Sector summary

Chapter 12 has an infographic explaining the stock market and showing you the sectors, industries within each sector, and stocks within each industry. You will need to drill down into these sectors very quickly. Combining the various StockCharts.com relative strength tools helps you see strength in the market based on your investment timeline. All of these tools are accessed from the Pro Control Center on the Members Page.

In the Pro Control Center (see Figure 20-1), scroll down to Reports & Analysis Tools. Notice the top five buttons in this Reports & Analysis area are all designed to help you see what is going on in relative strength and popularity. Working with the Sector Summary and the Industry Summary, you can find the strong sectors and strong industry groups quickly. Start with the Sector Summary button and use this link to drill down into the industries and stocks.

Drilling down into sectors

Click “Sector Summary (Drill down into the major market sectors)” to open a screen sorting Sector ETFs. (See Figure 20-2.)

On this Sector screen, adjust the sort order by clicking on the column headers. Click on SCTR to see the top overall sectors first. On the top left, you can click on different time periods. The default setting is Intraday, but we have adjusted it to show the change over three months. Other time frames are one week, one month, six months, and a year. Three months is a sweet spot. This period is long enough that you can see a meaningful trend start but not too short.

Drilling down into industries

Click on any sector name and it will take you to the industry lists within that sector. In Figure 20-3, technology is shown. Because you can’t actually buy an industry group, there is no SCTR for each one. Change the time period on the top left to see the industry performance over different time intervals. The screenshot in Figure 20-3 has one month selected from the drop-down menu. For industries, one-month changes can identify new trends early. You can use three months as well for swing trading. Longer periods tend to be too long for practical use in identifying new trends. Shorter periods like one week can just be normal market oscillations.

Almost every sector and industry will have some top-performing stocks, but the best moves take place when the whole industry group is moving and the majority of stocks have SCTRs above 75. By clicking through each of these industries, you can see which stocks are performing well. When large portions of an industry are all surging, focus your attention there. That industry group will probably have one of the largest % Change bars. In Figure 20-3, the computer hardware industry is surging, followed by software.

Drilling down into stocks

To continue drilling down to the stock level, click on an industry name. Figure 20-4 shows you the stocks in the software industry. Click on the SCTR column to bring the strongest stocks to the top, with an SCTR in the 90s at the top of the list.

The column to the right of the SCTR shows the SCTR peer group. Click on the U column to sort on market cap size. The stocks with no SCTR may be at the top, but scroll down to the market cap–size stocks you like to work with (for example, perhaps you are only a large-cap investor). Then alter the time using the drop-down menu in the top left corner to one week, one month, or three months. When stocks start to show up on these lists, something is going on that is making investors show interest in them. Stocks that are performing well usually have a reason. Investigate the chart pattern to see whether a stock is changing trend from down to up for a possible entry. Note: Not all stocks have SCTRs due to a small market cap or a low stock price, or they may be foreign small- or mid-cap stocks.

With this quick technique, combining the Sector/Industry/Stock drill-down with the SCTRs and the % Change bars, you can find strong stocks fast.

Industry summary

Under the Pro Control Center, scroll down to Reports & Analysis Tools. The Industry Summary button brings up all the industries on one page and allows you to change the look-back period in the center at the top of the page. Change from intraday to one-week, one-month, and three-months to find emerging areas of strength.

When you know which industries you’re interested in, you can use the Sector Summary to drill down and find stocks you like based on your chart settings.

Checking the speed of movement

Some stocks, such as biotech stocks, can have sudden shocks that wipe out profits and become huge losers very quickly. They also go up very fast. It’s a double-edged sword. This volatility is helpful if you are in strong stocks across multiple sectors, but you never want a significant portion of your portfolio in any one stock.

You may want fast-moving stocks, but you want to sell with profits. Slow-moving stocks have trouble outperforming the market averages, so typically you want some faster movement. The relative strength indicator will be rising if the stock is rising faster than the S&P 500. The SCTR (see Chapter 12) should be well above 75 for identifying stocks going up faster.

