Number 16

Please note that we have used historical data. These examples are for educational purposes only.

Riding the Waves vs Catching the Bottom

Everyone is trying to guess whether the markets have hit bottom... or not. Are the rallies we've seen over the last couple of weeks going to prove sustainable? Remember, we're still in a bear market.

Here's a timely reminder from the S&P Investment Policy Committee; "Historically, it has taken quite some time to turn a bear market around. The bottoming process for the S&P 500 took about three months to complete in 1974, the low in 1982 took five months, the 1990 and 1991 bottom lasted almost five months and the near bear market of 1998 took a month. Considering the severity of the recent decline, especially for the Nasdaq, the best we can hope for is that the bottoming process will end in three to five months."

Bottom-picking - and getting it right -- is a very difficult challenge!! Personally, I say, why bother? I'm no board-rider, but I do know that I'm better off "riding the waves" than "getting dragged along the bottom." How do you select the right markets to "ride the wave?" How can you make money in a bear market?! Read on, surfer-dude... (and I use the term lightly).

CURRENT TRENDS - Learning from the Zig-Zag

Here are a couple of key points - first of all, if you are looking to buy... look for markets that are in a long-term uptrend. These are the stocks that have at least a couple of a waves -- zig-zagging slowly but steadily uphill. One of the best ways of shaking-out these stocks is by finding those that are hitting new 52-week highs.

When a stock makes a new 52-week high after resting, there is a high probability that the consolidation has ended and that it will provide a springboard for the stock to move higher. Colin Alexander, author of Timing the Stock Market.

Second point... look for supporting technical indicators to confirm the right time to buy or sell. We'll take a look at one of my favorites - Wilders' Directional Movement System (ADX/DMI).

Let's take a look at some charts to illustrate...

Here's a one year, daily chart of Petro-Canada (PCA - TSE), with trendlines added. You can see that Petro-Can has been in a nice uptrend for the past year. And it has been making the classic zig-zag bull-market pattern - a succession of higher highs and higher lows.

Buying into this type of market goes against the notion of bottom-picking - of trying to take advantage of the "best deal." However, take it from personal experience... this approach will offer you greater success in the long run. Many bottom-pickers have learned the hard way that "a good deal today is often a better deal tomorrow."

"If you are to make really big money in the stock market, resign yourself to the fact that just about everything you buy, if you are buying stocks correctly, will seem too high priced by just about any traditional measure of valuation. This is because traditional measures of a stock's value generally are of little usefulness in circumstances where earnings are growing very quickly." Braden Glett, author of Five Minute Investing. www.invest-faq.com/fiveminute/

Here's PLX (AMEX) -- another stock featuring a strong uptrend since December 1999. Once again it demonstrates the zig-zag characteristics of a bull-market. It has also recently made a new 52-week high. In the second chart below I've plotted the ADX/DMI system.

I've magnified the ADX/DMI below to show the signals we're looking for (ADX is the pinkish line, +DI is blue, and -DI is gold). You can see that ADX is just breaking up through the 20 level and +DI has broken up through -DI. These are positive signs of a breakout. Looking at the chart above you can see that the price appears to be breaking out of a period of congestion, or a sideways market. Given these signals you would be relatively safe to invest in this type of market. This long-term uptrend is well-established and it's going to be hard to beat.

So, there you have it... one proven system for profiting from stocks even in a bear market. Learn to ride the waves... look for the zig-zag markets making new highs. And hop on board.

The next question is, "How do we lock-in our profits?" Oh, ye of little patience... I hope to discuss some proven techniques in the next issue of ChartFilter Newsletter.

TIPS & TECHNIQUES - Using this combination of indicators

For more detailed information see the ChartFilter reports on using Trendlines and DMI/ADX at ChartFilter.com. Also see a previous issue of the ChartFilter newsletter -- Issue # 5 - for practical tips on using ADX/DMI.

Putting ChartFilter into Context

ChartFilter is meant to complement your overall trading knowledge and decision-making. This newsletter focuses on applying technical analysis (TA) methods to various markets; but this is not to say that you shouldn't be considering important fundamental criteria, such as EPS or revenue, as well. Think of ChartFilter as your TA assistant; not as your overall trading strategist.

If you've missed any previous issues of the ChartFilter Newsletter you can read them at www.ChartFilter.com/archivednewsletter.htm. We will be archiving all of the newsletters at this site.

There's lots more to come! Your comments or suggestions are always welcome; e-mail us at Newsletter@ChartFilter.com.