It’s a risky business and shady too. If you see the history of Delta Corp CFO appointments, it’s always been frequent.

MARK MINERVINI QUOTES

My goal is not to buy at the lowest or cheapest price but at the “right” price, just as the stock is ready to move significantly higher. Trying to pick a bottom is unnecessary and a waste of time; it misses the whole point.

Transition from Stage 1 to Stage 2

There should always be a previous rally with an escalation in price of at least 25 to 30 per- cent off the 52-week low before you conclude that a stage 2 advance is under way and consider buying.
In the following figure, note that the 200-day moving average for Amgen has turned up and is in a definite uptrend. The 150-day moving average is above the 200-day moving average, and the stock is trading above both the 150-day and 200-day moving average during the markup phase. Note, too, the surging volume on the rallies, contrasted with lighter volume on pullbacks.

This would be the point at which I would start to consider a new pur- chase; any earlier lacks confirmation and is premature, meaning you run the risk of being stuck in dead money. Most amateurs would think the stock is too high and wish they had bought it when it was lower, using hindsight as a guide. That’s why most amateurs don’t make big money in stocks.

Stage 3—The Topping Phase: Distribution

Stage 3 Characteristics

Volatility increases, with the stock moving back and forth in wider, looser swings. Although the overall price pattern may look similar to stage 2, with the stock moving higher, the price movement is much more erratic.
There is usually a major price break in the stock on an increase in volume. Often, it’s the largest one-day decline since the beginning of the stage 2 advance. On a weekly chart, the stock may put in the largest weekly decline since the beginning of the move. These price breaks almost always occur on overwhelming volume.
The stock price may undercut its 200-day moving average. Price volatility around the 200-day (40-week) moving average line is common as many stocks in stage 3 bounce below and above the 200-day average several times while topping out.
The 200-day moving average will lose upside momentum, flatten out, and then roll over into a downtrend.

How to Pinpoint Stage 2

The Trend Template is a qualifier. If a stock doesn’t meet the Trend Template criteria, I don’t consider it. Even if the fundamentals are compelling, the stock must be in a long-term uptrend—as defined by the Trend Template—for me to consider it as a candidate.

Trend Template

1. The current stock price is above both the 150-day (30-week) and the 200-day (40-week) moving average price lines.
2. The 150-day moving average is above the 200-day moving average.
3. The 200-day moving average line is trending up for at least 1 month (preferably 4–5 months minimum in most cases).
4. The 50-day (10-week) moving average is above both the 150-day and 200-day moving averages.
5. The current stock price is trading above the 50-day moving average.
6. The current stock price is at least 30 percent above its 52-week low. (Many of the best selections will be 100 percent, 300 percent, or greater above their 52-week low before they emerge from a solid consolidation period and mount a large scale advance.)
7. The current stock price is within at least 25 percent of its 52-week high (the closer to a new high the better).
8. The relative strength ranking (as reported in Investor’s Business Daily) is no less than 70, and preferably in the 80s or 90s, which will generally be the case with the better selections.

Bases 1 and 2 generally come off a market correction, which is the best time for jumping on board a new trend. As the stock makes a series of bases along the stage 2 uptrend, base 3 is a little more obvious but usually still tradable. By the time a fourth or fifth base occurs (if it gets that far), the trend is becoming extremely obvious and is definitely in its late stages. By this point, abrupt base failures occur more frequently.

base counting will not tell you if a stock has topped or is about to move substantially higher. It does, however, provide a great way to gain perspective on where you are within the stage 2 advance.

The goal is not to buy at the cheapest price but to sell your stock for significantly more than the price you paid in the shortest period. That’s how superperformance is achieved.

If your stock experiences its largest daily and/or weekly price decline since the beginning of the stage 2 advance, this is a sell signal in most cases even if it comes on the heels of a seemingly great earnings report.

Many times before a fundamental problem is evident, there will be a hint in the form of a material change in price behavior. That change should always be respected even if you don’t see any reason for the sud-den change in sentiment. Earnings may still look good. The story may still be intact. However, in most cases, you’ll be far better off getting out—shoot- ing first and asking questions later—than waiting to learn the reason why. When a stock that had been in a strong stage 2 suddenly goes into a stage 3 topping pattern or transitions quickly into stage 4, don’t sit there and assume that everything is fine.

