Master Class on Stocks - Alessio Rastani › tools › download › Master_Class_Course_on… ·...

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Master Class on Stocks

With Alessio Rastaniwww.LeadingTrader.com

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Quick Quick RecapRecap on Previous Lesson on Previous Lesson

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1) Investing Golden Rules & Psychology

2) Understanding the big picture

3) Choosing Quality companies

4) When to buy and when to sell

5) Take Action!

The 5 steps to Stock Investing Success

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Fundamental

Technical

Execution

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1) What do we buy? (fundamental analysis)

2) How many do we buy? (money management)

3) When do we buy? (technical analysis)

4) When do we sell? (technical analysis & a bit of fundamentals)

4 Questions we ask BEFORE we buy a stock:

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a) The Economy

Economic Cycles:

1) Early Expansion 4) Early Contraction

2) Middle Expansion 5) Late Contraction

3) Late Expansion 19

Certain sectors perform better at specific points in

the cycle

Boom Bust

e.g. technology

e.g. Health care

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During the economic cycle which sectors should I invest in?

1) Early Expansion – Capital Goods, Technology, Transportation

2) Middle Expansion – Capital Goods

3) Late Expansion – Energy, Basic Materials, Consumer Staples

4) Early Contraction – Utilities, Consumer Staples,

5) Late Contraction – Financials, Consumer Cycles

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Which shares should I invest in?Which shares should I invest in?

Auto Parts, Automobiles, Broadcast Media, Building Materials, Entertainment, Hardware & Tools, Homebuilding, Hotel / Motel, Household Furn / Appl, Leisure Time, Manufactured Housing, Publishing, Restaurants, Retail, Shoes, Textiles, Toys.

Consumer Cyclicals

Insurance Brokers, Investment Bank / Brokerage, Insurance, Banks, Personal Loans, Savings & Loans, Financial.

FinancialsLate Contraction

Beverages, Cosmetics, Distributors, Foods, Health Care, Hospital Management, Household Products, House-wares, Medical Products & Supplies, Retail, Tobacco.

Consumer Staples

Electric Companies, Natural Gas, Miscellaneous.UtilitiesEarly Contraction

Beverages, Cosmetics, Distributors, Foods, Health Care, Hospital Management, Household Products, House-wares, Medical Products & Supplies, Retail, Tobacco.

Consumer Staples

Aluminium, Chemicals, Containers, Gold Mining, Metals, Paper, Steel.

Basic Materials

Oil & Gas Drilling, Oil, Oil Well Equipment & Services.EnergyLate Expansion

Aerospace, Electrical Equip, Engineering & Construction, Heavy Duty Trucks & Parts, Machine Tools, Machinery, Manufacturing, Pollution Control.

Capital GoodsMiddle Expansion

Airlines, Railroads, Truckers, Transportation.Transportation

Communication Equipment, Computer Software & Services, Computer Systems, Electronics, Office Equipment & Supplies, Photography / Imaging,Telecommunications.

Technology

Aerospace, Electrical Equip, Engineering & Construction, Heavy Duty Trucks & Parts, Machine Tools, Machinery, Manufacturing, Pollution Control, Packaging.

Capital GoodsEarly Expansion

INDUSTRIES IN EACH SECTORSECTORS (S&P 500)CYCLE

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Sector PerformanceSector Performancewww.marketwatch.com/tools/industrywww.marketwatch.com/tools/industry

SELECT PERIOD

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NOW MAKE A NOTE OF THE 10 BEST

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Sector Performance Sector Performance www.sectorspdr.com/marketmapwww.sectorspdr.com/marketmap

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1) Pay attention to the bigger market indexes.

2) E.g. S&P 500, Dow 30, Nasdaq, FTSE, Dax etc.

3) Remember: A rising tide raises all the boats (and vice versa).

4) Therefore if the market indexes start rising, they will most likely push the price of the majority of stocks up as well.

