Volume and Bollinger Bands

The way to make money in the stock market is in knowing when to buy a stock before it takes off. This situation can be understood by three factors: (1) knowing which stocks are really strong and news driven, (2) narrow Bollinger bands, and (3) low volume.

Low volume means there is not much current interest in a stock, and this is really the best time to buy it as long as you are buying a strong news sensitive stock. The volume will eventually pick up with a strong stock whereas volume may always be low on a poor stock.

Narrow Bollinger bands mean a stock will soon break out either in the up direction or down. Again, if you are looking at a strong stock, that is the time to buy it for whatever direction you anticipate it will go.

For example, TVIX, the double VIX volatility ETF, was selling for around $20 per share in the first part of June 2011. It also had narrow Bollinger bands at the time along with low volume. It was the perfect setup for a strong stock. It took almost two months before TVIX really started rising significantly, but it began making a moon shot around the first part of August when Congress was so indecisive about raising the debt ceiling. This was a very powerful volatile news driven situation. TVIX made it all the way to $100 per share by the first trading day of October.

Since it is difficult to pick an exact top, the best thing to do is to take profits when you have made three or four times your money and while the stock price is still high. TVIX spent several days in the $80 and $90 range. That would have been a great time to sell. You would have made 400% on your money in four months. A lot of people won't make 400% on their money in a lifetime. It is well worth the patience to wait for the right time to buy and then sell while you still have a great profit. If you can make 200% or more for your money in just a few months out of each year, you could sit on your hands the rest of the time and enjoy life!

Never Go All In

Most people agree that you should never put all your eggs in one basket on just one stock. Diversification is not enough, though. If you own five stocks, and you want to buy one more with $10,000 in cash, you should not buy the new stock all at once with the whole 10K. You should buy it in three or four segments. One thing that I have seen happen many times is your new stock immediately drops in price as soon as you buy it. This could be for a number of reasons.

First, you might not have done your homework. It might be a bad stock. If you only spent $2,500 on your first buy instead of the whole 10K, your losses will probably be minimal.

Secondly, the whole stock market could be going down, and it is taking your stock with it even when it is okay. One example of this is ERX, the 3X energy ETF comprised of major oil companies and other stocks. It looked like it had formed a bottom around $40 per share during August of 2011 and the first half of September. Then, suddenly, it dropped to the low 30s and even below 30 during the last part of September and the first trading day of October. If you had just spent $2,500 on your first purchase of ERX, you could have bought the rest of your position after it went down 25%. Then, you would have made a lot more money with ERX when it came back along with the rest of the stock market in the next month.

Stock Market Instability

The world is waiting to see how the Europeans will handle their financial issues during the week of October 24. It is my guess that we will see more promises rather than definite action. The EU is about as divided as the U.S. Congress. It is difficult to get anything done this way.

I am not planning to buy any additional stocks for the long term until there is more visibility on which way Europe is headed. The same thing could be said about the U.S. also. We have seen some good reports in October, but one month does not make a trend. I am long on the leveraged ETFs ERX and UDOW, but I would rate them as a hold rather than a buy at this level with the Dow at 11,800.

If anything goes wrong with the EU plans, the stock market could fall below 11,000 again. If the market rises on good news, that may be a good time to buy a volatility ETF because the good times will probably not last. If TVIX, the double VIX volatility ETF falls to 40, I will be a buyer. Sooner or later, bad news will reign again in the stock market. If you buy a few thousand dollars of TVIX at a low level, you could quickly double your money when extreme volatility sends TVIX past $80 per share again.

Low Volume Tops

The volume level is one of the best indicators for knowing when to sell a stock. For example, a three month chart of ERX, the 3X energy bull ETF, showed a relatively low volume of 2M shares in the middle of July 2011. ERX was selling for more than $80 per share then. When the August 2011 Congressional impasse began over the debt ceiling, ERX started dropping dramatically on much higher volume until it finally bottomed on the first trading day of October.

ERX was trading at around $30 per share when it had a buying volume surge of more than 8M shares on the second trading day of October 2011. As of October 14, the volume has dropped down to 4M shares. ERX may never reach its former high anytime soon. However, when the volume drops to 2M shares again, that may be the intermediate top for ERX. It so happens that the stock market in general is following the pattern of ERX, too. One reason for that is that ERX is an ETF stock which comprises some of the world's biggest oil companies. So, as oil goes, the market seems to follow, or vice versa. Anyway, it may be time to go short again whenever ERX falls to a low volume level of 2M shares of trading per day.

