Buy/Sell decisions and Technical Analysis

[sidewinder]

I started this journey down the path to trading small cap mining stocks about 1 1/2 years ago having discovered the Dines letter through a friend that had done quite well just blindly following the recommended list provided. I have since (because of discussion on this forum) added Casey’s three newsletters. 

Since that time I have been lucky in that I got in to many of my stocks while they were down last year.  However, this year because I held through most of the carnage I am down about 30% on these stocks.  So up 30% then down 30%.  There is no excuse for this and I have been studying quite a bit of material on chart reading and Technical Analysis. (I have taken the course offered by Technitrader and highly recommend it)

I trade in the US and because most of these Jr.s are Pink Sheet or Gray market stocks it is extremely frustrating to get the charts I want.  I guess Stock Charts .com is the best but many only have the .Vs or the .TO listing.  Then there is pink sheets.com but the charts are limited.  I use Worden telechart service which is great but they don’t cover any OTC
Stocks.  I know the market makers decide the price on these things and don’t really have a firm understanding of the mechanics of the trade process.  With many of these stocks I can only get price info after the close of market unless I check the TSX.  That only gives me the price in Canada and at best is just a guess.  My point is I feel like I’m flying blind with most of the recommendations from Dines and Casey. 

I did a stupid, stupid thing because I decided in the beginning to hold these things for the long term. (My opinion has since changed)  Only time will tell if the buy and hold approach is the best.  This past year was not very kind to those that have a long term approach to mining stocks.  They are just too volatile for me to pass up a repeat profit.  If you are 25 or 30 years old it may not be so bad but in my case I am retired now and would like to be able to live out of my investments.

. Now that I am starting to see some green numbers on my portfolio, I am placing trailing stops and this is proving to be quite a challenge because of the volatility.  I don’t want to get prematurely stopped out of a rising stock but I refuse to lose a profit ever again simply based on “hope”.  Anyway the way I look at it, if I get stopped out, it just may give me to opportunity to buy it again at a lower price and profit again.

Most of us who have traded these stocks for any length of time (at least one year) realize the seasonality issue but as this past quarter demonstrates, some major economic issues can through a wrench into the machine.  So, David you have given me concerned with your Jan 3rd prediction. I look over the historical charts and your point is well taken.  But the conditions that affect this market are a moving target. 

Sorry to be so long winded, but I have many decisions to make as to how to trade these stocks and do so with an unemotional well thought out approach to insure success.

So now the questions to any of you that are inclined to share your thoughts on the following.

• Who places sell stops or trailing stop on these stocks and what do you use as    a guideline for where to place the stop?
• How many here use chart analysis for buying decisions (i.e. when to buy and when to sell) and if so what are the best sources for charting info on the pink sheets and why?
• How many rely only on the recommendations of a newsletter (Dines or Casey etc.) and how  much influence do they have on your buy sell decisions?
  
• What method do you use to take profit? (example:  up 39% sell 50% or exit on reaching resistance or some combination)
• How many here, that are down for the year on Uranium stocks plan to sell as soon as you either get even or close to even if that occurs during this bounce?

Sorry again for the long post but sometimes I do go on.

Merry Christmas and a Happy and profitable New Year to All!

[langman57]

I don't know how much this will help, but I don't have the stomach for a lot of the above referenced stocks you speak of. I use them strictly to add another slice of risk to my overall portfolio. These positions amount to roughly 2-3% of my portfolio. I've never had luck trying to time the market. So my positions are small - never over $1500- usually $500-750 for a purchase. I did this with Summitt Resources and watched it climb to $7-$8. I sold it around there. The same thing with Pinetree. On both I made really good money, but I could sleep at night knowing that I could afford to lose it all, because that's what happens sometimes! 

I don't subscribe to newsletters but probably should. I do really enjoy reading this board to gain insight, and every so often add a stock to my watch list. But I leave most of the big decisions to the pro's in ETF's and mutual funds. 

[davidslane]

Hi Sidewinder,

I'm not sure you are going to like what I am going to say, but here it goes.


1) You can't use TA with micro-caps
2) Never, never, never put in a stop loss order with a micro-cap (use end of day mental stops)
3) Never actively trade pink sheets



Let's start with #1.

