prancingbull.com

It has come time for me to reconsider my holdings in Make Music (MMUS). I initially purchased this stock on 10/29/2007 at the averaged price of $9.07. This averaged price factors in the commission as well. It initially dropped down to $8 right away, but I held on and soon thereafter it reached $10.75/share on 12/24/2007 which also happens to be its’ 52-week high. Isn’t that convenient. Since that high, it has dropped 17.2% to its’ current price of $8.90/share.

After reading my most recent book on technical analysis, I have started to analyze charts in a much different way. Yesterday morning I was looking at the chart for MMUS, and I noticed that a descending triangle had been forming over the past three months. This triangle has a support of $9 which has been tested about six times depending on your definition of what a test is. During the time that this support price was being tested, the new highs on the bounce backs were becoming lower and lower.

Based on what I read in the book, this is generally seen as a very bearish signal. Typically once it fails to get a bounce back from the support it takes a large drop down once the support gives way. After that, the previous support level tends to act at the new resistance point.

Using this chart read combined with the fact that MMUS is trading at a P/E of 82.74 I have decided to sell my holdings in MMUS. My only concern with this sale is that MMUS is a very thinly traded security and I may not be able to get top dollar for my sale. I will be happy though to say that I got out of it before I lose a bunch of money on a big drop.

I have decided to adopt the common strategy of accepting a lot of small losses in order to get some large gainers. This is the first stock that I have consciously taken that approach on. In the past I was never able to sell a stock before it lost a ton of money because I would always get far too caught up in it. I would always talk myself into believing that it was poised for a big rally if I just hung on a bit longer. One of my worst trades like this was with Sirius Satellite Radio (SIRI), although I think many others shared the same outlook as I did.

So now that I have cut my losses on this security it is time to start looking for something new. Stay tuned to see what my latest bold pick will be.

A few weeks ago I mentioned that I had checked out a few finance books from the library. Well my checkout period is over now, and since I will be returning my book tomorrow I thought that I would take the time to write a brief review of the book.

I checked out two books, but I only ended up reading one of them. The one I chose to read was called “How Technical Analysis Works” by Bruce M. Kamich. I will admit that i didn’t make it through the whole thing, but I did make it through all of the topics that I was interested in.

In this book, Kamich does an excellent job putting the mysterious world of technical analysis into easy to understand terms that can be useful to both beginning and experienced traders. An experienced trader may want to read something a bit more advanced though.

Coming into this book I knew a little bit about technical analysis like moving averages and certain volume indicators. The book introduced me to a few new strategies that I have already started to use when analyzing different companies. The three strategies that I found most useful were trendlines, triangles, and areas of resistance and support. A few weeks ago I wrote an article about trendlines from what I had read in this book.

One great thing about this book is that Kamich does not simply tell you what a strategy means, but he also tells you how he uses them to trade. I found that to be very useful, because knowing what certain indicators are will only get you so far. Knowing when, where and why to trade is where your success will come from.

For me I found this book very helpful for the advancement of my trading strategies. The important thing to realize is that technical analysis is not the golden ticket to investment success, but is just one of many tools to use when analyzing a company.

Overall, I would highly recommend this book to someone who wants to know more about using technical analysis as an additional trading strategy.

I wrote a few posts earlier that I had checked out a couple of books from the library. The first one that I decided to go into was “How Technical Analysis Works“by Bruce M. Kamich. I’m about a third of the way into the book and it has been fairly interesting so far. The main points that Kamich has discussed are trend lines. Trend lines seem to be a promising way to predict the movement of a particular stock over a large period of time. Many of his examples show trends over the course of ten years. He used three years as well. He even had a couple of examples where the trend line was drawn over a time period of a year or less.

The purpose of a trend line is to show the investor the general direction a stock is headed based on past movements. The key to this is that it is based on past movements. Price movements that occurred in the past were based on news and expectations from the past. These expectations could change dramatically in the present day. Another important thing to consider is that trend lines are solely based on opinion. There is typically no one correct trendline to draw. This can prove to be especially difficult in short periods of time or with a very volatile stock.

In the book, Kamich suggests that if the price should fall below the upward trendline by a certain amount it may be a good idea to get out. He suggests that while some people use a 1% drop below the trendline as their signal to get out, many others will let it drop as much as 5% below the trend line before getting out in fear of missing out on a reversal. Kamich suggests that the best trend line trading strategy is to pre-determine your exit strategy so that you are not caught up in the emotion of trading.

Trend lines should be used as one of many tools to evaluate a stock. While they can be a helpful tool, the predictions that they may seem to make may not always come to fruition.

Below are a few examples of how one might trade using trend lines. If you click on the small images of the charts, they will open in their full size version in a new window.

This first example is your classic trend line example. The chart shows a one year chart for financial institution Horizon Bank (HRZB). The initial point starts in mid-June at roughly $23.75 and hits the next peak around mid-September at about $21.50. That is a drop of approximately$2.25 according to my guesstimates. If you believed that this trend line would hold true in the future, one would take a bearish position on the stock and short it. If you had shorted in mid-September at $21.50 you could have rode that price all the way down to the current levels of around $13 where you could have covered. This would be a 65% return over the course of about six months. Not too shabby. Below is the chart for HRZB. Notice that over the time period of the trend line the price of the stock never rises above it. Kamich suggests to always maintain your position in a given security as long as it is trading in favor with the particular trend line.

