10-28-11 Close Comments

[Mike]

The Market Exposure Count remains at +5 (100% invested long). The Market Exposure Count is developed from a Market Direction Model developed by O'Neil.
I am 100% long in the following stocks: SWI, SBH, UA, ISRG, GLD, DLTR, GNC
The list below are CANSLIM stocks that have broken out recently and their gains from their prospective buy points.
This list looks like a usualy rally, most are working somewhat. Some have failed, some have moved to harvesting points. So far the rally has been easy to work and the leadership has firmed up.

[nickola.pazderic]

Hi Mike,

Thanks very much for your work and willingness to share your work with us.

I wanted to ask the following question during the week but decided to wait until the week ended to ask the it.

How do you pick entry points for your stock purchases?

CAN SLIM has elaborate rules for selecting and buying stock, but the rules define only weekly and daily buys. With the robots and the pointers provided by Billy, Pascal and others, every stock purchase that I make now comes under greater scrutiny, insofar as entry prices are concerned. Specifically, I have seriously considered the purchase of stocks with "pocket pivot" buy points during this week, but I could not commit, knowing that a good entry improves both the profitability and personal satisfaction with the trade.

Many thanks always,

[Mike]

Hi Mike,

Thanks very much for your work and willingness to share your work with us.

I wanted to ask the following question during the week but decided to wait until the week ended to ask the it.

How do you pick entry points for your stock purchases?

CAN SLIM has elaborate rules for selecting and buying stock, but the rules define only weekly and daily buys. With the robots and the pointers provided by Billy, Pascal and others, every stock purchase that I make now comes under greater scrutiny, insofar as entry prices are concerned. Specifically, I have seriously considered the purchase of stocks with "pocket pivot" buy points during this week, but I could not commit, knowing that a good entry improves both the profitability and personal satisfaction with the trade.

Many thanks always,

Nicola,

I posted three CANSLIM presentations on this forum over the last month or so. The first two define the entry points for various chart patterns as well as the fundamental requirements for my picks. The chart patterns that occur most often are cup with handle and double bottom bases these are consolidation patterns that occur over a minimum of 7 weeks. I use pocket pivot entries for early entries for stocks that are setting up in one of those patterns.

I use MarketSmith which is a stock charting and screening tool to find stocks, the tool is created by Bill O'Neil. I find that almost every serious CANSLIMer ends up using MarketSmith, actually I do not know of a signle person who does not use it. It is a little pricey for some but for my money the best tool available. Most of my selections end up on one of two indexes in Investor's Business Daily. The IBD 50 Index has top CANSLIM oriented stocks, the list is published in each Monday edition. That edition actually comes out Friday evening in the electronic form eIBD that I read on my computer. The other list is called the Weekly Review also known as the 85-85 list. This list of stocks are all stocks above a minimum price and volume that show an EPS rating greater than 85% of all stocks in the data base and a RS rating greater than 85% of all stocks in the data base. One can run this screen directly in MarketSmith or wait for the Thursday edition of IBD where it is published. So the short hand answer to your question is to use those lists to downselect from.

Beyond what you can read in Bill O'Neil's book How to Make Money in Stocks or through lessons taught in his seminars or in IBD or my presentations I add three additional paramaters to my selections. I have studied stocks that go up and found three parameters positively correlated with price performance: Liquidity Rating, Demand/Supply Rating, and Margin Rating. I develop these rating myself each weekend. I use MarketSmith to download every stock in the database above $5 (usually around 4000 stocks) and then calculate the three ratings which I describe below.

Liquidity is price time 50-day average volume and Liquidity Rating is the 4000 stocks rank order by Liquitity in excel and then by formula a 1-99 rating for liquidity is assigned where 99 signifies top 1% of the stocks by this factor. AAPL comes out on top with a 99 rating as it trades 9.3 billion dollars per day. Institutions perfer liquid stocks, so why not measure liquidity and use it in your selections.

