The S&P 500 Chart and the Stock Market Basics Portfolio 3 Watch List are shown below

At last, today’s close (April 28, 2011) of the S&P 500 Stock Index seems to confirm that we now have the breakout above 1344 that we’ve been waiting for, meaning we can begin to populate our 3 versions of our proposed Stock Market Basics Portfolio No. 3. It would have been nice to see a little more volume but perhaps the breakout will draw more action, perhaps the institutions and mutual funds — that provide the major proportion of all trading — will begin to participate more heavily. There could still be a fallback of course, possibly short lived, the RSI above the main chart is indicating an overbought condition. The 1344/45 level now becomes a future support level — but let us hope it will not be re-visited for a while yet.

To begin the paper trading for the Stock Market Basics Portfolio 3, we can start by buying stocks listed in our Watch List — show below, Although we should just do a quick re-appraisal of them to reassure that they are still good stock buying  candidates.

Click on the following charts to obtain a larger and sharper view.

S&P 500 Chart April 28 Close of Trading

What is the in the future for the S&P 500?
What we would like to see in the future, based on what we can see on the above chart, is a repeat of the earlier up trending leg that ran from early December 2010, until late February 2011, a very nice 3 months of mostly upward movement when good returns became available for traders with the S&P gaining more than 150 points.

Our trading approach is based on the assumption that trading patterns that occurred in the past are likely to repeat themselves in the future. While it would be foolish at this stage to predict 150 point move up from here, we do say that it is possible –  although there are probably other points of resistance to get through before that happens.

But that is the whole purpose of this paper trading exercise and the reason for establishing various Stock Market Basics trading portfolios which can test and illustrate our rather simple method of stock trading pattern recognition. There are many other more sophisticated and detailed ways to trade the market, we must watch to see whether the method we propose and follow here will provide suitable gains for the risks involved. It should be an interesting exercise with some challenges along the way.

In the Watch List shown below, compiled from stocks mostly chosen after brief research a few weeks ago, while we awaited the arrival of “Earnings Season” and to ensure that our choice of stocks would not occur just before earnings release dates, I see that almost all of them have held up since their selection, none are showing any real loss — see the last two columns on the right side for the net and percentage gains and losses since the list was established.

Here is the Watch List

Watch List Porfolio 3 as of close April 28

See Watch List below
We assembled the Watch List for the Stock Market Basics Paper Trade Portfolio No. 3 on April 12, as reported in the article of that date and since April 21 have tracked it using the Yahoo Live Portfolio facility. This enables us to now and henceforth gain some idea of whether the choices made to populate the portfolio were appropriate, in other words, have they performed well, moving towards their anticipated chart signal to confirm an entry point? This is important because we will be buying stocks on this list when we start initiating our paper trades.

As mentioned in other posts, we are mainly awaiting for them to move past their April earnings announcement dates and we also await a confirmed breakout of the S&P 500, our reference index, to above 1334 — that is expected soon. We just prefer to be trading with a confirmed up trend — with the expectation that it will continue upwards for a while.

As can be seen by the Watch List chart below, updated to last weekend’s close of trading, the stocks are performing satisfactorily, with some already making worthwhile gains since the implementation of the simulated trades of April 21 — not the “0fficial” Portfolio 3 trades yet.

QPSA and AKPT
Two new stocks have been added to the original list, the first, discussed and illustrated with its chart yesterday, April 25 is QPSA and the other, illustrated below, is APKT, a more expensive stock suitable perhaps for the $10,000 portfolio — or we may just leave it on the list without committing to buying the stock. APKT has broken nicely above its previous $77.50 high with a first target of $90 and it may well make it to $100.

Note: Click on this chart for a slightly enlarged and sharper view:

APKT Chart

Watch List as of April 21 close

Chart suggests QPSA might be worth adding to our paper trading Portfolio 3
In keeping with method described in an earlier post on this website about Finding Stocks, I made a brief online search and in a few minutes found the names and symbols of about 20 possible stocks. After screening them in the customary way, also described on the earlier post, I found one interesting prospect that meets the criteria to be added to the current watch list. And subject to a review of the market early next week, this could be a stock to commit to for the Stock Market Basics No. 3 Portfolio.

