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Investor Wisdom - Dark Clouds Gathering on the Horizon

This page was created to give you access for trading tools and information. It helps to be able to keep track of what is going on in the stock market from day to day, and to understand the various stock trading systems that people use when investing, such as day trading, swing trading and scale trading. Most investment newsletters focus on one of theses.

Scale Trading is a disciplined, mechanical approach to buying low and selling high. It is based on the economic law of Supply and Demand, built on the premise that a physical commodity has an intrinsic value and, therefore, will not likely become valueless. The "what works" for the Scale Trading approach is that we can outline our trading plan ahead of time by carefully evaluating current supply/demand statistics and then comparing those with the commodity's historical price range. This gives us the ability to then pinpoint the price at which we want to begin our scale down buying and, most importantly, calculate the total capital we will likely need to maintain that scale under our worst case scenario. In addition to patience and money, here is the combination you need for scale trading:

Physical commodities only - something that is grown or mined and is consumed, therefore subject to supply and demand forces.

Historically low prices - you can determine that several ways but basically all you have to do is look at a long-term price chart for the last 20-25 years and divide the price range from low to high in thirds. A market in the lower third is a candidate for scale trading although you may not want to implement such a plan unless prices fall into, say, the bottom 10% of the total range or a more recent range of, say, the last 10-15 years.

Swing Trading: A style of trading that attempts to capture gains in a stock within one to four days.

To find situations in which a stock has this extraordinary potential to move in such a short time frame, the trader must act quickly. This is mainly used by at-home and day traders. Large institutions trade in sizes too big to move in and out of stocks quickly. The individual trader is able to exploit the short-term stock movements without the competition of major traders. Swing traders use technical analysis to look for stocks with short-term price momentum. These traders aren't interested in the fundamental or intrinsic value of stocks but rather in their price trends and patterns. Swing Trading requires that pay close attention every day to all stocks.

Day Trading: Day traders rapidly buy and sell stocks throughout the day in the hope that their stocks will continue climbing or falling in value for the seconds to minutes they own the stock, allowing them to lock in quick profits. Day trading is extremely risky and can result in substantial financial losses in a very short period of time. If you are a day trader, or are thinking about day trading, read our publication, Day Trading: Your Dollars at Risk. We also have warnings and tips about online trading and day trading.

Day Trading for a Living
There are two primary divisions of professional day traders: those who work alone and/or those who work for a larger institution.

Most day traders who trade for a living work for a large institution. The fact is these people have access to things individual traders could only dream of: a direct line to a dealing desk, large amounts of capital and leverage, expensive analytical software and much more. These traders are typically the ones looking for easy profits that can be made from arbitrage opportunities and news events. The resources to which they have access allow them to capitalize on these less risky day trades before individual traders can react.

Many people attracted to the "Get rich Quick" theory of investing jump too quickly into one of the stock trading systems defined above. Being willing to stay in for the long haul sometimes is the common sense approach, but if you are planing to go one of these directions, it is all about "doing your homework". Our stock market investment newsletter, The Common Sense Investor, will help you make decisions that will provide for a more proffitable future.

DARK CLOUDS ON THE HORIZON

OIL has given investors a much needed respite, dropping temporarily back below $50 per barrel. Don’t get too comfortable because it won’t last too long. We expect demand to start rising again this summer and there will be no way to increase supply. Oil prices will again rise in earnest and gas prices will move up right along with it.

One thing that Wall Street refuses to acknowledge and investors continue to think is a temporary apparition is higher oil prices. HIGHER OIL PRICES ARE HERE TO STAY.

With the unstoppable growth of China and India and the US consumers “bigger is better” consumption attitude, OIL prices will remain high. In fact, it will take at least a decade and even higher oil prices to cause consumers to become much more energy conscious and conservative. Only then will oil prices begin to trend lower but that trend could begin from prices that no one ever thought was possible…over $100 per barrel.

The fact that oil will remain high and most probably move higher in the future will keep a cap on the stock market. It also raises the specter of inflation which keeps the FED raising interest rates. This too keeps a lid on the stock market.

Rising oil and rising interest rates cause the consumer to slowdown spending and corporate profits to slowdown. All of these in moderation will keep a lid on how high the market can go over the next few years. An acceleration in any of these items and the market could head back into a renewed bear market which should take us down to retest the bear market lows.

For COMMON SENSE INVESTORS you must be ready to profit when we get the market moves we were looking for (like now) and you must always keep your losses small. As the market continues to move higher over the next few weeks make sure that you take some partial profits and move your stops higher so that you are ready to get out of a position once the market turns lower. We also want to use this market rally to look for good stocks to short, so that we can profit as the market heads lower.

I expect the summer to be dreadfully slow(much like last summer) and the real profits will come from the downside shorting stocks that disappoint. We will keep you apprised of the stocks that meet our criteria.

Lets see what the new year will bring! Our investment newsletter will add tips throughout the year.

Have a Profitable 2006,

Marc Barhonovich

Editor

The Common Sense Investor

Buy Now

No Buy Now for June, 2005

Additions

Broadwing (BWNG) -

Buy Limit $4.25                    Stop $3.50

Broadwing Corporation is a No Brainer at its current level.  With over $3.00 in cash, a book value of just under $6.00, increasing revenues and improved earnings, Broadwing is poised to rally.  Technically, BWNG has lost most of its downside momentum which is very typical after the market makers wash out most of the selling.  The stock is also showing early signs of accumulation by institutions.  Look for solid company fundamentals to be priced into the stock very soon.  Our proprietary indicators show Broadwing to be heavily undervalued at its current market price.

Deletions

No Deletions for June, 2005

Special Adjustments

Pfizer (PFE) - Have you ever taken an over-the-counter drug?  Chances are Pfizer was the maker and distributor of that drug.  With over $50 billion in annual sales, it’s hard not to find them in any pharmacy or grocery store.  With technical indicators lining up nicely and a 2.8% dividend makes Pfizer a drug we would like to take.  Pfizer discovers, develops, manufactures and markets prescription medicines, as well as over-the-counter products, for humans and animals.

Have you ever taken an over-the-counter drug?  Chances are Pfizer was the maker and distributor of that drug.  With over $50 billion in annual sales, it’s hard not to find them in any pharmacy or grocery store.  With technical indicators lining up nicely and a 2.8% dividend makes Pfizer a drug we would like to take.  Pfizer discovers, develops, manufactures and markets prescription medicines, as well as over-the-counter products, for humans and animals.

Portfolio Updates

No Portfolio Updates for June, 2005

 

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