When viewing the NH-NL data, much of the first half of 1987 was stable. Readings were mostly positive with a few bouts of light pink (negative readings) in April and May. Although there was some negativity in the NH-NL readings, the 30-d Differential (Diff) did not turn negative in May 1987. It did however turn negative for seven consecutive days in May 1987. The number of days with 100+ New Lows for the year up until the end of May was two (one on April 14, 1987 and one on May 20, 1987, 112 and 109 NL’s respectively).

July 1987 NH-NL Readings for NYSE:

By June, the readings were back to the positive side, averaging a +70 Differential for the summer (June, July and August) with the only negative daily reading coming on June 2, 1987 at 21 NH’s and 28 NL’s or a negative 7 Differential. The next negative day did not occur until September 2, 1987 with a 24-31 reading or negative 7 Differential.

August 1987 NH-NL Readings for NYSE:

Prior to dissecting the NH-NL data, I must iterate that all SEASONED investors should know that they must follow PRICE and VOLUME first and that the DJIA was flashing distribution days throughout the month of September. The NH-NL red flags only back-up the story that price and volume is telling (the NH-NL confirms what the market is doing). In addition to the DJIA showing multiple distribution days, the index closed below its 50-d MA in September. It attempted to cross back above the moving average late in the month but quickly crashed back below it in early October, prior to the crash.

DJIA 1987 – Distribution & NH-NL Red Flags:

The first big NH-NL clue signaling weakness came in September 1987. For the month, 18 of the 21 trading days recorded a negative Differential reading (the month averaged a negative 15 Diff, marking the weakest month of readings since July 1984 when every day was negative).

September 1987 NH-NL Readings for NYSE:

The average daily Differential reading for the first 8 months of the year, through August 31, 1987 was +69.9. As mentioned, the average Diff reading in September 1987 was -15. By contrast, the average reading for October turned out to be a whopping negative 226. The average reading from October 1st through October 16th was negative 70, a complete 180 from the first 8 months.

Below are the key dates that pop out waiving red flags for the longer term trader:

• On September 2, 1987: The NH-NL Differential (Diff) goes red
• On September 10, 1987: The 10d Average Diff goes red
• On October 7, 1987: The 30d diff goes red
• On October 12, 1987: The 1st 100+ New Low (NL) day is recorded
• On October 16, 1987: The NH-NL Diff goes DARK RED which means more than 300+ NL’s

The October 16, 1987 NH-NL reading of 5-327 or a negative 322 was the weakest NL reading since Monday, September 28, 1981 when 590 NL’s were recorded (with only 1 new high).

This was a MAJOR RED FLAG – but was it too late because data is recorded “end of day”?

We all know what happened the following Monday – markets crashed and NH-NL reading settled in at 10 NH’s and 1,068 NL’s for a -1,058 Diff. Tuesday, October 20, 1987 was even worse as the Diff closed at 1 NH’s and 1,174 NL’s for a Diff reading of -1,173.

October 1987 NH-NL Readings for NYSE:

Now, I was still shy of 10 years old in October 1987 so I can’t tell you what I would have done as a trader in real time. However, I can tell you that I watch the NH-NL data, as well as basic price and volume on a daily basis. I will be prepared for the next correction and/or crash and these tools will alert me to capture gains, lock-in small losses and move to the sidelines.

As I said in my post last month, March 2013 is currently sporting:

“…an environment where many pundits are predicting a correction or coming bear market. They may be right but why fight the trend when it clearly points higher. I don’t necessarily disagree with the so called “experts” but I will not make a move until the NH-NL ratio confirms a change in trend. As it stands now, the NH-NL data is logging positive “blue day after blue day”. Until the NH-NL breadth starts logging negative readings on a consistent basis which will in turn change my graphical readings from blue to red, I will not turn bearish. Trends tend to last longer and go further than expected so wait for confirmation.

Here is what we will need to see in the data to confirm a change in market trend has commenced:

1. More new lows than new highs
2. New low daily readings registering triple digit figures, consistently
3. The NH-NL differential must turn negative
4. The 10-d and 30-d average differentials must go negative (this is essentially the first sure sign that the market is changing direction – especially the 30-d diff.).
5. Differential readings start registering figures larger than -300, -400, -500+.

