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Greetings, Pro-fundity team members -
06-06-03

At the bottom of the Guidepost, a full listing of this weeks picks are shown, in addition to the Charts via the Pick-link.

As a benefit of membership, you have access to all Guideposts (including Archived GP's) and Picks. If you miss a week or two for whatever reason, you will be able to go into the Historical Guidepost link to catch up with both the weekly guidepost and the 30 picks made for the week.

Greetings, fellow Pro-fundity team members

1. Issue A: Last week we considered the Double-Bottom, or “W,” price pattern as one way to anticipate trend changes. During the recent bear market there have been more trends down than anywhere else. As we see the market show signs of recovery, it is a perfect time to look for trends the other way. That is what the “W” can do for us. This became very evident this week as we scoured the market for promising patterns.

2. Before we select the 30 weekly picks, a study of industry group charts finds industries with a positive price trend. Searching only among these strong industries is another way we get the “wind to our backs.” The following chart shows the current price pattern for the Drug industry, the type of price pattern we look for as we begin our search.

   
   

   

   Fig. 1 Drugs Industry-Group Price Pattern

3. 75% of the stocks in the market will go where the market goes. The same is true for industry groups, that is, ¾’s of the stocks in a group will follow the group. By selecting only strong price-performance industries, we improve our odds of choosing stocks that will go up. The price pattern in Fig. 1 gives us that advantage. But look at what happened before February in the following chart.

   
   

   

   Fig. 2 Drugs Industry-Group Weekly Price Pattern

4. In this “weekly” version of the previous chart, we find a price pattern looking somewhat like a double-bottom we discussed last week. It is not the perfect pattern, but look at the red horizontal bar identifying the resistance level of this trading-range. The important point in this example is the pattern has broken up through resistance on higher than average volume. That is what the industry group has done. Might we expect similar patterns among the individual stocks making up this group? Check the following chart for a Breakout pick this week, SGMO, in the Drugs group. What jumps out is a clear breakout up through the red resistance line on very high volume.

   
   

   

   Fig. 3 SGMO (Drugs Industry Group) Price Pattern

5. This foretells higher prices in the near-term. But we miss this message on a daily chart as shown below. Looking at this chart, it may seem ludicrous to buy the stock at $5.35. Figure 3 above tells quite a different story. Can you see the value of looking at price patterns in more than one time-frame?

   
   

   

   Fig. 4 SGMO (Drugs Industry Group) Daily Price Pattern

6. Let’s try another of this week’s picks, in the Media Industry group. First, the industry price pattern with a similar pattern to the Drugs group, with a confirming breakout on high volume. This confirmation (breakthrough with high volume) is the signal for higher prices, a change in the negative trend.

   
   

   

   Fig. 5 Media Industry Group Price Pattern

7. Within this group we selected TV as a Main-pick. A weekly price chart for TV follows with the breakout on high volume repeated, showing the promise of this selection.

   
   

   

   Fig. 6 TV (Media Industry Group) Weekly Price Pattern

8. If we look at the daily price pattern on TV, a problem pops up. For example, why would a pick ever be made at $32.95 on the top of a four-month rising trend? Particularly on a site that promotes rolling stocks? What happened to “buy low, sell high?” Excellent questions that we need to address.

   
   

   

   Fig. 6 TV (Media Industry Group) Price Pattern

9. The chart below was key in last week’s discussion of the Double-bottom price pattern. Notice how good the “W” looks as a rolling-stock. However, the pattern fails the rolling test when volume is considered. We could take our profit and sell near the top of the roll (resistance level) and leave bucks on the table. Rather, we must be aware of price patterns that shout “market psychology” and be ready to adjust, to re-think our strategy, to take advantage of opportunities when they present themselves. It is indeed a matter of market psychology. Markets change, economies shift, global conflicts arise, but the psychology of the players in the market remain pretty much the same. This is where opportunities can be recognized.

