IBD MEETUP/NORTHRIDGE

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IBD MEETUP/NORTHRIDGE

• LETS MEETUP AND DISCUSS STRATEGY FOR Q3gtQ4-2014
• AND REVISE OUR WATCHLIST

09/13/2014
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DISCLAIMER

1. During the course of this meeting we will review
   stocks that should be considered as additions to
   your watch list.
2. These are not trade recommendations. These are
   candidate trades.   Do your own research, keep
   position sizes modest, and stay diversified. 
3. Also past performance is no indication of future
   stock trends.

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TECHNICAL vs FUNDAMENTAL ANALYSIS

• Technical Analysis is the study of market action,
  primarily through the use of charts, for the
  purpose of forecasting future price trends.
  Market Action includes
• Price
• Volume
• Open Interest
• Technical Approach is based on 3 premises
• Market action discounts everything. cornerstone
• Prices move in trends. reflecting supply and
  demand
• A trend in motion is more likely to continue than
  to reverse.
• History repeats itself.
• Human psychology tends not to change.
• Fundamental Analysis examines all the relevant
  factors influencing Supply and Demand seeking to
  find Intrinsic Value. If the market is below
  Intrinsic Value, it is underbought and above it
  is oversold.
• The fundamentalist studies the cause of market
  movement while the technician studies the effect.

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DOW THEORY

• An important part of Dow theory is distinguishing
  the overall direction of the market. To do this,
  the theory uses trend analysis.
• Before we can get into the specifics of Dow
  theory trend analysis, we need to understand
  trends.
• First, it's important to note that while the
  market tends to move in a general direction, or
  trend, it doesn't do so in a straight line.
• The market will rally up to a high (peak) and
  then sell off to a low (trough), but will
  generally move in one direction.
• An upward trend is broken up into several
  rallies, where each rally has a high and a low.
• For a market to be considered in an uptrend, each
  peak in the rally must reach a higher level than
  the previous rally's peak (HH), and each low in
  the rally must be higher than the previous
  rally's low (HL).
• A downtrend is the opposite. (LH) (LL)

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PRIMARY TREND

• In Dow theory, the primary trend is the major
  trend of the market, which makes it the most
  important one to determine.
• This is because the overriding trend is the one
  that affects the movements in stock prices.
• The primary trend will also impact the secondary
  and minor trends within the market.
• Dow determined that a primary trend will
  generally last between one and three years but
  could vary in some instances.
• Regardless of trend length, the primary trend
  remains in effect until there is a confirmed
  reversal.
• For example, if in an uptrend the price closes
  below the low of a previously established trough,
  it could be a sign that the market is headed
  lower, and not higher.
• When reviewing trends, one of the most difficult
  things to determine is how long the price
  movement within a primary trend will last before
  it reverses.
• The most important aspect is to identify the
  direction of this trend and to trade with it, and
  not against it, until the weight of evidence
  suggests that the primary trend has reversed.

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SECONDARY, OR INTERMEDIATE, TREND

• In Dow theory, a primary trend is the main
  direction in which the market is moving.
• Conversely, a secondary trend moves in the
  opposite direction of the primary trend, or as a
  correction to the primary trend.For example, an
  upward primary trend will be composed of
  secondary downward trends.
• This is the movement from a consecutively higher
  high to a consecutively lower high. In a primary
  downward trend the secondary trend will be an
  upward move, or a rally. This is the movement
  from a consecutively lower low to a consecutively
  higher low. Right is an illustration of a
  secondary trend within a primary uptrend. Notice
  how the short-term highs (shown by the horizontal
  lines) fail to create successively higher peaks,
  suggesting that a short-term downtrend is
  present.
• Since the retracement does not fall below the
  October low, traders would use this to
  confirm the validity of the correction within a
  primary uptrend.
• In general, a secondary, or intermediate, trend
  typically lasts between three weeks and three
  months, while the retracement of the secondary
  trend generally ranges between one-third to
  two-thirds of the primary trend's movement.
• For example, if the primary upward trend moved
  the DJIA from 10,000 to 12,500 (2,500 points),
  the secondary trend would be expected to send the
  DJIA down at least 833 points (one-third of
  2,500).
• Another important characteristic of a secondary
  trend is that its moves are often more volatile
  than those of the primary move.

