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How To Bag And Take Home The Very

And Strengthen Your Abs

Best Stocks

In Only Minutes A Day

Trying to find the perfect system for selecting winning stocks is a little like trying to find

the perfect Nachos Supreme. No matter where you go or how many you try, there's always something wrong with it. Sometimes it's trivial, like the chicken is a little dry. Sometimes it's major, like it's burned on the oustide and cold in the middle. But if you try enough places and scarf down enough nachos, someone will eventually offer you something that will make you content, if not supremely happy (yes, that was a pun).

Back in the old days, when we placed our orders with two Dixie cups and a string, one had

time for leisurely research. One had time to analyze and evaluate and ponder. The air was clean and children were well-behaved. One could be as obsessive as one wished, for there was time. Plenty of time. A surfeit of time.

With the arrival of the PC and the internet, though,

things changed. Common ordinary investors just like you and me had at our disposal hardware and software that even professionals had only dreamed about. Information became instantly available to everyone everywhere, all at the same time. Presented with a staggering array of information, far more than any one person could conceivably process, much less absorb, I of course wanted to know all of it. But that was no longer possible (if it ever had been ). The most valuable commodity became not information, and not even money, but time. There was no time. Research no longer meant hours at the library. Research meant making sure you had the symbol spelled correctly when you placed your online order with your deep-discount broker. Long term no longer meant several years. Long term meant the next afternoon.

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But none of this mattered.

None of it. Talking to me about what was possible, much less reasonable, was a complete waste of time. Gripped with the fever, I not only wanted to find every single stock that was worth putting my hard-earned money into, I believed that I could. Unfortunately, in the amount of time it took to look up the financial data online (much less send off for the annual report), the stocks had a habit of breaking out and leaving me far behind.

I couldn't just ignore the fundamentals, though, could I?

Go with the flow, buying what's hot, preferably at new highs? That didn't make a whole lot of sense. Buy high, sell higher, and just hope that I'm not the one without a chair when the music stops? After all, less than half of US stocks earned more than a dime last year. Less than a fourth earned more than a dollar. Reason insisted that ignoring fundamentals could have severe and unwelcome consequences. Plus I had this unreasonable prejudice toward investing in companies that make money.

One possible way out of this dilemma was provided by an

inordinate number of websites -- and several financial publications -- which attached an almost religious devotion to rankings, ratings, scores (or, at least, their rankings, ratings, and scores). All I had to do was select something in the top 10% of some list and make sure it had a score of 80, free at last from the onerous burden of fundamental research. Didn't have to know what the earnings were. Or even what the company did. This siren song, however, hit some sour notes. After arranging and re-arranging tables and columns and rows and cells on spreadsheets until the fonts swam before my eyes, I realized that the results had nothing to do with fundamental research at all but with a game of Let's Pretend, i.e., I'll pretend to be doing fundamental research by taking these generally meaningless shortcuts and the various publications and websites will pretend that all of this has demonstrable value. While I was undoubtedly saving time, any notion that any of this busywork had anything to do with fundamental research was, at best, a rationalization (in fact, it had about as much to do with fundamental research as filling out the Cosmo Romance Compatibility Quiz).

What about charts?

Nothing fuzzy or squishy about charts. The bars are right there, permanent, immutable, incontrovertible. All I had to do was find the right patterns, the right indicators, the right settings, the right bar intervals, the right timeframe, inject all of this into a scanning program, then buy when the blue line crossed the red line. That's all there was to it. However, the stock had no idea I was doing all this work, and it missed the memo that the blue line was supposed to cross the red line the day after I completed my work. Or the day after that. Or the day after that. So nearly all my results went on "watch lists". And I watched. And I waited. And I tweaked (couldn't miss those trend channel breakouts, those reverse head-and-shoulders, those rising wedges or falling flags). This was saving time? And, truth be told, even if I did find a chart that I liked, I wound up making the fundies better than they were because (a) I had spent so damned much time looking for this lousy stock and (b) I didn't want to look at any more.

The choice, then, seemed to be to go the fundie route, finding the best stocks on a

fundamental basis, then waiting for their chart patterns to signal a buy (though one could get a bit cobwebby waiting for this eventuality) or to go the technical route, either following a momentum strategy or doing all the fundie work anyway, only this time only on those stocks which had constructive patterns (which, as we know, would resolve themselves to the upside while we were doing the fundie research).

As you might guess, regardless of which choice I made, they were essentially the same

choice: "bottoms up". But the bottoms-up approach just wasn't cutting it. You read about some stock in a newsletter or in a financial publication such as Money or Business Week. Or you pour over lists of stocks with the greatest percentage increase in price or volume. Or you scan a chartbook or pick up a tip off a message board, or a mediot on some financial news channel pounds the table on some stock only a mother could love. Problem is that by the time the news filters down to you about this stock you're so eager to buy, you're probably too late to buy it. After all, you probably wouldn't even be hearing about it unless the stock were already on the move. Even if you have a charting program and run nightly scans of the day's activity, you're probably still going to be late.

