rss

Trade Like an O’Neil Disciple -Book Review

The CANSLIM enthusiasts, and they seem to be legion if the reviews on Amazon are any indication, have nothing but praise for Trade Like an O’Neil Disciple by Gil Morales and Chris Kacher (Wiley, 2010). I decided to be a little more focused and less ebullient in this post and write about a trade setup not found in the standard O’Neil repertoire. Consider this a follow-up to yesterday’s discussion about the eye of ambiguity.

The setup is alternatively described as a pocket pivot or buying in the pocket. It is “an early base breakout indicator, which is designed to find buyable pivot points within a stock’s base shortly before the stock actually breaks out of its chart base or consolidation and emerges into new high price ground.” (p. 128) The pocket pivot indicator provides direction in what might be seen as an ambiguous situation. It is, the authors claim, particularly valuable in sideways moving markets.

A major virtue of a pocket pivot buy point is that it is a low-risk entry point—relatively close to support and far enough from resistance to be profitable even if the stock can’t break through to higher highs. Or, as the more optimistic authors claim, “the pocket pivot buy point technique can get an investor into a stock at a lower-risk price point and thereby make it more possible for the investor to sit through a pullback if the all-too-obvious new-high breakout buy point fails initially and the stock retrenches, corrects, or sells off.” (p. 129)

What are the characteristics of a pocket pivot buy point? “[A] stock should be showing constructive price/volume action preceding the pocket pivot. … [T]ighter price formations, that is, less volatility should be evident in the stock’s price/volume action as viewed on its chart. The stock should have been ‘respecting’ or ‘obeying’ the 50-day moving average during the price run that occurred prior to the time the stock began building its current base. … Except in very rare cases, … pocket pivots should only be bought when they occur above the 50-day moving average. Ideally, the stock’s price/volume action should become ‘quiet’ over the previous several days, which contrasts with the much larger and stronger volume move that comes on the pocket pivot itself. On the pocket pivot you want to see up-volume equal to or greater than the largest down-volume day over the prior 10 days.” (pp. 132-33)

The authors offer a series of variations on this generic trade setup. For instance, there’s the continuation trade: buying on volume after a pullback to the 10-day moving average. Or the bottom-fishing trade where a stock, after carving out a bottom, pushes through its 50-day moving average. They urge caution if a pocket pivot is too extended from its 10- or 50-day moving average when it begins its move or if a stock has been “wedging” upward instead of drifting downward before a pocket pivot. As they write, “context is everything.” (p. 162)

This setup is certainly not a revolutionary breakthrough in the world of technical analysis. In fact, anyone familiar with the literature might recognize several patterns rolled into one here. In the context of yesterday’s post, it is a “fast-follower” strategy because it requires a volume spike, created by the “first movers.”

16 Rules for Thirsty Traders

I always liked these rules for their simplicity and I think they can benefit some of you, if only in the form of a gentle reminder of what you should be doing…or not doing.

1. Market direction is the most important thing in determining a stock’s
probable direction.

2. Price and Volume action are more important than a jillion indicators and
complex theories, no matter how cool they may be.

3. Don’t miss the forest (broad market) for the trees (individual stocks).

4. Don’t anticipate. Wait for confirmation.

5. Don’t trade contrary to the market’s direction.

6. Don’t try to “outsmart” the market.

7. Things can go much, MUCH further than you think they can, in either
direction.

8. Divergences work best with double tops and double bottoms.

9. Quite often, divergence analysis doesn’t work at all. When that happens, it
means the prevailing trend is very strong.

10. You need to effectively filter or limit the amount of data or charts to look
at; otherwise, you will spread yourself way too thin. You must have the time and
alertness to keep your eye on the ball…..hard to do, when you are juggling
thousands.

11. Don’t focus on every tick of each trade. If you are, you are holding on to
the handlebars too tight.

12. Have a plan. Set stops and targets. Don’t be afraid to take 1/2 profits and
raise (or lower) your stops. If your trade follows your script, great. If it
doesn’t within a reasonable time, consider getting out.

13. That said, it’s OK to give your trade a little time, unless you are clearly
wrong. You are often ahead of the market a little bit.

14. You will lose money sometimes. Every trader does. It’s a business, not a
personal indictment against you. Get over it and move on to the next trade.

15. Political opinion and markets do not mix.

16. Learn from your mistakes, or you will be condemned to repeat them.

Go to top