The next example shows a bit different of a story. As I’m sure you have already gathered, not all price charts fit this model as nicely as HRZB. Take Netflix (NFLX) for example. Their price chart over the last year has been a bit more volatile. Notice in this chart there are both downward and upward trend lines. The lines are numbered in order of when they would be chronologically drawn (ex: it would be impossible to draw U3 chronologically before U2). Between April and May the stock develops a downward trend line (D1) which extends all the way into mid-September when it is broken by an upswing in price. At this point in time NFLX is trading at about $19/share. Using the 1% rule, you would not cover your short shares until the price had reached $19.19, which we can see it quickly does. Following the 5% rule, one would wait until the price reached $19.95/share before repurchasing. As we can see, this happens only a few days later. Take not though that the $19 intersection should not be used for the 1%/5% rule, but instead the price of the trend line should be used. The day after the $19 intersection, the trend line may be at $18.90/share. Using the 5% rule, the stock would only need to be trading at $19.85 to warrant a buyback.

You will also notice on this chart that the stock reaches a low of about $16 in late July. In hindsight this would have been the best spot to cover the shares, but since the trend line goes all the way to zero we must assume that the price will continue to decline until the trend line has been broken. It is at this low where the price starts to rise ever so slightly. By choosing that late July low and combining it with another low in mid-September, we have created a new upward trend line (U1). Had a new investor noticed this new trend line, they could have bought in mid-September at $17/share and ridden the rise all the way up to current trading levels of about $33/share. That is a nice 94% gain over six months! Notice that the price never falls below U1 during this time period.

Take a look at U2. From mid-September to early November, the stock realized considerable appreciation. U2 is created by using the dip in mid-September and the dip in mid-October. Had you bought in mid-October at $23/share, the trend line would have suggested selling it at around $24.70 using the 5% rule. Using this trend line the investor would have only realized a gain of only 7.3%. This is a far cry from the 94% gain using U1.

You can see from U3 and U4 that an investor could potentially find a number of different trend lines for a stock depending on what date it was being analyzed and where they felt the most accurate dips in the market were to put a trend line through. As you can see from the Netflix example, using trend lines is an imperfect art that should be used as one of many tools to analyze a stock. U1 and U2 show how drastically an investors returns will be depending simply on what lines are drawn.

I am including three additional charts to look at and analyze to get a little more understanding on the art of using trend lines. I won’t go into too much analysis on these ones. Trend lines are a fairly simple subject, so after seeing the first two examples these next three should appear fairly straightforward.

• Jones Soda (JSDA): U1 gives investors a false hope in early December. Using this strategy wouldn’t have netted much if any profit for a speculator who bought in mid-December and would have sold at the very beginning of January. D2 seems to show the most accurate trend line, but is also based off more data than D1. This chart was created over a six month period of time



• Cemex (CX): Cemex faced downward pressures from mid-October through mid-January. This can be seen from D1, D2 and D3. These downtrends show how difficult it can be to correctly choose a trend line. U1 shows promise for a speculative investor. This chart was also created over a six month period of time.



• Ford (F): This stock has been all over the map as far as trend lines are concerned. U1 would have shown little or no gain. If you shorted using D1 you may have seen a loss. A short using D2 would have experienced the best gains.

As a final note: of these five stocks, the only one I own is JSDA as of 3/12/2008 (the time of this writing).

I figured that since I have been living in Seattle long enough it was about time that I got a membership through the Seattle Public Library. Seattle recently built a brand new library for downtown. From the outside it has this totally random shape made out of steel and glass. It really is more of a work of art than an actual building. Inside there are 9-10 different levels. The first 5 levels have a lot of seating and computer areas, as well as a lot of fiction novels. The remaining floors are the non-fiction. These floors spiral on an incline around the northern half of the building. It is a pretty clever idea, but the library can be a bit confusing to navigate. The following picture is what the Seattle Public Library looks like. You can find a nice little review of the library, as well as some other cool pictures here.

Anyway, I set up my account during my lunch break and set out to explore the library. I decided to go check out the books they had in the business/investing section. Those are in the 330’s in the dewey decimal system for those keeping track at home. Originally I wanted to join the library because I didn’t feel like paying $27 + tax for the Turtletrader book at Barnes and Noble. Unfortunately it is already checked out, but I am next in line for it.

It took me awhile to find the right section. I knew that I wanted to be in the 330’s, because it seemed like every other finance book started with 33x as well. I naturally assumed that the 3xx section would be on the third floor. Turns out I was wrong, and the third floor just had fiction books. I found a map that showed that the section that I needed to be in was actually on the 7th floor.

Once I finally found my section, I realized that I needed to find something fairly quickly if I were to be able to check it out and get back to work with enough time to eat some lunch as well. The library actually has a pretty decent selection of finance titles, and after a bit of searching I came along a couple that looked like winners.

The first book is called The EDGAR Online Guide to Decoding Financial Statements: Tips, Tools, and Techniques for Becoming a Savvy Investor. The book was written in 2004 by Tom Taulli, an EDGAR Online analyst. The book looks like it shows how to decipher the typical financial statement that is on the EDGAR website and how to make the most of it. For those of you who don’t know, EDGAR Online is a website run by the SEC which lists all of the financial releases of publicly traded companies.

The second book that I checked out is called How Technical Analysis Works by Bruce M. Kamich. After flipping through this book, it looks like it gives a nice overview of many of the different chart reading techniques. This should be an interesting read.

I have to return these books by March 24th, so hopefully that will give me enough time to take a decent look through them and possibly write a little review about each of them.