The new Bull Market: Get Ready

Many people missed the bull market that started at the beginning of 2009 and almost end at the beginning of 2020 due coronavirus crisis. That bull market took the DOW 30 index from its bottom which hit in March 2009 and was 7000 points and did not stop until it reached 30,000 in January 2020. This index moved about 23,000 points and made a profit of more than 328% in almost 11 years. The same is true for S&P 500 index which moved from its bottom that hit in the same date, which was 700 points until it reached 3400 points in January 2020, which means that it made 2700 points as a profit that almost 380%.

Both major indexes made a profit of about 320% or more, which means that if some one at that year of 2009 invested about 10,000$, then within almost 10 years she will made about 32,000$ as profit, and if she invested about 100,000$ then she will end up with about 320,000$ in profit. So what all of that is have to do with market toady and coronavirus crisis and 2020.

Coronaviruse Crisis hit the market so deep and started huge sell off pressure in February 2020, when all stocks have been drooped almost around 20% of its prices or more. This can be either one of two cases. The first of which is market starting correction phase which means the it will move in side-way for almost a year or so failed to make new highs as well as supported by investors whom prevent it from making new lows. While the second case is market staring new bear move which means that it will make new drops and not able to make new highs. Both cases will not last for long. The correction phase may become shorter than the bear market phase, but both of them are good opportunity for investing. Because both of them having an opportunity to by good stocks with cheap prices.

What should people who missed 2009 Bull Market do in order to take advantage of the Coming  opportunity?

There are two types of people based in their knowledge about stock market which are as following:

  • People who have no clue about stock market (Type I).
  • People who have knowledge about stock market and know how to invest and make fundamental and technical analysis (type II).

Type I people should not be worried about their lack of knowledge in financial market specially in stock market, because their lack of knowledge might be their strength. The reason is that a lot of expert in this field is trying to spot the bottom to ride the wave of new bull market and failed to do so. While those who has no clue about stock market they don’t need to bother them-self about market tops or bottoms. They can easily open an account in any fund that invest in DOW 30 and/or S&P 500 indexes such as:

  1. Fidelity ZERO Large Cap Index.
  2. Vanguard S&P 500 ETF.
  3. SPDR S&P 500 ETF Trust.
  4. iShares Core S&P 500 ETF.
  5. Schwab S&P 500 Index Fund.

Once they invest in these mutual fund, they will be riding the next bull market and this will happen when the correction phase or bear market finish and market start break the top that made in January 2020, and start moved up and make new tops that might be 60,000 or 90,000 or more than that. But to get rewarded properly in this investment, people who used this approach must hold their position for almost 10 years or so. And they should only invest with money they can afford and get no loans. Also they should use money they don’t need it for the coming 10 years.

Type II those are who know stock market and how to read charts and do some fundamentals and technical analysis regrading any company and its stock to know which stock is the best and when will be the good time for entering and exiting an investment, I have some tips for them – they might go for the tip that provided for Type I – and they are as below:

  1. If you know how to short stocks and familiar with this type of trade, then go ahead and do it, but you have to make sure to read candle properly and the volume that made it, in order to spot a good entry and exit and made some profit while the market is dropping.
  2. If you want to buy the market and go long, never do that until both Dow 30 and S&P 500 indexes made bullish candle in monthly time frame with higher volume than all precedent candles (specialty the red one).
  3. Do not buy good companies while there are best one, and to know which one is the best:
    1. Go to earning report and see which companies are able to make huge profit in the time of crisis.
    2. Companies that have perfect earning reports should move in advance of the index, for example if the index made the bullish candle in (2) and still did not break its MA(50), and the stock that you are willing to buy is already cross above MA(50) then this is a good sign that this stock is a leading one and it will be good if you invest in it since it might be the leader of the new bull market.

Both type of people should be prepared for the next bull market which might start after one year from now or so, and they should save some cash to invest in stock market because it’s the only place that can allow you to be shareholder in best companies in the world and provide you with more than 300% return on investment or more.

