Dave Landry Teaches: How To Find Strong Stocks In Both Up And Down Markets

This is a transcript of a live TraderTalk workshop conducted by TradingMarkets Director of Research, Dave Landry,
and Editor-in-Chief Eddie Kwong, with TradingMarkets members on Thursday, July 11, 2002.

Eddie Kwong: Dave how are you doing?

Dave Landry: Great!

Landry: Right. Eddie, one of my favorite areas of research is sectors. I would like to cover that in detail today, I'll then open it up for questions, on anything listed above.

Landry: Refer to the charts. Notice Chart 1 has biotech plotted as the green line; Immunex (IMNX) is shown in the blue bars. Notice the divergent behavior. In and of itself, IMNX might look like a potential momentum stock. However, biotech, the line below the chart, is headed south.

Chart 1.

NOTICE THAT THE STOCK CATCHES UP TO THE SECTOR. In about 90% of the cases, this happens. SO YOU WANT TO BE IN THE BEST SECTORS! As I mentioned above, a top down approach MARKET-SECTOR-STOCKS (SETUPS) is the best approach.

Referring to Chart #2, notice that the stock market is somewhat "iffy."

Chart 2.

Now look at the way I've sorted sectors in the following table. This was done by sorting based on the time period illustrated in the chart below the sector sort. Even though the market has headed lower, there was some positive sectors NOTABLY, the health care related issues.

Chart 3.

Now, look at Chart 4. Notice the how the Subsector is set up as a cup and handle (a running cup and handle) or, if you prefer, a pullback. Notice the sector line, (Health care plans) making new highs and in a strong trend.

Chart 4.

On the next chart I have the Health care plans plotted by themselves.

Chart 5.

NOTICE The big blue arrows?

Now, let's walk forward. The stock market falls out of bed (Chart 6) BUT HMOs (health care plans) go straight up (Chart 7) as does the stock.

Chart 6.

Chart 7.

Now, go to the next table... Notice how HMOs have risen to #1. This is known as "delta" relative strength As you can see, it pays to put the sectors behind you.

Chart 8.

...and all the while the overall stock market is headed lower.

Chart 9.

Landry: First thrust is a setup where you have STRONG thrust from a major low/high. You then enter on the FIRST signs of pulling back. YES, they work best in TRANSITION markets. After Sept. 11, a plethora of stocks set up like this......

Kwong: Looking at the chart of ATH, it appears that it pulled up a bit before resuming a downtrend. Where you were able to capture the second leg?

Landry: Yes, sometimes you get a big leg and sometimes it retraces and sets up again. I LOVE these transition patterns, especially when the sector itself is breaking down.

Landry: Great question! FIRST, the whole HMO sector was breaking down. Second, look at the velocity in which the stock broke down. OK, the stock is in pretty much a free fall. The sector is in a free fall. SO, you have to be on your toes....this is how you catch a market transition. Look for bowties, first thrusts or first pullbacks

Question: With ATH, isn't it easier to say that on the sharp pullback, it penetrated the 50-MA for the first time this year and then pulled back to it, making it a good short? Also it had strong volume on this pullback to the 50-MA but couldn't break it.

Landry: I recognized it as a pattern I trade (First Thrust), but I can't argue with that analysis. NICE JOB!

Question: In your table below Chart 2, what are you actually measuring to compare the sectors? Is it price action or some other indicator?

Landry: OK, I am picking a time period in the S&P and then sorting on sector. SO, it shows me the hottest (or weakest, by reversing the sort order) sectors.

Landry: OK, look at a LOT of periods, 1 day, 1-week, 1 month. PICK swing highs and lows. This is how you get a "Feel" for what's going on. I'll tell you a secret too. If you work hard, you will be trading stocks for 3-months...then on CNBC, you'll here "The XXX sector is up 300% this year, it's the hottest sector." THAT'S A GREAT TIME TO GET OUT. Time and again, I laugh my a** off when I've been trading a sector for months and then here it announced on CNBC. For example, the HMO's were announced as HOT, right as they topped.