I will be following the readings and will update my followers on twitter and will certainly post an article on the blog using the graphics to show the change in trend.

By carefully studying the New High and New Low readings, an investor with a longer term time frame can avoid getting slaughtered during a nasty bear market at the beginning, middle and end. This same investor will also be given a green light as to when he should start adding shares after a long hibernation. If a longer term investor ONLY trades based on the major NH-NL signals, he would always outperform the markets and most likely outperform the majority of professional investors.”

The NH-NL data is positive as of March 28, 2013 so trading will continue. Don’t try and predict a market top, let the basic tools tell you when to start moving to the sidelines.

March 2013 NH-NL Readings for NYSE:

NOTE: I am using the same data for my images as highlighted in my March post:

New High – New Low data is historically the most accurate indicator for identifying a major change in trend by highlighting extreme readings and the change in underlying market breadth.

The images contained in this article will identify the following data points:

1. NYSE New Highs: The number of stocks making New Highs on a specific date
2. NYSE New Lows: The number of stocks making New Lows on a specific date
3. New High –New Low Differential: This is simply the number of stocks making new highs minus the number of stocks making new lows.
4. NH-NL 10d Diff: This is a simple 10-day moving average representing the number of stocks making new highs minus the number of stocks making new lows.
5. NH-NL 30d Diff: This is a simple 30-day moving average representing the number of stocks making new highs minus the number of stocks making new lows.
6. NH-NL % Ratio: To calculate the percentage correctly, use this formula: (New Highs – New Lows) / (New Highs + New Lows) * 100 = X%
7. NH-NL % Ratio 10d Ave: This is a simple 10-day moving average representing the percentages listed in the column terms #6 in this list

No one can guarantee an “exact top or bottom” but this data will pinpoint an overall change in trend. There’s plenty of time to get out of the market before a devastating fall and even more time to jump on a new up-trend after a bottom.

To support my findings, I will use extensive New High and New Low (NH-NL) data extracted from the NYSE in 2008 and 2009. This data phenomenon is not exclusive to the market bottom of 2009 as studies will show the exact, yes exact, same results can be extracted from every other major market bottom stretching back as far as the NH-NL data is available.

New High – New Low data is historically the most accurate indicator for identifying a major change in trend by highlighting extreme readings and the change in underlying market breadth.

The images contained in this article will identify the following data points:

1. NYSE New Highs: The number of stocks making New Highs on a specific date
2. NYSE New Lows: The number of stocks making New Lows on a specific date
3. New High –New Low Differential: This is simply the number of stocks making new highs minus the number of stocks making new lows.
4. NH-NL 10d Diff: This is a simple 10-day moving average representing the number of stocks making new highs minus the number of stocks making new lows.
5. NH-NL 30d Diff: This is a simple 30-day moving average representing the number of stocks making new highs minus the number of stocks making new lows.
6. NH-NL % Ratio: To calculate the percentage correctly, use this formula: (New Highs – New Lows) / (New Highs + New Lows) * 100 = X%
7. NH-NL % Ratio 10d Ave: This is a simple 10-day moving average representing the percentages listed in the column terms #6 in this list

I follow the progress of stocks making new highs and new lows on the NASDAQ and NYSE and pay specific attention to turning points in the differentials and ratios. I am particularly interested in the extreme highs and lows of the readings, especially after a long trend, as they start to drop hints of an impending change of trend (positive to negative and negative to positive).

The image below shows that New Lows had dominated the market for nearly 18 months when extreme readings started to appear in October 2008. In fact, the readings in October 2008 were the most extreme that my NYSE NH-NL data contains which goes back to the early 1980’s.

October 2008 NH-NL Readings for NYSE:

As the second image shows, the daily New Low readings were well above 1,000 with a peak of 2,901 on Friday, October 10, 2008. The market was screaming exhaustion as the selling pressure of the past 18 months was hitting its max. All other readings were in extreme territory including the basic NH-NL differential, the 10d & 30d differentials and the % ratio. The extreme readings continued through the end of November 2008 when they final subsided in December but remained negative.