And thats where groups come in.

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they're going to do regardless of what the investor thinks about it, group moves and group influence account for the bulk of an individual stocks progress, or lack of it (yes, it's true). So while the market is your anchor, preventing you from drifting onto the shoals, groups are your rudder, pointing you in the right direction, then keeping you on course. Want your life back? Want to read a book that doesn't have anything to do with investing? Want to eat at the table? All right, then.

While there are powerhouse stocks like Coke and Wal-Mart that are going to do whatever

haven't studied Trendlines 101 and Tops 'n' Bottoms). Given that, you want to know which groups are strong and which groups are weak. You've spent weeks (months, years) following the various rankings and ratings and blah and new highs and blah blah and what the funds are buying, but you've found that this approach lags too much to do you any good. You've learned that not only will the rankings take a while to reflect moves up or down, it's no comfort when your stock is tanking to see that the group it's in is still ranked 99. On the other hand, when you see a bunch of stocks in a particular group begin to take off like rockets, it's not encourageing to note that the group strength number is 23. That number may change dramatically in a week or so, but in the meantime, your trains have all left the station. And though you may be as sure as you can be that the ranks will soon be much lower, or higher, whichever the case may be, what the hell good are the rankings in the first place if they're so often wrong when it matters? You'd like a little advance notice of all this. You'd like something a bit more real-time useful than a number to tell you what's moving and when and by how much and how fast.

Begin with the assumption the market is with you (which may be a big assumption if you

And that's where charts come in. By using a chart, you can see the dynamics of the move graphically (that's why it's called

a graph -- Hey!!). You can see whether the group/sector is moving up or down day by day. Also how strong (fast) the move is. You won't get a number, but you will get a sense for what's happening in terms of movement. You can compare the chart of one group with the chart of another to see which is the stronger.

We begin our adventure, then, at BigCharts.com (which

was bought by CBS/MarketWatch and should therefore be around for a while, though you may someday have to access it through the latter). Once there, we click "Industries" at the top of the page. When this page loads, click "Show All Industries", and behold That Which Will Make All Things Clear. Every sector and every group, from the first level through the fourth, will have a chart. You don't have to rely on a ranking or a rating or a score. You no longer have to take time from your family or your bridge club or your porno collection to fiddle with spreadsheets. You no longer have to overpay for software and data feeds that enable you to create your own groups. You can see at a glance, for free, if the group is in an uptrend, a downtrend, or no trend at all. You can see if it's resting, pulling back a bit, or is reversing. You can see if it's breaking out or breaking down. All in minutes.

You also have complete control over how much is too much and how much is enough.

You can limit your survey to the first level of ten sectors. Or you can, if you like, go on to the next level of thirty-plus groups. Or if you're the type who can't leave even a single stone unturned, you can examine every one of two hundred-plus groups at the last level.

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So the market is with you.

The wind is at your back. You've reviewed all ten sectors and however many groups and sub-groups you care about or have time for. You've analyzed them just as you would stock charts. You know which are in uptrends, which prices are on the rise, which have patterns that are resolving themselves or are about to. You've seen The Forest. You have the Gestalt. You know, generally, what's weak and what's strong. But so what? You can't buy "generally".

Well, actually, you can.

You no longer have to pick over nine thousand-plus stocks looking for something to put you through college or fund your retirement. You can stop with those groups, or sectors, or even at the markets themselves by purchasing ETFs, or Exchange Traded Funds, baskets of stocks which are designed to mirror the performance of a group or sector or index.

Let's say, for example, that you believe in the future of biotechnology but you have absolutely no idea how to evaluate a given biotech stock, much less select one to buy. And the volatility scares you to death anyway. Well listen up, Sport. You don't have to know squat about biotech to invest in biotech. All you have to do is buy shares in BBH, a basket of biotech stocks all wrapped up and ready to take home. Or if you don't know diddly about biotech but you have generally good feelings about Healthcare (all those seniors, you know), you can purchase XLV. Or if you don't even want to mess with that, you can buy the market itself: the Dow (DIA), the S&P (SPY), or the Nasdaq (QQQ). Or any combination thereof. If you insist on buying individual stocks, though, the temptation to settle in amongst all
those charts that BigCharts has to offer can be overwhelming. But what about the fundamentals? We're not going to abandon all that just to chase the top-ten-percentage performing whatevers. On the other hand, we don't want to doom ourselves to picking over all those annual reports, either (or slogging bleary-eyed through EDGAR).

