Advanced CAN SLIM™ IBD Meet-Up Training Series

Module-4

Mike Scott

Presentation copy can be found at http://www.meetup.com/thousandoaksibd/

Module-1, Introduction to CANSLIM ™Market GeneralitiesCANSLIM™ definedPreferred stocks to buyCup and Handle BaseDouble Bottom Base

Module-2, More BasesAscending BaseFlat BaseHigh-Tight FlagCup without handle BaseBase on BaseBase stage counting

Module-4, Portfolio ManagementBuy rulesManaging the portfolioMarket Tops and Bottoms

Module-5, When the run-up is overMore on Faulty BasesTopping PatternsSell Rules

Module-6Investor psychologyShort SellingTools and Routines

New Module 3Alternate Buy Points

3-Weeks TightPocket Pivot12-of-15 upMA bounceShort Stroke

Portfolio Basics• Big money is made by concentration rather than

diversifying• It is important to develop individual rules that

prevent you from getting shaken out of true leaders

• Develop rules to cater to your own personal weaknesses found through post analysis

• Hone in on the market leader, make sure you have the most amount of money in that stock

• Hold the best stocks for as long as possible• First movers are the leaders• Getting used to margin can be a key skill

The importance of rules• Follow rules because they work• If for no other reason, follow the rules so

that you do not undermine your own confidence

• Be careful tweaking CANSLIM™ rules, they are not our rules– There is plenty of room for style differences

The number one mistake I find people making is not entering the market at the start of a rally. I see this very often.

Do I always follow the rules?I listen to what the market is saying and I make

adjustments within my rules• I suspend add on buys in difficult markets (this is

one of my rules)• Sometimes I do not buy breakouts but only

alternative entry points (this is one of my rules)• I usually wait for sound bases to form before I

decide to buy on day one of a rally• Some stocks breakout before a FTD, sometimes

I try them

Who are you listening to?

• What are the sources of your information?– Is there system like yours? Can you apply

their information to your system?– Are they eternally pessimistic or overly

optimistic?– How do you react? – Can you enter the market when the news is

ALL BAD?

Some people should not listen to market news at all but just watch price and volume

Basic Buy Rules1. Take a position on “day one” of a rally confirmation The true

leaders in an overall market rally break out first. Confirmation means a follow-through day and stocks breaking out of sound bases, learn to recognize faulty set ups

2. Buy equal dollar amounts Initial positions will be equal in dollar value, adding to positions later can concentrate value in the top performing stocks

3. Scale into positions Buy stocks gradually as they prove themselves

– Automatic buys of 50%, 30%, 20%– You may treat each buy individually relative to sell rules– This rule may be suspended if the current rally is deemed not robust.

In this case half positions will be taken with no automatic follow-on buying.

4. Use Secondary Position Entries. Stocks may be added to or purchased on secondary entry positions.

– Three-weeks tight, Moving average bounces, Pocket Pivot, Short stroke, 12 of 15 days up)

– Stop losses should be tighter, 3-5% and less than full sized positions should be taken. These purchases are reserved for the very best candidates.

How Many Stocks Should You Own?

Portfolio Size (include margin if you are inclined)

Suggested Number of Stocks (End Result)

Less than $100K 4-5 Stocks

$100K to $1M 5-6 Stocks

$1M to $5M 6-8 Stocks

Over $5M 7-8 Stocks

Position Size Example

• Portfolio Value = $20K (Cash Account)– Own ~4 Stocks

• Each full position = $20K / 4 = $5K– 1st Buy = 50% of $5K = $2.5K– 2nd Buy (up 2-2.5%) = 30-35% of $5K = $1.5K– 3rd Buy (up 4-5%) = 15-20% of $5K = $1.0K

Position Size Example(Margin Account)

• Portfolio Value = $250K– Buying power on margin is $500K– Own ~5 Stocks

• Each full position = $500K / 5 = $100K– 1st Buy = 50% of $100K = $50K– 2nd Buy (up 2-2.5%) = 30-35% of $100K = $30K– 3rd Buy (up 4-5%) = 15-20% of $50K= $20K

By the time you buy 3 full positions you will be on margin

Managing the Portfolio

• Normal profit objective = 20-25%– The profit objective is measured from the classical

buy point from one of the standard bases– Allow 8 weeks for this objective to be met unless you

need the money to feed your winners• Hold rockets longer

– Hold institutional grade stocks that go up 20% in three weeks or less for at least 8 weeks

• Concentrate in the stronger stocks, sell laggards in order to add to portfolio

Building a Position• Add shares when there are signs of

support• When you add shares, add fewer shares

than your previous purchase– One conservative measure is to keep your

average cost 25% below current price– I almost never achieve this

• If recently added shares drop 7%, sell those shares– Later, if you have an opportunity to buy, buy

those shares back, plus some more…

Follow-up BuyingPrimary buy at the pivot, 1st or 2nd stage base

1. Automatic follow-up buys @+2-2.5% and +4-5%, no buying > 5%

2. After another proper base forms

3. Pullbacks to the 10-week line• Sometimes can use other averages

4. After “Three-weeks tight”

5. Pocket Pivot

6. Unusual strength 12 of 15 days up

7. Shakeout + 3

8. Short Stroke

Never add at a lower price, do not average down

Signs of Support

Confidence to add shares• Constructive price and volume action• Holding logical support areas• Five weeks or more in a row up

– 30% of big winners have five weeks in a row up in the right side of their base

Signs of Weakness

• New Highs on low volume• Breaking a trend line• Not holding logical support areas• 2-Up, 2-Down to a new high

YHOO Weekly 2003

Chart Not Split Correctedfor 2:1 split

Even Though YHOO was a leader in the prior bull market it ran up again

YHOO Daily

YHOO Summary

Add at Pull Back to 10-Week or 50-Day MA

RIMMBreaks out of a 24 week base-on-base or flat baseand pulls back to the 10-week line twice

Never add when theprice is lower than your last buy (don’taverage down)

You may start a smallposition at these places

InitialBuy

Add

Add

Add on buys are10-30% of position

5 Weeks In a Row Up

5 Weeks close up

30% of the bigwinners have five or more weeksup in a row formingthe right side of itsbase

OVTI

OVTI Weekly

OVTI was a small cap--didn't participate in the prior bull

Chart not corrected for 2:1 split

OVTI Daily

Chart not corrected for 2:1 Split

OVTI Summary

Follow Through Day 9/1/10After a decline look for the market to attempt to rally.

A follow through day can occur on the 4th or later day of a rally attempt

Major index must close up significantly* on volume higher than the day before

Often 1.2-2% range depending on market volatility

Lowest intraday

Big Reversal Day-1

11.3% E

IBD 9/1/2001

September 1, 2010 IBD

8/26/2010 Thursday

EGO FIRE

8/27/2010 Friday

Eureka! RVBD TSL NZ

8/30/2010 Monday

OVTI LOGM SXCI

8/31/2010 Tuesday

ARMH BVN ANV

9/1/2010 Wednesday

FTD ABV CMG LZ IVN

CMG Weekly

CMG Daily

Ford

Next time we will address • How stocks top• Sell rules• Market tops

Pull Back to 20-day Moving Average

Buy

Add

Careful, no volume!

What to do after you are in a Position?