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MINOR TREND

• The last of the three trend types in Dow theory
  is the minor trend, which is defined as a market
  movement lasting less than three weeks.
• The minor trend is generally the corrective moves
  within a secondary move, or those moves that go
  against the direction of the secondary trend. 
• Due to its short-term nature and the longer-term
  focus of Dow theory, the minor trend is not of
  major concern to Dow theory followers.
• But this doesn't mean it is completely
  irrelevant the minor trend is watched with the
  large picture in mind, as these short-term price
  movements are a part of both the primary and
  secondary trends.Most proponents of Dow theory
  focus their attention on the primary and
  secondary trends, as minor trends tend to include
  a considerable amount of noise.
• If too much focus is placed on minor trends, it
  can to lead to irrational trading, as traders get
  distracted by short-term volatility and lose
  sight of the bigger picture.Stated simply, the
  greater the time period a trend comprises, the
  more important the trend.

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MAJOR TRENDS THREE PHASES

• Dow theory -there are three phases to every
  primary trend
• The Accumulation phase (distribution phase)-The
  first stage of a bull market is referred to as an
  Accumulation phase, which is the start of the
  upward trend the point at which informed
  investors start to enter the market when the
  price of the market is at its most attractive
  level.
• The public Participation phase-During this phase,
  negative sentiment dissipates as business
  conditions - marked by earnings growth and strong
  economic data improve permeating the market
  more and more investors move back in, sending
  prices higher. This phase tends to be the longest
  lasting, and the one with the largest price
  movement as the new upward primary trend has
  confirmed itself
• A Panic phase (excess phase)- the one in which
  the smart money starts to scale back its
  positions, selling them off to those now entering
  the market. ("irrational exuberance). The
  perception is that everything is running great
  and that only good things lie ahead the time
  when the last of the buyers start to enter the
  market buying near the top. 

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DOW SUMMARY

•  While the Dow Theory is one of the best systems
  for determining the markets trend, do not
  believe in all-or-nothing market-timing, for
  several reasons
• The Dow Theory is not infallible, and it is not
  designed to be a foolproof prediction system.
• History suggests that when both the Dow
  Industrials and Dow Transports are reaching
  significant highs, stocks are likely to continue
  rising. When both averages are reaching
  significant lows, stocks are likely to remain
  under pressure. But the Dow Theory will nearly
  always be bullish at the markets absolute top
  and bearish at the bottom.
• The Dow Theory should be viewed as a system, not
  a divining rod. Nothing knows where the market is
  heading, but Dow Theory in a disciplined,
  moderate manner can help keep the odds in your
  favor.
• Sometimes, the Dow Theorys verdict is mixed. The
  Industrials and Transports do not always align.

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CONSUMER SENTIMENT
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PUT/CALL RATIO vs VOLATILITY
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KEY ECONOMIC INDICATORS

• Gross Domestic Product (GDP) is the value of all
  goods and services produced in the U.S.
• Producer Price Index measures the change in
  prices received by the original producer at the
  wholesale level.
• Consumer Price Index measures the change in
  prices paid by consumers for a representative
  group of products and services.
• ISM Purchasing Manager's Index is a gauge of
  conditions in the manufacturing sector of the
  economy. (50)

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WHAT IS VIX?

• VIX is not a measure of historical volatility
• VIX is a measure of implied volatility which is a
  forward looking measure
• Historically VIX has had an inverse relationship
  with price changes in the SP 500
• VIX has drifted lower when the market is in a
  bullish phase and tends to move higher when the
  SP 500 sells off
• This inverse relationship is a function of how
  SPX options are used by market participants
• See the Chart to the right----?

