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SUBSCRIBER QUESTIONS

Q: How should your readers go about choosing the stocks to invest in from the newsletter?

A: Our method of investing and making money in the market is different from many places. Most brokers or managers want you to buy into a stock and sit in it for a long time. You buy it at a low, 'value' price, and sit on it until the rest of the market decides to buy it as well. Could be a long wait. We love to be able to buy and hold long-term as well; in the 1990's that was a great way to invest with CSCO, DELL, INTC, and others on a rampage for years. Still, we don't just buy because a stock is 'cheap,' and then hope it rises. We buy a stock when it looks ready to make an important move (short term or longer term) so we can get the most out of the move. Sometimes they never make the move. They break down before that. We market those off and look at them again later. The key is making the move over an important resistance point that can free it of sellers and launch a good run. That may be a shorter term move or a longer term move. We have targets in mind, but we let the stock show us if it is going to continue to run for us.

Given the end of that bull run and the subsequent bear market, however, the recovery has been very choppy. Some stocks have done very well for us over the long run (WLP, LLL, ACS, BBBY) and are still solid, while other longer term winners folded up (GNSS, NVDA). Most stocks are still trying to work out of the bear market, and the action remains choppy. We can make 15%, 20%, 30% on many stocks over a fairly short time period (days to weeks), and then see the stock turn over and lose all the gain and then turn into a loss. The market just does not support a lot of long term buy and holds right now.

That is not necessarily the end of investing. What we have always done, no matter what the market conditions, is get a handful of investments that we really like for each session or each week. We rank them in preference. Then we let them make the move. In other words, I pick a group that looks promising. Then I had buy points for them. I would only buy if they hit the buy point. When I worked full-time at another job I would call my brokers in the morning and let them know what I was looking at. Then they would call me (sometimes not) when the move was made. I also started putting in buy orders above the breakout point and letting the stock hit it while I was away. Lots of times I would not even get in on the first day of the move; I would come home and see the stock had started the move and then get my order in for the next session either beforehand or after the open with a call to the broker. Then I would set my stop point and a target I already had in mind.

Again, the key was focusing on stocks that I liked (good sector, leader, good pattern, type of play) and letting them make the move. Sometimes I would run out of money for the plays on my list. Sometimes I would see others make the move but wait on the select few I wanted to focus on. The key was picking a handful that I wanted to invest in and then let them make the move. That way I would not lose focus and would not get stretched too thin with too many positions.

THE PLAYS:

Reading the Plays: Please note that when we reference the 10, 18, and 50 day moving averages (MVA), those are exponential moving averages (EMA). The 200 day moving average is always simple (SMA). We will note when we reference a particular MVA differently, e.g., a simple 50 day MVA. Please click on the Yahoo and chart links for company and charting information. A "prior high" refers to the high at the start of a base.
For conserving space on listings of stop losses, the symbol (7%) indicates that the stop is 7% below the buy point.

Stocks from Monday's report:
STSA: Still looks great in its ascending wedge.
CRFT: Still flying higher!
PRU: Not the action we wanted. Falling hard after the nice doji Thursday in the handle.
CHPC: Making the move on rising volume.

Continued Plays:
MYK: Still in the breakout attempt, but still no volume.
CCRN: Starting to move higher in the handle on the double bottom but volume is not there yet. Still time for it to rise into the breakout.
DANKY: Another tight doji at the 10 day MVA on once again low volume. Still looks ready, but lets see the move.
RMCI: Big breakout on big volume!
PEGS: Yes, was indeed ready to start the move to the new high, rising on strong volume today (278,800).
SPF: Looks as if it already wants to try the breakout over the handle high.
OMX: Continuing the move on very strong volume.
HARB: Running, but volume backed off today.
SNS: Still working on forming the handle on below average volume. Good.
HKF: Showing a doji on slightly higher volume. Needs to pick up the pace.
GBBK: Another low volume pullback to the 10 day MVA. Needs to hold here.
CHK: Trying to start back up after Friday's doji.
CHGO: Gapped higher and then sold off. Volume much lower but still above average volume. After a ballistic move it may try to test back further. Can take some profits or ride it down to 7 or so and look for another bounce there.

Best Plays: They all look good.
1) RMHT: Strong bounce off of the 50 day MVA.
2) HUM: Forming the handle for another breakout.
3) AGAM: Nice handle forming.

New plays:

RMHT (RMH Teleservices--$19.30; +0.93; no options): Management services
http://biz.yahoo.com/p/r/rmht.html
STATUS: Cup w/handle. Trying to get back to the all-time high hit September 2000. There is some resistance at the 20-21 level, but the stock has formed a 3-month cup with handle, testing back to the 50 day MVA Friday on very low volume and then bounding higher today on very strong volume (276,200; avg. is 115K). Great buying and money flow is excellent. Price/volume action is good in the pattern.
BUY POINT: Aggressive (50 day MVA bounce): 20.10. Breakout: 21.40 on volume of 300K. Target=25.62. Stop=19.90.
POSITION: Stock (no option chain).

