Insider Trading - Can You Take Advantage Of It?
Being on the inside without the 'Smoky Room'
Who wouldn’t want the opportunity to be on the inside? It’s your favorite holding; this company has been in your stock portfolio almost since day one. If you had the chance to be a fly on the wall and do a little inside trading, you would do it wouldn’t you? Go to jail? Hey this isn’t illegal; you’re simply going to use something available to all successful traders.
Insider trading is illegal under one circumstance. If a person with knowledge in a company acts on basic stock information before it is available to the general public, then it is illegal. Virtually every executive in every company owns stock; it’s not insider trading, it’s required in many companies. They can buy and sell like fools; the only difference is that the SEC considers key employees and directors as insiders and requires them to register their trades of company stock within two days or be accused of insider trading. Everything is fine in the world of the stock market, and it works to your benefit as well. Here’s how you can do a little legal insider trading.
Remember your favorite company, ABC Inc.? Of course you do. You notice that the president of ABC Inc. just sold a bunch of shares of the company, but that doesn’t really tell you anything. Maybe the IRS got a hold of him, he wants to enhance his portfolio diversification or that 20-something bride of his filed for divorce. But a few days later, you’re checking the insider trades on the Internet, (perfectly legal and very public information) and you notice he sold again, as did the CFO and the Director of Engineering. Now the warning bells go off in your head and you plan to do some stock technical analysis.
Since you are a knowledgeable trader, you start doing some fundamental analysis of ABC Inc. That’s when it jumps out at you; how did you miss the press release two weeks ago that the company was having money management problems? After a quick check on the ABC Inc. stocks, you realize just about everyone missed that announcement because the stock price is just as high as ever. You sold your share in the company and just did a little insider trading! You are going to make a ton of money and the Feds won’t be showing up at your door. Sounds like a great day to me!
Here’s what happened. The announcements were made but nobody caught them. The executives followed procedures, sold their shares and registered the trades with the SEC. The stock market information hit the streets and you found it. There was no stock volatility so the average investor didn’t catch it; but you’re no average investor, you’re an insider trader!
You didn’t rely on the original sale alone. You looked at the move and started running risk reward ratios. You calculated a price to earnings ratio and everything looked fine. You did a price to cash flow ratio and there it was, the company was bleeding money. You make the sale and two weeks later, the quarterly report comes out and down goes the stock. You just made good money and since you are still bullish on the company, you take some of your earlier profits and buy this hot stock at a much lower price! That’s how you can take advantage of a little insider trading.
Remember, executives selling stock isn’t necessarily some great insider trading stock market tip. But when you couple that information with some of your technical analysis tools, you are definitely operating some impressive insider trading…..and you even bypassed the smoky room to boot!
Market Direction:
Candlestick signals make it very easy to observe the obvious. This is best illustrated when analyzing the trend of the Dow. The obvious factor of this uptrend since mid-July is how the 20 day moving average consistently acts as the support. How Do candlestick signals act as a benefit? The ability to analyze the indecisiveness of investors at each pullback to the 20 day moving average produced a simple evaluation. The Bears were not in control as the markets traded at the support level. Long positions do not get spoofed out.
The markets definitely liked what the Feds had to say on Wednesday. The Dow moved from the lower end of the trading channel to the top end of the trading channel in two days. This is the area that has acted as resistance for the past three months. But this time there is a difference. Is there enough strength in the markets to break through the top of the trend channel? A simple analysis will recognize that possibility.
DOW
Note the conditions of the stochastics during past tests of the top of the trend channel. They were in the overbought condition. Notice the position of the stochastics today. The stochastics are slightly above midrange, a lot more upside potential. The Dow is currently trading at the top of the trend channel. There are no candlestick sell signals as of yet. With the stochastics showing more upside potential and no potential candlestick sell signal, the probabilities are that much greater that prices could breakout through the top of the trend channel. This may cause a new strong rally to start.
The longer the markets in general maintain a direction, no major whipsawing, the better the possibility of recognizing high profit patterns. The ISRG chart illustrates what would be normally expected after a candlestick reversal signal in the oversold condition. An uptrend. The probabilities of an uptrend maintaining itself is obviously better when the markets are in a steady uptrend.
ISRG
Bigger percent profit moves can be exploited from the markets when recognizing the candlestick high-profit patterns. Recognizing when those patterns are setting up is made easier to see with the candlestick signals. Knowing the potential of a high profit pattern and knowing there won't be any major downside oscillations in the market allows for huge profits. As can be seen in the CRM chart, the price move had all the makings for a Jay-hook pattern, an inordinately strong up-move followed by profit taking. After a few days, the profit taking could be seen to be diminishing with the appearance of a Hammer and a small Spinning Top. The bullish candle following the Spinning Top was a clear indication the profit taking was over and the potential for another strong move to the upside was in place.
CRM
Candlestick analysis is merely the common sense evaluation of what high probability signals are illustrating. It adds the element of investing funds into high probability situations. Have you ever bought a stock with the thought process of "hoping" this trade would work out? The candlestick signals eliminates that mental process. Each signal and each pattern demonstrates investor sentiment that has been observed many times over the centuries. Those signals and patterns have probable results. Learn how to use candlestick analysis correctly, and you will control your investment future for the rest of your life.
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