I ran across Trader Nick on my early Internet/AOL days.
His ideas did and still hit home with me. I agree and use
many of the same concepts to trade as he does.

Nick's Technical Techniques

By Nick Proffitt

OVERVIEW

I'm a firm believer in the KISS (Keep It Simple, Stupid) school of TA. No exotica for this country lad. No astrology, no chaos theory, no fractals, no neural networks, no Elliott Wave. I'm not saying these things don't work, only that they don't work for me. I'm also a firm believer that while many things can be of use to an analyst, nothing's more important than pure price action. I'll sneak a peek now and then at market internals such as the put/call ratio, the advance/decline line, sentiment numbers, etc., but I go with price action every time.

Various traders have various approaches to the market. Some are momentum investors who like to buy breakouts at the tops of price ranges. This is the "buy high, sell higher" approach. I've been know to do it once or twice myself, but normally I'm what I call a "technical value" trader, preferring to look for bottoming formations and buying there. Why? Too many breakouts prove false, and if a stock fails at the top of its range after an extended run up, it's got a lot farther to fall than a stock that's already had a correction. What it boils down to is that I'd rather buy low than buy high.

After experimenting with dozens of technical tools and indicators over the years, I've come to settle on a handful that seem to work best for me. Here's a list of them, in no particular order:

  1. Moving Averages. I use 10 period and 30 period exponential MAs on my daily charts, and 10, 30, and 40 period exponential MAs on my weekly charts.

  2. Regression Channels, sometimes called Least Squares. I use 1.5 standard deviations. If your software doesn't have regression, price channels can be substituted. You can play with the settings until the channel incorporates 95% or so of all prices.

  3. Fibonacci Fan Lines & Time Lines. As measured from significant price tops or bottoms.

  4. Cycle Finder. A customizable indicator that helps find significant cycles over various time frames.

  5. Stochastics. I use "slow" stochastics, set at 9 periods.

  6. Relative Strength Indicator (RSI). Set at 14 periods.



  7. Directional Movement Indicator (DMI) & Average Directional Movement (ADX). Set at 9 periods.

  8. Granville's On Balance Volume (OBV).

  9. Moving Average Convergence/Divergence (MACD) Histogram. I use inventor Gerald Appel's standard settings of 9,12,26.

That's it. I'm not saying these are the ONLY technical tools that work. Nor am I saying that the way I use them is the ONLY way to use them. I'm saying that these are the ones that work for me. There is no Holy Grail in technical analysis. No single indicator works all the time, and none should be used alone without corroboration from others. Also, there's no substitute for experience and feel. You can give these same indicators to a dozen different people, teach them all how to use them in exactly the same way, and still get a dozen different sets of trading results. It is said that TA is part science and part art. You can master the science part in a relatively short time. You'll still be trying to master the art part the day you die. The only way to get better at chart reading is to read charts. Lots and lots of charts, studying how the indicators and the price action correlate, until you finally come to the point where the chart "speaks" to you, and you can almost intuitively predict the next move. Only then will you be on the Yellow Brick Road, slouching toward Oz.

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DISCLAIMER: Nicholas Proffitt is not a registered investment advisor. Nick's Picks is a list of stocks with interesting chart characteristics, it is not a solicitation to buy or sell the listed securities. You are responsible for conducting your own research on stocks that appear interesting to you.

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Copyright 1999 Decision Point


About Nick Proffitt

by Nick Proffitt


I came to market analysis rather late in life and in a very roundabout way.

I was born in 1943 and grew up an Army brat, never living in any one place for more than a couple of years at a time. After a stint in the US Army infantry, I attended the University of Arizona, graduating in 1968 with a BA in journalism.

I spent the next 13 years in journalism, the final 12 with Newsweek magazine, almost all of them overseas. I was the magazine's bureau chief in Saigon, Beirut, London, and Nairobi. I was their "Four Horsemen of the Apocalypse" correspondent. If there was war, famine, pestilence, or death involved, I was usually there. In 1981, I quit after learning that my next assignment was to be yet another "shallow grave" country, this time Salvador. I'd always wanted to try my hand at fiction and I wasn't getting any younger. I gave myself two years to write and sell a novel, and came in right under deadline. My first book, "Gardens of Stone," was made into a feature film by Francis Ford Coppola, one of his box office bombs. I followed with two more, "The Embassy House," and "Edge of Eden," then lost my passion for writing. Or rather, I'd found a new, more exciting mistress. The stock market.

I'd been "in the market" nearly 30 years, but mostly as a buy and hold investor. The blind-side collision that was the Crash of '87 made me re-think my approach to investing. Watching my net worth get cut in half in a single trading session left me wondering if there wasn't another, better way to play this game. I began reading everything I could about the markets, and the first book to make me sit up and take notice was about technical analysis, Stan Weinstein's "Secrets for Profiting in Bull and Bear Markets." Thus began a crash course in TA that goes on to this day. I'm still learning, still experimenting, and still convinced by my results that while fundamental analysis is useful in choosing which stocks to trade, technical analysis is the only viable tool for actually trading them.

I try to keep my technical work fairly simple, because after experimenting with scores of exotic indicators and methodologies, I've found that "simple" simply works best. I use moving averages and trend lines, looking for support and resistance points. I use linear regression analysis (least squares) and a few cycle studies. I use Fibonacci fans and time lines. I look for classical chart formation patterns such as head-and-shoulders, triangles, and double tops and bottoms. The indicators I find most useful are the Relative Strength Indicator (RSI), Stochastics, the Directional Movement Indicator (DMI) and is by-product ADX, the Moving Average Convergence/Divergence (MACD) Histogram, and Granville's On Balance Volume (OBV).

