Mar

Research Lab Blog – Investing Systems Member Update on 1st Day of Spring 2010

Welcome to Spring 2010. As you have heard on our recent shows (archives available in the RL), we have been anticipating Friday’s price action for about a week. Our rationale was explained in detail.

I want to show you exactly why you should be reading this blog each week.

Below is an image from our blog post in February: http://blog.investingsystems.com/331/investing-systems-research-lab-trade-plan-recap-and-market-analysis/

Here is where we are today:

Look closely to see this months price (so far) as it is hidden right inside the green zone we drew last month. As we mentioned, it was critical for the market to stay above the rising trendline.

So the question is where do we go from here? Unfortunately, as we have been saying for almost a week, the market is due for a pullback. The past couple weeks we emphasized on the Wednesday show, from a longer term perspective, the market is still in an uptrend. It is above the 10-month SMA and the 30-week SMA.

Investors would be wise to evaluate the potential drawdown on their portfolio if the market were to test those key long-term areas.

We will discuss a strategy for using the 10-month and 30-week moving averages as stop-loss targets for long-term investments this week on the show.

So where do we go from here?

Well, I have moved a chess piece on our chart, the red “danger zone”.

Notice we crossed above the 30-month SMA, and the 10-month is riding the uptrend line. With a week and a half to go in March, we want to observe closely how this month’s Monthly bar/candle closes out. It is unlikely that the market will pull back enough to turn the candle red, however it “bears” watching.

Also we will keep a keen eye on the trendline as a break would likely send it down next month into the “red zone”.

If we see a break of the 10-month MA and a trendline bread to the downside, the red-zone is likely the outcome.

On the flip-side, Q1 earnings start in 2 weeks. IF the economy has indeed improved as many would lead us to believe, then the market may indeed stay inside the channel, and hold the 10-wk. IF spring fever catches on in a big way and the public gets involved in trading stocks again and they get back to “opening 1000 new E-trade accounts a day”, we could potentially see the 10-month cross above the 30-month down the road and a melt-up break out of the channel to the upside.

Which case seems more likely to you?

More likely, the direction of the Dollar will have a lot to do with which way the market goes. We discuss the relationship of the Dollar to the overall market frequently.

Next, let’s take a look at the Trade Plans.

We are in a speculative position in AUY at the moment. The reason I say speculative is that we are trying to get in early. We could have waited for the trend line break to the upside, but we were able to place a low-risk stop in the red zone just under the recent double-bottom. The entry is indicated by the green arrow.

We are anticipating a trend line break, a move into the yellow ellipse, and Target 3 is indicated by the horizontal green line.

There’s a few ways to play this at this juncture. This is a special case, hence the reason we jumped in early. The idea being perhaps we want to ride a portion of the position up above Targtet3. As we frequently discuss , we favor scaling out of a trade incrementally and in certain cases maintaining a “low-cost” position for a longer-term move.

This is a good potential case for those of you that like our technique.

The lowest risk entry is to buy on a trendline break and take partial profits in the yellow zone and partial profits at T3. Depending on how long this pattern takes to play out, the stop-loss risk actually decreases. Any break into the red zone means that we sell all of the position immediately. In all Trade Plans the stop-loss is always in place. Using stops protects from large losses and is the only way we have to minimize risk.

So we shall see how AUY plays out. While the current price is slightly above our Entry at 10.10, a market correction could easily take AUY down to our stop. If you are too nervous at this point, feel free to sell at break even and move the allocated cash to the sidelines.

Let’s look at our other open position from two time frames.

First, a zoomed-in look at where we took the entry in PRX as indicated by the yellow ellipse.

Notice the entry was right above all three of the moving averages we watch. It coincided with a trend line break and the stock has essentially moved sideways for the past week. It still looks pretty good in my opinion, but again, there is risk.

Let’s take a longer-term view of PRX.

In the longer view, the entry looks very nice and the stop looks reasonable. Target 3 is indicated by the horizontal green line.

It is interesting to note a few key statistics Yahoo! Finance provides on PRX.