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WHAT THE VIX CAN TELL US

• Possibly some really spectacular opportunities in
  the weeks ahead as we see this market breakout or
  breakdown.
• In the short term, as long as the VIX holds
  12.50, bullish momentum will keep going for the
  week ahead.
• If the VIX can close below 11.50, it will confirm
  that fresh all-time highs for the SP 500 Index
  are on the way.
• If the bears can break 12.50, then well be at
  risk of another downtrend and a possible
  breakdown.

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SP500 vs VIX
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WHAT IS MOMENTUM INVESTING?

• Momentum investing involves buying and selling
  stocks that are likely to witness a substantial
  jump in prices in a short span of time. In other
  words, the investor buys stocks that are about to
  soar and sells them at a much higher price. As a
  momentum investor, one seeks to identify stocks
  that have the potential to yield spectacular
  returns within a short to medium holding period,
  say, 1-6 months.
• When the market rallies, momentum stocks are
  usually better placed to lead the market and
  touch new highs. Typically, the strategy involves
  capitalising on an existing trend. So, one would
  try to lock in gains by riding hot stocks, those
  that are already witnessing a surge in prices, or
  momentum. Alex Mathews, head of research, Geojit
  BNP Paribas Financial Services, says, "Momentum
  investing is essentially about betting on stocks
  that have already gathered momentum."
• This involves monitoring stock prices daily and
  cashing out within weeks or months of acquiring
  the asset. However, this is not as easy as it
  sounds. Momentum play can be highly misleading
  and frustrating at times. If you get your
  calculation wrong, the money may just as easily
  go down the drain. Without the right tools,
  getting a fix on such stocks is difficult. Hitesh
  Sheth, head, technical research, Prabhudas
  Lilladher, says, "Momentum investing can be
  rewarding if you can master the use of the
  indicators available. The strategy can work both
  waysyou can ride the bull markets as well as
  benefit from market declines."

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HOW TO SPOT MOMENTUM STOCKS

• For those keen on making money from this
  strategy, there are several indicators or tools
  that can help identify momentum stocks. However,
  before learning about these indicators, you must
  understand the logic behind their functioning.
• As anyone driving a car knows, he needs to slow
  down to change the direction. Likewise, the speed
  at which a stock is moving up or down will reduce
  before the final turnaround. The momentum
  indicators help you capture this reduction in
  speed. However, a stock that is losing momentum
  need not necessarily result in a turnaround. Just
  as a car can slow down, but then accelerate
  again, so should a loss in momentum be considered
  as an indication of a possible turnaround.
  Through the following charts, we explain some
  simple momentum indicators and a few basic rules.
  You can start keeping track of the performance of
  some potential momentum stocks using these tools.
  Over time, you will be able to spot the stocks
  that can deliver high, double-digit returns in a
  few months or even weeks. These indicators are
  readily available for investors on Websites, such
  as yahoofinance.com.

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RATE OF CHANGE

• The rate of change (RoC) indicator is a basic
  momentum oscillator, which measures the speed at
  which the stock price is changing within a
  defined time period. It calculates the percentage
  change between the most recent stock price and
  the price that existed 'n' periods ago. When
  plotted as a trendline, it forms an oscillator
  that fluctuates above and below the zero line as
  the RoC moves from positive to negative.
• A value greater than zero indicates an increase
  in upward momentum (spike in RoC reflects a sharp
  uptick in price) and a value less than zero
  suggests an increase in downward pressure (plunge
  in RoC reflects a sharp fall in price). However,
  this indicator can be misleading if used in
  isolation. It should be used in combination with
  other momentum indicators.

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VOLUME

• Trading volume
• Another indicator to be considered is the trading
  activity around the stock, which is represented
  by its trading volume.
• The stocks that are adequately supported by
  strong volumes can be assured of continued
  interest, at least in the near term.
• Low trading volumes, on the other hand, indicate
  lack of interest in the security and, therefore,
  a lack of momentum.
• Usually, momentum investors prefer to buy stocks
  that are rising with high volume and sell stocks
  that are falling with high volume.
• Volume contains the sum total of all fact and
  opinion translated into action.

