It’s time to take another look at our favorite stock market index chart, the S&P 500, shown below.

Anyone who has read the recent posts to this Stock Market Basics website would be aware that I have mentioned that the key reference line on the chart is that of the 20-day moving average (20 dma), shown as the wavy green line on the chart — that’s just my own opinion of course, as are most of the interpretations of chart signals expressed here. What we’ve been looking for is what we are seeing on today’s chart, shown below, and that’s a close of trading at above the 20 dma level after moving up from a series of trading “bottoms” that occurred just above the 1120 level.

The next challenge for the S&P, if it continues to move upwards, is to penetrate through the 50 dma at around 1259, which is also a former support level established in late June of this year.

Not everyone will agree
For many, that will not be a convincing enough of a signal to re-enter the market to the upside, especially since the trade volume is not too great for the day. The volume is indicated by the vertical bars in color at the bottom of the main chart. Here is an article that warns Stock Buyers Beware, worth a read for sure.

But to me the S&P chart looks promising and with another good day like this today even if there is a small reversal tomorrow, I will be ready to start buying stocks for our next Stock Market Basics paper-trading portfolio.

But some are saying maybe?
As for my comment above that not everyone is in agreement that we’ve reached a market bottom, after completing this article I came across a piece on the internet, on MaketWatch by Mark Hulbert, titled Leading Indicator of a new Bull Market — We will have to wait and see!

On the Watch List
Almost all of the stocks that we have on the Stock Market Basics Watch List, referred to with selected stock charts in out last post, are already above their own 20-day moving averages. They also have what I consider as a secondary confirming Buy signal, one that I like to follow, known as a cross-over of the 5 dma and  the 10 dma lines.

Also, another crossover that I like to see, not necessary followed by too many, is the MACD — it appears in the small graph below the main chart — shown below as black and red lines.

Not Scientific
I should mention that such chart “analysis” as I am referring to here as signals is certainly not scientific but is based more on the expectation that it depicts patterns that have occurred thousands of times in the past and that a sufficiently good percentage of them have proven to be predictive of a profitable outcome — enough to warrant them being taken into consideration, together with other attributes.

Stocks to trade
The Watch List compiled to date (with today’s closing price in brackets), includes ALXN (57.02), CTAS (31.50), WYNN (147.11), LVIS (45.81), MGM (11.16), and MPEL (12.57), plus a new addition in TIF (71.52), and only MGM and MPEL are still blow their 20 dma.

So, unless the market falls quickly back to the previous lows, around 1120, then I will take paper trading long positions in all those stocks above their 20- dma’s.

The objectives of the Stock Market Basics website
This website is targeted at newcomers to the stock trading arena who are wishing to learn the stock market basics. The purpose of illustrating our stock picks with charts, and paper trading them in real-time, is to give the newcomer an understanding of the trading process, how to select and qualify the stock candidates and to how to recognize the potential entry and exit signals that may be provided by the stock price patterns as they evolve and show up on the charts. That information together with a set of simple guidelines to minimize risk and manage trading capital are the essential stock market basics we wish to convey. Win or lose (on paper) the actions that we take and illustrate here on this website should teach us something.

Note: Click on the chart below to enlarge for a sharper view.

S&P 500 Index Chart for 29 Aug close

Stocks featured below, with charts, in this article: ALXN, CTAS, MGM, LVS.
Other stocks for the Watch List are the casino stocks, WYNN, MPEL.

About this website
This Stock Market Basics website is about buying stocks and options from a trading perspective. This means that our main emphasis is on buying stocks on the move in which we can take a position and hold them for a short time, usually no more than 3 or 4 months. If we have chosen correctly, the stocks that we do buy will have provided us with a suitable gain — which can then be used for a new short-term trade.

