Use the Quick Ratio
Investors use the quick ratio, also known as the acid test, to determine if a company has the ability, in the near term, to pay back current debt. Creditors also use the quick ratio in deciding whether or not to extend loans to companies. Both investors and traders use the quick ratio in evaluating stocks and deciding if a stock price is likely to rise or fall. The quick ratio differs from the price to earnings ratio in that it does not measure current cash flow but rather cash, or cash equivalents, in hand. In this sense investors use the quick ratio as a measure of a stockfs margin of safety. A stock with a high quick ratio will be seen as a secure investment whereas a stock with a low quick ratio will be seen as risky. The day trader may use the quick ratio in picking stocks that might become volatile due to debt problems. If a company is currently unable to retire its debt, it may subject to stock price volatility. Following the stock with Candlestick analysis will help the trader anticipate price movement in response to this situation.
Investors use the quick ratio as part of fundamental analysis of stocks. Although the fundamentals of a stock are quickly discounted by the market, knowing fundamentals gives the investor or trader as clear idea of the likely limits of a stockfs price. In long term investing, intrinsic stock value is thought by many to be the gold standard. However, a company with great products and services still needs to manage its short term debt in order to survive. Sadly, too many promising companies go out of business or are taken over because of short term debt issues. The savvy trader will spot these stocks and use technical analysis tools such as Candlestick pattern formations in order to profitably anticipate changes in price.
To use the quick ratio effectively one needs to understand that what constitutes an acceptable quick ratio varies among market sectors. In other words the investor or trader will compare a stockfs quick ratio with other stocks selling comparable products or services and not with the market in general. A quick ratio of 1 or better tells us that a company has cash and quickly convertible assets sufficient to retire immediate debt. It does not tell us about the companyfs credit worthiness. For example, a company with substantial debt free property and plant facilities as well as a strong cash flow will typically be able to borrow money to cover short term needs even it does not have the cash on hand. We would typically not expect to see a great deal of market volatility in such a stock using Candlestick charting techniques. In trading stocks or in options trading the quick ratio is a useful guide to short term credit worthiness. Spotting stocks with questionable quick ratios and analyzing with Candlestick patterns can lead to profitable stock trading. For the long term investor finding stocks with high quick ratios can be a first step to finding valuable additions to a stock portfolio.
For example, XLNX formed a Doji right at the resistance/breakout level. Knowing the simple trading rules associated with a Doji made getting into a strong price move relatively easy. A trend is going to move in the direction of how they open a price after a Doji. This makes identifying big potential trades very simple to analyze. As seen in the XLNX chart, a positive open after a Doji would produce the expectation of the price continuing higher. At the same time, a price moving higher would be breaching the highs of late March. This type of breakout can be seen by all technical investors. That is why it is important to get in early, which is what a positive open after a Doji will do.
The CHTR chart has a number of candlestick indicators that would pinpoint when a strong breakout move is about to occur. The Doji right on the T-line is followed by bullish confirmation. The support of the T-line, the creation of a morning star signal, and the formation of a slow curve pattern, produces a high probability situation that the prices will be moving higher and with a good possibility of moving significantly high. This would be the expected results of a slow curve breakout.
Today the Dow formed a Shooting Star signal, at the same time the NASDAQ formed a Bearish Left/ Right combo. Tomorrow's open will show whether the uptrend will continue or some profit-taking will be apparent current next few days. Continue to hold the strong charts but do not be hesitant to liquidate any long positions that are demonstrating candlestick sell signals. Anticipate a few days of consolidation.
Mini training - May 3rd - 8 PM ET - Identifying High Probability Breakout Patterns - This mini training demonstrates how to use the candlestick signals in conjunction with support and resistance levels, producing high profit trades situations. The simple techniques illustrated in this training will be easy to comprehend whether a sophisticated investor or a beginning trader. Do not miss this opportunity to learn trades setups that can produce consistent and inordinately strong price moves. Click here for more information.
May 19 2011 - Tina Logan will be the guest speaker for the Thursday night training session. Please mark your calendars.