PowerInvesting

Trading Your Way to Financial Freedom

by Brian Neall (Founder of Tradetobefree.com)

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal or other expert assistance is required, the services of a competent professional person should be sought.

Brian Neall - All Rights Reserved. www.tradetobefree.com Unauthorized duplication or distribution is strictly prohibited.

PowerInvesting Overview
What Im about to teach you can make you very wealthy. Years of trial and error and research have gone into this instruction manual. I truly believe this is your shortest path to financial freedom in the stock market without relying on risky options. The strategy detailed in this book is really very simple in its philosophy. Instead of buying and holding a stock for a year or more, hoping the company will be a winner longterm, you buy a stock and shoot for a small gain while times are good for the company. You then sell the stock, take a sizable profit, and buy another company thats doing well now. Im not a big believer in a lot of fluff, especially when it comes to work and money matters. My intent is to give you a very straigtforward, step-by-step manual thoroughly explaining my powerful swing trading techniques. Period. I think youll appreciate its hard-hitting substance and detail. With that said, heres an overview of each step of this wealth-generating strategy: STEP 1 - Determine the short-term and long-term market direction. STEP 2 - Find quality stocks poised for a short-term rally. STEP 3 - Review fundamentals of the company to weed out any bad apples. STEP 4 - Patiently wait for the buy signal. In the meantime, calculate your risk/reward ratio - Identify your target sell prices if the stock goes up and if the stock goes down. STEP 5 - Purchase your stock. Enter your Good-til-canceled order to sell and check the chart and new s daily. Dont worry if youre not familiar with the terms Good-til-canceled, resistance or any other words mentioned above. Theyll all be explained in later chapters. Following these steps maximizes your chances of short-term gains of 5-30%. Thats all you need to grow a huge nest egg in the next few years. With a success ratio of 70-80% (which has been my experience using these techniques), you will grow wealthy quickly and steadily over the next several years starting with just a few thousand dollars or less. The trick is to follow the system carefully, learn from mistakes and ride out any

bad times that may befall the market. Theres been times when Ive lost money and cut my losses on a couple trades in a row. This has almost always been followed up by a greater understanding of the market. (And usually 20-30% returns on my next trade!) As you go through this book, practice trade on paper until you have the confidence to use your hard-earned money. Over time, youll learn more and more about this technique and trading in general. Im confident youll be delighted when you see how well this strategy works! Making small gains over and over. Its imperative you have the right attitude, analyze any failing trades to see where you may have made a mistake, learn from any mistakes and say to yourself Ive had a learning experience which will make me a better investor going forward or Hey, occasionally Ill have a bad trade, but the law of averages dictate that Ill succeed in the long term if I learn and keep at it. This book is all about putting the law of averages on your side and winning financial freedom in the long term. Follow the steps outlined in this book and Im confident most of your trades will be successful. (Trade on paper first using fake money for a few months before using real money until you get the hang of it.) The most important thing Ive learned as an investor is that you MUST cut your losses when they do occur and re-apply these techniques to get the eye-popping, triple digit annual returns we all want. Persistence is paramount.

Step 1 - Determining Market Direction

Stock investing is a little like farming. You try to plant at the right time, rotate your crops wisely, use the right fertilizer and pray that the weather holds out and you have a great crop. In this case the seeds are stocks and mother nature is the market as a whole. In general, most stocks move up and down with the market averages. As the S&P and nasdaq averages move higher or lower, so do most stocks. Of course theres exceptions and Ill explain how to find these in a moment, but we definitely need to know the near term direction of the market to know how careful we need to be in selecting our stocks. Over the last few years, Ive found that my percentage of winning trades is much better during a short-term uptrend than a short-term downtrend in the market. Not to say that my methods wont work in a down-trending market, its just that youll have to be much more selective when picking your stocks. So its great to know with some certainty which direction the market is going. Ive found the least reliable indication of near-term market direction to be advisors and pundits. In fact, studies have shown that when advisors and other experts are the most bullish, the market tends to do worse over the near term and vice versa. Ive actually found this to be very often true. Back in June of 04, it seemed that every expert was saying that we were very near a nice rally in the market. Earnings were good, uncertainty over Iraq seemed to be fading and we had come off a fairly large pullback in the market. However, the market started a downtrend soon after. In late August, when all the advisors were talking about doom and gloom and exercising caution, the market began to rally. Ive found that candlestick reading and William ONeils methods (the founder of Investors Business Daily) are very consistent and the most realible. Basically, ONeils rule says that if you get 4-5 distribution days on a major index (DOW, Nasdaq or S&P 500) within a 3 week time period, a bull market generally turns into a bear market (downtrending market). A distribution day is one where theres higher volume than the preceding day and the daily average goes down. Or, in some cases when there is higher volume with very little progress upward in the index. The market averages are always trending upward or downward. Look at any chart of a major index (or any stock for that matter) and youll see what I mean. Lets take a look at a recent chart of the S&P 500 index (probably considered the broadest indication of market activity and direction). This can easily be seen online with up-to-date

information by going to stockcharts.com (just type in .spx, the ticker for the S&P 500, where it says symbol and click go). When you view the chart, you can customize it to your liking as I have here using the options below the chart. This site also has excellent free information on candlesticks, which are the representation of the opening, closing, high and low price for each day. Theres a candlestick for each market day on the chart with the days going chronologically from left to right. Can you spot the trends on this chart of the S&P 500? The long-term and short-term direction?

Ok, heres the same chart with the trend lines drawn. See the trends now?