The second factor is Demand/Supply Rating. This is a measure of the demand for a stock compared to its suppy or float. Demand/Supply = 50-day average volume / float. I compute this ratio and then rank order the list of 4000 stocks by this parameter and assign a 1-99 rating to each stock using the same formual as used for the Liquidity Rating.

The third factor Margin Rating is a measure of the margins that the company is reporting. I sum two paramaters ROE and Pre-Tax Margin in excel for the 4000 stocks. I then rank order the list by this factor and assign a 1-99 rating factor to each stock as in the above ratings.

The last factor I use is Bill O'Neil's Composite Rating direct from IBD or MarketSmith. This is a 1-99 ranking of all stocks in the database by a large number of CANSLIM factors.

So now I have four parameters that I sum into a Combo Rank, a simple sum of the four paramaters above. When I rank this list by the Combo score, the stocks I want to possibly buy come to the top. If you think about it, this is a list of stocks that show institutional liquidity, show high demand, have the best margins in the industry and have the best other CANSLIM charateristics. From here I look at stock charts in MarketSmith to down select to 10 or so to put on my watchlist.

I also take the top 100 from this list and paste into an eSignal quote table. I wrote some special formula scripts in eSignal to monitor for pocket pivot developments. Essentially for all 100 stocks in real time I extrapolate end of day volume and compare that volume to the prior ten days and find the stocks that meet the pocket pivot volume signature. I then check for proximity to the 10 and 50-day moving averages. I then alert in realtime every stock that is flashing a possible pocket pivot buy point. I also load the IBD 50 list on another page and do the same procedure. So now I get alerted to stocks that are showing possible pocket pivots early in the day. Usually one-half hour into the market day I have a pretty good list of pocket pivot candidates. I don't do a linear extrapolation of end of day volume, volume usually doesn't come linearly. I developed a sixth order polynomial expression for how volume flows during the course of the average day. I use this to extrapolate end-of-day volume.

I know a lot of the above seems complicated, but you asked how I did it and my mind tends to move in doing technical analysis. I see no problem with using IBD as a resource, looking by hand at each stock in the IBD 50 and 85-85 lists and down selecting from there. That is the way I used to do it. There is a small weekly chart for each stock on these indices published in IBD. They are useful. On eIBD you can blow these up on your screen and directly analyze for the proper stock chart pattern.

Finally if you want to bring in my additional factors above into your selections, simply pick stocks with the following characteristics: Liquidty above $40M per day (with some picks allowed to go down as low as $20M). Demand/Supply > 3% of the float traded per day (with some down to as low as 1%), Composite Rating > 80 and ROE+Pre-Tax Margin > 50% (with exceptions lower). You will find that using this procedure will rapidly weed out the thinly traded stuff that tends to show up in the IBD indices and reduce you to a workable list of stocks.

You should analyze your stock patterns for late stage base formations and mostly stay away from them. I defined base counting in my second CANSLIM presentation. I will post the 4h in the series shortly. Finally if anyone wants a more detailed explanation for how I do any of the above I will gladly share.

[EB]

Mike, the beauty of your forum is that it is full of instant classics. If you can elaborate on the sixth order polynomial expression for volume flows, that would be particularly appreciated. However, if it is proprietary, I understand.

It could also be helpful with respect to the real time 20 day MF because final separation volume to determine LEV/SEV is not known until the EOD. If it could be estimated throughout the day, it might improve the accuracy of the intraday readings.

Also, you mentioned that linear extrapolation was not suitable. This makes sense if the procedure is to take the first 30 minutes of volume and assume that each of the following periods will contain the same volume. However, one thing I've experimented with is to measure the percent deviation of volume for the current day, x minutes into the day, from the average volume for the first x minutes going back y days. Then, apply that percent deviation to the average EOD volume for the prior y days to get an estimate of the current day's EOD volume.

[Mike]

Mike, the beauty of your forum is that it is full of instant classics. If you can elaborate on the sixth order polynomial expression for volume flows, that would be particularly appreciated. However, if it is proprietary, I understand.