Here is the chart – can you see why it becomes a candidate?

Note: Click on this chart for a slightly enlarged and sharper view:

QPSA April 21 with 10 DMA

A little fundamental research can help too
As I have mentioned elsewhere, while we primarily use charts to help choose appropriate stocks to trade and to provide signals to enter into a trade on them, it also useful to know why a particular stock pattern may be emerging on a promising stock.

The process of searching to gather a little background information on the corporation whose stocks we are considering trading also provides a continuing education process that adds to acquiring a deeper understanding on the workings of the market and the reactions of the market to news. And I should add that many times the reports and opinions you can read are contradictory and confusing, making it difficult in some cases to know what to believe, however, information does impact the market, you have probably heard the saying “Buy the rumor, sell the news!”

In many instances, market reaction can be interpreted as the result of a large volume of transactions taking place after information becomes available and that then have a noticeable affect on price movement. News that impacts the market includes everything, not just news about stocks. The market is sensitive to international and domestic events of every kind – and sometimes the lack of news in a specific topic of interests has a dampening effect on market activity. The market does not “like” uncertainty.

So, returning to market research – what has caused the reversal of the downtrend of QPSA ?
I cannot now find the article but I believe I saw something about QPSA having made a deal that gives them a substantial amount of money, I need to find that, if it exists and if this stock was to go back to its previous high of $14 there is no hurry to take a position, it might be safer buy at a higher price — so let us see where it goes from here.

The reason it becomes a candidate is that it appears to be moving up sharply from a recent low of around $5 on heavy volume (about 3 times normal) it may have a pull back as often happens. The average volume for the last 3 months barely qualifies it as a candidate under our paper trading guidelines. I have added the 10 day moving average line, shown in blue, and it can be seen that the stock price has now moved above that line.

Trading with very limited working capital
The Paper Trading Portfolio No. 3 is now established and in process as we follow the steps described below to populate the 3 proposed versions that are focused on trading with very limited working capital — as might be the case with someone wishing to learn the stock market basics without having much at stake but wanting to just “see how it’s done” in real-time while learning what to do

A brief summary of our approach

The many other articles on this website provide details at greater length on various aspects of trading and can be accessed from the List of Topics or the Home Page.

The Stock Market Basics website is meant to provide basic but essential information and background lore for the person wishing to learn how to trade stocks in the stock market, as a speculator, not an investor. The investors usually hold stocks for a longer time period compared with the short-term outlook of the trader who chooses to hold a stock, depending on their trading style, from minutes to a few hours of one day to perhaps a few months. For this website, the approach calls for a turn-over period of up to about 3 months.

Various categories used to describe traders include: day traders, swing traders, momentum traders, position traders — and others. We are primarily position traders working with a simple technical approach by following chart patterns to signal entries and exits.

In our stock market basics approach, we are focusing on the beginning trader who is now wishing to learn as much as possible before putting real cash on the line. We are introducing some practical guidelines, guidelines followed by well known speculators that have proven to be effective in the past. Without them, I’m quite sure that it will be much more difficult to succeed and would extend the learning period significantly and at much greater financial costs.

Our strategy and objectives
Our objective is to buy stocks that can provide about 25 to 35% gain within a period of about 3 months, or maybe 4 months at the most.

How to do it
A more detailed explanation of this important procedure is given in our post of April 21, 2011.

To choose the stocks to trade, we rely especially on stock charts. It is well known in the stock market community that there are several recognizable patterns that, if they should develop, tend to provide the type of gains that we seek during the time period that we have established.

Expected results don’t always materialize
However, even if our selection process is able to identify the promising stock candidates, we realize there will be some stocks that do not perform up to expectations. These must be sold in accordance with our pre-established guideline, which is to exit any stock that falls by 8%. When doing our performance projections we must allow for both gains and losses

Avoid uncertainty, follow the guidelines
It is possible that some of those stocks will recover and later meet their original projected level. But we cannot be sure of that so we follow the -8% exit rule and at a later date, if the stock does recover, a re-entry can be considered.