Micro-cap stocks are so illiquid that the primary brokerage houses which trade them will often trade back and forth a few hundred shares just to move the price up and down.  You will see them intentionally manipulate the stock price to simulate TA patterns artificially to encourage selling or buying.  TA is a manifestation of how mass pyschology drove the masses to buy and sell stock shares.  It only works when the masses really trade and trade in volume.  These micro-caps are too thinly traded to trust their charts!  The charts are fakes.


Now, #2.
Similar to #1, the primary brokerage houses which trade micro-caps know where beginner traders may put stop loss orders, so they will trade amongst themselves in the hopes of triggering those orders and taking your shares before trading the stocks back up.  This is why you sometimes see stocks swing from 15% down to 15% up in a single day.  If you want to use stop loss orders, they should be mental stops (in your head) and only triggered based on how the stock closes end of day (never its intra-day low).  Better yet, make decisions based on weekly closes instead of daily closes to determine if a stop loss has been hit.


Now, #3.
I trade pink sheets because I trade so few shares of micro-caps.  Trading pink sheets costs me about 5% to enter and 5% to exit due to the bid/ask spread.  And if I'm selling into a bad down day, I'll sacrifice 10% to 15% to exit.  I can handle this if I buy for the long term (or even say 6 months ---- November to April) and have a 100% gain.  But to buy in and out of pink sheets on a weekly or even monthly basis is suicidal.

The 6 month swing on most uranium stocks may be 50%.  100% if we're lucky.  (Might be a bit more this year because of the huge sell off.)  Some will do better, but I'm talking averages here.  There is no way you'll time the bottom or top.  So, if you're lucky, you'll see 30% of a 50% move.  Now, take away 15% for getting in and out, and you're at 15% gain.  Take short term cap gains taxes out and you might as well not even bought and sold the stock.  If you're going to trade pink sheets, I would at least hold for 6 months and buy in at the start of the seasonal run in November and sell at the end of the seasonal run in April.  But don't trade pink sheets.



Trader vs. Investor.

What are you?  A trader or an investor?

If a trader, be prepared to sit by your computer all day.
And for god sake, get a $89/month subscription to Trading the Charts.

http://www.tradingthecharts.com/phpBB/

http://www.tradingthecharts.com/phpBB/viewtopic.php?t=3737
   (weekly newsletter upate)


And trade the S&P, not micro-cap stocks so you're playing with liquid positions.  And trade options so you have leverage in the short term moves.

Trading the Charts has a chat room where they swing trade the S&P one to two times a day (great in this volatility) based on Elliot wave patterns.  They buy and then close out put and call option positions on the S&P every few hours trying to skim a few hundred bucks a day.  The options are liquid and will return a much higher percentage then you could get trying to time trades on micro caps.  You can see 20% gains a day (and losses, but these guys seem successful).


Personally, if I didn't have a full time job and I had some more liquid cash, I'd be part of that group.  But I don't have the emotions for short term trades.  I screw them up and time wrong (note my tax loss selling of uranium stocks Thursday morning as opposed to Friday afternoon or even next week).



Now let's talk about investing instead of trading.

Let me provide a section from Doug Casey's Big Gold edition this month:

We don’t believe anyone will add to his success in the junior resource sector by fretting about daily ups and downs – which can lead to too much trading and the self-defeating costs of commissions and bid-ask spreads. Watch your stocks, of course, but with some emotional distance. Give the long-term trend time to deliver the profits you’re looking for.

Every stock you own is a cake in the oven, and you’ll ruin it if you keep opening the door.

Are you happy when one of your favorite stocks goes down? Why not? Since the Mania phase hasn’t yet begun, unless you’re already fully invested, treat the decline as a gift that lets you buy more at a better price. The most profitable way to add to a position is to "buy on the dips" when you’ll get the most shares for your money. This means you’ll be buying on days the stock is dropping. By averaging down, you lower your overall cost and increase your profit when you eventually sell.

You need to let your trades work.
All our uranium stocks will be 100% to 1000% higher in 3 years.
Same goes for gold stocks.

If you can trade the ins and outs of the tides, good for you.
But it is hard, because you won't know to sell until the short term top is already in and you won't know to buy back in until the short term bottom is already in.  So, you'll be late at both ends and you probably won't make nearly as much as you hope to and you'll get hurt by the short term capital gain taxes --- not to mention the bid/ask spreads selling once the down turnhas exposed itself and the buying once the up leg has exposed itself.


