Following the rules

By Jani Ziedins | Intraday Analysis

Jun 21

S&P500 daily @ 12:27 EDT

The Euro is tanking, pushing the USD higher and the markets lower.  A strong dollar dilutes overseas revenues and profits for domestic companies, hence one of the reasons US stocks typically decline on a strengthening dollar.

Today’s decline is pushing us back down to the 50dma and testing this key technical moving average.  No doubt there is a cluster of stop-losses sitting just under the 50dma that would be triggered if we break this line.  Then the question becomes if value buyers jump in and prop up the market before we trigger more stop-losses around the 1340 level.  Without the value buyers support, the autopilot stop-loss selling can snowball and the next key level is prior support just above 1305.  Of course all of this is moot if the market holds above the 50dma and avoids triggering those stop-losses.

Update:  Since I started writing this post, the markets have slipped under the 50dma and the decline accelerated and we broke this level.  We’ll need to watch the rest of the day to see if the market can bounce back.

There doesn’t seem to be much in the way of headlines driving this modest weakness.  If I had to guess, it was a poor Spanish debt auction that sent the Euro lower, but in reality this is just a normal pullback after a strong run the last two-weeks.  The market tends to bounce around as it overshoots on both the upside and downside, giving us the sawtooth patterns so common in stock charts.  The calendar is littered with meetings and economic reports, so it will be interesting to see which ones the market grabs on to and which it ignores.

Yesterday’s price action was interesting, while the market closed mostly flat, there were wild swings after the Fed’s statement.  While it looked like a quiet day to anyone looking at a daily chart, no doubt it chewed up and spit out a lot of day-traders who got whipped around by those intraday swings.  The best course of action around events like that is to let the dust settle before trying to place a trade.  It’s better to be a little late than a lot sorry.

I went to one of the new IBD meetups last night hosed by IBD and presented by Ted LePlat.  It was a boilerplate CAN SLIM review peppered with promotion of premium services.  Ted is a very convincing guy, but the question I’m left with is if it is really as easy as it sounds?  If it is simply a matter of following the rules, how come we aren’t all rich by now?

Many people will rationalize the lack of widespread success to lack of discipline and not following the rules.  While that sounds plausible, surely there are lots of anal-retentive people who follow the rules to the letter.  Where are they?  And of course if the key to success is simply a matter following the rules, why not automate it using a computer that has zero emotional impulses or temptations to cheat?

Virtually every aspect of CAN SLIM is already automated.  All the fundamental data contained in Current and Annual earnings and is already automated and compiled in the newspaper and on investors.com.  Supply and demand is accounted for in IBD’s accumulation/distribution ratings.  Leader or laggard shows up in industry group rankings, relative strength, and stock checkup.  Institutional sponsorship shows up in IBD’s mutual fund rankings and fund holdings.  Market direction is easy to calculate given the simple rules and the market outlook is published daily in the paper.  The most qualitative component is the New, but it should be fairly easy to identify between annalists’ growth projections, relative strength of the stock, and write-ups in the New Americas section.

So far all of CAN SLIM is already calculated and automated on various IBD computer generated screens, ratings, and lists.  The next important aspect is chart reading.  But IBD even automated this with its Pattern Recognition upgrade to its Market Smith charting package.  It will automatically identify common chart patterns, show buy points, stop-losses, profit taking levels, and even base counts.

So with all of the above, why not automate the whole thing and relax on the beach while a computer prints money for you?  Further, why does WON still pay portfolio managers big bucks to do his trading?  He was an early pioneer in using computers to compile and calculate market data back in the 60s, why not take the next step and use computers to do the trading too?  Wouldn’t a computer be far less likely to cheat on the rules?  That sounds like a perfect solution………unless there is something more to CAN SLIM than simply following the rules.

If a computer can’t do it, could that mean there is some secret sauce that isn’t in the rules?  Does it take human insight and intuition to make CAN SLIM work?  Is that why some, like WON, can be phenomenally successful while his mentees, portfolio managers, and followers struggle to produce the same kind of profits?

Now don’t get me wrong, I’m not bashing the system as I am a huge believer in the logic behind it, having read HMMS five plus times already.  But the thing I question is how easy is it?  Obviously I believe it is the special sauce that separates the few from the many.  It is being able to pick the true winners from a sea of false positives.  It is knowing what rallies to buy and which to sit out.  It is knowing when something is topping or just pulling back.  It is knowing when to hold and when to take profits.

I don’t really know where I am going with this other than to say it is never as easy as a salesman makes it sound.  If you really want to be successful at this game, you won’t find all the answers in a 300-page book or a set of seminars.  It takes years of learning, practice, and experience to succeed.  Never stop learning.  I’ve read countless books on the market from a wide range of viewpoints.  Some of my favorite books were the ones that claim no one can beat the market.  Rather than always drink the Kool-Aid and ignore the critics, I embrace the other side and learn as much as I can about those criticisms in order to mitigate those very legitimate weaknesses.  The honest truth is all sides are right, it is simply a matter of figuring out which rules apply at what times.

Stay safe

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.