Paradigm Market Shift

In August of 2011, we experienced the beginning of a new paradigm in stock market investing. While Americans were appalled by the deadlock in Congress over increasing the debt limit, the stock market began to sink uncontrollably. The smart money suddenly realized how hopeless our economy was becoming. Then, in September and on the first trading day of October, the world started taking note of the Greek debt seriously. These events had a profound effect on the stock market. Fundamentals of individual stocks no longer matter that much. Most stocks now move in tandem with each other depending on the macro view of the world economy.

The best way to make money under the new stock market conditions is to buy leveraged ETFs as long as you can buy them near the bottom. The stock market had a tremendous rally during the first two weeks of October after the first bad trading day of the month. Now, we are technically overbought, and we are not near a bottom for either longs or shorts. TVIX, the double volatility VIX ETF, has fallen to $50 from $100 since the rally began. According to the ECRI and other sources, we still might see a recession. So, dark days are ahead again sometime in the future. When TVIX drops to $30 per share, I will be a buyer. Then, in the coming months when the bad news once more rules the stock market, I expect to make three times my investment as TVIX makes another run at $100 per share.

Managing Risk

In a volatile unpredictable stock market, an investor must ask himself or herself "what could go wrong" before every trade. As the old cliche goes, "the devil is in the details." If you enter a bad trade with a leveraged ETF or a speculative stock, the price of the stock could drop 25-50% in three days waiting time before the stock trade settles.

If you invested $10,000 in what you thought was a sure thing, and you lose 30% on the trade, you are down $3,000. What if this happens multiple times? You could lose $9,000 more or less on just three bad trades.

I also have real examples to prove this from the stock market of September-October 2011. ERX, the triple energy ETF, was selling in the $44 range around the middle of September. It was down almost 50% from its high of $85. It seemed like the bottom was somewhere in the low 40s. Then, believe it or not, the stock dropped to $30 per share by September 30. If you had bought it around $44, you would have lost over 30% of your money in two weeks.

Then, for a second example, I'll turn to TVIX, the double VIX volatility ETF. By the end of September, it looked like the whole world was heading into a recession. The respected ECRI even predicted a recession for the U.S. for certain around this time. TVIX jumped up to $100 per share on the first trading day of October. What if you had bought $10,000 worth when TVIX was selling for $100? The stock was selling for $75 per share just three days later. You would have lost $2,500 in less than a week on a trade that seemed like a sure thing at the end of September.

My advice is to limit trades to $2,000 unless you have money to burn. If you make 30%, that is $600, and you should take your profit while you have it. If you lose 30%, it is only $600 rather than thousands of dollars. Even the best traders may only be right 2/3 of the time. If you make 48 trades per year at a 66.7% win rate with $600 gained or lost on each trade, you will be able to keep the $600 on 16 of those trades. The other 32 trades will cancel each other out. $600 times the net 16 trades adds up to $9,600 per year that you could make with just $2,000 of investment money that you keep cycling throughout the year.

Volatility and Volume

Whenever you see increasing volume in a stock with a resulting chart upswing or downturn, that is the time to buy or sell depending on the chart direction. The volume increase I am talking about is five to ten times the normal volume. The volume peaks will sometimes be so high that it looks like a skyscraper rising in a desert.

A classic example of this occurred in August of 2011 when Congress was in a terrible debate over the debt ceiling limit. XIV, the inverse volatility index ETF signaled that tremendous volatility was on the way. The average volume was less than 5 million shares per day prior to its explosive sudden change. XIV first started jumping up around 20 million shares of volume and eventually hit around 30 million shares of volume a couple of times. During this high volume period, the stock price dropped over 50%. If you had sold when the volume first spiked high, you would have only lost a little money versus a lot of money later on.

Whether you owned XIV or not during the August-September 2011 bear market raid, this volatility situation affected nearly all stocks. Even if you don't want to own XIV, it will be very beneficial if you put it on your watch list because it can be a warning signal to sell your favorite stocks in other sectors before you lose a lot of money. For example, ERX, the 3X energy bull ETF lost over 50% in this volatile time also. So, you can save yourself a lot of grief and money if you pay attention to increasing volume in a volatility index like XIV.