If we have not chosen correctly and the stocks we buy become losers, our guidelines require that we must exit from those losing positions promptly in order to preserve our working capital. This stock market basics website discusses the simple guidelines to achieve that working capital preservation and also suggests other guidelines to identify promising stock candidates for purchase and their entry and exit levels, often with the aid of stock charts that depict recognizable price patterns that we can illustrate in the articles about the respective stocks – such as those shown below.

We need to heed the often repeated advice to “cut your losses short and let your profits run.”

Investing differs from trading
The trading approach, by definition, is more speculative than buying stocks for investment purposes where the focus is more on buying stocks that will pay dividends or have great growth prospects in the future, stocks that are usually held for the long term.

While we wait to resume trading activities
When the time is right, in terms of stock market activity, this stock market basics website will commence a series of paper trading exercises on stocks to demonstrate to its target audience, newcomers to the trading arena who wish to learn some of the the basic stock trading guidelines and strategies, what must be done to initiate, track, and exit particular stock trades according to those basic guidelines referred to.

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Stock Candidates for Watch List

The charts below depict the trading that occurred from July 18 to August 24, 2011.

In the following charts, the daily range of stock prices is shown using the “Candlestick” style and the moving averages are the “wavy” lines, being Green for 20 dma, Blue for 10 dma, and Red for 5 dma. The smaller graph below the main price chart is the MACD (Moving Average Convergence-Divergence), a popular indicator used in technical analysis.

The 20 dma is our major reference level. To trade to the upside (going long) the stock-price must be above the 20 dma. The shorter 5 and 10 dma’s are added to help more quickly identify possible changes in price direction, but we place less emphasis on them because their short duration can create a “whiplash” type of action when they signal buy or sell crossovers too frequently with much less price movement.

Chart of ALXN 24 August 1.15 pm

ALXN

We can see that the price of ALXN is in a new short uptrend and if it continues will approach and hopefully break through the 20 dma — if that occurs and the general stock market environment is positive we could consider taking a position for our paper-trading exercise.

The MACD also appears to be approaching a cross-over, a possible technical “Buy” signal confirmation.

Target
Our first target is to retrace to the recent high at $59 on July 24 that can be seen on this partial chart.
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CTAS 24 August (Partial Chart)

CTAS

CTAS is exhibiting a similar pattern to that of ALXN, except that yesterday it did close above the important 20 dma level after several up-trending days. The MACD is also showing a cross-over to the upside so we should watch closely both this emerging stock-price pattern and the general market environment for the next day or two, and be ready to paper-trade this issue too.

Target
Our first target is to retrace to the recent late July high at $34.50 that can be seen on this partial chart.
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MGM 24 August (Partial Chart)

MGM

MGM is one of 4 casino stocks that we are watching, 2 of which we show here in the form of their partial stock charts. All of the casino stocks have been beaten down considerably during the current correction. Similar to the above stock-price patterns, but MGM is much farther below the 20 dma and the chart shows only the one up-day, yesterday, after the low of the day before. This one may take longer to qualify as a candidate but it is an issue I like, together with the other casino stocks.
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LVS 24 August (Partial Chart)

LVS

A similar pattern to CTAS, with a close yesterday just above the 20 dma after a short upward trend from its recent bottom. This is another casino stock that should perform well in the future. We expect it to be a stock to buy for our Stock Market Basics Paper-trading Portfolio, together with the other stocks discussed above — and when the general stock market environment seems favorable to start buying stocks.

Target
Our first target is to retrace to the recent early August high at around $48 that can be seen on this partial chart.
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Note: Specific stocks are discussed in “Our New Watch List”.

In our previous post to this stock market basics website, we mentioned that we are waiting on the sidelines until we see a confirmed reversal of the recent predominantly downward trend — which may be days, weeks, or even months away.

However, as also mentioned, we should use this non-trading period as an opportunity to identify promising future stock candidates for the time when we wish to again start buying stocks. Especially since the market is now oversold and many high quality stocks are trading at significantly lower prices.