There is no real gain until the position is sold
It can be difficult to know when to sell a stock that is showing a gain for the trader. The desire is to not exit too soon but there always comes a point when a correction occurs. If the correction is small and short-lived and the winning move is resumed then the trader would wish to hold the position of course. That’s the tough part, knowing how long to stay with a stock that has had a setback. A good example of this can be seen in a stock referred to in a previous post for which the chart and the question is given at the end of the article titled It takes More than Stock Picking.

There is a guideline for the above dilemma based on setting a “Trailing Stop”, explained at Stop Loss and Exit Price. It still gives me some problems but I have yet to find a better alternative.

The long term approach
In today’s economic climate, I would imagine the long term investor, as opposed to the short-term speculator, would consider a 4% or 5% dividend yield on individual assets as being satisfactory when coupled with an additional overall gain in the growth and value of their underlying stock issues.

S&P 500: + 12.7%
Overall, I believe the S&P 500 basket of stocks provided a return of about 12.7% for the last 12 months, that is very good and was influenced by the current long bull market that started more than 2 years ago. The data available shows that the average annual return of the S&P 500 over many of the past years  is less than that.

The Short term approach
But what should a stock market trader, taking the short-term approach to holding stocks, consider as a reasonably satisfactory return?

60% or 30% ?
The modest trading level that our current stock market basics approach advocates does provide trading profits. While I like to think that they should be around about 60% before taxes, the arithmetic, which I will summarize separately on a later post, tells me it should be closer to 30% — that is still better than the S&P, but shows that it needs a steady approach over several years to really build a worthwhile stake for future comfort — after taxes.

Let us ignore for the time being, the stories that we hear of people making fortunes in the stock market in very short periods of time, I know it happens, and I have personally worked for a financier who made many tens of millions within just a few years, but it takes experience and skills and usually a great deal of working capital to do so. Skills and assets that small traders do not normally possess.

Our strategy and objectives
Our objective is to buy stocks that can provide about 25 to 35% gain within a period of about 3 months, or 4 months at the most. That would allow a turnover and replacement of about 3 or 4 stock positions per year. The paper trading series now in process on this website will show whether that is possible and at the same time is meant to introduce useful stock market basics information to the beginning or would-be trader.

There is a lot to learn and the more knowledge acquired the better. The coming paper trade activities should allow ample time to introduce various guidelines that help show how to identify worthwhile stocks to trade and how to minimize losses and maximize gains. All in real time as the market fluctuates in the days and weeks to come, a true test of our methods that, win or lose on paper, provide an insight into what happens –  I am not aware of any other website that provides an equivalent simulated trading experience.

Keep up-to-date, check out more recent and specific stocks with charts, reviews, — and sometimes paper-trading exercises in order to watch real-time stock performance — that and more, at Stocks Today. [Part of this website]
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Suggestions for the beginning trader, new to Stock Market Basics
Using the internet, print, or television media, it is not difficult to find and compile a list of stocks for trading but after finding them, the real challenge is to know how to screen and qualify them as potential winning trades and to determine just when to enter or exit a trade in them. Stick with us, we will discuss some relatively easy to understand ways for doing that with the aid of stock charts and we do name stocks and paper-trade them on this website in order to verify that our chart interpretations can produce the winners. Losing trades are inevitable but we have rules to exit losing positions as quickly as possible in order to preserve working capital.
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Update, September 2011:  An example of how I find information for the selection of stocks to trade :

One of the sources that I name below, under the heading of Free Online Sources, is a website called Seeking Alpha — so I enter “seekingalpha.com” into  Google and up comes Stock Market News & Financial Analysis - Seeking Alpha which I then click on and it takes me to their home page where a row of tabs at the top provide several interesting possibilities to explore later, but for now I am looking for stocks to trade so I click on Long & Short Ideas and today, September 3, as I update this article, up come 40 relevant articles I can look into — and there’s more elsewhere!

For instance, the very first article is of interest — it’s titled “Tiffany & Co.: Buy A Luxurious Company At Clearance Prices”. [Tiffany happens to be a stock that I am currently paper-trading in real-time on this Stock Market Basics website.] I then read the article, making notes and then repeat the process by reading any other of the listed articles that seem to provide ideas from which to find promising stocks. The articles are categorized under vrious headings such as: Long Ideas, Short Ideas, Quick Picks and Lists, Cramer’s Picks, and several others.

