How to Make Money in Stocks, a nice set of principles and rules.

William O'Neill's book is one of the best when it comes to stock investing. This is not a book for the novice, but for stock traders who know a thing or two about investing and trading. A lot of his ideas may sound counter-intuitive for conservative investors, who might prefer to buy stocks during signs of weakness or bottom fishing. Instead he suggests to buy stocks during stock upward price movement, stocks at or near their 52-week high and stocks breaking into new highs with a upsurge in volume. You will have to read a it a few times before things start to sink in. One of the winning chart patterns he talks about is the Cup and Handle pattern, reviewed in this blog.  You can buy this book at Amazon or Flipkart.

Book: How to Make Money in Stocks: A Winning System in Good Times and Bad

Winning Price Structures: Flag Formation

The Flag price structure (up) formation happens when the stock moves up dramatically with a large volume spike. This is followed followed by a period of consolidation over several days where price falls narrowly with decreasing volume. This is then followed by a breakout in the direction of the previous trend with a high volume.

It's best if the pole formation coincides with a breakout over a previous resistance. The flag itself is a narrow slope down accompanied with diminishing volume. Flags are short-term price structures. The best time to buy is when the second breakout occurs (with high volume) giving a nice stop-loss and a high reward/risk ratio.

The psychology behind the move is that the first breakout usually happens with a fundamental news flow. The long-term buyers come in with euphoria and smart sellers depart. As the price begins to fall, the sentiment is still strong and this move occurs at low volume. Sensing the strong sentiment, fresh buyers jump in and push the stock even higher.

Watch these charts, there are others in the slide shows on the main blog page.

Happy Hunting!

Cup with a handle and W price pattern - find it now!

Now that the markets are looking up and Tom, Dicken and Harry are all upgrading India. it's fun time again. During the consolidation phase over the past 3+ months, many good stocks formed a nice base. These stocks went down really fast and are now rising up really fast also.  What that means is that they are forming tall sides of a W or sides of a cup. Chart base patterns that corrected the least during this decline are the best choices at this point. Look through the slide shows at the main blog page to select such stocks. See two examples below.

 

The psychology of the W pattern is that investors are buying or selling en masse and representing frantic behavior. The recent upswing has been so swift that many might be feeling left out and want to enter at higher levels. After this period of euphoria comes the real test when the momentum fades. For the cup formation, the bottom should give the apperance of a U rather than a V.

In the cup and handle pattern, a trading range is seen on the right side leading to the formation of the handle. The handle formation should be accompanied with lower volume - shaking out the last weak holders. If the stocks fall with lower volume, that is a good sign. Watch carefully when they rise again and a breakout should happen at higher volume to confirm the pattern. 

Happy Hunting! I expect to see a few of these over the next couple of weeks.

 

Add colour to your portfolio with these paint companies

Are you painting your house this summer? Here is a slide show of 3 paint stocks to consider - Asian Paints, Kansai Nerolac, Berger Paints.

Wyckoff Creek – Understand this and increase your profit potential

Wyckoff Creek is a zone of resistance near the top of a trading range. This resistance must be overcome with a significant sign of strength to justify upside potential (jumping the creek).  This sign of strength is indicated by price spread, volume action, and a strong close.
A good buying opportunity presents itself, when the stock comes back top the creek and tests at a low volume. Our markets have been in a trading range over the past 3 months. Several stocks jumped the creek recently. See NIFTY & SENSEX charts. Look through the slide shows.  Buy those that backs up (coming back to ice) with lower volumes.

 
Source: http://knowledgebase.mta.org

Market Technician Extraordinaire

Richard Wyckoff was one of the greatest minds in Wall Street.  He developed several rules for optimal trading. He summarized these rules in the book “Studies in Tape Reading”, which is a classic in tape reading and stock market tactics.  What is Tape Reading?  According to Richard Wyckoff, it is “rapid-fire common sense”.  He adds that Tape Reading is “the only known method of trading which gets you in at the beginning, keeps you posted throughout the move, and gets you out when it has culminated.” 

Human psychology works differently.  The instinct is to buy when the stock prices are going up – why miss the bus and lose the opportunity to make a lot more money.  Or, hold on to the stock at higher prices in the hope of making more money. This is Greed.  The instinct is to hold on to the stock when the market starts to fall -  the prices might move back up? This is Hope.  The instinct is to sell when prices stay low for a long time (in a bear market) – the prices might go even lower and the possibility of losing more money. This is Fear.

Think about the people who bought SENSEX at 21,000 and those who sold SENSEX at 8000.  There is greed and hope when there should be fear. There is fear when there should be greed.

You might say that this is easier said than done?  Read Richard Wyckoff’s books and see if you can devise a buy and sell strategy. More importantly, can you stick to your strategy? If you can, you have the potential to become a market technician extraordinaire.