Avg Vol (3m): 415,692

Market Cap: 881.51M

P/E (ttm): 11.21

EPS (ttm): 2.25

The headline from the most recent earnings release:

UPDATE 1-Par Pharma Q4 profit tops estimates on strong sales

http://www.reuters.com/article/idCNSGE61N0G520100224?rpc=44

So it remains to be seen if the stock can resume the uptrend after this recent pullback without hitting our stop-loss first. For intra-day real-time updates on this trade see the Trade Plans section of the Research lab.

Let’s take a look at a stock we will be watching for a potential Trade Plan. As you know, our system has not been identifying many potential longs recently as an indication of just how extended the market got.

However we always have stocks on deck for the next cycle.

Here’s one, PCYC.

I wanted to bring this one to your attention to put on your watchlist in case we get an unexpected breakout to the upside next week. More likely we expect PCYC to trade in the yellow-to-green zone for a bit, then perhaps fall into the upper-red-to-yellow area. We can see a couple areas on the chart for a good entry and would prefer to see it cycle-down for a week or more, then catch it on the next upswing. However the potential exists for PCYC to break above the horizontal green line, break the trend line and trade into the yellow ellipse and perhaps spike up next week.

Here’s a longer-term look at the daily chart. A solid uptrend and nice pattern indeed. A break-out on this one could be significant.

Keep your eye on it. Check the Trade Plans for exact entries, stops and targets if we decide to let it pass through the system.

This is why you are a Member of the Research Lab and why we appreciate your support. While the real-time, intra-day scanners are great for scalpers and daytraders, our system is also great for identifying good swing trades.

We also like to present speculative stocks because deep down trading stocks is all about speculation. We know that it’s ok to go out on the risk-curve with small positions that have great potential rewards.

Case in point ARNA.

Arna Pharmaceuticals announced today that the US Food and Drug Administration (FDA) has assigned a Prescription Drug User Fee Act (PDUFA) date of October 22, 2010, for the review of the lorcaserin New Drug Application (NDA). http://finance.yahoo.com/news/Arena-Pharmaceuticals-prnews-346867073.html?x=0&.v=1

You can do your own DD, but essentially ARNA has a new “weight-loss” drug pending FDA approval and there will be a lot of games played with the stock in the next 7 months.

Right now it looks to be at the very low end of the range and just formed somewhat of a double-bottom on the chart.

We also see a potential trend line break and a nice “watch zone” over the next few weeks.

If ARNA violates the red line and moves into the red ellipse, we will take it off the watchlist. However if it breaks the trend line and moves into the yellow-to-green zone, it might make for a good entry. Furthermore, if the recent lows hold, we see a lot of potential going forward and we have seven months to play this one for “low-cost” shares to hold into the FDA announcement.

As long as we respect the stop-loss and proceed with the idea of scaling out incrementally to obtain low-cost shares, there is not a lot of risk at this juncture.

Again, it is important to wait for the trend line break to initiate a position. Watch this one closely.

Last but not least, another one on the radar screen that might turn into a Trade Plan, ACXM.

Where else do you see trades planned this far in the future?

We will be watching ACXM as it works it’s way into the apex of the triangle and stay on alert for a trend line break and a move into the yellow ellipse. A break of the yellow support line would likely mean a move between the red and yellow lines, but we will then watch to see if the green major uptrend holds.

This one will get real interesting this time next week. The potential exists for a “premature” move up and a break of the downward-sloping trend, which would constitute a “breakout” and warrent closer scrutiny, if not a “buy”, however we want to give it time to set up a bit more before passing it through the system.

Check the Waiting Trade Plans each morning before the market open. When we see these and other stocks arrive at the highest-probability points, we will load them in the Trade Plans so you can see the specific entries, stops and targets.

Please join us in the Live Broadcast where we will discuss some of the finer details of trading these stocks.

To wrap things up, we urge you to be extra cautious next week. We reinforced this over and over on the shows last week and look what happened Friday. When the market opens Monday, we will have a better indication of where the Health Care Bill stands and how the market will react to it. This would make a perfect excuse for a scary drop, a near-term correction, or a total meltdown.

I am not going to try and guess how it plays out, but we have presented a range of possibilities and we have shown the indicators we watch that will tell us how to personally react with our trading.

Remember that while we specialize in daytrading, we are all investors as well and our Wednesday evening show is dedicated to the “longer picture”. We provide some great strategies and details on managing longer term investments on the show.

Have a great weekend and we will see you Monday morning Live in the Research Lab.