November 2008 NH-NL Readings for NYSE:

December 2008 NH-NL Readings for NYSE:

Heading into early 2009, “blood was running in the streets” as Baron Rothschild once declared and most investors had been knocked to their knees while two of the most prestigious investment banking firms in America disappeared. The greatest value investors of all time state that the best time to buy is when this type of extreme environment occurs. The problem with that statement is that it’s based purely on fundamentals and I just can’t blindly jump-in and grab shares without some form of technical guidance. Think about that for a second, blood had been running in the street for the duration of 2008 so I suspect that many value investors were buying and saw more pain before the market decided to turn. Buyers in early to mid 2008 had to endure quite a ride before the market turned up in the spring of 2009. I prefer to catch a trend on the up-swing, not the bottom; besides, pinpointing the exact bottom is virtually impossible.

January 2009 NH-NL Readings for NYSE:

Bernard Baruch was quoted as saying: “Don’t try to buy at the bottom and sell at the top. This can’t be done–except by liars.”

January 2009 was much like December 2008 as the market remained negative. Then in February 2009, the market dropped again as the NH-NL readings started to head back towards more extreme levels. However, they didn’t reach the levels of October 2008 so this signified a “higher low” for the readings, a second clue that the market may be looking to reverse direction.

February 2009 NH-NL Readings for NYSE:

NH-NL Readings making higher lows for NYSE:

March 2009 was the turning point. The extreme readings subsided (light red and dark red readings on my graphics) and the FIRST positive reading was registered since May 2008 (represented by “blue figures” on my graphics). On March 26, 2008, the NYSE logged a reading of 10 New Highs and 0 New lows, the first time a “0” New Low reading was logged since February 27, 2004. By contrast, the NYSE logged 11 additional days with “0” New Lows in 2009 and 20 days with “1” New Low for that same year. The year 2008 had one day with “1” New Low and the years 2005, 2006 and 2007 had zero days with “1” New Low. Amazing stats!

March 2009 NH-NL Readings for NYSE:

Aggressive trend and swing traders would have been given the green light to dip a toe into the water in late March 2009 but with tight stops. I will not speak for day traders but I would imagine that they were all over the March 2009 signals. April 2009 gave traders reason to get more aggressive on the “long side” of the market. Consistent New High readings above 100-200+ per day is my official confirmation to add shares for mid & longer term investors. However, a confirmation must be signaled before jumping “all-in” and this confirmation is triple digit New High readings. The confirmation for a mid or longer term trader is the most important indicator after a change in trend has been identified. Until this happens, a “true” up-trend is not sustainable over the long term. As you will notice, the up and down whipsawing from March 2009 to July 2009 is what a trader can expect until consistent readings in the triple digits prevail.

April 2009 NH-NL Readings for NYSE:

It wasn’t until July 2009 that this confirmation in STRENGTH (underlying breadth) took place and the market signaled that the nasty bear of 2007 and 2008 was over. Thursday, July 23, 2009 was the day the market logged its first triple digit New High reading with 108 NH’s and 2 NL’s. From there, the market was off and running as triple digit readings became commonplace and it wasn’t too long before 200, 300 and 400+ New High readings were logged (October 14, 2009 gave us 462 NH’s and 2 NL’s). By January 2010, the NYSE had its first 500+ New High reading (1/11/2010: 523 NH’s and 1 NL) in more than 3 years (December 5, 2006 was the last 500+ reading when the DJIA was trading 2,000 points higher).

July 2009 NH-NL Readings for NYSE:

I mentioned that market bottoms are easier to identify than tops and I believe this is true. However, major market tops can be identified as I clearly showed readers back in 2007 and 2008, starting with these posts:

NH-NL Ratio giving a top warning:
Two Months of Warnings

“The posts below show detailed analysis and warnings over the past two months of the current correction we are experiencing. Do NOT blame anyone but yourself if your stocks are sitting there getting slaughtered over the past couple of weeks.”

A Negative New High – New Low Ratio (NH-NL)

“To prepare, I have already sold several large positions over the past couple of weeks as noted on multiple blog posts. I have been in profit taking mode and must pay attention as a trend follower because draw-downs can be substantial if I am not careful.”