The Markets vs. Stocks

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Choosing Quality Companies

Fundamental Criteria What do we want?PEG RATIO <=1

CURRENT RATIO >=1

EPS GROWTH >=20%

5 YEAR EARNINGS GROWTH >=5%

NET INCOME (REVENUE) >=$50 Million

NET INCOME GROWTH >=20%

DIVIDEND YIELD >=1

NET INCOME MARGIN >=10%

P/E RATIO <=20

Optional additional criteria:

>= Greater than or equal to <= Less than or equal to

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Screening for Screening for TOP QUALITYTOP QUALITY Companies Companiesin seconds…in seconds…

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Screening for Quality CompaniesScreening for Quality Companieswww.nasdaq.com/reference/StockScreener.stmwww.nasdaq.com/reference/StockScreener.stm

www.leadingtrader.com/stockscreenerwww.leadingtrader.com/stockscreener

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You should then have a list of between 50 – 100 companies.

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Strategy #1 – Trendline Ambush

BIDU re-tests theTrendline support3 times. Either of theseis a buy opportunity.

BIDU - Baidu

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Strategy #1 – Trendline Ambush

Retest of the“New” Trendline

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Strategy #2: 200 MA Ambush

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Amazon

DAILY chart

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Exit StrategiesExit Strategies

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EXIT based on close BELOW the Weekly 8 EMA (T-line)

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1. Shares / stocks

2. CFDs

3. Spreadbetting

4. Options

5. ETFs of industries

You STILL get paid dividends with CFDs and spread betting (not just shares).

Different Methods of Investing:

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Selling Short • Making money in a downward market, index or stock.

• Sell high - buy back low.

• Selling something you do not own.

• Borrow shares from broker and sell to the market place.

• Account is frozen to the current value of the shares borrowed.

• When the share prices falls you buy back the shares at a lower price.

• Transaction is complete shares are returned to the broker and you keep the difference.

• If the share price goes up to close your position you have to buy the shares back at a higher price.

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You Market Maker

You Sell to market @ £10 x 100

Account Frozen by £1000

Buy Back from the market 100 shares x £5 = £500

YouMarket Maker

Price drops to £5 per Share

YOU KEEP £500! Receives Back 100 Shares

Lends You 100 Shares

100 Shares Owed to Market Maker

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1) Borrow 1000 shares of BP1) Borrow 1000 shares of BP

from brokerfrom broker

SELL SHORT BPSELL SHORT BP

@ £6 per share@ £6 per share

BUY BACK BPBUY BACK BP

2) Broker will require deposit2) Broker will require deposit

of £6000 from you (£6 x 1000)of £6000 from you (£6 x 1000)

3) SELL BP shares at £6 / share3) SELL BP shares at £6 / share

- You now have £6000- You now have £6000

4) BP stock drops due to bad news4) BP stock drops due to bad news

5) BUY BACK BP shares at5) BUY BACK BP shares at

discounted £3 per share (£3,000)discounted £3 per share (£3,000)

6) Return the shares to broker6) Return the shares to broker

BP shares - 2010BP shares - 2010

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1) Borrow 1000 shares of BP1) Borrow 1000 shares of BP

from brokerfrom broker

SELL SHORT BPSELL SHORT BP

BUY BACK BPBUY BACK BP

2) Broker will require deposit2) Broker will require deposit

of £6000 from you (£6 x 1000)of £6000 from you (£6 x 1000)

3) SELL BP shares at £6 / share3) SELL BP shares at £6 / share

- You now have £6000- You now have £6000

4) BP stock drops due to bad news4) BP stock drops due to bad news

5) BUY BACK BP shares at5) BUY BACK BP shares at

discounted £3 per share (£3,000)discounted £3 per share (£3,000)

6) Return the shares to broker6) Return the shares to broker

BP shares - 2010BP shares - 2010

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Bank of AmericaBank of America

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Bear StearnsBear Stearns

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Choosing Poor Quality Companies

Fundamental Criteria What do we want?EPS GROWTH (last year) <=1%

SALES GROWTH <=1%

5 YEARS SALES GROWTH <=5%

NET (Profit) MARGIN <=5%

CURRENT RATIO <=1

NET INCOME GROWTH <=5%

PEG RATIO >=2

P/E RATIO >=20

SHORT % OF FLOAT <=10%

Optional additional criteria:

>= Greater than or equal to <= Less than or equal to

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Net Profit MarginThe profit margin is how much profit a company makes (after tax) for every $1 it generates in revenue or sales.

$ net profit ÷ $ revenue = net profit margin

(x 100 becomes % net profit margin)

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Go to Yahoo Finance – Key Statistics – Short % of Float – this tells you the percentage of shares publicly traded that has been sold short by traders.

