Nuts and Bolts of It

Look at the Inverse Head & Shoulders pattern on Fastenal Co. (FAST). According to the pattern it should move up to $55 in the next 5 months. Terrific volume confirmation with the MACD lows moving higher gives great confidence in this trade.

Clear Message from Universal Translators

Reed Elsevier Plc (RUK)

Big money movers seem to be sending a message on Reed Elsevier Plc (RUK) the last two days, while much higher than normal volume has appeared. Breaking up to new all time highs a window has opened as the stock gapped higher. While this stock specializes in many different areas of information technology and retrieval one that is most interesting to the Ferengi is that work it has done in the are of Machine Translation as a partner in the Babylon translation technology. One caveat I must highlight is before our recent volume in the stock it was only trading about 50,000 shares a day. I will usually pass up a stock with such little liquidity, especially, since I rely on stop losses so much. It is to easy for a stock to be manipulated by big money and market makers.

BTW as a rugby fan how can I pass up a stock with a ticker symbol of RUK?

Autopilot

Like something right out of Star Trek, okay not really Star Trek but more like Time Cop or Demolition Man, cars that may drive themselves. Looking at GM stock it might take ten years to care but the concept is cool.

Using your Lobes on Job Numbers

Today market participants and conservative politicos were excited about what they saw as a positive job reports. Wiser commentators downplayed the significance of the report and here is why. The job report doesn't account for illegal migrant workers. Construction jobs are taking the brunt of the bearish housing market which has been perhaps the largest employer of illegal workers. Housing start are so slow now that contractors no longer need to take on the risk of hiring these workers. Therefore, these workers don't go in and apply for unemployment for obvious reasons. So in a reporting sense they don't count.

The unemployment records have been screwed for sometime. First of all we haven't been accounting for the the number of illeagal workers in the past. This means those already low unemployment numbers not only had us at full-employment but over-employment. This was a very inflationary sign through all of last year. Wages on "lower tier" jobs were pressed higher because we were "growing" at a fast pace (Or at least we thought we were and kept building on those inflated expectations.) We Ferengi agree with business owners that paying higher wages is hard on the bottom line.

Sales people who were working in the housing and mortgage fields are also left somewhat an accounted. They may very well be looking for work or they may be dying on the vine. Commission based salesman may hold out for some time because of the nature of the sale business. You cannot be in sales and have a defeatist attitude so many salesman will stay at much longer then they can afford. In the end many people should be looking for some type of back up plan and that takes training.

The point that I am making here is to assess the Economic numbers with a grain of salt. I have only pointed out a few weaknesses in the numbers right now. Perhaps the biggest discretion in the numbers is after a person has been unemployed for so long we just quit counting them. If we had counted unemployment like that in the 1930s then the Great Depression would've been the Fairly Big Recession. In the end many people should be looking for some type of back up plan and that takes training.



The market will once again give us the truth of what is going on. We find this by using our relative strength tool. This time we will examine the Education stocks. These are stocks like Apollo Colleges (APOL) whose subsidiary University of Phoenix you are probably most familiar with. Also ITT Technical Institutions (ESI), Corinthian Colleges (COCO), and finally Career Education (CECO) to name a few that lead the markets back in 2001-2003. We can see in our graph here that money has been flowing into this industry group for about a year. This tells me that the "Smart Money" believes that unemployment and/or underemployment (having a job that doesn't cover your needs) are a much bigger concern then what the economic numbers are telling us.

Insurance Surveillance

Chances are this week aren't going to see much action in the markets as far as buying and selling. We Ferengi always keep an eye on the lunar cycle and the lunar cycle is moving into its consolidation phase, but that is a topic for a different time. I my post Finding Stocks the Ferengi Way I highlighted Insurance (Accident & Health) so I will highlight a few stocks in which I the Bajoran Profit am keeping my lobes alert for.

Long term chart of UNH

In the 2 year weekly chart of UNH we see the downward trend has been broken although we are definitely cautious since see another resistance level at 56. Our oscillators at the bottom both gave us bullish divergences as a an alert to the recent movement and the trend reversal. With the new found uptrend in the industry group we are bullish on this stock's ability to break resistance. This is probably not the entry for a swing trader but the trend trader should consider a small position here.

Short term chart of UNH

The next stock in this group is WLP or Wellpoint Inc. The long-term chart of WLP shows a downward consolidation that was recently broken. The trend trade could entry here with a stop around $82 and then scale into a larger position if and when the stock breaks the $86 resistance level.

Long term chart of WLP

The shorter term play would be the channel itself. No doubt the break a few weeks ago would've been the best entry but we are half way through the $10 move now. Entering now with a stop at the quarter mark ($82.50) can still allow us to make a little off them move here and keep at least a 2 to 1 reward to risk ratio.

Short term chart of WLP

Smokin like a Vulcan

Earlier this week we highlighted Tobacco. If you were an on the ball you may already be in this trade. Altria (MO) formerly known as Phillip Morris just broke out of some sideways action. I have outlined another swing trade here.

