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Greetings, Pro-fundity team members -
9-27-02 Background music:

Our “Four-Corners” guidepost format includes: 1) A look from outside the forest at a big-picture issue; 2) An important trading principle from inside the forest; 3) A detailed strategic example with a TA (technical analysis) example on a current or recent pick; 4) A look at recent pick performance. Enjoy...

1. From the Tallest Tree!

1. As we anxiously await solid "bottom" signals, to venture confidently back into the market, Pro-fundity finds this a period of preparation. The following letter posed to a financial service from a poorer but wiser investor highlights the value of this period of preparation. This is a time to learn, and to un-learn some bad habits acquired during the long bull market.
   "I had the misfortune of starting my investment career at the peak of the market in 2000. I was a beginner and lost most of my money over the past two years. It was an expensive learning experience. I have been holding $50,000 cash for the past year and patiently waiting for the market to turn up. One of the most valuable lessons that I learned is that stock picking consists of 50% overall market conditions - 30% sector rotation - and the last 20% is stock selection within that sector. With the DOW, SP-500 and NASD all testing lows, I think I see a bottom. As I look at some of the stocks that have been popping up on scans, I see that CREE, ORCL, BEAS and many more are testing their bottoms at the same time. I feel encouraged. My question is what constitutes a successful test of an index or stock? How is volume figured into the equation? Luck to all. Still hopeful and learning. John"

2. This week's Guidepost will focus on one kind of education that can be very helpful in times like this. Methods and strategies will be presented in an easy to understand format. Trading techniques do not need to be difficult, nor require hours of research to use. So, from the top of our tree, let's learn how we might take advantage of this "down-time."

Return to the top!

2. From Within the Forest

1. A long-term subscriber posed a question this week about a ticker we’ve discussed several times over the months. This ticker, MOVI, made the Quick Pick list last week. This is a familiar company, showing up first on our page in April 2001, then six more times to its seventh position on 9/13/02. The primary reason for its re-occurrence lies in its sound fundamental health. This has continued to be a solid earner. The difficulty, however, seems to follow the line discussed in the previous section; expectations vs. behavior. Let’s consider the history of this company relative to the market, using the S&P-500 as the market proxy.

   
   

   
   Fig. 1 S&P 500 Price Pattern, 1998-2000.

2. This chart shows the dramatic rise the last three years of the bull with the price well ahead of its 50-day MA (red) and its 200-day MA (blue). The magenta regression line shows the strength of this bull pattern.

   
   

   
   Fig. 2 S&P 500 Price Pattern, 2000-2002.

3. Here we see the dramatic reversal of events, the bear-trend highlighted by the magenta regression line, with the price falling below both its 50- and 200-day MA’s. Both these price charts are “Big-picture” views, punching up the character of the market during the times shown. Now, compare the price charts of MOVI during these same two periods.

   
   

   
   Fig. 3 MOVI Price Pattern, 1997-2000.

4. MOVI, in this time frame, is a low-price, low-volume volatile ticker that fails to participate in the Bull market shown in Figure 1 (S&P-500) above.

   
   

   
   Fig. 4 MOVI Price Pattern, 2000-2002.

5. This second time-frame shows the explosion of MOVI the last half of 2000, then its trading-range through 2001 up to the current date in September 2002. We picked up on MOVI as it entered the trading range, April 2001, and have followed it closely since. Currently, its stats include:
   • Revenue growth rate (last 4-quarters) = 32%
   • PE Ratio = 15.9
   • EPS % change 4th quarter back = 161%
   • EPS % change 3rd quarter back = 138%
   • EPS % change 2nd quarter back = 115%
   • EPS % change latest quarter = 350%

6. Those are indeed stellar stats. But the question: why has the price remained relatively flat the past two years? We’ve said how we try to select our picks from strong fundamentals to give us a “wind to our backs” bias. Strong fundamentals provide that bias. Picks are “less” likely to trend down with this bias. Does it always work? Of course not, we’re dealing with probabilities in the market, likelihood’s. However, we believe the odds are in our favor with strong fundamentals. And, in this case it worked! Look at the market trend (bear) in Figure 2, compared to MOVI in Figure 4. Remember, three-fourths of the traded-companies follow the market. MOVI did not follow the market. Rather, it has provided a treasure for us to exercise our trading skills for over a year and a half.

7. With the potential-bottom for the market near, we expect companies like MOVI to make another move up sometime during the next year. In the meantime, we will continue to trade and enjoy its trading range. If it ever does drop to conform to lower market action, our protective stops will keep us in business. The following chart shows the current S&P-500 pattern, with the pattern getting dangerously close to testing the July lows. However, notice the comparative volume levels for the two low points. That suggests a test of the July low will be successful and we can finally see some strength.

Fig. 5 Current S&P 500 Price Pattern (9/20/02).

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3. ”Moving About the Forest!”

Now, click on the 5-day link on the big-chart. We can now see the Inter-day action for the last five trading-days.

Another important view of the chart data can be seen by clicking again on the 3-month link and the Cdl “type” for the power of a candlestick chart.

Next, let’s get into the good stuff as we tackle the technical analysis features of the site. Click on the Technical Analysis chart link and see the wide variety of indicators available for our study. For this example we have chosen a Bar type, 3-month, with 10 and 50-day moving averages as well as Bollinger Bands around the price channel.

We tapped into a rich resource we use to help our selections as we go forward. With this set of tools it will be much easier to identify better entry and exit point as we roll our way to higher profits.

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4. Pick Performance:

Fig. 1 Main picks on 9/20/02 (7 days ago).

Fig. 2 Breakout picks on 9/20/02 (7 days ago).

Fig. 3 Quick picks on 9/20/02 (7 days ago).

Fig. 4 Main picks on 9/13/02 (14 days ago).

Fig. 5 Breakout picks on 9/13/02 (14 days ago).

Fig. 6 Quick picks on 9/13/02 (14 days ago).

Return to the top!

9-27-02 Main Picks:
BBT,BKUNA,BPFH,CLC,COLM,CSG,CURE,FBR,HYDL,KKD

Breakouts:BLI,CHH,ENR,ERES,FAF,GB,ITMN,MHO,MYL,PENN

Quick Picks:
BLI,BORL,CK,CNB,DCN,EOC,FED,LJPC,MLNM,OS

Take advantage of our daily "Funditties," profound thoughts for each day. This weeks focus is on Education, important principles each day as we learn to trade more effectively.

We have arranged with Worden Bros., Inc. to distribute their products (TC2000, TCNet). See how your Pro-fundity subscription can be a fixed, no-cost feature of TCNet. Please send us an e-mail to sales@pro-fundity.com for all the information. In the meantime, always use stops!

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