So, here's what I'm doing.
I'm picking a number of sectors which I think will perform well over the next 3 to 5 years and I'm buying a bunch of stocks in each of these areas.  Energy, infrastructure, foregin, agriculture, commodities, gold, silver and uranium.


I will then hold a core position in each of these areas for the long haul.


And then, I will try to take profits when I think seasonality, technicals, and fundamentals suggest my stocks or the market is getting frothy (but I will always keep my core positions).  And then when seasonality, technicals, and fundamentals suggest my stocks have corrected, I'll buy more shares.

You can also buy puts on large stocks like GFI, GG, HL, CCJ if you want to keep your stocks (to protect against the tax hit) but make money on a short term pull back.


Now, to be honest, I have not had the guts to take profits in frothy times, so I have ridden all my stocks up and down.  I'm going to try to get better reads this year on when to reduce positions and when to add.


For instance, whenever I send my brother a "Wow!" e-mail bragging about our micro-cap performance, we're at a short term top.  This technique is pretty full proof.  I even include in these e-mails a line about how now that I'm writing this e-mail, we should probably sell.  And we don't.  And we should have.

The, "I have never seen uranium stocks act this bad in 4 years of investing" e-mail this past Tuesday marked the bottom.  My brother's response was, great, with this e-mail, the bottom is in.


I recommend buying and holding a core set of larger stocks and ETFs across different sectors for good diversification and holding them through thick and thin.  Make this 50% to 60% of your portfolio.  For the other say 40%, you can try to add micro-cap miners suggested by Casey and hold some and sell some based on seasonality, technicals and fundamentals to secure profits and time some trades.  But just trade a small subset and over 3 to 6 month intervals.

At least, that's what I can suggest from my experience (and frail emotional nerves).



Suggestions for core positions include:


Commodities

BHP
RIO


Gold

GG
KGC
RGLD
GDX (as an inclusive ETF)


Silver

SLW


Uranium

DNN
UUU.TO
URRE
PDN.TO
ERA.AX


Energy

IEZ (as an inclusive ETF)
SLB
BHI
APA
NOV
ECA


Infrastructure

SGR
CLB
JEC
FLR


Foreign

EWA
EWZ
EWY
EWS


Agriculture

MOO (as an inclusive ETF)
MON



Whatever plan you take, I wish you good luck!

I'll leave you (and this long posting) with the e-mail I sent to my brother today regarding how in 2007 --- it was "really different this time" regarding seasonality and why Jan. 2 may not be a short term top this year.

The usual uranium timing was taken over my the overall stock market timing in 2007.


First we had the big correction in early March.
The overall market tanked and took uranium with it.
Uranium wasn't supposed to be down in March, one of its best months of the year.
The market snapped back and so did our stocks.  But if the market didn't snap back, our stocks wouldn't have either in my belief based on what happened in the rest of 2007.
[This year was different.]


Yes, uranium pulled back in May as ususal.


But then when the market swooned in July and August, it took the uraniums with them again. But August is normally one of the three or four best months of the year for uraniums.
[This year was different.]


And then uraniums recovered in October really, really well with the overall market.
October is usually next to May, the second worst month of the year for uraniums.
[This year was different.]


And now we get November.
Arguably the best month of the year for uranium stocks.  Maybe a close second to March.
This November (along with December) was my worst month for uraniums in 4 years.  December is also normally a strong month and was awful coming into Wednesday morning.
[This year was different.]


People only invest wildly in speculative stocks when money is easy to come by and the markets are roaring.  When money is hard to come by, and credit is tight, people sell their most speculative stocks and move to "safer" ones and use the extra cash from the sales to cover margin calls.  Deflation and credit tightening is the kryptonite of our micro-cap strategy.


So, until the overall markets get back on their feet, and the credit crisis is over, and the markets are no longer concerned with a recession, then, and only then will uranium stocks start acting in their normal seasonal patterns.



The markets swooned from July to September of this year and uranium stocks didn't rally like they normally do in July and August.

So, my theory is that if the overall markets swoon from March to June, so to will uranium stocks even if March and April are normally good months.  The exception will be if the overall markets do not swoon this early or if they snap back fast like in 2007.


