Learn how to count bases

What is a bull trap? It's a stock that looks great and has everything going for it -- but is actually poised for a major fall.


Late-stage bases usually are such a trap. By the time a stock makes a fourth base, it already has three solid bases and advances under its belt. It has come a long way.



By this time, stocks are too well known to investors, and the amount of new buyers diminishes.


And the biggest shareholders -- the mutual funds, banks and other institutions that drive most of the buying -- are sitting on big gains.


What is a late-stage base? Usually it's the fourth base a stock builds, although in some cases stocks peak after their third base.


It can be the fourth base since the start of a bull market, or since the stock becomes a bona fide growth company. So bases that form while the stock is losing money or making limited gains don't count.


Many stocks in late-stage bases have prime numbers going for them: Sales and earnings growth could be booming, margins are wide and its IBD ratings are likely strong.


But that's the trap. Those great fundamentals drove the stock higher from at least three bases already.


You're buying into an old story. And the shareholders from lower prices in earlier bases seeking an orderly exit welcome such buyers.


How can you spot a late-stage base? It's just a matter of counting bases.
CAN SLIM investors know to look for one of a limited number of base types. Those are the cup with handle, cup without handle, flat base and double bottom. A more rare example, but still necessary to count, is the ascending base.


Remember, you must see an advance of at least 20% from any given breakout to the start of the next base. Otherwise, you're probably looking at a base-on-base pattern. And that just counts as one base.
Look at CheckFree (CKFR), a provider of e-commerce transactions services, portfolio management and other financial services.


From the start of the bull market in 2003 through 2006, the stock formed four bases. (The first doesn't appear on the accompanying chart.).
The first three produced gains of more than 20%.


But the fourth-stage base really petered out badly (point 1). It didn't take long for CheckFree to fall below its 50.65 buy point 14d proceed to go into a long slide.
CheckFree dived 42% until bottoming about a year ago.

If investors had taken my advise in the last few weeks, they would have profited from nearly every stock I recommended. Now, if you are one of those investors, it's probably a good time for you to take more risks, now that you have more confidence and money on your side. I believe in taking sound, calculated risks for maximum return. To do so, I believe the Financial sector is currently on sale, and is a good investment.

Bank of America invested $2 billion in Countrywide, the nation's leading mortgage lender, in what Countrywide called a "vote of confidence" as it weathers the credit crunch. Countrywide shares jumped more than 20 percent in after-hours trading. Bank of America said it looked at Countrywide's books and found the company to be undervalued. (Bloomberg) "Countrywide is no longer on the endangered company list," said Punk Ziegel analyst Dick Bove. "And it is a prize despite what has been said recently." (Los Angeles Times)

Encouraging news from banks -- including large central-bank borrowing by four U.S. banks and Bank of America's investment in Countrywide -- helped boost optimism early today that the damage from the credit market drought would be contained. (MarketWatch) Asian markets ended their day higher, with the Shanghai Composite Index closing above 5,000 for the first time. Japan's Nikkei 225 rose 2.6 percent, despite the Bank of Japan's decision to leave its interest rates unchanged. (AP in Yahoo! Finance) "The market is getting more comfortable," said ABN Amro Morgans analyst Tony Russell. "But confidence can certainly be shattered by any more revelations." (Reuters)

Putting together these signs, on top of Warren Buffett's investment into Wells Fargo, investors should also get into the scene now. Look into the large cap Financials and/or buy index funds. You can contact me for specific stock names and purchase price points.

Safe Asia Pacific Pick

For investors who are looking overseas for safe investments, PHI offers attractive dividends and high growth emerging market status.

Philippine Long Distance Telephone Company, together with its subsidiaries, provides telecommunications services in the Philippines.As of December 31, 2006, the company had 24,175,384 subscribers; 1,776,647 fixed line subscribers; and 264,649 broadband subscribers.

