Q: When I compare your 620 chart to what I have on Stockcharts they are quite different and I don’t know why. Stock charts lags and would not trigger the buy this morning until much later than what your chart shows. Just curious.
G: My charts include after-hours and pre-open trading, that’s probably why they’re different.
Q: I have heard of a buy signal being given if a stock is up in 12 of the past 15 days. Where would the actual entry point be?
G: I look for 11 out of 13 or 12 out of 15 days up in a row after a breakout. Once the stock does this, I’ll wait for it to move sideways or perhaps pull back for anywhere from 3-10 days, and once it moves back out through the top of this little formation I will come into the stock heavily as I add to my original position, or even sometimes just enter the stock for the first time.
Q: In addition to a follow-through day and individual stock leadership, what are your primary indicators for analyzing market bottoms?
G: I focus primarily on price/volume action in the indexes and leading stocks. Leadership is probably the key component, and the number of set-ups I pick up each week, e.g., stocks in nice, tight bases, can often tip me off to a strong market rally developing very soon. Sentiment and oversold indicators, particularly the % of stocks above their 150-day moving average, are also taken into account, but for the most part I let the tape tell me the story.
One indicator I’m not so sure about anymore is the Public/NYSE Specialist short interest ratio, since the NYSE specialist has become less and less of a force as trading has moved away from specialists and market makers and towards the almighty ECN.
Q: I am looking for direction in the market. Is the Gilmo Report for me?
G: The way I make “recommendations” is to discuss an idea I like and under what conditions I would move to buy the stock. So readers should make note of my comments regarding a particular idea and then be ready to take action when the conditions I have outlined occur. I prefer this method since I believe sending an email forces readers to become overly dependent on being fed a fish, rather than learning to fish themselves. The intent behind the entire website is to introduce ideas and the thinking behind those ideas, including the conditions under which a stock should be purchased, and allow readers to incorporate some of their own judgment into the process. I consider my website more of a guiding service and not a “buy here, sell here, buy here, sell here” service that essentially leads subscribers around by the nose.
I feel that I am helping subscribers most by imparting an understanding of how and why an idea becomes actionable, and then to allow them to take these guidelines and impart their own judgment, timing, and thought to it. In this way I feel subscribers are empowered over time. I understand that over time a subscriber might become increasingly empowered as they learn from my thinking and eventually have no need for the website and cancel their subscription, but I feel that if this is the case then I have done my job. On the other hand, if this is not what the subscriber is looking for, then obviously they should not be a subscriber. In the end, the consumer is king!
Q: What were some of your biggest biases or problems that you had to overcome when employing the CANSLIM strategy? After reading O’Neil’s book I wrongly assumed I could trade successfully within 6 months, but it wasn’t until almost a year of stock chasing and buying near earnings(learning the hard way in both cases) that I’ve gained the confidence to invest.
G: It took me two years to get it down. My biggest bias, and probably my only significant one, was that at first I tended to want to buy 15-20 dollar stocks, instead of realizing that 50,60, 100 or more dollar stocks were of much higher quality. Other than that, I was brand new to the business and the stock market in 1991 when I started as a broker at Merrill Lynch, and O’Neil’s book was one of the first I read, and certainly the first one that made any sense to me, so I really had no bad habits that I had learned previously. I was like a blank sheet of paper, so once I read O’Neil’s book there was nothing prior that had to be “erased” first! Be persistent, recognize that mistakes are part of the learning process, and you will get there.
Q: Could you please explain a “short stroke” pattern?
G: As I understand it, a short-stroke forms after a stock has a big move up on a weekly chart on a breakout, and then the next week has a very tight range and the stock closes at the peak of the week as volume dries up. You can see this on the attached RIMM chart. The short stroke is only a week long. After a big run-up from its breakout, a stock may show tight trading action for a week as volume drops. Usually it stays about flat compared to the prior week. If you spot a short stroke and the stock meets all your other buy criteria, when should you buy? Wait for it to surge on heavy trade, which indicates mutual funds and other big players are buying shares.
Q: What do you consider high short interest for a stock? is it a certain percentage of the float or something else?
G: Ten days or more of short interest is pretty high in my view, particularly on a stock that only trades a few hundred thousand shares a day. A lot of these big earnings gap-ups are due to a lot of shorts having to run for cover. I am not aware of any study that proves that a stock that is some percentage above the 200-day moving average is going to pull back, or that there is some magic percentage at which they will automatically top out. A general rule is 70% above the 200-day moving average, but if you short a stock when it is 70% above the 200-day it could easily continue to a point that is 90% above the 200-day moving average, handing you a nice loss on the short side.
Shorting or selling is not that black and white, and shorting a strong stock just because it is a certain percentage above the 200-day moving average is not an automatic trade and can be dangerous in my view.
Q: I understand that institutions move the market. I hear statements that “the average daily volume on this stock is too thin for institutions to want to get into.” I am uncertain as to the average daily volume and price per share needed in a stock for institutions to consider entering that stock. Please tell me what you suggest to be a minimum “average daily volume” and a minimum “share price” requirement for a stock for an individual investor as myself.
G: Institutions may, in some cases, take positions in smaller, thinner stocks, particularly if they are small-cap mutual funds. However, since the relatively low trading volume and float of these types of stocks makes it difficult to buy a large position, they will often just buy a very small position. I myself prefer to trade in “big stocks,” or stocks that 1) are above $10 in price, because most institutions adhere to some price rule where they will only look at stocks that are a minimum of $10 to $15 a share, and 2) trade at least $35 to $40 million in average daily dollar volume (share price x average daily volume, so that a $10 stock that has average daily volume of 1 million shares has an average daily dollar volume of $10 x 1 million, or $10 million average daily dollar volume).
Remember, however, that if you find a small stock with outstanding fundamentals that trades only 100,000 to 200,000 shares a day, and your account size is small enough so that buying 100 or 200 shares is a good-sized position for your account, you can pretty much play anywhere you want if the stock is sound.
Q: i am an australian subcriber that lives outside the US, in Malaysia. I love your reports and learn a great deal from them. My main challenge is the time zone. Malaysia is 12 hours ahead of New York. I currently work during the day and later trade in the first hour and set limits/stop losses on my trades. It’s not the optimum way of trading your way but at the moment I have little alternative. My question is do you think your trading strategies can still work when some people have restrictive access to the market during the trading day? i am open to getting up during the night but not sure when as key decision times vary from day to day.
G: I believe that given the price guidelines I put out in the report with respect to various stocks, if one has a trading platform that allows one to set automatic buy-stop and sell-stop orders on the system then it is feasible to make use of the ideas. Often, when I sell short, my cover point is an automatic buy/cover-stop order so that my emotions do not get in the way.
Q: How should one operate in different follow throughs? It seems to me that we have FT’s like in March ’08 with old stuff and stuff coming off the bottom, and you seemed to be very quick to get out on any market distibution. Then there are FT’s like in ’03 with lots of new stuff, and the potential for huge gains, where sitting tight and not losing one’s position, giving some room, would seem to be the right approach. Do you make such a distinction of FT’s in your thinking or market operations vis a vis trading around positions vs holding on?
G: Marginal follow-throughs in markets that are “late” in the cycle, such as we had in March generally mean, at least from my perspective, that you don’t want to give your positions too much room, since some could be breaking out of late-stage bases, and breakout failures from these can be brutal if you sit too long. If we are in a newer bull market with lots of new leadership, I am more likely to give the positions some room. It all boils down to trying to assess the strength of the follow-through based on the types and positions of stocks that are breaking out, as well as the general “age” of the market in the overall bull market cycle.