There is an easier way.

If you are of the persuasion that cannot sleep at night unless you know the CEO's wife's

sorority and the details of how the CFO calculates the discounted cash flow, then you already know what to do and what follows will be of no interest to you. You have, after all, all the time in the world.

But if you (a) really do not have all the time in the world, (b) enjoy a good book/movie/

concert every now and then, and (c) do not truth be told give a rat's ass how they calculate the discounted cash flow (or even, God forbid, care what a discounted cash flow is), then there is a way for you to determine whether or not the company you're looking at is "fundamentally sound" without going to night school.

shakeup and shakeout of websites, including those which provide assistance in researching stocks, assistance available in the form of -- and don't laugh -- the "canned scan". There's nothing brand new about these scans. They've been around since the first internet newsletter. Their quality, however, has improved dramatically, particular at Reuters.com (nee multexinvestor, nee marketguide: it's been around for a while). You can, if you like, create your own scan, specifying the most arcane fundamental details. Or you can simply click on, for example, "Accelerating Earnings Growth". You can, via 19 screens, look for various forms of "value" or "strength". You can, in other words, let somebody else do the grunt work. You can then do what you do best:

While you were licking your bear-market wounds, there occurred a

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assess, evaluate, judge. If you are uncomfortable about delegating this work, you can always combine elements of a scan with something of your own to make a little extra work for yourself and assuage your guilt (much like the cake mix companies had to backtrack from their "add water" formulas to include adding an egg because housewives felt vaguely sinful about not doing enough). And let's be honest, kids: using these canned scans is, in spirit, not the least bit different from using the ratings, rankings, scores that we've been using all along. And the quality of the results is at least as good. The chief difference is that we know exactly what the scans are looking for and what the results mean. (As far as how this option compares with the more traditional approach, see "About the Canned Scan" at the end of this file.)

Armed with the results of my canned

scan, then, I quickly eliminate all those stocks which are below my minimum price and which are thinly traded. That generally cuts down the list substantially. I then make my way back to BigCharts and call up the charts of the groups of which the stocks on my list are a part. If the group looks good, I then compare the stock's chart to the group's chart to determine how the one stacks up against the other (is the stock doing better or worse?). I then list those stocks which are in constructive patterns as well as those that look like they aren't going to be waiting around buffing their nails for very long (see the Demand/Supply, Bases, and Bottom Fishing files).

What I love about this procedure is that I have my life back.

I don't have to spend hours and hours researching hundreds of stocks. Or even dozens. The canned scans point me in the right direction with plenty of choices. More than enough. But not too much. Not thousands. And they make it much easier for me to have a vairety of stocks in my portfolio, if that's what I want -- some tried and trues, some young and hungrys, some ares, some wannabees, but no has beens. And the market, group, and individual stock charts guide me toward my destination. After all, I don't need 30 or 40 stocks in my portfolio. If I felt that I really needed that many, I'd buy a fund. Or an ETF. At most, I need 10. With ten, I can put enough in each to make the work worthwhile. Eight is better. Six is better still. I can follow six. I can keep up with six. Six is good. So I don't even try to find every conceivably qualifying stock on the planet. I look for what I consider to be the best. No fudging. Not necessary. There are way more than six ripe, attractively-priced, fundamentally-sound stocks out there. I can find them in less than an hour. If the market's near a top, I may have to wait more than an hour for that attractive price to make itself available, but that's a problem of timing, not selection.

And as for that little gem that nobody knows about, who the hell cares?

I'm in this to make money, not to massage my ego. Before I write any checks, though, I make one last check of the news, just in case there's something that wasn't mentioned in the fundies or hasn't shown up in the chart. Like the company was bought last week. Or its earnings will be reported tomorrow (I regularly forget about this).

The single greatest advantage of this approach -- other

than the fact that most of the stocks selected go up -- is that it doesn't have to be done every day. One can easily get away with twice a week, even once a week. During the week, I can spend the time I'd ordinarily be spending going through financial statements to monitor the financial news, further stiffening my backbone to go ahead and pull the trigger when it comes time to buy (or perhaps finding something that eliminates the stock from consideration before it's too late).

This is, of course, somewhat simplified.

If you're doing fundamental research, you have to know what you're looking for. If you're looking at charts, you have to know what you're looking at. But if you have any experience at all, a routine like this will quickly become second-nature, even if it isn't entirely mechanical. You don't think about every little movement you make and decision you reach while you're engaged in the act of driving a car. Everything you know about driving and your car and your surroundings and traffic conditions and laws and the weather and that pedestrian supposedly waiting at the corner for the light is all there in the back of your mind somewhere, like Muzak -- you're not really thinking about it, not even aware of it, but it's there. Same with stocks and stock research.

