Sunday, January 07, 2007

Idea Stocks

Every night when I go to bed I say my prayers and I always include one extra plea - God, please save me from idea stocks.

An "idea stock" is one where you have this great idea - a can't miss idea - a wonderful, blessed, absolutely fabulous idea and then, because you are so stupid that next to you a stump is a fountain of wisdom, you invest in it because it "just can't miss".

There is nothing in this world that says a stock that went down can't keep going down nor is there anything that says a stock that went up must keep going up. There is also nothing that says that just because winter is coming that energy stocks must go up just because. Or do they? Here is an "idea stock" that maybe we should start to watch.

If for the past 6 years you had started tracking XLE on a weekly basis in September you would have wound up with some wonderful, nearly automatic money. (I didn't but that's just me).

Here is what XLE looked like on a quarterly basis in each of those six last quarters of the year.

It is interesting that in the first quarter of '03 XLE put out a stone cold dummy spot and had you invested your portfolio in energy at $25 at that time you would have doubled your money in three years. (I didn't do this either - back in '03 I didn't know much about "dummy spots").

Now this trade isn't automatic - you have to look for entry points and watch for exits too. This is what this year's looked like.

You can see based on the increasing volume in September that a bottom is forming. The last week in September served as a confirmation but I say wait for October to make the trade and any close above the third week in September (X marks the spot) would be a good buy point. Then, because of the warmish winter on the East Coast (so far) a new dummy spot top formed based on lack of interest in the energy sector at that time. If that wasn't a good enough indicator the next week should have been a solid tip off (steepling) and you could have gotten out at that time. By that time everyone in the world kind of knew that the East was enjoying spring like temps anyway.

So there you have it. Or do you? One thing I do know is that even if we don't have a cold winter we sure as shootin' are going to have a hot spring, summer and fall and guess what will happen with energy then. Do the words "air conditioning" mean anything to you?

I know I plan to keep a close eye on the sector from here on out as it might be taking off and soon.


Steven said...

So is the dummy spot simply a candle whose range is very tight?

or better yet, culd you offer an overview of what makes a dummy a dummy.


p.s. in response to your comment here is your chance to make my best of 2007

Marlyn Trades said...

A "dummy spot" is what we used to call an NR7 or narrowest range in the last 7 candles. It is a "dummy spot" because any dummy can tell that the stocks price is probably going to reverse there.

There are Blogs out there that do a whole lot better job than I do at explaining this stuff - I just use it and report on the results.


Great idea