The Van Tharp Institute

April 27, 2005 — Issue #216

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In this Issue:

Trading Tip

The Latest on Crude Oil Prices: Some Basic Technical Analysis By D.R. Barton, Jr.

May Workshop

Professional Tactics Of Day Trading Workshop - Expert Training

Real Estate

$99 Down Preconstruction Condos! By Chris Anderson, PhD

Listening In...

Personal vs. Managed Account Trading

View this newsletter on-line, or read back issues

 

 

Trading Tip: 

The Latest on Crude Oil Prices: Some Basic Technical Analysis

Trading Tip

by  D. R. Barton, Jr.

The best result that we can hope to achieve using “standard technical analysis” is to gain an edge –something that’s right 55+ percent of the time.  Or it can be something that will give us a heads-up when a larger move than normal is on the horizon.  Knowing that we are looking for an edge and not a sure thing certainly helps us in putting useful beliefs together for using technical analysis.

There are some very good analysts (both fundamental and technical) out there looking for crude oil prices to head down in the short to intermediate term.  So I decided to take a look at the charts and see if some of the standard tools that we like to use support this view.

Momentum Indicators.  The three most popular momentum indicators are (in no particular order): MACD, RSI and Stochastics.  (For an easy to use reference on these and other indicators, check out http://stockcharts.com/education/IndicatorAnalysis/index.html .) 

One of the things that we have found very useful in our trading is looking at the convergence or divergence between momentum indicators and price.   Convergence means that the momentum indicator “agrees” with the price direction and that the given direction is likely to continue, while divergence indicates a disagreement.

Looking at the Crude Oil futures contract, I checked our three momentum indicators versus price.  The significant price feature on the crude oil chart is a sequence of two tops: one on 4/10 and one on 4/25.  In this sequence, the first top (58.28) is higher than the second (56.00).  So we have sequence of lower highs, or a rally that failed to reach old highs.  In general, this is a bearish sign.  Our question is:  do the momentum indicators show convergence with this price movement?

The answer from our three momentum indicators are yes, yes and yes.  MACD, RSI and Stochastics show lower values on 4/25 than they did on 4/10.

Chaikin Oscillator.  Marc Chaikin is a technical analysis genius.  You can find the results of his work in almost any charting package in the form of “Chaikin Money Flow” and the “Chaikin Oscillator” among others.  You can find more on these indicators in using the link referenced above.

The Chaikin Oscillator measures the momentum of money flow into or out of a stock (or commodity in this case) using both price and volume as raw data.  In absolute and relative terms, the Chaikin Oscillator confirms a downward price move when looking at the 4/10 and 4/25 tops.

Key reaction areas.  Lastly, I looked back on the crude oil charts for past key reaction areas – support and resistance zones where price is likely to react.  And I found a big one.  On 10/25/2004, Crude oil made a high of 55.67, a high that was not broken until March of this year.  That old high is in the same area where the 4/25/2005 high faltered, giving us another piece of information for our analysis.

When trusted technicians and analysts point to characteristics that should lead price down and my own analysis agrees, I believe that I have the basis for developing an edge that I can act on.  Crude oil prices may or may not be headed further down from here, but I think the weight of evidence in on the bearish side.  Your actions should reflect your own beliefs and analysis, but this step-through may give you some helpful ideas that you can use.

D. R. Barton, Jr. will be teaching the upcoming Professional Tactics of Day Trading Course, May 14-16, 2005. 

He is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching and teaching in the markets since 1986.  D. R. has taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-edom and co-creator and contributing author on Fin-ancial Fre-edom Through  Electronic Day Trading. He also writes a stock screening newsletter called Ten Minute Trader.

Editors Note: Throughout the issues you will see certain words with odd spellings, such as Fre-edom and mort-gage. This is because spam filters are likely to block message that contain certain words and this is one solution.

May Workshop...

Professional Tactics of Day Trading

May 14-16, 2005

Phoenix, AZ

Register Now and Qualify for a $500 Discount

 

Learn More ...     

Real Estate

$99 Down Preconstruction Condos!
How Much Money is Required to Get Involved in Preconstruction Investing?

By Chris Anderson, PhD

Ok, now close your eyes and imagine the late night infomercial proclaiming this! It would come complete with pictures of yachts, tropical beaches, and Rolex watches of course.  In addition, there would be no less than 13 video testimonials about how “you too can be rich if you just follow this simple program!” 

Obviously I was being flippant in order to introduce a very common question that we constantly hear regarding preconstruction real estate:  How much money is required to get involved in preconstruction investing?  The simple answer is it depends!  Since that answer would result in a very short article and some disappointed readers, let me clarify this a bit.  Actually, the answer is that it is typically between $99 and $250,000 and it all depends on how the deal is structured.  Let’s dig a little deeper into this.

To understand the preconstruction process, we need to understand the money trail.  Preconstruction opportunities typically exist because the developer needs to obtain financing for their new development project.  Frequently, a financier for the developer will agree to finance their project if the developer can demonstrate true demand for the project.  How do they do that?  By the developer pre-selling somewhere between 30-60% of the project, the financier is comfortable with this project since they will be able to have their risk covered through the pre-selling.