As you can see from the above graph, the market is currently in a intermediate to long-term bear market. Each successive rally after the beginning of March ends at a lower point than the preceding rally (See solid lines drawn on chart). And the lows get lower as well. The area between the upper and lower lines is the current channel, where the upper line represents resistance and the lower line represents support. The market is made up of people buying and selling stocks, and the current market price is the result of the buyers and sellers finding a middle ground. As you can see, as the price of stocks goes down toward the support line (support - you need to know this term), more buyers enter the market to drive prices back up. As the prices go higher and get near resistance, they hit a point where enough people (as with buying - a lot

of these are professional investors, hedge funds, institutions, etc..) decide to sell which starts the trend downward once again. The market doesnt bounce wildly from day to day, with the S& P 500 index being 1050 one day, 1150 the next, 1000 the next and so on. It almost always follows a near term upward or downward trend with a definable slope normally between a support and resistance level. Now one point I want to make about support and resistance. Its not a good idea to bet against it. If you do, in most cases youll be wrong. Not to say you shouldnt buy stocks when the market is near resistance or trending downward, you just want to be very, very careful when you do. Buy stocks that buck the market trends due to the industry they are in if possible. Also, look more closely at the support and resistance of the stock youre thinking of buying, check the fundamentals very closely and dont buy a stock that you think may be overvalued. Eventually the market will go through either support or resistance, but most attempts will fail. I want to make sure I emphasize that if the market is going down, we want to be very careful and buy only the very best stocks that meet are criteria. Ill explain the criteria in the next step. If the market is trending up, we can be more aggressive and should fare much better especially if the long-term trend is upward as well. The big question is, if the market is trending down, when do we know the market direction has changed? Good question. You want to be extra cautious until the resistance line has been broken. Look at the right-side of the chart on August 1, noting the dashed resistance line. It looks like the market broke its short-term downtrend line (eyeballing the chart may be good enough, but you should copy the image off stockcharts.com and paste it in a word processor and draw the line). The downtrend line is created by drawing a straight line touching the tops of at least 2 candlesticks in the downtrend without touching the others. On August 1 it broke this line slightly, but on weak volume. A positive sign, but not convincing with the weak volume (this shows theres not a significant amount of buying interest). However, on about the 14 th of the month, the downtrend is broken again on stronger volume after the index touched the support line and started another upward move. Perfect time to buy! I did this and bought VPI and NSS and made 10-20% off each! Other practice trades did extremely well also. Some over 30%! The important thing you need to know at this point is that the market has broken its downtrend and is very likely to go higher - at least until it nears resistance. A very exciting time that will repeat itself again and again! After we purchase our stocks eventually the rally will fade and well notice that our stocks are not gaining as much or have started to turn downward. This usually occurs

when the market averages near their resistance line on the charts. As always, we want to follow the market averages closely at this point. We should also be very cautious about buying other stocks after a runup of several weeks. Once the uptrend is broken (from the chart above, we can see this has happened very recently!), it is likely that a downtrend lasting at least a few weeks has begun! Time to be very selective in buying any stocks. Once you have more experience, you may also want to start buying some put options at the point the averages start to break their uptrend. Put options are contracts which give you the right to sell a large amount of stock at a certain price on or before a particular date. To find good stocks to buy put options on, I would just change my search criteria to find only #5 ranked stocks that are optionable with volumes in excess of 500,000 shares. The powerful Zacks screener will be explained in the next chapter. Keep in mind that options are very dangerous, as the movement in their price is much more magnified by the movement of the underlying stock. They can be a great hedge, however, to the purchase of a stock. Recent practice trades or paper trades have yielded terrific results when the market was near resistance and started a downtrend. In once recent paper trade, I was up over 100% in just two days, using techniques Ill show you later! However, a surprise rally in the market could easily cause you to lose the entire investment you made. You want to practice trade put options vigorously and gain a lot of experience trading in general, understanding swing-trading to a tee, before using your own money. Even then, I would only invest a small portion of my portfolio on options. What Ive discussed so far are short-term rallies and downtrends. We also need to know the intermediate to long-term trend as well. By connecting the highs with a line and the lows on the chart with a line, we can see the longer-term trend. As the previous S&P 500 index chart indicates, we are currently in an intermediate to long-term downtrend as the channel is pointing downward. Once the resistance line is broken and the next rally exceeds the preceding one, we should be in a new longer-term uptrend (bull market). According to William ONeils book How to Make Money in Stocks, a bull market normally starts when the averages start to move up and between the 4th and 10 th day of the rally the market rallies at least 1.5% in a day on higher volume. This is exactly what occurred in March of 03 before the bull market that lasted from late March of 03 to January of 04. During this time, I was able make gains of 10-15% per month while developing and refining my trading techniques. Looking back, I know I could have made more with the knowledge I now have. A longer term bull market will yield better results than a longer term bear market using my strategies. A longer term bear market will require us to be more careful even during short-term up-trending markets. Hopefully you can now see that the long and short-term trends are pretty easy to

spot just by glancing at the charts. I follow the nasdaq (ticker $COMPQ), the S&P (.spx), the Dow Jones Industrial (.dji) and the russell 2000 average (.rut) daily. The nasdaq is a reflection of technology stocks as a whole, the russell 2000 of smaller company stocks as a whole and the Dow of large companies that weve all heard of such as GM and General Electric. I also follow certain sector related indexes such as the price of oil (ticker $wtic), the ten-year treasury rate ($tnx), retail indices and others. Sector index charts such as these come into play when we look at a particular stock within a particular sector. More on this later. Determining market direction is such an important first step before buying a stock using a swing trading/rolling stock strategy. I cant stress it enough. If the market is downtrending, we want to lower our profit expectations off each stock. Instead of going for say a 12 % gain, you may want to go for an 8% gain or less. Not much profit, but if you can do it a couple times a month, you can still make huge profits over a years time! Some investors like to study charts a lot and some dont. If you would like a synopsis of market activity on a periodic basis without as much effort or you just want to confirm your own analysis of current market direction, you can subscribe to our service at www.tradetobefree.com. Reference coupon code X100 when ordering the quarterly or annual membership to receive $39 off your order. Youll also receive weekly stock picks we identified using the strategies in this book. I like to close this chapter by noting that, as investors, the wind is really at our back. The price of stocks is based off of earnings growth more than anything else. When you buy a company, youre really buying a piece of those future earnings and growth. Corporations are all attempting to increase their profits by growing revenues and reducing expenses. Over the last century, US corporations have grown earnings at about an 7-8% average annual rate. In the past couple years it has been much higher than that. This is what really drives stock prices in the long run. And as long as companies continue to grow profits, stocks should continue to go up. So chances are more likely that stock prices will go up in the future than go down based on past history. Thats why Im always confident that another at least short-term rally is right around the corner just waiting to produce lots of profits for us swing traders! Until the next rally starts, just be very selective on which stocks (the best fundamentals and the best chart) you trade using the methods you are about to learn. Even if the overall market is bearish, there are normally plenty of sectors that are in a bull market. Use index charts such as the ones mentioned above to find those bull markets.