Fast forward to March 2013 (today) and we are currently in an environment where many pundits are predicting a correction or coming bear market. They may be right but why fight the trend when it clearly points higher. I don’t necessarily disagree with the so called “experts” but I will not make a move until the NH-NL ratio confirms a change in trend. As it stands now, the NH-NL data is logging positive “blue day after blue day”. Until the NH-NL breadth starts logging negative readings on a consistent basis which will in turn change my graphical readings from blue to red, I will not turn bearish. Trends tend to last longer and go further than expected so wait for confirmation.

Here is what we will need to see in the data to confirm a change in market trend has commenced:

1. More new lows than new highs
2. New low daily readings registering triple digit figures, consistently
3. The NH-NL differential must turn negative
4. The 10-d and 30-d average differentials must go negative (this is essentially the first sure sign that the market is changing direction – especially the 30-d diff.).
5. Differential readings start registering figures larger than -300, -400, -500+.

March 2013 NH-NL Readings for NYSE:

I will be analyzing the readings and will update my followers on twitter and will certainly post an article on the blog using the graphics to show the change in trend, when it happens. Please be aware that the signals could come next week, next month or even next year (no one knows, except the NH-NL ratio).

By carefully studying the New High and New Low readings, an investor with a longer term time frame can avoid getting slaughtered during a nasty bear market – at all stages (beginning, middle and end). This same investor will also be given a green light as to when he should start adding shares after a long hibernation. If a longer term investor ONLY trades based on the major NH-NL signals, he would always outperform the markets and most likely outperform the majority of professional investors.

The same logic holds true on the positive side. The NH-NL indicator will begin to log negative or “red” graphical readings as the change in trend commences after a long up-trend. Calling a market top is not nearly as easy as calling a market bottom but the NH-NL indicators will give warnings.

Failure to employ the power of the New High New Low market breadth is failure to confidently identify a major change in trend. Don’t get caught up in the day-to-day nonsense of the financial “talking heads”, the so-called experts on twitter, on blogs or the political mind-games played by the governments and central banks of the world.

Follow market breadth, it can’t be manipulated!

1. How to Make Money in Stocks (4th edition) by William J. O’Neil (1988)
2. Reminiscences of a Stock Operator by Edwin Lefevre (1923)
3. The Nature of Risk by Justin Mamis (1991)
4. Trader Vic: Methods of a Wall Street Master by Victor Sperandeo (1991)
5. Trade Your Way to Financial Freedom by Van K. Tharp (1999)
6. The Battle for Investment Survival by Gerald M. Loeb (1935)
7. Martin Zweig’s Winning on Wall Street by Martin Zweig (1986)
8. How to Trade in Stocks by Jesse Livermore (1940)
9. Market Wizards: Interviews with Top Traders by Jack D. Schwager (1988)
10. When to Sell: Inside Strategies for Stock-Market Profits by Justin Mamis (1994)

**Original copyright dates are listed even though many of the books linked are newer editions**

Would you say that’s “crazy”?

Perhaps but that’s the direction the world is headed.

“Printing goes beyond product that you can see and touch”. Guitars, tables, board games — those objects can be printed today. But food, organs, bones, houses? Those “will take probably 10 years to come,” – says Geomagic’s Ping Fu

General Electric is “So Stoked About 3D Printing, They’re Using It To Make Parts For Jet Engines”

As Business Insider noted: “CONFIRMATION as to how seriously some companies are taking additive manufacturing, popularly known as 3D printing, came on November 20th when GE Aviation, part of the world’s biggest manufacturing group, bought a privately owned company called Morris Technologies.

Many manufacturers already use 3D printing to make prototypes of parts, because it is cheaper and more flexible than tooling up to produce just one or two items. But the technology is now good enough for it to be used to make production items too.

GE sees the purchase as an investment in an important new manufacturing technology. “Our ability to develop state of the art manufacturing processes for emerging materials and complex design geometry is critical to our future,”

Printing parts for jet engines is already here but the jeans, well, that may take some more time before its commonplace but it’s not out of the question.

So how can you invest to capitalize on this new industry?

Two stocks catch my eye in the world of 3D printing and rapid prototyping:

1. Stratasys, Inc., SSYS
2. 3D Systems Corporation, DDD

I don’t intend on spending this blog post describing the detail of the technology itself as plenty of that exists through a simple Google search, however, I will include basic company descriptions from Yahoo Finance (see bottom of post).

