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"If home is where the heart is, wisdom is where the success is."
ChartWatchCentral - Frequently Asked Questions If your question is not addressed below, please e-mail me at cnmail@chartwatchcentral.com Question: "How do you
define 'bullish' and
'bearish?" Response: All opinions with regards to a specific security, reflects what we expect to transpire within a six month period. Bullish: If a security's prior trend was down and we specify we are bullish, it means we expect that issue to stop declining, or even rise in value. What's more, if the overall market is falling, a bullish pick is expected to outperform the major indexes. Bearish: If a security's prior trend was up and we specify we are bearish, it means we expect that issue to stop rising, or even fall in value. What's more, if the overall market is rising, a bearish pick is expected to underperform the major indexes.
-- Christina Nikolov
Question: "Since ChartWatchCentral primarily recommends options and I do not trade options, your service (while very good) does not match my investment needs. Any suggestions?" Response: You are correct that we primarily post option recommendations within our stock commentaries. Our rationale is that options provide more bang for your buck, since leverage is far greater. If your trading account is an IRA or some other type which restricts option trading, then you cannot trade many of our option picks. However, there is nothing preventing you from reading our commentaries and then using what we say to enter a long or short position in the underlying shares, rather than buying the options we are writing about.
-- Christina Nikolov
Question: "What parameters do we use for our
intermediate and long-term market outlook" Response: Our outlook pertains to the equity market as a whole. (Dow Jones Industrial Average, NASDAQ Composite, S&P500 Stock Index, etc) Intermediate-term pertains to a period of up to six months, while long-term is based on anything over six months. When we change our official outlook, that shift is logged as of the closing price on the date of that change. If the market's prior trend was down and we specify we are bullish, it means we expect the major indexes to stop declining, or even rise in value. If the market's prior trend was up and we specify we are bearish, it means we expect the major indexes to stop rising, or even drop in value
-- Christina Nikolov
Question: When a new pick is posted, how do we
decide what price to use? Response: To maintain consistency, we always use the most recent closing price. For example, if a commentary is posted anytime between when the market closes on Friday and when it opens on Monday, the date and pricing will be based on Friday's closing price.
-- Christina Nikolov
Question: "When a recommendation is removed from the list of current picks and added to the performance page, does that mean the position should be closed?"
Response: Once a recommended stock has moved far enough in the anticipated
direction, where we think most or all of the move already occurred, the pick
will then be removed from our list of Current Picks, but can still be seen on
our Track
Record page. We wouldn't necessarily consider it to be a sell
signal.
-- Christina Nikolov
Question: "My key question is about the closing of the positions. Are the closed position prices in your results the target prices or a change of the service's position (bullish or bearish) on the stock in question? In other words what exactly triggers an exit?"
Response: When we post a commentary, the stated opinion reflects how we feel at that specific point in time. Our opinion could change the next day or even a month down the road, but is intended to play out over a three to six month period. Sometimes we post a commentary and the shares immediately move in the anticipated direction. Other times, the stock initially moves against us before eventually turning in our favor. The 'closed position' price does not necessarily reflect our target. On some occasions the share price stopped short of our target, while in other cases it exceeded our expectations. It's more accurate to say that the ending price actually depicts the price action after we posted the commentary. While we make every effort to move a commentary to the archives after the move has ended, there were at least seven occasions since last November, when the shares continued to move in the anticipated direction after it was placed in the 'free archives'. One example is Airborne, Inc. (ABF). We placed ABF's bullish commentary in our archives on 12/17/2002, after the shares rose 41%. It turned out the shares were not finished rising. Over the next three months, ABF rose another 31%, to $20.52. Another example, Alpharma (ALO), was originally placed in our archives with a 37.5% gain on 11/26/02. Two months later ALO peaked at $17.50, with a total gain of 72.4%. ALO continues to appreciate, but we won't be amending our performance figures for this stock, since the recent gains came well after our six-month time frame. Because of what happened with ABF and ALO, we now trying to keep commentaries in our members area until we are absolutely sure they are stale. When we place a stock in the archives, it is usually because we think the move is probably over. Of course, ABF and ALO are two examples when we were wrong, and the shares continued rising. Technical analysis is not 100% accurate, especially when it involves anticipating a reversal prior to a breakout. That said, it's not uncommon for a potential head and shoulders pattern to turn into a wedge or broadening formation. Our service provides investors with trading ideas and quality analysis (including support and resistance) that can be used to make decisions if a member wishes to bet on one of our recommendations. The charts within a commentary are a snapshot of our analysis as of the date posted, and are not updated after the commentary is written. After a commentary is posted, we never make any changes. We always leave trade management to the individual, since everyone has different investment goals and risk tolerance. Also, we need to be careful not to break any laws, since we aren't licensed money managers.
-- Christina Nikolov
Question: Is there a clear exit signal from your site calling for a closure of the position once it has been entered? Also do you have an account that has been trading the signals so a real percent return could be calculated. If many signals are given in groups it is difficult to take all of them. Or if there are periods when few are given, would the account be in a high cash position?
Response: When choosing a stock to profile, we look for a technical
picture which can be confirmed by fundamentals, investor sentiment and/or a few
other proprietary things. By approaching our picks in this manner, short-term
pattern failures almost always turn around and become profitable over a three to
six month period. Our commentaries usually include support and resistance
levels, as well at specific target prices. Since everyone's portfolio has a
different risk structure, we try not to influence their exit points with our
bias. The same goes for setting a stop loss, where we may prefer to give a trade
3%, while someone else might be willing to lose 15% before cutting the
trade loose. Technical analysis is not a perfect science, especially
when anticipating a reversal, as we do. There have been cases when a stock
appeared to be forming a head and shoulders top, but it turned into a rising
wedge or broadening top. The last thing I want someone to do is close a position
and then see the shares move back in the anticipated direction. Last year, one
of my members was stopped out of a position on a downside fakeout, but was then
savvy enough to re-initiate his position when he spotted an upside reversal. He
almost doubled his money in a few months. As a bonus, we also provide members with lists of stocks with interesting charts, along with a chart and our reason for watching it. This gives members some additional stocks to look at in addition to our regular picks. Regarding cash positions, we suggest placing no more than 10% of a portfolio in one position. During times when there are fewer picks, a higher cash position will be the most likely result. When there are more picks to trade, the cash position could be zero, or lower, if someone wants to take on the additional risk of a negative cash balance. For the record, we don't suggest trading on margin. Allocating no more than ten percent of a portfolio to any trade is a benchmark that we like to use, but may not apply to all investors. Since cash position falls under the blanket of risk tolerance, it's possible that some investors will allocate their portfolio among five stocks, while others might split it among 10 or 20 issues. It's all related to personal preference. Since the SEC prohibits us from managing individual accounts, we provide our ideas and analysis, then leave the specific trade management to the individual investor.
-- Christina Nikolov
Question: "I received my password today and spent some time viewing the current stock recommendations. Why the dramatic fall off in performance from the historical track record? Some of the recommendations are off 40-50%. Surely you do not expect an investor to hold for that kind of drop. I would think some would have been banished to the archives. What's up?"
Response: Thank you for your inquiry. After reading your mail, I reviewed some of our picks and found three commentaries that can be removed from the members area and placed in the archives. BEAS was posted on 1/31 and surpassed our target six weeks later. ADTN and CSCO were both recommended in January and came close to our targets on March 12th. ADTN and CSCO are currently well above their March 12, 2003 lows. While we make every effort to calculate precise targets, there is no way to be 100% accurate. When we post a commentary, the stated opinion reflects how we feel about a stock at that specific point in time. Our opinion is based on a three to six month time period. Sometimes we post a commentary and the shares immediately move in the anticipated direction. Other times, a stock initially moves against us before eventually turning in our favor. BLTI and GRMN are examples of stocks we expect to fall, but have gone against us short-term. The main reason why we haven't placed them in our archives yet, is because only two months have passed since they were posted. Also, when we wrote these commentaries, we mentioned they were risky and suggested in-the-money options. BLTI initially broke down as expected, but firmed up and took more than a month to break the upper trendline of the rising wedge. On April 22nd, the shares quickly broke back down, then started rising again. At that point, the shares were already just above $10. Due to the amount of time that elapsed until the actual breakout and the pullback on April 22, we opted to keep the pick on the active list and give it a little more time. GRMN underwent a similar pullback after we profiled it, then firmed and only took three weeks to convincingly break through the upper trendline. Now the shares are on their way to posting an eighth straight monthly gain. This kind of movement is unsustainable and we still believe prices will fall dramatically over the next few months. You are correct that we don't want people to lose 40% of their money. That's why everyone should have a built-in stop-loss based on their personal tolerance for risk. One of my members keeps his stops very tight and then waits for a sign to get back in before re-entering his position. When I say tight, I am referring to less than one percent. He was stopped out of a stock last summer on a downside fakeout, but jumped back in on the upside reversal. In the end, he achieved about a 70% gain between the two trades. Technical analysis is not 100% accurate, especially when it involves anticipating a reversal prior to a breakout. That said, its not uncommon for a potential head and shoulders pattern to turn into a wedge or broadening formation. Our service provides investors with trading ideas and quality analysis (including support and resistance) that can be used to make decisions if a member wishes to bet on one of our recommendations. The charts within a commentary are a snapshot of our analysis as of the date posted, and are not updated after the commentary is written. After a commentary is posted, we never make any changes. We always leave trade management to the individual, since everyone has different investment goals and risk tolerance. Also, we need to be careful not to break any laws, since we aren't licensed money managers. While we make every effort to move a commentary to the archives after the move has ended, there were at least seven occasions since last November, when the shares continued to move in the anticipated direction after it was placed in the 'free archives'. One example is Airborne, Inc. (ABF). We placed ABF's bullish commentary in our archives on 12/17/2002, after the shares rose 41%. It turned out the shares were not finished rising, because over the next three months, ABF rose another 31%, to $20.52. Another example, Alpharma (ALO), was originally placed in our archives with a 37.5% gain on 11/26/02. Two months later ALO peaked at $17.50, with a total gain of 72.4%. ALO continues to appreciate, but we won't be amending our performance figures for this stock, since the recent gains came well after our six-month time frame. Because of what happened with ABF and ALO, we now try to keep commentaries in our members area until we are absolutely sure they are stale. When we place a stock in the archives, it is usually because we think the move is probably over. ABF and ALO are two of many examples where shares have continued moving in the direction we predicted, even after being removed from our active list. So you can get more acquainted with our service, you might want to take some time to review our 'Frequently Asked Questions' and 'Disclaimer'. Another informative place to visit is our 'Education' section. Within the text on that page, select the hyperlinked words 'this section', then choose 'protecting your portfolio' and read my thoughts on portfolio protection.
-- Christina Nikolov
Question: "I am an investor trying to learn trading techniques, I became
a
little confused when you spoke of the Stochastic Oscillator on April
19. How can I learn more about the Stochastic Oscillator? Can I track
the SO like I track the VIX ($VIX.X)? Is the SO similar to the VIX? What
are the guidelines for the market being overbought or oversold?
Response: The Stochastic Oscillator (S.O.) is an indicator which is based on an individual security. The only similarity between the S.O. and the Volatility Index (VIX) is that they are both indicators. That's where the similarities end. The VIX measures level of fear in the marketplace, and is quite accurate with regards to predicting market turns, when it hits an extreme peak or low. In comparison, the S.O. indicates that the security is overbought or oversold, but cannot be relied upon to pick the turn without having some sort of confirmation from other indicators. That's why I always suggest using more than one tool, when attempting to time a reversal. I usually stick to writing about the S.O., to keep the commentaries simple and consistent. However, I assure you that our proprietary research incorporates several indicators, many of which are not mentioned in the commentaries. The Stochastic Oscillator is considered overbought when it rises to 80 and oversold when it falls to 20. We had a Neutral rating for the market in early June, because we expected the major indexes to be pretty in the same place in early September as they were in early June. That doesn't reflect any swings up or down that may occur during the period. We discontinued the short-term stuff because it was too short a time frame to provide reliable buy/sell reading in a timely manner. The one thing would have taken too much time away from the stock and index analysis. After the market declined almost to where we thought the bottom would be, we changed from bearish to neutral, because we were concerned that people might miss the actual market bottom. The last thing we wanted to do is keep the outlook as bearish until the very bottom and see someone short the SPX on the reversal day because of our bearish outlook. It was a way to tell people we are not 100% bearish, but not 100% bullish either. While it was intended to mean "raise cash" because a buying opportunity is very close, we don't mean raise cash by selling current positions. If people listened to us in January, March and April, they would have already raised the cash that would be needed, months earlier. The neutral rating basically indicates a time to start nibbling in anticipation that the reversal is coming soon. -- Christina Nikolov
Question: "I was reading the BGEN comments and noted you suggest the 4/03 $25 calls as the best risk/reward ratio option for a long position. However when I checked them there was 0 open interest. The $22.50s are priced at $13.70 and have 3 open interest contracts. How would you/do you consider options that have no pricing or very limited open interest?"
Response: Thanks for your inquiry. Liquidity wasn't really part of that decision process. Since you brought it up, it might be something to incorporate in the future. Mostly all options that we consider revolve around intrinsic value. There isn't any complicated formula. It's mainly what makes sense based on how far I expect the stock to move.
While several different factors are looked at, one of the main considerations is the percentage profit that can be made from different options. The goal is to get the best possible gain, with the least amount of monetary risk. For example: An underlying security is trading at 17.32 and we are looking at buying either an April 20 call at 1.60 or an April 15 call at 4.10. Excluding time value, volatility, commission, etc. the stock would have to rise to $19.10 before the April 15 call reaches break-even. The April 20 would not be profitable until the stock reaches $21.60. If we only expect that stock to rise to $21.50, the shares would have gained 24%. Meanwhile, the April 20 would have lost you money, while the April 15 returned 58%. In my opinion, the open interest is not that important, because if you want to purchase a particular option and no OI exists, , the market maker is has to write those options to satisfy your order.
-- Christina Nikolov
Question: "Thanks for taking time to respond to my email. I certainly understand your option selection process and it has brought clarity to some of my option ideas. However, I am still interested in the Open Interest component. I liken it to volume traded in a stock and liquidity. If I buy an option that has no open interest, or very limited open interest, then aren't I creating the market. In essence I could be the market. Consequently, there is no competition for pricing to change based on supply/demand and no liquidity to exit the trade as readily as I might be able to if there is Open Interest of at least 20 times the number of contracts I plan to enter."
Response: Volume has a much different meaning when it comes to options and stocks. When there is low volume on a stock, you would be making the market. Since an option's movement is determined by the underlying security, technically, you're not making the market. In my opinion, supply and demand is not a factor when an option is in the money and doesn't have excessive volatility priced in. It's possible to have zero open interest and zero volume on an option for several weeks. Meanwhile, if the underlying security moves, the option will also move. It has no choice. That's why I always look for options with the best intrinsic value, versus time value and volatility. If you want to buy or sell and option and it is in the money, there will always be a bid and ask, and you will be able to buy or sell no matter what the open interest is. That's why I put a lot of weight in the intrinsic value. The intrinsic value always comes before everything else in my opinion. Many people look at fancy pricing models, etc., but in my opinion, intrinsic value is the most important. I try to keep it as simple as possible. As long as the underlying security moves in the direction that you want, I don't see any way that you can lose. -- Christina Nikolov
Question: "When you make stock recommendations you do not give limits in case the stock goes in the opposite direction? Thank you for your service."
Response: Thank you very much for your feedback. Specific support and resistance levels are almost always mentioned within our commentaries, and also depicted on the included charts. Going beyond that would be difficult, since we strongly believe that stop-loss limits should be based on an individuals personal risk tolerance. In the event that we expect a stock to move in one direction and it ends up moving in the opposite direction, the mentioned support or resistance levels would come into play. Rather than attempt to micro manage each stock that we comment on, we prefer to provide investors with the unbiased facts (support, resistance, etc) and leave the trade management up to the individual. -- Christina Nikolov
Question: "I'm getting killed on the NEOL short recommendation. The
short got filled at 13.86. I decided to give it wiggle room when it was at the
right shoulder. So instead of putting my stop above the right shoulder I put it
in above the stick high of the head at 15.20. Well yesterdays hangman gunned out
my stop. So I'm out with a 10% loss. Then today the h/s formation was
invalidated by the shooting star. I then reestablished the short and got filled
at 15.10. I placed a very tight stop at 15.90 which gives me a 5% risk loss. The
reason is that the shooting star at the end of a rally usually ends the rally.
The other reason is the gap from a couple months ago provides resistance. This
has been a total disaster. Do you think that gap is going to be filled? And if
it is filled would it be a good idea to do a failure pattern trade in the
opposite direction since support would now be resistance? In other words it
would be a double top breakout. Or maybe I should just like my wounds and find
another stock. Or maybe I should not be shorting in this type of market in the
first place and instead should be doing trades on the long side."
Response: First, I would like to say how sorry I am about NEOL moving against you. I do congratulate how you approached the trade though. It would be great if more people who read my site were as informed about charting and trading as you. Some people (against my advice) blindly place trades and then don't keep a close eye on them. If you have a small risk tolerance, limiting your loss to 10% was really smart. The only thing that I would have done differently, was once I got stopped out of as trade, I personally would have been gun shy with regards to re-establishing a position. You handled it very intelligently though, by keeping the stop price close. The first (pattern failure) warning for me would have been the abnormal sideways movement within the right shoulder of the pattern. I am not sure about placing a pattern failure trade since I have never tried that approach. I also noticed the increasing volume as the share price moved higher in recent days. Other than the dismal fundamental picture, the main thing in favor of a short position is the stochastic oscillator, which has failed to confirm the move to new highs on a weekly basis. (see attached chart) It hasn't happened often, but occasionally I have seen stocks move against me like this, then for no reason whatsoever, reverse course and move in the direction I expected. One of these days I will go back and see if those failures have anything in common. Regarding gaps being filled, they usually are filled eventually. Us caution when trading based on gaps alone, since there is no way to know how long it will take to fill a gap. I remember a case when it took IBM something like 5 years to fill a breakaway gap. -- Christina Nikolov
Question: Why do charts pop up in such small windows? It's irritating to have to keep enlarging the chart windows.
Response: We originally created the charts to pop up as a full-screen image. Unfortunately, it confused most people and caused them to think they lost the navigation bar. By having the chart in a smaller popup window, the reader will never lose sight of the navigation bar, while also having the option to enlarge it on their own. Since all charts should be setup to utilize the same window, an easy solution would be to enlarge the window to the desired size after you open the first chart, then leave it open until you finish clicking on the charts you wish to view. -- Christina Nikolov
Question: Why aren't charts within commentaries updated on a daily basis?
Response: Every commentary and chart posted to the website reflects our analysis as of the specific date the pick was originally posted. If we were to update the charts on a daily basis, it would also be necessary to update each commentary, pricing, etc. It would defeat the whole purpose of what we are doing, while also significantly limiting our ability to generate new stock picks. -- Christina Nikolov
Question: "What kind of 'stops' do you recommend?"
Response: 'Current Analysis' commentaries include references to support and resistance levels, as well as target prices. Many times we also mention options that might be worth trading. While we speak of support and resistance within commentaries, we purposely avoid setting specific stop limits, since everyone has a different risk tolerance. Some traders might place a 3% stop above or below support/resistance, while other give the trade more leeway. Some people prefer to cut their loss at a preset percentage of the holding's value, like a 15% loss. I have known people who were stopped out of a trade because the shares hit their price, only to watch the shares then reverse without them onboard. Stop limits are a very personal thing that can only be decided by the individual. The law prohibits us from managing an individual's portfolio, so we stick to reporting the facts, while leaving trade management to the trader. -- Christina Nikolov
Question: "Which moving averages are used for charts within commentaries?"
Response: Unless otherwise indicated, we typically utilize the 50-day and 200-day weighted moving averages with daily charts and 10-week/40-week weighted averages with weekly charts. If we determine that other moving averages are more suitable for a particular issue, we will typically use them and label the charts appropriately. -- Christina Nikolov
Question: Is it true that you can predict price direction by Technical Analysis more than by the news? Or do you see news as a contrarian signal to buy? I am VERY interested to know what you think about this. It is a question I've tried to answer for years.
Response: Thank you very much for your feedback. A chart pattern is only reliable when the chart is analyzed correctly. There is always a possibility that some obscure clue was overlooked, which could eventually lead to the pattern's failure. But that risk always exists. News is a big factor in a stock's price movement, and is often reflected in technical patterns which are traced out by price activity over a period of time. There is a lot to the saying that "When Analyzed Correctly, A Chart Never Lies", because there is often anticipation that some certain news event will occur and it is that anticipation which causes prices to trace out a particular pattern. If the fundamental issue which the pattern was reflecting (up or down prediction) does not occur as expected, the pattern might fail, potentially resulting in a significant movement opposite to the anticipated direction. Some chart patterns precede major trend reversals, while others precede short-term counter-trend moves, or a pause in the the longer-term trend. For example, I have seen stocks such as Micron Technology (March-July 1997) pause for several months and trace out a head and shoulders bottom, before continuing on to higher levels. And once surprise news which was not factored into the stock's price action hit the market, the shares plunged. You will notice on the chart that Micron Technology consolidated, then broke upward out of the March-June trading range, met its upside objective, then plummeted. The tremendous decline came on the heels of an unexpected report that chips being dumped on the market in Asia. When I look at technicals, I also attempt to decipher what might be occuring fundamentally, so I know whether or not the fundamentals confirm the technical picture. Since I strongly believe in chart analysis, I think at least 80% of the time a correctly analyzed chart will accurately predict future price movement. One common belief many investors have in common is that "A Stock In Motion Will Continue Moving In The Same Direction". As you can see by the Smith International, example, the shares soared from $25 to $90 in 18 months, then guess what? A Head and Shoulders Top formed at the absolute peak, right when investors were gobbling up shares like they were going out of style. And within six weeks SII plunged to $60, followed by a short-lived rally back to the pattern's neckline, before shedding 80% of its market capitalization over the next eight months. Technical analysis is used to predict future price movement of a security and can be utilized in many ways. While it could be used as a contrarian signal to buy or sell, it can also be used to verify an established trend, allowing an investor to set an exit point, should the established trend weaken. Simply put, whether or not technical analysis is a contrarian's tool all depends on the user. In my case, I attempt to time major reversals using technical analysis, so for me it is a would be contrarian. -- Christina Nikolov [ Back ] |
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