Avoid this Common Stock Trading Mistake

by Darrin Donnelly on March 2, 2011

Click on chart to enlarge.

Click on chart to enlarge.

When the stock market begins a downtrend, the most important thing a Darvas trader must do is keep the downtrend in proper perspective.

Whenever a new downtrend begins, there is no shortage of panicked doomsayers and catastrophic predictions.  But the fact is that the majority of downtrends decline about 15% from peak to valley and they usually last about 6-12 weeks (we’re currently two weeks off the peak in this pullback). 

These typical downtrends are perfect base-building opportunities for top stocks that need to consolidate before the next big move.  In that sense, not only are these downtrends normal, they’re also constructive.  We actually LIKE to see them.  [click to continue…]

Stock Market Poised to Make Decisive Move

by Darrin Donnelly on February 27, 2011

Click on chart to enlarge.

Click on chart to enlarge.

The market is at a crossroads moment and I expect to see a decisive move – one way or the other – in the coming days. 

On the bullish side of the road, there is optimism that last week’s Libya-induced pullback was an overreaction by investors.  After all, the economy is still showing signs of improvement and, despite a strong uptrend since September, market multiples remain below historic overvalued levels. 

From a technical standpoint, bulls were able to cheer the NASDAQ’s clear support at the 50-day moving average line, a break back above the 3-month trendline, and a close on Friday in the upper-half of last week’s range.

On the bearish side of the road, some analysts are concerned that last week’s surge in oil prices is only the beginning of a larger trend that would become a huge weight on the shoulders of a fragile economic recovery. 

Technically speaking, bears point to the fact that the NASDAQ does look due for a rest and last week’s rally attempt on Thursday and Friday came on weaker volume. 

As a trader, the wise move here is to take your foot off the gas as we approach this crossroads moment.  Let the market give us a clear signal before aggressively moving in either direction.  [click to continue…]

How to Profit in a Market like This

by Darrin Donnelly on February 24, 2011

Click on chart to enlarge.

Click on chart to enlarge.

When the market shifts into a downtrend, it can happen quickly. 

Last week, we were humming along in a powerful uptrend that continued to produce higher highs and higher lows.  On Tuesday and Wednesday, the sentiment changed dramatically. 

High-volume selling walloped the market, dropping the NASDAQ nearly 4% lower in just two days.  The increased volume during these two sessions gave us our fourth and fifth distribution days in less than one month.  The NASDAQ also slashed through its three-month trendline and its 50-day moving average (marking the first time the NASDAQ has traded below the 50-day line since September 2nd of last year). 

All this action confirms that we have shifted into a Stage 4 Downtrend.

This abrupt move lower was triggered by the chaos in Libya, which has caused oil prices to skyrocket.  Investors are worried that this could be just the beginning of a prolonged rise in energy prices, which could put pressure on the rebounding economy.  (I also happen to think that many investors used the news from the Middle East as a good reason to take some profits after riding the strong uptrend that began more than six months ago.)

Regardless of what the causes were, our objective is to make money from this shift in the market’s trend. 

Here are two ways to profit from this break in the trend. [click to continue…]

The “Dirty Little Secret” of Successful Trading

by Darrin Donnelly on February 23, 2011

Let’s say two successful fund managers approach you with the opportunity to invest with them.

Both of these fund managers have been very successful over the past five years.  In fact, they have both achieved an identical average annual return of 50%.

The key difference is that Fund Manager A shows his trade-by-trade record and you see that he has booked a profit on an incredible 80% of his trades!

Fund Manager B, on the other hand, actually had many more losing trades than winning trades.  His winning percentage was just 25%.

With this information, which fund manager would you choose to invest with?

How you answer this question tells a lot about how successful you are as a trader. [click to continue…]

5 Energy Stocks to Watch

by Darrin Donnelly on February 22, 2011

Click on chart to enlarge.

Click on chart to enlarge.

I’ve been beating this drum for a while now, but with the recent political unrest in the Middle East, it’s looking even more likely that 2011 could be a hugely profitable year for energy stocks.

When the energy sector is hot, not only can it lead you to some big-earning, fast-moving growth stocks within the group, but having a portion of your portfolio in energy can be an excellent hedge trade. 

High oil and gas prices can often weigh down the majority of the market while rocketing energy stocks higher.   This means that it’s not uncommon to see days when the NASDAQ falls 1% or more and a top energy stock is up 5% or more. 

With this in mind, here are five powerful energy stocks you should be considering. [click to continue…]

Why Darvas Boxes Work

by Darrin Donnelly on February 16, 2011

Click on chart to enlarge.

Click on chart to enlarge.

Nicolas Darvas developed his famous method for identifying stock trends using “Darvas Boxes” in the late 1950s. 

His goal was to create a trading system that allowed him to ride a powerful stock’s rising trend for as long as it remained in that rising trend. 

This is obviously a simple and logical concept, but extremely difficult to implement.  The difficulty lies in deciphering what is a “normal” correction within a rising trend and what is an “abnormal” correction, which breaks the rising trend.

There are numerous methods used for determining stock and commodity trends.  There’s the original Dow Theory, Jesse Livermore’s “Pivotal Points,” Richard Donchian’s moving averages, the famous Turtle breakout system, classic chart patterns, and on and on this list could stretch.  All of these methods work to a certain extent and a successful trend trader usually implements portions of each.  

Like the trend trading strategies listed above, the Darvas Box System stands the test of time. [click to continue…]