Today’s Trading Lesson From TradingMarkets

The following is an
edited transcription of this week’s TraderTalk, a live, interactive workshop
conducted by Gary Kaltbaum for TradingMarkets members on Jan. 30, 2002.

My main focus today is
to try to isolate my favorite types of setups. First off, volume, to
me, is the key. Every big move, up or down, starts with a big influx of volume.
So, always watch for extreme volume days.

Next, 75% or more of picking a stock is picking a sector that is going your way.
It is not very often where one stock in a group is going up while all others are
going down. Great examples are the Homebuilders and
Restaurants of recent times.

Then you start looking for setups. What stocks
are hanging in a trading range? I start to make up a list. If a bunch of names
in a group show up, it emboldens me. If you
recall, my reports on

Homebuilders and

Restaurants and recently

Truckers were right on, because the more names that are working in a
group, the better.

Then you look and wait for a high-volume move
above the trading range. The more volume, the better. The more names, the
better. I love cups and handles, flat base
breakouts and gaps. Those are my three favorites. When there are no breakouts,
it tells you something about the market. When the breakouts are low quality,
that’s another thing.

I am also a big believer in Relative Strength. I
have made several great calls on AOL Time Warner
(AOL)
over the past six months for one reason: The markets kept rallying and the stock
didn’t go along for the ride. So, the next question is if it can’t rally in a
good market, odds favor it will sink when the market tops — and that’s exactly
what happens. The same is going on in General Electric
(GE)
right now.

I also compare stocks in the group as far as
strength goes. When you have a chance, look at two airlines —
RyanAir Holdings (RYAAY)
and US Airways (U).
Which one do you want to own? RYAAY, because of its strength.

Let’s look at some charts. First,
Genesis Microchip (GNSS).

The main point on GNSS is that it was one of the
first stocks to break out after the follow-through day on Oct. 3. Look at the
gap. Look at the volume and understand one of my mottoes: “The first stocks to
break out are usually the strongest.” GNSS fits the bill.

I included Darden’s
Restaurants (DRI)
and Bob Evans (BOBE)
in the Restaurant group.

I could have also put up
P.F. Chang’s (PFCB),
Panera Bread (PNRA),
Brinker International (EAT),
Tricon Global
Restaurants (YUM),
Outback Steakhouse (OSI),
Champs (CMPP),
Ryan’s Family Steakhouse (RYAN)
or Sonic (SONC).
Applebee’s (APPB)
broke out today (1/30/02).

The point: Buy the groups when you see this type of action. It is meaningful and
should not be ignored.

McAfee (MCAF)
was another beauty, one of the first to break out and most importantly, a new
name, which means institutions have to start positioning. That’s why it is
always important to find names you have never heard of

The next chart to look at is the
Nasdaq Composite ($COMPQ).

.

Please review the follow-through day of Oct. 3.
Monstrous volume and lots of doubt. Please read

my TM report.

The next chart is the reversal on Jan. 9.

High volume to the downside. Today’s (Jan. 30)
action was a positive reversal indicating we may start bouncing around in a
trading range. I suggest buying “How
to Make Money in Stocks” by William O’Neil, to learn more about the follow
through day.

I actually put out a short on a bounce for
Spx Corp. (SPW)
last night (Jan. 29). It dropped $22 before bouncing today (Jan. 30). Notice the
high-volume drop off the highs…no volume on the rally. A high-volume drop like
this stuck out like a sore thumb. Volume is very important.

The same goes for
Affiliated Computer Services (ACS).
Look how it topped on monstrous volume. That first day is a clue to get out.
Simple as that — especially after a big run. The same thing happened to many
other names recently.

Let’s look at Tyco
(TYC)
next.

If you do like I do — like Marder, like
Haggerty, like Kuhn, like Landry — you must know that this stock gave multiple
sell signals. Study them all. These bozos that keep saying, “Don’t worry,” are
now fools who lost a ton. Don’t let it happen to you. If I can teach you one
thing, it is this:

The market is going to do
whatever it wants to do, regardless of what everyone thinks. And the market is
going to screw everyone, so when everyone is going one way, you will find me
on the other side of the ship.

Q&A

Q:
Do you have a checklist (similar to

Tim Truebenbach) that you use for all stock purchases? If not, how do you
keep from making emotional decisions? Also, I assume that you watch the markets
closely intraday. Do you make trading decisions in the middle of the day, or do
you execute a plan from the night before?

A:
Just what I detailed above, but add in strong earnings growth.
This takes all of the emotion out. Every time I deviate, I lose money. A ton of
work should be done at night with the markets off. However, I also do a ton of
intraday work.

