Today the S&P 500 violated its 40 day moving average. According to the rules of this portfolio (see Blog 4/21/10), we liquidated all of our long positions and initiated a short portfolio of five stocks with each position worth $1000. (No commission costs included and only stocks over $5 are shorted.)

Note that market declines are generally more violent and much more short-lived than rallies, so you must be vigilant in monitoring these positions and be ready to cover should the position move against you. The portfolio can be held for up to eleven days but usually the positions are closed out before then.

All of today’s candidates are culled from the New Yearly Lows list on today’s *Blue Plate Specials*.

I closed out the other four long portfolios and will post them shortly.

In today’s final installment in the series of “How to order from the daily Blue Plate Specials” we’ll be looking at the portion of the menu designed for all of you hungry bears namely stocks that are either breaking down or are hitting new lows. But these lists aren’t just for the short-sighted! Most of us have diversified portfolios and if you see a stock in which you have a long position appear on one of these bear lists, then you should probably consider either lightening up your holding (either all or some of it) or protecting it via the use of put options.

So as not to finish off this series on a down note, we’ll also look into the daily Market Notes as well as the Trading Tips selections.

Bear Menu categories

FYI:
* Please note that only stocks trading above $5 are considered. This is because most brokerage houses will not let you short stocks below that.

* Trading volume is not considered on the short side because it doesn’t have the same impact as on the long side.

New Lows
Hot Lists: These are the stocks appearing on the New Yearly Low hot list that are currently trading above $5.

Selection Criterion:
* Stocks in this category need only to be making a new yearly low. Trading volume isn’t a factor here but one thing you might want to look for is a stock making a new low on extremely high volume and with a long bottoming tail in relation to the body (on a candlestick chart). This means that the supply of sellers has run out and a reversal in trend direction is highly probable.

How to use:
Stocks that make this list stand a good chance of going lower except for those fitting the above mentioned exception. Dr. Kris does not recommend that you run out and short these stocks unless you are experienced in short-selling (or buying put options) and are able to read a chart well enough to discern how far the stock could fall. For example, if there’s a major support level close by, it may not be profitable to take on a short position considering the reward versus the risk.

Example: See chart below.

Breaking Down
Hot Lists: These stocks are principally culled from the following hot lists: Percent and Point Losers, -VWAP, Unusual Volume, and Unfilled Gaps.

Selection Criterion:
*Stocks that are breaking a support level. These can include those issues that have enjoyed a significant run-up but are falling perhaps due to changes in company fundamentals (e.g., lower than expected earnings, lowered guidance, change in management or business focus, analyst downgrade, etc.), sector rotation (institutions moving into another sector because of a perceived change in future economic conditions), or the incompetence of one or more of their competitors thus bringing down the entire industry group. Sometimes there’s no apparent reason for the fall other than investors are losing interest and are finding other places to put their money.

How to use:
Stocks that make this list have the potential to go a lot lower. Shorting stocks is an art in itself and unless you’re experienced with the vagaries of short-selling, please only play with money you don’t care about losing.

Example:

Click to enlarge

Other categories: Market Notes & Trading Tips

Market Notes
This section appears at the bottom of the menu. Think of it as your eye on the market and as a crystal ball into future direction. It’s a distillation of internal indicators that are used to interpret current investor sentiment and leading technical indicators that point the way of future direction.

The main indicators used to measure the current market temperature are the Volume Weighted Average Price (VWAP) which is considered to be a measure of institutional buying or selling interest (VWAPs can be both positive and negative), the number of advancing issues versus the number of declining issues, and the Trin (Arms Index).

Indicators of where the overall market may be headed in the future include support and resistance levels of the major indexes especially the S&P 500 (SPX) and the Dow Transports (DTX); divergence in the direction of the Dow Transports compared with the Dow Industrials (Dow Theory); the direction of the Trin; and the direction of the VIX which is a measure of investor fear and uncertainty.

All of these indicators are used to formulate the state of today’s market and to provide an indication of near-term direction. Just one caveat: Lackluster internals cloud the crystal ball so that predictions of near-term movement can’t be made with much accuracy.

Trading Tips
This feature is only included when specific trading opportunities arise. Sometimes trading tips are disguised as “On the Move,” “Heating Up,” or “Cooling Off.” Consider these tips as possible trades that merit further investigation.

Conclusion
Now that you have a glimpse of what constitutes the Blue Plate Specials, I hope you start to use these menu selections as springboards for your own research. Please remember that all of the suggestions and recommendations made in the Blue Specials are just that; it’s up to you how you digest them.

Buon Appetito!

Continuing our perusal of the daily *Blue Plate Specials* Menu, today we’ll be looking at a few of the more popular Special Menu categories. You can think of these as daily treats–sometimes they’ll be there, and sometimes they won’t.  It all depends on what ingredients the chef has to work with. 