Let the Wind Fill Your Sails
As we’ve discussed in this chapter, to achieve superperformance, you need the powerful force of institutional buyers on your side to propel your stock’s price sharply higher. A proper stage 2 uptrend provides evidence that insti- tutions are indeed stepping up to the plate, just as a stage 4 decline clearly demonstrates the opposite.

You want to see same-store sales increasing each quarter. High-single-digit to moderate-double-digit same-store sales growth is high enough to be considered robust but not so high that it’s unsustainable (25 to 30 percent or more same-store sales growth is definitely unsustainable over the long term)

Interestingly, cyclical stocks have an inverse P/E cycle, meaning they generally have a high P/E ratio when they are poised to rally and a low P/E near the end of their cycle.

Inventories and supply and demand are important variables in analyzing the dynamics of cyclical stocks. When the P/E ratios of cyclical stocks are very low after earnings have been on the rise for many months or several years, it’s often a sign that they’re near the end of their up cycle. When P/Es are superhigh and you’ve heard nothing but doom and gloom about the company or industry for an extended period, the bottom may be near.

Specific Industry Groups Lead New Bull Markets
The formation of a bear market bottom typically begins with signs of accu- mulation in certain market sectors or segments.

How do you find which groups are leading? Follow the individual stocks. I like to track the 52-week new high list. The industry groups with a healthy number of stocks hitting new highs early in a bull market will often be the leaders. Your portfolio should consist of the best companies in the top four or five sectors.

Buying into the leading areas early in a bull market can lead to signifi- cant capital gains. Some groups start emerging late in a bull cycle and can lead during the next upturn after a bear market. It’s definitely worth inves- tigating the industry groups in which the most stocks were resisting the decline and then subsequently broke into new highs while the market was coming off its lows or during the market’s initial few rallies.
The top relative strength leaders in these groups typically lead their group’s advance from the beginning and are likely to show the greatest appreciation. When you see a growing number of names in a particular industry making new 52-week highs (especially coming off a market low), this could be an indication that a group advance is under way.

I have found that more often than not, the best stocks in the leading groups advance before it’s obvious that the group or sector is hot. Therefore, I focus on stocks and let them point me to the group.

If a company has posted very good quarterly results that are much better than were anticipated by analysts, there are probably more good quarters ahead. If a company is performing well with earnings surprises, other companies in the same industry or sector may post some upside surprises as well.

Because earnings surprises have a lingering effect, we want to focus on companies that beat estimates and avoid firms that have negative earnings surprises. One way to find candidates is to check to see if earnings reported in the last couple of quarters were better than expected.

Look for companies for which analysts are raising estimates. Quarterly as well as current fiscal year estimates should be trending higher; the bigger the estimate revisions, the better.

Really suc- cessful companies generally report earnings increases of 30 to 40 percent or more during their superperformance phase.

The ideal situation is when a company has higher sales vol- ume with new and current products in new and existing markets as well as higher prices and reduced costs. That’s a winning combination.

The best kind of margin improvement comes from pricing power because of strong demand for a company’s products.

Although it’s not uncom-

148 TRADE LIKE A STOCK MARKET WIZARD
mon for stocks to sell off on profit taking after a big rally and decline on news, a superperformance stock will come back and resume its advance. For a true superperformer, there should definitely not be a huge sell-off that breaks the whole leg of the stock’s upward move.
After a company reports its earnings, my focus turns to the postearn- ings drift (PED), which suggests that it may not be too late to buy a stock after it has reported better than expected earnings. Even if you miss the first upward reaction after results are reported, the postearnings drift after an sig- nificant surprise can last for some time. Stock price movements from signifi- cant earnings surprises not only are felt right way but can have a longer-term effect beyond the immediate price adjustments. Many studies have shown that the effect can persist for months after an earnings announcement.