Simple Moving Averages

Paying attention to simple moving averages can often tell you when to buy or sell stocks. For example, the 200 day moving average for a broad market index like the S&P 500 tells you whether we are in a bull market or a bear. Generally, if the S&P daily price is above the 200 day average with a positive angle upward, it is safe to be in stocks.

You can sometimes make money if you notice the stock market is in a repeatable trading range. You could dial in a moving average like 13 days or another number to determine when to buy and sell. The danger here, however, is that the stock market might break out of its trading range at anytime, and it might go in the opposite direction from what you expected.

The best use of the moving averages occurs when we are in a bull market. If the trend is pointing upward, you can buy the dips in the price chart. Beware if the S&P 500 is below the 200 day average, though, because most stocks trade together, and you never know when a bear market will end or if it will get worse.

Diversification Plan

An investor must be diversified at all times to avoid financial ruin. This allocation should involve cash, stocks, and bonds among different sectors and companies. Of course, you will have slow growers in the group that limit your overall gain, but putting too much money on one stock because you are certain that it will gain a lot is a recipe for disaster. You have probably heard the cliche "the devil is in the details", and the odds are great that something unknown in the stock market will strike down your favorite stock pick when you are counting on it the most.

For example, suppose you thought the stock market bottom came in August of 2011, and you put half of your money on ERX, the triple long energy ETF. If this was $10,000, and you bought ERX at $40, you would have lost more than 25% or $2,500 before ERX finally hit the bottom October 4 briefly at $26 per share. Then, what if you had a panic attack and sold ERX when it got around $30, and you loaded up half of your money on TVIX because you thought we were going into a bear market? You not only sold while you were down, but TVIX dropped 25% from its high during the first week in October. So, you would have lost thousands of dollars more back to back.

Do not put half or all of your money on anything no matter how desperate or certain you are about a stock or the market direction. You will often be wrong due to unknown stock market variables. This can also be at the worst possible time if you need the money. For example, the Fed might suddenly do some quantitative easing to avoid a recession at the very time you have gone half in betting on a bear market. So, the government could cause a big boost in stocks at any time. Then, the bulls will suddenly take your money before you can get out of a bad trade.

Here are ten stocks you could buy for diversification, and you should sell them whenever you have a good profit on them. Then, keep that money in cash for whenever you can buy them again at the annual low point.

1. ERX, the triple long energy ETF stock.

2. TVIX, the double volatility stock for bad times.

3. AGNC, a REIT that was paying a 19% dividend in 2010 and 2011.

4. TNK, an oil tanker company that was paying a double-digit dividend in 2011.

5. JNK, a bond ETF that pays around 8% annually.

6. RCS, another bond ETF that pays 8% or better depending on when you are in it.

7. MCP, a strong company involved in rare earth minerals.

8. AGQ, a double long silver stock.

9. GLD, the gold trust ETF.

10. DIA, the Dow stocks ETF because they are the strongest group.

Long and Short

Since the stock market can reverse direction at any time, it is a good idea to be both long and short at the same time. The catch is that you have to buy your long or short position when it is near one of its low points in order to profit a lot. Then, when the stock market makes a hard move up or down, you can make 10% in a day if you are in the right stocks. If the macro movement of the market is firmly in one direction for weeks at a time, you could even make as much as 100% or more in leveraged ETFs.

For example, the stock market had been beaten down for weeks at the end of September 2011. Then, on the second day of trading in October, the Dow jumped 153 points signaling a possible change in the trend direction for stocks. ERX, the triple long energy bull ETF that is related to oil, jumped 8.5% for the day. If the stock goes from its low of $28 to its high of $85 in the next few months, you will have a 200% gain! Even if it takes a year for ERX to climb to its former high, a 200% gain would be fantastic for a year's investment.

Then, on the other side of the coin as I have recently suggested, TVIX is great stock to own whenever volatility is high and times are gloomy for stocks. The financial condition of the U.S. and the world is still on shaky ground. You could have also made over 200% on this stock if you had bought it in June or July before the stock market started its downtrend.