It could also be helpful with respect to the real time 20 day MF because final separation volume to determine LEV/SEV is not known until the EOD. If it could be estimated throughout the day, it might improve the accuracy of the intraday readings.

Also, you mentioned that linear extrapolation was not suitable. This makes sense if the procedure is to take the first 30 minutes of volume and assume that each of the following periods will contain the same volume. However, one thing I've experimented with is to measure the percent deviation of volume for the current day, x minutes into the day, from the average volume for the first x minutes going back y days. Then, apply that percent deviation to the average EOD volume for the prior y days to get an estimate of the current day's EOD volume.

EB

I am attaching an excel spreadsheet used to create the 6th order polynomial. The procedure was to collect a number of days of NASDAQ intraday volume. Then for each day compute the percent of final end of day volume at intraday points. Then average the sets of data to create an average percent of eod volume by clock time. Then a 6th order polynomial was fit to that curve using excel. The spreadsheet should be understandable with this description. Please note that I used California time for the X axis for this analysis. If you were to try to use the same polynomial you would have to convert to Calfirnia time. So if you place a clock time of 7AM (half hour into the trading day) into the x in the 6th order polynomial equations shown in the spreadsheet you would get 16.6% of eod volume estimate out for the y value. So to extrapolate eod volume you divide current volume by y.

Copy of Projected Volume Calculations (2).xlsx

[ernsttanaka]

Nicola,

I posted three CANSLIM presentations on this forum over the last month or so. The first two define the entry points for various chart patterns as well as the fundamental requirements for my picks. The chart patterns that occur most often are cup with handle and double bottom bases these are consolidation patterns that occur over a minimum of 7 weeks. I use pocket pivot entries for early entries for stocks that are setting up in one of those patterns.

I use MarketSmith which is a stock charting and screening tool to find stocks, the tool is created by Bill O'Neil. I find that almost every serious CANSLIMer ends up using MarketSmith, actually I do not know of a signle person who does not use it. It is a little pricey for some but for my money the best tool available. Most of my selections end up on one of two indexes in Investor's Business Daily. The IBD 50 Index has top CANSLIM oriented stocks, the list is published in each Monday edition. That edition actually comes out Friday evening in the electronic form eIBD that I read on my computer. The other list is called the Weekly Review also known as the 85-85 list. This list of stocks are all stocks above a minimum price and volume that show an EPS rating greater than 85% of all stocks in the data base and a RS rating greater than 85% of all stocks in the data base. One can run this screen directly in MarketSmith or wait for the Thursday edition of IBD where it is published. So the short hand answer to your question is to use those lists to downselect from.

Beyond what you can read in Bill O'Neil's book How to Make Money in Stocks or through lessons taught in his seminars or in IBD or my presentations I add three additional paramaters to my selections. I have studied stocks that go up and found three parameters positively correlated with price performance: Liquidity Rating, Demand/Supply Rating, and Margin Rating. I develop these rating myself each weekend. I use MarketSmith to download every stock in the database above $5 (usually around 4000 stocks) and then calculate the three ratings which I describe below.

Liquidity is price time 50-day average volume and Liquidity Rating is the 4000 stocks rank order by Liquitity in excel and then by formula a 1-99 rating for liquidity is assigned where 99 signifies top 1% of the stocks by this factor. AAPL comes out on top with a 99 rating as it trades 9.3 billion dollars per day. Institutions perfer liquid stocks, so why not measure liquidity and use it in your selections.

The second factor is Demand/Supply Rating. This is a measure of the demand for a stock compared to its suppy or float. Demand/Supply = 50-day average volume / float. I compute this ratio and then rank order the list of 4000 stocks by this parameter and assign a 1-99 rating to each stock using the same formual as used for the Liquidity Rating.

The third factor Margin Rating is a measure of the margins that the company is reporting. I sum two paramaters ROE and Pre-Tax Margin in excel for the 4000 stocks. I then rank order the list by this factor and assign a 1-99 rating factor to each stock as in the above ratings.

The last factor I use is Bill O'Neil's Composite Rating direct from IBD or MarketSmith. This is a 1-99 ranking of all stocks in the database by a large number of CANSLIM factors.