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Therefore, take what I offer in the spirit in which it's intended, to make the process easier,

faster, hence more enjoyable and profitable. That little bugger who's going to make you money is out there somewhere, hiding in the underbrush. To stalk him, you will have to find weapons that are suited to you, just as you will have to develop a strategy that you are comfortable with. If you don't have the right weapons and the right strategy, instead of bagging the littile sucker, you're more likely to wind up shooting yourself in the foot.

ButBeforeYouWriteThatCheck . . .
"Stalking" pre-supposes a few things, such as that you know what you want.
know what you want, I doubt that the preceding will you much good. If you don't

One of the biggest stumbling blocks which beginners and not-so-beginners face is figuring

out just what kind of trader they are. A trader doesn't become an investor just because his price target has been exceeded. If he hangs on, he's more likely succumbing to greed than changing his entire strategy. Nor does a trader become an investor because he neglected to use stops and the price sank like stone. If he hangs on, he's clinging to hope.

By the same token, an investor doesn't become a trader just because the price pulls back

and he panics. Or he gets bored. Or he reaches his goal far faster than he thought he would. Becoming a trader should not be the result of fear, or greed, or of sulkiness over the fact that one's selections aren't performing the way one had expected. An investor enters every commitment with the intention of holding them for more than a few days. If he didn't have that intention, he wouldn't have chosen that particular chart, much less that particular stock. If it turns out to be a trade after all, that's not his problem. He looks at the result, determines what -- if anything -- he could have done to alter the result, then moves on.

Becoming a trader, in other words, means more than just taking

profits sooner; it means changing one's straegy at a much deeper level. If one looks at it solely as a slight adjustment, he's going to become very disconnected very quickly because the question of short-term vs intermediate-term vs long-term is not so much a question of what you want to be as of what you are. You are already suited to one of these timeframes. Your task is to figure out which one. If your trading style conflicts with the kind of trader you are at heart (and at stomach), you're going to be making a lot of poor trades.

Think of a continuum from daytrading through swing-trading and short-term trading to

intermediate and long-term trading/investing. The closer you move toward the daytrading end, the better you must understand immediacy; that is, you must understand the need for making quick decisions and have the ability and will to do so, and you must have the tools necessary to enable you to make those decisions. You must also be willing to put in the necessary time, since you can't make the necessary decisions if you don't know what's going on.

The closer you move toward the intermediate/long-term end, the better you must

understand and be capable of patience. The trader cannot afford to be patient, once he's made his entry. He cannot even allow for the possibility to enter his mind. The decisions he has to make must be made too quickly. The longer-term investor, however, must be capable of sitting and doing nothing. He must not allow himself to get too caught up in -or even pay any attention to -- the trivia of day-to-day price movements, much less hour-to-hour or minute-to-minute. Micro-managment is not part of his universe.

The amount of money to be made has absolutely nothing to do with the timeframe you

choose in that a daytrader and a long-term investor can do equally well. The amount of money to be made has to do with how closely matched your investing style is to your personality (see The MindGame file). Once that match has been made, issues of buy and sell rules; trade, money, and portfolio management; risk tolerance and so on begin to fall into place.

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Tools
That Which Will Make All Things Clear
The following list is available as a series of hyperlinks in the Sector/Groups Flipbook

Basic Materials (BSC); example ETF equivalent: XLB)

Basic Resources (BAS)
Forest Products & Paper (FRP)
Forest Products (FOR) Paper Products (PAP) Mining & Metals (supply the remaining symbols and links for whatever you're interested in) Aluminum Mining Nonferrous Metals Precious Metals Steel

Chemicals (CHM)

Consumer, Cyclical (CYC; ETF: XLY)

Automobiles (ATO)
Auto Parts & Tires
Auto Parts Tires

Chemicals, Commodity Chemicals, Specialty

Cyclical Goods & Services (CGS)

Airlines Home Construction & Furnishings
Furnishings & Applicances Home Construction

Automobile Manufacturers

Leisure Goods & Services

Casinos Consumer Electronics Lodging Recreational Products & Services Restaurants Toys Clothing & Fabrics Footwear

Textiles & Apparel

Media (MDI)

Consumer, Noncyclical
Food & Beverage (FOB)
Beverage Food
Food Products Distillers & Brewers Soft Drinks

Advertising Broadcasting Entertainment Publishing Retail (RTS; ETF: RTH) Retailers, Apparel Retailers, Broadline` Retailers, Drug-based Retailers, Specialty

(NCY; ETF: XLP)

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Noncyclical Goods & Services (NCG)

Consumer Services Cosmetics Food Retailers & Wholesalers Household Products
Household Products, Durable Household Products, Nondurable