The One Strategy that might save your Money

All investors and traders alike knew Warren Buffet the Oracle of Omaha. This guy has been listed in Forbes billionaires list as one of the most wealthiest people in the world for 25 years. He could not do this without unique criteria that make him different than others who work with him in the same field. One of those criteria that made Warren buffet the man that we knew today is that he is capable to distinguish between the asset price and its value. For example, if he want to buy stocks in a company, he will first study the company to determine its value and how much cash this company are capable to generate in the coming 20 or more years. Once he end up his calculation and come up with a value for that company, he then see what is the price that value listed for (stock price). If the price is too high that cannot justify the value then he will pass this investment. But if the price of the stock was reasonable for the value or was so cheap he will ask himself another question before he invest and this question is the one that distinguish him form all other.

He will sit a side and ask himself this question: (If I – Warren Buffet – have only 20 investment chances in my life, would I loss one of them to invest in this company?). If the answer was yes he then will invest in this company, but if he see there is no chance to waste one of his 20 chances to invest in this company, he will stop right there and look for another opportunity to invest in it.

This question is telling us that how easy for Warren Buffet to skip an opportunity while it seems good investment for that time been and capable to control himself and his greed. That what make him skip investing in the dot com companies which was the reason for the financial crisis that hit the stocks markets at the end 1999 and the beginning of 2000. It is not an easy for investors and traders to pass an opportunity and did not take it once its arise which is the reason why there is no investors or trader make a fortune like the one Warren Buffet did.

This question that Warren Buffet used is working as filter for the good chances that he counter. When you dig deep and see how much investors and traders losing money chasing each chance appear in front of them looking for profit in short term you know why this question is so important.

To explain it clearly let assume that an investors who studied a company and went through its financial records and see everything is fine with it, then he decided immediately to invest in that company or may be wait for good technical indicator signal to buy its stock. This investors think only in one mind set which is buying this stock because its company has good financial records. He did not think in the other direction which is why I should not buy this stock even if its company shows good financial records and it is a good opportunity to invest. If she think carefully in this mind set – to not invest in a company where it seems good opportunity – she might end up with good reason or two or may be more why she should skip this investment and look for other opportunity.

The lesson form this for investors and traders is not to skip any opportunity they did due diligence about investing in it. The lesson is to think about any chance arise in front of them twice in different mind set, the first of which is why they should invest in it, and the second of which is why they should skip this investment even when it seems good one, as pros and cons for investing or trading this opportunity. Once pros is higher than cons then they are free to invest or trade this chance, but once the cons is greater than pros then they need to pass this opportunity and look for another one, to minimize their chances to end up in an investment that will make them little profit or even worst by wiping their money.

Sales: The leading indicator to pick winning Stocks

Sales is the amount of money that companies received for selling its products and/or services. This money is usually include (cost of products/services + profit ). The cost of products/services can be the raw materials that company used to produce its products/service and human recourse as well as other assets that company had to have in order to produce its products/services and make it available in the market. The profit is the amount of money that company added to the price of products/service that it produced in order to make profit form those items. Once the number or amount of sales has been increased then that the profit will increase and once the profit increase earning per share for the company will increase (EPS). Finally, when (EPS) of company’s share increase it will be under high demand and that will lead to increase in its price which will make it go up, or keep going up if it already was moving in uptrend.

Usually increasing in sales will be leading indicator for increasing in (EPS). Wise investors will screen for stocks that has increasing in its sales for three or more quarters but its (EPS) did not change except for some positive earning. But once the (EPS) of that company which its sales was increasing for a while, jump and increase 75% or 100% or more, then the investor has two indicators tell her that this stock will rise and move in strong bullish up trend, then and only then when the (EPS) increase and confirmed the sales, investors should bet on that company’s stocks and invest in it as long as its sales maintain the same records and (EPS) fluctuate within the range of increment.

