Q: When you find a stock idea, do you concern yourself with the fact that earnings are coming out in the next week?
G: To some extent, that’s why I won’t take a huge position going into an earnings report, but if the breakout is good and on strong volume, I think its okay to come in with a 5% position – if the stock breaks 10% on the earnings that will cost you .5% in your portfolio which i think is quite tolerable.
Q: Do you need to put a trade in during market hours or can you do it the night before the market opens?
G: I generally put my trades in during market hours. But as an individual investor, you could put in stop orders on whatever system you are using the night before if that works better for you.
Q: Do you do trade mutual funds, stocks, or ETF’s?
G: We only make recommendations on stocks or ETFs that are fairly liquid. Mostly stocks, however.
Q: How long is your average trade?
G: Average trade can be from a few days to a few months. Essentially we’re trying to distill down to the primary market leadership in any rally or bull phase.
Q: What are some of your favorite stock market books?
G: With respect to some of my favorite stock market reading, I would say to start with anything by Richard D. Wyckoff, including his books “Stock Market Technique, No. 1,” “Stock Market Technique, No. 2,” “How I Trade and Invest in Stocks and Bonds,” “Studies in Tape Reading,” “Wall Street Ventures and Adventures Thru 40 Years,” and whatever else you can find by him. Along with Nicholas Darvas and Jesse Livermore, much of O’Neil’s philosophy is derived from Wyckoff and I think it is useful to have a thorough grounding in the thinking of Richard Wyckoff. I also like Victor Sperandeo’s books, “Methods of a Wall Street Master” and “Principles of Professional Speculation.”
Q: What would be a good strategy to use when buying a stock that pulls back after breaking out of a base?
G: You can probably buy a small position and see if they hold their 50 day moving average first…if volume comes in then you can increase the position. With most of these pullbacks into the 50 dma I like to buy ’em as they come right into it, even if they look scary. Sometimes you have to have a little courage when buying on pullbacks, because they don’t make it easy. It’s not like they send out invitations to buy them…but if you are trying to buy them after they’ve bounced off the 50 day then start small and see if they hold the 50, then add if volume comes in on the upside.
Q: I am new to your newsletter and am gaining an appreciation of the different methods you use to enter a position. Currently, I run IBD’s screen wizard daily to identify volume breakouts on high quality stocks. Many times the breakouts go beyond 5% above the pivot as recommended by IBD. My method for entering has been to use [a] limit buy [order] at just below this 5% price. My problem is these positions seem to hit the 7% stop at a high rate (with many turning tail and heading back north). Can you recommend a better way to buy into these breakouts? I only need 3-4 stocks to be fully invested so I don’t mind missing a few opportunities.
G: What you describe is a very common problem for investors who buy at around 5% beyond the proper buy point or just under that – a lot of breakouts come right back in, looking as if they are going to fail and then turn right back around. What I would suggest is buying a smaller position if you are buying closer to 5% above the pivot point. Then, establish a plan whereby you would finish the position out if the stock pulls back, using 2-3% below the actual pivot point as your stop. Also, The Gilmo Report often shows stocks that we believe are setting up, so this might help you indentify situations sooner and enable you to establish a small position a little sooner
I believe that the whole buy-the-breakout concept has become over-popularized and hence too obvious, so investors have to think in a contrarian manner to devise ways to work around this. Expect that some breakouts will try to fake you out first, so buy less when a stock is 5% up with the idea of finishing your position on a normal pullback.
Q: How long is your average trade? Do you trade mutual funds, stocks, or ETF’s? Do you need to put trades in during market hours or can you trade the night before the market opens?
G: Average trade can be from a few days to a few months. Essentially we’re trying to distill down to the primary market leadership in any rally or bull phase. We only make recommendations on stocks or ETFs that are fairly liquid. Mostly stocks, however. I generally put my trades in during market hours, but as an individual investor you could put in stop orders on whatever system you are using the night before if that works better for you.
Q: When you are monitoring your positions (in eSignal or TradeStation or whatever platform you use) how do you set up your watch lists? Do you have one list with all the setups you are watching and another list that is narrowed down to your best? What is the best way to monitor stocks pulling back to a 20-day or 50-day moving average? Sometimes during the day, I have my head on a swivel and can’t see everything, only to review charts at night and see I missed a great pullback.
G: I have five columns on the right side of my screen with all the names on my watch list, symbols A-D, F-M,N-O,R-S, and T-Z, all sorted in real-time by percentage up move for the day. This way I can see immediately what is moving. On the left side I have three separate columns, two columns that show my holdings in each of my portfolios – one concentrated, the other diversified, and one for the stocks on my watch list that I am very, very interested in for that particular day. That last one I update every evening after going through my screens – you can call that my daily “hit list.” In terms of monitors, I only use one monitor for quotes, one monitor with my trading platform and online Daily Graphs equivalent, and one monitor for news and other extraneous stuff. I am not a big fan of the big multi-screen set-up as I have not figured out how one human being can constantly swivel around to take it all in at once or in any meaningful way. I let my systems tell me what’s going on by keeping everything compact and using alerts. All day long I am also scrolling through my watch list on my online Daily Graphs equivalent which is connected to my eSignal so that I can see price moves and volume intra-day on the Daily Graphs equivalent charts. I try to keep it as simple as possible.