Several things stand out while researching these two stocks (see charts):

1. Year-over-year EPS growth
2. Double digit quarterly growth for sales and earnings (going back 8 quarters)
3. Increasing Intuitional Sponsorship

In addition to the fundamental items above, the daily and weekly charts for both SSYS and DDD show some solid technical setups for the long term (I am not writing this post from a short term perspective). We’re talking 2-5 years out as this game is only in its infancy with Wall Street.

SSYS has been trending higher for the past year showing a 170% gain since last November. The recent weekly pattern clearly shows a breakout point to new highs above $73.32. Considering the overall environment of the market, I would prefer a better risk-to-reward buying opportunity closer to the 50-day or 200-day moving average. Due to its technical strength, the 50-day moving average looks to be the ideal pullback area for accumulation.

DDD has pulled back more than SSYS and may provide investors with an opportunity sooner as it trades just above the 50-d moving average. Like SSYS, DDD has given early investors a great return on investment with a 193% gain over the past 12 months. I’d be suspect of the large distribution week, two weeks back, but as long as the 200-d moving average is not violated, an initial entry could be warranted.

As of this post, I do not own shares in either company but I plan to accumulate both as we head into 2013. Both the action of the individual stocks and the general market will dictate when I start the accumulation so please perform your own due-diligence. Follow me on twitter for my latest updates.

Lastly, as Stratasys notes on its home page, 3D printing is “ADVANCING INDUSTRIES” to which it highlights the following:

1. Aerospace 3D Printing
2. Automotive 3D Printing
3. Commercial Products 3D Prototyping
4. Consumer Products 3D Prototyping
5. Educational 3D Printing
6. Medical Device Prototyping
7. Military 3D Printing

Yahoo Finance:

Stratasys, Inc., together with its subsidiaries, engages in the development, manufacture, marketing, and servicing of three-dimensional (3D) printers, rapid prototyping (RP) systems, and related consumable materials for office-based RP and direct digital manufacturing (DDM) markets. The company offers its products as integrated systems consisting of an RP machine and the software to convert the CAD designs into a machine compatible format, and modeling and support materials. Its products enable engineers and designers to create physical models, tooling, jigs, fixtures, prototypes, and end use parts out of production grade thermoplastic directly from a CAD workstation. The company also offers rapid prototyping and production part manufacturing services; and maintenance, leasing/renting, training, and contract engineering services for 3D production systems and 3D printers.

3D Systems Corporation, through its subsidiaries, engages in the design, development, manufacture, marketing, and servicing of 3D printers and related products, print materials, and services. The company’s principle print engines comprise stereolithography, selective laser sintering, multi-jet modeling, film transfer imaging, selective laser melting, and plastic jet printers. Its 3D printers convert data input from computer-aided design software or 3D scanning and sculpting devices to produce physical objects from engineered plastic, metal, and composite print materials. The company also blends, markets, sells, and distributes various consumables, engineered plastics, metal materials, and composites; and offers various software tools, as well as pre-sale and post-sale services, including applications development, installation, warranty, and maintenance. In addition, it provides custom parts services, such as precision plastic and metal parts service and assembly capabilities. The company markets its stereolithography materials under the Accura and RenShape; laser sintering materials under the DuraForm, CastForm, and LaserForm; and materials for professional printers under the VisiJet brands.

Historically speaking, November, December and January are the year’s best three-month span in terms of overall percentage performance for the S&P 500 (data from 1950 through today). Similarly, the NASDAQ is historically best from November through January with an extended positive trend running through to June (data from 1971 through today). The Stock Trader’s Almanac states that the year-end strength comes from corporate and private pension funds.

There are a couple of things to consider before backing up the truck and investing in stocks.
1. Understanding the general economic environment & fiscal policy
2. Understanding technical analysis of the markets to anticipate low risk environments

It is very important to understand that fiscal policy, the taxing and spending power of the Federal Government, may be the most powerful influence affecting the nation’s and many times the world’s economies. Now, Bernanke and The Federal Reserve do not have the power and mechanisms to control movements in money with accuracy over the short term but they often tip their hand and lend a clue for long term performance.