Step 2 - Finding Quality Stocks Poised for a Short-term Rally

Im about to share with you the second secret of this powerful swing-trading technique. Finding the right stock to buy at the right time. This section is all about building our list of stocks to watch closely. One of the reasons that many investors never venture into rolling stocks or swing trading is because it generally calls for buying much smaller stocks with little in the way of fundamental value. To make any rolling stock technique work, you need to find stocks that trade in a range or channel that is wide enough to make a decent profit when the stock bounces off support and heads to its resistance level. Most of these stocks are small companies with little in the way of profits and revenue. They are very speculative companies which is why the price tends to vary so much. Small stocks with poor fundamentals tend to fail when times get tough. Its just a fact of life. So theres some risk in being in the wrong place at the wrong time. However, many of these smaller companies are producing terrific results if only for the short-term. Profits are exceeding expectations, future estimates are trending upward and analysts are upgrading the stock. To find these gems, we need a quality stock screener to reduce the universe of thousands of stocks to just a few dozen or so. I personally go to the website Zacks.com and look at their list of number 1 ranked stocks. Zacks has been around for decades and has a good reputation in the industry. They have a wealth of information and are a reputable organization that has been around for decades. And their ranking system and associated custom screener are second to none. So why do I use the Zacks screener? Well, Zacks #1 ranked stocks have yielded an average of over 33% per year over the past 17 years! This ranking is primarily based on how well the company exceeds earnings forecasts and how much the future earnings estimates have been revised upward. It also takes into account how consistent the revisions have been across the various analysts and how reliable each analyst is based on his/her past performance. Stocks are continuously being added and deleted from the list as more analyst and company statements are released. Stocks often go on the list and then off it again in a span of a few days to a few weeks. The unbelievable 33%/year track record is based on monthly portfolio rebalancing. So these stocks outperform only in the short-term. Perfect for a trader who only holds the stock for generally a few weeks or less! Whats even more impressive is that the list of

#1 ranked stocks has outperformed the broader S&P in each of the last 17 years except 1 with 1 losing year! You cant beat those odds when buying small company stocks. As you can see, were already ahead of the game by picking stocks from this pool. Unfortunately, this powerful screener will cost you. At last check, they were charging $199 per year for the screener which is a bargain when you look at the track record of their proprietary ranking system. Ill show you how to use the Zacks custom screener first in case you decide to go this route. After that, Ill go over other screeners some of which are free. Go ahead and go to Zacks.com, click on the the screening tab, scroll down, and click on custom screener. The following screen should display.

Notice the Select Category drop down. This contains differenct categories of metrics which we can use to narrow down our list of stocks. On the right you see the metrics for each category. Screening here is basically a 2-step process. You first select a category to the left first and then enter amounts and conditions for a particular metric to the right and click screen. When all of the screening criteria you need has been entered, you just click on the report button on the left.

Were now going to select all stocks with a volume above 80,000, have a Zacks ranking of 1, and a price less than $25. Ill explain how you screen using these parameters and then Ill explain why we chose each. First scroll down under Company Descriptors and enter >= 80,000 for the volume. Click Click Here to Screen. Then choose the category of Zacks rank on the left and enter = 1on the right and click the screen button again. Current price is under the Pricing info category. Select <= $25 for the price and click the screen button again. Now, you should see # of companies off to the left. Usually theres around 50 or so that fit this profile. Now click the Run Screen button. Then scroll down on the right and click the Submit Screen button. The list of tickers should now show up. Heres the reason we chose each selection criteria. Stocks with volumes less than 50,000 can be more difficult to get out of when we want to sell. (Ive never had difficulty getting out of a stock with an average of 80,000 shares trading hands per day after hundreds of trades.) We want to be in stocks that have a lot of shares trading hands so theres plenty of buyers waiting to buy our stock. Also, studies show that technical indicators such as stochastics (which well use in a minute) are less effective at predicting future price movements on low volume stocks. They also tend to be weaker performers as my experience has shown with Zacks top-ranked stocks. The reason we choose a price of less than $25 is that lower-priced stocks tend to have much greater price fluctuations on a percentage basis. Ive done back-testing that shows that stocks under $25 move upwards twice as much as their higher-priced counterparts. They also tend to hit their price-targets sooner. Not to say that more expensive stocks wont make large rolls - some more expensive stocks do. In fact, if my first search of under $25 stocks yields few golden opportunities, Ill often do a search of the other stocks over $25. If the higher-priced stock has a historical pattern or channel thats wide enough, Ill often put it on my watchlist. As I stated above, other screeners exist and can be used if you do not want to spend the $199. Yahoo has a decent free screener on its website. Just go to yahoo.com, click on the finance link, scroll down and click the screener link on the left. On the next screen, scroll down and click on the more preset screens link. The bargain growth and strong forecasted growth screens are both good screens for this technique. Another good pool of stocks to work with is the IBD 100. IBD, short for Investors Business Daily, has a cult following as you will notice if you have been on any of the major oline investing forums. This is for good reason. IBDs top 100 stock list has an average annualized return of over 30% for more than 20 years. IBD focuses more on

