ibd meetup

IBD MEETUPPutting it all togetherOrganizers – Tom Ellis and Lee TannerCreating a Watch list - Presented By Tom EllisPetaluma, CASeptember 12, 20127:00 – 9:00 PM

We Are Amateur VolunteersNon-Professionals

•We are not offering Investing Advice.•Not Recommending Any Stocks.•Not Selling Anything.•No Affiliation with IBD.•All investing has substantial risks. •You can suffer huge losses.

Making a watch list

“You should be looking for stocks with High Earnings, High Return on Equity and High Relative Strength.”

-William J. O’Neil

Making a watch list

• All of the tools we use to build our watchlist are not premium tools. All you need is access to IBD’s website.

• In order to make a watch list we need to come up with a list of stocks that have High Earnings, High Return on Equity or Margins, and High Relative Strength.

• These stocks need to be near a buy point and we must be ready and have confidence that we have selected well.

• The watch list must contain no more than 7-8 stocks. We want the best 7-8 stocks out of the 8,000 stocks that are trading.

Making a watch list

Manage Portfolio• Hold Good Stocks• Practice Patience• Add to Best Stocks• ID Super Stocks• Margin Use

Sell Just Right• Down 7% to 8%• Up 25% - Most• Sell Rules – for the Super Stocks

Review Results• Keep Good Records• Careful Review• Honest Appraisal• Learn from Experience

Study, Learn and Make Plans for 2 - 6

Make A CAN SLIMWatch List

Buy at Right Time and Right Way• Market Up Trend• Base Breakouts• Scale-In (Pyramid)• Only off Watch List

Pick Only The Very Best Stocks

Write Rules & Learn Enough to Follow Them

Post Analysis

Weekly Watch List Routine

Saving Watch for Post Analysis

Making a watch list – Main Bullet Points Page 1• Starting with a good screen or list. We’ll use the IBD 50

for now.• Add columns to our list to make notes and remove stocks

we don’t want to buy.• Include only stocks with Top Fundamentals. Remove

Stocks that don’t have High Earnings and High Return on Equity (or Pre Tax Margins).

• See if the stocks on the list are near a buy point.• Only include stocks when they are near a buy point in a primary

chart pattern.• If a stock is more than 5% past a buy point do not include the stock

on your watchlist.

Making a watch list – Main Bullet Points Page 2• Look more closely at these stocks that are near buy

points to decide whether we really want to own them.• Review additional fundamental factors included in the IBD 50

download and remove some stocks with major flaws.• Review Stock Checkup.

• Less than 3 flaws is very good. • Greater than or equal to 4 flaws and less than or equal to 7 flaws is

average. • Greater than 8 flaws is poor.

• Looking at the chart more closely.• Is it a first or 2nd stage base?• Is the Relative Strength good enough for me to want to own it?• Is the Pattern Classic or sound?• Is the Base long enough?• Is the base depth correct?

Making a watch list

• Download IBD 50 list

Making a watch list

Making a watch list• Save file to your hard drive. Change Type from Web to Excel

Workbook.

Making a watch list

on your watchlist.

Making a watch list

• Go to http://www.meetup.com/petalumaibd/

• Under the more tab go to files and download the file called “Weekly Watchlist”. Save this file to your hard drive.

• Copy columns A-P from the most recent tab in the “Weekly Watchlist” and Insert the copied columns into the IBD 50 list you just downloaded. Insert these columns before Column A.

Making a watch list• Copy these columns (A-P) from the Weekly Watchlist and insert

into your IBD 50 download. To do this, highlight the columns and right click while they are highlighted.

Making a watch list• Insert Copied Columns here. If you highlight column A then right

click with the mouse button you will see this menu.

Making a watch list• Note that only some stocks have a “Y” in Column H.• This Expression includes High Earning and High ROE Plus PreTax Margins. See next slide for details.

• =IF(AND(G15>=30,D15>=20),"Y",IF(AND(G15>=20,D15>=50),"Y",IF(AND(G15>=10,D15>=100),"Y","")))• Clear any values from Columns I10 through Column P59.

on your watchlist.