How do you know what the market wants other than the published estimates? Study how the stock price responds. Was the stock rewarded or punished when the results came in? Was an upside surprise big enough to move share prices higher, or did the stock sell off? Even if an earnings report appears to be a surprise, you can judge the true perception only from the response of the share price. Unexpected surprises can have a dra- matic effect

better than expected earn- ings along with positive earnings guidance. A company should not only be doing well but be doing better than analysts anticipate.

In some cases, the reaction to earnings guidance is stronger than the reaction to the actual earnings report when it is announced. By track- ing what a company says and then what develops later on, you can ascertain the quality and tendencies of the company’s guidance.

In dealing with future earnings, it’s important not to look too far out. Growth investors tend to have a “what have you done for me lately” mentality. Therefore, focus on what the company is saying about the upcom- ing quarter and the current fiscal year. My rule of thumb is to take long-term forecasts with a grain of salt. No one, not even management, can accurately forecast what a company will earn or what its rate of growth will be a year or two down the road. If they say, “Business conditions will be tough this year, but we see improvement coming next year,” that’s not positive guid- ance. That’s spin.

The best situation for rapid earnings growth is to be hitting on all cylinders as sales accelerate and profit margins expand simultaneously.
Look for what I call a Code 33 situation, three quarters of acceleration in earnings, sales, and profit margins. That’s a potent recipe.

As a bull market enters its later stages (generally after one or two years), many of the
161

162 TRADE LIKE A STOCK MARKET WIZARD
leadership stocks that led the market advance will start to buckle while the broad market averages march on toward their tops. Typically, a second wave of postleadership stocks start to perform relatively well as money rotates out of the true leaders and into some of the group’s constituents, laggard follow-up stocks, or defensive groups such as drugs, tobacco, utilities, and food stocks that are thought to be less sensitive to an economic downturn. Follow-on stocks and laggards, however, rarely experience the length or, more important, the magnitude of the price move that true market leaders accomplish. When you see this rotation occurring, it’s a warning that the market rally may be entering its later stage. The ultimate market top may still be weeks or even months away, but this internal market action is a pro- verbial shot across the bow that should get your attention.

After a market correction, many investors are busy hoping to break even on the open losses they hold or are convinced that the end of the world is coming because they got crushed during the pre- vious decline and refuse to acknowledge the buy signals individual leading stocks are offering.
Making it even more difficult is the fact that leading stocks always appear to be too high or too expensive to most investors. Market leaders are the stocks that emerge first and hit the 52-week-high list just as the market is starting to turn up. Few investors buy stocks near new highs, and fewer buy them at the correct time. They focus on the market instead of the individual market leaders and often end up buying late and owning laggards. Adding to the distraction is the fact that the news media are usually wrong at major turning points. At a market bottom they’ll predict the end of the world, and at a top the same people will say you can’t go wrong investing in stocks.

More than 90 percent of superperformance stocks emerge from bear markets and general market corrections. The key is to do your homework while the market is down; then you will be prepared to make big profits when it turns up.

Many inexperienced investors will be looking to buy a pullback that rarely materializes during the initial leg of a new powerful bull market, which from the onset will appear to be overbought.
Typically, the early phase of a move off an important bottom has the characteristics of a lockout rally. During this lockout period, investors wait for an opportunity to enter the market on a pullback, but that pullback never comes. Instead, demand is so strong that the market moves steadily higher, ignoring overbought readings. As a result, investors are essentially locked out of the market. If the major market indexes ignore an extremely overbought condition after a bear market decline and your list of leaders expands, this should be viewed as a sign of strength. To determine if the rally is real, up days should be accompanied by increased volume whereas down days or pullbacks have lower overall market volume. More important, the price action of leading stocks should be studied to determine if there are stocks emerging from sound, buyable bases.

In the early stages of a market-bottom rally it’s absolutely critical to focus on leading stocks if your goal is to latch on to big winners. Sometimes you will be early. Stick with a stop-loss disci- pline, and if the rally is for real, the majority of the leading stocks will hold up well and you will have to make only a few adjustments. However, if you get stopped out repeatedly, you may be too early.
The Best Stocks Make Their Lows First
To make big money in the stock market, you’re going to need to have the overall stock market’s primary trend on your side. A strong market trend is not something you want to go against. However, if you concentrate on the general market solely for timing your individual stock purchases, you’re likely to miss many of the really great selections as they emerge at or close to a market bottom.
The true market leaders will show strong relative price strength before they advance. Such stocks have low correlation with the general market averages and very often act as lone wolves during their biggest advancing stage.