In addition to The Fed, unique cycles occur within markets, such as the 4-year presidential cycle and we know by studying the markets that recessions typically occur in years between presidential elections. With the 2012 election behind us, we will now be headed into that territory; however, we also saw what took place during President Bill Clinton’s second term (boom). So use history as a gauge with relation to what’s happening today and not a full-fledged prediction tool. Macro cycles clearly exist so I suggest you become familiar with their tipping points and seek action when opportunity becomes favorable (I will highlight some techniques below).

Although the Federal Reserve has enacted a policy of near free credit, the private business sector in the United States is deleveraging. It has been argued that the business sector has been accumulating large surpluses of cash reserves since the meltdown of 2008-09. One can argue that this deleveraging is responsible for the poor economic activity over the past several years. American businesses and individuals to some extent are more concerned about repaying their debts than discretionary spending. This is the main reason why The Fed’s generous monetary policies have been mostly ineffective.

Some analysts have suggested that the deleveraging (debt reduction) may continue for another 4-5 years which would extend the length of Obama’s entire second term. If that is the case, interest rates should remain low and prove that additional stimulus will provide little to no spark to an already sluggish economy. I don’t know how unemployment will turn out but it benefits us all if these figures improve so consumer spending can edge higher thus creating further job opportunities.

Will we face a period of hyperinflation or complete deflation? I don’t know and I can’t lead my life based on “possible doomsday scenarios”.

One may believe that I am tilting to the bearish side on the macro perspective of the market but that is not the case because there are two sides to investing: Fundamentals and Technicals. Up-trends and down-trends will form in the market regardless of marco bear and bull cycles. So, I will keep investing in strong American companies via the stock market regardless of any pending “fiscal cliffs”. As far as the fiscal cliff is concerned, I’d like to believe that Washington will figure something out, at least in the near term (next several years). It behooves us all.

Moving on, investors should know approximately when to expect opportunities to buy stocks at relatively low risk by using technical analysis to recognize these opportunities. The fundamentals usually point us towards “what” while the technicals usually tell us “when”. In buying young, innovative and profitable American companies, I am looking at holding their shares from anywhere between 6 and 36 months. Ideally, the average position will last from 6-18 months as I am not in the business of trading or flipping for a quick profit. I have a full time career so short term focus on the market is kept to a minimum these days.

As highlighted in the past (on this blog), we must look towards a few simple charts that will give all investors a fantastic risk vs. reward setup/ signal. By following these simple charts, any investor should be able to consistently outperform the market (buy when the market is deeply depressed and sell when it becomes over-bought). Please keep in mind that these signals are for longer term investors as they only appear once every year or so.

The three charts represent the following:

1. The % of stocks above the 200-day moving average for the NASDAQ
2. The % of stocks above the 50-day moving average for the S&P 500.
3. The % of stocks above the 50-day moving average for the NASDAQ

I consider this first chart the most powerful of the three (because of the sheer magnitude of the weakness or strength charted among individual securities) for gauging the overall risk level for accumulating shares in the market. The chart highlights the NASDAQ percent of stocks above the 200-day moving average. It is a rare occurrence when only 5%-15% of all stocks are trading above their 200-day moving average on one or more of the majors indices. Think about that for a moment, the idea of having 85%+ of all stocks trading below their respective 200-day moving average. This level of depression shows that the market is likely close to a bottom and is providing a nice risk-to-reward accumulating opportunity.

The levels reached in late 2008 and 2009 were near historical lows and provided one of the best opportunities to accumulate shares in recent memory. In fact, the percentage of stocks trading above their respective 200-day moving averages (on the NASDAQ) in late 2002-2003 only fell as low as 12.29%. As you can see on this chart, the levels reached in 2008 and 2009 went as low as 5.23%. In other words, nearly 95% of all NASDAQ stocks were below their 200-day moving averages. If that doesn’t scream buy, I don’t know what does.

By using the second chart, we are looking for the S&P 500 percent of stocks above the 50-day moving average to cross below the “20%” oversold level. Historically, this is a level that signals a lower risk environment to commence accumulating shares in leading stocks. Please note that oversold levels for the general market can last for a period of several months so please be patient with your buys. Investors do not have to buy as soon as this level is breached and the summer of 2011 serves as a nice example.