The selected stocks must be screened and qualified
Following my usual practice, I then examine the chart for Tiffany, symbol TIF, by going to StockCharts.com and make my decision based on what I can glean from the stock chart — a process I have described and refer to frequently elsewhere on the Stock Market Basics website.
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The following sources provide many leads, data, and information on a wide range of stocks, however, before buying stocks they should be researched and screened to ensure they meet relevant criteria that can qualify them as promising candidates for trading. Many suggestions and guidelines on how to do so at a basic level appear in the articles on this website together other articles targeted at beginning traders who wish to learn the basics of stock market trading. Questions and suggestions are always welcome.

• Free Online sources
• Print publications
• Paid for “Tip” sources, paid subscriptions
• Television

Free online sources that I follow
There are plenty of sources from which to obtain the names of companies that can be screened to see whether they fit the desired profile for buying stocks. In my case, that profile requires them to exhibit a stock chart pattern that meets any of a number of recognized potential set-ups that indicate a possible break out in the near future – so that I can initiate a trade if a confirmed signal occurs. Examples are often cited and illustrated in articles posted to this website.

Some free online sources I follow, in no particular order of priority — its the stocks mentioned that are important: Motley Fool, The Street, Seeking Alpha, Finance.Yahoo, Marketwatch, Zacks, among others.

Print publications, the IBD
The daily and weekend financial newspapers, mainly the Investor’s Business Daily (IBD) the best by far. Although I’m sure they are OK, I don’t bother with the others such as the Wall Street Journal or the many financial magazines such as Barons or Forbes – I find that there is already too much for me to read anyway.

A general comment for the newcomer who is now wishing to learn the basics of stock market trading,  I do highly recommend buying IBD for a while, just a couple of bucks each day, it really is a good source of general information and in addition to market news provides details on all the stocks according to the SLIM trading strategy. The SLIM strategy was invented by William J. O’Neill, the founder of the IBD and a well-known writer on the stock market and trading, whose books I can also recommend highly, they should be considered as required reading for the beginner. The SLIM strategy is described in O’Neill’s book “How to Make Money in Stocks”, published by McGraw Hill, Inc.

Advisory services, “Tip” sources through paid subscriptions
I subscribe to one myself, it save me a lot of time. I have tried several services in the past with varying success but many years ago I found the one that I liked, was successful with, and that suits my own trading philosophy so I have used that service ever since.

Therefore, based on my own experience, I do recommend a paid subscription to one of the less expensive stock market advisory services. Not as the sole source of stock information and maybe just during the early days when still learning the stock market basics when it is good to have access to information from experienced traders – if they are successful, and their record can be confirmed.

Several advisory services advertise in IBD and some offer a trial subscription for a month or so at a reduced price. I know that Vector Vest does at $9.95 for 5 weeks and $59 monthly thereafter. I have myself subscribed to Vector Vest in the past many years ago and I have also paid to attend several of their multi-day trading gatherings. They offer more than you can possibly use as a beginner but it is all very good value for the price – and that is my unpaid-for private opinion based on my fairly long time ago experiences of them. There are also ads for advisory services selected and placed on this website by Google — and most other similar websites have ads of this type too.

There are a lot of advisory sources, some free, some very expensive. Use caution because it is possible that some services fail to deliver. I like the trial subscription approach where I might pay $50 for one-month while I check out the quality of the stock selections. But to repeat my own theme, the free online sources provide a lot of good stock choices that are worth watching for a while.

For any of the advisory services, I suggest that you check out their past records and paper trade their recommendations for a while if you do take a trial subscription. It’s good practice to paper trade anyway. From some services you may get many more recommendations than you can use, so they will need to be reduced in number by using a suitable screening and filtering process in the same manner as I do, mentioned below.

Television
I do sometimes watch CNBC intermittently throughout the day, for short periods and although I do not often take notes I have learned of one or two prospects that, after my usual screening process mentioned below, were found to be worthy trading candidates. The last one I recall was AGCO which became the vehicle for the Stock Market Basics paper-trading Portfolio #1 and produced profitable results within a couple of months, as can be seen at AGO Paper Trade. Jim Cramer’s Mad Money show on CNBC in the late afternoon can provide both stock tips and how to trade tips — Cramer is a very successful trader but clowns around a lot which can be distracting.
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The screening process

Stock chart patterns
Is the stock’s trading pattern showing break-out possibilities?
A lot of company stock symbols can be gathered by checking the above sources.