Be cautious of “short squeezes”!

Over 10% = HIGH

Over 20% = Woah! Extremely High!

(Note: We will check this criteria only at the very end.)

Short % Of Float

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Only 2% of AAPLshares are beingshorted – this isOK for shortingas there’s little risk of a shortsqueeze.

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Very high!

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http://www.nasdaq.com/reference/stock-screener.aspx

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ClickRunScreen

©LeadingTrader.comClick Export

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Save the Excel Spreadsheet.

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Mastering Sector : Stock Index

Relative Strength

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• We look at Sectors i.e. a GROUP of stocks in a specific industry instead of just individual stocks.

• We compare the sector’s performance against the Stock Index (e.g. the S&P500, Dow Jones, FTSE).

• This can give us more reliable analysis.

• To calculate Relative Strength, we divide the sector index by the S&P 500 value and we get the Relative Strength “ratio line”.

Relative Strength & Sector Analysis

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• We will use stockcharts.com for this – a handy tool.

• For example, to compare the performance of the financial sector against the S&P500, we type this symbol: XLF:$SPX

• This DIVIDES the Financial sector ETF (XLF) by the S&P500 index.

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If the line is DECLINING, it means sector isUNDERPERFORMING the S&P.

If RISING, this shows OUTPERFOMANCE.

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• You can also divide it by:

S&P 500 ETF = SPYDow Jones 30 = $INDUFTSE (UK 100) = $FTSEGold = GLD Silver= SLV

And so on…

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QQQ:SPY - Nasdaq ETF vs. S&P500 ETF

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$XAU:SPY - Gold/Silver index vs. SP500 ETF

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Comparing an individual stock against its own sector:

Goldman Sachs vs. Financial Sector

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Comparing Countries: USA vs. China

SPY:FXI

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S&P 500 ($SPX or SPY)Euro (ULE)U.S. Dollar ($USD)Treasury Bonds (TLT)Gold (GLD)Oil (USO)

Energy (XLE)Natural Gas (UNG)Silver (SLV)Gold Stocks ($HUI)Volatility ($VIX)Japanese Yen (FXY)

British Pound (FXB)Australian Dollar (FXA)Canadian Dollar (FXC)

Full List for stockcharts Relative Strength

USA (SPY)UK ($FTSE)Germany ($DAX)France ($CAC)Europe (FEZ)Singapore (EWS)Japan (EWJ)Israel (ISL)Canada (EWC)India (IFN)Taiwan (EWT)China (FXI)S. Africa (EZA)S. Korea (EWY)Russia (TRF)Lat. America (ILF)

Construction (PKB)Health Care (IYH)Consumer Svcs (IYC)Media (PBS)Financials (IYF or XLF)Insurance (PIC)Water (PHO)Telecom (IYZ)Real Estate (IYR)Industrials (IYJ)Transportation (IYT)Retail (PMR)Defense (PPA)Software (PSJ)Biotech (PBE)Big Tech (QQQ)Utilities (XLU)Basic Mat (IYM)Nanotech (PXN)Semis (PSI)Alt. Energy (PBW)

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• For investing, I look for sectors that have been in decline and are breaking their downtrend line, or breaking their 200 daily MA.

• For shorting I look for sectors that are breaking an uptrend line.

• Important: look for divergences on MACD.

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• I also like to use the MACD indicator to look for DIVERGENCES between the price and momentum.

• A Positive Divergence shows the force or strength of a downward trend is weakening (i.e. the market is preparing to reverse and go higher).

• A Negative Divergence shows the force or strength of an upward trend is weakening (i.e. the markets is preparing to reverse and go lower).

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A ship’s “wheels” turn BEFORE the actual ship itself turns.

This is similar to a divergence. Technicals like momentumstarts turning before the price does.

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Weekly Chart of AAPL.Weekly charts are useful asthey smooth out a lot of the noise on daily charts.

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AAPL breaksthe uptrendLine.

Weekly Chart of AAPL.Weekly charts are useful asthey smooth out a lot of the noise on daily charts.

Negative Divergenceon MACD. It failed to makea higher high even though the price did. Trend is weakening.

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Clear sign of divergence in theTechnology / stock index ratio line.