   
   

   

   Fig. 7 Double-bottom price pattern on AUO

10. Prices in any freely traded market are determined more by the traders attitudes toward fundamentals than by the fundamentals themselves. This means price trends are driven largely by psychological forces. Emotions jump from one extreme to another – from greed to fear, from hope to despair, bullish to bearish… It is this phenomenon that causes prices to fluctuate from overbought to oversold extremes. It is what causes rolling stocks to roll. At times this causes what seem to be irrational price movements. That is, markets seem irrational when they move against where we think they should go. What usually happens is our expectations reflect our emotions rather than rational logic. In retrospect, the markets rationally reflect the psychology of market participants.

11. That is why many picks this week will seem a bit irrational. Let’s watch closely to see where they go.

1. Issue B: Magnify Success with Back-Trading. Many market guru’s recommend paper-trading as a low-cost method to learn the trade, to find indicators and strategies that fit our own personalities. A unanimous voice shouts that success will come when we find that mix, that combination of factors that blends with our own makeup and mindset. This rather than finding the person or technique to follow that has worked for others. Pro-fundity has developed a unique combination of Excel spreadsheets we can use for this purpose. We want to highlight one such tool in this guidepost – PTS-4 (Pro-fundity TradeScape 4). During recent guideposts we have introduced a measure of variation (volatility) in price patterns called the Average True Range. PTS-4 gives us some real trading experience in its use.

2. First select a ticker or group of tickers to analyze with PTS-4. For this example we’ve chosen the ten Breakout picks offered on 4/11/03. The following table is a recent performance watchlist for that group, eight weeks after the date of the pick. Let’s examine how these picks performed using a trailing stop based on each ticker’s volatility.

   
   

   

   Fig. 1 04/11/03 Breakout Pick list.

3. Now consider the PTS-4 spreadsheet to understand how it can help. We must make five entries before executing the analysis, entering data into the light-blue shaded cells: 1. The commission rate you pay for a buy and a sell (cell D6). 2. How many dollars you want to invest (cell G7). 3. The ATR (cell E6, which is calculated below as we’ll see). 4. A multiple of the ATR (cell G6). 5. The date you want to buy (column K). Only one “1” is to be entered in this column at any time, the selected buy-date.

   
   

   

   Fig. 2 PTS-4 Spreadsheet for ATR Analysis.

4. Since this group of tickers was picked on 4/11/03, the following table shows how to enter the “1” in column K to designate the buy-point. Notice, the ATR on that date was $1.37, which is entered into cell E6.

   
   

   

   Fig. 3 PTS-4 Spreadsheet showing the date you want to buy.

5. That completes the blue-cell entries except the multiple of the ATR. Now, this is where the PTS gets interesting. We can try out any value we want, try the analysis, try another value, try the analysis again, etc. Let’s begin with a multiple of “1”

   
   

   

   Fig. 4 A close-up of PTS-4 Spreadsheet before executing the analysis.

6. Instruction #3 says to press Ctl r (control and “r” together) to load the analysis result into the table on the right. We have increased the multiplier in 0.5 increments deriving the following results for our first ticker, ANF. By loading data for each of the other ten tickers we derive the following results.

   
   

   
   
   
   Fig. 5 Tables showing how results change with different ATR multipliers.
   This shows how there is no one best multiplier, rather we must study carefully the results to select a value that fits our own objectives. But can you sense the power in the spreadsheet? Only after reviewing dozens of similar examples on stocks we are likely to deal with, getting a feel for what "irrational" direction the market may take, can we come to a gut understanding of our own position and role in the market. We will consider other factors in the use of PTS in future guideposts.

   06-06-03 Pick Selection:

   Main Picks:
   ARIA,ARNA,ASTSF,IFX,LIOX,MANH,RGCI,SYMM,TV,WCN
   Breakouts:
   BNT,DRXR,ENCY,IMCLE,LNCR,NCN,PDLI,RHAT,SGMO,THQI
   QuickPicks:
   ADLR,ADSK,AGY,CNCT,CYTC,EPD,HMA,PENN,RINO,TSN

   For detail and followup on Pro-fundity Tradescape,
   find the link on "Advanced Trading Tools" on the home page.

   Be Diligent
   Take Action!

   

   
   
   
   
   

   
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