Typically the financier wants to see REAL money put into this deal by the presell purchasers.  This is important because it lets you know that somehow, someway, at some point in time, the developer is going to need to get real money (or line of credit) from you to satisfy their financier.

Because each financier/developer has different needs and circumstances, the exact requirements for amount due at reservation (if there is a reservation period) and the amount due at hard contract will vary greatly.  For example, let’s consider condo projects.  As a rule of thumb, typically 10% down is required and then another 10% letter of credit is also required.  But I have seen this drop to as low as $2,500 required at hard contract for a large townhouse project and as little as $1,000 for a single family home project.  In other words, it is all over the map.

If you are low on cash and/or want to get in on the cheap, then the obvious course of action is to find all the $2,500 and $1,000 projects that you can.  But wait! Before you make that your sole purpose in life, there is a little more that you need to consider.  

In my opinion, people focus on the wrong thing when mainly considering how much up-front money is required.  I will make a statement that is considered blasphemy in many real estate circles.  Ready?  “INVESTORS SHOULD PLAN TO CLOSE ON THEIR PRECONSTRUCTION PURCHASES even if they fully intend to flip before closing.” Bottom line is that this is just simple risk control.

If you subscribe to that philosophy, now how much is required for this investment?  That will depend largely on your ability to obtain investor financing.  One of the 19 critical steps that I suggest in my home study course is to meet with a mortgage broker to determine exactly where you stand in your ability to obtain a loan to close the project. 

Suppose you find out that it is pretty easy for you to get an investor loan with 10% down and your project only requires 10% down at hard contract.  If you PLAN to close, then you will need the 10% plus about another 4% for closing costs.  Then you will also need some cash reserves as you attempt to either resell or rent the property.  All things considered, you will probably need 15-17% of the project available in cash.  So even if the deal only requires $1,000 down payment, you may find yourself needing between 15-17% in reserve. 

I know….I can hear you thinking “but the title of this article is $99 Down Preconstruction Condos!   So how does that match what I said above?  The answer is quite simple.  You call up your buddy who has plenty of money and take them out to a nice $99 dinner.  You then tell them that you have learned a ton about preconstruction and you have found a great deal for them but you don’t have the money.  Would they be interested in partnering?

I don’t make this statement lightly.  I have done many projects where I have zero money in the deal and in fact, I am closing on one this month.  In our upcoming teleseminar, I will discuss this topic in a lot more detail!

 

Chris Anderson is a leading authority on preconstruction real estate investing.  Get his 4 day e-mail course and view his 33 minute video free today!  Visit www.GetPreconstructionProfits.com & www.GetPreconstructionDeals.com.  In addition, Dr. Anderson is the on-line training coordinator at the Van Tharp Institute, which provides world class training for investors and traders.

 

Listening in....

Excerpts from Dr. Tharp's Mastermind Discussion Forum

 

Personal vs. Managed Account Trading
Author: Sam
Date:   04-25-05 14:52

I have been trading for nearly 5 years using a discretionary trend following approach with its expected draw-downs. I am comfortable with the method because I know (from experience) the rewards it returns.

Recently I have been approached by a few individuals who have requested I manage their funds. While I am interested, I wonder about their true receptivity to the same draw downs I am comfortable with and whether it would be better to limit both the draw-downs and reward of those accounts so as to limit the fluctuation in the equity curve.

My question (specifically to those who are managing others' funds currently) is if it is possible to manage funds using a discretionary trading method in 2 separate manners simultaneously? Or would I be fighting my own personality which is comfortable with greater draw-downs in expectation of greater returns?

Reply To This Message 

 Re: Personal vs. Managed Account Trading 
Author: Ramanujan
Date:   04-25-05

Not only is it possible, it's common. Two different accounts use different "heat" but the same trading signals. When your discretion tells you to short Soybeans, you sell (1 contract per $25,000 of equity) in Alan's account and simultaneously you sell (1 contract per $40,000 of equity) in Betty's account. Betty receives less %drawdown and less %return, than Alan.

Reply

 Re: Personal vs. Managed Account Trading
Author: Sam

That makes perfect sense. 

Any other things I should consider when determining whether to manage funds? I have read in several places that managers either educate their investors well or interview them well before hand to determine if they are a good match for each other. Do you know what things they are looking for to make that decision?

Reply To This Message 
Re: Personal vs. Managed Account Trading 
Date:   04-26-05 

Can they afford to lose 100% of the investment?

Do they have a realistic estimate of what to expect from the managed account?

Do they understand the concept of equity drawdown?

How deep a drawdown can they stand? How long a drawdown can they stand?

Are they going to be a Pain In The Rear client, phoning you every day with meddlesome inquiries?

What would cause them to close the account?

Do they understand your management and incentive fees? Do they understand how you get paid even if the investment underperforms or loses money?

Click  here to read more  responses on Dr. Tharp's Forum 

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