Energy (ENE; ETF: XLE)

Tobacco

Financial (FIN; ETF: XLF)

Banks (BNK)
Banks, Ex S&L Savings & Loans

Coal (COA) Oil Companies, Major (OIL) Oil Companies, Secondary (OIS) Oil Drilling, Equipment & Services (OIE; ETF: OIH) Pipelines (PIP)

Financial Services (FSV)

Healthcare (HCR; ETF: XLV)

Diversified Financial Real Estate Investment Services Insurance (INS) Insurance, Full-Line Insurance, Life Insurance, Property & Casualty

Biotechnology (BTC; ETF: BBH) Healthcare Providers (HEA) Medical Products (MTC)

Industrial (IDU; ETF: XLI)

Construction (CNS)
Building Materials Heavy Construction

Advanced Medical Supplies Medical Supplies Pharmaceuticals (DRG; ETF: PPH)

Industrial Goods & Services (IGS)

Advanced Industrial Equipment Aerospace Containers & Packaging Electric Components & Equipment General Industrial Services
Industrial Services Pollution Control

Industrial Equipment
Factory Equipment Heavy Machinery

Industrial Transportation
Air Freight Land Transportation Equipment Marine Transport Railroads Transportation Services Trucking

Technology (TEC; ETF: XLK)

Industrial, Diversified (IDD) Communications Technology (CMT) Semiconductors (SEM; ETF: SMH) Software (SOF; ETF: SWH) Technology Hardware & Equipment (THQ) Technology Services (TSV)
Computers Office Equipment

Telecommunications (TLS)

Diversified Technology Services Internet Services (ISV; ETF: HHH)

Fixed-Line Communications (FTS)

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Utilities (UTI; ETF: XLU)

Wireless Communications (CTS) Electric Utilities (ELC) Gas Utilities (GAS) Water Utilities (WAT)

Assorted Market Indexes (that one can buy)

Dow-Jones (DIA) S&P 500 (SPY) Nasdaq (QQQ) MidCaps (MDY) SmallCaps (IWM)

A Quickie Technical Scan

Over the years, I have experimented with every technical scan known to humankind.
I'll spare you the sordid details of my odyssey (I'm thinking of developing a script for Warner Bros). Instead, let's just cut to the chase.

The two most useful scans I've found are (a) increase in volume and (b) moving average However, a volume scan doesn't always find what you want when you want it.

crossovers. There are a number of examples in the Bottom Fishing file of what a volume scan can find for you and there's no need to go into that again. And sometimes it doesn't find it at all if the stock makes its move without unusual volume (this happens far more often than you're supposed to believe).

The MA crossover scan, howver, is particularly useful when you're looking for certain kinds
of moves, such as Vs, Ws, base "breakouts". However, you have to be very specific about what you want. Otherwise, you wind up looking at a lot of junk.

This particular scan looks for

A 50d EMA > 200 EMA A 20d EMA < 50d EMA two days ago A 20d EMA > 50d EMA yesterday. What it finds are stocks that are or have been in uptrends (50>200), have been in a decline of some sort (20<50) but pulled out of it, at least long enough to poke its head above water, by yesterday (20>50). I said simple, didn't I? I said quickie, didn't I?

There's no point in providing multiple examples of this.

You'll want to play with it anyway, if it interests you. Therefore, what's provided is a simple illustration, presented in the same fashion as the illustration in The Big W file. When I ran the scan that yielded this particular stock, I didn't get 612 results or 289 but 3. Simple, not complex. Minutes, not hours. Using time efficiently, not wasting it.

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The following notes and annotations will carry much more meaning for you if you've read

the Tops 'n' Bottoms file since the decisions made are dependent to a great extent on the market activity at the time, and this market activity is detailed in Tops 'n' Bottoms and will be addressed here only generally. Without that background, most of what I say below will seem as though it is being said solely through the luxury and comfort of 20:20 hindsight, without regard to the knowledge of principles and the development of rules which are necessary prerequisites for making decisions at the time they must be made.

This chart provides a context.

The first "trendline" is more accurately a "demand" line since it is drawn under swingpoints, i.e., there is no "trend" until a new high is made in March '03 (see the blowup of this section, below). Even so, this demand line can't be drawn until early October '02 or confirmed until December '02. Therefore, it's not especially useful until it's tested in February/March '03. The second demand line can't be drawn until at least September '03. The third can't be drawn under January '04 until the end of that month, but this line comes in very handy in April/May '04. Therefore, you shouldn't assume that those lines would have helped you at every point at which price contacts them since they would not even be there until most of the swing points had been created. They aid in trade decisions only in Feb/March '03 and April/May '04. They do, however, aid now in showing changes in trend direction, trend strength, trend momentum: context.