Similar to the second chart, the NASDAQ percent of stocks above the 50-day moving average also triggers a nice risk-to-reward environment for accumulating shares. The investor would be wise to start accumulating shares when the percentage of stocks drops below the “10%” oversold level. Late 2008 through early 2009 and the summer of 2011 serve as the most recent examples.

With the above in mind, continue to monitor these charts and have the courage to buy when “blood is running in the street”. Investors must have the courage and intelligence to buy when markets are beaten down and individual securities are collectively trading near lows. A completely separate post would be required to discuss “which stocks” to buy at these depressed levels but a quick rule of thumb is to focus on the market leaders, ones showing strong relative strength and earnings growth.

Looking at the current readings on all three of these charts, I can confidently venture to say that we are not in the prime low risk accumulation phase of the market. We appear to be heading in that direction but we are nowhere near a major bottom. Keep an eye on fiscal policy, economic indicators such as unemployment, consumer spending and the three charts above. By doing this, every investor should be prepared to accumulate shares in a favorable, low risk environment.

“Why do you like Invensense so much?”

My answer: It’s an investment in the technology and I believe this is the company to take that technology to the next level. I always follow that response by emphasizing this: Do your own due diligence and NEVER make an investment based off of what I do.

I am not a short term trader but I do follow rules while making trades and one of the most important of these rules is: CUT LOSSES!

As several of my twitter followers have pointed out, I have violated that rule with INVN. That’s true, I didn’t cut the loss when is violated my mental stop. In fact, I dollar-cost averaged my original position. The follow-up purchases have taken my original position to a maximum position size. Now, I sit here writing this post stating that I DO NOT violate “position sizing” within my portfolio. That may be difficult to believe if I just violated another rule but as of today, I have not violated that one. My cost basis is higher than Friday’s closing price for INVN and it took a lot of strength not to buy another block of shares when it dropped below $10 (as low as $9.06 to be exact).

Think about it, a purchase below $10 is showing a gain anywhere from 10%-20% in two weeks. I knew it was a fantastic level to enter and my cost basis would have dropped but I am maxed out – I CANNOT increase my risk against my overall portfolio. That’s how you GO BROKE (especially if you turn out to be wrong – and I may be wrong with Invensense).

That’s the beauty of trading and investing. Your ideas prove to be right or wrong based on making money or losing money. As of today, I show a loss in INVN. So why do I still hold on?

Two reasons

• The technology: INVN is a leading provider of MotionTracking™ devices for consumer electronics products such as smartphones, tablets, game controllers, smart TVs, and wearable sensors. I see a big future here and I’m betting that INVN is the leader or one of the leaders.
• The fundamentals (specifically: sales and earnings growth)

I am a technically based trader on a longer term time-frame but for now, I am not trading the chart. Although one may argue that the recent price action suggests that support has been established – it’s still debatable based on the number of shares sold short. The IPO lock-up period has passed, the lawsuit is open knowledge, supplier product shortages have been discussed and the market has not performed well so INVN has paid consequences. I’d like to believe that all of that BAD news is priced in.

The pending lawsuit from their main competitor, STMicroelectronics, does keep me a bit worried on the fringes but I have no control there, other than to sell (that can screw up everything, regardless of fundamentals and technicals).

Let’s take a look at the numbers:

Earnings (YoY):
2008: -0.09
2009: 0.01
2010: 0.19
2011: 0.13
2012: 0.47
2013: 0.61 estimated +30%
2014: 0.85 estimated +39%

Earnings (QoQ):
June 30, 2011: 0.11 vs. -0.01
September 30, 2011: 0.15 vs. 0.04 | +275%
December 31, 2011: 0.13 vs. 0.06 | +117%
March 31, 2012: 0.07 vs. 0.03 | +133%

INCOME STATEMENT | FY2012 (April 1, 2012) vs. FY2011 (April 1, 2011)

BALANCE SHEET | FY2012 (April 1, 2012) vs. FY2011 (April 1, 2011)

INSTITUTIONAL ACTIVITY (as of May 28, 2012):

Two things stick out:
1. The increasing number of institutional investors (including large quantities of shares bought)
2. Increasing earnings, year-over-year and quarter-over-quarter.