Making a watch list• There are a few reasons we want these extra columns.

• The first filter we are going to apply to the list is to only look at stocks that have “High Earnings” and “High Return on Equity Plus Pre-Tax Margins.” I use the most recent quarterly earnings increase (C) for the earnings. I add the Annual Return on Equity and Annual Pre-Tax Margins together for the ROE PTM number. In his book HTMMIS O”Neil suggests selecting stocks with a high Return on Equity in the “A” section. In his advanced seminars he ammends this statement and says High Return on Equity or High Pre Tax Margins. We lump them together for our filter.

• The requirement to pass this filter is• > 30 ROE PTM and > 20 EPS or• > 20 ROE PTM and > 50 EPS or• > 10 ROE PTM and > 100 EPS

• Other reasons for the extra columns include:• Add more filters later• See some important data more clearly• Make notes we can refer back to when trading• Make notes we can refer to when trading during the upcoming week.

Making a watch list

• Apply a filter to Row H so you only see High EPS and High ROE Stocks. By Unchecking the Blank Box you will select the High EPS and High ROE PTM Stocks.

Making a watch list• Notice in Row H that the only stocks that are shown have a Y in

Row D. Now we have a list of all the IBD 50 stocks that have High ROE and High EPS. We are ready to begin our work.

• This takes about 5 minutes to get to this point.

on your watchlist.

Making a watchlist• We now want to look to see if the stock is near a buy point. Since many

people who attend these meetups don’t have a lot of experience in identifying chart patterns, we’ll rely for now on the editorial staff at IBD. Well look at either the print edition of the Monday paper or a pdf, which can be downloaded from the website.

Making a watchlist• Go through each stock on this list. See if the stock is in a buyable base. Go

ahead and include stocks that are up to 5% extended. For now don’t worry about the base stage or whether the base is productive or not. We are trying to get a smaller list of stocks to look more closely at.

• If a stock is in a buyable base put a Y in column I of your IBD 50 list.

Making a watch list• Let’s look at our first stock on the list. Our first candidate is Solar Winds.• Since we only buy stocks that are in primary chart patterns we will not

add SWI to the smaller list of stocks we will look more closely at.• Let’s again review what type of patterns we establish initial positions in.

Only 4% above buy point, good.

What is an add on entry? What is a tight pattern?A 3, 4, or 5 weeks tight pattern is a secondary chart pattern.

If I already hada position thiswould be terrific.For now I needto follow my rulesand only buy the primary chart patters.

• Primary Chart Patterns• Many CANSMLIM investors use primary chart patterns to initiate

an initial position in a stock.• These are the entries that are the easiest to identify, take a long

time to develop, are easy to enter, and offer the highest probability of success.

• Secondary Chart Patterns• Many CAN SLIM investors use secondary chart patterns to add

shares to an existing position in a stock. • These are more difficult to properly interpret, develop more quickly,

are more difficult to enter properly, and offer a lower probability of success.

Making a watch listChart School and Pattern Recognition - Review

• Primary Chart Patterns• Cup with or without Handle - Most Important Pattern

• 7 Weeks Minimum• 20-30% Maximum Depth, up to 50% in Bear Markets

• Double Bottom – Very Important Pattern• 7 Weeks Minimum• 35% Depth, up to 50% in Bear Markets

• Flat Base – Very Important Pattern• 5 Weeks Minimum• 15% Maximum Depth

• Square Box• 4 Weeks Minimum• 15% Maximum Depth

• Saucer with Handle• 7 Weeks Minimum• Usually more shallow than cup and more spread out• 12-20% Maximum Depth, up to 30% in Bear Markets

• Primary Chart Patterns continued

• Ascending Base• 9-16 Weeks• 10%-20% Depth for each pullback

• High Tight Flag• Flagpole

• Stock usually doubles in price (100 to 120%)• Length is typically 4 to 8 weeks

• Flag • Corrects no more than 10-25%• Length is usually 3-5 weeks

• Shakeout Plus Three (Similar to Double Bottom). • 7 Weeks Minimum• 35% Depth, up to 50% in Bear Markets

• IPO Base• 3-4 Week Minimum• Usually corrects no more than 15-30%

• Initial Base• 20-30% Uptrend not necesarily required.