So let us make this a review of some possible stocks to add to our watchlist and to identify the possible entry points at which we can commence a paper trading exercise. The purpose of paper-trading our stock picks is to measure the effectiveness of our stock selection process and our pre-established stock market basics guidelines. Paper-trading allows us to do this without putting real money at risk.

Starting with some stock charts
Our stock market basics method for buying stocks relies on the use of stock charts and our interpretation of patterns of price movement, levels of resistance and support, and other factors that can help guide us on entry and exit points as we examine the charts each day as we follow our trading progress.

My first choices would be to re-examine some previous trading candidates, namely ALXN, CTAS, and the 4 casino stocks, MPEL, MGM, LVS, WYNN – so let us see what their charts can tell us, keeping in mind that we are looking for stocks that have taken a hit during the market correction but that can rebound eventually with the prospects of again reaching or exceeding their previous recent highs.

But first, our favourite reference, the S&P 500 Index, for how the overall market is trading. The S&P is preferred by most traders because it is more representative of the overall stock market issues than are the other major reference indexes, the DOW and the NASDAQ. On the chart below the S&P price is the wiggly line and the smoother wavy green line is the 20-day moving average, another important reference line that traders often watch.

Note: Click on chart to enlarge slightly for better view.

Chart of S&P 500 24 August 12.40 pm

What we can see from the above chart is that the S&P commenced its downward correction somewhere about the 1340 level on July 25, 2011 and then legged down to reach a bottom just above 1100 on August 8. There are 2 slightly higher bottom levels shown on the chart since then and as of this hour, trading is at 1163.70 for this index.

What we would like to see happen
The first thing we’d like to see for this major index is for it to move above the 20 dma — and stay above, so that it would indicate the start of a new upward trend, although it might not last, however, the target would be to move back to 1340, the previous high, and better still, to move above that level and continue on for the rest of the year. Meanwhile, we can check out a few charts of the stocks mentioned above that we would consider buying if the current market uncertainties are cleared up — that may take a while.

Next
In our next post to this Stock Market Basics website we will review 3 of the charts of the stocks mentioned above, ALXN, CTAS, and a representative casino stock. Buying stocks, even for paper-trading, requires research and careful examination of available information and current market trends and conditions.

Note: The stock charts shown below are courtesy of StockCharts.com with amendments by author.
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Today is August 22, and the S&P 500 large-cap index closed at 1123.82, which is about the same as last Friday’s close and not much above the recent low of this current correction at about 1101 on August 5, 2011 — As can be seen in the previous Dead Cat Bounce? article.

So, at this time we cannot know whether there will be a further drop to the downside in the near future or whether we are somewhere near the bottom of the this correction.

First, we have to find some promising stocks to buy
Because of current uncertainties, we are sitting on the sidelines until such time as we can see a definite reversal and a confirmed upward trend and that could be days, weeks, or months away.

But because the market is significantly oversold and many quality stocks have taken a beating, it is generally recognized by traders that this presents a very good opportunity to take positions, to be ready to start buying stocks at bargain prices.

Here at Stock Market Basics, while we are waiting for the market to turn and trend up once more, let us take this opportunity to compile a list of potential trading candidates so that we are ready for the time when the stock charts provide us with the necessary signals to again commence buying stocks. With this list we can then begin a series of simulated trades, usually called paper trades because no real cash is at risk. By paper-trading, we can introduce trading strategies and simple guidelines — or any other information — that should help the beginning trader to become familiar with the stock market basics and how a trade can evolve, be tracked, and how a stock’s entry and exit price can be determined.

We have explained elsewhere on this website our typical routine that can help us find stocks to consider as possible trades, (see article: Finding Stocks) the important task is to decide whether we should trade them and to do that we need to “qualify” them.

The role of stock chart analysis and interpretation
There are various ways to qualify stocks as worthwhile trading vehicles – but there are no sure things. For this stock market basics website, which is targeted primarily at newcomers to self directed stock market trading, our favored approach relies on the ability to read simple stock price patterns that we recognize as having often provided positive results in the past. We acknowledge that the interpretation and analysis of stock charts is not scientific but it has been shown that certain patterns of stock price movement tend to be repeated from time to time and if these can be recognized they can serve as at least one possible confirmation to enter or exit a trade position.

