Second Opinion Weekly - Quick Start Technical Terms Explained

In Quick Start, our goals are to:

  • Answer the most basic "How do I use it?" questions
  • Show you how to read and interpret the Second Opinion Weekly report
  • Provide some keys and disciplines used by institutions
The purpose of Second Opinion Weekly is to give you access to meaningful information that assists you in making those difficult Buy-Hold-Sell decisions. QUICK START is a 10 minute primer focusing on Second Opinion Weekly that explains our research in easy-to-understand, everyday language rather than technical jargon. Whether you are an experienced investor or a newcomer to the market, QUICK START will unlock the power of Second Opinion Weekly for you. Refer to it any time you need a refresher.

Let's get started !

What is Second Opinion Weekly?

Second Opinion Weekly is a quantitative model designed to help you manage market risk. Whereas analyst reports are intended to manage fundamental risk by supplying information on "fundamentals" such as sales, earnings, and industry outlooks, quantitative or "technical" analysis measures market risk--how investors and traders are actually trading. (Think about it: If you like a company and no one else does, it's unlikely that you'll make any money. If you like a company and others do as well, it's more likely that you'll make money. Second Opinion Weekly tells you what the others are thinking by measuring what they are doing with their money.)

Second Opinion Weekly generates Buy-Hold-Sell opinions on nearly 5,000 stocks representing over 90% of the daily volume on the NYSE, AMEX and NASDAQ markets. (Additional stocks are added each month. See the FAQs for the procedure.)

Second Opinion Weekly will enable you to position stocks in the early stages of up moves and get out of stocks prior to a plunge.

Let's first take a look at what is contained in the six sections of each Second Opinion Weekly. Afterwards, we'll look at what to key on when making your own individual Buy-Hold-Sell decisions, including the four warning signs that Second Opinion Weekly flashes for every stock.

  1. The Opinion Box
The Opinion Box presents key information. You will find the current opinion (Long, Neutral or Avoid) as well as the date and price when the opinion was originally formed. To further assist you, Neutral opinions provide you with direction and are listed as either Neutral from Long (a downgrade) or Neutral from Avoid (an upgrade). Finally, new additions to the Second Opinion Weekly universe carry a Long, Neutral or Avoid opinion but will not show a retroactive price and date. Price and date will be provided once the stock has its initial opinion change.
  1. Recommendation Box
The Recommendation Box is designed to give you up-to-date guidance as to what the appropriate action for a stock should be THIS WEEK! Unlike other research, every Second Opinion Weekly has a date and price for the current opinion. The real question is "How valid is that opinion today?". For example, have you ever bought a stock from a firm's "Best Buy" list? Did you really know what the analyst thought about the stock the day you bought it. Was he still comfortable with the recommendation or was he concerned about the stock? You don't really know because you couldn't read his mind. The Recommendation Box lets you read Second Opinion Weekly's mind. If the model still likes the stock the recommendation will be "Buy". If the model sees deterioration in the trading patterns, it may say "Hold" or "Consider closing the position". The idea is to give you advance warning of changing conditions. And we all know the only thing consistent about the stock market is change.
  1. Comment Box
The Comment Box translates the technical picture of the stock into action-based language. The Comment highlights the technical condition of the stock. The Comment Box, one of the most popular features of Second Opinion Weekly, is best utilized in conjunction with the Recommendation Box.
  1. The Week's Activity, Price Analysis, and Moving Average Boxes
These three Boxes provide you with recent price data as well as historical data such as the trailing 52 week high and low and the percentage change in price over the last month. One of the most important pieces of information contained here is the Stop.

Stops are area of significant recent support or resistance. The break below a Sell Stop or above a Buy Stop is an extremely important change in the technical condition of a stock and typically represents the beginning of the end of a previous trend. Stops are typically far away from the current price when a stock is clearly in an established trend. The stop will tighten closer to the current price when the stock's trend begins to change. For example, in early 1998, the sell stop for RAIN was near 23. The stock was experiencing significant selling. A few weeks later, the stock fell to 11 as the reason for the selling came out: disappointing earnings. Conversely, at the same time the buy stop on DEC was near 40. The stock was experiencing significant buying. At 45, the company announced it had received a $56 take-over offer.

