This Market Has Problems: The Stocks
below Look Awful!
Short Sales As A Hedge
Our Hotline looks at NYSE New Lows every day, the total count and the individual stocks
on the list. One of the key ways to spot an intermediate term decline or
a bear market is to
note how quickly NYSE new lows exceed new highs very soon after the DJI makes a new high.
I read this in an article in Barons many years ago, so I can't tell you whose idea this
first was or
gives its historical pedigree. But you can see it worked this summer. As the
DJI was making
a new all time high on 7/17/07 and we were getting a major Sell from Peerless, we
NYSE new lows were 80 and new highs were only 45. This was a very bearish sign.
Another way to view new highs and lows is simply to go to:
The two charts
below are explained on-line. A falling below 70 gave a fine sell signal at the most
peak, though the June Sell signal was premature. This also tells you when it is safe
to buy again.
A variation of this tool I used for many years when Harry
Lankford published his little weekly
pocket charts. I would simply look for the NH/NL ratio drop below 75 and stop
breakouts. At that point there was too little follow-through and too many false
But the beauty of the indicator was that it kept us properly bullish for long periods of
when a bull market made that appropriate.
-------------------------------- NYSE New highs and Lows
-------------------------------- NASDAQ New
highs and Lows -----------------------------------------
New Highs Systems Abound.
People have all sorts of systems for buying new highs and seeking gains from the
huge gainers. This works superbly, of course in a bull market. We have our
system using augmented Buy B24s and holding automatically a year, but using a stop loss of
10% below the first augmented B24. That system is now explained in the back of my
Super Stocks book.
Just to get you thinking I set forth one such system. It is called Haller's 200
A goal of 200% is sought when buying a stock making a new high. A stop loss is used
the purchase price and as the stock trend upward, one uses a stop loss 26% below the
intra-day price achieved. Buying strong stocks on 15% pullbacks from
their highs is part of this system.
In that case, use a 15% stop loss. The stop losses are on a closing basis. Investors Daily has
publicized the notion of buying
strength, namely buying new highs and using a 7% stop loss. William
O'Neill should give more credit to his source of this trading approach, Nicholas Darvas
two books: You can see something about this icon of technical trading
New Lows Trading Systems
I appreciate that short selling is not something some of you do much of. But I
think it is timely.
More and more stocks are making new lows. You can see some of the more bearish
the section on Darvas. Since bear market seems unavoidable given the dramatic fall
of the dollar, I think
a study of new lows will be helpful. This extends what I have written in my
book on Short Selling using
Tiger's Accumulation Index. For the materials on new lows, please skip the section
on Nicholas Darvas
NICHOLAS DARVAS -
Author of A Very Influential System for Trading New Highs
Nicholas Darvas How
I made $2,000,000 in the stock market , 1964
and revised and updated 1975. Also: Wall
Street The Other Las Vegas.
Before Darvas came to America he studied economics at the University of Budapest.
In1951, he immigrated to the United States, where he trained with his half-sister, Julia,
to be a
ballroom dancer. And he was a very good dancer, touring the world by 1956. He
in 1952, a ballroom dancer who had never invested in the stock market. But a Toronto
couldn't pay him in cash, so they paid him with three thousand shares of a Canadian mining
called Brilund. Two months later, the stock tripled and Darvas made a tidy profit. An
investor was born.
Like anyone beginning to trade on the stock market, Darvas made his mistakes. When he
many of his trades were gambles. He would pick companies that were the next big thing, or
recommended by other traders. Many of his first large trades resulted in a huge losses.
on by whatever small profits he did make, Darvas
began asking questions about why stocks behaved
the way they did. Realizing that even experts couldn't predict the market,
Darvas decided that he needed
to acquire his own understanding. He began devouring newsletters, books, tip sheets,
hot tips, and
so-called insider information, in his quest to understand the market.
Yet, despite his arsenal of knowledge Darvas continued to lose money. In 1955,
over fifty thousand dollars worth of a company called Jones and Laughlin. Jones and
Laughlin had an
excellent price to earnings ratio, high dividends, and was in a strong industry group. He
confident in his analysis, that he bought most of this stock on margin. Then Jones and
Laughlin began to
fall. Jones and Laughlin`s price fell far enough to account for a $9,000 loss. In a
desperate attempt to
recoup his losses Darvas bought a stock
he knew virtually nothing about. Soon it had risen to a point
where he regained about half of his losses.