• Secondary Chart Patterns - Traditional

• Correction and Rebound from 50 Day Moving Average• Three Weeks or more Tight• Short Stroke

• Secondary Chart Patterns – Non Traditional to be reviewed at a later date

• 12 of 15 days Up• Confluence of 10, 21, 50, and 200 Day Moving Averages.• Momentum Gap• Stock Corrects 10%• Support at the 10 DMA• Daily or Weekly Shakeouts• Pocket Pivot

Making a watch list

Making a watch listThe words are not clear but it does appear that ALXN is in a base. We’ll call it a buyable base for now and take a closer look at it later. It is 6 weeks long and may be a flat base.

Making a watch listSince this is the first stock that I can add buy, I’ll go over to my spreadsheet and put a “Y” in Column I for ALXN.

Making a watch listApple is 10% above a recent buy point. We generally only include stocks that are within 5% of their buy points.

Making a watch list

ALGN is less than 5% above a recent buy point.

Making a watch list

What is an add on entry? What is a tight pattern?A 3, 4, or 5 weeks tight pattern is a secondary chart pattern.

If I already hada position thiswould be terrific.For now I needto follow my rulesand only buy the primary chart patters.

Making a watch list

• Below 10 Week. Don’t include for now.

Making a watch list

Making a watch list• Now our Spreadsheet looks like this. • Let’s only look in more detail at the 19 Stocks. We’ll add a filter.

Making a watch list

• Starting with a good screen or list. We’ll use the IBD 50 for now.• Add columns to our list to make notes and remove stocks we don’t want

to buy.• Include only stocks with Top Fundamentals. Remove Stocks that don’t

have High Earnings and High Return on Equity (or Pre Tax Margins).• See if the stocks on the list are near a buy point for one of our primary

chart patterns.• Look more closely at these stocks that are near buy points to decide

whether we really want to own them.• Review additional fundamental factors included in the IBD 50 download and remove

some stocks with major flaws.• Review Stock Checkup score.• Looking at the chart more closely.

• Is it a first or 2nd stage base?• Is the Relative Strength good enough for me to want to own it?• Is the Pattern Classic or sound?• Is the Base long enough?• Is the base depth correct?

on your watchlist.

Making a watch list• We have 19 Stocks on our list. • The first thing we will do is to remove BIIB since it has a negative estimate for earnings this

quarter.• If you see Red in this box you want to eliminate these stocks. Red means either Last

Quarters Sales, Current Quarters EPS est, or Current Year EPS % change is negative.• Yellow tells me to be cautious. I won’t remove these now, but I will be a little careful about

adding these stocks to my final watch list.• Next we’ll go to the Stock Checkup.

on your watchlist.

Making a watch list• At the Stock Checkup we will count to see how many deficiencies a stock has.

All negatives are not created equal.• A red dot equals “1”• A yellow dot equals “.5”• If you have a score of 3.5, round up to 4.0.

• We must have High Earnings, High Return on Equity or PreTax Margins, and High Relative Strength to buy a stock.

Making a watch list• When scoring don’t include market condition.• ALXN• Score = 0 which is the best possible.

Making a watch list• ALGN• When scoring don’t include market condition.• Score = 4 which is the best possible.

Making a watch list• QCOR• When scoring don’t include market condition.• Score = 2 which is the best possible.

Making a watch list• TDG• When scoring don’t include market condition.• Score = 3 which is the best possible.

Making a watch list• LULU• When scoring don’t include market condition.• Score = 1 which is the best possible.

Making a watch list• ROST• When scoring don’t include market condition.• Score = 6 which is the best possible.

