Tuesday, December 18, 2007

To answer a Question.

I had a question from a reader - Why these two stocks?

SCSS - I have been researching this company for some time and I always find that times like now (sideways markets) are good times to watch for over-reactive investor buying or selling. In this case the stock lost 40% of its value on gloomy news alone. Yikes!

Considering that SCSS is still in the black for earnings, possibly losing 20% of it's net, a 40% decline is far too much. On top of that if you look at the short % for November 27 and consider that since then there were 2 days which had the same volume of SELLING that existed in the previous 2 WEEKS. Obviously the short sellers would want to lock in profit after such huge gains, and the sellers are now experiencing remorse as they watch the price ascend again.

What I will discuss in the next few days (I was going to do this last night but it's been extremely busy for me this week) is that the stock market is about primal psychology, and that the charts tell the story of the mind.

That is why I picked this stock, because of the erratic takeover of group-panic-selling. I am already at my first profit goal ($7.00 on the button at the close and who knew lol) and have thus sold 200 shares of SCSS and now I am riding out the rest. I have moved my stop-loss position to $6.50/share so that I am still profitable but can handle a one-day retraction as may very well occur.

My second pick, DUG, is very simply a way to short Oil if you don't have the capital to actually deal in futures. I also have shorted the April 2008 futures contract at $92.08, because I strongly believe that oil will dip down into the $70's and below in the coming months and I plan to profit from that loss. DUG works on the same principal except that you buy it (it is an ETF) and it goes up if the oil market goes down, kind of a mirror effect.

Since I am betting on oil going down I thought I would show people how you can do that without the actual risk of short selling (where your loss potential is technically infinite, which I will explain in a later post).

This is more of a long-term trade, though, which I plan on holding until it either reaches a satisfactory price target in the next couple of months, or hits my stop-loss number. Either way I am only risking so much for a much greater potential gain.

I hope this answers your questions. I know you only asked for a paragraph on each but I wanted to give other readers a bit more of an in-depth view. Here is the chart for Crude Oil, and one of the main reasons I am shorting it (also refer to my first post for other reasons on each stock).

Please click to enlarge this as you will see what I am referring to much more accurately.

There is a strong head-and-shoulder which about 68% of the time points to a sharp immediate decline. Also the fact that the bottom of the "head" is lower than that of the left shoulder points to a raise in the strength of bearish tendencies.

This also shows that it has broken the trend line and the last shoulder represents a last-ditch attempt at a bull-run which has failed.

That being said a very small percentage of the time this may turn. If there is a very significant change in the American dollar or world oil economies or both this could potentially go on a strong bull-run. If this happens I will hold to my stop-limit and sell my futures contract and my shares of DUG and eat my small losses.

However, a point to be made: If you encounter a head and shoulders that turns against your short position and actually reverses enough that it equals the height of the top of the head, chances are that it will take another bull-run at least the height of the first upward movement. If this occurs I will take a long position and set my stop at a midpoint between the top of the head and the red line which represents the neck.

So in simpler terms, if this reverses on me I will lose about 1.80/barrel on my contract and about $1.50/share on DUG before I hit my loss-limit. If the run continues in my favor I stand to make about 14.00 - 20.00/barrel on the futures contract and a potential 50% gain on my shares of DUG before I sell. My profit potential is about 10x my loss potential which is unusually high (I usually try at least 4:1), but a good start for this blog!

Thanks for reading I will keep you posted. Still researching a few other position.

p.s. Another thing I will have some fun discussing is the goings-on of traditional stock brokerages, where I spent some time working. I will say this now - you really don't have to know anything about stock profitability, just terminology. And it's all about salesmanship, not the success of your clients. And that's why I don't broker stocks anymore - too many showers to clean my conscience. I looked like a damned raisin at the end of the night!

But that's another story for another day. Today's story is one of the start of success. Hope you're following along.

The wrap up: SHORT OIL! (with the right stop-loss of course lol)

Here is a visual guide I made on head and shoulders - sorry I can't draw with a mouse very well - I can trade stocks fine, just can't draw!

One last thing that's very important. I may be using some terms here that you aren't familiar with. If that is the case I strongly recommend using THIS SITE to help. Just type in a search for what you need to know and it is kind of like an encyclopedia of investing terms for the layman. Fantastic Resource!

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