Using StockCharts.com, Finance.yahoo.com or possibly the trading platform of my stockbroker, I quickly pull up their stock chart one after another, looking to see if I understand the recent trading pattern and can see whether there is a potential breakout in the direction of its current trend and the market’s trend, up or down. If so, it is marked for addition to the portfolio watch List

Volume
Volume should be one million daily, or at least several hundred thousand daily – this is to ensure liquidity to make it easier to move in or out of a position when necessary. Also, the more the volume, the more likely it will be that the spread between the bid and ask is reasonably narrow.

Price
Price around $10 to $20 is prteferred. The higher priced stocks are possibly safer but require too much capital for the small trader. I think I recall that the above mentioned William J. O’Neill favors buying stocks in this price range. But stocks in the $5 to $10 range can be considered if they exhibit the right attributes. For instance, for the Stock Market Basics No. 3 paper trading portfolio, we are considering QPSA as a potential buy next week, a stock that closed Friday at $7.72.

Options
Whether they have options attached. I like optionable stocks to trade, for my views on options, see The Stock or the Option.

Earnings
Check earnings dates, when earnings are announced their affects on the stock’s price is often quite unpredictable, often contrary to the news announced and where an entry into a stock position too near to earnings date can be dangerous. Not a wise move when your strategy is meant to aim for minimizing trading risks at all times.

Finally, The Watch List
Add all the selected candidates to a watch list until there are about 10 to 20 possible trading opportunities. Upload the watch list to an Active Portfolio file on Finance.Yahoo, listing current prices and then continue to monitor the portfolio for which Yahoo will update the prices at intervals each day and from which their stock chart can be easily accessed and checked for re-assessment purpose.

When ready to trade
When funds are available, selection from the watch list should provide possible trading candidates that have already been screened and watched for a while. There should be more candidates than are needed, allowing a further process of comparing one with another in order to make the best choice according to your interpretation at that time. There are no guarantees of course.

Setting our trading objectives
In one of the next posts we should discuss our overall expectations for trading, the type of profit returns we seek or are possible after allowing for losses, the time frames for holding a position, and so on. We need to set some  objectives.

The objective of trading is to make a profit. Success is measured by whether or not gains are achieved consistently over time. But early on, when explaining the stock market basics, which is the objective of this website, it must be pointed out that some losing trades will occur.

This article, and the chart of a specific trade shown below, is meant to inform the beginning trader about how and why losses occur, or potential gains are diminished, by negative news events that are often not directly associated with the underlying stock.

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To succeed as a short term trader takes more than just being able to pick good stocks to trade – although it does start with that ability of course. But after taking a position in a stock, unforeseen events often occur that interrupt the expected flow of events — from the moment of eagerly buying stocks in anticipation to selling them with a happy profitable ending.

Losses will occur, not always because of poor stock choices
The unexpected events I refer to may, at best, merely delay the move to a profitable outcome but can, in some cases, lead to a more distressing exit. The point I want to make is that losses will occur and have to be accepted without flinching (too much) and if there is anything to be learned when a loss occurs then that just might provide a benefit for the future. We are always looking to the future, to the next trade, we are speculators, our trading philosophy does not permit a buy-and-hold approach but instead is based on a fairly short time horizon that allows us to be in and out of a trade in short order.

An example of an extended trade delayed by unforeseen events
At the end of this article, to illustrate the type of interruptions in a likely profitable upward movement — due to unforeseen events as referred to above, a chart is shown of a recent trade that probably should have been closed by now but instead is approaching a new possibly “critical” moment, in this case earnings and future prospects are about to be announced.

But first, let’s mention some styles of trading
There are several forms of short term trading, there’s day trading, swing trading, momentum trading, position trading and probably others, titled and described variously, depending on their strategic objectives and methodology. Those can be described in more detail elsewhere on this site at a later time.