Making a watch list• RGR• When scoring don’t include market condition.• Score = 5 which is the best possible.

Making a watch list• GNC• When scoring don’t include market condition.• Score = 5 which is the best possible.

Making a watch list• TJX• When scoring don’t include market condition.• Score = 9 which is the best possible.

Making a watch list• WDC• When scoring don’t include market condition.• Score = 8 which is the best possible.

Making a watch list• LOPE• When scoring don’t include market condition.• Score = 5 which is the best possible.

Making a watch list• EW• When scoring don’t include market condition.• Score = 6 which is the best possible.

Making a watch list• ULTA• When scoring don’t include market condition.• Score = 4 which is the best possible.

Making a watch list• FTNT• When scoring don’t include market condition.• Score = 6 which is the best possible.

Making a watch list• TIBX• When scoring don’t include market condition.• Score = 9 which is the best possible.

Making a watch list• BIIB• When scoring don’t include market condition.• Score = 7 which is the best possible.

Making a watch list• V• When scoring don’t include market condition.• Score = 8 which is the best possible.

Making a watch list• DVA• When scoring don’t include market condition.• Score = 10 which is the best possible.

Making a watch list• PETM• When scoring don’t include market condition.• Score = 6 which is the best possible.

on your watchlist.

Making a watch list

• We now have a list that looks like this. We have 19 candidates• We will Put an N in Column J for any stock that has 7 or more

flaws in the stock checkup. We will not do any additional chart or fundamental work on these stocks.

• We remove 6 more stocks based on the Stock Checkup.

Making a watch list

• We now have a list of 13 candidates.• Since we want a list of no more than 7-8 stocks we will focus on the stocks that have

the fewest number of fundamental flaws. Each of these has 3 or fewer flaws.• ALXN, QCOR, TDG, LULU

• The next group we will look at has 4 flaws.• ALGN and ULTA

• The next group has 5 flaws.• RGR, GNC, and LOPE

• The last group of stocks we will look at has 6 flaws.• ROST, EW, FTNT, BIIB, and PETM

on your watchlist.

Making a watch list

• We now have a list of 13 stocks to look at more closely. We are going to first look at the base stage. We will eliminate most stocks if the base stage is higher than 2.

• If the base stage is higher than 2, we will then look to see if the Relative Strength Line is acting properly. If the stock has almost broken out, the RS Line should be near high ground. If the stock is not close to breaking out we will see if the RS Line is moving smartly higher.

• If the Base Stage is 3 or higher and the RS line is lagging badly we will remove the stock from consideration, otherwise we’ll dig deeper

• If the Base Stage is OK, and the the Relative Strength is OK, we will then look to see:• If the shape of the base is proper. (See chapter 2 in HTMMIS) • If the length of the base is proper. • If the depth of the base is proper.

• If it passes each of the above tests we will add the stock to our watch list.

Making a watch list

• Advanced Questions. • For this simulation we will not answer many of these questions. In future sessions here are a

few additional questions we will ask ourselves.• Is it a base on base?• Are there any unusual bars on the chart that need an answer? Daily and Weekly• Is this base structure tighter or looser than the prior base? Daily and Weekly• Does the stock come straight up from the bottom? Daily and Weekly• Is the pattern in the lower half of the base? Daily and Weekly• Is there a volume dry up in the base? Daily and Weekly• Is the handle proper? Daily Only

• Volume drying up?• Not wedging?• Within 15% of the high of the base?• In the upper half of the base?

• Are there any Big Volume Support areas? Daily and Weekly• Is the overall action in the base tight and constructive? Daily and Weekly• Is there a shakeout in the Bottom of the chart? Daily or Weekly• Is the left side of the base disproportionate to the right side of the chart? Daily or Weekly• Is the left side of the base longer then 1 week? Daily or Weekly• Are there any?

• Accumulation Days or Weeks?• Distribution Days or Weeks?• Support Days or Weeks?

Making a watch list

• Here is how we get to the charts.