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VOLUME

• Volume is one of the most important technical
  analysis tools to learn and understand how to
  apply to price movements.
• Volume increases every time a buyer and seller
  transact their stock or futures contract.
• Volume has two major premises
• When prices rise or fall, an increase in volume
  is strong confirmation that the rise or fall in
  price is real and that the price movement had
  strength.
• When prices rise or fall and there is a decrease
  in volume, then this is interpreted as being a
  weak price move.

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ON BALANCE VOLUME

• On Balance Volume. On Balance Volume measures
  volume flow. When a stock or ETF closes up,
  volume is added to the line and when a stock
  closes down, volume is subtracted from the line.
  A cumulative total of the volume additions and
  subtractions form the On Balance Volume line.
• The theory behind OBV is based on the distinction
  between smart money namely, institutional
  investors and less sophisticated retail
  investors. As mutual funds and pension funds
  begin to buy into an issue that retail investors
  are selling, volume may increase even as the
  price remains relatively level. Eventually,
  volume drives the price upward. At that point,
  larger investors begin to sell, and smaller
  investors begin buying.

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ON BALANCE VOLUME (OBV)

• On Balance Volume (OBV) combines price and volume
  to determine whether price movements are strong
  or are weak and lacking conviction.
• On an up day, the volume is added to the previous
  day's OBV
• On a down day, the volume is subtracted from the
  previous day's OBV.
• Volume is usually interpreted as follows
• Increasing or decreasing price with increasing
  volume, confirms the trend.
• Increasing or decreasing price accompanied by
  decreasing volume, price move is weak lacking
  conviction.
• The OBV indicator is used to confirm price trends
  or warn of potential price reversals when
  divergences of the price and the OBV indicator.

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RELATIVE STRENGTH INDEX - RSI

• The RSI compares the magnitude of recent gains to
  recent losses. It is calculated by using the
  formula, RSI100-100/(1RS), where RS is the
  average price for 'x' days when the stock closes
  up divided by the average price of 'x' days when
  it closes down. RSI ranges from 0 to 100 and a
  stock is considered to be overbought when this
  value is above 70, and oversold when it is below
  30.
• However, these are not considered as buy or sell
  signals because the stock may continue to move,
  taking the RSI to much higher/lower levels. Like
  other indicators, a signal is generated when a
  stock loses its momentum and turns around. In
  this case, RSI crossing the 70 mark from above is
  considered a a sell signal and crossing the 30
  mark from below is considered a buy signal.

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MACD SIGNAL

• The moving average convergence divergence (MACD)
  indicator is used to confirm the buy or sell
  signals for a particular stock, as given by other
  indicators, such as relative strength. It shows
  the relationship between two moving averages of
  stock prices (usually the 26-day and 12-day
  moving averages).
• The MACD indicator comprises two lines. The first
  depicts the movement that is the difference
  between the two moving averages, while the other
  is the signal line (usually the 9-day moving
  average of the MACD), which is plotted on top of
  the first line, functioning as the trigger for
  buy and sell signals. When the MACD falls below
  the signal line, it is a bearish signal, which
  indicates that it may be time to sell.

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MACD DIVERGENCE

• Traders employ indicators like the MACD, RSI,
  etc, to identify divergence between the stock
  price movement and the respective indicator. For
  example, if a stock touches a new high, but the
  MACD fails to do so (that is, the recent MACD
  high is lower than the previous high), it is
  called negative divergence.
• This shows that the buying momentum has slowed
  down in the counter and, therefore, the uptrend
  in the stock price may be coming to an end.
  Likewise, positive divergence occurs when a stock
  makes a new low, but its MACD fails to make one.
  This implies that selling pressure has receded
  and that the downtrend in the counter may not
  continue for long.

