Phil Town

Timing When to Buy or Sell Based on Tools

Phil Town answered this in the comments yesterday, but I think it's worth reiterating here:

It's easy to decide if it's too late to buy or sell based on tools.  You have three tools (MACD, Moving Average, Stochastic) and all of them have to say the same thing at about the same time.  Say within a couple of weeks or less. 

So first one tool goes green (gives you a buy signal) then another one... so now all you're doing is waiting unemotionally for the third signal.  It could be any one of the three.  If it's the Stochastic then when it goes green, you buy the next day. 

But what if you missed it?  Then you wait and see if if the price returns to the Moving Average line and bounces off.  If it bounces off you buy, if it doesn't the you'll get your first red, right, so you don't buy.  You wait. 

Now go play.

Phil Town

Using Trading Tools

The arrows that Phil Town uses are at Investools and they make for easy analysis, but virtually every research site and online broker now has these key tools.

In Rule #1 I show you how to set them up on MSN Money, and the principle holds for Yahoo, TD Ameritrade, Scottrade etc. You may not have arrows on the chart, but it's not rocket science to read the actual indicator and make a decision.

Read them like this:

Phil Town Question of the week

A lot of Rule #1 readers are writing in with variations on the same question:   if the MOS is good but the tools say Sell, now what?

Here's how Steve worded it:

Question:

Hi Phil Town,

RULE #1-Great book. I'm still going thru it and have a question about when two factors collide. For example, I'm running the Big 5 numbers for NBR and they all look really good. Using your calculator, the MOS is really, really high, but I think my last calculation had the MOS around $450+ and the stock is under $40. This seems like a really good buy, but when I look at the chart tools, many of the signals are saying SELL (e.g. MACD just turned negative, RSI is approaching the 50 mark, moving averages are about to cross, STO going below the 80 line).

So my questions:

Is my MOS incorrect?

What to do when two factors collide?

Thanks for any input,

Steve

Answer:

The big guys -- the institutional investors -- control 85% of the money in the stock market, and they don't play the game the way we do.  The game they play is "How did I do this quarter compared to my peers?"

For that reason, they may sell a stock that is well under the Sticker simply because others are selling it... and someone started the run just because they wanted to take profits to make the quarter look better.

DNA's Volume Increase

I recently received this comment on the blog, about DNA.  Dated July 21:

Hey Phil Town or anyone,

I am new to investing and have always heard it takes the big guys a while to move in and out. What happened today with DNA avg. daily vol. is 3.8 mil and I have seen some companies double their daily avg. in a day, but they had 45 mil today? Just wondering exactly how this all works?

thanks,
william

Here's what happened:

When the big guys move, they like to sneak in or sneak out.  To do so they have to take time or their purchases / sales will bounce the volume and alert all the other Big Guys that someone big is moving in a very specific direction. 

This is quite a lot like shouting "Fire!" in a crowded theater.  The result is predictable. 

However, there are times when the theater's fire alarm goes off and the lights go on, and you have to get out (or in, if you can stand the upside down metaphor). 

DNA - Genentech - suddenly came in play to be acquired.  The lights went on at the announcement and everybody took action right now.  And the result was predictable - the price rocketed overnight. 

However, if you are playing along in DNA using the tools, you would have bought in at $70 as the Big Guys started buying on the rumor (or inside info) that some kind of acquisition talk was in the works.  You can see from the DNA chart that Big Guys were buying several weeks in advance of the actual announcement.  They drove the price from $70 to $80.   

Then the announcement hit and the lights went on and, BANG, the Big Guys all jumped in.  40MM shares.  And a price that rocketed to $95. 

Do you wonder who was selling at the announcement?  Well, nobody, until the price got to $92.  Then the same Big Guys who were buyers at $70 got out.  They bought the rumor and sold the news. 

You guys should just buy the business (which was a steal at $70).  But you buy it and sell it with the Big Guys.  Who cares what the reason is that they are buying or selling?  Following them keeps you from making a big mistake. Phil Town now says, GO PLAY.

Stochastic: Buy and Sell Lines

Rule #1 Reminder: On the Stochastic, which line is the buy line and which is the sell?

Originally published on 5/9/06 and filed under The Three Tools.

Barry in Chicago is one of many to ask the following question about how to read Stochastic:

Question:

Phil Town,

I have purchased the book and read it cover to cover. VERY GOOD!!!

I am having trouble with the Stochastic chart on MSN. Which line is the buy line and which is the sell? Is the buy line the 14-Period %K?

Any help would be greatly appreciated.

Thanks,

Barry

Answer:

The "buy line" for the Stochastic is the 14-Period %K line -- and it's usually black. 