Making a watch list• William J O’Neil suggest we first look at the weekly charts.

• First a quick primer on Base Counting• Schematic showing 1st and 2nd stage base. The high of base 2

is more than 20% above the pivot point in base 1.

$120.01

$100.00

• Base Counting continued• Schematic showing two 1st stage bases.

$119.99

$100.00

• Base Counting continued• Schematic showing base count reset. The base on the right is now a first stage base.

Making a watch list

ü • Base stage?

• Relative Strength?

• Proper or Classic Shape?

• Proper Depth?

• Proper Length?

All Bases that formbelow 28.78 are first stage bases23.98 X 1.2 = 28.78

Since this base doesnot undercut any of theprior bases it will be the4th 1st stage base

109.96

Forms more than 20% higher than prior base

Making a watch list

• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Since this base doesundercut the prior base,it is a 1st stage base

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Unknown, RS line is improving.

Current Base is 41% Deep.The Nasdaq corrected 13%Sometimes leading stocks can correct2.5 to 3 times the market.This is a little too deep.

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Since this base doesundercut the prior base,it is a 1st stage base

All Bases that formbelow 145.78 are first stage bases121.48 X 1.2 = 145.78 2

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

üü6 Week Flat Base, 14% Deep. Base countdone on Weekly Chart.

See next slide for explanation.

• The only news I could find on TDG for this big down day on heavy volume was this article from Street.COM. It seems to say that the Aerospace/Defense industry declined. The Nasdaq was up .5% on this day. Since it is the heaviest day and week of down volume in the whole base I will not put the stock on my watchlist. Given that everything else about the stock seems good it would be reasonable for you to include it on your watch list.

• TransDigm Group (TDG) pushed the Aerospace/Defense industry lower today making it today's featured Aerospace/Defense laggard. The industry as a whole closed the day down 1.9%. By the end of trading, TransDigm Group fell $8.72 (-6.8%) to $120.01 on heavy volume. Throughout the day, 1.9 million shares of TransDigm Group exchanged hands as compared to its average daily volume of 501,500 shares. The stock ranged in price between $117.77-$129.14 after having opened the day at $128.55 as compared to the previous trading day's close of $128.73. Other company's within the Aerospace/Defense industry that declined today were: Sifco Industries (SIF), down 8.3%, Hexcel Corporation (HXL), down 4.4%, Heico Corporation (HEI), down 4%, and Rockwell Collins (COL), down 4%.

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

• Base stage?

• Proper Depth?

• Proper Length?

üUnknown, RS line is improving.

36% Deep

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

üüüü

Making a watch list

• Base stage?

• Proper Depth?

• Proper Length? 1

Making a watch list

• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

üüüü

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

Making a watch list

ü• Base stage?

• Proper Depth?

• Proper Length?

üüü

Making a watch list

• Apply Filter to “Put on Watchlist.” Uncheck N and Blanks to see Column Headings and your watchlist stocks.

Making a watch list

• Your watchlist.

• You will notice that there are not any barnburner stocks on the watch list this week and the list is small.

• What is next?• What else do I need to know.

Making a watch list

• Available technical resources to create watchlist.• Small Charts in IBD 50 section of newspaper.• How to Make Money in Stocks by William J. O’Neil• IBD Pamphlets• IBD University - Charting the Course Series• Files section of Petaluma Meetup

• “PP Chart School and Pattern Recognition - Module 3”• A detailed review of Base Counting

• “PP Chart School and Pattern Recognition - Module 2”• A detailed review of the Primary Chart Patterns

Making a watch list

• Available fundamental resources to create watchlist.• IBD Stock Checkup - look up fundamental information• Investors.com Home Page - look up information about the company

and read articles. Find out what is New.• Earnings Whisper - lookup next earnings release date.• Earnings.com - historic record of a companies Quartely Earnings• Market Watch look up news and articles written about a company

by date.• Yahoo Finance – Get quarterly and annual estimates for sales and

earnings for the current and next period.

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