Dvidend yields at 4.1%. it tumbled below its 200-day moving average line Thursday as it fell victim to worries about the U.S. stock market. The Phillipines-based company provides local, domestic and international phone service to more than 20 million customers.

Currency plays

The U.S. central bank cut the discount rate on Friday in a surprise move that sparked a wave of buying by global investors relieved that a financial crisis stemming from subprime mortgage failures may have been averted.

European stocks shot into positive territory and prices surged after U.S. stock market opened as investors perceived the U.S. Federal Reserve would not neglect its role as lender of last resort amid a global tightening of credit.

"That's the right support for the market. This is an important message. The central bank is signalling that it is standing by to lend support," said Max Holzer, head of portfolio management at Union Investment in Frankfurt, Germany.

The Fed, in slashing the rate at which it lends directly to banks to 5.75 percent from 6.25 percent, noted that tighter credit conditions and increased uncertainty "have the potential to restrain economic growth going forward."
A group of major U.S. and some foreign banks, the Clearing House Association, said it endorsed the Fed's action as a step that could improve credit market conditions.

The dollar fell broadly on Friday after the Federal Reserve slashed its discount rate on loans to banks and said U.S. economic growth could slow in light of tightening credit markets.

The dollar started to pull back from a seven-week high against a basket of major currencies on Thursday after investors sought safe-haven bids in low-interest currencies and U.S. Treasuries in the midst of a global equities weakness.

n late afternoon trades, the euro was 0.5 percent higher at $1.3485, on pace for the biggest gain in a month.

The dollar index (DXY), which tracks the dollar's performance versus a basket of currencies, was down 0.44 percent to 81.371, after reaching a seven-week high early Thursday of 82.132.

Against the yen, the dollar was nearly flat at 114.28 yen, while the euro climbed 0.42 percent to 153.99 yen.

Currency fluctuations have not been nearly as volatitle as it has been this summer. Investors can consider arbitraging currecies, along with equity plays.

Don't rush into the market just yet~

Despite a sharp rebound on Friday, after the Federal Reserve cut its discount rate, the major averages finished another turbulent week lower.

Stocks have traded in extremely erratic fashion over the past few weeks, with the the Dow Jones Industrial Average consistently showing triple-digit swings and the S&P 500 recently falling more than 10% below its peak – the definition of a market correction – before paring its losses. The volatile trading follows a period last month when both the S&P 500 and Dow saw record finishes.

The Fed's move on Friday to change its discount rate – the rate at which it lends funds to banks – from 6.25% to 5.75%, however, was a welcome relief for investors and helped calm the global markets amid signs that credit was drying up. To be sure, it saved the market from posting more sizable losses for the week and served as a welcome confidence boost.

The decision to cut the discount rate was especially notable since the Fed showed concern about the turmoil in the financial markets and stated that it is ready to help support overall economic growth if necessary. In other words, if it is necessary, the Fed will cut the fed funds rate, which it left unchanged at 5.25%.

I do not believe this market is ready to rebound back to a bull market just yet. The credit crunch is not yet over, as the Fed move is more like a band aid then a cure. Initially the market reacted to the Fed move with a 300 point advance. However, that increase lost steam as institutional investors and average investors both, sold into the strength. By 12pm ET, Dow was barely holding onto its triple digit gain. That move, demonstrates a lack of confidence for the sustainability of the rebound. Although Dow finished with over 200 point increase, investors should observe the market on Monday before jumping back into the market big time. Paying special attention to Financials and Construction.

The timing of the Fed's action was also notable as it followed in the wake of an alarming announcement Thursday from Countrywide Financial (CFC) that it had drawn down the entirety of its $11.5 billion unsecured credit facility to supplement its funding liquidity position.

Incidentally, Countrywide's news fueled a 300+-point drop in the Dow at one point on Thursday, before a furious short-covering rally in the financial sector late in the session brought the Dow all the way back to virtually unchanged for the day.