The breaking of a stop is one of the four warning signs that a high probability exists that a stock's trend is changing. However, since it is one of four signs used to confirm a change in a stock's technical outlook, the opinion will not change even though the stop is broken.

Advanced technicians will want to note support (a price at which the stock is expected to hold), resistance ( a price at which the stock has difficulty breaking through). Support and Resistance are calculated using 3 seperate trend lines( for each) and extending the trend line to the current date. The closest trend line is used as the support or resistance number. As the stock moves through the trend line the next trend is then used. When all the trend lines have been violated, the value goes to N/A(Not Available).

The Moving Average Box provides you with details on four of the most popular moving averages. Included in the data is the current value of the moving average, the percentage of the current price represented by the moving average value, and the slope of the curve. This box can be very usefull in identifing stocks which are very extended up or down.

  1. The Volume Analysis Box
The Volume Box provides volume statistics. Of particular importance is the Up/Down slope, our most sensitive "smart money" indicator. A green "Up" is bullish and a red "Down" is bearish. The Up/Down slope can be a key indicator alerting you to a potential change in a stock's trend. While changes to the Up/Down slope are not incorporated into the four warning signs for matters of simplicity, you'll want to be aware of any change. You may choose to use this indicator as a tie-breaker if you experience difficulty in making a Buy-Hold-Sell decision.

Advanced technicians will want to note a stock's trading volume vs. it's trailing one month average daily volume and monthly percentage change.

  1. The Technical Analysis Box
The Technical Analysis Box contains eight different indicators. Novice technicians need only to focus on the Power Rating. The Power Rating reduces all the technical underpinnings of Second Opinion Weekly to a single number. You can gauge a stock's strength or weakness by comparing its current Power Rating to the three benchmarks that trigger the opinions: crossing +60 upgrades to Long, crossing -27 downgrades to Avoid, and changes to Neutral occur on crosses of zero. Thus, a Long Opinion with a Power Rating of 12 tells you there has been some deterioration in the technical condition (you would expect to see at least one of the four warning signs in this case) while a Long Opinion with a Power Rating of 66 or 83 is a Long still in healthy technical condition.

Day traders or "scalpers", those with an extremely short-term perspective, will want to note the stochastics (Slow %K and Fast %K). These give one day and three day overbought/oversold signals.

Advanced technicians will want to note the Bollinger Band and Wilder's RSI readings and MACDs.


How do I use Second Opinion Weekly?

There are two key elements to Second Opinion Weekly. The first is the OPINION which we have already covered. The second is the SCORE. Together they produce the Recommendation which is the best way to manage your stock investments.

The Score reduces the level of market risk to a single number for interpretation purposes. Scores range from 0 to -4 for Longs, attempting to show levels of technical deterioration and guiding you to an exit point. Scores range form 0 to +4 for Avoids, attempting to show levels of improvement and guiding you to an entry point. The table below summarizes the Score System.
 
Opinion Score Interpretation / Market Risk 
Long 0 Stock is a buy. Market risk is low.
Long -1 Stock is a buy with minor deterioration. Market risk is low.
Long -2 Stock now experiencing technical deterioration. Market risk is moderate but increasing.
Long/Neutral -3 Warning sign if you own the stock. Significant technical deterioration. A good point to begin evaluating your individual Buy-Hold-Sell strategies. Market risk is significantly increasing.
Long/Neutral -4 Warning sign if you own the stock. Extreme technical deterioration. Market risk is high.
Avoid 0 Stock is an Avoid. Market risk is high for buyers.
Avoid +1 Stock is an Avoid with minor improvement. Market risk is high for buyers.
Avoid +2 Stock now experiencing technical improvement. Market risk is moderate but decreasing for buyers.
Avoid/Neutral +3 Warning sign if you are short the stock. Significant technical improvement. A good point to begin evaluating your individual Buy-Hold-Sell strategies. Market risk is significantly decreasing for buyers.
Avoid/Neutral +4 Warning sign if you are short the stock. Extreme technical improvement. Market risk is low for buyers, but not as low as a Long with a score of 0.
The Four Warning Signs

Our relationships with institutions and our experience over the years have provided some reliable, tested criteria in making Buy-Hold-Sell decisions with a high degree of confidence.