I am flexible and will adjust my views as needed.

But if we start heading into a recession by 2Q and if the market has rebounded well the next two months and is no longer pricing in a slow down then the market will be primed for another big down draft of a few months in 2Q.

The Fed will need to slash rates by 2Q and this will help our stocks, but not until after another hiccup.
The hiccup, whenever it happens, will affect our micro-cap stocks.


If we think a hiccup might happen after a big up move, look for another "WOW" e-mail and we should lighten up. How much, we'll have to see.


But 2007 was different, and so too might 2008.

[sidewinder]

Hi Langman,

  I have noticed you mentioned the ETFs in other post.  You are correct that the ETF may be more secure and offer more peace of mind than individual mining stocks but the risk vs. reward has a ratio so to speak.  I just happen to have the trading personality which seeks speculative plays that offer greatest reward.  I only intended to allocate about 25% of my ammo to these small caps but throughout the year and half of trading in them I am in considerably more.  There were just too many good buys in August. 

After reading JDH’s weekly missive I can totally relate to him.  I think we are both asking ourselves the same questions about how to approach 2008 in regards to the mining stocks. I know one thing for sure; I intend to stick to only about 20-25% in the small cap and perhaps even less.  Mainly because I want to be ready for gold if it retraces any during the first quarter.

You mentioned you don’t subscribe to any of the newsletters but if you should I recommend Casey of the others.  If for no other reason than the research they do.  Unlike some that just say buy this because I have a good track record and by the way here are the charts telling you “UP 1700%”  “UP 2875% which take up 70% of the newsletter. Casey at least tells you why they recommend each stock complete with People Finances Properties and so on.     

[richmanch]

Sidewinder,

Answers to your questions:

I don't use stops.

I consult charts for the "regular" stocks that I own, like Chevron. Not so much for the uranium juniors, though it's mostly because I haven't learned the techniques. And it seems that a lot of stocks have emphatically broken their resistance--I might be wrong, but I still like these stocks. Alberta Star (I'm sorry I ever said a bad word about you) basically doubled last week.

I think I might not understand exactly how the pink sheets work. For instance,  if you trade the TD Ameritrade in the US, you trade on pink sheets, right? But you still should be able to get the stock for the right price. I don't understand what David is talking about (+ or - 5%).

I have some Canadian stocks in my TD account, but most are in Interactive Brokers. I subscribe to the market data and see the realtime bid/ask price and size. Highly recommend this brokerage for this reason. And very cheap commissions. Can't vouch otherwise--can't say they won't go belly up like Etrade, or abscond to Jamaica will all your dough.

Most of my stocks are either from Dines and Casey.

I try to buy and sell based on where I think the market is going, rather than my own personal stake--which is completely arbitrary to the life of the stock. I have no more than 20% in uranium. 

And, for what it's worth, I am not looking to get out even. I've been nibbling over the last thirty days or so, but staked out some larger positions last week. So far, that strategy is working--ASX, CHX, LAM, PNP, UUL etc. I also bought more chunks of UUU and UEC, and they're yet to really bounce.

I might cut back on these, I haven't decided. I thought these would bounce after tax selling season is over (not during), and I imagine that a lot of others had the same idea and will be looking to flip them. And it's still possible they'll be more tax selling, which could pull these stocks down on days that will probably have light volume. I don't think the next few days are going to confirm an uptrend or downtrend. I think if we're "lucky" these stocks will drift down and give us all a final chance to get it at a good price. 

I have some other thoughts and questions of my own--but I'll save them for another thread.

Good luck.

[davidslane]

Richmanch,

Traditionally, uranium stocks rally on Jan. 2 each year and then take a big hit on Jan. 3 each year which lasts about 2 weeks.  Not sure why.  Possibly the big players like to rally the stocks after tax loss season into the first trading day of the new year when fresh money hits the market and artificially rally the stocks ---- and then sell out for a short term profit by the close of Jan 2 (only to buy back in a few days later).

But uranium seasonality has been off the past year so this may not happen this year.  US job numbers come out pre-market on Jan. 4, and may swing the markets up or down.  If the job numbers are weak, this may hurt the US dollar and help resource stocks on Jan. 4.