At this point in his career, Darvas was frustrated with his attempts at analyzing stocks.
Jones and Laughlin, he had put a value on the stock and expected the price of the stock to
as he expected. When the stock price fell instead of climbing as expected, Darvas finally
his method wasn't working. He decided there wasn't much worth in analyzing stocks by
trying to assess
their value. Annoyed with information from tip sheets, friends, so called experts, and
even Wall Street
maxims, he decided to shun most of these common sources.
In 1956 Darvas embarked on a two-year tour of the world to showcase his ballroom dancing.
During this time he developed his famed Darvas Box method of screening stocks. Wanting to
on his holdings in stock he already owned and always on the lookout for new stocks, Darvas
ways to get American stock quotes while he traveled. This was a daunting task, but
made to obtain a copy of Barons or the Wall Street Journal through United States
Brokers wired time sensitive information when needed.
Without brokers, friends, or other investors to influence him, Darvas developed a method
stocks based solely on the stock's price and volume. It was based on stocks rising above a
set of highs and letting the stock rise afterwards, using a stop sell below earlier lows.
By the time he
returned to New York in 1959 he had made about $500,000. After Darvas returned to New
people who were amazed with his success began to give him hot tips and stock
advice again. Darvas
listened to them, and took huge losses on the fortune he had made. This was also a
period of time
when the overall market was weak.
Realizing that it was the human element in stock trading that was his downfall, Darvas sequestered
himself in Paris in February of 1959. He made arrangements with his brokers to make all
his trades via wire
and get the day's highs, lows and closing prices. Using very little data, and a lot of
intelligence and discipline,
Darvas perfected his Box method of picking stocks. Within six months, he had turned a
profit of two
New Lows Trading Systems
to Trade Using Fibonacci Retracements
Leonardo Fibonacci was a 13th century mathematician who, among
other things, noted
that there are certain ratios that tend to reoccur in nature. The
common ones that he identified
were 38.2%, 50%, and 61.8%. For example, the distance from your
fingertips to your wrist
is 38.2% of the distance from your fingertips to your elbow. There is overwhelming
of Fibonacci ratios operating throughout nature.
We can us these naturally recurring ratios to help us anticipate stock market activity.
What we can do is watch for retracements to these levels. For
example if a stock has just completed
a 10 point run, say from $90 to $100 and is now pulling back. We
would expect the stock to
retrace to $96.18 (38.2% retracement from $100) if it does not turn there we would next
at $95 (50% retracement from $100) and the next level would be $93.82 (61.8% retracement
Short sellers would notice when a stock retraces more than 67% of its gain. That
a test of the lows. The Tiger charts let you produce these retracement levels.
After a chart is on the
screen, chose Operations and Likely Retracement Levels. Then point the
mouse at the most recent
lows and click. Do the same with the most recent highs. The resulting chart
shows where a simple
33%, a 50% and a 67% retracemetn level would be, The 50% retracemetn is probably
more than any other by professionals.
Short sellers will often pounce on a weak stock that makes a 33%
recovery of what it has lost. See this in the chart of ALOY. As it turned out
9.5 was a good point to sell short and that was on a 33% retracement of its
decline from 12.7 to 7.7.
In the charts below, consider a reverse Darvas System.
Sell short on a
confirmed new low and hold short so long as stock does not make a
week closing high and intra-day high.
MER short at 75 now 55.
BLG short at 20 now 8.
to be continued...
Short An Internally Weak Stock on A Tiger Automatic Sell or
when it crosses back below its
falling 50-day ma with a negative
Hold It Short so long as it does not rise above
its blue 50-day ma with the
Accumulation Index positive.
This is demonstrated below.
When the market looks dangerous, I
pick short sales among stocks
that are making new lows for 12
months with a current Accumulation
Index below -.15 and with the OBV
confirming the new lows. Consider
relative strength. The first
stocks making new lows are the most
vulnerable. And pick stocks
in weak groups.
Other materials are available in my
book on Short Selling and its supplemental