There are many points that can be made about these charts, but the purpose of this is to show when to consider taking these MA crossovers and when to let them go. Therefore, look first at point A, which is the first XO (crossover) during this period. The power of those upbars and that volume would make entry here almost irresistible, and an aggressive trader who understands and accepts the risk could make a little money here if he kept a tight stop and could exit without pushing any emotional buttons. However, if you've read the Demand/Supply file, you know that these long bars, the V character, and heavy volume practically guarantee a test of some sort. This doesn't mean that price can't be propelled to a decent profit point. However, the extent of that test can easily put you well below your entry price.

The above chart details what is encompassed by demand line 1 in the context chart.

The next XO is at point B.

By now, you have a little triple top and a test low. You can't draw that magenta supply line yet (it's still before November at this point), but you've tested that V on lighter volume, suggesting that selling pressure is lessening. Unfortunately, the price bars are still fairly wide by B. You might take this or you might not, depending on how much risk you're willing to assume, e.g., how wide a stop you're willing to set.

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By this cross, you have another swing low which enables you to draw a more definite demand line (dotted) and you can draw a supply line. Given that these form what you recognize as a hinge, confirmed by the decline in volume and the ever-shorter bars (equilibrium between buyers and sellers is being reached), you consider buying now with a stop just under the swing low, buying or shorting when the price breaks out of this one way or the other, or waiting until the hinge resolves itself to the upside or the downside and entering on a test of some sort. Buying or shorting inside a hinge is generally not a good idea, but if you know and accept the risks, who's to stop you?

The next XO is at point C.

Next up is point D, an extremely low-risk, high probability trade that doesn't generate as

much profit as buying "at the bottom" but which is largely a Duh! if you understand the nature of demand and supply. By this time, you have more than enough information on demand and supply from your demand and supply lines, the hinge has resolved itself, the bars continue to be short, that big surge of volume in February fails to pull price below the apex of the hinge, which is tested not once but twice in less than two weeks. The selling, in other words, is over. And the absence of selling interest makes the XO at point D a virtual lock. This, then, is the best cross so far, and perhaps the only one that someone well-versed in demand and supply would take, and one of only two that someone who had only a superficial understanding would take (the first being point C). From this point forward, it's simply a matter of trade management until May '04.

Let's assume that you didn't run your scan until September '03. There are only two XOs here: points E and F. However, if you've read The Big W, you know that buying the XO at point E is high-risk and low-probability due to the lower low in July (lighter volume or no lighter volume), the long bars, and the considerable distance to the first level of important support. The lighter volume on the lower low suggests that the tests aren't over, just as with the illustration in "The Big W", only this one -- unlike the one used in "The Big W" -has not just one but two more tests to endure, three if you count the pullback in September. Even if you had run the scan in July, I hope you would have passed for all the reasons I've listed. Why? You've had multiple selling tests by then and ever-lower volume suggests, again, that the selling is for all intents and purposes over. And even though you've got lower highs, you've also got higher lows, all of which points to another hinge, though this one isn't nearly as pretty as the previous one. One could jigger lines here and there to show the support of an apex, but that's a little too self-enabling for me. The most I'm willing to do in that regard is to plot two tentative supply lines, one above the highest July swing high, and the other cutting through it and crossing above the swing high in August (just in case that one bar in July is an anomaly). Support, however, is found in the zone created in part by the swing low in June and the swing high in August (not by the MAs). At the time, of course, that's only a hypothesis; you don't know that support will be found there until it has been. However, note how short the bars get, suggesting that something is in the offing. Placing a buystop above the highs of each of those bars, or above that entire "hook" would likely not be unacceptably risky, particularly since higher volume at the bottom of that swing can't pull price below what you think is a possible support level. Certainly the stop required is about as tight as it gets.

This chart is a blowup of the area encompassed by demand line 2 in the context chart.

The XO at point F is the better entry, hindsight or no hindsight.

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Next up is point G.

Remembering that demand line 3 will be there only tentatively, it can't be relied on as any sort of signpost to support. In fact, the nearest support is back in June '03. Plus the test of the pullback in November was already made in December. The V just before the XO at point G is a lower low and the volume is just as high as it was on the December test, so you have much the same potential for multiple tests that you had in the previous chart. Here, though, an aggressive trader could try buying a break of the tentative supply line since it coincides with the XO, thus increasing the probability and lowering the risk. Still risky, but not as risky. Could this same tactic have been employed in the previous chart? Yes, at point F. However, the supply line is more defined here, and if one had bought the break of the supply line at point F, the pullback would have put him underwater. If his stop had been tight, he might not have been inclined to assume further risk by taking the better trade out of the pullback. Rather than decide based on "intuition" and "feeling" and chalking the whole thing up to "art", the trader with a more business-like approach weighs risks, probabilities, and the bull/bear dynamics as manifested in the price and volume bars to come up with a "best bet". The trader who passes on the trade entirely might feel like somewhat of a chump given the outcome, but he also knows that all things eventually come to the spider, and he'd be there to watch the market show its hand during the next opportunity.

