May 2006 Newsletter
Welcome to another edition of the Alpesh Patel Special Edition newsletter. A total market turnaround this month with the FTSE 100 showing much weakness. As I write, I could see the FTSE 100 hitting 5800 - 5700 even does not look unlikely at all.
Bearish Momentum
This month I want to focus on the Bearish Short-term Momentum filter. As I write, it has four stocks in it: Carnival, Inter Link Foods, Smith & Nephew and Vebnet.
These are weak stocks that are likely to get weaker and have their prices fall. Spreadbetters and CFD traders like them for 'shorting' - that is, selling first and buying back later when they are cheaper.
This list is a good starting point before I examine each stock in more detail using my momentum radar. Shorting these stocks is medium to high risk and targets 20%+ return over 1-3 months.
Now one of the key questions people ask about these stocks is are they value or growth stocks? The answer is no - these are purely momentum stocks. In other words I am looking at price weakness based on certain criteria I have honed over years. This is a completely separate set of stocks to my Value/Growth picks.
So what am I looking for when I click on the Momentum radar for each of these stocks? One key aspect is a break below a recent price support level. So, for instance, with Smith & Nephew it would have to be below 430p approximately.
Carnival is at a 7 month support level of around 2660p but has bounced back off this level before. Watch for a break below here and also through the next support level around 2600.
It is not just the direction we have to call right. It is essential that we understand the price target and the stop-loss (that is, to understand when we are wrong?).
Looking at Smith & Nephew, I would worry if the price fell below the support but then rose up to say 444p. The price should be moving down so I would exit if the price rises back above support.
I know it sounds complicated and convoluted but it is how we professional traders think.
Vebnet is a bit different. It is in a downtrend and there is no short-term support to speak of. Consequently I am looking at going short without waiting for a break of support downwards. See the educational piece in the next section about deciding when to exit.
What else do I look for in Bearish stocks? I'll look for Bearish Divergence on my Momentum radar - where the price makes higher peaks but the MACD makes lower peaks. This suggests the next price move will be a shift down in the 1 week to 1 month timeframe.
But they do not have to be in my Bearish Short-term Momentum filter for me to be Bearish. For instance, I could scan FTSE 100 stocks on my Momentum Radar and look for Bearish Divergence. A quick scan for shorting opportunities gives me: Anglo American, Rexam, Rolls-Royce, Barclays and Wolseley among others.
Educational User Tip for the Alpesh Patel Special Edition Users
How do I use stop losses to determine when to exit? Well, for my Bearish Momentum plays, I wait until the price fails to make a three day low. If, the next day, it moves higher again, then that is it - out. Now the rule may be relaxed, for instance, if I have a big level of profit built up in which case I may exit half the position at a three day high being broken and the rest at a five or six day high. Of course, for my Bullish Momentum stocks, this is reversed.
Some Lookbacks
In this section of the newsletter I will examine some of the stocks I have written about in recent newsletters. To get updates I always click on the Momentum radar button on the Alpesh Patel Special Edition toolbar.
In the April newsletter I mentioned the following stocks from the Bullish Short-term Momentum filter:
CSR - I cautioned against entering a position with CSR unless its Standard Deviation came lower. It did this on the 28th April and the price then shot up 23%. Currently +18% and looking neutral for the next month.
Randgold and Anglo American - I suggested that, based on my Volatility radar, these stocks might take a breather for a week or so and indeed both have been flat since the last newsletter. I now expect them both to fall over the next month.
Patel talking
Each year, I pick some stocks for 12 months ahead which I like for medium risk and target 20-25% returns. I publicly disclose these so they are out in the open. In 2004 I did them for Barclays. In 2005 I did them for BBC2 Working Lunch. This year in 2006 I have done them for WorldSpreads and broadcast them on BBC2.
How has the portfolio done for the past two years? It is up a compounded 83% before dividends in two years. The filters in the Alpesh Patel Special Edition of ShareScope were used to generate the names. What were the stocks and which are the ones for the year ahead I like? Email me and I will send them to you. Included in the free presentation is the names from past years and when they were published so you can check for yourself.
The performance is testimony to the quality of our development of the Alpesh Patel Special Edition of ShareScope.
ShareScope Users Questions Answered
In this section I pick great questions to answer. The tougher the better.
| Q: | Why does the PEG on your Bullish Momentum stocks have such a high reading? |
| A: | The Bullish Momentum indicator is for the short-term (up to 3 months) and based purely on price action, not any valuation or growth factors such as revenue growth or price-earnings ratios. |
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