Sales is one of the leading fundamental indicators that investors usually use to predict if there will be an increasing in (EPS) for stocks. Once they spot consecutive increasing in sales but no change in (EPS) they start to prepare for investing in that company once they got the green light which is an increase in (EPS).

Also investors can use sales to justify if the increase in (EPS) of company come from its sales or it just come from cutting cost.

Head and Shoulders Pattern: the complete guide

Head and Shoulders is one of the most known and successful pattern in money markets. It always appears where the price is reverse, means that when price move in uptrend and its about to go down, or the other way when price moving in down trend and the price want to reverse to up trend. It also appears in different time frame which means that you might not notice this pattern in daily time frame but when you go deep and search for it in lower time frame such as 4 hours, one hours or may be 15 minutes time frame you will notice it.

First I am going to put a picture for real chart of price movement in one of financial market that has the head and shoulder pattern, and then I am going to explain the philosophy and psychology behind this pattern and its formation and why it is so profitable.

As you can see from the above chart for Apple stock. The stock moved from almost May 2018 at price 141 $ to reach its top in March 2019 which was 230 $. It took the stock just three months or about to reach its starting price which was 141 $ and that after a successful formation of Head and Shoulder pattern. That means if someone was watching this stock closely and found that this pattern formed and short/sell Apple Stock at the right shoulder, she would make in three months as much as the one who bought this stock one year ago.

But in order to master this pattern and know where is the right moment to enter trade like this you have to know the psychology and the other traders emotions that helped the price to move that way and formed this pattern. And here we are:

  • The price moves in regular up trend where its formed higher lows and higher highs as the picture below.
  • The price moved from point 1 going up until it reach a resistance in point 2 and then drop in pull back movement. (as figure below shows)
  • When price reached point 3 which considered as support, price continue its movement upward until it reached point A.
  • When price reached point A it find a resistance there which was stronger than the resistance found in point 2 which made the price dropped in strong move down than the previous one that made price dropped from 2 to 3, and then point B formed which worked as support and helped price to move up.
  • In the price movement from (A to B), the price found strong sell momentum that made it drop strongly than the previous drop from 2 to 3, this momentum can consider as high sell volume but not greater than the volume that made price go up from point 3 to A.
  • Then price which found support in Point B go up slowly to point C, and when I said slowly I mean that this movement lack the momentum and/or high volume. Always this movement has MACD bearish diverging and/or RSI bearish diverging which means that the price in C is higher than A, while the two assigned points for A and C in MACD and/or RSI are going in down trend as shown below.

As you can see in the above figure the price of Apple stock made new high and uptrend while the MACD and RSI were making down-trend, and this is what I meant about bearish diverging which is a good sign but not the only one for Head and shoulder formation.

Back to our pattern explanation:

  • Once the price barley reached point C, it will drop with high momentum and strong volume to reach point D. This high momentum and strong volume helped the price to break the up-trend pattern and formed the first lower low in the pattern which is point D.
  • Once point D is formed, the wise trader who followed the trend will reconsider her positions, and think hard to either keep her position or exit this long position that she entered in point 1. But she still waits for good bargain and good price to sell her share. She does not trust this up trend pattern anymore specially when there was a contradiction in the main principle of uptrend which is forming higher highs and higher lows, and now there was new lower low which formed in point D. Even if she does not know any thing about volume or momentum or how to read it, but she only knew that this contradiction in the price movement that lead to form new lower low does not make her feel right and the market is going to do something else but not going up. At this point this wise trader will decide to exit her long position as I said that she entered in point 1, but she will wait for right moment to exit with maximizing her profit, and that will happen only when price move up and reached point E and failed to go more further than that.
  • At that time she will know that this price is either going to go sideways or down which will be no good for her, and she with other wise traders who think the same way decided to exit their long positions that they entered in point 1 when price reached to point E which is another contradiction for up trend when price formed lower high.
  • The price will reach point D with low volume and low momentum which prove this movement was just a reaction to the previous strong movement that made it drop from C to D. Once those wise trader exit this long move started in point (1) especially after they see price started forming lower highs and lower lows which is a sign for down trend, their exit will combined with the high momentum and volume of sellers who caused the up momentum of previous up-movement from 3 to A and from B to C to fade , and only then the price will drop in strong movement from D to reach the same level that it started with, which was point (1). This is exactly what happened in Apple’s stock movement in the previous figure. 