So now I have four parameters that I sum into a Combo Rank, a simple sum of the four paramaters above. When I rank this list by the Combo score, the stocks I want to possibly buy come to the top. If you think about it, this is a list of stocks that show institutional liquidity, show high demand, have the best margins in the industry and have the best other CANSLIM charateristics. From here I look at stock charts in MarketSmith to down select to 10 or so to put on my watchlist.

I also take the top 100 from this list and paste into an eSignal quote table. I wrote some special formula scripts in eSignal to monitor for pocket pivot developments. Essentially for all 100 stocks in real time I extrapolate end of day volume and compare that volume to the prior ten days and find the stocks that meet the pocket pivot volume signature. I then check for proximity to the 10 and 50-day moving averages. I then alert in realtime every stock that is flashing a possible pocket pivot buy point. I also load the IBD 50 list on another page and do the same procedure. So now I get alerted to stocks that are showing possible pocket pivots early in the day. Usually one-half hour into the market day I have a pretty good list of pocket pivot candidates. I don't do a linear extrapolation of end of day volume, volume usually doesn't come linearly. I developed a sixth order polynomial expression for how volume flows during the course of the average day. I use this to extrapolate end-of-day volume.

I know a lot of the above seems complicated, but you asked how I did it and my mind tends to move in doing technical analysis. I see no problem with using IBD as a resource, looking by hand at each stock in the IBD 50 and 85-85 lists and down selecting from there. That is the way I used to do it. There is a small weekly chart for each stock on these indices published in IBD. They are useful. On eIBD you can blow these up on your screen and directly analyze for the proper stock chart pattern.

Finally if you want to bring in my additional factors above into your selections, simply pick stocks with the following characteristics: Liquidty above $40M per day (with some picks allowed to go down as low as $20M). Demand/Supply > 3% of the float traded per day (with some down to as low as 1%), Composite Rating > 80 and ROE+Pre-Tax Margin > 50% (with exceptions lower). You will find that using this procedure will rapidly weed out the thinly traded stuff that tends to show up in the IBD indices and reduce you to a workable list of stocks.

You should analyze your stock patterns for late stage base formations and mostly stay away from them. I defined base counting in my second CANSLIM presentation. I will post the 4h in the series shortly. Finally if anyone wants a more detailed explanation for how I do any of the above I will gladly share.

Mike, not often enough said --- thank you for your extreme clear explanations and your willingness to share years of experience!!

Ernst

[mnoel]

Thank you Mike for your generosity. This is very valuable information.

Martin

[nickola.pazderic]

Mike,

Your answer is certainly beyond the call of duty, and I'm humbled and cheered by it.

I hope I haven't been misunderstood, however. For as I noted in a previous post on EB's Forum:


EB--

..

Let me note: I think CAN SLIM is deceptively easy. In fact, I think it is the genius of O'Neil to make it look easy when it is not.

As I have also noted, I arrived at this site by way of O'Neil's book, IBD (indeed, I did subscribe to Market Smith), Morales/Kacher and HGSI. When I learned you are a forum leader, I recalled Kacher's warm and respectful reference to you in their book. So, please know I respect greatly your contributions and your willingness to share.

That said, perhaps my question is as idiotic as my approach to the market when it comes to the purchase of stock. Say, for example, I want to buy LULU because it shows pocket pivot signature volume and all fundamentals and market signs flash "BUY". In fact, say Morales and Kacher have sent an email informing their students that LULU is buyable. So, I turn to the intraday chart. I cannot decide when to buy it. The price is moving up or down or in consolidation intraday. It is above or below VWAP. Again, my response is perhaps moronic: I back off. Having bought and sold CAN SLIM leading stocks last fall, I realize that -- from my current perspective-- that on the intra-day scale I could have closed my eyes and simply pushed the buy button. Would this make a differece? Perhaps not. CAN SLIM is an intermediate term investment system. What does it matter if, due to my poor choice of intra-day buy points, I wake up the next day to a -3% position rather than a, say, -1% position? Perhaps it does. Because if the day after the market is down again and the stock falls 6-8% below my buy point, I may be forced to sell. Perhaps a more optimized intraday buy point would have kept me in the trade.