Looking at typical support levels

Most stocks in fast uptrends hold above the 20-day moving average. On a significant pullback, they may drop down to the 20-week moving average. You can use those pullbacks to add to positions, but the preference is not to sell strong stocks when they are pulling back in a normal rhythm of the market. If the overall market is receding from the highs, a pullback is normal. Every few months the market will make higher highs and higher lows in an uptrend and hold above the 40-week moving average. That scenario is supportive for your stocks.

A shorter-term trader will sell stocks falling below the 20-day moving average. Longer-term traders will want to hold until they fall below the 50-day moving average or longer. For commodity-related stocks, the 50-day moving average or the 10-week moving average (about the same) are good for trading an upsurge in momentum. Very long-term traders may use the 250-day moving average (about one year).

For information on moving averages and horizontal support and resistance, go to Chapter 10.

Gauging gains

Unfortunately, there is no magic percentage gain for selling because different market conditions lead to faster or slower markets. Identifying the strength of the stock can help with the management of the trade. Determining when to lock in gains is also a somewhat emotional decision to make; some people are risk takers and some are not. Risk takers may ride a gain for a longer period of time than non–risk takers.

Following technical clues to help manage your trades

After a stock has drifted sideways to down, a few key technical events happen:

• The stock touches an important moving average. Some of those are the 10-week moving average, 20-week moving average, and 40-week moving average (see Chapter 10). Expect bounces off some support.
• The stock goes low enough to get oversold readings on technical indicators, such as the relative strength index or RSI (30 or 40) or stochastics below 20. These are typical buy areas. (Chapter 11 has more info on the RSI and stochastics.)
• Trend lines are broken. Look for ways to hold strong stocks that may be consolidating. Selling some on a break can lock in profits. (See Chapter 9 for more about trends and consolidation.)
• Price breaks below where the price has bounced up from before. After multiple attempts to hold above the previous lows, a lower low can be a clue that the support is fading. Rising stocks don’t make lower lows. One low might be an exception for a few weeks, but uptrends have a series of rising lows.
• The stock starts to make new 52-week lows.

Figure 20-5 shows Amazon (AMZN), which is one of the world’s juggernaut companies. By dominating one particular space so well, Amazon has been crushing everyone in its path. But Amazon investors have ridden some massive swings.

For example, in 2014 the Federal Reserve had lots of stimulus going on to help the economy heal from the financial crisis. The market was roaring higher until the oil business struggled in late 2014. But Amazon was a dog all year, after years of running higher. The chart in Figure 20-5 shows a few big things:

• Moving averages: As an investor, what will you hold through? Working from the left to the right, Amazon was finding support at the 10-week moving average. As 2014 started, Amazon had a big down week that wiped out about ten weeks of price gains. The stock dropped into May, losing $125/share before finding support at $285, which was the January high of 2013.
• Indicators bounce from oversold levels: The stock continued to wobble and make lower highs all year. The support level of $284 held, but investors holding the stock throughout the year were staring at losses for the year of 30 percent. Was Amazon’s long-term top finally here?
• Trend lines: Use previous run-ups in the stock price to find a similar slope for trend lines. A short, sudden burst is not a good trend line slope, but one with a reasonable angle (45 degrees or so) is a better place to watch for support.
• Price support and new 52-week lows: All the moving averages collapsed together in 2014, and Amazon struggled. Heading into 2015, Amazon risked gapping to new 52-week lows. Great stocks make higher 52-week highs, not lower 52-week lows. On the January 2015 earnings call, the stock roared! It broke above all three moving averages; the moving averages were in a bullish alignment, with the short-, then medium-, and then long-term averages above each other; and Amazon more than doubled in price in one year. Price support held!

Thinking about trading styles

Depending on your investment style, what works for you? If you’re a very short-term trader and hold stocks for only a few days, you use much shorter time periods on your charts. If you want to hold a stock for weeks and even months, you aren’t going to sell just because the stock made new four-day lows, whereas a short-term trader would have already exited a trade.

