To keep this conversation from getting too long, I'll list the first three (3) items here, and we'll build out our list over subsequent Saturdays.
"Big Bill's" Big 10 Checklist (Items 1 - 3)
Item #1: Always Start By Looking at the Wider Market
This sounds almost insultingly obvious, but it really is the most important thing to do. Before entering a position, you want to make sure that you're trading in the same direction as the major trend.
In college I took music courses. One was called "Musicianship", and it was filled with obvious-sounding rules like: "Always count out the measures in a piece of music".
"Well, D'uh!" I thought. "No kidding!"
That is indeed a very obvious rule. If you're supposed to start playing your part at measure 24... then you should count the measures until you reach 24, right?
But here's the thing... You actually have to DO it. On the spot, live and in real time.
And if you forget to do it, you're doomed. You'll blunder your way through an entire performance.
So, yes... It is obvious that you should know whether the wider market is trending up... down... or sideways. But you actually have to find out.
You also want to know if the market is at or close to an oversold or overbought condition. If it's oversold risk is to bears (that is, to bearish positions). If it's overbought risk is to bulls and bullish positions.
An easy way to size up the general market trend is to look at the New York Stock Exchange Bullish Percent Index (NYSE BPI).
The ins and outs of this indicator could fill a small book. We've put together a free website you can access that will help you use the BPI effectively. We update the page every time something important happens.
Item #2: Keep and maintain a "Stock Watchlist".
Again, very obvious. And again... You actually have to do it.
A good watchlist is part trading journal and part "tickler file".
Here's an entry from my watchlist. I had my eye on Paylocity Holding Corporation (PCTY) a mid-cap provider of cloud-based payroll services.
I list the sector, ticker symbol, date that I've begun researching, the current price and the next earnings date.
(By the way, I also keep notes about conversations I've had with people at the company or at hedge funds, but I won't display those here.)
The "good stuff" is in blue, and it's hard to make out in that image. It says...
"Stock is All Blue on PosKey. LT = Up; Funds = 1.34x; PCTY bounced off Res. at $122, just broken above the 61% Fibo level; 50-Day is approaching 200 which is at 50% Fibo. RSI = 62.23; All time high is near $149.50 = 26% above today's price. Get bullish if golden cross."
Ok, let me decode that for you...
What I've done is written down what I considered the main attributes of the stock.
I'm telling myself that, among other things, this stock is in a long-term uptrend (LT = Up)...
That right now giant hedge funds are buying 1.34x more of the stock than they're selling (Funds = 1.34x)...
That its Relative Strength Index (RSI) reading is 62.23 (not yet overbought)...
That the 50-Day Moving Average is approaching the 200-Day (very important).
And (most important) that the stock is "All Blue on PosKey".
That means that when I plug the stock into the Sector Prophets Pro Position Key tool, I see the strongest possible reading.
Here's what I saw back on May 11th when I began researching this stock:
"All Blue" means that, when I look from left to right, I see that in the short term...
1. PCTY is in a sector (Software) that is on Bull Confirmed status -- the strongest possible designation.
2. The Software sector is strong versus the wider market...
3. PCTY is strong against its sector peers...
4. And strong against the wider market.
You can easily see why I decided to keep a close eye on this ticker!
The crucial part of my PCTY notes is this final sentence: Get bullish if golden cross.
That brings me to the next item on my Top Ten list:
Item #3: Be on the Lookout for "Crosses"
As you probably know, one the most important indicators is the Moving Average (MA).
There are all sorts of MAs, but there are two of them that you're likely to see most often.
They are the 50-Day MA, also called the 10-Week MA because, with five trading sessions in a week, 10 weeks and 50 days mean the same thing... And the 200-Day MA, also called the 40-Week MA.
There are also two kinds of crosses you'll want to watch for.
The so-called "death cross" is when the faster-moving 50-Day MA crosses below the slower moving 200-Day MA...
And the so-called "golden cross" when the 50-Day crosses above the 200-Day.
As you could probably tell from their names, the death cross is considered bearish while the golden cross is considered bullish.
In my notes I was telling myself to keep checking up on PCTY, and when I saw the 50-Day cross above the 200-Day, to pull the trigger on a bullish position.
(I'm oversimplifying here a bit. Before entering the trade, I would of course double check that no key attributes had shifted enough to alter my stance.)
Here's a PCTY price chart showing where the golden cross finally happened, on Friday May 22nd (11 days after I made those notes to myself).
I didn't get into the trade immediately, because the stock closed lower on the day and I wanted confirmation that the short-term uptrend that started six days earlier was likely to continue.
I got in on May 26th, the first trading session after Memorial Day when the stock gapped up slightly.
Here's where we are today...
The highlighted yellow area shows PCTY's movement since May 26th.
It gained 22% in 25 days before pulling back about -3.5%.
So, yes... It's smart and wise to pay attention to your checklist.
To be continued...
And if you didn't get a chance to join Chris Rowe this past Thursday for his "Great Re-Opening" investor training...
We've put up a video replay that you can stream here for free.
Chris reveals his #1 strategy for trading the re-opening economy.
Traders have already used Chris' method to turn $930 into $15,866.
Have a great week!
Bill Spencer
True Market Insiders
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