The other line, the 5-Period %K line, is red and is the sell line.  When black goes above red, buy.  When red goes above black, sell. 

(Of course we don't use just one Tool, but that's how we'd read this one.)

Now go play!

Phil Town

Time Frame on the Tools

Phil Town is going to start something new on the blog -- featuring a different post from the past every Monday, to highlight the tremendous amount of resource material we have here in the Rule #1 Archives. I hope this new feature will help those of you who are new to Rule #1 find the information you need (but don't forget the Rule #1 FAQ).  For the rest of you, these old posts may serve as reminders of tips we've gone over before. Below is the first "Rule #1 Reminder".

Rule #1 Reminder:  What Time Frame Should I Use On the Tools?

First published: 3/26/07 as a Question of the Week.

This week's question:

Q: What time frame should I use when viewing the tools?

A: The time frame isn't important.  The inputs to the tools are what matters.  Set the inputs and then use whatever time frame you want.  I use 3 months, 1 year, 5 yr and 10 yr. depending on what I'm looking at.  But just to watch the tools, I use 3 months.

How Important is Market PE?; Applying Tools to the Market; and Where to Put Cash

Three interesting comments were posted to the blog over the past week, and I answered them tonight. I'm re-posting them here so you can all see the answers.

1.  From Dom, re: "Predicting the Market":

If we can use the tools to see what the big boys are doing and predict stock prices, why can't we do that with the stock market? If we know that the PE of the market is generally 10, shouldn't we be able to buy when it is less and we have 3 arrows? Also, should we continue to use a PE of 10 or should we consider bumping it up like we do for our future sticker prices?

Basically, if we know that a good company is going to grow at its historical rate, couldn't we also say that the markets will grow at their historical rates? If so, couldn't we use the tools to predict them the same way we predict stock prices?

Phil Town's response:

You make a good point.  First, though, the market averages a PE of about 15, not 10.  A market PE of 10 is low.  The problem with relying on a market PE is the same problem we have relying on a PE for a business.  I wish it was that simple but it isn't.  PE's reflect expectations of growth.  Thus a company with a high PE might be a lot cheaper in the long run than one with a low PE, depending on what you pay for it.  When we look at the whole market, all we can do is make the reasonable assumption that in the long run the market is going to do well. 

Moving Average Intervals

I received this note from Matt the other day, regarding the MA (Moving Average):

Hi Mr. Phil Town,

I am still baffled by using the 35 day MA (35, not 30, b/c you can only put in 5 for the "period" if you're using weekly intervals) vs the 10 day MA. In my practice investments, I get completely different signals.  For example, for CAKE, back in your book example of the Connoley's, if I use the 35 day MA, it tells me to NOT sell on 3/26/03 when the other 2 tell me to sell. If I use the 10 day MA, it tells me to sell on date 3/26/03 ( i went back in time using your book's example to 2/2003 to 4/2003). Also, if you are using "weekly" intervals, how does the "10 day MA" sync.  This exact issue wasn't addressed previousy, but rather, we taked about the other tools being synced.  I'm specifically asking about the MA sync.  thanks.

Matt

Hi Matt,

Using the weekly intervals is going to give you totally different results.  The way these tools all work is off of specific periods based on whatever the chart is that you are using. 

NTRI's Moat

Some of you wanted to know if I'm in (or have been in) NTRI. Here's the comment I left on the blog a little earlier today:

I'm not an owner of NTRI, gang. I don't know the diet business well enough to make a call on the moat. I have students who are trading this thing and have just killed it so I used this as an example in the talk I do to show how important the arrows are, even if you think you have a wonderful business at a great price. And it really is a great example.

What's Going Wrong With NTRI?

Well sports fans, we're seeing the wisdom of using tools, aren't we? The first NTRI gap was a big wakeup if you were still trying to buck the downtrending stock. 

Remember what I've told you:  no matter how good you think the business is, no matter how cheap you think it is, if the big guys are dumping it, it's going to go down like a brick.  Never forget the lessons of 2000-2003, when people held onto great businesses and watched half or more of their wealth disappear.

That's just being stubborn, you guys.  You are not big enough nor rich enough to buck whatever is going on out there that is causing the big guys to dump a stock or an industry or an entire market.  We are not Warren Buffett. We're not smart like those guys, we're not working in this thing all day and night.  We didn't get to be mentored by geniuses (well actually, I did, but that was just good karma or something...) 

So we MUST use the one advantage we have that they don't have: we are little and nimble and can dance in and out.  We're not going to get it right all the time.  Maybe not even half the time.  But our losses will be small and our winners, when we get them, will be big -- and the result is a very nice retirement in 5 or 10 or 20 years. 

Back to NTRI: