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Posted by Martin February 25, 2013
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Find a Good Entry Point or How to Buy Stocks to Increase Profits

Find a Good Entry Point or How to Buy Stocks to Increase Profits

A few stocks I own or plan to buy an initial position such as GLW provided a great opportunity today as the whole market ended down. I wrote on Friday last week that I wanted to add Lorillard (LO) to my positions but the trade would execute only if the stock goes higher.

Today it didn’t continue in the morning’s march into higher levels and ended down although my entry point got almost hit and I would pick up a losing position. Today’s high price reached $41.69 a share and my buy order was sitting at $41.77.

Later the whole market collapsed and took almost all stocks with it. A typical behavior which every investor knows or should know. Besides LO I would like to add AT&T to my current positions and open an initial position in GLW stock.

How I set my entry point into stocks

I will use Lorillard as my example how I entry into stock positions. Last week the stock got hit hard. It fell from $42.76 a share to $41.15 and today to $40.80 a share. The drop was 4% and almost another 1% today. After such a huge drop on Friday I would typically expect a recovery, but the overall market pushed the stock lower.

Lorillard

(Enlarge the picture)

I like to use FreeStocksCharts when not at home where I use Think or Swim or Strategy desk. I like to see all three time frames (6 months daily chart – the largest one, 5 minute 1 day chart and 5 year weekly chart) to see where the stock is to make a decision when to buy.

Three time frames

5 year time frame

After I screen for a dividend paying stock I take a look at the 5 year chart to see where the stock is related to the long term behavior. From the 5 year chart I can see LO trending up (see the yellow trend line), but recently during August 2012 and November 2012 the stock dropped down to its long term trend line (it touched the yellow line again). Although it doesn’t mean that the stock won’t go lower, I consider this as a good price position for adding the stock. It is on its long term uptrend support and most likely will continue up.

It can break the trend, for example when the Government tighten the regulation in tobacco industry. If that happens I will postpone adding new positions to my holdings and most likely wait for the bottom. I will not be trying to fish the bottom, but I will wait e.g. for the next possible support, which would be on 5 year 200 day MA where I would expect the stock to stop its fall. If that happens and the stock reverses I would pick up a few shares on the way up.

From the 5 year chart I can see that the stock is a buy (not extended as it was at the beginning of 2012).

Fair value

Then I take a look at the stock’s fair value. I use Morningstar.com to check their value. As of today, Morningstar is listing a fair value to be $43.00 a share. I run my own calculations and my calculated fair value is at $41.58 a share, which is about in line with Morningstar numbers. I also calculate annual expected return and LO is at 21%. Then I check the current price action. LO is trading as of this writing at $40.80 and thus providing a safety margin of 1% to my calculated fair value. Still a buy to me.

6 months time frame

The next step would be a look at 6 month daily chart to see the stock behavior from the short term perspective. Is there a potential for growth or will the stock fall? I briefly scan my holdings daily. If the stocks are running up unstoppable I am not interested in them and screen for another candidates or keep cash in sidelines. If however the stock fail making new highs and reverses like LO did last week, it gets my attention. The stock ran up after a good earnings report and dividend increase announcement 12 days ago. Would you buy in this hype rally? I wouldn’t.

The stock traded below 200 day MA (the red line) but above 50 day MA (blue line). I could pick up shares when the stock was at lower Bollinger Band below the trend line e.g. in January 2013, but at that time I didn’t have cash available (still struggle creating cash reserves). Then the stock ran up to upper Bolinger band and broke thru the 200 day MA with an extended bullish candle. A good sign, but I want to pick the stock at the lowest possible price, not this hype.

Daily chart

I do not use this time frame much, only in occasions when trying to enter the stock and trying to pick up a few pennies. Sometimes I use this when trading options, but very little when entering my portfolio core dividend positions.

Opening a trade order

I already wrote about this strategy. It is not my original strategy and many experienced traders apply it when entering a stock position.

If the stock which passed through my fundamental screening (dividend growth stock) behaves technically as described above I enter a contingency order with my broker. If you take a look at Lorillard’s chart, you can see the stock falling. I calculate what would be my activation price for the next day. Refer to my previous article how I do it. Also you can read Dave Landry’s book The Layman’s Guide to Trading Stocks where he describes this strategy in a very plain English.

There will be three possible outcomes:

  1. The stock will continue down as in LO case today.
  2. The stock will reverse and go up.
  3. The stock will gap up far beyond your limit price.

A contingency order

First let’s take a look at the contingency order. I open an order which would look like this:

If the last of LO is greater or equal to 41.77 Buy 24 LO at limit $41.77

If the stock continues down or even gaps down, the next trading day I adjust the price based on the new calculation:

If the last of LO is greater or equal to 41.26 Buy 24 LO at limit $41.26

if the stock reverses and goes up, the activation price is hit and the limit order becomes life. Usually this happens at the same time and it gets executed immediately (at the same time with activation of the order). In some occasions when the stock moves very fast up, you may be left behind, but this hasn’t happened to me yet.

The stock will gap up. If this happens, the activation process activates the limit order, but the order is not executed. Then I once again check the charts if I want to chase the stock, cancel the order or leave it alive as “Good-till-canceled” (GTC).

Since Lorillard dropped in price, I adjusted my entry limit order and will wait for tomorrow’s trading.

AT&T and Corning at the same boat

That said, the other two stocks popped up today as great candidates to buy. One stock is AT&T (T) and the other is Corning (GLW). I am not buying these stocks yet, since they didn’t fall far enough. I am however watching the stocks closely and if the trend reverses I may add a contingency order for AT&T. It broke 200 day MA down. The stock struggled to stay above it and may continue down to hit lower Bollinger Band along with 50 day MA (it can go to 34.5-ish price level from current $39.15) mainly if the market continues or speeds up its sell off.

As far as GLW goes, I will be applying a different strategy to buy this stock. I will apply put selling to get assigned. Most likely I will sell 12 strike put. But I haven’t analyzed this stock and trade yet, so I cannot say.

Conclusion

There are investors who do not care much about entry points into the stocks, some apply regular investing approach investing smaller amounts every month and averaging the stock cost basis. And that is a completely legit strategy and I am fine with it. Other investors apply the similar “cherry picking” strategy as described above and they are waiting for their price. I like such approach, because I believe using this way of entering the stock an investor can boost capital gains (although with dividend investing it is not an overly important aspect).




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Posted by Martin February 24, 2013
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My inspiration in last week #11

My inspiration in last week #11

I often browse the internet to find ideas about investing, trading stocks, options, investing opportunities and strategies. I like to read about investors and what their investing/trading approach to create income you can live on is.

 

This week I found the following interesting posts:

The Case For A Higher Minimum WageThe First Million is the Hardest

Minimum wage increase may backfire for blacksThe Grio

How To Double Your Return With Armour Residential REITSeeking Alpha

McDonald’s: Today’s Price Will Look Cheap 5 Years From NowSeeking Alpha

The Crowd Has Spoken: If It Doesn’t Pay Dividends, We Don’t Like ItDividends & Income Daily

Is It Time To Buy Gold Via GLD?Seeking Alpha

McDonald’s Corporation (MCD) Dividend Stock AnalysisDividend Growth Stocks

New Trade – GLWThe Money Tree

Heinz Deal Has Some Wondering Whether Buffett Is Still a Bargain HunterCNBC.com




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Posted by Martin February 22, 2013
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Is Lorillard offerring another buy opportunity?

Is Lorillard offerring another buy opportunity?

I think Lorillard is offering another buy opportunity. On Friday session the stock dropped by 4% and hit 200 day MA. That is the kind of a retreat I usually look in stocks of my interest to add more shares.

I am not buying yet, since the stock may continue sliding down, but I entered a contingency order. If the stock crosses above $41.77 a share I should be buying another 24 shares of this stock.

If the price won’t cross this level, but continues falling down, the trade won’t execute and at the end of the next down session I’ll move my contigency order down again as long as the stock reverses and pick me up on it’s way upwards.

If however the stock gaps up the next session the trade will activate my limit order at $41.77, but will not execute and stays in Good-till-canceled mode.

Look at today’s trading of this stock. The dip is deep and touched 200 day MA. Will this support hold or will the stock break down below 200 day MA?

Lorillard

(Click to enlarge)

If the trade executes, I’ll keep you updated.




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Posted by Martin February 21, 2013
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Trade adjustment – TASER International Inc (TASR)

Trade adjustment - TASER International Inc (TASR)

I hold TASR as my option play, but today’s frenzy selling compared to results of this company (50% better revenue which beat analyst expectations)makes TASR a good buy play. So I added another 100 shares to my current holding. As the stock recovers I will be selling more calls against the original and new holding.

In my opinion today selling is irrational and the stock will recover. I would like to participate on that recovery.

TASER International, Inc. (TASER) is engaged in development, manufacture and sale of electronic control devices (ECDs) designed for use in the law enforcement, military, corrections, private security and personal defense markets. Federal, state and local law enforcement agencies in the United States and globally represent the target market for its TASER ECDs. Its TASER devices are deployed in county correctional facilities, such as those operated by the Los Angeles Custody Division and the Maricopa County Sheriff’s Office (AZ). TASER devices deployed in support of strategic military operations in locations globally. Private security officers represent a range of individuals, including contract security patrol, healthcare, gaming, retail security employees and many others. During the year ended December 31, 2010, TASER C2 personal protection device with other consumer offerings, contributed approximately 5% its total net sales.

02/21/2013 15:26:16 Bought 100 TASR @ 6.8999




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Posted by Martin February 21, 2013
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Market correction

Market correction

The market finally truned into a correction. Hold your hats, we may be running low. My estimate is to pull back down to $145 – $146 level (SPY). Have you saved enough money to buy more stocks?




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Posted by Martin February 20, 2013
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Trade adjustment – Gold (GLD) addition

Trade adjustment - Gold (GLD) addition

Today I added a few shares of GLD into my portfolio as Gold suffered a huge sell off. As I wrote in my previous post I believe the today’s price action is an overreaction of investors, most likely responding to (outdated) report from Sorros Fund Management.

As I wrote I believe GLD indicated a bearish exhaustion as is due for reversal. Let’s take a look at charts:

First take a look at 5 year chart, which nicely shows the new support line formed in October 2011.

Gold 5 yr chart

(Click to enlarge)

The red horizontal line indicates the support at which I originally placed a trigger buy order ($151.60 a share) and honestly I haven’t expected the price ever touch this level again.

Following is the 6 months daily chart:

Gold 6mo chart

(Click to enlarge)

In this chart you can see a very extended bearish candle and trippled volume. In my opinion this is a bearish exhaustion and we may experience a rebound. This price action also triggered my buy order today and I added shares to my portfolio.

02/20/2013 14:05:43 Bought 6 GLD @ 151.6

This trade lowers my cost basis in GLD from $164 a share to $160 a share.

[poll id=”15″]

Thanks for voting.




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Posted by Martin February 20, 2013
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Is today’s trading marking the beginning of the correction?

Is today's trading marking the beginning of the correction?

Today’s trading was hectic and markets fell hard after FOMC meeting. The market is idicating nervousness and today’s price action – extended bearish candle may indicate the end of the trend.

Almost all my stocks fell hard as well. I am not that concerned about it however, since I have been expecting correction since two weeks ago. I just moved more cash to my account to protect my current posittions against potential margin calls, and will be riding it down where I may start adding more shares.

However today trading offered some nice opportunities as well. I was watching GLD and I had a buy trigger order at $151.60 a share. Honestly I didn’t expect Gold to reach this mark today. I was expecting a couple more days for Gold to slide towards that mark.

Gold was under sell off recently because of some institutional investors unloaded Gold from their portfolio. For example Sorros Fund Management sold 50% of his stake in Gold as reported in December 2011. I am not sure when this latest 13-F filling came actually out, but it is quite outdated. If traders were reacting to this news today, then it is a very stupid reaction.

Gold is very oversold these days and today trading could mark an exhaustion day. An exhaustion day can indicate the reversal in stock trend. It is a day, when everybody give up and throw the towel into the ring. Usually retail investors aren’t willing to bear more losses anymore and sell. Typically it is that last wave of selling (or buying if we look at bullish exhaustion), where there is no more sellers and the stock reverses. This day is marked by large extended bearish candle (or bullish) with unusuall increase in volume and it must occur during a continuing trend. When you take a look at Gold, you can see the stock falling since October last year. Today the stock fell sharply on heavy volume and it reach major support line. This support line has been formed in July 2011 when the parabolic run up in Gold started and this support was tested (and held) for many times during the last period.

Based on above technical anaylisis I believe Gold has reached bottom. Based on that I accepted my buy order and let it executed. If however Gold continues falling I have reserve funds and will be buying on my next buy point level which is at $140 a share.




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Posted by Martin February 20, 2013
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New Trade – 8×8 Inc. (EGHT) covered call

New Trade - 8x8 Inc. (EGHT) covered call

My MBI covered call trade was cleared this Saturday with a nice gain. This released some cash and I am looking for another opportunity to make some cash. I found 8×8 Inc. (EGHT) stock which seems to be a good candidate to deliver a profit.

The stock recently corrected and is considered undervalued based on PEG value of 0.4346, one of the lowest in the Communications Services industry, which is supported by a PE of 6.519 that is also among the lowest in the industry.

From 5 yr chart you can see nice growing graph with healthy corrections:

EGHT

Take a look at daily chart. You can clearly see the stock undergoing correction. At this moment the stock corrected below 50 day MA, but it still is well above 200 day MA. From the technical analysis perspective, this correction seems to me in line with the previous ones, so I can expect the stock to rebound and go higher.

EGHT daily

Analysts are positivie on the stock and recommend moderately buy. Earnings and revenue are expected to grow from 0.06 a share to 0.20 a share (300%) in the next quarter and by 40% annualy. If that happens, this should provide enough boost to the stock to go higher.