The stock market basics approach also recommends a number of guidelines to manage risk and to minimize losses that will inevitably occur during a number of even well researched trades, our earlier article cover this topics, it might be worth reading our post on this site: Things to Know When Starting Out.

What are the signals to look for?
This stock market basics website follows several stock-chart indicators that we consider as being suitable for buying a stock. Some price-pattern activity may alert us to the potential that a stock that we might wish to buy, or sell, is moving in the right direction and steadily approaching the target level that we have established as the level that, when reached, is a signal to take action.

Breakouts and higher highs
We do look for breakouts above or below resistance levels. Resistance levels and breakouts can be easily recognized on stock-charts. Our recommended source of free stock charts is StockCharts.com and it is well worthwhile to become familiar with the various ways that their data can be modified and presented to suit individual preferences. We also favor stocks that exhibit’s an upward trending pattern of higher highs and higher lows, also readily discernible on stock-charts.

Moving averages
We also watch for crossovers of moving averages. Perhaps the chart of a  recently traded stock that has moved through a series of crossovers will better illustrate this method of identifying signals for buying stocks or selling stocks. For this we can take a look at the chart below that shows the price action of Alexion Pharmaceuticals, stock symbol ALXN. For this we will:

1. consider and illustrate first the chart with the 20 day moving average only as our major reference to Buy or Sell and then
2. look at the same chart with the 5 and 10 day moving averages added to “refine” the Buy and Sell levels. The explanation is given below the charts.

Chart of ALXN 22 August

1. 1. Let’s start with the 20 day moving average (20 dma), shown by the green line above, and follow the simple rule that when a stock price moves from below to above the 20 dma (as it did on 28 July 2011, position A-1 on the chart above) it is an OK to buy the stock or get ready to buy the stock, perhaps after a day or two of confirmation on the upside if that is what occurs – always subject to other possible factors of course, about which, as traders, we must become aware of. Our paper-trading exercises may bring those possibilities to our attention as we chart action in the future.Conversely, when a stock price moves from above to below the 20 dma (as it did on 5 August, 2011, position A-2 on the chart above) it is a signal to sell the stock or get ready to sell the stock, perhaps after a day or two of confirmation.
2. Now the same ALXN chart with the 5 dma shown by the red line and the 10 day moving average shown by the blue line.

Chart of ALXN 22 August with 5 and 10 dma's

In the same way as previously, the crossover for the Buy signal is shown by B-1 and the Sell signal is shown by B-2.

You can see other crossovers also, that I have not marked and you can also see on the above charts that the lower portion of the stock showing the MACD chart, similarly has a crossover that might be used as signals in the same way as those on the main chart.

After a while and given time to examine a few charts, it should be possible to recognize theses signals and then check them through following days and weeks to see whether the signals actually do prove to be reliable — or sufficiently reliable to use for initiating trades.

Different numbers of days can be selected for the moving averages that may work equally well, I have illustrated using 5 and 10 because I have become accustomed to using them, they are my personal choice. The 20 dma is a more commonly accepted moving average reference, as are the 50 dma and the 200 dma’s — but we can discuss and refer to those sometime in the future.

Note: click on the charts shown below to obtain an enlarged and sharper view.

Welcome to this Stock Market Basics website where we discuss stock trading topics, trading strategies, and simple guidelines to help in the management of the associated risks involved in trading stocks and options. The articles appearing here are targeted primarily to the person who is new to the stock trading arena who wishes to learn the stock market basics — as the title of this site suggests.