These concerns are based on my actual experience.

Many thanks always,

[Mike]

Mike,

Your answer is certainly beyond the call of duty, and I'm humbled and cheered by it.

I hope I haven't been misunderstood, however. For as I noted in a previous post on EB's Forum:


EB--

..

Let me note: I think CAN SLIM is deceptively easy. In fact, I think it is the genius of O'Neil to make it look easy when it is not.

As I have also noted, I arrived at this site by way of O'Neil's book, IBD (indeed, I did subscribe to Market Smith), Morales/Kacher and HGSI. When I learned you are a forum leader, I recalled Kacher's warm and respectful reference to you in their book. So, please know I respect greatly your contributions and your willingness to share.

That said, perhaps my question is as idiotic as my approach to the market when it comes to the purchase of stock. Say, for example, I want to buy LULU because it shows pocket pivot signature volume and all fundamentals and market signs flash "BUY". In fact, say Morales and Kacher have sent an email informing their students that LULU is buyable. So, I turn to the intraday chart. I cannot decide when to buy it. The price is moving up or down or in consolidation intraday. It is above or below VWAP. Again, my response is perhaps moronic: I back off. Having bought and sold CAN SLIM leading stocks last fall, I realize that -- from my current perspective-- that on the intra-day scale I could have closed my eyes and simply pushed the buy button. Would this make a differece? Perhaps not. CAN SLIM is an intermediate term investment system. What does it matter if, due to my poor choice of intra-day buy points, I wake up the next day to a -3% position rather than a, say, -1% position? Perhaps it does. Because if the day after the market is down again and the stock falls 6-8% below my buy point, I may be forced to sell. Perhaps a more optimized intraday buy point would have kept me in the trade.

These concerns are based on my actual experience.

Many thanks always,

Nicola, you are probably looking at too much. Forget intraday charts when CANSLIM investing forget the VWAP. I used to clutter my screens with intra-day data. No more. Analyze your bases and pick your buy points on weekly charts. Shift to a daily to watch the buy buypoint come to you on a small watchlist after you have decided what you want to buy using weekly charts and fundamentals. When the price and volume gets to your buy point buy it, no fuss. I do something else that I should bring up. It is in one of my presentations. I pyramid into positions. I buy 50% of a position at the proper buy point. I add 30% more when the position is up 2%. I add the final 20% when the position gains an additional 2%. This protects you from a prompt sell off on the breakout.

Something Dr. K told me once when he first started trading for O'Neil. O'Neil gave him 20-minute delayed quotes saying real-time would cause him to over trade. Think about this: Chris was trading O'Neil's money and O'Neil gave him 20-minute delayed quotes. Compare what you are doing with your money with this statement. I suggest you simplify. Pocket pivots give you addtitional buy points and these can only be seen using daily chart data. If you have narrowed down to ten stocks you wish to own using weekly charts and fundamentals then okay look at them with daily data and buy at a pocket pivot with the understanding that you are buying early in a set up.

O'Neil's watchlist is often around ten stocks. He is a master at finding companies that he wants to own. He can now focus on this short watchlist and the price and volume action of the market. When the market and the stock comes to him he is in. He has in history been able to concentrate his portfolio in a single stock on full margin. He has a cast iron stomach it seems. I think he had 200% of all IBD assets in AMGN when it was a leading stock of the early 90's.

Bill O'Neil learned his trade using weekly charts largely because when he started in the business he had to draw his own charts by hand. If you were drawing your own charts, how many stocks would you follow and what timeframe would you chart them? I have taken many seminars taught by Bill. I figured out his emphasis on weekly charts by noticing that was all he showed in his seminars. One day I said to myself: I guess I need to get out of the intra-day charting business that was clouding my thinking.

[nickola.pazderic]

You answered my question and then some.

Gratefully,