So, remember to buy winning stocks when the market is going against them. Then, simply hold on for a few months for double or triple digit gains whenever the general trend goes a couple of months to the downside or the upside. There is enough bad news in the world to bring stocks down for an extended period at least one time each year. Then, on the other hand, we have enough bulls in the world to send stocks up for at least a couple of months each year. Just be willing to buy winning stocks when they are cheap and have the patience to wait until they jump significantly in their prices. You only have to hang on a few times each year to make a fortune!

Sell REITs

Now is the time to sell your real estate investment trusts. The double-digit dividends will not offset the double-digit capital losses that are on the way due to recession fears. Highly respected Annaly Capital fell almost 5% on Monday, October 3, 2011. American Capital Agency dropped around 4.5% in addition to previous declines. Then, for a real scare, Armour Residential slid 13%.

REITs are great when interest rates are low as long as there is no immediate chance of a recession. They can easily borrow cheap money, and then farm it out for a much higher rate. But only a few people will have any money to spend in a recession or depression. Hence, REITs cannot make money in today's environment where the world is about to tear apart at the seams. Financial catastrophes are looming in the U.S. and Europe. China cannot bail out everyone either because they are starting to have problems of their own. TVIX, the double VIX ETF, has gone from $25 at the start of August to $100 today. It can probably go to $160 before the volatility ends. If you don't want to be in cash or quality bonds, TVIX is your best bet for profit when the stock market makes an avalanche to the bottom.

Stock Market Volatility

If you have not heard already, the Economic Cycle Research Institute said recently that a new recession is unavoidable. This is a reputable organization that is stating this situation based on economic fundamentals. Technical charts have also been pointing out this fact for the last two months. Now is the time to be in cash, in stock shorts, or long volatility indexes like VXX or TVIX.

For example, TVIX attempts to double the current VIX volatility reading. It was selling for $89 per share at the market close on September 30, 2011. If you had been paying attention to TVIX at the first part of August 2011 when Congress was deadlocked, you could have bought the stock for $25, and you would have made over 200% so far on your short-term investment. The 9-day simple moving average crossed over the 50-day moving average on high volume in the first week of August, and that was the signal to start betting on TVIX. As the bad events of August and September gradually unfolded, TVIX made its rocket run.

It is not too late to buy TVIX, though. If the ECRI and other bears are right, a new recession will push VIX to a reading of around 80 like it was in the last bear market, and TVIX will be selling for around $160 by then. So, you can buy now and make over 75% while the stock market sinks in the coming months.

Deflation versus inflation

The current stock market condition at the end of September 2011 was a deflationary environment rather than inflation. The ECRI is indicating a recession ahead. Money availability is tight, and people will not be spending much at all. This situation has caused oil, gold, silver, and copper to fall. The only stock market bets that are dependable are shorts and volatility ETFs like VXX and TVIX.

Normally, when interest is low, stocks will grow. When the Federal government is printing money, stocks will grow also, and this is when gold and silver will be bought as a hedge against inflation. However, the FOMC is not currently doing any more quantitative easing. Since inflation is no longer on the horizon, people will prefer cash and bonds over stocks and precious metals. So, an investor needs to be aware of the macro view of the economy at all times to avoid financial loss.

Bear Market

The stock market is now in a bear market downtrend. Several reasons can be given for this from both charts and fundamentals. The S&P 500 is having lower lows and lower highs. ERX, the triple bull oil ETF previously had a trading range between 39 and 48, but it has now broken down to the $31 area.

The FOMC is also out of bullets to fight unemployment and boost the economy. Our current situation is very similar to Japan's economy where their stock market has not recovered in 30 years in spite of low interest rates. The government cannot raise money to create jobs because the Republicans will not allow it. The IRS will have a constant shortfall in funds until millions of the unemployed are put back to work. Then, to add more grief, China manufacturing is down and Greece has not yet been fully delivered from its financial problems.

What can we do to make money in this environment? You can make big bets on more volatility. The VIX is now more than 40 and climbing. The VXX volatility index ETF is over 50 and TVIX is around 90 and steadily climbing. I think VIX will ultimately make it to 80 just like it did in 2008 when financial problems were great and a recession was coming. Now is the time to buy TVIX, the double VIX ETF. If VIX goes to 80, TVIX will go to 160. That will be a 77% gain from the current TVIX price of around $90. Even if TVIX does not get to 160, it will surely be a double-digit gain from here while the rest of the stock market tanks. Please do your own research before buying or selling.