Whatever the method of trading, after taking into account the winners and losers, all styles of trading can be profitable — if you can stay the course through those wins and losses. Remember the remarks of Bernard Baruch, the great trader from the early days of Wall Street, who said:

“Even being right only three or four times out of ten should yield a fortune to a person who has the sense to cut their losses quickly”

About price targets and exit dates

The stock market basics site follows mainly the approach of a position trader with a typical target stock holding period of about 3 or 4 months. When taking a position, part of the process is to establish the price target and an exit date. The “exit by” date is often determined by the unofficial rule of not holding a stock position through earnings announcement dates if possible.

An exit might also be necessary if the expected potential stock action has not materialized, possibly because of a loss occurring or perhaps because the stock has stalled with no or little gain having been achieved and seemingly with little hope for improvement. For example:

• In the case of a loss, an exit is triggered by following the unofficial rule to cut losses at a given percentage.
• When no loss has occurred but the stock is not moving up or down as expected – we might exit the position and buy stocks that appear to have better prospects, rather than losing time by staying with a non-moving trade.

Let’s coin the phrase “Unexpected Event” to use for the following:

A further comment on when a significant “unexpected event” occurs
A trader will likely have several stocks in play at any one time (my suggestion is to try for 8 to 10 positions to provide some diversity and enough action to stay engaged but not too many to monitor and manage easily). When a significant “unexpected event” occurs it can effect every stock in a portfolio, compounding the loss, especially since stocks can drop 5 or 10% or more in just a few days.

Unexpected Events also compound the problem if any of the affected stocks in the portfolio are reaching their pre-determined sell dates – perhaps based on earnings dates – in some cases an Unexpected Event might not allow time for recovery before the sell date has been reached.

Examples of recent Unexpected Events:

• Geo-political unrest in the middle east – in Tunisia, Egypt, Libya and other countries.
• Followed shortly after by the earthquake and tsunami in Japan and the near melt down of the nuclear in that country
• Serious financial problems in Portugal and other EU countries
• Just a few days ago trading was negatively affected by the concerns over the US budget deficit and the credit rating agency suggesting the the U.S. Could lose it’s AAA rating.

Here is how the above Unexpected Events played out on a given stock, MO (Altria Group Inc.)

MO Chart

There are probably better examples than this one shown here, but what I wish to illustrate is a stock, in this case MO (Altria) reacting to bad news, even though it did resume its upward motion after the initial setback.

MO was moving steadily up for quite a while until about March 10th, when at level “A”, it fell back after news of the Middle East political troubles took hold, and that news was followed by the sad situation in Japan after the Earthquake there.

MO then recovered and resumed its upward move until around about position “B” when it again faltered and traded sideways for a while after more serious troubles were encountered in the Japanese nuclear plants.

Again MO moved up until at position “C” there was another reversal, starting Monday, on the market reaction to the U.S. deficit problems and the comment about the country’s AAA credit rating being suspect and could be downgraded.

What next?
Our current dilemma is that earnings announcements on this company are due to be released tomorrow, April 19 — meaning we have broken our rule to exit positions, where it makes sense to do so, prior to earnings announcements — will that be a costly mistake? Tomorrow we will know.

Let’s start with a quick review of the chart of the S&P 500, shown below
The chart will not tell us much that is new from the previous Friday charts that we customarily look at but doing so always gives us a “base” from which to contemplate possible actions and the direction that the market will take after Monday’s opening –  and on through the week as we start to get quite a few of the serious and important corporate earnings announcements each day.

Barring geopolitical events that cause disruption to the market’s normal activity, it is corporate earnings that drive the market — so in support of the bullish outlook and hopes of traders wishing to go long, we need good earnings releases, and that is what is expected. It is important to see the S&P and the other indexes break through their previous highs. I will be watching for the S&P 500 to get above 1344, preferably on decent volume.

As the stock picker and demonstrator of the paper trading  for the stock market basics portfolio 3, I need to see the market move to an upward trend to justify and initiate taking positions. The purpose of demonstrating with paper trading is to allow those wishing to learn the stock market basics to see how a trade would be made, monitored, and concluded over a real time period. The trades fluctuate in response to the actions of the market but where the trading actions taken at the different stages will be guided by a set of unofficial rules that we will refer to as the house rules.