A few days ago, on August 15, we posed the rhetorical question “Is this a Dead Cat Bounce?”. The main purpose of this question was to prompt an examination of the current trading pattern shown on the chart of the S&P 500 Stock Index. The objective also being to encourage anyone wishing to learn the stock market basics to become familiar with chart patterns of stock price movement because, in some instances, chart patterns do repeat themselves and can act as a general guide to what may then follow on future trading days. Not scientific, certainly not infallible, but often helpful anyway.

Re the question: Is This a Dead Cat Bounce ?
Well, if you look at the chart shown below of the S&P 500 as of today’s close, as we are urging, I think the answer is clearly a “Yes!”

By way of explanation, a Dead Cat Bounce is a term used in the stock market vernacular to describe a promising looking upward reversal after a significant decline (like the one on the August15 chart shown below) — but which turned out to be short-lived and was then followed by a continuation of the former downward trend, shown on the second chart of today’s date, August 19, 2011.

S&P 500 August 19 close

Something to watch for
The chart of our favorite market reference, the S&P 500 Index, looks interesting right now as it hints at moving up from a bottom, exhibiting a “W” pattern – or it could be called a double “V” pattern — with the bottom of the second V being a slightly higher low that is then followed by a couple of days of higher highs up to today’s close – as can be seen in the chart below. Whatever, we should at least keep an eye on it to see whether we can get back above the 20-day moving average, now at 1253.90, shown by the blue line on the chart.

Note: Click on the chart to enlarge slightly for a better view.

S&P 500 August 15 close

We cannot realistically expect to pick the actual bottom of the market and there’s no need to since we accept the fact that we may “lose” a few points while we await a confirmation of the possibility. It’s the smarter approach and we can watch things develop — if that is what is to be — but we do want to be in early on the next leg up whenever it happens. The Stock Market Basics team is waiting to renew stock paper-trading efforts when it does.

Our next move
So for the above mentioned proposed Stock Market Basics paper-trading exercise, let us take a look at our earlier pick of a few weeks ago that did rise nicely after we first showed its chart, it was then down with the rest of the stocks in the correction of last week but is now again rising nicely. This is an exercise, so let us assume we do have a position in this stock and must watch its action at the end of each day and determine when to sell it, win or lose.

What do you think — how would you play this one?

As the “unofficial” Stock Market Basics paper-trader, I will comment on our possibilities after you examine this chart and decide YOUR move or possible moves:

Important reminder
Oh, one more thing, earnings for MPEL will be be announced on August 23rd before the opening bell, so that will have to be taken into account. The Stock Market Basics general guidelines suggest to NOT hold stocks through earnings announcements dates because of the additional uncertainties on how the “Street” will react when the details are released — especially if they miss analyst’s estimates by even a penny.

Note: Click on the chart to enlarge slightly for a better view.

MPEL Chart August 15 close

Isn’t that a nice chart pattern?
We are looking for this stock to move above the 20 day moving average (shown by the blue line) and then to move above the previous high of $16 — can it do so? And can it do so before August 23rd? Probably not.

What to do? Sell before earnings release date.
This website is directed at beginners, and as beginners just learning the stock market basics, we should follow the guidelines. We can hold out as long as possible until the day before earnings if the stock continues to rise but be ready to “pull the trigger” and sell if it falters before then — so that gives us only 5 trading days to see what happens.

Possible alternative
In real trading, there is sometimes an element of gambling. Let us say we have a given number of shares (or options if are trading options) and if we are able to accept the risks — which are considerable — we could sell half of our position the day or so prior to the earnings release date if they are steadily moving higher as they are currently doing, and keep the other half of our position until earnings results are announced. If the announcement is positive, it may shoot the stock higher, but in any case, the art is to exit with the greater gain very quickly and take whatever we can before the stock falls back in price, as it usually does since others will probably be taking profits like we are trying to do, and the additional selling will depress the price. In which case, if we think its prospects are good, we might again take a position at the lowered price.

But be warned
In any event we may lose out, a recent example can be seen in the case of MGM a couple of weeks ago, where after good results were announced that beat expectations, the stock was downgraded anyway by one analyst and it fell immediately in price.