A. Why is the approach FA and TA based?

According to my research, a stock’s share price is controlled by both its fundamentals and its exteriors such as the overall market condition and investors’ sentiment. Moreover, change in fundamentals contributes to 60% fluctuation of its share price while exterior factors 40%. If we employ FA and TA approaches, we can literally use FA to capture the 60% fluctuation while TA the rest 40%. This research shows both FA and TA are important when scouring investment candidates and FA plays a more important role in a successful investment.

Considering the complexity in FA and TA, SwingBH has developed a practical and easy-to-use model for non-professionals to invest mid-term. Simply put, the model is a FA+TA based approach that consists of a few conditional checks in the areas of FA and TA, very easy to implement.

B. FA

SwingBH has chosen seven key rules that can be easily followed to find potential investment candidates. Information involved is available for free either at Yahoo Finance or MSN Money Central. By importance, each rule is given a 1-5 star rating,

1. A candidate is a good ER stock (5 stars)
By SwingBH’s definition, a good ER stock is the one that beats estimates and raises guidance in its quarterly earning report. For a conservative investor, the candidate should have been on the good ER list for at least 2 times in a row.

2. A candidate is a profitable company with positive cash flow (5 stars)
This guarantees that the target company lives on a sustainable financial fundamental without the need for further financial help in the near term. For a conservative investor, the candidate should have been profitable for at least 3 times in a row. 3 consecutive earnings is also a wall street consensus.

3.A candidate has a forwarding p/e less than industry average or SP500 average, whichever is smaller (5 stars)
It is a prerequisite that the candidate is comparatively undervalued. In this case, SwingBH is talking about forwarding p/e, not trailing p/e which has already priced. If selected after conditions 1 and 2, a target candidate may be a high growth stock other than a value type one. In this case, a Ben Graham valuation formula can be used to estimate the stock’s potential value. However, SwingBH suggests that the candidate should be avoided unless condition 3 is not applicable at all.

4. A candidate has continuous insider buying. (4 stars)
Insiders are harbingers. They know more about the candidate’s fundamentals than outsiders. Especially buying from top executives (president, CEO, CFO, CTO, COO, etc.) makes a big difference.

5. A candidate is in a favorable industry sector. (4 stars)
Market flavor changes all the time. A candidate in a favorable industry sector can easily become a market focus once it moves up to market top 10s and then get chased. In a bearish market, this condition has more significance. Stocks in such a sector become a safe harbor in a bear market.

6. A candidate has a floating share less than 100 mil. (3 stars)
The fewer the floating shares, the more volatile the candidate’s share price. In a bullish market, it means the candidate can easier outperform the overall market indexes. More risk-taken investors can narrow the number down to 40 mil or 10 mil.

7. A candidate has continuous institutional buying (3 stars)
Key institution investors include Fidelity, Vanguard, and Goldman Sachs. Institutions have more resources to conduct research than us retail investors, therefore, they’re able to spot gems a step ahead of us. However, this condition is not as important as the above others. When a candidate is highly held by institutions, there is not much room left for us to play. But at the early stage when institutions start accumulating, it’s not too late for us to jump on the train. There is another special case. It’s more valuable for a candidate not to be covered by analysts or few analysts yet.

C. TA

Since previous FA rules are based on ER and other information, a candidate that has passed through a FA background check is for a quarter investment. Looking at an intraday chart or a weekly one or a monthly one is not comparable to looking at a daily one. Looking at a variety of technical indicators is not as good as looking at price and volume because the majority of indicators are derived from the both. Three golden rules guide the search for a potential investment candidate. By the same token, each rule is given a 1-5 star rating,

1. A candidate is in an upward trend (5 stars)
An upward trend indicates the candidate is agreed upon by the market as a good object for long. A candidate’s share price should be higher than its daily ema(5) average while ema(5) is above ema(10) and ema(10) above ema(20). During a quarter window, ema(50) is not useful. Neither is ema(200).

2. A candidate’s share price is more than 80% of its 52 week high (4 stars)
If a candidate’s share price has dropped more than 20% from its 52 week high, the stock is in a bearish trend. No matter how good its fundamentals could seemingly be, there must be something wrong hidden from public investors.

3. A candidate’s daily volume has no spike after ER’s spike (4 stars)
By SwingBH’s definition, a spike refers to a volume is close to or more than historical/52 week high. A spike in volume means that the candidate gets market’s attention. It doesn’t matter a spike happens right after the candidate’s ER, which is a normal reaction by the market. It does make a difference when a spike happens for other known/unknown news than ER. It’s a good sign that a spike follows a stock price appreciation. Otherwise, it’s sign for investors to exit.

D. How is entry/exit price determined?

A candidate stock having passed a FA/TA check doesn’t mean the candidate is a 100% winner or money in the bank. Generally, the strategy to invest the candidate is buy dip and hold for a quarter or 3 months. TA should be utilized again to find entry/exit point.

1. Entry point
After ER is released, there is always time for us to load. SwingBH suggests investors should always buy dip when volumes have shrunk other than chase. This chance would emerge on the 2nd or 3rd day following ER.

Keep in mind right after the ER is not the best time. Why? First we need know market’s reaction. Do institutions and investors like the ER? This can be easily figured out by looking at that day’s volume change and price fluctuation. The best scenario is price appreciation with volume spike. The worst scenario is price depreciation with volume spike, which is a 放量阴线, indicating institutions take the chance to run away. Secondly, stock price can be too volatile for us to make a calm decision.

SwingBH suggests investors should always use limit order. A conscious investor should avoid market order. Either ema or key support levels can be as entry references. SwingBH likes ema(5) or ema(10). He also likes adding 1 more cent to a key support number, for example, if 5 is a mentally key support, SwingBH’s limit order would be placed at 5.01.

2. Exit point

When a stock’s fundamentals are changed all of a sudden (examples include warning or lowered guidance before ER, resignation of auditors or CFO, SEC investigation, losing a big customer, etc.), the stock should be unloaded at whatever price even using a market order. Any exterior factor such as a terrorist attack should not be used as a reason to sell. When a stock’s top executives kick off selling as a plotted group, the stock should be unloaded at whatever price even using a market order.

Other than the above, there are at least two possible good reasons to exit. A trailing stop is triggered or a price target is reached. Otherwise, SwingBH suggests the target stock should be held until before its next ER. Last but not least, SwingBH doesn’t suggest anybody should bet on ER unless he/she has insider information.

¶ 11:30 PM

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