Q: Would you take a
trade on the day of a gap? If so, what would be your
limit? Or do you wait for a follow-through
day?

A:
It depends on market conditions and the stock recently. I did not
hesitate to put a short on (CHKP)
when it gapped at $40.50 because it was a surprise gap. Fortunately, it worked.

Q: My question is about being
stopped out, just to see the stock reverse back into the base. Take American
Woodmark (AMWD)
today (Jan. 30). What do you do in such a situation? Should we bite the bullet
and buy it back? If so, when?

A:
First off, it’s the ones you don’t stop out on that go down 50%
that should worry you. I know it sticks you right in the stomach on a day like
today when the market reverses up, but you have to remember, there is always
another train coming along.

Q: What would be a
good volume to search for when using the stock scanner? Would you search on
volume of 150%? 200%?

A:
50% in large caps and above 100% in others. The more the better.

Q:
What do you do precisely for preparation for the
next day?

A:
Well, according to my wife, I am nuts about how much time I
spend, but the only way to get good at anything is to work hard at it.

I follow almost every stock and all sectors. I am
basically looking for changes in direction in both movement and volume. I have
proprietary software that enables me to look at new highs, new lows, up on
volume, down on volume, gaps, five-year highs, and everything else under the
sun. I then go through an arduous process of weeding things out.

Q:
What are the lowest-priced stocks, the smallest
capitalization and lowest average daily trading volume that will work with your
techniques?

A:
I hardly ever buy under $12 or under 250,000 shares/day. I don’t
have any criteria on market cap.

Q:
When you’re looking at
cup-and-handle breakouts, do you also look at indicators such as MACD, ROC or
RSI? I ask because on some of the breakouts I have examined in the past, some of
the stocks will be forming a negative divergence on their MACD, ROC and RSI
indicators, indicating to me that the stock breakout might not follow through
very far after breakout. Do you take the patterns of these indicators into
consideration when choosing your breakouts?

A:
I don’t pay attention to them, even though I probably should. I
know a lot of people who are very successful with them.

Q:
I have been watching stocks gap up
or gap down. I sometimes enter a trade on the day the stock gapped, but it did
not work. I got stopped out. Or it might work a few days later without me. For
those I passed, most are huge winners. How can I optimize when to enter/exit?

A:
Two words: Scale in. I have found that it pays to do a little
knowing that odds favor things going my way, but as the questioner stated, many
times you get stopped out only to see the stock then go the way you wanted it
to.

If the market is going up, gaps to the downside
take a little time. But when the markets are headed south…they crater quickly.
That leads me to Elan Corp. (ELN).

It gapped down 10 days ago, and look what
happened since. My favorite gaps are when a stock has been doing well…everyone
loves it…everyone owns it, and BOOM. It’s like the Three Stooges heading for
the door at once.

Imclone Systems
(IMCL)
is another good example.

Q:
I have noticed that most gaps try to
fill. Do you enter immediately on the gap or wait for a pullback?

A:
I disagree with that statement. I know this because I went back
through 10 years of gaps — over 80% didn’t fill. That’s good odds.

Q:
This may be a little off the topic,
but with the indices down over 3% so far, it doesn’t look good. With January
often being a predictor for the year, does this look to be another choppy but
down year for the major indices?

A:
I don’t know. I don’t believe in seasonality. And more than ever,
there are so many outside variables that will twist and turn things. No one
knows. Terrorism, accounting scandals…who knows what’s next? My biggest
problem with this year is that most are bullish about it.

Q:
Do you ever pay attention to a
stock’s recent news when you consider opening a position, or avoid stocks which
will make earnings announcements in the next few days? In other words: Do you
trust your eyeballing unrestrainedly?

A:
Yes, because earnings, or the lack thereof, is the most important
factor in stock performance over a period of time.

Q:
For your short plays, are you looking strictly at
the charts, or do you use some fundamentals? Do you set profit targets, trail a
stop, or micro-manage it?

A:
Purely technical because the bad news usually comes out after the
fact. I don’t usually put in trailing stops. I just watch it!

Q: Which (one) signal will
cause you to reverse a pick?

A:
Price and volume. Nothing else.

Q:
Looking at the TYC example from above, can you go over the clues
you see here, so we can get the next one?

A:
High-volume reversal today, which means buyers have the upper
hand for this second. But it’s a fluid situation, so be careful. Odds do favor
upside testing because of the market reversal, as well as its own. I will not
play it myself.

I hope this workshop has helped you.
You are all very lucky. I had to learn to trade all by myself. TradingMarkets is
a great place to learn. If there is ever anything I can do to further your
education, it would be my pleasure.