So, if you put history on your side and you are looking to buy back in, you may want to do so on Jan. 3 after the Jan. 2 run up and before what could be a US jobs induced rally on Jan. 4.



Pink Sheets

Many of the micro-cap stocks we trade are so small that they require market makers (brokers) to handle the trades.  They match buy order and sell orders together and try to skim a little off the top.  The larger the spread, the better chance to take a few pennies a share off the trade.

Most of the mining stocks we follow trade on the Toronto exchange or the Venture exchange (I've seen referred to as the Vancouver exchange as well).  To buy them as US investors, you either have to have an account with a Canadian broker, use a US broker which can trade Canadian stocks, or buy the Canadian stocks using pink sheets in the US.


Interactive Brokers and E*Trade allow US traders to trade the Canadian stocks directly.  I use E*Trade, but I don't use this feature as there are minimums to the size of the trade blocks you have to trade to trade on foreign exchanges.  And there are some other issues as well regarding segmenting your money.  So I buy pink sheets.  I could switch from E*Trade, but I really like my service there and I have too many accounts and stocks to switch over.


The problem with pink sheets is that they trade so little volume.
For instance, UEX.TO trades around 900,000 shares a day.  The pink sheet equivolent, UEXCF trades around 35,000 shares a day.  The smaller uranium stocks may only trade 10,000 shares a day on the pinks.  This lack of liquidity makes for wide bid/ask spreads.

For example, UEX.TO may have a srpead of C$6.67/C$6.73.  That's less than 1%.  The pink sheet may have a spread of US$6.60/US$6.80.  That's a 3% spread.  Fairly average for a pink sheet.  Unless the stock is making a big move up or down, then the spread may widen to 5% or 10%.


If you want to buy, you have to hit the ask price (or have a limit order in, but it will only go through when the ask price reaches your bid --- which may not happen unless the stock goes into a quick fall --- meaning your order may not go through if you refuse to hit the ask price).  Want in, you must take the ask price and pay 5% to 10% over market.

In reverse, if you want to sell, you must hit the bid.  If the market is falling, you may have to take a 10% to 15% hit on your desired sell price just to hit the pink sheet bid price.  Or just keep waiting with a limit order for the stock to rally an extra 10% (but your order will stay where it was --- so you still take a 10% hit).


Let's look at a stock under $0.50.

Cash, CHX.V has a bid ask of C$0.45/C$0.46.  That's 2% in Canada.  In the US pink sheet CHXMF, that spread may be US$0.41/US$0.47.  That's 13%.  If Cash is having a slow day, the spread may only be 10%.  On last Tuesday's capitulation day, I saw spreads as large as 20% on the pinks.

Imagine buying a stock and having an immediate 15% loss as soon as the trade goes through based on the bid to sell that stock.  That's what you get with pink sheets, especially those trading under $1.



Think of it as a penalty for using pink sheets.


Dines recommends pink sheet symbols, but never takes into account how the spreads may decrease his performance by another 15%.


Here's what Steve Saville of Speculative Investor (http://www.speculative-investor.com/new/index.html) has to say about pink sheets.

We are in a secular bull market for natural resources and a large proportion of the money spent throughout the world on mineral exploration is spent by Canada-based companies. Therefore, the Toronto Stock Exchange is probably the world's most important stock market at this time and is likely to remain so for many years to come.

To maximise your investment returns you need to go to where the bull market is. This doesn't mean you should move to Canada, but you must be able to trade on the Canadian stock markets. Many of the small exploration-stage resource stocks that trade in Canada also trade over-the-counter (OTC) in the US on markets such as the Pink Sheets, but the Pink Sheets and other markets of its ilk are not proper stock exchanges. Rather, the buying and selling on these 'markets' is totally controlled by market makers who make their money by maintaining wide buy/sell spreads.

As well as the additional costs incurred by traders/investors due to wide spreads, the poor liquidity that is often characteristic of Pink Sheets stocks can make it impossible to 'get in' at a reasonable price during a fast upward-moving market and 'get out' at a reasonable price during a fast downward-moving market. Also, because the OTC markets in the US are not proper stock exchanges it is possible for the price of a stock to trade through your buy/sell limit without your order being executed. Last but not least, although it is generally possible, albeit not advisable, to trade the junior Canadian resource stocks on the Pink Sheets, it is often not possible to trade Canadian stock warrants on the Pink Sheets. This is a problem because during a long-term bull market for natural resources the warrants issued by junior resource companies will regularly provide some of the stock market's best money-making opportunities.

