you learn how to properly interpret what’s taking place on the tape – and on your chart – you’ll often be buying or selling with the insiders without even knowing it. "You don’t have to be Sherlock Holmes to know that something is up in stock XYZ if it has traded an average of 20,000 to 30,000 shares each week over the past several months while quietly moving back and forth in an 8 to 10 trading range; and then, suddenly, it breaks out above its ceiling, or what we technicians call resistance on huge volume (say, 250,000 to 300,000 shares for the week). In my reading I came to see the stock market as a great competition. When you buy a stock someone else is selling. There are winners and there are losers and you need to have some sort of edge to be a winner. But how do you get that edge? There are insiders who have an edge that you never will have. How do you go up against them? How do you effectively challenge (what I thought was) the intelligence of the Wall Street mutual fund managers and analysts? How do you compete with professionals and hedge fund managers Most people simply buy because they read a magazine, hear some good news, or see some hype on CNBC. But the market discounts the future and the public consistently buys behind the curve. The insiders distribute ahead of bad times and buy when the news is bad and the future is bright. How can you outsmart those people? It seems like you need to know more than they do - know everything you can about the economy, their competition, and perhaps be able to predict the future But that is virtually impossible. Stock analysts merely pretend to do that. In reality, they are sales people whose job it is to get you to buy stocks their firm is pushing. And the mutual fund managers on TV – they simply give rosy forecasts about the economy and the stock market to hook you into buying into their fund. They are selling you too. You never hear a mutual fund manager say sell, because if everyone sold out of their mutual funds they would be out of a job. That is why CNBC acts as an infomercial for Wall Street and why its viewers almost always get left holding the bag. Mutual fund managers - by a large percentage - don’t perform better than the averages. They have no special abilities No. The people with the special knowledge are the insiders. A recent study revealed that US Congressmen, on average, outperform the market by 10% year after year. It isn’t because they are value investors or were trained on Wall Street, but because they have a line to the inside dope. It’s a line we’ll never have. But we don’t need to have it. What Weinstein revealed to me in the paragraphs I quoted from his book was an investment philosophy that made sense - a philosophy that would align your investment position with the smart money. What we need to do is be able to read a chart for signs of insider accumulation and then buy along with them. Now I can’t just look at any chart and say here are the insiders and here the insiders selling to the greater fools. But there are consistent patterns to stocks and insider buying influences some of those patterns. The philosophy of technical analysis – charting – holds that a stock is influenced by the market forces of supply and demand. When demand increases and purchases eat up the supply of stock, then a stock rises in value. When sellers hit a stock they increase the number of shares available – increase the supply – and if there is no subsequent increase in demand then that stock will fall in value. What is interesting is that when you plot a stock chart out you’ll notice that it has areas of 'support' and 'resistance'. Support is an area in which a stock seems to always bounce up from not being able to fall down through. Resistance is an area where rallies in the stock don't have the strength to continue higher. These are areas in which demand keeps a stock from falling (support) or sellers hit and prevent a stock from going up (resistance). When a stock is in a trading range it is in a neutral zone in which an ongoing battle between buyers and sellers takes place. It isn’t so much that the two forces are fighting each other, but that they are roughly equal. The more equal they are the lower the volatility in the stock you are following will become For instance, if a stock trades between 8 and 10 for several months it has support at 8 and resistance 10. As long as the stock continues to trade in this range the buying and selling pressure will be roughly equal. That is why the stock remains stuck in its range. However, eventually one force will simply run out of energy. Once that happens, the stock will either break resistance or break support and an explosion in volatility will appear. This is what causes a spike in volume and a rapid jump in stock price after a breakout. It isn’t so much that a whole bunch of buyers come in that makes a stock go up, but simply that the sellers have run out of shares to sell. With the sellers gone, the buyers are able to take over and run the price up. Now this doesn’t necessarily mean that insiders are buying and beating the sellers. This simple technical pattern can be short-term and just last a few hours or a few days. However, there is a time in which it comes after a period of insider buying, in which shares are exchanged from the weak hands to the strong. This is the buy point that is the most profitable because it happens at the start of a long-term bullish trend. To understand this period you have to get a grasp on the life cycle of a stock - what Stan Weinstein calls stage analysis. Weinstein’s breaks a stock’s life cycle up into 4 phases: 1 – Share Accumulation / Basing 2 – Mark Up / Rising Prices 3 – Share Distribution / Topping 4 – Share Liquidation / Declining Prices Each of these four phases is characterized by a distinct pattern caused by the free market forces of supply and demand. In some phases, buyers have the upper hand and in other phases, sellers do. As an investor, you do not want to own a stock that is in liquidation. Nor do you want to buy a stock that is topping out. By understanding the life cycle of stock chart patterns you will be able to know when it is best to buy a stock and when you should sell it. Phase One – Accumulation / Basing During the accumulation or basing phase, shares of a stock are transferred from weak hands to strong hands. This phase usually happens after a long decline or a lengthy advance. The stock trades in a very narrow range and appears to be dead money to the average investor. They are correct to a certain degree, because - during this phase - the forces of supply and demand are roughly equal. Although there is no big buying excitement, there are no waves of sellers either. During this time, the average investor often sells out of fear that the stock will drop further or he/she sells because of impatience. The stock market discounts the future. The market does not move based on today’s news, but on perceptions on what the future of the economy and business prospects will be. This is true with individual stocks also. The smart money, insiders and institutions, are the first to realize that a company’s prospects are brightening. Towards the end of the basing phase they begin to heavily accumulate the company’s stock. Often, although not always, the stock’s trading volume will pick up towards the end of this phase and large 'big