But how can trader make sure that the head and shoulder pattern has been formed and its good time for trading this pattern and making some money, this is what I am going to show in the coming points:

  1. First of all, the trader must make sure that the pattern has been formed and satisfied the following point with accuracy not less than 90% or more, if it is less than that she must not enter this trade as head and shoulder pattern formation. And these points are as following:
  2. The price should go down to point B in strong move, stronger than the movement that made it stop in point 3.As shown in the previous figure.
  3. The movement that took price up after that to pint C should be equal or less stronger than the previous movement that took price down to point B. That means the bearish has a strong power that equal to or greater than the bullish which made strong believe that they are able to take the price down.
  4. To make sure that point 3 is satisfied the next down movement for the price will make new support point which is lower than the support in point B, which is D and this point will make sure that those traders will have confusing and the long position they entered is no more valid and they should re-consider their position by exit it and take their profit.
  5. Those long traders who decided to exit their long positions will hold those position to get the maximum profit by waiting until the price reach point E. The price movement to point E will have lower and weak movement compared to movement from point C to D which means the price moved as consolidation or reaction to the bearish movement and the bearish just resting and willing to take the price down again to make new lows.
  6. Once the price barley reached point E with low momentum and weak volume the bearish will took the control and drive the price down again and the price will be ready to broke all down levels and reached to the place where all this was starting to the beginning of this up movement.

Here is some other considerations about point ( A, E) which consider the two shoulders of this pattern as well as points (B,D) which consider the Nick-line for this pattern:

  1. Point E (right shoulder) should reach the same level as point A (left Shoulder) which means that point A should work as Resistance for point E and prevent it from going higher than this level, and its totally recommended to have down trend between these two points. (as shown below between left and right shoulders).
  2. The same is true for point B and D, it’s totally recommended to have down trend between these two points as shown in the figure below:

Finally, head and shoulders is not that famous pattern as other patterns, but once this pattern started forming, trader should pay clear attention to it to make sure its completed all its characteristic explained above, because it will be completely profitable for traders of all markets types. This pattern can be found in revers way which called “Revers head and shoulders” pattern which make markets reversing from down-trend to up-trend. The same principle applied in head and shoulders pattern can be applied in Reverse head and shoulders pattern but instead of sellers taking controls in head and shoulders pattern, the buyers will take the control and will take the price from low prices to more higher prices in revers head and shoulders pattern.

Make Assets your Weapon

Company assets are considered one of the most important criteria that long term investors should study carefully before making investment decisions. The success of any company is based on its ability to convert these assets to profit, and once the company failed to do so that consider as a big failure.

Investors should investigate companies’ financial reports and see where is the company’s profit comes from. Once they found that the profit of the company is derived from its assets that means the company can make profit from its own assets which is good. On the other hand, once they found that there is no link between company’s profit and its assets then ignoring this company is the wise choice an investor should make.

There are so many companies that failed to make profits from their assets, even if their technologies are widely spread across the world, which make their stocks hit lowest prices of all times and not able to make new highs such as Snapchat.

If you studied the snapchat balance sheet you will see that that the company has more assets as well as it’s debt-free.But even though it fails to make a profit from these assets as you can see in its earnings report which made it hard for its stock to reach at least the IPO prices which was (28 $). But once the company knows how to make a profit from its own assets its stock will go up and make new highs that lead to an increase in the company’s market value.

Long term investors should always look for details in companies financial reports specially companies’ balance sheet which needed to be studied carefully, because the last thing that investors need to see their-self are holding an investment (stocks) in company that generated its profit by cutting costs, and let go of its employee. Instead of that, investors need to hold and invest in those companies which treated employees as its main assets and generate its profit from its own assets.