A "Long" that flashes one or more of the following four warning signs is in trouble. At this point, you should be monitoring the stock closely and considering defensive strategies:

  • breaks the Sell Stop,
  • Score drops to -3,
  • Score drops to -4,
  • the opinion gets downgraded to Neutral.
These warning signs may appear in any sequence, but all must occur before an opinion gets downgraded to an "Avoid".

For advanced technicians and short sellers, the same warning signs apply to Avoids:

  • breaks the Buy Stop,
  • Score improves to a +3,
  • Score improves to a +4,
  • the opinion gets upgraded to Neutral.
These warning signs may appear in any sequence, but all must occur before an opinion gets upgraded to "Long".


Can Market Edge improve my investing results?

The following back tested results used the Score to trade the stocks that are incorporated in the S&P 100 Index (OEX) over a 5 year period from 8/6/90 to 5/16/95. Four tests were performed for the Long side. Long positions were opened when a stock was Upgraded to Long by SECOND OPINION. Positions were closed when the Score reached -1, -2, -3, and -4. The results are listed below.

                              ANNUALIZED      % TIME
   STRATEGY                     % RETURN    INVESTED

   Buy on Upgrade to Long           9.5%       38.5%
   Sell when Score is -1                                        

   Buy on Upgrade to Long          15.2%       46.2%
   Sell when Score is -2                                        

   Buy on Upgrade to Long          23.0%       53.9%
   Sell when Score is -3                                        

   Buy on Upgrade to Long          25.1%       56.5%
   Sell when Score is -4                                        

   S&P 100                          9.6%      100.0%
The annualized percent return is the average annual return computed from the total profits and total capital required for the life of the test. The average annualized % return is calculated by taking the dollar amount of the largest transaction less any profits from prior transactions divided by the number of years in the test for each stock in the test. The percent time invested represents the time spent in open positions.

Notice that the results are much better if the position is held until the Score reaches -3 or -4. Not only does the annualized percent return increase, but the time invested increases also. When the Score reaches the lower values a greater degree of deterioration occurs before the position is exited. Of particular importance in this analysis is the % time invested. For example, opening positions when the Opinion was Upgraded to Long and closing when the Score reached -3 generated a 23.0% average annualized return while being invested only 53.9% of the time. Being fully invested in the S&P 100 Index during the same period would have generated a 9.6% annualized return.

A more aggressive approach when initiating positions can be accomplished by entering into positions using the Early Entry Long in the Personal Stock Watch module. Create a list of stocks that you want to monitor and then access Early Entry Long to access those stocks which meet the Early Entry criteria.

The results of trading the same list of stocks over the same time period follows.

                              ANNUALIZED     % TIME
   STRATEGY                     % RETURN   INVESTED

   Buy on Early Entry Long         13.4%      46.7%
   Sell when Score is -1 

   Buy on Early Entry Long         23.0%      55.7%
   Sell when Score is -2

   Buy on Early Entry Long         31.5%      64.3%
   Sell when Score is -3 

   Buy on Early Entry Long         33.4%      66.5%
   Sell when Score is -4 
Once again you will notice that the lower the Score gets before exiting the position, the better the results.

As you can see, during this test Second Opinion Daily outperformed the S&P 100 by over 2.5 to 1.

Of course, past results are no guarantee of future performance.

Summary

First and foremost, it pays to remember that nothing works ALL of the time and there is no such thing as a magic "Black Box". If you want Second Opinion Weekly to fulfill this fantasy, you will be disappointed.

However, technical research can help you manage market risk, as opposed to fundamental risk, by measuring what people are thinking and by identifying what they are doing. This is the basis for the old adage "The Trend is your Friend". Adherence to the technical conditions enables you to position yourself in stocks in the early stages of up moves and alerts you to get out of stocks prior to significant declines.

Market Edge is a leader in providing technical research in a form the individual trader or investor can easily use and understand. Market Edge identifies conditions that have a high probability of predicting bullish or bearish price movement. By focusing on the few items highlighted in our discussion of the six components of the Second Opinion report and familiarizing yourself with the Scores and four warning signs, YOU provide yourself with powerful and reliable input that assists in making those difficult Buy-Hold-Sell decisions.