Although it’s true that many of the market’s biggest winners are part of industry group moves, in my experience, often by the time it’s obvious that the underlying sector is hot, the real industry leaders—the very best of the breed—have already moved up dramati- cally in price.

By applying a bottom-up approach to find the best relative performers in the early stages of a bull market, you will put yourself in a position to latch

CHAPTER 9 FOLLOW THE LEADERS 167
on to some really big winners. The stocks that hold up the best and rally into new high ground off the market low during the first 4 to 8 weeks of a new bull market are the true market leaders, capable of advancing signifi- cantly. You can’t afford to ignore these golden opportunities

Market leaders tend to stand out best during an intermediate market correction or in the later stages of a bear market. Look for resilient stocks that hold up the best, rebound the fastest, and gain the most percentage- wise off the general market bottom. This, too, will identify potential leading names. After an extended bear market correction, look for stocks that hold their ground or, even better, work their way higher while the general mar- ket averages trend lower. A series of higher lows during lower lows in the general averages is a tip-off that a potential market leader is in the making. The relative strength line of the stock should show steady improvement as the market declines. It’s important to study carefully the price action of individual companies with new positive developments and strong earn- ings per share during major market declines. Many of the most strongly rebounding stocks and the ones that hold up the best are likely to become the next up cycle’s superperformers.

Volume on the major averages should also be watched for signs of distribution. If this is accompanied by increasing volume on down days versus up days, it may be too early, and you may need to revert back to cash for protection.

Which Leaders Should I Buy First?
As you shift into buying gear, the question becomes, Which stocks should I buy first? It’s simple. Buy the strongest first. Coming off a market low, I like to buy in order of breakout. The best selections in your lineup will be the first to burst forth and emerge from a proper buy point and into new high ground. The ones that act the strongest are generally the best choices at this point. Let the strength of the market tell you where to put your money, not your personal opinion, which rarely is a good substitute for the wisdom of the market. Ultimately, opinions mean nothing compared with the ver- dict of the market. The stocks that emerge first in the early stage of a new bull market with the greatest power are generally the best candidates for superperformance.

When a market is bottoming, the best stocks make their lows ahead of the absolute low in the market averages. As the broader market aver- ages make lower lows during the last leg down, the leaders diverge and make higher lows. It’s important to watch very carefully at this junc- ture and stand ready to cut your losses if volatility widens too much in your individual holdings. If more leaders emerge and the overall market strengthens, be ready move to an even more aggressive long bias.

A Double-Edged Sword
Just as the leaders lead on the upside, they also lead on the downside. Why? After an extended rally or bull market, the market’s true leaders have already made their big moves. The smart money that moved into those stocks ahead of the curve will move out swiftly at the first hint of slowing growth. When the leading names in leading industry groups start to falter after an extended market run, this is a danger signal that should heighten your attention to the more specific signs of market trouble or possible trou- ble in a particular sector.
Most stocks experience a relatively severe decline in price after a super- performance phase has run its course. This is due to profit taking and the anticipation of slower growth ahead. Scientific evidence and my personal experience indicate that the chances of a superperformer giving back most or all of its gains are high. You must have a plan to sell and nail down prof- its when you have them. History shows that one-third of superpeformers give back all or more of their entire advance. On average, their subsequent price declines are 50 to 70 percent, depending on the period measured.

Bull markets sometimes roll over gradually, whereas bottoms often end with a sudden sell-off, followed by a strong rally. As the leaders start to buckle, the indexes can move up farther or start to churn, moving sideways. That occurs because cash stays in the market and rotates into laggard stocks. The indexes hold up or even track higher on the backs of the stragglers. Watch out! When this happens, the end is near and the really great opportu- nities may have already passed.

you should concentrate on the new 52-week-high list. Many of the market’s biggest winners will be on the list in the early stages of a new bull market. You should also keep an eye on stocks that held up well during the market’s decline and are within striking distance (5 to 15 per- cent) of a new 52-week high.

