Trade Like an O'Neil Disciple

How two former traders of William J. O'Neil + Company made mad money using O'Neil's trading strategies, and how you can, too

From the successes and failures of two William O'Neil insiders, Trade Like an O'Neil Disciple: How We Made Over 18,000% in the Stock Market in 7 Years is a detailed look at how to trade using William O'Neil's proven strategies and what it was like working side-by-side with Bill O'Neil. Under various market conditions, the authors document their trades, including the set ups, buy, add, and sell points for their winners. Then, they turn the magnifying glass on themselves to analyze their mistakes, including how much they cost them, how they reacted, and what they learned.

• Presents sub-strategies for buying pocket pivots and gap-ups
• Includes a market direction timing model, as well as updated tools for selling stocks short
• Provides an "inside view" of the authors' experiences as proprietary, internal portfolio managers at William O'Neil + Company, Inc. from 1997-2005

Detailing technical information and the trading psychology that has worked so well for them, Trade Like an O'Neil Disciple breaks down what every savvy money manager, trader and investor needs to know to profit enormously in today’s stock market.

Foreword xi

Preface xiii

Acknowledgments xvii

Chapter 1 The Evolution of Excellence: The O’Neil Trading Method 1

Preparation, Study, and Practice 2

Buy Expensive—Not Cheap—Stocks 4

Averaging Down 5

Cutting Losses Quickly 5

Taking Profits Too Soon—Letting Your Winners Run 6

Position Concentration 7

Dealing in Big Stocks and Institutional Sponsorship 8

Chart Patterns 9

Pivotal Points versus Pivot Points 12

Timing the Market: When to Be In, When to Be Out 13

Emotions and Predictions 14

Listening to Opinions, News, and Tips 15

Overtrading 16

The O’Neil Approach: Techno-Fundamentalism 17

Conclusion 17

Chapter 2 How Chris Kacher Made Over 18,000 Percent in the Stock Market Over Seven Years 19