There are no guaranteed winners, there will be losers, there always are in a series of trades but we need to follow the basic guidelines to “cut the losses quickly and let the profits run”. Paper trading will provide an opportunity to see how typical trades evolve and can be assessed each day using the standard tools and references always given on this website. In a way it’s fun but for me it is very serious, I paper trade as carefully as possible and stay prepared for the unexpected.

The first rules
The first rules being to “trade with the trend” meaning that we are only going to enter a trade to buy if the market and our stock is in an upward trend. When it is time to sell stocks short it will be with a downward trend. Another rule to follow is that we need to see a moving price pattern on the stock chart that we can interpret as a buy signal in order to commit to the position, either a “full” position or a partial if we wish to enter gradually. We prefer to see the buy signal confirmed which may cause us to wait a while, maybe lose part of the move but some caution is required because of the limited working capital.

There maybe more to consider as we go along, but this is meant to be a learning situation to introduce buying stocks from a speculative point of view, trading for the short term rather than the long term that investors prefer.

For a slightly larger and sharper view, click on the chart

S&P 500 April 15 Close

Comment: Well the chart shows that we are at the beginning of an upturn having just broken above the 50 day moving average (the line in blue — we will explain moving averages elsewhere shortly) so that’s a breakout yet to be confirmed but a good sign anyway. The technical traders will be looking for a further move up to occur to above the previous high at about 1344.

Breakouts are better when accompanied by a surge in trading, although in recent months the volume correlation has not always been consistent. The RSI, the mini chart above the main chart shows agreement upward but the lower mini chart, the MACD, is not yet signalling the upward move.

If and when the up trend is confirmed, we hope to see a similar pattern continue in the same way that the previous trend achieved from December 2010 through to late February of 2011. The approximate 3 week dip from early in March coincided with the unrest in the middle east, followed by  the natural disasters of the earthquake and tsunami in Japan — a good illustration of how external forces significantly influence the market — but a correction was due, or overdue, by then anyway and had been anticipated by most traders.

S&P 500 April 15 Plain Version - 2

Note: See April 14 Watch List performance chart at the end of this article.

Portfolio 3
There are 3 versions for Portfolio 3, each devised to find out whether it is possible to successfully trade with small amounts of start-up working capital — small amounts of  $1000, $5000, and $10,000. Our previous introductory versions of stock market basics paper trading portfolios, initiated in September and November of 2010, were limited to separate single stocks without concern for the amounts of capital required, and yes, they were very successful showing good paper profits, details of which are listed in other posts on this site.

We are guided by unofficial rules, we can call them “house rules”
Portfolio 3 is a little more ambitious and has the objective of conveying, and illustrating with stock charts, a few simple unofficial rules that traders often use for timing their entry when buying stocks and to guide other trading activities. These portfolios will have several stocks rather than just one, as in the previous paper trading examples, so that should allow for more situations to contend with as the market fluctuates in its normal fashion.

It is hoped that “house rules” already exist somewhere in memory that can be drawn on — and can be passed on here at stock  market basics — to guide our reaction to unforeseen events, internal and external to the stock and the stock market in general, events that often have a significant negative impact on stock prices. Recent evidence of that can be seen on stock charts that cover the period of the recent geo-political events in the middle east and the earthquake and tsunami in Japan.

Starting with the universal house rule to “Trade with the Trend”
Using the S&P 500 index as our guide for the overall stock market, we are waiting for a “green light” signal that would occur if the index breaks above the 1345 level and is confirmed. That does not preclude an earlier move in some cases. The charts of individual stocks on our list might suggest an earlier entry and prompt us into buying stocks that have a convincing pattern and buy signal. For example, HL and STX seems to fit that category.

The list of about a dozen stocks, given in a previous post on the topic [see item 1. in Related Posts List at the end of this article.], represents our current watch list that we can now make reference to below.

Watch List Appraisal No. 1 — Earnings announcement will be made this month for these stocks.
House Rule: We prefer to NOT open (initiate) any positions this close to announcement dates — things can change drastically, up and down.

Monitoring progress of selected stocks
Having compiled a list of potential trading candidates from the dozens that look promising according to their charts or for other reasons, we now must monitor them and track their progress until we can see whether their stock charts can provide a signal to buy (or sell). We need to see chart signals that we can act upon for our stock market basics paper trading Portfolio number 3.