Discovering a book on technical analysis was the first important step on my way to a new trading life. Discovering Carl Swenlin's Decision Point was the second. I was honored and humbled when Carl asked me to be the DP forum co- host on American Online, which eventually led to the launching of the Nick's Picks, in much simpler and shorter form, in early 1996.

It's been a heck of a ride ever since.

In some ways, trading the market is a lot like writing novels. Same confining room, same staring at a computer screen all day long, same reluctance to leave the house, same deterioration of what few social skills I ever possessed. Once, when I described my daily routine to a friend, he said, "Jeez, get a life." My dirty little secret is that I love the one I've got.

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NICK'S PICKS A Decision Point Publication By TraderNick

June 12, 2004

MARKET OVERVIEW:

So, it's time. Our last weekend rendezvous. It seems to be a time for endings. For Ronald Reagan. For Ray Charles. And now for Nick's Picks. Mr. Reagan was good for the economy and the stock market. Mr. Charles was good for your soul. And I hope Picks was good for your pocketbook.

I could talk to you today about THIS market in this space, as usual, but I'd really rather talk a bit about THE market. As far as THIS market is concerned, there's not much to say in any event. The Nasdaq has worked off some of its ST overbought condition, but is still in the upper reaches of its ST regression channel. The Dow and S&P are still ST overbought. But in all three cases the IT picture still looks positive, so there should be room for more upside before any kind of meaningful correction sets in.

As for THE market, the nature and trading of same, most of my opinions are encapsulated in one or another of the articles and tutorials in the Picks Archive on the website. If you haven't already downloaded these for future reference, I really urge you to do so within the next few days. If, for some reason, you're unable to access the website, email me direct and I'll send them to you.

A number of you have asked if I could recommend another advisory service as a possible replacement for Picks. My reply has been that if it's strictly market statistics and general analysis you want, you couldn't do better than the Decision Point service available from my publisher, Carl Swenlin. But Carl doesn't do individual stock recommendations. He rates industry groups and ETF's (Exchange Traded Funds), however, and you can use those ratings to trade general markets such as the Dow (DIA), the S&P (SPY), and the Nasdaq 100 (QQQ), along with individual industry sectors. There are a number of services out there who do recommend individual stocks, but I really don't know who is good and who is not. Very few of them trade their own money alongside their readers and many of the famous names, with the slick brochures and the massive subscriber lists, seem more interested in enriching themselves rather than others. Sorry I can't be of more help.

A lot of you have been with me from the beginning, or close to it, and how you proceed from here will likely depend on how you spent your time with Nick's Picks. If you used me as a jumping off point to learn some technical analysis, and picked up some quality charting software, you should be ready to strike out on your own. For these folks, I have a few reminders:

1. Keep it simple. You don't need to be a Chartered Market Technician to do this stuff. Nor do you need to delve into the arcane and often esoteric methodologies described by the Ph.D. types found in the mathematics clotted pages of "Technical Analysis of Stocks and Commodities" magazine. You've seen the small handful of tried and true indicators I use. If you use those and only those, there's no reason you can't replace me with yourself.

2. Determine your time frame and stick to it. If you are a short term trader take your cues from the daily charts. If you are an intermediate term trader, work from the weekly charts and use the daily only for timing your buy or sale. Unless you're committed to trading for a living or have a lot of time to put into it, I'd recommend the intermediate time frame. And in that case, focus on the weekly MACD as your go-to indicator.

If you haven't developed any charting skills during your time as a Picks subscriber (shame on you!), then here are a few general guidelines:

1. Apply what you know of human nature. The crowd isn't always wrong, but it usually is, so don't blindly follow along. I spent my years as a war correspondent going into places and situations everyone else was trying to get out of. Apply that same approach to the stock market. Don't automatically buy stocks on a day when the Dow is up 200 points and, conversely, don't automatically sell stocks on a day when the Dow is down 200 points. At least consider doing ju st the opposite. The object of this game is to buy low and sell high, despite what many analysts preach about buying high and selling higher; it's that "selling higher" trick that will get you.

2. Don't trust anything you read or hear in the media. Anyone who purports to know exactly what the market is going to do is likely a charlatan. Anyone who touts an individual stock is likely to have an agenda. The mainstream financial media is part and parcel of the great selling machine that is Wall Street. Caveat emptor. Buyer beware.

3, Diversify your stock holdings. And don't automatically assume that buying a mutual fund takes care of it. Most funds aren't nearly as diversified as they'd have you believe. And while mine may sound like an extreme position, I'd stay away from mutual funds altogether. They charge too much (that includes so-called no load funds), their managers are the worst sort of herd following sheep, and most of these managers underperform the market. It's not that these are necessarily bad people, but the compensation system on Wall Street dictates that they do what they do. Instead consider ETF's. They will give you more bang for your buck and they're easier to buy and sell. I predict that within 10 years ETF's will replace mutual funds altogether.

4. Don't ignore dividends. Before you buy Zowie.com from the pink sheets, consider the fact that about 40% of all market returns over the years has come from dividends, not price appreciation.

The temptation here is to repeat and expand on every single thing I've ever told you over the last 6 years, but that way lies madness. As I said, everything you need to know is in the archives.

Well, that's pretty much it, my friends. I'll do my Daily Updates Monday through Thursday of next week, as usual, although I'm not sure why. Well, yes I do. Because I said I would, that's why. Until then...

Current support/resistance levels on the primary indexes are Dow 10200-10600, S&P 1100-1150, and Nasdaq 1960-2080.