A common characteristic of virtu- ally all constructive price structures (those under accumulation) is a con- traction of volatility accompanied by specific areas in the base structure where volume contracts significantly.

I want to see the stock move from greater volatility on the left side of the price base to lesser volatility on the right side.

The progressive reduction in price volatility, which will be accompanied by a reduction in volume at particular points, eventually signifies that the base has been completed.

line of least resistance. Tightness in price from absolute highs to lows and tight closes with little change in price from one day to the next and also from one week to the next are gen- erally constructive. These tight areas should be accompanied by a signifi- cant decrease in trading volume.

A significant contraction in volume associated with tightness in price signals supply has stopped coming to market and the line of least resistance has been established.

If the stock’s price and volume don’t quiet down on the right side of the consolidation, chances are that supply is still coming to market and the stock is too risky.

I rarely buy a stock that has corrected 60 percent or more; a stock that is down that much often signals a serious problem. Most constructive set- upscorrectbetween10percentand35percent.Youwillhavemoresuccess if you concentrate on stocks that correct the least versus the ones that cor- rect the most. Under most conditions, stocks that correct more than two or three times the decline of the general market should be avoided.

By demanding that the price action display VCP characteristics, you will increase your chances of identifying a stock in which supply is diminishing and a sound point for entry is developing, which will lead to an immediate and sustained advance.

Avoid a stock that follows a big demand day with even bigger down days on vol- ume. Large up days and weeks on increased overall volume, contrasted with lower-volume pullbacks, are another constructive sign that the stock you are considering is under institutional accumulation. Look for these traits before you buy.

Price Spikes Preceding a Consolidation
Often a price spike will occur on the left side just before a price correc- tion or consolidation begins.

Jesse Livermore described the pivot point as the line of least resistance. A stock can move very fast once it crosses this threshold. When a stock breaks through the line of least resistance, the chances are the greatest that it will move higher in a short period of time. This is the case because this point represents an area where supply is low; therefore, even a small amount of demand can move the stock higher. Rarely does a correct pivot point fail coming out of a sound consolidation.
The next chart shows Mercadolibre (MELI), which has a technical footprint of 6W 32/6 3T, meaning that the basing period occurred over six weeks, with corrections that began at 32 percent and concluded at 6 percent at the pivot.

During the tightest section of the consolidation (the pivot point), vol- ume should contract significantly.

Now, just as the price breaks above the pivot on increasing volume, that’s where you want to place your buy order.

Extrapolating Volume Intraday
After the last narrow contraction in a VCP pattern on light volume, ide- ally you want to see an upward move in the making on stronger than usual volume. Let’s say that a stock normally trades 1 million shares. Two hours into the trading day, 500,000 shares—half the usual volume—has already exchanged hands and the stock is moving up. You still have four and a half hours to go. Therefore, you can comfortably extrapolate that on the basis of the intraday volume thus far, the volume for the day could easily be 300 to 400 percent (or more) of the average daily volume. Now, when the price goes through the pivot point, you can place your trade.

If the pivot point is tight, there is no material advantage in getting in early; you will accomplish little except to take on unnecessary risk. Let the stock break above the pivot and prove itself.

Once the stock successfully breaks out, the stock price should hold its 20-day moving average and in most cases should not close below it.

Don’t buy just because a trendline is breached; wait for the stock to turn. The spot to begin buying is just as the high of the pause is taken out. This could occur at the cheat area or the handle.

Regardless of your methodology or approach to stock investing, there is only one way to protect your portfolio from a large loss, and that is to sell when you have a small loss before it snowballs into a huge one. In three decades of trading, I have not found a better way.

Avoiding large losses is the single most important factor for winning big as a speculator. You can’t control how much a stock rises, but in most cases, whether you take a small loss or a big loss is entirely your choice.

Every major correction begins as a minor reaction. You can’t tell when a 10 percent decline is the beginning of a 50 percent decline until after the fact, when it’s too late.

When funda- mental problems arise in a public company, management is probably your worst source of information.