block' purchases will take place. A trading range defines the price action in a base. Stocks that are basing bounce between a specific high and low price zone. Sellers often wait for the stock to go to the top of its range before they sell. By doing this they create an area of resistance, a price level the stock cannot trade through. When it reaches resistance it repeatedly falls back down. The more often it does this, the stronger the resistance. The basing phase lasts as long as resistance holds and the stock remains stuck in its trading range. As a general rule the longer this phase lasts the longer the second phase will last. Phase Two – Mark Up / Rising Prices If the smart money continues to accumulate shares they will eventually run out of sellers to buy from. At this point, resistance gets taken out and the stock price clears its base. Bulls get the upper hand with the stock, not because there are suddenly more buyers interested in the stock, but because the sellers have disappeared. Often - at the moment the stock breaks out of its basing phase - the fundamentals of a company are poor. However, even though this is the best time to buy a stock most analysts will be down on the stock and consequently your stockbroker will probably try to talk you out of buying. But remember, the smart money buyers and stock prices themselves, are anticipating a positive future. You are always better off following their lead than the opinions of Wall Street analysts and most stockbrokers. As demand outpaces supply, institutions and insiders will compete with one another to buy the stock. Their psychology begins to change. During the basing phase they bought on dips, now they do not mind buying as the stock price advances. As the advance continues, eventually word gets out that the fundamentals of the company are improving or some positive development concerning the company becomes common knowledge. As this happens, the average investor and the general public becomes interested in the stock and begin to buy too. Analysts begin to put the stock on their recommendation lists. Phase Three - Share Distribution / Topping Eventually the stock gets ahead of itself and stops advancing. Perhaps the growth prospects for the company no longer look so grand. Or the stock has simply reached a high valuation. Whatever the case may be, at this point insiders and institutions decide that it is time to sell and take profits. They find plenty of willing buyers. In fact the news is often so good about the company that people are willing to pay any price for the stock. They saw it climb during its stage of rising prices and believe that it will keep going up. Analysts say it will and so do their brokers. Almost everyone is positive about the company. Everyone that is, but the smart money sellers who know better. Although they carefully sell into rallies so as not to cause the stock price to collapse, the stock begins to flatten out and move sideways as it bounces off of new resistance and support levels. It trades in a range, just like it did during the basing phase, but with greater volatility and price swings. In this phase, though, the smart money is distributing their shares instead of accumulating them from other people. This phase lasts as long as the selling and buying pressure remain equal. Once the buyers become exhausted the stock will break below its trading range and begin its liquidation phase, which is characterized by sharply falling prices. Phase Four - Liquidation / Falling Prices While a stock is being distributed and is topping out after a lengthy price advance, big players sell into rallies while the remaining true believers try to buy dips. After the demand for the stock becomes exhausted, sellers overtake buyers and no longer wait to unload their shares on rallies. Despite the falling prices at the beginning of this stage the average investor remains bullish about the stock and believes the pullback is nothing but a temporary correction. The good news and business fundamentals have likely just reached their peak and the stock is still considered a hot issue by most analysts and stockbrokers. Buyers mistakenly believe that the stock is now cheap because it has dropped and become obsessed with trying to guess the bottom, thinking that the stock will return to its lofty price highs. In fact, the longer and greater the price advance in stage two the more popular the stock will remain during the beginning of the stage four decline. However, buyers in stage four become bagholders for the smart money sellers. Stage four begins with the average investor full of hope, then holding in disbelief, and finally selling near the bottom in outright panic. Most people think that stocks bottom when prices get so cheap that institutions and big money start to buy and that tops happen when all of a sudden people start to sell. Things don't exactly work like that. Stock market Phase 4 declines end, not when big money buyers come in to support the stock, but when every last bagholder has sold in a panic. Basically, since there are no more sellers left, the stock begins to hold its ground - and thus the cycle repeats itself starting over with Phase One - Accumulation / Basing. This why you get a final wave of panic selling. All the average investors who bought on hope throw in the towel in a final burst of panic. And since there is no one left to sell, and likely not many buyers interested - you get the sideways basing action that is characteristic of stage 1. The most profitable time to buy into a stock is at the end of the stage one – which just happens to be the time of the heaviest insider interest. This is the most profitable chart pattern I know. It allows you to actually buy in low – with the insiders – and sell high when the general public, who knows very little, will willingly buy your shares and play the role of the greater fool. Having this knowledge and putting it to use in the market is, in my opinion, worth more in actual $$$ than any degree you could possibly get from a University. Let's all make a resolution to put it to good use this year. Gold is at a magic pivot point. Gold stocks just broke their corrective downtrend that began in September are now consolidating and preparing to make new 52-week highs. This is the time to buy them. To take a look at my full recommendation list and position yourself now (before these stocks take off) take a moment to sign up for a risk free trial of WallStreetWindow here: http://www.wallstreetwindow.com/riskfreetrial.htm It's definitely going to be fun riding this back up. Don't miss out! Sincerely, Mike Swanson P.S. Today you witnessed how tough this gold market can be to navigate. But if you play it right there's a whole heap of money to be made here. That's where I come in. I want to help you make as much money as you can in the market because that's my goal too. Don't let my WallStreetWindow members have all the fun. Join us! To get more info on our Risk-Free Trial click here now: http://www.wallstreetwindow.com/riskfreetrial.htm |
| TheRumpledOne 6,411 posts msg #42390 - Ignore TheRumpledOne |
3/23/2006 4:11:08 PM 1 – Share Accumulation / Basing 2 – Mark Up / Rising Prices 3 – Share Distribution / Topping 4 – Share Liquidation / Declining Prices Each of these phases can be identified using the WARM FILTER DISPLAY! |
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