Break of uptrend line

Resting on200 MA

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Keep an eye out forDivergences.

Break of downtrend lineis a good buy signal.But watch out if it breaksbelow the 200 MA.

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Energy:stock RATIO LINEhas broken downtrend line(bullish) AND broken its200 weekly MA (blue line).

MACD crosses into positiveterritory which is bullish. Onceweekly MACD goes above zeroit can stay there for long periods.

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No divergence, butMACD has crossed intoPositive territory.

Oil & gas Exploration / stock index ratio line

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Gold Stocks / stock index ratio line

Keep an eye out forDivergences.

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Shorting StrategiesBasic & Advanced

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BE AWARE:

• The psychology is different near market bottoms than it is near market tops.

• Near Bottoms market is ruled by fear. Market acts differently when people are selling to exit losing positions.

• Near Tops market is ruled by excitement and euphoria as more and more late-comers join the scene.

• Therefore the chart patterns are slightly different. Bottoms are more crisp and sharp. Tops are broad and stretched out.

Shorting Strategies

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We can either short a bullish market (uptrend) or short a bearish market (downtrend).

• Shorting an uptrend can be more profitable in termsof risk-reward, BUT can result in a lot of whipsaws (false signals). Therefore we’ll commit smaller positionswhen doing these trades.

• Shorting a downtrend can be easier, but it can usuallymiss the start of a major downturn. Less headaches andsimpler to execute. Can commit bigger positions.

Shorting Strategies

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Was there a divergence on MACD?

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Was there a divergence on MACD? YES!

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2 Consecutive closes BELOWA trend line give confirmationof trend break.

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Was there a divergence on MACD?

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Entry at break of theLOWER trend line(support).

Entry at test of the UPPERTrend line (resistance).

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Entry at break of theLOWER trend line(support).

Entry at test of the UPPERTrend line (resistance).

Divergence on MACD

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Shorting a Downtrend

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If you miss the entry point at the trend line, you can enter again

at a pull back to the 21 EMA and 50 SMA.

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Candle Reversal Patterns

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NO. YES.

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Doji candles

Shooting Star candles

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Shooting Star candle

We wait for a close belowshooting star candle before wesell short.

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Waiting for the BIG andPowerful momentum moves

Small risk.Great Profit potential.

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Bollinger Bands (20,2)

Keltner Channels (20,1.5)

LeadingTrader.com/etx

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ADX (setting 14)

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ADX is a big clue as to whichsqueeze breakouts are likely to be

the biggest in magnitude.

Squeeze with ADX below 20 = “Turbo squeeze”which usually result in big moves.

Squeeze with ADX above 20 = These are good too but less likely to be big moves.

1. ADX is a measure of volatility (as well as trend strength).

2. Low ADX corresponds to low volatility.

3. Since the squeeze is about a transitionfrom LOW to HIGH volatility, then low ADX indicates the “perfect” squeeze conditions.

Why does this happen?

Combining 2 time-frames:

Weekly240-min (or 60 min)

Combining a weekly squeeze breakout with a 4-hour squeeze.

Wait for the weekly squeeze to fire first(Bollinger bands exitingKeltner channels).

Take Squeeze on a4 hour chart (or a 60min chart).

Stop-Loss andEffective Risk Management

Average True Range(ATR)

Minimising Risk (stop-loss)Minimising Risk (stop-loss)LeadingTrader.com/etx

• Use the Average True Range (ATR) of the next higher time-frame as the stop-loss.• ATR is a measure of volatility.

• E.g. If you’re taking a trade on daily chart (e.g. a squeeze or trendline), use the Weekly ATR as stop-loss.

• If trading on 60 min use the daily ATR as stop.• If trading on 240 min use weekly ATR.

Effective Stop-loss and Risk management

• Once the stock has moved by ½ (half) the higher time-frame ATR (e.g. ½ the weekly ATR) then move stop to Entry Point (breakeven point).

• This way, you move from a position of RISK to ZERO RISK as soon as possible.

• I do this method for 90% of all my trading.

Effective Stop-loss and Risk management

Use the Weekly ATR as stop distance whenyou’re taking a trade (e.g. a squeeze on 240min or daily chart.

ATR on weekly chartis 20. Once stock

moves by ½ weekly ATR (10 points) move stop to breakeven.

