VMWARE, INC (VMW)

Many of the early leading stocks are now extended past safe buy points. If the market continues to digest the past couple weeks gains, there may be some add on buy opportunities. VMW has provided an additional buy opportunity in the form of a Three Weeks Tight (3WT) base. The 3WT is when a stock closes on the week within 1% of the previous weeks closing price for three consecutive weeks. This is a sign that institutions are holding their shares and the stock is digestion before continuing it's price progression.

The buy point would be ten cents higher than the high price of the 3WT or $87.26. It also then will only be 6% past the original break out in early September. Volume ideally will be 50%+ higher on the breakout day.

VMW is in one of the top industry groups. It has pre-tax margins of 24%, quarterly EPS growth of 70%, quarterly sales growth of 48% and a ROE of 17%. VMW reports earnings again in mid October.

ANCESTRY.COM (ACOM)

ACOM is setting up a potential 20 week Cup & Handle offering a buy point at $21.45

I love the fact it's an IPO and potentially under owned. Last quarter ACOM announced 50% EPS growth and 36% sales growth. It is in the Internet content group.

**One thing to keep in mind is ACOM has a fairly low float (24MM shares) which can make it somewhat "whippy". ACOM is relatively thin trading 200K+/- a day. You typically want stocks that trade 500K minimum. Therefore, ACOM positioning size may need to be smaller than normal.**

Technically, what I particularly like in it's Cup & Handle base is the handle held above the 50 Day Moving Average during the recent market correction. Also, its relative strength line is near new highs at 91. Monday provided an early entry as volume was higher than any day for the past several weeks. It probably is the clue that institutions are jump starting the actual pivot point.

MAKEMYTRIP.COM (MMYT)

I tend to follow the philosophy of putting the majority of capital in a handful of names that are the true leaders. As I got well positioned in CMG, NFLX and ARUN on the 9/1/10 Follow Through Day, I had some funds available to invest in perhaps a more speculative name.


The Indian stock market is near new highs (see India ETF=INP) and several Indian stocks are attractive. Some that are especially strong are TTM, INFY, IGTE and CTSH.


However, I tend to gravitate to IPO stocks as many of the biggest moves come from newer offerings. One that caught my eye with a beautiful high tight flag (HTF) set up was Makemytrip.com (MMYT). First, I should point out that MMYT is a thinner stock so caution is needed. MMYT is in the #1 Industry Group right now in the "Leisure-Travel". It is a group mate of PCLN which is obviously one of the strongest stocks in this new uptrend.


MMYT provided several positives in my eye. First, it has strong fundamentals with a 3 year sale's growth of 42% and last quarter sales growth of 45%. Second, the RS line is at a new high at 97. Third, it is a recent IPO and experiencing strong early accumulation. Fourth, it is in the market strongest industry group. Lastly, it provided an entry opportunity with a HTF set up.


I had a buy stop in at $36.29 in the event I wasn't able to see the breakout. Fortunately, MMYT was trading up in premarket on good volume and sort of "showed it's hand" which gave me the chance to hit it early around $35.80 at the open on 9/9/10. Typically, on the breakout you'd like to see 100+% volume. Prior to breaking out, volume had fizzled to 200K shares a day or less. On the breakout day it traded over 1.2MM shares which showed that hopefully institutional investors were snapping up shares. MMYT began trading on 8/12/10 with an IPO price of $14.00. It ran to $36.19 in 5 trading days (+157%). There was a brief 20% correction phase on much lower volume. Ideally, the breakout will produce a new phase with much higher prices. However.....only time will tell if this can make one of those monster stock type runs.

NEW UPTREND

After nearly four months of chop and slop, the market confirmed a new uptrend on September 1st. As with many new uptrends, leading stocks will begin breaking out near the follow through day (FTD). The September 1st FTD was no disappointment as I began to make initial purchases. Leading stocks are showing decent price progression and many are extended above even their 10 day moving averages.

First, I want to identify some of the leading stocks of the market since the FTD. Also, we can see some trends as the Cloud Computing industry is providing many of the leaders.

FFIV
ARUN (Purchased 9/1/10 at $19.00)
AKAM
CRM
VMW
RVBD
NFLX (Purchased 9/1/10 at $130.30)
PCLN
CMG (Purchased 9/1/10 @ $154.53)
MELI

We are now at a point where what appears to be the leaders have shown their faces. These stocks now have some cushion so there is little to do but watch our positions as volume will surely make its way back into the market post Labor Day Holiday week. So far, the Nasdaq has only experienced one distribution day. Although, we have a market of stocks and not a stock market, it would be ideal to see some nice days of accumulation on the indexes.

The indexes have retaken their 50 day moving averages (unfortunately in lower volume) and now the next test will be their 200 day moving averages. Ideally, we can power through this moving average in bigger volume.

So while we have identified the early leading stocks, if this FTD is the real deal there should be another wave of movers to jump on which is the good news if you missed the early breakouts. There should be some safer opportunities to add to these leaders down the road as well. History has proven (i.e. Aug-Nov 2007) that the stocks in the top industry groups near the FTD will perform the best.

The top performing industry groups are as follows:

#1 Leisure/Travel (PCLN, CTRP, MMYT)
#2 Software (VMW, CTXS, CIS)
#3 Data Storage (ISLN, NZ, PAR)
#4 Leisure/Movies (NFLX)
#5 Computer Enterpise (CRM, QLIK)

Note that the Retail/Restaurant group has moved up considerable with stocks like CMG, PNRA, MCD, BWLD, YUM, DPZ, and BJRI

TRADING RULES

I was preparing some documents which required me to articulate my trading philosophy in just a few paragraphs which is not easy. Without posting every rule I follow, here (in short) is what I attempt to practice in trend following:


Buy the leading stocks of the current uptrend as they move up through a proper pivot point or new high. Using the CANSLIM formula we identify strong fundamental companies that also possess the correct technical "look". Stocks are only purchased as they break out of a proper sound base. The only time to be invested is in an uptrend. Cash is also a position and many times throughout the year 100% cash is a desirable position. Protecting capital is the #1 priority.

When/if fully invested the portfolio may consist of 4-6 positions. There may be cases where 3-4 is desired to maximize our return with the true leaders. Starting position is 60% of the desired total position and we only add as the first purchase shows us a profit. Typically, we'd look to add another 20-30% as we have a 3% gain and pyramid from there. We don't want to add past a 5% gain as this raises our original basis and increases the chances of being shaken out of our position. Keeping in mind nearly 3 of 4 stocks will reset the pivot.

Profits will start to be taken in the 20% area and taken incrementally. It is normal to take profits as the stocks is still advancing. The exception being if a stock advances 20+% in less than 3 weeks, in which we hold for a minimum of 8 weeks. However, we never let a 20% gainer turn into a losing position.

Selling rules are the most important. If a position is taken and the stock begins to move against us we sell 40% when down 3%, another 40% down 5% and remaining when down 7%. Most important factor is cutting loses quickly and letting winners run. With this formula, we can have 4 or 5 losers with only 1 winner and remain profitable.

This trading method uses rules and not opinions or emotions. We are rigid with our rules but flexible with our expectations. In most cases, the less you do the better. Sitting tight when right and quickly cutting losers is the key.