Refer to the Amazon stock shown in Figure 20-5. Traders out below the 10-week moving average and back in when the stock rises above had a choppy year after a solid 2013. The same applied to the 20-week moving average traders. The traders who sell when the stock moves below the 40-week moving average spent most of 2014 ignoring the stock. When they did get in (July and November), the stock immediately went back down. Ouch. While the example highlights whipsaws (failed breakouts) above the 40-week moving average, there were only five weeks of whipsaws in 2.5 years.

One big consideration is taxable gains. If you have to pay some tax to the government every time you sell, you may choose to hold through larger downtrends on big juggernaut stocks. The issue comes when the stock continues down for three years and you have given up all your gains. (Microsoft did exactly that in 1999 and lost 70 percent from the highs.)

There is no sign at the top saying “Exit now.” If there were one, everyone would sell and there would be no buyers. The January 2014 plummet for Amazon in Figure 20-5 was a sell sign near a top. But as a shareholding investor, you have to decide what to do based on your time frame. Stocks don’t usually recover quickly when they drop past ten weeks of previous price action.

If you decide to trade in and out, you’ll need to pick the level of moving average or support at which you will actually sell or buy. You could also make your decision based on the RSI or full stochastics (see Chapter 11), the SCTR (see Chapter 12), or any number of other indicators.

Considering big picture trends

If the 40-week moving average has positive slope (pointing up), that can be part of the signal. If the 40-week moving average has a negative slope (pointing down), avoid the stock.

The best way to find your way is through experience, but you have to start with some ideas. Being aware of momentum and how the stock is behaving compared to others in the industry group is valuable. You need to watch the strength of the industry group to decide whether your stock is showing short-term weakness in a strong group or whether the whole group is starting to weaken. When your stock’s industry group starts to weaken and other industries and sectors start to outperform, locking in profits may be worthwhile.

Chandelier exits

Chandelier exits can help indecisive investors. Chandelier exits are placed as a line on the chart that is a maximum retracement off the most recent high. As the price moves up, so does the line. Eventually the stock drops in price and kicks you out.

Put the overlay on the chart by selecting Chandelier Exits from the Overlays drop-down menu and click Update (flip to Chapter 3 for an introduction to overlay settings). Check to see whether the price goes below the line too often. If so, increase the range from 3.0 to 4.0 until the line fits the stock better. Two chandelier exit lines are shown on Figure 20-6 on the panel with the price bars.

The Cabot Oil and Gas (COG) weekly chart is shown in Figure 20-6. The chandelier exit set at 3.0 would have kicked you out in October 2016, but the setting of 4.0 would have been okay. In that example, changing 3.0 to 4.0, which is four times the average range for a week rather than three times the average range, works better as a setting. However, for most of the downside moves in 2014 and 2015, getting out earlier would have been better.

You may need to eliminate the other moving averages to clearly see the chandelier exit line on your charts, but the actual price level is shown on the legend.

Parabolic stop and reverse

Parabolic stop and reverse, commonly called parabolic SAR, moves the stop closer to the price as the advance continues. Eventually, the stop is very close to the price and kicks a sell signal. Parabolic SAR is found in the Overlays area. Figure 20-7 shows the default settings for the parabolic SAR. The parabolic SAR dot will move up above the highest price recently recorded and move the system to a sell signal. This system works well on strong trending stocks, but is terrible during sideways consolidations.

For Cabot Oil and Gas, the parabolic SAR was on a sell signal for most of 2015. In 2016, it switched to a very profitable buy signal. However, from June 2016 through most of 2017, the sideways chop was an awful solution, with every trade losing money as a buy-high, sell-low trade. In a full parabolic SAR system, you would short the stock when the system reversed, until the price of the stop was hit to the upside, telling you to go long on the stock. In this example, shorting the stock would have only doubled your losses in the sideways chop. You don’t have to short the stock; you can just sell the shares you have and wait for another buy signal to trigger on the parabolic SAR or use other indicators you like. For this reason, use the parabolic SAR on strong trending stocks only.

The best rule in trading is to have a stop somewhere. If you don’t have a stop, a downturn can really hurt your year-end profit despite all the wins you may have racked up during the year.