One thing I forgot to mention is that I study the sectors every night as I flip through hundreds of charts...So, if I see 10 semis set up as pullbacks from lows, I then check out the SMH and SOX and if they too are setup, I know it's going to be a good day.

Kwong: Everybody's talking about gold...is it a good time to take profits based on what you just said?

Landry: Exactly. Gold broke down out of an inverted cup and handle a few weeks ago. Now it's retraced.

Landry: OK, let's say we are measuring temperature. If I tell you the temp is 95, then you'll know it's HOT but, what if I told you it was 100 just 10 minutes ago? The "delta" (difference) is very meaningful. You find the delta by looking at a lot of periods

td606: A perfect example regarding CNBC is that after the Russell 2000 moved up the first five months they finally put the R2K bug along with the other indexes.. That was the very top.

Landry: GREAT ANALYSIS!

td606: You're welcome.

Landry: HMOs were the last area of strength and now it looks like insurance has caught up. Most sectors have already broken down...so it's a little late in the cycle for transition patterns.... but guess what, these patterns will play themselves out over and over again.

Question: Is TradingMarkets.com a good place to find the top sectors in the market indicators sections or do you need to set up your own sector analysis?

Landry: I think trading takes a lot of hard work. Definitely look at the TM lists, but do your on homework too... Don't wait for someone to TELL you what's hot/cool, find it yourself!

Question: Without giving away specifics you don't want to reveal, could you elaborate on the concept behind your closing count system? Is it the same concept as some of Tom DeMark's work?

Landry: I don't understand DeMark. Remember, I'm a trend-following moron. The close count looks for an ob/os condition based on consecutive closes...it's really simple.

Question: What role does volume play? By strong thrust you mean engulfing bar off of major resistance line or...?

Landry: You know, I'm a real purist. I mainly look at price but yeah, I bet all those HMO's broke down on heavy volume.

Landry: OK, first, when I lock in half when my profit = my initial risk. This gives me some income and a "free ride" on the second half... Some may think this has a negative expectancy, but this isn't true, the idea is to hit the occasional home run on the second loaf....look at AOC an insurance company mentioned recently as a short in my service. NOW, there's a lot more to it than that, You might look to lock in profits AS a profit target is approached and the market /sector is turning OR you might let it ride if the market/sector is in gear. You have to come to work and pay attention to conditions.

Question: Might the homebuilders be an example of a potential transition right now?

Landry: Possibly. The problem is that they have been really choppy lately......and only a few stocks were leading the index...but you got the idea.

Question: Do you think the general market is at a bottom? What are the most important things you are looking for to judge that the general market is in a trend change from the current down trend to a new up trend? Or do you think we are just in a pullback off of the down trend?

Landry: OK, FIRST, I follow the big blue arrows...I think we are in BOUNCE mode here and I will look to short the next bounce........ with that said, many stocks look really sold out.........so, I'd prefer if we had a decent bounce before shorting again. One last point, I am not the king of all bears, I just look at charts as a six-year old would......and, off of the September lows, there were some great transitional longs! So there is opportunity in a bear market (e.g., the HMOs mentioned in the sector talk earlier)....

Landry: Great question. YES follow the trend, notice the aforementioned HMO's had thrusts/pullbacks and thrusts. THEN Notice they broke down.....DO NOT PICK TOPS...but when you see a meltdown....look to enter on the first pullback. One last point, yes, when I see 10 semis set up, I might pick one or two and also trade the SMH to make sure I get a piece of the move.... BTW, you want the holy grail? Only trade when the sectors are setup.......you will thank me for that one.

Landry: OK, if I get scared out of the position, then I might re-enter on an intraday basis. However, most of the time I try not to micromanage the positions. My re-entries become another setup. For instance, notice that ATH broke down then retraced/set up again and then broke down again. When I see something juicy like that, I stalk it and wait for the next setup (TKO, PB, etc.).

Kwong: Dave...we're about out of time. Thanks for joining us. For more information about Dave's new strategies, click here.

Landry: Thanks for listening to me!

Kwong: You will get complete details about his new video course.

Landry: If any of your questions went unanswered, email me! I promise to reply to all!

Landry: Will do!

Landry: Good night.