http://www.investmenthouse.com/cd/rmht.html

ASBC (Associated Bancorp--$38.80; -0.06; optionable): Midwest regional bank.
http://biz.yahoo.com/p/a/asbc.html
STATUS: Trading range. Broke out of a 13-month trading range/flat base in March. It has since moved into another trading range between 37 and 39 that is forming into a double bottom. May be trying to form a handle right now at the top of the range, showing a doji today after tapping 39 on the high. Volume was just about average on the move (165,500; avg. is 167,500). Money flow is strong and relative strength has already broken out. Price/volume action is excellent in the recent pattern.
BUY POINT: 39.10 on volume of 250K+. Target=46.94. Stop=37.65.
POSITION: Stock and/or September $35c to buy (QVS IG; only 28 OI as of now).

http://www.investmenthouse.com/cd/asbc.html

Revisited Plays:

HUM (Humana--$14.31; -0.24; optionable): Health care plans
http://biz.yahoo.com/p/h/hum.html
STATUS: HUM gave us a great run before and now looks to be setting up for another. After a great move in February and in early April, the stock is currently pulling back from a high near 15 on lower volume (615,600; avg. is 1.05 million). Over the past 15 months, the larger pattern is a cup with a high at 15.28 (closing). After testing that level three sessions back, the stock is pulling back and looks to be making a handle as noted. Money flow is ahead of price and relative strength is impressive, higher than it was back at the pre-correction high at the start of the base. In other words, it has gained strength in the overall market as it has worked through this base. It make take some more time to complete the handle given the size of the base, but that is okay. This could be another good run when it does.
BUY POINT: 15.30 on volume of 1.5 million. Target=18.24 (initial). Stop=14.20.
POSITION: Stock and/or August 12.50c to buy (HUM HV).

http://www.investmenthouse.com/cd/hum.html

PKG (Packaging Corp. of America--$19.59; -0.01; optionable): Paper & products
http://biz.yahoo.com/p/p/pkg.html
STATUS: Still in the 8-month cup with handle pattern, testing down close to the 50 day MVA on Friday's low (19.20). Today it jumped higher on much stronger, above average volume (484,400; avg. is 290K). Relative strength has broken out ahead of the stock.
BUY POINT: 20.30 on volume of 550K+. Target=24.55 (initial). Stop=18.88.
POSITION: Stock and/or October 15c to buy (PKG JC; no OI).

http://www.investmenthouse.com/cd/pkg.html

AGAM (Acres Gaming--$5.55; +0.03; no options): Computer peripherals
http://biz.yahoo.com/p/a/agam.html
STATUS: In a 3.5 month cup with handle pattern as the stock moves up in its base after hitting highs near 7 back in 2000. It has formed a handle over the past two weeks, fading back on falling, below average volume (41,100; avg. is 100K). Money flow is strong and relative strength is high relative to prior levels at higher prices. Price/volume action is excellent in the pattern.
BUY POINT: 5.80 on volume of 145K+. Target=7 (initial). Stop=5.25.
POSITION: Stock.

http://www.investmenthouse.com/cd/agam.html

PORTFOLIOS: Each report, we look at these to see which is in a buy position. We don't cover them all each time, just the ones that look ready to pick up a few shares.

THE LEADERS: DGX, FRX, LLL, MIK. New: ICUI; RMCI

ICUI (ICU Medical--$38.16; +1.72; optionable): Medical instruments
http://biz.yahoo.com/p/i/icui.html
STATUS: Made the buy point on very strong volume (204K; avg. is 90K). Just the right timing to open this new addition to the portfolio!

RMCI (Right Management Consultants--$27.75; +2.30; optionable): Management services.
http://biz.yahoo.com/p/r/rmci.html
STATUS: Added this weekend as well, and it too wasted no time in breaking out on a heavy volume session (598K; avg. is 298K). It gapped over the buy point at 26 and ran from there. We are looking for a test of 27, and then we will enter positions on this portfolio stock that looks strong.
BUY POINT: On a pullback toward 27 to test the break over 26 and a bounce from there.
POSITION: Stock.

FRX (77.64; +0.14): Showed a tight doji today just above 77 (low at 77.20), and rose slightly. Volume was lower but right at average (1.39 million). Looks as if it will hold here, so we are going to buy back the calls sold if it starts back up tomorrow.

UP & COMERS PORTFOLIOS: BBBY, SRCL

SRCL (62.84; -0.67): Showing a doji above the 10 day MVA after testing 65 and pulling back. Volume has dropped off on the move after a strong volume bounce back over the 50 day MVA. We will look at a breakout over 65.20 on strong, above average volume (avg. is 325K).

MEMBER PORTFOLIO: CSCO, SEBL, EMLX, BRCM, HDI, BRCD, BUD, AMGN, WMT, ORCL, HB, NOC

BUD (51.70; -0.79): Falling through the 18 day MVA on rising though still below average volume (1.91 million). After four bounces up the 18 day MVA, BUD looks ready to test the 50 day MVA at 50.05. Stocks tend to run up the 18 day MVA 4 times after a breakout, and then need to test the 50 day MVA. We can sell some May $50 calls here on the pullback, buying them back when the stock hits the 50 day MVA and bounces.

Good Investing!
Jon L. Johnson and The Daily Staff

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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