In our opinion, therefore, the Canadian juniors should not be traded on the US OTC markets. Furthermore, there's generally no good reason to trade the Canadian juniors on these markets because it is easy for anyone to open an account with a broker that provides the facility to trade directly on the Canadian stock exchanges (the TSX and the TSXV). Here are some suggestions:

  a) It is possible to trade in Canada via some of the major US on-line brokers. For example, http://www.interactivebrokers.com provides its customers with convenient low-cost access to several non-US stock exchanges, including the Canadian exchanges. However, it is generally not possible to trade warrants on junior Canadian resource shares via Interactive Brokers.

  b) Pennaluna and Delta Global Advisors are two US-based companies that, as far as we can tell, provide a good service for people outside Canada who want to trade on the Canadian exchanges (Delta is an off-line broker, Pennaluna provides the option to trade on- or off-line). Refer to the bottom section of the 16th April 2007 Weekly Market Update for more details.

  c) Charles Cox Sr, a broker at UBS (one of the world's largest financial companies), has clients from all over the world and is very familiar with the Canadian-traded resource shares. Phone: 1-800-2252385 (ext 8307) or 1-617-4398307.

  d) Euro Pacific Capital in Oregon does business directly through Canaccord's primary trading desk. Contact Will Reishman at 1-877-7400174.

  e) It is possible for anyone (as far as we know) to open an account with a major Canada-based brokerage such as Canaccord. At least, we can confirm that it is not a problem for an Australian living in China to do so.

Again, if you expect a 100% or 1000% return on a pink sheet and plan to hold it a while, then giving up 10% to 20% is not that bad.  But to skim 30% a time on pink sheets and then give up half of that to the bid/ask spread is a really bad choice!

[richmanch]

Thanks for the explanation. I then don't understand why anyone with more than a few stocks, and who trades more than  a few times a month, would not use IB. I kept TD for my US stocks, and still have some old pink sheets in there.

I'm a relatively new investor, and actually had to stretch the truth in order to get an account at IB. They don't want novices. But, it's been great for someone like me--You can see the manipulation first hand. ASX: bid .445 at 10,000 shares; ask .45 at 7,000 shares; last sale .49 at 300 shares. This can happen right at the end of the day (the best time to be watching) in order to give the stock a misleadiing closing. The transparency is great, and so are the low commissions--sometimes only a dollar. You can build a position with 3, 5 or even 10 purchases. Again, for someone without a lot of experience, it's easier to buy in stages.

[langman57]

That explains why I was getting those bad readings on Blue Rock. And I concur, the Canadian Exchanges are where the action is with a lot of those smaller mining stocks. I'm not sure about opening up another account in order to get at them. Nothing against Canada. As a boy I attended Haliburton Hockey Haven outside Ontario. That's when I wanted to play for the Rangers. That didn't pan out either. Oh well.

[sidewinder]

Davidslane,

  I expected nothing less from you.  Thanks for sharing your knowledge.  FWIW I don't "trade" the small caps but position trade the S&P.  I mostly buy and hold these Small Caps simply because of all the reasons you stated.  But I want to be able to take profits as we go along.  I didn't do much of that last year electing to hold through the dips.  (in my mind carnage)  this led to riding down down down.  Then couple this with all the bad economic news of the sub-prime melt down I began to worry and then sweat.  I plan to trim down my exposure in the mining stocks to less than 20% simply for peace of mind.  I may kick my own $%## three years from now but I could avoid a huge loss of sanity.

  Also I have over 40 different stocks and keeping track of this "wild bunch" takes up too much time.  My plan is to trim it down to the 10-12 best and watch the seasonal nature of these stocks. 

I hope this little bounce will last through Jan 2.  If your prediction proves valid you certainly deserve some sort of award.  I printed you response to my questions so I might review you advice on ocassion in the future.  I like the web site you linked also.  I will log on for a while and see if it is for me. 

Anyway I know I will have more questions after I can properly digest you reply. 

As always great post and thanks for your input