Gaining a Foothold in the Business 20

1996—“Y2K” Stocks Put Me Over the Top 22

1997—Keeping Profits during the Asian Contagion 27

1998—Demoralization Sets In Just Before the Market Takes Off 29

1999—The Bubble Expands 31

2000—The Bubble Bursts 35

2001—A Lesson in Shorting 37

2002 to Present—Choppy, Sideways Markets and the Birth of the Pocket Pivot 39

Chapter 3 How Gil Morales Made Over 11,000 Percent in the Stock Market 43

A Rocky Start Turns Golden 44

Climbing on Board the Rocket Ride 46

Joining the 1,000 Percent Club 49

Oracle Bubbles Up 50

Patience and a Watchful Eye 53

Cleared for Take-Off 54

Verisign: The “Spice in the Soup” 56

Sitting Not Thinking 60

Closing In on the Top 62

The Theme of Success 64

The Secret Ingredients 65

Chapter 4 Failing Forward 67

The Psychology of Success Lies in Taming the Ego 68

Learning from Our Mistakes 72

Problems, Situations, and Solutions 107

Conclusion 125

Chapter 5 Tricks of the Trade 127

Dr. K’s Laboratory: The Pocket Pivot Advantage 128

Characteristics of Pocket Pivots 131

Definition of a Pocket Pivot Buy Point 132

Pocket Pivots and Standard Breakout Buy Points 133

Buying “in the Pocket” 136

Bottom-Fishing with Pocket Pivots 149

Continuation Pocket Pivots: Using the 10-Day Moving Average 153

Improper or “Do Not Buy” Pocket Pivot Points 157

Using Moving Averages as Sell Guides 163

Dr. K’s Laboratory: Buying Gap-Ups in Leading Stocks 165

Selling Techniques Using the 10-Day and 50-Day Moving Averages 173

Putting It All Together 177

Conclusion 185

Chapter 6 Riding the Bear Wave: Timely Tools for Selling Stocks Short 186

The Golden Rules of Short-Selling 187

Short-Sale Set-Ups 192

Shorting Rocket Stocks 221

Conclusion 224

Chapter 7 Dr. K’s Market Direction Model 226

Timing the Market 226

Chart Examples 234

Stealing the Model’s Secrets 243

Timing Model FAQ 244

Conclusion 259

Chapter 8 Our Bill of Commandments 260

Misconceptions 260

Surviving by Keeping Ego in Check 263

The First Commandment 265

The Second Commandment 265

The Third Commandment 267

The Fourth Commandment 267

The Fifth Commandment 267

The Sixth Commandment 268

The Seventh Commandment 268

The Eighth Commandment 268

The Ninth Commandment 269

The Tenth Commandment 269

Conclusion 270

Chapter 9 In the Trenches with Bill O’Neil 272

1997–1998 272

1999–2000 286

The Great Bear of 2001–2002 307

2003–2005 Bull Market 318

Conclusion 329

Chapter 10 Trading Is Life; Life Is Trading 331

Ed Seykota: Teaching a Technique That Has Helped Traders around the World 332

Eckhart Tolle: Helping People Achieve Inner Peace and

Greater Fulfillment, a Prerequisite to Optimized Trading and Living 334

Esther Hicks: Teacher of the Law of Attraction 340

Jack Canfield: Seminal Works on Personal Optimization 341

Psychological Checklist: Questions to Ask Yourself 343

Parallels between Teachings 345

In Conclusion 346

Appendix Dr. K’s Top 50 Wall Street Books 347

About the Authors 351

Index 353

GIL MORALES is the author and publisher of www.GilmoReport.com; coauthor and publisher of www.VirtueOfSelfishInvesting.com; a former proprietary internal Portfolio Manager and Chief Market Strategist for William O'Neil + Company; and is currently a Managing Director of MoKa Investors, LLC. He also co-authored, with William J. O'Neil, the Wiley title, How to Make Money Selling Stocks Short. Mr. Morales received his BA in economics from Stanford University.

CHRIS KACHER is a frequent contributor to www.GilmoReport.com; coauthor and publisher of www.VirtueOfSelfishInvesting.com; a former research analyst and proprietary internal Portfolio Manager for William O'Neil + Company; and a Managing Director of MoKa Investors, LLC. He received his BS in chemistry and PhD in nuclear physics from the University of California at Berkeley. How is it that so many traders and investors lose money in the market, while others—like authors Gil Morales and Chris Kacher—have shown the ability to earn huge returns on investment? As Bill O'Neil himself says, "Human nature being what it is, 90% of the people in the stock market—professionals and amateurs alike—simply haven't done enough homework." Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market is your homework. And if you invest in the market, you can expect that there will be a test involving your own money.

The result of years of observation and the subsequent application of the commonsense rules learned, Trade Like an O'Neil Disciple details the small realities that make up the stock market, including:

• The importance of a 6–7% automatic stop-loss policy on stock purchases

• Sit tight and be right, or "take your profits slowly"

• The value of psychological capital, and how mastering your own psychology allows you to operate from a position of strength

• Position concentration, and how diversification—"kissing all the babies"—is unnecessary

• How timing the market is possible and necessary, despite claims to the contrary by those who can't

• Mistakes novices or lazy investors make, such as averaging down or purchasing only cheap stocks

• How O'Neil applied historical precedent to box theory to come up with consolidation patterns ("bases"), such as: ascending; cup-with-handle; double-bottom; square box; flat base; and high, tight flag

• Using early buy points in the form of "pocket pivots" to gain an advantage in difficult market environments

• Using gap ups as buy points to jump on board of some of the most powerful stocks

• The finer points of O'Neil-style short-selling techniques

It took years to identify, analyze, catalog, and verify the characteristics of winning stocks for O'Neil to finally perfect his system. Authors Gil Morales and Chris Kacher save you the time and—if you're an investor, money—by bringing together in one comprehensive guide, the commonsense investment philosophies that allow them and you to Trade Like an O'Neil Disciple.

How is it that so many traders and investors lose money in the market, while others—like authors Gil Morales and Chris Kacher—have shown the ability to earn huge returns on investment? As Bill O'Neil himself says, "Human nature being what it is, 90% of the people in the stock market—professionals and amateurs alike—simply haven't done enough homework." Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market is your homework. And if you invest in the market, you can expect that there will be a test involving your own money.

The result of years of observation and the subsequent application of the commonsense rules learned, Trade Like an O'Neil Disciple details the small realities that make up the stock market, including:

• The importance of a 6–7% automatic stop-loss policy on stock purchases
• Sit tight and be right, or "take your profits slowly"
• The value of psychological capital, and how mastering your own psychology allows you to operate from a position of strength
• Position concentration, and how diversification—"kissing all the babies"—is unnecessary
• How timing the market is possible and necessary, despite claims to the contrary by those who can't
• Mistakes novices or lazy investors make, such as averaging down or purchasing only cheap stocks
• How O'Neil applied historical precedent to box theory to come up with consolidation patterns ("bases"), such as: ascending; cup-with-handle; double-bottom; square box; flat base; and high, tight flag
• Using early buy points in the form of "pocket pivots" to gain an advantage in difficult market environments
• Using gap ups as buy points to jump on board of some of the most powerful stocks
• The finer points of O'Neil-style short-selling techniques

It took years to identify, analyze, catalog, and verify the characteristics of winning stocks for O'Neil to finally perfect his system. Authors Gil Morales and Chris Kacher save you the time and—if you're an investor, money—by bringing together in one comprehensive guide, the commonsense investment philosophies that allow them and you to Trade Like an O'Neil Disciple.