ATR on weekly chartis 5.

Stoploss is placed 5 points ($5) away.

Once stock has moved by ½ the weekly ATR (2.5 or 3 points) then move stop to breakeven.

ATR on weekly chart is 8.

Stoploss is placed 8 points away.

Once stock moves by 4 points (1/2 the weekly ATR) move stop to breakeven.

Market Correlations

Positive correlation = markets move together in same direction. If one goes up, the other also goes up.

Negative/Inverse Correlation = markets move in opposite directions. If one goes up, the other goes down.

Market Correlations

Positive correlation

Stock Indexes e.g. S&P 500 and Dow 30Stocks (S&P 500) & EuroStocks and Gold (and silver)Gold and SilverStocks and Crude oil (recent exception)Stocks and AUDJPY (hedge funds).

Market Correlations

Negative/Inverse Correlation

Stocks (S&P500) and US Dollar.Stocks and VIX (volatility index).Stocks and Treasury Bonds (10yr, 30yr).Gold and US Dollar.Japanese Yen and Crude Oil.Bond prices and Bond Yields.

Market Correlations

Sentiment

The 2 Main Option Contracts:

• Calls• Puts

You buy:

CALLS = Make money when shares go UPPUTS = Make money when shares go DOWN

Sentiment and Open InterestSentiment and Open Interest

Don’t worry.

You don’t have to know ANYTHINGabout options to do this bit.

(We just compare 2 numbers.That is all.)

The total number of option contracts that are open on a particular day (which have not been closed or exercised).

An indicator of liquidity.

Google Finance – We use this for Individual Stock Sentiment Analysis

(see next page for annotations)

Type SymbolSelect Expiry date (3rd Friday of Month)

Set to Straddleview

Current price ofthe stock

Call Open interest Strike Prices Put open interest

Google Finance – We use this for Individual Stock Sentiment Analysis

Simple Rule: Compare 2 numbers i.e. the Open interest for calls and puts.

Important Tip: We look for SIGNIFICANT differences between Call and Put open interest (e.g. over 50% or 100% discrepancy). A difference of less than 20% is not verysignificant.

E.g. if CALL open interest is 2000 and Put open interest is 4000 this IS Significant (100% difference).But if CALL open interest is 2000 and Put open interest 2500 then this is NOTparticularly significant.

If PUT open interest is SIGNIFICANTLY greater than CALLopen interest this indicates BEARISH sentiment.

If CALL open interest is SIGNIFICANTLY greater than PUTopen interest this indicates BULLISH sentiment.

AAPL Open Interest Strike Price

Bear Stearns

We can change the Expirationto April 2013(2 months from now)on the same stock.

Exit out of a Trade

Just like in the investing course, we wait for priceto close beyond (above) the 8 EMA to exit.

When long, we wait for close BELOW 8 EMA.

Note: if it is hugging the 8EMA or closes very close to it, this does not count as an exit signal. Must be a decisive break.

By the way, notice the divergence.

When Short, wait for priceto close beyond (above) the 8 EMA to exit. In the GRPN examplebelow, this would have kept you in the trend for $15 gain (75% return).

Did we have divergence?

Execution

Full video on Trade Execution on:www.leadingTrader.com/chart

Selling Short Using ETX Platform: www.LeadingTrader.com/etx

This is What I use.It is safe, reliable and user-friendly.

For a full video and PDFon using ETX platformgo to:

LeadingTrader.com/chart

Buy /Short

Stop-loss

Target

Using ETX Platform: www.LeadingTrader.com/etx

Important Do’s and Don’ts

Avoid Shorting very low priced stocks (e.g. below $5).Remember we want to sell short HIGH, buy back low.

It is NOT worth shorting low priced stocks because there is little DOWNSIDE potential.Better to short more expensive shares (ideallydouble digits).

Avoid Stocks that are going sideways for very long periods of time, specially after a gap in price.

Avoid Stocks that have too many spikes on their pricebars (use a candlestick chart to see this).

Avoid Stocks that have too many gaps in the price.This can cause a lot of slippage and increase your risk.

Too many gaps in the price.

Avoid very thinly traded stocks – they look like this.

Avoid erratic stock chart that look like this.

Congratulations.

You’ve made it through theFirst Day!

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