Another Nicolas Darvas Style Breakout

My scans combed through about 10,000 eligible stocks and reduced that number to 150.  Out of that list, here is the one that I like the best:

The stock above has gapped through a constructive consolidation area to a new 52 week high.   That's bullish.

To build upon last week's post, here is a monthly chart of the stock that, in my opinion, further develops the bullish argument:

In addition to this stock, I continue to like WSM, which I mentioned and subsequently purchased last week.

Highest Potential Stocks of the Week

The Art of Using Monthly, Weekly and Daily Charts

One of my objectives for creating this blog is to get into touch with other like minded traders.  One like minded trader that I have been following since 2009 goes by the name Trader Stewie, who runs a blog called the Art of Trading.   While not exactly a trend follower, he is a professional, profitable trader who generously shares valuable advice to his readers.

Here is a recent quote that I found myself particularly relating to:

"As a technical trader/Chartist one of my "strength" is using MULTIPLE time frames to help locate the absolute HIGHEST quality trade setups. What i try and do is find the strongest setups that align in good and 'reliable" technical setups on MULTIPLE time frames for example a stock that is setting up well on the WEEKLY, DAILY and 60 minute charts make for the best setups and if executed properly, these can be nice trades. I try and make it a PROCESS where on EVERY DAY i am looking for the best setups that align on WEEKLY, DAILY, 60 minute and even 30, 15 minute time frame charts.

It all starts with the BIG PICTURE and ZOOMING down into LOWER time frames to help me "detect" patterns that are otherwise not easily recognizable in HIGHER TIME FRAMES."

Because I am a longer term trader, I have been, over the years, trying to combine monthly, weekly and daily charts to find the highest potential stocks possible.  This is something that cannot be reduced into an algorithm, backtested or easily taught, but a skill that can be cultivated through many hours of diligent practice.

As an example, my most recent purchase, AMGN, which is beginning to look very promising, has a very strong daily chart, weekly chart, and monthly chart.

Below is a monthly chart of this stock:

This long term chart of AMGN shows the stock breaking out from a very lengthly consolidation period to a new all time high.   That's a bullish development that would not be detectable on the daily chart or weekly chart.

A second example is the stock DK.  This chart had a very bullish daily chart at the time that I purchased it, but it also had a very constructive weekly chart as well:

The weekly chart of DK shows the price breaking out, negating a potential double top, to a new record high price - something that would have been completely missed if one looked solely at daily charts.

Stocks are Currently Going Up

For a while now,  experts have been saying that markets are over-bought, over-extended, over-priced and over-valued.   My view, on the other hand, is that the trend is up, so I should be long stocks.

Although anything can happen and I have no clue what stocks will do next, it is certainly possible that this rally could last even longer.

Below is a weekly chart of The Russel 2000 Small Cap Index:

By simply looking at the price action, we can see that the index is at a new all time high.   That's bullish.  Secondly, notice how the index was consolidating for 2 years and has only recently broken out.

The path of least resistance, therefore, is up and my plan is to continue holding strong stocks until the trend ends - whenever that may be.

Speaking of small caps, here are 2 more stocks that my scans identified this weekend:


Using Donchian Channels to Trend Trade Forex

Four months ago, I wrote about a Forex trading system that I was developing and had backtested.  The backtesting results at the time were excellent and perhaps too good to be true.

Being skeptical, but curious I decided to open a micro Forex account to test the system with real money.  The system is 100% mechanical (but not automated) and I have been strictly following the rules of this system since December.  Since that time, the system has generated 52 trades, which I have diligently recorded in this spreadsheet. 

Although 52 trades is not a large enough sample size to draw any meaningful conclusions on, the results so far have been even better than what the backtesting suggested.

Paradoxically, 75% of the trades lost money, but despite that, the system generated +25.23R in 4 months, which would translate to a 50.46% return if one bet 2% per trade.

The system uses Donchian channel breakouts, similar to what the original turtle traders used, to generate trading signals.   Specifically, the system benefited from the plunge in the Japanese Yen,  and big moves in the Euro, Silver, and the British Pound.

Below is an example of a trade generated using a 20 day Donchian breakout system on the Japanese Yen:

I have to admit that I may have gotten lucky starting this trading system at the time that I did and I know that the system would have done poorly, for example, this time last year.   However, I will gradually deploy more capital into this account and continue to document the results of this system.

Nicolas Darvas Style Breakouts


The Lie of Buy and Hold

A few years ago, while visiting an office of a mutual funds salesman, I noticed a large chart hanging on the wall called an Andex Chart.   These charts are designed to show the benefits of buying and holding, and investing for the long term since, as the charts seemingly prove, markets always go up.

Curiously, the chart began in 1950.   Market data exists going back to at least 1900, so why start then?

In my opinion, this start date was chosen intentionally because buy and hold performed dismally prior to 1950.

Below is a chart of the Dow Jones Industrial Average for the first (and often forgotten) 50 years of the last century:

The above chart shows, for example, that the Dow was at 100 points in the year 1906 and also at 100 points 36 years later in 1942!    Furthermore, the Dow did not surpass its 1929 peak until 1954 - another 25 years of buying and holding just to get back to break-even.

Just as buy and hold loses some of its luster when looking long term, trend following shines when looking long term, as I will delve more into in later posts.