Time will tell and my account balance will let me know if I am right or wrong. As for now, I am long $INVN – betting on the technology, industry growth, earnings growth and sales growth. In addition, I would like those institutional investors to continue buying!

Several of my indicators are also starting to enter those same levels but what many are failing to realize is that the market can take several months to complete a full correction and reach a bottom.

See below for the most recent two year chart with individual corrections for both of the recent bottoms in 2010 and 2011 (highlighted below the 20% figure).

As you can see in 2011, the secondary indicator started to flash “bottom” signals in June but the market didn’t complete its volatile correction until September.

In the summer of 2010, the secondary indicator started to flash “bottom” signals in May but the market didn’t complete its correction until July, two full months of up-and-down action.

The lesson: 2012’s secondary indicators started to FLASH a market bottom last Friday, for the FIRST time. Based on past corrections (going back a decade), this will only be the start of a volatile period of up-and-down action that could last several months (the swings can be greater than 10%). Be Patient!

The three charts represent the % of stocks above the 50-day moving average for the NASDAQ, the % of stocks above the 200-day moving average for the NASDAQ and the % of stocks above the 50-day moving average for the S&P 500.

The recent sell-off has been steep (points only) but unfortunately, we haven’t come close to historic bottom signals. This simple fact (using the charts below) suggests that the market has further room to consolidate so be careful with your buy and sell decisions.

1. How to Make Money in Stocks (4th edition) by William J. O’Neil (1988)
2. Reminiscences of a Stock Operator by Edwin Lefevre (1923)
3. The Nature of Risk by Justin Mamis (1991)
4. Trader Vic: Methods of a Wall Street Master by Victor Sperandeo (1991)
5. Trade Your Way to Financial Freedom by Van K. Tharp (1999)
6. The Battle for Investment Survival by Gerald M. Loeb (1935)
7. Martin Zweig’s Winning on Wall Street by Martin Zweig (1986)
8. How to Trade in Stocks by Jesse Livermore (1940)
9. Market Wizards: Interviews with Top Traders by Jack D. Schwager (1988)
10. When to Sell: Inside Strategies for Stock-Market Profits by Justin Mamis (1994)

**Original copyright dates are listed even though many of the books linked are newer editions**

That was my tweet from Thursday, February 9, 2012.

The signs that I was referring to are located in the following two charts. The divergence over the past month is very clear on the charts below as the transports are showing weakness in comparison to the industrials. I am not calling a market reversal or downtrend but I am seeing some exhaustion among the leaders and major market averages. Recent gains need to be digested before moving higher (if that’s where 2012 is headed).

Oil has become a topic of interest with gasoline prices across America making headline news on a daily basis. With crude oil pushing higher, above $100, I have become interested in two dividend plays that also present solid technical charts.

ConocoPhillips ($COP – $73.36) operates as an integrated energy company worldwide. The company’s Exploration and Production (E&P) segment explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids.

The company has a market cap just shy of $100B, an annual dividend of $2.64/3.60%, 65% held by institutional investors and a P/E of 8.17x. A move to new highs could catapult the stock well into the $80 range (along with that dividend). The company has been experiencing an increase in net income, year over year revenue growth and a solid record of earnings growth. One could argue that the ideal entry is closer to the 50-d moving average.

BP p.l.c. ($BP – $47.62) provides fuel for transportation, energy for heat and light, retail services, and petrochemicals products. Its Exploration and Production segment engages in the oil and natural gas exploration, field development, and production; midstream transportation, and storage and processing; and marketing and trading of natural gas, including liquefied natural gas (LNG), and power and natural gas liquids (NGL).

The company has a market cap of $150B, an annual dividend of $1.92/4.03%, 10.68% held by institutional investors and a P/E of 5.90x. A move to new highs could push the stock back towards pre- “Gulf of Mexico” disaster levels (along with that dividend). The company has been experiencing increasing net income, growing revenues, reasonable debt and future potential with new contracts and repaired brand image.

As with $COP, an ideal entry for $BP is closer to the 50-d moving average but we are targeting these stocks as value plays considering their dividends and low PE’s.