Special Menu Categories

Low-Priced Leaders
Hot Lists: These are culled from all of the bullish Hot Lists.

Selection Criteria:
*Stocks trading under $30 with most of the them under $15.

*Significant daily volume (usually >250k). They can trade on lower volume if their 5-minute charts move in an orderly fashion.

*Stock price has been moving up steadily for at least several months.

How to Use: Low-priced stocks moving up steadily on decent volume can signify that the investment community is waking up to new companies with major growth potential. This is where you’ll need to put extra effort into your due diligence as these could be companies you might want to hold for the long-term. Think Microsoft and Google in the early years.

On the other hand, I do pick stocks that have risen substantially which means that their runs could be coming to an end, at least in the near-term, and especially if the market is reversing to the downside. In bull markets you might want to add a few of these to your portfolio during market dips, starting with partial positions and building each as it moves up. Just remember to set a stop-loss as a fierce market move to the downside can spell disaster for smaller issues.

Example:

Speculative Leaders
Hot Lists: These are culled from all Hot Lists, especially Unfilled Gaps, Unusual Volume, and Percent Gainers.

Selection Criteria:
*Stocks trading under $10. Sometimes if a higher-priced stock has been in a significant uptrend and it trades at a low volume, I’ll include it.

*Lower daily volume (usually <250k). They can trade on higher volume if their 5-minute charts move in a choppy fashion, usually according to the whims of the market-makers.

*They’ve been moving up for at least a few weeks to a few months with very few pull-backs below previous support.

How to Use: These are highly speculative issues. They can turn out to be extremely profitable but the probability of that happening is low. In this respect, it’s of the essence that you do as much research as you can on the company and only play with discretionary funds.

Stocks of this ilk tend to be very volatile so you might want to consider either dumping them when they break their first support level; or, you can sign-up for the longer term and hold them until they either tank completely (and hopefully you haven’t risked much money) or launch into orbit in which case you can retire in luxury.

Just don’t blame Dr. Kris if your investment in any of these speculative stocks leaves you with indigestion!

Example:

Darlings of the Day
Hot Lists: All bullishly-biased Hot Lists.

Selection Criteria: These tend to be higher priced stocks (>$30) that have been in an up-trend for at least several months. Technically speaking, their charts are about perfect.

How to Use: Generally, these are well-established companies whose stocks have been beaten down and are on the rebound. Long-term investors might find them especially appealing and look to investigate them further. But remember that nothing ever goes up in a straight line forever and at some point, even these stocks will take a break.

Example:

Caveats to keep in mind:
*Despite the fact that I look at hundreds and hundreds of charts per day, many valid candidates don’t make the hot lists because they are symbol-limited. This means that if you see a stock breaking out to a new high and it’s not on my list, that doesn’t mean that it’s invalid. Most likely it didn’t make my hot lists at the time I was looking at it. Remember, too, that the price of a volatile stock can change markedly from minute to minute.

*Sometimes I see stocks that have broken out the day before that somehow escaped filtering. If the stock hasn’t broken out too much and I think it has an excellent chance of going higher (assuming the market is trending upward), I’ll put it on the appropriate Break Out list. I don’t want you to miss out on some good prospects!

*This may seem obvious, but please remember that stocks tend to move in the overall direction of the market. That means if the market is in a strong bullish trend, shorting stocks is not the percentage play, and vice versa. Even the strongest stocks will succumb to the pressure of a bear market.

Summary
Now that we’ve cleansed our palate with the bullish candidates, we can next focus on those that can cause gastric pain in many–the bearish entrees.

Bon appetit!

I spend a couple of hours a day putting together the Blue Plate Specials that appear in the right-hand column of the website. Many people have written expressing their thanks for my efforts, but I’ve also received messages from people who weren’t sure what it means nor how to use it. To all of you in the latter group, don’t despair for I’m dedicating as many blogs as will be required (hopefully no more than fifty–okay, maybe three at most) to adequately explain the information contained in the menu and provide tips on how to use it.

So, unfold your napkins and get ready to be served!

How the Blue Plate menu is generated
Menu selections are based on technical analysis of stock charts that are sorted according to specific price and volume criteria. My charting program uses these data to organize stocks and ETFs into specific “Hot Lists.” Each list is comprised of the top 100 equities and ETFs that fit the list criteria. The Hot Lists that I use most frequently are New Yearly Highs (and Lows), Percent Gainers (and Losers), Point Gainers (and Losers), Unusual Volume (that is, those stocks that are trading significantly above their average daily volumes), Unfilled Gaps, Positive (and Negative) VWAPs*, Trade Rate, and Volume Rate. Even with all of these lists, there are still stocks that slip through my fingers.