It didn't appear as if there would be any follow-through early Friday, though, as a global market sell-off, led by a 5.4% decline in Japan, had investors on edge. When news of the Fed's action broke, though, the tone changed dramatically and stocks rallied out of the gate. The indices didn't close at their highs, but they finished the week on an upbeat note.

In other developments this week, the Commerce Department on Thursday showed that July housing starts fell 6.1% to a 1.381 million annual rate as builders continue to struggle with the housing downturn. That was down nearly 21% from the year ago level and marked the slowest pace since January 1997. Homebuilding stocks, not surprisingly, remained under heavy selling pressure.

Wal-Mart (WMT), meanwhile, posted disappointing second quarter results and offered a bleak outlook for the remainder of the year, exacerbating concerns about consumer spending. The retailer attributed the disappointing performance to pressure from the housing market.

In turn, Home Depot (HD) reported its first quarterly sales decline in more than four years due to the housing slowdown, while mortgage REIT Thornburg Mortgage (TMA) said it will delay its second quarter dividend payment due to significant disruptions in the mortgage market and a subsequent increase in margin calls from creditors.

On the economic front, the July CPI inflation data on Wednesday was reasonably good, and in line with expectations. July CPI was up just 0.1%. The core rate was also up 0.2%. Those are reasonably tame numbers that reflect modest inflationary pressures. The July Producer Price Index produced a mixed result with a larger than expected 0.6% rise in total PPI and a smaller than expected 0.1% increase in core-PPI.

In this market, I have suggested to many investors to invest in more defensive stocks, such as food and energy. I would continue to advocate that. I know investors might want to just hold cash, and wait-it-out, so to speak. But remember, investing wisely in a downturn, would mean better than average return when the market recovers. Cash at best gives you 4-5% in a CD. A market rebound, as traditionally seen in American markets, can easily give you double digit gains in less than a year. Think about it~

Apparently the housing market is in such dire straights that not even the lowest reading in confidence among homebuilders in 16 years has been a catalyst to move stocks (or bonds). At the top of the hour, The National Association of Home Builders/Wells Fargo index of builder confidence fell to 22, from 24 in July. That was also the second weakest reading since the survey's inception in 1985.
However, since the gauge was widely expected to fall for six straight month amid rising defaults on subprime mortgages and an inventory glut, the weak report has been overlooked, leaving investors focused on tomorrow's more influential housing starts and building permits data to paint a more accurate yet dismal picture of the ongoing housing correction.

Market loses more steam in early trading

As I forecasted, the market continues to go downhill in this early Tuesday trading. Traditionally summer are the "slow" times of the year, as many traders go on vacations. Coupled with the credit crunch issues, this market sees no sustainable recovery anytime soon, especially in the Financial sector.



In times like this, investors should begin to look at investments that are "safer" with low P/E ratios and solid earnings. Here's my advise to investors who are risk-averse and uncomfortable with complex vehicles such as ETFs. Look for American companies that has international exposures. The real growth, at least in the near future, will not come from America. You want to leverage solid multinationals that provides growth and value in your portfolio. Take a look at solid American multinationals that can benefit from its international exposure. Additionally, their large cap status needs to be appreciated in a volatile market, hence reducing its downside due to speculative trading.

Here's an industry that I would recommend. Take a look at high-end American luxury goods retailer/manufacture. These companies can benefit from the weak dollar, international exposure (as China is now the 3rd largest economy in the world and its consumers are buying up luxury goods like there's no tomorrow), and is safe enough to sustain anymore market downturn through solid earnings and creative hedging strategies. One name everyone would recognize would be Tiffany & Co. (TIF), it also pays about 1.3% in dividends. TIF is on sale now because investors are worried that a credit crunch would keep consumers wallets tight, however, high-end retailers traditionally are not affected by interest rates. Most of the TIF shoppers are affluent enough, and they will continue to shop for their significant others. A large contrast with shoppers going to Target or Walmart. So pick it up around low $40's.