trailing earnings and growth and stock price performance as opposed to the Zacks system which ranks based on earnings estimate revisions. The IBD ranking system works great during uptrending markets, but can be dangerous when the market is near or during a bearish reversal and the downtrend that follows. This is because the IBD 100 high growth stocks, the market leaders, tend to get hit hard when the market turns south. IBD will give you a free trial, however, or you can drop by your local library or convenience store to see their top 100 list which comes out over the weekend. As with Zacks, a subscription to this service is money well spent. Besides Yahoo, other sites have free screeners that you can give a try. MSN has a free screener for example as do many other sites. One very popular screener is Reuters PowerScreener. They give you a 30-day trial to the Pro Version and the lite version is currently free. They also have generic daily screens that are free on their website. Just go to http://www.investor.reuters.com/ScreenEntry.aspx?target=/screening or go to the investing section of their website to look for the Screening Center. They also give the historical performance of their built-in screens which are pretty good. The Rising Expectations screen should do well although the Zacks ranking system factors in the performance of the analysts making the future projections. If you go with the free screeners listed above, be sure to check-out the earnings revision trends and the tendency for the company to beat their quarterly earnings expectations. Yahoo Finance is a great place to check this information out. You will see an analysts estimates link off to the left when you search on a ticker symbol. We always click on this and view the trend in revisions before adding a stock to our watch list or recommending the stock in our Weekly Alert. (The Weekly Alert is a weekly email sent to subscribers with our top 4 picks each week using our system. Since you purchased this book, you are qualified to receive $39 off the annual subscription by entering the code X100 when ordering.) We favor the Zacks screener and the IBD top 100 list when trying to reduce the thousands of stocks to just a couple hundred with the best near-term fundamentals. Since these ranking systems have long-term average annual returns of over 30% per year, this should increase your success rate using the trading system Im about to share with you. Later on, once you get to know the different sectors and how well they are performing, you can start searching on just stocks that are in the energy sector, homebuilding, etc... I often do this if the market is in a downtrend and need to find a bull market to ride higher. All of the aforementioned screeners have options to select stocks only in certain industries. Now that I have my short list of fundamentally strong stocks, Ill start viewing each chart to find the ones that are poised for a short-term rally. To do this, I simply open

Page 14 another browser window and go to stockcharts.com. Ill walk you through examples of how I analyze the chart patterns and select the best swing trade opportunities from the pack. First though, you need to setup your stock charts to show the technical indicators youll need to spot the best trade opportunities. Go to stockcharts.com and enter a ticker symbol from your screened list and click Go to see the chart. Well add Stochastics and CCI to the charts. Well also widen the charts to make seeing the patterns easier. Heres a snapshot of the settings I use for my technical analysis. Notice the Chart Size is Wide, the scale Linear (Ill change this to log if the stock has moved rapidly over the past few months), and the duration is 1 year for our initial examintation. Be sure to also to set the 2 indicator windows, One for Slow Stochastics and the other for CCI using the numbers shown.

Page 15

Stochastics is a measure of the closing price in relationship to the near-term trading trading range (in this case over the last 12 days). When the stochastics line is below the 20 line, the stock is considered oversold. When the stochastics line is above the 80 line, the stock is considered overbought. Here we have also defined a 3-day short-term average. One of the first indicators we look for is the short-term average crossing the long-term average as the stochastics move out of the over-sold range. Most stocks tend to move higher in price when the stochastics are oversold and are rising above the oversold line. CCI is a cyclical indicator determining where the stock price is in relation to its cycles of rallies and selloffs. An oversold CCI that is moving out of oversold readings is a buy signal whereas an overbought reading (above +100) that is moving below the +100 solid line is a sell signal. Now heres the setup we are looking for. A stock that recently had an oversold stochastic and CCI that are now both trending upward combined with the price piercing a resistance during a downtrend. After you look at a lot of these stock charts, youll begin to see how often stocks move up in price when all of these conditions are met. Its even better if we see strong volume when the stock begins its upward move. If we see lower volume with a large price move out of oversold levels, we need to be a little more careful. Heres a great example of what were looking for. Below is a chart of NSS from early September:

Page 16

This is probably the best scenario you can find. Theres an obvious long-term uptrend with the lows lining up nearly perfectly defining the support level. The short-term downtrend is broken right after the price bounces off the long-term support level. Perfect! Notice too the stochastics moving average cross-over and the CCI increasing from oversold levels. And the volume is enormous as we can see from the bar chart below the graph. You can see from the lines on the chart that the price has just broken its downtrend line. This one was too easy and is a perfect example of the ideal setup we are looking for. Also notice the other rallies during the uptrend. If we would have bought right after the short-term downtrend was broken in late November and late February (after the price touched support), we would have made out like bandits! Now we may have missed these because the trend at that point wasnt well-defined, but we can study these breakouts to test our system to see if it worked in the past. It seems to work every time. So did I buy this one? You bet! And heres the chart showing what happened after we bought the very next morning. The chart below is from a month or so later.

Page 17

As you can see the stock moved much higher! I bought it at 15.78 in early September and I sold a week later for 17.25. An easy 10% in a week. We could have put an order to sell near the next resistance level which is where the prior rally. This is around 19.50. However, it would have taken three more weeks to get that. 10% in a week is more than 20% in a month on an annual basis. Its best to take the smaller quicker gains - the old adage Take the money and run comes to mind. Besides, the stock came off the #1 ranked list a week later. Ill talk more about when to sell and take our profits in Step 4.

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Now lets get back to our list of #1 ranked stocks and look at a few to find our next winner. The first ticker on our list is ACO. Ill draw some lines again for you so you can see the trends:

If we switch again to a log chart we can see a support level. This doesnt look too bad for our first chart! We can see we have a long-term uptrend with large swings between the highs and lows. However, the rallies seem to be getting weaker and weaker over time. Maybe interest in the stock is waning? This is just speculation. Im very interested in this stock at this point since the upward trend hasnt broken and it hasnt broken out to new highs in a while. Since the fundamentals are strong (its #1 ranked), this has a good chance of breaking out to the upside. Notice how well the stochastics predicted upward moves in the past when the price was near its long-term support. Its touching support now. Id do a 1 month chart to get a closer look at the current downtrend to see how close the stock is to breaking out. We should put this on our watch list and watch it

Page 19 closely. If the CCI and stochastic moves higher sharply and it breaks the downtrend, Ill want to buy this stock quickly! Our next stock is AKS Steel Holding. Again, we just type in the ticker AKS and click the update button on stockcharts.com:

Notice theres several trends this time (mostly upward) that Ive drawn with lines. Of course, were most interested in the most recent uptrend which appears to be logarithmic, so well change our time-frame to 6 months and re-draw the chart. Youll find the log radio button and duration drop-down below the chart. Heres the 6-month log chart:

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As we can see, the stock has not dropped to its support level. Also, the stochastics are falling, but are not yet oversold. Generally, downtrends have lasted about a month for this stock so we may have another week or so before the price passes into the buy zone. Notice the price increases after the price has touched support (Ive circled the points where the short-term downtrends were broken in the past). The price went from $6 to $10 on the last roll. Thats nearly 80%!!! The roll prior to that was from about $4.50 to over $7. Thats nearly 60%!! Well definitely watch this one closely as well. Now, dont get too excited about this stock just yet. We need to make sure it stays on the #1 list (if its rank falls to #2 we may still consider it due to the profit potential) and doesnt break either the logarithmic or linear support. A lot of the stocks we put on our watch list will fall off the #1 list or break their long-term support. If this happens, the stock well need some time to develop a new trend before we ever think about buying it. Well add it to our watch list and follow it daily.

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On to the next stock. Heres AXA:

It appears that this stock is pretty close to a downtrending resistance level and is poised to drop further. It looks like the downtrend may be changing at this point - it made a slightly higher low recently (which defines a trend reversal to many technicians) in early August (19.12 vs. the previous 19.00) and is an intermediate uptrend. However, the rolls arent very wide (about 10- 15%). I would probably go on to the next stock - especially since the last 2 offer much more profit potential based on historical price patterns. Next we have BDY - Bradley Pharmaceuticals. Again, Ive marked the trends:

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Not good. Notice how the preceding down-trend becomes the support level for the next downtrend. This seems to almost always occur. It looks like this stock may have even broke through its downtrend support level as well! The stochastics and CCI are oversold and still going down! Yuck! If it ever were to break its current downtrend on much higher volume, I may want to buy this stock assuming its still a #1 ranked stock. But I would probably wait until a new trend develops. Thats OK, theres still 50 other stocks to look at. I say bye-bye BDY! Ill skip down now to some more interesting charts Id like to show you. We should be able to find a range-runner or 2. Lets take a look at CLE:

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Notice theres a long-term uptrend. Also notice the volatility. A lot of $3 (10-15%) swings, which is not the greatest profit potential, especially considering some of the earlier stocks we looked at. However, the upward moves occur in a couple weeks or less. Cool! Again, its much better to gain 10% in a week than it is 20% in a month using these techniques. My goal is to find stocks that have a historical tendency to move 10-15% within 2-3 weeks. It looks like its about time to buy this since the downtrend is being broken. It moves quickly so we dont want to be late by even a day! Im going to run a 3-month chart to see the short-term down-trend channel a little more closely.

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Now this chart was run during the day. We definitely want to see where this goes during the afternoon. If Im around this afternoon, Ill go ahead and buy just before the market closes as long as the price doesnt turn downward (and as long as there are no red flags in the companies financials or recent news stories - Ill cover this in the next chapter). If Im not around, Ill check to see where it closed this evening. Hopefully, itll go a little higher and well see strong volume on the day. If it doesnt go down much here, I would buy at the open tomorrow as long as the fundamentals are OK. This has become a nice range runner at this point. I would still consider buying this range runner if the stochastics werent oversold - as long as they dipped below the 50

Page 25 line and had started to turn upward while the price rebounded off of its support. I also look closely at the candlesticks and volume for clues that the stock is turning around. If I see a lot of down days on heavy volume or a bearish engulfing candle or reverse hammer, Ill be very cautious. With this chart, it looks like we have 2 recent candles that are bullish engulfing - meaning one days candle completely overlaps the preceding days candle and the price has gone up (its even better if the candle spans several prior days). This is very bullish - usually preceding a rally in the stock. A bearish engulfing candle is where the candles overlap the same way but the price goes down. It usually precedes a trend reversal to the downside. These candles are also useful in predicting turnarounds in the market averages as well. Now heres a caveat to the perfect scenario Id like to show you. Take a look at newport corp (NEWP):

I had this on my watch list for the last couple weeks. Notice how theres 2 possible downtrend lines. The lower seems to represent the downward move a little better over the

Page 26 past couple of months. However, if we follow the guidelines for setting up the resistance line strictly and connect the top of at least 2 candles without crossing any other candles, we can see that the stock is just now breaking out. We could have gone with the lower trend-line which would have been a little more risky. If we would have done that, we would have bought at the market open on or around Oct.2. Notice that the price pulls back, touching the new support line which is the old resistance line. Remember, the old resistance line usually becomes the new support line when a stock breaks out on the upside - especially upon reversing an uptrend. I see this time and again. Often after the breakout, the stock will rally for a few days or less, pull back to the old resistance line and then make a bigger move upward. I see that a lot. This is sometimes called a double-bottom by market technicians and is very bullish as we have seen. When the market closes, the volume for the day should be quite strong relative to the near-term average - another good sign. I might buy this one now, but it looks like it may have already had its run. We may be wise to wait until after the next dip. Once it dips, it may become oversold on stochastics and CCI and leave us a perfect opening now that the long-term trend has changed to the upside. Im seeing a lot of good charts here getting close to a breakout. This often corresponds to a bottoming out of the market and a reversal to the upside. Its also late October which historically is a good time to buy stocks as we normally see a selloff in September and early October. However, I wouldnt take seasonal factors too seriously and would avoid getting sloppy by not following a disciplined approach. To summarize, we are looking for the following technical setup when swing trading: 1. #1 ranked stocks from Zacks that are under $25 and have volume over 80,000 shares/day. We can even narrow down the list to only those sectors that are in a bull market or where a sector downtrend is reversing according to the sector indexes. We especially want to look for bullish sectors in a downtrending market. 2. Find stocks that have just broke out of a short-term downtrend or are nearing the down-trend resistance and have typical swings of at least 10-15% within a few weeks. The entry point will be once the downtrend has been broken with a closing price. 3. Make sure the stochastics are moving upward out of the oversold range before buying. Same with CCI. 4. Check the predictably of stochastic moves in the past. If we would have bought following the rules in the past, would we have had winning trades with this stock?

Page 27 5. Check the candles for any bearish or bullish signs. 6. Check for signs in the candles and volume for impending reversals if the stock is in a longer-term uptrend. Make sure the stock is poised to at least make a higher low. Or, if a higher low has already been made, the low is at least equal or within a couple percent of the prior low on the chart. 7. If the stock meets our criteria, add it to our watch list and go on to the next step 3 reviewing the fundamentals. Typically, Ill find 1 or 2 stocks out of 50 that meet the criteria and either are nearing a breakout from a downtrend or have already broken out. We want to be more careful with stocks that are breaking out of a long-term downtrend as the reversal may take a little more time. Stocks that are in a long-term uptrend and breaking out of a short-term downtrend are ideal as long as the slope of the trend is not too steep.

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Step 3 - Review fundamentals of the company to weed out any bad apples
Now that we have our list of stocks poised for a breakout we need to review the fundamentals. At a minimum, I always answer the following questions. This generally takes me all of 5 or 10 minutes once I developed my methods. What does this company do? What industry is it in? What interesting news has come out recently that could affect share price? When is the next earnings release? Is the company over or under-valued compared to its peers? Are a lot of insiders selling the stock? Is the company buying back shares? This is a good sign as it shows signs of management confidence in future price appreciation. Is the company offering more stock to the general public? This is generally a bad sign, but the new shares can often be easily absorbed by the market within a few weeks. Im basically looking for any red-flags that would indicate an impending problem. Clearly the consensus and smart money is flowing into the stock at this time based on the technical analysis in Step 2. This is evident by the stochastics moving upward which is a measure of closing price relative to the recent trading range. Professional investors tend to buy late in the trading day while the dumb money tends to purchase in the morning. Thats why stochastics are so effective in predicting future price moves. The insiders and smart professional investors smell good news and an upturn in the stock before anyone else and begin to buy the stock before the rest of the herd. Still, we need to watch out for any signs for impending problems before we buy. One thing I always check is the P/E ratios, price/book value and expected long-term growth compared to its competitors. I also check how much the earnings estimates have moved up in the last 3 months. They should be increasing. I get real excited if I see the

Page 29 expected earnings rising 30% or more - especially for the year following the current fiscal year and if there hasnt been a corresponding increase in the stock price as yet. A red flag to me is a stock that has a high p/e and/or book value relative to its peers and that has already been on a steep uptrend for some time. Watch the technical factors very closely on these as explained in the previous chapter. One thing to always keep in mind is when earnings are scheduled to come out. I use fidelity.com or yahoos finance site to find this and other financial information mentioned above. Fidelity has a great tool to compare the stock to its peers. You may have to start an account with them to use this, but theres plenty of other sites that have this information as well. Watch out for those earnings releases! A good rule of thumb is to never buy within a couple weeks before or a couple weeks after earnings. Ive been burnt too many times doing this. Ive found that even if earnings and the future outlook are strong, the stock price tends to go down within a few days afterward. Happens almost every time, especially if the price gets near a longer term resistance level! If the company doesnt beat the whisper number and crush their earnings estimates and more importantly increase their future estimates, they almost always sell off after earnings. Im pretty sure this is due to the buy the rumor - sell the fact school of investing. A lot of investors and traders want to get in when they know the next earnings report will be good and then sell on the news due to the uncertainty over the new quarter. Be especially careful in the July-Aug and March-April reporting periods. July and early August are generally a bad time for swing traders. Theres also a tendency towards more market downtrends when companies are reporting earnings. You want to watch the market averages closely during these periods for signs of new downtrends. On the flip-side of earnings, Ive found that 3-4 weeks after strong earnings is a great time to buy- especially if the stock sold off somewhat after the earnings release! - as long as the stock has the #1 ranking and the technical setup is right as explained in Step 2. Check all the recent news on Yahoos website for any other bad news. Other definite red flags are below: 1. Shareholder lawsuits. These tend to drag on for awhile. Theyre a distraction and can be costly to the company. 2. Real bad same-store sales comps for retailers.

Page 30 3. Other lawsuits. 4. Analyst downgrades. These tend to affect the price for days or weeks. 5. Downward earnings estimate revisions. This should take the company off the #1 ranked list shortly. These are just some of the more common ones. Do your homework to figure out the impact any bad news has on the company. Or, dont take any chances. There will be plenty of opportunities for other profitable swing trades! One thing I often check is the Yahoo message board. A lot of what you read will be hype spewed by those who want to see the share price go up or down, but its interesting to hear the bulls and bears duke it out on the message boards. Sometimes, not always, youll read something thats insightful and helpful. Just take everything you read with a grain of salt and realize that some people are there just to pump or bash the stock. After checking the basic fundamentals and recent news Ive normally taken a couple of my stocks off my watch list. Now were just about ready to take action with a list of little gems that have passed all our criteria. We just have to wait for our these potential gold mines to enter the buy zone!

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Step 4 - Wait for the Buy Signal and Calculate the Risk/Reward Ratios
Patience, patience, patience. Its a waiting game. At this point, we know we have a great #1 stock and we know the stock is just ready to break out and make us 5-10% or more. Its so tempting to just buy it now before the breakout! Dont do it. Just sit back and check each of your stocks every day (you can even add more to your list - the list of #1 ranked stocks changes nearly every day). I also check the market averages daily along with the the Zacks rank. You can easily check the current ranking by going to the Zacks website and entering the ticker symbol. If the stock breaks a long-term support level or closes below the former downtrend resistance line after breaking out, its technical damaged goods and I take it off my watch list. This process of checking your stocks should only take a few minutes every day once you get the hang of it. Likewise, a stock that makes a definite lower low is taken off the list as well. When I say lower low I mean the current pullback for the stock has taken the price lower than the preceding pullback on the chart. This is key as it indicates the longer-term trend is reversing to the downside. About this time, you should check the risk/reward ratio of each stock on your watchlist. You need to determine when to sell if the stock goes down and if the stock goes up. What I normally do is look at the resistance levels and at the historical rolling pattern to see the average gains in the past. I use this information to determine the potential gain. Then, Ill look at the trend-line support level to figure the risk on the downside. Ive found the best thing to do when the price goes below support is sell right away! No need to take risks when using this methodology. Theres plenty of opportunities if this one doesnt work out. If we keep our losses small, well have plenty of capital to go after future opportunities. Lets take a look at CLE (Claires stores) again. This time Ill draw a 6-month chart:

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Page 33 I went ahead and bought this yesterday and we can see its already going up nicely! (at least as of mid-morning) But when do we sell? Well, looking at the previous rolls, this stock tends to increase 12-25% from its lows. In fact, the last time the stochastics were solidly below the oversold line, the stock moved up over 20%! Now look at the channel Ive drawn with the lines. If the stock moves up within a week or so as it seems to do after breaking out of the short-term downtrend, and the price hits the resistance line, the price will be in the neighborhood of 27.50 - 28.00. To be safe, I always place my target price just below the resistance line - a point that previous rallies have exceeded. I would probably sell this at about 27.20 or so. Thats almost a 10% gain. On the downside, the support line is at about 24 or so. I would sell if the price closes below this. This would be about a 4% loss. The potential reward is twice the risk which is excellent! I always try to enter trades where the potential profit is at least 1.5 times the potential loss. If its not, Ill generally take it off my watch list. Also notice the horizontal lines drawn on the chart above the current price. These are points where the stock price tends to resist going beyond. Notice that the $25.70 resistance level has been run into twice. Im betting on the price breaking through and continuing the uptrend. But this level could mean a delay, a brief drop to the $24 level (current support level) and a final burst that gets the price past $26. Ill have to watch this daily as the rallies seem to be strong but short-lived. Another thing I want to point out about this chart is the tight trend that seems pretty consistent and uniform. This is not be the best example, but uniform trends like this that last a while often end with a large rally! Probably because a large institution starts the trend, traders start trading it more and more until enough money starts rushing into the stock to ignite a larger rally. We may have bought this at just the right time and may cancel our 27.40 sell order if we get a large upward price move on strong volume.. Now heres an example of a stock breaking a longer-term downtrend - Orbotech.

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On the chart below, it looks like the downtrend was broken and the stock is falling back to the old resistance level (which becomes the new support). At this point, it would be wise to wait for the price to touch the support line and the stochastics and CCI to start uptrending from being oversold before purchasing this one. Stocks that break a long-term downtrend will often fall back to at or near the former resistance line before uptrending. Well have to watch this one closely. Once this happens, I would target the resistance line above the previous high - about $20 and change. A real nice roll of about 20% if we buy near the $16.50 - $17.00 level which I think we may do. The support in this case would be either the former resistance downtrend line or the next level of support which is about $15.00 (youll see this on a 2-year chart.) So, again it looks like we have the potential of twice as much profit as loss.

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Now heres a downtrending stock that just broke out - NEWP:

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Now heres a closer look at the breakout with a 6-month chart:

Notice the stock went a long way yesterday on higher volume. In this case, we could have chosen to buy it at the open or wait until a pullback. A pullback often happens after the initial breakout especially on large price moves. Since the volume wasnt that high for such a large price move, I decided to wait for some consolidation or a pullback. I may buy this one once the price touches the support line and/or begins to move back upward. If that happens, Ill probably purchase for about $12.20 and sell close to $14 or $15. The support line will probably be around $11.50 - $12. So, once again, we have a nice risk/reward ratio potential and well definitely keep this one on our watchlist - waiting for a stochastists crossover or CCI turnaround.

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STEP 5 - Purchase your stock. Enter your Good-til-canceled order to sell and check the chart and new s daily. Note: If this is the first time using my methods, be sure to practice trade with fake money first! Now were ready to pull the trigger and buy our stock(s). The key again is seeing the stochastic move upward along with the CCI indicator along with the breakout from the short-term downtrend. Usually the stochastic and CCI moves come first followed by the breakout. My suggested approach is to just buy the stock at the market price the day after the breakout. You just check the chart the night before, note the breakout and put your order to buy the stock at the market price. The order will execute automatically when the market opens the next day. Another alternative to this strategy is to put an order to buy with a limit price of at or slightly below the previous closing price. This is effective if the initial price move was strong on weaker volume. However, if the yesterdays price move was strong and much higher volume, youll miss a few stocks that take off and never look back. Before you buy, make sure the stock is still ranked #1 and there are no negative stories that have come out since the last time you checked. Check again the next morning before going off to work if you can. A question you may ask is where do I get the money? Well, the ideal place is your IRA. In fact, if you dont have an IRA I would contact Fidelity, Ameritrade, Schwab or another brokerage company that will set up an IRA for you and get one started right away. Earnings in an IRA grow tax-deferred, which will make an enormous difference in a few years - even if you withdraw the money in just a couple years! Unless you plan to use the money within a year or two, I would use an IRA as much as possible. Why? Because the type of returns you can get per year are enormous and the money you would otherwise pay in taxes can grow very quickly! I suggest using just a small portion of your existing retirement funds initially as you learn these methods. And you will get better with these methods with practice. Even after a year or more of trading. Now I wouldnt use any real money using these methods until you practice trade for at least 2-3 months - realizing, of course, what kind of market youre currently in. For example, if you do real well during a bull market on paper and the market turns downward once you use real money, you may want to put your money back into cash or a safe investment until you practice trade the downtrend. As you practice trade, draw the

Page 38 lines on the charts and analyze your technique, double-checking to make sure youre following the methods in this book. After you buy the stock, put in an order to sell at least half your shares at your target price. If you cant decide which resistance level to sell at, sell half at the first level of resistance and the rest at the next level. I do this a lot if I cant decide. That way you can take half your profits now and wait until the uptrend is broken before selling the rest. Heres an example with a recent paper trade I made while using this method - LSS:

I bought this on paper in August for about $30 as noted by the circle on the chart. I put a limit order (Good til Canceled) to sell half the shares at $35 (the next resistance). Now, I could have taken 2 approaches to selling the rest of my shares. If I loved the stock, industry prospects or chart, I could put a Stop-loss order to sell the rest of the shares if they go below $33 (most recent support). Once the new uptrend was established a couple

Page 39 weeks later, I could have followed that and sold once that short-term uptrend was broken (or once we saw the bearish engulfing candle - see step 2) which was very effective because that would have yielded us about $38 and change. Or, I could have held onto the rest of the shares until the intermediate-term uptrend was broken. 3 things you should be doing while holding the stock is check the news, review the chart and check the Zacks rank daily. If any negative new s comes out, (downgrades, downw ard earnings estimate revisions by the company, etc..) you should reassess the stock. If theres not a strong compelling reason to hold onto the stock such as other very positive new s or strong technical factors such as a strong positive stochastic reversal, you should sell the stock immediately. Dont be foolish and break this rule. If we would have checked the news on Friday evening October 8 th , we would have seen the downwardly revised earnings expectations of the company. This is usually very bad! Be careful about a companys statements. In this case, an apparent rosy earnings outlook was actually a substantial reduction. We would have had to compare the companies new expectations with the current analysts consensus on Yahoos finance website or one of the other many other free sites with such information. If we would have sold at the open the following Monday, we would have gotten out before the real carnage began and still came away with a nice profit! One more comment about this stock. At this point, the intermediate uptrend has broken. On the chart, Ive drawn the longer-term uptrend which is still in tact. Well probably see a downtrend with a couple minor rallies on the way down to this support level. Who knows? If the company gets its act together and is put back on the #1 list and if the right technical setup presents itself again, we may buy this stock for another shortterm gain. Until then, its a waste of our time as swing traders. Theres much better places to put our money where well have better odds of making a nice profit. Some would say Why not just buy the stock and hold on to it? Well, if I had a crystal ball and knew the less than 10% of all stocks that would make this kind of move, I would do that. But no one does. Predicting major events that will shape this companies fortunes over a year is nearly impossible (and usually insiders know these misfortunes before you and I will). I would rather make 5-30% on 3 out of every 4 trades and make twice as much or more on a yearly basis. Predicting what will happen (and more importantly what wont happen) is a lot easier over a couple weeks than it is over a year or more. Most sure-thing stocks that are expected to double or more in price over a years time end up faltering and make investors far less than this (or end up being a loser).

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Final Thoughts
There you have it. The five steps of building real wealth, one stock trade at a time. If you consistently apply these steps over time, you should do very well. If you were to gain 12% a month, you would double your initial investment every 6 months. Heres an example of how a $5,000 investment would grow in a few years time by doubling your money every 6 months - reinvesting your profits: 6 months - $10,000 12 months - $20,000 18 months - $40,000 24 months - $80,000 30 months - $160,000 36 months - $320,000 42 months - $640,000 4 years - $1.2 million Remember, very often youll make 10% within 2 weeks! Of course, you wont win on every trade. Ive looked at other books that say the historical reliability of the patterns discussed in Step 2 is 70% or so. Combined with the powerful fundamental analysis of the Zacks ranking system and watching the news, market, volume and candlesticks, your odds should be even better. This has been my experience using this technique on paper and with real money. One of the biggest keys is to cut your losses when they do occur. If you lose 10% on a trade, you can get this back with just a 12% gain on your next trade. If you lose 30%, you need to get a nearly 50% gain on your next trade to get back to where you were. For example if you have $1,000 and you lose 30% after transaction costs, you would be left with $700. Now you would need $300 (almost 50% of $700) on your next trade to get your account back up to $1,000. Sometimes a bad news story will come out, the stock will go down 10% and youll say to yourself That news isnt so bad, Im going to keep my investment because I know the stock is worth more! Dont do it. Stocks very often go down further and bottom out over the next several days or weeks before turning around. A stocks direction in the near-

Page 41 term is more determined by the whims of large institutional buyers and market sentiment than the fundamental value of the company you own. Many times the stocks sell-off is based on rumors or insider information that you wont learn about until its too late. Watch the charts closely and youll see clues in the price action and volume of impending meltdowns. If the stock price breaks its longer term support before reaching your target, I would sell instead of waiting what could be weeks or longer for the price to come back to its true value. In that time, you could have made 10% or more many times over in other stocks with the proper technical setup. Thats why I say cutting your losses is rule #1. I reduce risk and smooth out my gains from month to month by buying more than one stock. That way, if 3 out of 4 go up and the other goes down, Ill still see consistent gains month after month. If the worst happens and the stock goes down 20% or more, this will only be 7-8% of my invested capital. Sometimes youll search for stocks that fit the profile described in step 2 and find nothing. This is frustrating, but is also telling you something - the market is in a downtrend or about to go into a downtrend after a sizable rally. If no stocks fit our profile, its probably best to stay in cash or buy put options until the market turns. Again, put options can be lucrative but are also very risky. Your entire investment can either double or evaporate completely in a short span of time. Remember, consistency is key to making large sums of money over time. You have to reapply these techniques and be willing to accept losses now and then for this strategy to bring you real wealth in the next few years. Occasionally step 1 will show the market in a short to intermediate downtrend and the market will fall through support! This is the worst time to be in the market and you want to be on the sidelines until the market begins to turn around (Step 1 tells you how to determine when this happens.) This doesnt happen too often, but you need to watch for it. Another important key is to always keep learning. Only a few of the most wellknown, reliable candlesticks were covered in this book (i.e. bearish engulfing candle). Theres other excellent books out there that cover this topic in more detail. I would also try stock picking services that offer free trials or low cost trials for a month or so. Theres some brilliant people out there that have figured out other ways to beat the market. I happen to think this is the best technique and have found countless other experts that have come to the same conclusion - using other variations of swing trading techniques. I think after you try other techniques, youll find that the methods detailed in this book are the safest and most powerful.

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