points H and I. By now, demand line 3 is in place, though the supply line can't be drawn until the swing high at H is complete. The drill should be familiar by now and the reasons for passing on H should be obvious, i.e., wait at least for the test of the pullback low in April. By the time you've done your scan and the XO at point I triggers a hit (if you'd done the scan earlier and found the stock due to the XO at point H, you'd be watching it before and during the cross), the demand line has been tested, you've got a nice bull spike on April 15, an even nicer hammer on May 10th, and breaks of the supply line and that last swing high two weeks earlier. (As for the "new high", by the time you get there, you're already 9-10% in the black.)

Finally we arrive at the next opportunities at

Whether or not and by how much you profit from a "simple" moving average crossover,

then, depends on whether or not you've done your homework. If you're ignorant of the dynamics of demand and supply, of the nature of support and resistance, of the behavior of traders as revealed in price and volume bars, then you'd take every one of those nine MA crossovers. On the other hand, if you'd done your homework, you'd have taken three (D, F, and I), or at most, five (if you took chances on C and G). If you'd had your homework done before any of these opportunities arose, you'd have taken one, at D. And you'd still be in it.

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CannedScan...
The stocks in one column were chosen using a Canned Scan.
This procedure took minutes.

About the

The stocks in the other column were chosen using a traditional approach which took hours. Can you tell the difference? The issue is not whether one group will outperform the other, or even if their performances
will be indistinguishable from each other. The issue is time, and time saved, which over even a month is substantial.

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Valuation
and Voodoo

A spreadsheet is a

record of a company's financial behavior. It may be restated into a P&L or an income statement or whatever, but it usually begins as a spreadsheet. It tells you (or at least is supposed to tell you) where the money is coming from, where it's going, what management is doing with it, how it's being husbanded. A good accountant, can tell you with impressive accuracy just what's going on in that company by tracking the flow of money hither and yon. (The preference of all concerned is generally that this accountant work for the company. Unfortunately, the accountant too often works for the Internal Revenue Service. Or the Attorney General.)

A chart is a record of a stock's

price behavior or, more accurately, the behavior of those who are interested in buying or selling the stock. It tells you who's interested in buying it, how many buyers there are, what price they're willing to pay (there have been many reasons advanced for the collapse of the Nasdaq in 2000, but the chief reason for the collapse was simply that the market ran out of people dumb enough to pay those prices; when the selling began, there were no buyers left on the field). But rather than do it with cells in a spreadsheet, the chart does it with a bar showing the opening price for the day and the low, high, and closing prices for the day. Combined with the number of shares traded and an understanding of the relationships of these elements to each other, one can judge the balance of demand and supply. And since demand is what makes the price go up, this is worth knowing.

That, in its simplest form, is what a chart does and it is all that many chartists care about.

Quite a few chartists, however, go beyond this into patterns. But pattern people often go far beyond simple patterns which have demonstrable psychological importance and sail into the realm of what is often silly. Since the predictive validity of many of the more esoteric patterns is debatable at best, discussions of them alienate many investors who might otherwise gain valuable insights into how markets behave (see the "Make It Simple" file).

But the third element of charting -- that of technical analysis and the use of "indicators"

-- is where the unwary beginner is pulled through the looking glass and persuaded that all he has to do to attain quick and easy wealth is to become expert in the use of RSI, MACD, MFI, OBV, IRT and QED, or is confused so thoroughly with all this that he becomes convinced that anything having to do with charting in any way whatsoever is just so much hokum and not worth the attention of the serious student of markets and investing.

Hokum, however, is not the sole province of the technician.

Fundamentalists must share in this guilt to at least some degree. Those with long memories will remember that, at one time, investors flocked to equities for the dividends, their way of sharing in the profits of the companies which they had selected. For reasons with which you are all familiar, dividends dropped to the bottom of the list as criteria for investment. Investors wanted growth, and growth companies rarely pay dividends. Rather they put that money back into the company to fuel further growth. Therefore earnings, not dividends, became the touchstone.

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eventually became far too easily manipulated (the infamous "beat expectations by a penny"). "Whisper numbers" became a hastily and crudely fashioned tool to get at the meat of the earnings numbers, but were doomed to failure. Now with basic, non-basic, diluted, undiluted, before extraordinary items, after extraordinary items, blah blah blah, even the experts have difficulty determining what the earnings are. So to revenues and the PSR.

