For the past week the major averages have remained in their trading ranges yet the overnight action in Apple, Inc. (AAPL) suggests that the Nasdaq 100 tracking Powershares QQQ Trust (QQQ) may finally be ready to catch up with the major averages.
The Nasdaq 100 Advance/Decline line closed at another new high Tuesday as it has been above its WMA since June 29th. The evidence continues to favor another push to the upside as the Spyder Trust (SPY) is likely to reach the $218.50-$220 area.
In my view the low volume is offset in part by the fact that the A/D lines are acting stronger than prices indicating the rally is still broadly based. Last weekend (Breakout or Fakeout) I reviewed what has happened in the past when the A/D lines have staged longer-term breakouts. I would expect to see more deterioration in the market internals before there is a deeper correction.
Many are aware that I use a combination of relative performance and volume analysis to identify stocks and ETFs that I am interested in buying or selling. Some may be surprised to learn that I often spend more time on determining my entry level and stop than I do on finding the best trading or investing candidates from my scan results.
This focus is based on my observation over the years of reviewing client portfolios that 1 or 2 big losers can offset otherwise positive portfolio gains. These large losers are often the result of buying too high and/or using too wide a stop.
Sometimes a good entry can also lead to very big winners when lightning strikes. Last Monday July 18th one of my recommendations to Viper Hot Stocks subscribers was Linear Technology (LLTC). As I noted before the open
"LLTC was a profitable trade early in the year as it had broken through major resistance at line a in the $47 area. The completion of the 30 month trading range has upside targets in the $58-$60 area. It dropped sharply in late June but has now moved above the previous high. LLTC is on the weekly buy list and the daily chart makes a pullback likely. Traders go 50% long at $47.74 and 50% long at $47.11 with a stop at $44.77 (risk of 5.6%)"
Linear Technology (LLTC) had closed the previous Friday at $48.59 which was well above the 20 day EMA at $47.21. The daily relative performance analysis had completed its bottom in May as the downtrend, line b, was broken. This signaled that it was a market leader. The daily on-balance-volume (OBV) had surged to the upside in early July which favored buying a pullback as the weekly OBV analysis was strongly positive.
The initial buy point at $47.74 was based on the prior week's range, pivot point analysis, the 20 day EMA and the fact that LLTC had formed a doji on July 25th. This made a decent pullback more likely. On July 18th LLTC rallied to a high of $49.15 but then closed near the lows at $48.60. On Friday July 22nd LLTC had dropped to a low of $47.38 which was below the 20 day EMA which had risen to $47.57.
After the close on Tuesday July 26th Linear Technology (LLTC) reported strong earnings and its was also announced that it would be acquired by Analog Devices (ADI) for $60 per share.
Of course the reality of fine-tuning the entry levels is that sometimes your entry level is missed by a few tick which can leave you on the sidelines. Also you can get sometimes get lucky as you buy point turns out to be very near a correction low.
In the July 7th Viper ETF Report I presented the chart above of the Spyder Trust (SPY) and noted that it had "dropped just slightly below the 20 day EMA before closing strong. The pullback has held well above the 38.2% support at $206 and the 50% support at $204.61. The S&P 500 A/D line was very strong on the pullback and is showing good strength as its WMA is rising more clearly.
I often use a two stage buying strategy when I am bullish as I want to be sure that I have part of a position established and then am a more aggressive buyer at a lower level which minimizes the overall risk. In this case I advised traders to go 50% long at $209.16 or better and would add 50% long at $208.64 with a stop at $202.44 (risk of 3.1%). Investors were advised to go 50% long at $208.64.
The initial buy level at $209.16 was based on the previous day's range ($209.80-$207.06) while the second buy level also used the close on July 5th at $208.41 to come up with $208.64. As it turns out the low was $208.63 as I was very lucky as no one tries to buy the day's low.
For many investors just looking at the previous week's price range can be effectively used to determine entry levels. These two examples from a recent Viper Trading lesson I hope will explain how I use the weekly data.
In the first example, the strong close at (point 1) put McDonalds Corp (MCD) on my buy list. The weekly OBV had formed higher highs (line b) while prices had made lower lows, line a. The bullish divergence in the OBV was a sign that MCD was bottoming.
The weekly range in MCD was $90.86 to $88.44 or $2.42. One of the simplest methods is to base the initial entry on the week's range. If the weekly close is strong I use 1/3 of the range , in this case $0.80 is then subtracted from the high for an initial entry of $90.06. The following Monday MCD had a low of $89.91 before closing the week at $91.92 (point 2). Over the next three weeks it continued to make higher highs as well as higher lows surpassing the $95 level.
The second example is of Public Storage (PSA) which had corrected over a four-week period. At point 1 PSA closed at $205.51 which was above the previous two week highs. The OBV that week reversed back above its WMA which was a bullish buy signal.
The range that week was $209.26-$199.32 for a range of $9.94 with PSA closing at $205.51. The weekly close was well under the weeks high so a lower initial buy point was warranted than with MCD. Thus 50% of the week's range was $4.97 which when subtracted from the week's high of $209.26 gives you a buy price of $204.29.
Using a stop under the correction low meant a risk of 5.3%. PSA had a low for the next week at $203.19 and then closed at $207.78 (point 2). The following week PSA surged to close at $214.68 and by the end for the year had surpassed the $250 level. It was not until seven weeks after the buy point that PSA had a lower weekly low.
I hope these examples will help you focus more effort and energy on your entry level. The full trading lesson "Finding The Best Entry Levels" is sent out to all new subscribers.