Click Here For A Free 1-Week Trial To Gary Kaltbaum’s Intra-Day Alerts
Service

The following is an
edited transcription of this week’s TraderTalk, a live, interactive workshop
conducted by Gary Kaltbaum for TradingMarkets members on Jan. 30, 2002.

My main focus today is
to try to isolate my favorite types of setups. First off, volume, to
me, is the key. Every big move, up or down, starts with a big influx of volume.
So, always watch for extreme volume days.

Next, 75% or more of picking a stock is picking a sector that is going your way.
It is not very often where one stock in a group is going up while all others are
going down. Great examples are the Homebuilders and
Restaurants of recent times.

Then you start looking for setups. What stocks
are hanging in a trading range? I start to make up a list. If a bunch of names
in a group show up, it emboldens me. If you
recall, my reports on

Homebuilders and

Restaurants and recently

Truckers were right on, because the more names that are working in a
group, the better.

Then you look and wait for a high-volume move
above the trading range. The more volume, the better. The more names, the
better. I love cups and handles, flat base
breakouts and gaps. Those are my three favorites. When there are no breakouts,
it tells you something about the market. When the breakouts are low quality,
that’s another thing.

I am also a big believer in Relative Strength. I
have made several great calls on AOL Time Warner
(AOL)
over the past six months for one reason: The markets kept rallying and the stock
didn’t go along for the ride. So, the next question is if it can’t rally in a
good market, odds favor it will sink when the market tops — and that’s exactly
what happens. The same is going on in General Electric
(GE)
right now.

I also compare stocks in the group as far as
strength goes. When you have a chance, look at two airlines —
RyanAir Holdings (RYAAY)
and US Airways (U).
Which one do you want to own? RYAAY, because of its strength.

Let’s look at some charts. First,
Genesis Microchip (GNSS).

The main point on GNSS is that it was one of the
first stocks to break out after the follow-through day on Oct. 3. Look at the
gap. Look at the volume and understand one of my mottoes: “The first stocks to
break out are usually the strongest.” GNSS fits the bill.

I included Darden’s
Restaurants (DRI)
and Bob Evans (BOBE)
in the Restaurant group.

I could have also put up
P.F. Chang’s (PFCB),
Panera Bread (PNRA),
Brinker International (EAT),
Tricon Global
Restaurants (YUM),
Outback Steakhouse (OSI),
Champs (CMPP),
Ryan’s Family Steakhouse (RYAN)
or Sonic (SONC).
Applebee’s (APPB)
broke out today (1/30/02).

The point: Buy the groups when you see this type of action. It is meaningful and
should not be ignored.

McAfee (MCAF)
was another beauty, one of the first to break out and most importantly, a new
name, which means institutions have to start positioning. That’s why it is
always important to find names you have never heard of

The next chart to look at is the
Nasdaq Composite ($COMPQ).

.

Please review the follow-through day of Oct. 3.
Monstrous volume and lots of doubt. Please read

my TM report.

The next chart is the reversal on Jan. 9.

High volume to the downside. Today’s (Jan. 30)
action was a positive reversal indicating we may start bouncing around in a
trading range. I suggest buying “How
to Make Money in Stocks” by William O’Neil, to learn more about the follow
through day.

I actually put out a short on a bounce for
Spx Corp. (SPW)
last night (Jan. 29). It dropped $22 before bouncing today (Jan. 30). Notice the
high-volume drop off the highs…no volume on the rally. A high-volume drop like
this stuck out like a sore thumb. Volume is very important.

The same goes for
Affiliated Computer Services (ACS).
Look how it topped on monstrous volume. That first day is a clue to get out.
Simple as that — especially after a big run. The same thing happened to many
other names recently.

Let’s look at Tyco
(TYC)
next.

If you do like I do — like Marder, like
Haggerty, like Kuhn, like Landry — you must know that this stock gave multiple
sell signals. Study them all. These bozos that keep saying, “Don’t worry,” are
now fools who lost a ton. Don’t let it happen to you. If I can teach you one
thing, it is this:

The market is going to do
whatever it wants to do, regardless of what everyone thinks. And the market is
going to screw everyone, so when everyone is going one way, you will find me
on the other side of the ship.

Q&A

Q:
Do you have a checklist (similar to

Tim Truebenbach) that you use for all stock purchases? If not, how do you
keep from making emotional decisions? Also, I assume that you watch the markets
closely intraday. Do you make trading decisions in the middle of the day, or do
you execute a plan from the night before?

A:
Just what I detailed above, but add in strong earnings growth.
This takes all of the emotion out. Every time I deviate, I lose money. A ton of
work should be done at night with the markets off. However, I also do a ton of
intraday work.

Q: Would you take a
trade on the day of a gap? If so, what would be your
limit? Or do you wait for a follow-through
day?