Your goal is not risk avoidance but risk management: to mitigate risk and have a significant degree of control over the possibility and amount of loss.

The Initial Stop-Loss
Before buying a stock, I establish in advance a maximum stop loss: the price at which I will exit the position if it moves against me. The moment the price hits the stop loss, I sell the position without hesitation.

You shouldn’t assume that a stock will reset if it moves against you. You should always protect yourself and cut your loss. However, if a stock knocks you out of your position, don’t automatically discard it as a future buy candidate. If the stock still has all the characteristics of a potential winner, look for a reentry point. Your timing may have been off. It could take two or even three tries to catch a big winner. This is a trait of profes- sional traders. Amateurs are scared of positions that stop them out once or twice or just weary of the struggle; professionals are objective and dispassionate.

Selling into strength is a learned practice of professional traders. It’s important to recognize when a stock is running up rapidly and may be exhausting itself. You can unload your position easily when buyers are plen- tiful. Or you could sell into the first signs of weakness immediately after such a price run has broken down. You need to have a plan for both selling into strength and selling into weakness.

The importance contingency planning plays is that it enables you to make good decisions when you’re under fire, when you need it the most.

very important rule: always keep your risk at a level that is less than that of your average gain.
At What Point Should You Cut a Loss?

A rule of thumb could be to cut your losses at a level of one-half of your average gain.

Avoid the Trader’s Cardinal Sin
Allowing your loss on a trade to exceed your average gain is what I call the trader’s cardinal sin.

if your winning trades produce a gain of 15 percent on average, you should sell any declining stock at no more than 7.5 percent off the purchase price.

If you can’t time a purchase well enough that you need more than 10 percent fluc- tuation from your point of purchase, something is wrong with your timing and selection criteria.

In my experience, a 10 per- cent decline signals that something is wrong with the trade, assuming that you purchased it correctly in the first place.

Always Determine Your Risk in Advance
The time to think most clearly about where you will exit a position is before you get in. By the time you purchase a stock, the price at which you will sell at a loss should already be determined. When a stock drops to your defen- sive sell line, there is no time for vacillating or second-guessing. There is no decision to be made; it’s been decided ahead of time. You just carry out your plan; you should write down your sell price before you buy each stock.

Not defining and committing to a prede- termined level of risk cost traders and investors more money than any other mistake.

Most investors can’t stand to take losses. Unfortunately, as a result, they suffer much bigger losses that do lasting damage to their portfolios. This is ironic;

Sooner or later, however, one of your stocks will dive under your sell price before you can react; this is called slippage. My advice is to get out immediately. Take whatever the next bid price is. Such a hard-falling stock is sending a warning.

How to Handle a Losing Streak
A losing streak usually means it’s time for an assessment. If you find yourself getting stopped out of your positions over and over, there can only be two things wrong:

1. Your stock selection criteria are flawed.

2. The general market environment is hostile.

Leading stocks often break down before the general market declines. If you’re using sound criteria with regard to fundamentals and timing, your stock picks should work for you, but if the market is entering a correction or a bear market, even good selection criteria can show poor results.

If you’re experiencing a heavy number of losses in a strong market, maybe your timing is off.

By pyramiding up when you’re trading well and tapering off when you’re trading poorly, you trade your largest when trading your best and trade your smallest when trading your worst. This is how you make big money as well as protect yourself from disaster

In my trad- ing, I try to buy or add to a position in the direction of the trade only after it has shown me a profit; even if I’m buying a pullback, I generally wait for the stock to turn up before going long. The lesson: never trust the first price unless the position shows you a profit.

Move your stop up when your stock rises by two or three times your risk, especially if that number is above your his- torical average gain.

Depending on the size of your portfolio and your risk tolerance, you should typically have between 4 and 6 stocks, and for large portfolios maybe as many as 10 or 12 stocks.

Can Anybody who is studying delta corp help. CFO of the company is saying that the margins and profit will reach at its original level by Q3Y25. And the governance issues are still there with all the gst and taxes part also. Is any steam left with the stock?

(At loss of 23% CMP)

DII Bagholders aren’t doing anything