MO

Using the break of resistance here for another flag we can outline our risk and reward. Implementing an ancient Japanese trading system of candlesticks we know that the half way point of “large” candles act as an area of support or resistance. So I have a fairly tight stop.

Anyone can trade the trend on these bullish trends by implementing an 8% trailing stop loss.

I Want a New Drug

In my earlier post on Finding Stocks the Ferengi Way one of the first industry groups I highlighted was the Major Drug companies. Here is a look at a few that have tickled my lobes.

Johnson and Johnson JNJ

I’ve set JNJ up as short-term swing trade but it can certainly be traded as trend trade as well. Here we see a classic flag break out. According the Encyclopedia of Price Patterns, flags have a probability of success around 70% correct in meeting the price target. The price target is the equivalent move of the flag pole as I have designated. I would exit at the target or a cross below the 8 day moving average whichever comes first.

Merck MRK

MRK is giving us a classic Ascending Triangle pattern. Here we see a good break on strong volume. The base of the triangle will once again give us a price target. I would look at exiting at $63 or a break below the 8 day moving average, whichever comes first.

Pfizer PFE

Pfizer I am showing as a much different trade then those above. This one is much longer in nature. The long-term chart is showing us support bounce along with a recent channel break.

The shorter-term chart is confirming out long tern outlook. We see a bullish divergence on the MACD as it creates higher lows. The Stochastic oscillator is giving us a triangle pattern and a break of resistance would be a great confirmation. Since I am bottom fishing here on this stock I am going to go in with a very small position. You can see two more resistance lines where if I see breaks take place I will continue to scale in. Currently I have my stop set at $23.25 but once the stock breaks the next resistance line I would begin to use 3% below the 30-day moving average.

Honeywell bounce

Just wanted to point out a play on Honeywell (HON) this morning. Remember the Ferengi Rule of Acquisition to be aware of which direction the wind is blowing. When the Dow 30 bounces, start looking at the Dow components. If you enter today look to sell half your position when the stock moves up to 57 and the second half if the stock moves up to 61. I like to use the 8 day moving average as my stop. If the stock closes below the 8 day moving average then close the entire position. This keeps a a very tight rein on the stock helping us to control our losses.

Honeywell (HON)

Finding Stocks The Ferengi Way

Here are a few key Ferengi Rules of Acquisition that can helps us find stocks in which we would want to trade. These rules are significant because they lead us into a top down approach. A wise man can hear profit in the wind because he is looking for the next opportunity. He understands that in a bull market everyone looks like a trading guru but a bear weeds out the chaff. The crowd jumps on at the end when the wise and prudent are selling and those who have become educated will reap the rewards.

Rule 22 – A wise man can hear profit in the wind
Rule 44 – Never confuse wisdom with luck
Rule 69 – Ferengi are not responsible for the stupidity of other races
Rule 74 – Knowledge equals profit
Rule 162 – Even in the worst of times someone turns a profit
Rule 217 – You can’t free a fish from water

Below you will find relative strength charts of four different industry groups versus the S&P 500. If the chart is uptrending then the industry group is outperforming the S&P 500 whereas the opposite is true if we were searching for bearish stocks. The recent decline in the markets makes the wise trader prove his mettle. As I mentioned before the prudent investor is looking for the next opportunity. Since stocks tend to move with their industry groups we can find good stocks by finding industry groups with strength.

Relative Strength Charts

Major Drugs

I particularly like this chart because it has recently broken out of a down trend. Although we didn’t get the very bottom (and rarely will we ever) we may be getting in on a fresh new uptrend.

Insurance Accident & Health

Insurance gives me similar excitement because we see it was in a sideways basing pattern for some time. Now we see it has broken out of its consolidation and a new uptrend may be on the way.

Tobacco

Tobacco has been showing strength for some time so we aren’t necessarily finding a bottom but we are seeing a break out of a “resting period”. These companies do a lot of exporting so they are benefiting from a weak American dollar. Also, any Ferengi investor understands what a good investment addictive products are!

Oil & Gas Operations

We have all seen gas and oil companies profiting from the rise in oil prices. Once again the weak dollar along with higher world demand for crude has driven oil prices higher and higher. A break out of this consolidation is also evident on the chart.

Here we have identified four possible groups of opportunity. Look for my next postings where I will identify stocks and ETF stocks that will allow us to begin out profiteering.

On a side note, these are all industry groups that perform well when the economy is about to go into recession.

Welcome to Trading the Ferengi Way

We are a couple of traders that want to have some great discussions and give our thoughts on trading in the markets. We have many, many insights and need a place to put it all. We needed a venue to discuss everything that we have in our big Ferengi heads. We want to show real life examples and insights with a Ferengi twist. We will be using the Ferengi Rules of Acquisition as a kind of play book and model.

I guess the only thing to say now is Hang On And Enjoy The Ride.