A:
It depends on market conditions and the stock recently. I did not
hesitate to put a short on (CHKP)
when it gapped at $40.50 because it was a surprise gap. Fortunately, it worked.

Q: My question is about being
stopped out, just to see the stock reverse back into the base. Take American
Woodmark (AMWD)
today (Jan. 30). What do you do in such a situation? Should we bite the bullet
and buy it back? If so, when?

A:
First off, it’s the ones you don’t stop out on that go down 50%
that should worry you. I know it sticks you right in the stomach on a day like
today when the market reverses up, but you have to remember, there is always
another train coming along.

Q: What would be a
good volume to search for when using the stock scanner? Would you search on
volume of 150%? 200%?

A:
50% in large caps and above 100% in others. The more the better.

Q:
What do you do precisely for preparation for the
next day?

A:
Well, according to my wife, I am nuts about how much time I
spend, but the only way to get good at anything is to work hard at it.

I follow almost every stock and all sectors. I am
basically looking for changes in direction in both movement and volume. I have
proprietary software that enables me to look at new highs, new lows, up on
volume, down on volume, gaps, five-year highs, and everything else under the
sun. I then go through an arduous process of weeding things out.

Q:
What are the lowest-priced stocks, the smallest
capitalization and lowest average daily trading volume that will work with your
techniques?

A:
I hardly ever buy under $12 or under 250,000 shares/day. I don’t
have any criteria on market cap.

Q:
When you’re looking at
cup-and-handle breakouts, do you also look at indicators such as MACD, ROC or
RSI? I ask because on some of the breakouts I have examined in the past, some of
the stocks will be forming a negative divergence on their MACD, ROC and RSI
indicators, indicating to me that the stock breakout might not follow through
very far after breakout. Do you take the patterns of these indicators into
consideration when choosing your breakouts?

A:
I don’t pay attention to them, even though I probably should. I
know a lot of people who are very successful with them.

Q:
I have been watching stocks gap up
or gap down. I sometimes enter a trade on the day the stock gapped, but it did
not work. I got stopped out. Or it might work a few days later without me. For
those I passed, most are huge winners. How can I optimize when to enter/exit?

A:
Two words: Scale in. I have found that it pays to do a little
knowing that odds favor things going my way, but as the questioner stated, many
times you get stopped out only to see the stock then go the way you wanted it
to.

If the market is going up, gaps to the downside
take a little time. But when the markets are headed south…they crater quickly.
That leads me to Elan Corp. (ELN).

It gapped down 10 days ago, and look what
happened since. My favorite gaps are when a stock has been doing well…everyone
loves it…everyone owns it, and BOOM. It’s like the Three Stooges heading for
the door at once.

Imclone Systems
(IMCL)
is another good example.

Q:
I have noticed that most gaps try to
fill. Do you enter immediately on the gap or wait for a pullback?

A:
I disagree with that statement. I know this because I went back
through 10 years of gaps — over 80% didn’t fill. That’s good odds.

Q:
This may be a little off the topic,
but with the indices down over 3% so far, it doesn’t look good. With January
often being a predictor for the year, does this look to be another choppy but
down year for the major indices?

A:
I don’t know. I don’t believe in seasonality. And more than ever,
there are so many outside variables that will twist and turn things. No one
knows. Terrorism, accounting scandals…who knows what’s next? My biggest
problem with this year is that most are bullish about it.

Q:
Do you ever pay attention to a
stock’s recent news when you consider opening a position, or avoid stocks which
will make earnings announcements in the next few days? In other words: Do you
trust your eyeballing unrestrainedly?

A:
Yes, because earnings, or the lack thereof, is the most important
factor in stock performance over a period of time.

Q:
For your short plays, are you looking strictly at
the charts, or do you use some fundamentals? Do you set profit targets, trail a
stop, or micro-manage it?

A:
Purely technical because the bad news usually comes out after the
fact. I don’t usually put in trailing stops. I just watch it!

Q: Which (one) signal will
cause you to reverse a pick?

A:
Price and volume. Nothing else.

Q:
Looking at the TYC example from above, can you go over the clues
you see here, so we can get the next one?

A:
High-volume reversal today, which means buyers have the upper
hand for this second. But it’s a fluid situation, so be careful. Odds do favor
upside testing because of the market reversal, as well as its own. I will not
play it myself.

I hope this workshop has helped you.
You are all very lucky. I had to learn to trade all by myself. TradingMarkets is
a great place to learn. If there is ever anything I can do to further your
education, it would be my pleasure.

Click Here For A Free 1-Week Trial To Gary Kaltbaum’s Intra-Day Alerts
Service