Some Ideas Work

 

A few weeks ago we were all hot and bothered about a buy sell signal that was proving to be very exciting. We were calling Novem Menses. (Latin for "Nine Months"). With the help of one of our readers--Thank you MaryKate-we back tested more than 100 stock buys. MaryKate took a rudimentary spreadsheet and made it beautiful.

 

Here is what we learned. If you do your homework and look for well valued companies (Little or no debt, great cash on the balance sheet, decent to exciting earnings growth year after year for 3 years, a good ROE-above 15%- and low PEG-around 1 or less- and a pretty chart) the buy signal in the Novem Meses does a good job of indicating buy and sell signals. We would estimate that about 62% of the time it assists in making a good timing call for ins and outs.

 

Now here is how you can add this to your tool box. What ever charting system you use to look at the chart of a stock, use a 6 month daily chart with a 20,2,2 Bollinger Band, a volume bar, three SMAs (Simple Moving Averages) lines set for 20 days, 50 days and 270 day (The 270 will act as your 9 month buy/sell signal), a (MACD) moving average convergence/divergence overlay set at 12,26,9-which is normal, a momentum indicator set at the standard 14, and then a relative strength indicator set at the standard 20.

 

If all of that scares you, don't worry almost all of the FREE stock websites have interactive charting tools that support all of the above. Your broker's site would be the best place to start. I use the charting in Schwab's Street Smart trading platform. Google and Yahoo Finance has it if you have a free account. MSN has it. FINVIX has it in the premium section. Stockcharts.com has it free.

 

Anyway it is easy to find and with the above paragraph it is easy to set up. You should be able to save the overlays so they stay with every symbol you look up.

 

Because of the Novem Menses exercise, we were intrigued to find out what other leading and trailing indicators are out there. We got out the Bloomberg book, Technical Analysis Tool, by Mark Tinghino

 

 

This is a great book for beginning and slightly advanced traders to help understand how the big money folk read the tea leaves of all those pieces of data we see everyday. The overlays we suggested above do provide some guidance as to where and when to enter or leave a position. By looking at the 270 day simple moving average, you can look at your holding and if you have done your homework in the first place you will see that when the price is above the nine month average, it is a good time to be buying you well researched stock. Once it crosses through, you should consider taking some profit. If you add to that the inertia indicators of RSI (Relative Strength) and Momentum, you can start to see some trends about where a price has been and where it MIGHT go. Really, look at few stocks you have traded this year and have your account history in front of you. Look at the day you got in and track where the price goes and look at the 270 day SMA, the RSI, and the momentum indicator. Cool huh!

 

Then for the final touch, add the MACD indicator set at 12,26,9 and look at your stock. Cool huh! We spent last night after the bird feast tracking a stock we have been in and out of for 3 years. GME Gamestop. By doing the overlays, we confirmed our initial purchase (Thanks to the idea from Jack) was brilliant. In July 2010, we nibbled at the stock at $20.47 and eventually got into a 700 share position and selling at $26.31 making a nice profit of 36%. If you look at the overlays for that time, Volume was heavy to the positive, The short term MACD line had just broken above the long term line )a buy signal), momentum was headed in the right direction, and RSI was showing a positive trend. These are all buy signals.

 

When we sold our GME all the signs were in a selling indicator mode. Unfortunately, they were still in a selling mode when we bought back in to the stock in November and continued to buy in through February even though we heard about the news that Walmart was spanking everyone one's prices on video games and video game platforms.

 

The fundamentals looked great, but all of theses indicators were screaming DANGER WILL ROBINSON. We lost 17% between November and February. Now if GME sounds familiar to you, it is because we recently got back on the dance floor with this company. We got in, (a sizeable position after doing all of our homework), as we told you here in the blog at $25.49. In looking at the indicators we were definitely in a sell phase. We stopped out on the 16th with a 10.1% loss.

 

Now if we have faith in these indicators, we would have bought some puts on the 8th, probably January puts in the 24.00 range and we should have been able to get them for about 1.50 a contract. They would be worth about 3.00 today. Mmmmm.

 

How much faith do I have in these indicators, here are a couple of trades we made this morning based upon PROPER HOMEWORK and the indicators.

 

Bought:

January 2012 550 GOOG Puts at 21.30 a contract. Looking for 25.60 in two weeks. (Ironically, this triggered while I was writing this. This was a sizeable 21% gain in less than 4 hours.)

 

January 2012 12.50 KGC CALLS at 1.15 a contract looking for 3.00 by Mid December This is a Gold Rally Bet.

 

January 2012 160 GLD CALLS at 9.50. We are looking for 11.75 by January 1. Another play on a positive Gold.

 

LONG EXEL at 4.04 a share. We are looking for 6.00 by mid January.

 

January 2012 14.00 ARO PUTS at $1.15 a contract. We are looking for a double by the end of December.

 

January 2012 155 GWW PUTS at $3.50 a contract. We are looking for 5.00 by the end of the year.

 

SOLD SHORT (DO NOT DO THIS TRADE-VERY RISKY THERE IS NOE END TO THE DOWN SIDE) ASGN at $10.60. I am betting a 2 month run down to about 6.00 as share. There are no acceptable put options on the stock which is why I am doing a short sale. (This is my third short sale of my life and they scare ME to death.)

 

We will keep you informed of how we are doing and let you know how reliable these indicators turn out to be. We will get back to you tomorrow after we read this week's Barron and look into the Crystal Ball for the next week.

 

Salve Lucrum