Available Mon- Friday after 6:00 P.M. Eastern, 3:00 Pacific.

DOW                                               + 14 on 1,100 net declines

NASDAQ COMP                                + 9 on 1,050 net declines

SHORT TERM TREND                        Bullish  

INTERMEDIATE TERM TREND            Bullish

STOCKS: The averages were higher on Monday. Better than expected earnings reports and a receding crisis with Greece got the credit.

But, for the second session in a row, the markets rallied on poor internals. This normally is not a good sign, especially when you consider that the S&P 500 is at a resistance zone. See the chart below.

GOLD:  Gold was clobbered for $35. Rumors about Chinese bank selling. Greenback up again.    

NEXT DAY: Tuesday. No prediction

CHART:  The S&P 500 is fast approaching the peak of mid may, but the advance decline line is nowhere close (arrows). Also, the last two days have been atrocious. This doesn’t guarantee a decline, especially since earnings have been pretty good, but it makes us want to take profits on our trading profits.

BOTTOM LINE:  (Trading)

Our intermediate term system is on a buy. We are long the SPY from  206.42. If there are more declines than advances at 3:45 EST, sell at the close.

   System 7   We sold the SSO at 68.66 for a gain of 2.96. Stay in cash on Tuesday.                           

   System 8   We are in cash. Stay there.                    

GOLD  We are in cash. Stay there.     

News and fundamentals:  There were no important economic releases on Monday and there will be none on Tuesday.

Interesting Stuff  Gold and silver keep getting clobbered. Gold has been declining for 4 years. Silver even more. But, we still see TV advertisements urging people to buy gold and silver. When these ads stop, perhaps we’ll get a bottom.

TORONTO EXCHAN GE:   Toronto got clobbered for 217 points.     

S&P/TSX VENTURE COMP: The TSX dropped 12.       

BONDS:  Bonds fell back slightly.                                                        

THE REST:  The dollar keeps moving higher. Silver  and crude oil were whacked pretty hard.              

We’re on a buy for bonds as of June 11.                      

We’re on a buy for the dollar and a sell for the euro as of July 16.                         

We’re on a sell for gold as of  July 2.                         

We’re on a sell for silver as of June 23.                        

We’re on a sell for crude oil as of July 16.                             

We’re on a sell for the Toronto Stock Exchange as of May 6.    

We’re on a sell for the S&P\TSX Venture Fund as of October 30, 2014.    

We are on a long term buy signal for the markets of the U.S., Canada, Britain, Germany and France.  

Stock Features of the Week – Abnormal Breaks
Strong price trends usually start with abnormal price moves with abnormal volume. There is a significant change in fundamentals, the people who follow the company closely react by buying aggressively and start the stock moving higher. As more people learn about the change in fundamentals, more people buy and the stock goes in to an upward trend.

Today, I ran a scan for Abnormal Movers and then inspected the charts for signs that investors were surprised by the move. Here is one stock that is worth checking out:

1. SCON
SCON has been quietly moving sideways for a couple of months but is coming alive today with abnormal volume and price action. This is breaking the downward trend line and could be the start of a rebound for the stock. Support at $0.98.

Here is the rest of Tyler’s weekly newsletter titled:

Return on Capital
Stockscores.com Perspectives for the week ending July 20, 2015

In this week’s issue:

• Weekly Commentary
• Strategy of the Week
• Stocks That Meet The Featured Strategy

In This Week’s Issue:

– Stockscores’ Market Minutes Video – Pull Backs to Trend Lines
– Stockscores Trader Training – Return on Capital
– Stock Features of the Week – Abnormal Breaks

Stockscores Market Minutes Video – Pull Backs to Trend Lines
Opportunities arise when myopic traders sell on weakness to take prices back to the long term upward trend line. Learn that plus Tyler’s regular weekly market analysis with this week’s Market Minutes..Click Here to Watch

Trader Training – Return On Capital
A Stockscores user asked me a question that I think many people have, “If you have more trade opportunities than capital, how do you pick which trades to take?”

The short and simple answer is to take the trades that give you the most bang for your buck. Let me explain.

We size our trade positions based on the risk of the trade. The risk of the trade is the difference between the entry price and the stop loss price. Divide the risk in to your risk tolerance amount and you have the number of shares you can buy.

Consider two trade possibilities, each with strong charts that show the same potential for price appreciation. The first has an entry price of $5 with support, and therefore our stop loss point, at $4.50. That means there is $0.50 of downside, or the potential for a 10% drawdown.

The second trade has an entry price of $20 with a $19 support price and stop loss point. On this trade, if wrong, we stand to lose $1 per share or 5% drawdown, since $1/$20 is 5%.

If we are willing to risk $500 on each trade, we will buy 1000 shares of the $5 stock for a total cost of $5,000 and 500 shares of the $20 stock for a total cost of $10,000. Each trade has the same amount of risk but the second trade requires more capital because the stock is less volatile. That also means the expectation for percentage gain on the second position is also less. The price volatility on the entry signal is a good predictor of what price volatility will be in the trend.

Clearly, the first trade gives more bang for the buck. We can use less capital for the same profit potential. We may believe both trades have the potential to make $1000 but the first trade will do it with half as much money invested. For a trader with limited capital, the first trade is the one to take.

Generally, lower priced stocks will be more volatile on a percentage basis, making them a source of greater percentage gain potential. You can place less capital in to a low priced stock to get the same dollar upside as a higher priced stock trade.

I did a quick survey of this week’s best gainers to confirm this fact. I ranked the 2000 most actively traded stocks in the US last week by percentage gain and focused on the top 20 gainers. Of the top 20, 17 were under $10. The other 3 were under $20.

The lesson here is to focus on lower priced stocks if you have less capital to trade with. Many will argue that these lower priced stocks are riskier and maybe dangerous for a risk averse trader. They are actually not riskier, they are more volatile. That means you have to take a smaller position size in them so that the risk of the trade does not exceed your risk tolerance.

By adjusting position size based on the difference between the entry price and stop loss price, you can make every stock trade have the same amount of risk. If the stock is volatile buy less. If your amount of capital is insufficient for all the trades you find, focus on the lower priced stocks.

There is one caveat to this style of risk management. Lower priced stocks tend to have an added element of risk because they have a greater potential for price gaps. Lower priced stocks tend to have less established or diversified businesses which means a problem with one of their businesses can have a major impact on share price. It is much easier for a small Biotech stock to gap down 30% on bad news than it is for Pfizer to. That means the low priced stocks you trade could blow through your stop loss point if bad news brings a big price gap.

That makes it important to not put all of your capital in to just a few low priced stocks. If you are going to focus on relatively cheap stocks then you must own a number of them so that a larger than expected loss on one of them does not bring your portfolio performance down significantly.

If you have less capital to trade with than what you would like, focus on the lower priced stocks. You can adjust your Stockscores Market Scans to include a price filter for stocks under $10 or even lower if you like. Just remember to size your positions based on the volatility of the stock, the difference between the entry price and support on the chart, where you will put your loss limit. By doing that, you can match the risk of the trade to your risk tolerance and use less capital to gather the same dollar profit potential.

Back To TopBack To Top

References

• Get the Stockscore on any of over 20,000 North American stocks.
• Background on the theories used by Stockscores.
• Strategies that can help you find new opportunities.
• Scan the market using extensive filter criteria.
• Build a portfolio of stocks and view a slide show of their charts.
• See which sectors are leading the market, and their components.

  Disclaimer
  This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.