The problem with earnings, however, was that they became much too important and

apparently has no bounds. Many companies consider orders to be revenue and book revenues long before the cash is actually in hand. And what if the company is young and hungry and aggressive? What if it is more concerned with market share than with pleasing the accounting fraternity? Is this not the crucible from which gorillas are ultimately forged (so to speak)? Hence the PVR or Price to Vision Ratio.

But even the use of revenues has not been clear sailing since creative accounting

When it comes to bizarre forms of reasoning, fundamentalists have as much to answer for
as technicians.

I encourage anyone who has been turned off by charts -- or who has been turned off to

charts by others -- to look at them again with a fresh viewpoint as records of transactions, not as mysterious petroglyphs whose meaning can only be determined through the tossing of chicken bones and the waving of rattles. Even the so-called Long Term Buy & Hold investor would do well to keep an open mind to the possible value of charts for a number of reasons:

Whatever valuation methods you choose for one may be completely inappropriate for the other. Determine first your reasons for buying the stock and the choice of valuation method might be more easily made. If you have determined your reasons for buying a share in the company and found them to be compelling, you may yet find that the price of that share is currently beyond all reason.

One, valuing a company and valuing a stock are two entirely different processes.

Two, even the very best companies have variable growth patterns and growth

curves. Many stocks have parabolic rises followed by declines that even the word "plummet" fails adequately to describe. CANSLIM, the Gorilla Game, and similar approaches are designed to help the investor avoid these traps and focus on those companies that will do well over the long term. But over that long term there will be periods of hypergrowth, periods of seeming stagnation, periods of tentativeness, periods of decline (see the Demand/Supply file). Throughout these periods it is critical to remember the difference between the company and its stock. Whether one wants to participate in the declining periods as well as the hypergrowth periods is a matter of personal choice, but the "long-term" investor should not assume that the slope will be ever upward without pause, and those pauses can sometimes last for years.

Three, market and stock timing are not impossible, no matter what you've heard. They are difficult and time-consuming, but not impossible. Most people don't want to mess with the process and rightly so. It's a job in itself -- but no more difficult than learning how to do a thorough fundamental analysis -- and should not be attempted by anyone who is not suited to it (see the Tops 'n' Bottoms file). Four, if nothing else, a chart tells you what value buyers and sellers have agreed
upon at a particular point in time regarding a particular stock. This point in time can be a minute, hour, day, or year, but during that period this is what "the market" has decided that the stock is worth. This need not have anything to do, however, with the value of the company. Your belief that the stock is worth more will not budge the price one iota.

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"cyclical". However, all stocks are cyclical in their own way, particularly if they follow the group, sector, sub-market and market cycles of which they are necessarily a part. Those who want to take the time and effort to understand these cycles can sell near the tops of these cycles, providing themselves with the extra cash to buy back the same stocks in the same companies when those stocks reach the bottoms of their cycles. Those who don't want to fool with it certainly don't have to, but one should take care to avoid the "it's not in the Bible so it's not allowed" point of view. If nothing else, even a superficial understanding of the stories which charts tell will prevent the novice from buying stocks at overextended levels, watching them sink, and remaining underwater for months or even years before getting back to a breakeven point (see the Bottom Fishing file).

Five, many "long-term" investors avoid companies like AMAT because they are

The same valuation criteria cannot be applied to company and stock alike without running
into a lot of head-banging, and valuing the company and the stock separately through fundamentals on the one hand and the chart on the other won't necessarily make reconciliation any easier or faster. But by incorporating both fundamentals and technicals into your valuation and selection process, you will at least have a clearer focus of your opinion of the value of the company and of the market's opinion of the value of the stock, and be able to arrive at a more reasonable and rational determination of the best entry point into the stock you want to buy, or the best point at which to buy more of what you already have.

As we all know, it is very difficult to change the long established habits that were
inculcated in us when we were quite young. People will fight to defend old maps and old symbols, regardless of whether those maps actually represent any territory here and now, and regardless of whether they ever did represent just what we were told they represented.

Even when people take their map and go to the territory and compare them and

note the changes or corrections the map needs, they will still cling to the old map, so much so that even when these realities have demonstrably changed, or are provably different from the "map", they still tend to deny the external reality and assert the "truth" of the map.

Is it any wonder then that there are contradictions among the views of various

stock market analysts, if they are each clinging to a simple all-out view and for all practical purposes ignore anything that does not support the view they hold already? There are no contradictions in reality, you know. If we can just look away from the high abstraction long enough to see the facts, we find no contradiction.

If we value the map more than the reality, we must not be surprised to
find that the reality doesn't always fit the map. In such a case, the reasonable man will change his map, not try to explain away the facts. -- John Magee

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