Most of the stocks have been chosen because their stock chart patterns show them to be near to a simple potential breakout from one type of resistance level or another.

Let us review the stocks together, and add an appropriate comment on them to provide a current opinion, knowing that some things will change as time passes. The stock charts can be found as usual at StockCharts.com or at Finance.yahoo.com

After today’s comments, I will review them at the weekends and post a “screen shot”, a picture of the chart showing all the stocks and their individual gain or loss to date starting with closing prices of April 11, 2011 up until the current Friday end of day close. Some stocks may be added, some may be deleted to/from the watch list.

Doing so in this way should provide a useful learning experience relating to many stocks, even though we may choose to not paper trade.

Opening watch list comments in brief  — Wednesday April 13, 2011

Looking good in the following list: EMC, HL, KFN, STX

• AUY not looking too interesting or encouraging.
• CVI looks to be recovering, maybe a breakout above $24 would be more attractive.
• EMC this one I like EMC after today’s good move back up on increased volume.
• HAL not of interest right now.
• HBAN nothing here either.
• HL this was my original pick — but only if it can breakout, so we will wait to see if it can at around $10.
• KFN yes, this one appears to have broken out above resistance on increased volume — price is right when there are limited funds, we can go with it at the end of the day Thursday 14th if it continues.
• MO Looks OK but it may not have far to go to make it worthwhile
• SCHW Nothing here.
• QQQ This would be OK over $57.50 – $58.00 if the upward trend is confirmed.
• QLD like QQQ, above about $91.00 in a confirmed uptrend.
• STX yes, this another one good volume and price increase after earnings information.
• XRX not yet, seems to be consolidating, we will watch to see which way it breaks.

Here is the Watch List as entered in the Yahoo site as of close of trade April 14, 2011 — with 100 shares of each stock as a basis for reference — this current list has a value today of $36,478.52 — a lot more than our limited working capital for our portfolio. The gain or loss shown is based on starting prices as of close of trade on April 11, 2011

SMBG 3 Watch List

For those visiting this website who wish to learn about the stock market basics, general information such as this presented here now, and elsewhere, on the “lore” of the stock market, are useful as basic information to help understand how the market works, although quite separate from the more specific information on guidelines and trading rules posted in other articles on this site.

Earnings season
Earnings season, usually a period of increased activity in the stock market, refers to a period of about six weeks commencing a week or two after the end of each fiscal quarter. The importance of earnings season to market participants who are holding stocks, buying stocks, or selling stocks is significant — the last paragraph of this article sums up my beliefs on the subject.

At the end of each quarter
Every three months, many publicly traded companies announce their earnings-to-date and their forecasts for the future together with other relevant business performance matters that are of great interest and importance to the financial community.

Mostly starting after the quarters ending March, June, September, and December, and traditionally following the lead of the major aluminum producer Alcoa Inc., a flurry of corporate news releases and conference calls occur when other major companies, report financial numbers relating to their current performance and their prospects for the following quarters. Some companies report their figures at the end of different months, based on different fiscal year endings.

Earnings dates for companies can be found by entering their stock symbol in the lower box at top left side of this Earnings Calendar Source.

Expectations of “the Street” (Wall Street)
Ahead of time, forecasts are made by various stock market analysts on what those past earnings and future earnings might be and the forecasts are circulated publicly and are available as possible guidance to shareholders and other interested parties, whoever they may be. The positive forecasts can encourage buying stocks, but actual negative forecasts are less common. But they are forecasts, educated guesses you might say, the exact figures must wait on the official corporate announcements and not released before then.

Lots of market action
Earnings announcements create a lot of market activity, especially if they beat or fail to meet the values expected by the “market”, based on the forecasts made by analysts — even being off by a penny (one cent) can cause a big drop in price or a big gain. After earnings announcements, there are sometimes instances when stocks have seen a rise or fall in price by as much as 20% or more.

Earnings season is eagerly anticipated, awaited with the newspaper and television media ready to report, to analyse, or to perform a post mortem on the key results.

The importance of Earnings Season
After all is said and done, after the stock market’s reactions to geopolitical events or natural disasters or other external big news occurrences, it is earnings that drive the stock market — when good news on the earnings front prevail then the market will go up, if not, then down.