Valuable Investing Advice

• Posted by Joe Fahmy
• on February 1st, 2010

I posted this advice on my blog last November. I am re-posting it with a few date changes because it applies to the current market:

I am about to share one of the most valuable lessons I have ever learned about the stock market. I learned it from one of the best traders I know. Even if you already know this, it never hurts to hear it again because as Tony Robbins says "Repetition is the Mother of skill." Ready?

Use the 50-day moving average of the NASDAQ Composite as your general guide to get in and out of the stock market. Consider it like a red light/green light on a traffic signal. If the NASDAQ is above its 50-day, then it's a green light to be invested in stocks. If below the 50-day, it's a red light, step on the brakes, and get out of the market!

When I look back at my 14-year trading career, 95% of the money I made in the stock market came when the NASDAQ was above its 50-day and when the "wind was at my back." Unfortunately, a large percentage of my losses came when the NASDAQ was below this line, and I forced trades in an unhealthy market. If you used this guide over the past 2 years, it would have kept you out of the market from Sept 2008 through March 2009, and it would have told you to get back in from March 2009 through January 2010. Even if you are not a technician, go to any free charting website and plot the 50-day to see this. In fact, I'll do it for you. The red line is the 50-day; you might have to click on "2y" at the bottom if the 2-year chart doesn't appear (click here to see).

I'm sure a few questions immediately come to mind: Why the 50-day? Why the NASDAQ? And why get out of the market?

The 50-day is one of the strongest areas of institutional support for both an index and a stock. I consider it as a "sign of health." For example, if someone asks me "what do you think of XYZ stock?" The first thing I do is pull up a chart and see if the stock is trading above or below the 50-day. I almost NEVER buy a stock below its 50-day because if it's not good enough for the institutions to support it, it's not good enough for me. (Note: the 200-day is also a strong area of support, however a stock or index near its 200-day is usually already below the 50-day, and further deteriorating in health).

I use the NASDAQ Composite because, in my opinion, it is THE leading index filled with the young, entrepreneurial growth companies that make for Great Winning Stocks.

Why get out of the market? Because I believe in Jesse Livermore’s philosophy: the market is healthy 2-3 times a year, do your homework to identify those times, and trade them aggressively. The rest of the time, build cash and protect your profits. Livermore believes you are a fool for trading everyday and “you should not be in the market all the time.” By the way, I do not recommend irrationally selling everything when the NASDAQ breaks below its 50-day. Other factors need to be considered such as distribution days and if leading stocks are breaking down. On the way back up through the 50-day, such as in March 2009, one needs to evaluate "follow through days" and if stocks are breaking out of strong bases. In other words, the 50-day is a GUIDE to use in addition to other market variables.

I decided to re-post this trading advice because it significantly applies to today's market, which broke below its 50-day recently. On Friday 1/22/10, the NASDAQ broke below 2226 on heavy volume. While watching the tape, it seemed like NO support was coming in at this level. In addition, the index has experienced distribution (professional selling) in 7 of the past 11 trading days AND leading stocks are breaking down. My best advice is to raise cash and wait patiently for healthier conditions, which could come very soon. I share this valuable advice with the hope that you can learn from my past mistakes and prevent further losses.

Follow me on Twitter @jfahmy

Tickers: Anthony Robbins, Jesse Livermore

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