8×8, Inc., is a United States-based company, which provides telecommunication services and technology for Internet protocol (IP), telephony and video applications. The Company provides voice over Internet protocol (VoIP) and Video Telephone service that enables broadband Internet users to add digital voice and video communications services to their Internet connections. The Company also offers voice mail, caller ID, call forwarding, call waiting, 3-way calling, online account management and billing, international call blocking and caller ID blocking services.

Here are the trade details:

Bought 100 shares EGHT: $6.79
Strike: $7.50
Sold 1 Covered Call: $0.45
Total Purchase: $634.00
Commissions: $8.78
Total purchase: $642.78
   
Expected Option Assignment: $750.00
Option Assignment Fee: $19.00
Expected Proceeds: $731.00
   
Expected Net Gain: $88.22
Expected ROI: 13.72%

If my expectations are correct and the stock rises above 7.5 a share by the option expiration, the stock will be called away and I will realize the profit listed above. If it doesn’t end up above 7.5, I will continue selling covered calls as long as it will be called away. That should also increase the potetial return. If the stock however continues falling, I will apply a correcting measures by selling calls longer away and with lower strike to still end up with gain when called away – a similar approach to what I am currently doing with a DMD trade.

Happy Trading!




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Posted by Martin February 19, 2013
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Market expectations

Market expectations

Today’s trading is over and the markets added to their gains and added to their overbought pressure. Everybody is already talking about correction behind the door, but the market is still strong and marching up. Investors are still pouring new money, moving more cash to the stocks on every dip. It really is something which should make every savvy investor cautious.

Fear and Greed indicator is at 86 level – still very elevated. Optimism is supported by investors confidence data from Germany, but not economical improvement. US homebuilders confidence fell down from previous period. All that can quickly turn into negative and investors can run away from the market very quickly.

I am waiting with my new purchases or additions to see what happens next. I do not want to be buying at the current price levels. There are stocks out there, where you can already see some pressure and slow down.

I might be wrong and I do not want to be predicting the market movement, but I think, it would be wise to wait at this moment. However, I have a few stocks I am currently watching closely being ready to buy.

One of them is McDonalds (MCD). A fenomenal stock in my opinion. Last week I have read an article, why you should sell MCD today and buy it later at a lower price. As a dividend investor I do not agree with this strategy, but I take it as a great opportunity. If the author is correct and bad data from MCD, in my opinion temporary, really push MCD down to $84 a share, which again I do not think is a realistic expectation, I would buy more shares. I agree with another investor, Craig Van Pelt, who posted his story witnessing opening of McDonalds stores in Russia and what wonder it did to Russians, that MCD still has great power around the world to easily overcome any consumer drops today. I have a similar experience from a post-communist East European country. As MCD is expanding to other countries, it will provide realitively cheap fast food to inhabitans of those countries. In many occassions I remember McDonalds was considered a restaurant with high food standard in quality and assurance that the food is checked and fresh as opposed to many local restaurants. If any problems should occur, they will be temporary and create a great opportunity to buy MCD for cheap.

Another stock I am considering to add to my portfolio is Gold ETF (GLD). Gold is currently heavily shorted. I believe that in long term this is another opportunity to buy more shares. Given the monetary policy of FED and ECB currencies will decline and that will push gold up. The banks are buying gold heavily, so all the hype around gold these days look like a shake out to me. I plan on holding gold for another 15 – 20 years from now. Given the time frame I think, this would be a good time to buy some more shares.

Last stock in my nearest focus is 8×8 Inc. (EGHT). Today I did some reading about this stock as a candidate for covered call and I liked what I could find on the internet. The stock is currently in correction phase and the correction is in line of the previous corrections. If we assume that the stock market moves in some sort of a rythm repeating itself, than I am assuming EGTH would act in similar manner in the future. Given that the stock may grow up at or above $7.5 per share and that will be my play. I will buy-write a covered call trade expecting the stock to be called away.

In the near future it looks like the market will continue its upward move with some minor stops or slight corrections. We are not exhausted yet to see some major pullback. My strategy will be however waiting for it and adding new trades carefully.

Happy Trading!




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Posted by Martin February 18, 2013
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My inspiration in last week #10

My inspiration in last week #10

I often browse the internet to find ideas about investing, trading stocks, options, investing opportunities and strategies. I like to read about investors and what their investing/trading approach to create income you can live on is.

 

This week I found the following interesting posts:

Dump Your Hedge Funds and Buy This StockInsider Monkey

G-20 Sparks Gold’s Ugly Sell-OffSeeking Alpha

Central Banks Buy the Most Gold Since 196424/7 Wall Street

Why It’s Time To Sell McDonald’s Shares Now And Buy On The Next Major PullbackSeeking Alpha

Buying Options Is A Fool’s ErrandBrick By Brick Investing

Top 10 Reasons I Like Dividend Growth StocksDividend Growth Stock Investing




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