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BOLLINGER BAND SIMPLE STRATEGY

• It has been found that buying the breaks of the
  lower Bollinger Band is a way to take advantage
  of oversold conditions. Usually, once a lower
  band has been broken due to heavy selling, the
  price of the stock will revert back above the
  lower band and head toward the middle band. This
  is the exact scenario this strategy attempts to
  profit from. The strategy calls for a close below
  the lower band, which is then used as an
  immediate signal to buy the stock the next day. 

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TRADING WITH BOLLINGER BANDS

• Bollinger upper and lower bands close to each
  other in the area of white arrows makes a narrow
  range a breakout that can be the beginning of a
  big trend. You can easily predict the direction
  of the breakout with the signals that the market
  already has shown. Just follow the numbers at the
  image.
• The candlestick 1 has a long lower shadow. What
  does that mean? It means a big Bullish pressure
  is imposed to the market suddenly. So the price
  wants to go up. This is the first signal. You
  could take a long position after this candle but
  the market would show you some more signals to go
  long.
• After candle 1, market becomes slow and
  Bollinger upper and lower bands become so close
  to each other.
• Candle 2 shows a breakdown with the Bollinger
  lower band but it is closed above it. This candle
  also has a long lower shadow that reflects the
  upward pressure.
• Then the market becomes slow for
  several candles BUT candle 3 assures you that
  the range is broken up.
• So if you didnt have a long position, you could
  go long at the close of 3 candle. Then some red
  candles are appeared but you should know
  that after a range breakout, the very first
  reversal signal is not in fact a reversal signal.
  It is a continuation signal.

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KELTNER CHANNELS

• Keltner Channels are volatility-based envelopes
  set above and below an exponential moving
  average.
• Similar to Bollinger Bands, which use the
  standard deviation to set the bands, Keltner
  Channels use the Average True Range (ATR) to set
  channel distance.
• The channels are typically set two Average True
  Range values above and below the 20-day EMA.
• The exponential moving average dictates direction
  and the Average True Range sets channel width.
• Keltner Channels are a trend following indicator
  used to identify reversals with channel breakouts
  and channel direction. 
• Channels can also be used to identify overbought
  and oversold levels when the trend is flat.
• Trends often start with strong moves in one
  direction or another. A surge above the upper
  channel line shows extraordinary strength, while
  a plunge below the lower channel line shows
  extraordinary weakness. Such strong moves can
  signal the end of one trend and the beginning of
  another.

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SPRINGBOARD

• A candlestick buy signal that only TechniTrader
  teaches. It is called the springboard and it
  occurs often in lower priced stocks poised to
  move up quickly. It is a very reliable
  candlestick buy signal based on a group of
  candles forming in a specific way. The volume and
  institutional accumulation indicators-the bars
  below confirm there is sufficient energy and
  buying activity behind the price to move it up
  for good swing trade profits.

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SPRINGBOARD

• And the stock moves up quickly for swing trade
  profits.

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EXAMPLE

• As of 8/8/14 TSLA was trading at 250, and you
  are convinced that TSLA is going to be
  substantially higher within a year or two.
• Buy the stock outright, receiving roughly 80
  shares of common stock for 20,000.
• Or leverage TSLA 2-1 on margin, bringing your
  total investment to 40,000 and 160 shares of
  stock with an offsetting debt of 20,000.
• Or buy 2 LEAP contracts controlling 200shares
  TSLA Jan 16 250 Calls _at_ 51, 10,200.
• AS OF 9/12/14 The LEAP calls were at 67.29 x
  200 13,458-10,200 3,258 31.94 in one
  month.

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WATCHLIST AS OF 9/12/14
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NEXT MEETING

• IBD WILL HOST THE NEXT MEETING OF THE NORTHRIDGE
  IBD MEETUP. BE SURE TO RESERVE THE DATE, OCTOBER
  11, 2014, AND INVITE YOUR FRIENDS TO ATTEND.
• JASON DAMORE WILL DISCLOSE SOME EXCITING NEW
  TECHNIQUES DEVELOPED BY IBD.