I go through each hot list looking at the daily chart of every stock on it. When one of them fits the technical criteria that I’m specifically looking for, I add it to that menu category. So that you can see what I look for chart-wise, I’ll be providing current examples.

Let’s see what’s cooking on the Blue Plate menu…

Selection parameters
*Only equities and ETFs that trade on US exchanges are included.

*In bear categories such as Breaking Down and New Yearly Lows, only stocks trading above $5 are included since it’s the policy of most brokerage firms not to allow shorting of stocks under $5.

*Commodity and Sector selections are all US exchanged traded funds (ETFs) but futures traders in these areas may wish to make note of the movement in the corresponding ETF.

Bull Menu categories

Breaking out to new highs:
Hot Lists: Stocks are selected primarily from the New Yearly High list.

Selection Criteria:
*The stocks must be making a new yearly (or almost yearly) high.

*They must be breaking out of a consolidation pattern, even if that pattern has only been in place for a few days. In general, the longer the length of consolidation, the more forceful the breakout and the following upward continuation.

*The stocks must be trading above their 65 day average volume.

How to Use:
Technically speaking, stocks that pass the above fitness test have the greatest chance of moving upward in the future, provided that the market continues to move upward as well. Select the ones that appeal to you the most and begin your research using your own fundamental and/or technical criteria.

Example:

Breaking out to new highs on lower volume
Hot Lists:  Same as above.

Selection Criteria:  Same as above except the volume is below average.

How to Use:  These stocks have all of the features of those in the previous category but they’re trading on lower than normal volume. You’ll have to do a little digging to see why that is; sometimes it’s just because whatever good news is propelling a stock higher hasn’t yet reached the masses and other times it could be that investors and institutions aren’t all that interested in the company’s business model. In general, these stocks don’t hold up as well as the previous ones in market downturns.

Example:

Breaking out
Hot Lists:  Percent & Point Gainers, +VWAP.

Selection Criteria:
*Stocks that have broken out of consolidation patterns but are not making new yearly highs. These can include stocks that still face some significant resistance at higher price levels.

*Stocks must be trading at greater than normal volume.

How to Use:  After a period of consolidation, a stock that breaks out on heavier than normal volume is a good candidate for further upward movement. It’s important that the stock not be bouncing off a low as this could be short-covering resulting in a false breakout. It’s also important to note the next levels of resistance in determining whether or not you actually want to be in the stock and also for how long.

Example:

Breaking out on lower volume
Selection criteria and chart are the same as the preceding except that volume is less than normal. Use them the same as you would for stocks “Breaking out to new highs on lower volume.”

Sector & Commodity Highs
These lists are composed of exchange traded funds (ETFs) only.  They follow the same rules as for stocks given above.

Although ETFs don’t always mirror the action of their corresponding futures market, futures traders may wish to take note of the current action since sometimes ETFs can front-run the futures.

Summary
Today we’ve focused on the rich, bullish dishes on the Blue Plate Menu.  Tomorrow, we’ll focus on the palate-cleansing special situational stocks. 

*VWAP: Volume Weighted Average Price:  A rough measure of institutional interest (or disinterest).

The Stock Market Cook Book’s resident expert on Modern Portfolio Theory and ace software programmer, Professor Pat, has developed an addition to the right sidebar per my request. It’s going to be a short, mid-day feature highlighting stocks that are making new highs on strong volume, stocks that are making new lows, stocks breaking out (on strong volume) as well as those breaking down, and low-priced stocks in strong, bullish trends. Think of it as a the daily blue plate specials.

So what does this feature mean to you? Well, if you’re an active trader, you might want to check these out for short-term plays. Stocks breaking out of bases might entice the longer-term trader and investor while those breaking to new lows or breaking support might provide savory tidbits for all you hungry bears.

The stocks will be named by symbol only. Those on any short list will be either priced more than $5 (at the time of writing) as most brokerage firms will not let you short stocks under that price. If a potentially shortable stock is currently trading under $5, it will only be listed if it has options, and those stocks will be designated with a * next to their symbol.

No research is done on these issues. That, dear reader, will be left in your hands. Space permitting I might also include a thought on general market trends or note anything else of interest. Please be aware that penny stocks will not be included (unless there’s a spectacular reason why one should be), and most of the stocks I’ll mention will be trading over $2 on decent volume (generally over 150,000 shares on average).

I hope you find this feature valuable since some of these categories, especially the breaking out and breaking down ones, are something not found in too many other places, if at all. (I’m not aware of any.)

Although it’s after market hours, I’ll still post today’s blue plate specials. This is a trial run so we’ll see if the software works the first time through.

Bon appetit!