atein those reversals that are substantial. 
CHAPTER 10
SPENT MARKETTRADING PATTERN(SMTP)
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For years we have read about the virtues of trading reversal bars. Unfor-tunately, their track record is horrendous. I will quote Jack Schwagerfrom his fine book, Schwager on Futures: Technical Analysis,
“It can be said that reversal bars successfully call 100 out ofevery 10 highs . . . in my opinion, the standard definition ofreversal days is so prone to generating false signals that it isworthless as an indicator.”
T agree with Jack.
Fortunately though, the story doesn’t end there. I have had very goodsuccess trading a variation of reversal days which I call the “Spent Mar-ket Trading Pattern.” This strategy has structured rules that combine re-versal days, spike bars, trends, and a specific entry method to provide alow-risk setup.
Here are the ruies:
 
8182 Chapter 10
FOR BUYS (SELLS ARE REVERSED)
1.
23.4
Today the market must make a 10-period low.Today's range must be the largest range of the past 10 bars.Today’s close must be in the top 25 percent of today’s range.
Tomorrow, or the trading day after tomorrow, buy one tick (1/8 forstocks) above today’s high.
If filled, place an initial protective sell stop at today’s low and trailit appropriately to lock-in profits.
Let’s look at three examples.
FIGURE 10.1 Coinpaq Computer
 
  
Spent Market Trading Pattern (SMTP) 83
1. Today’s high is a 10-period high, the range is the largest of the past 10trading sessions, and the close is in the bottom 25 percent of its range.
2. A sell short stop is triggered 1/8 below yesterday's low of 35 1/2and our protective stop is at yesterday's high of 37 1/2. The market
proceeds to lose over 10 percent of its value over the next few trad-ing sessions.
3. A 10-period low, the largest range of the past 10 periods, and a"close at the top 25 percent of the range.
4. A buy is triggered at 31 5/8, one tick above yesterday’s high andour protective stop is placed at yesterday's low of 29 1/2. TheSMTP identifies an intermediate term low as Compaq rises nearly20 percent over the next month.
FIGURE 10.2 US Bonds
 
1. A 10-bax high, the largest range of 16 days and a close in the bot-tom 25 percent of its daily range.
2. Our sell stop is triggered one tick under yesterday’s low of 120-25and a protective buy stop is placed at 122-04.
 84 Chapter 10
3. The setup identifies the life of the contract high for bonds and themarket drops more than 2 points in four trading sessions. An addi-tional strategy to look at with this setup is to sell options. In thisexample, both the 120 and 122 calls lost more than half their valuein four days.
FIGURE 10.3 Biotechnology Index
 
 
1. A 10-bar low, the largest range of 10 days, and a close in the top 25percent of the range.
2. A buy stop is triggered.3. The market trades 15 points higher over the next few weeks.
  
Spent Market Trading Pattern (SMTP) 85.
FIGURE 10.4 December S&P 97 Futures
 
 
 
 
 
1. A 10-period low, the largest range of the past 10 days, and a closein the top 25 percent of today’s range.
2. The sell-off exhausted itself and the market moves back to near all-time highs. 
86 Chapter 10
FIGURE 10.5 SLOT
 
1. The market makes a 10-period high, the range is the largest of thepast 10 days, and the close in the bottom of its range.
2. Sell short at 91 3/4.3. The stock drops 15 points in two weeks.
SUMMARY
In all time frames this setup indicates the exhaustion phase of a moveand a short-term to intermediate-term reversal can be expected. Eventhough we only looked at daily examples, this setup works equally wellwith intraday and weekly time frames. 
SECTION FOUR
EQUITY TRADING
The following five chapters will cover trading equities. The chapters“Crash, Burn, and Profit,” “When They’re Late They Are Probably Dead”and “The Double Volume Market Timing Method” are a short-seller’s de-light. In spite of what the mutual fund and brokerage house industrieswant you to believe, stocks actually do go down. As shocking as thisnews is I will top it; stocks drop much faster than they rise! This meanstraders who can properly identity and time stocks before they collapsecan make substantial profits quickly.
The other two chapters are for very short-term traders who want to be inand out of a stock within a day or so. A couple of these strategies relateclosely to other chapters and should be fairly simple to master.
87 
CHAPTER 11
THE CRASH, BURN,AND PROFIT TRADINGSTRATEGY (CBP)
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le you look at the results of the major hedge funds from 1991 through1997, you will see that the short-sellers have performed the worst. This iseasily explained as the market more than doubled in value during thatperiod. The one common characteristic of these short funds, though, isthat when they are correct, they are very correct.
The majority of short sellers tend to focus on high flying stocks withhyped stories and then short them. Many times these short sellers arecorrect, but most times they are too early. Soine of these stocks tend to goto stratospheric levels, moving 100 percent, 200 percent, and 300 percentabove where they were shorted. Needless to say, most of these fund man-agers are long gone (stopped out) before the inevitable collapse.
Ihave studied these high-flying stocks and looked at the common charac-teristics they had before they collapsed. What invariably comes into thepicture is that their weekly ADX reading reaches above 60 and then uponthe ADX downticking, the stock also declines, at times never to see thoseprice levels again.
 
8990 Chapter 11
Let’s understand what is happening before moving onto the rules. For astock to reach a level of 60 on its daily ADX, it must be climbing verystrongly. For it to reach 60 on its weekly reading, it must be parabolic.Greed, fear (from the shorts), and volatility are at a maximum and itdoesn‘t take much to make this bubble burst.
A word of warning needs to be given. These stocks can and do go evenhigher and I highly recommend using some type of predetermined protective buystop. Because you will be looking to make larger gains on these setups, Irecommend a 15 percent stop-out point. Also, deep in the money puts area good choice instead of shorting the stock, as your loss will be limited ifyou are wrong and you avoid the difficulty of borrowing the stock. (Thelatter is a good tactic to keep in mind whenever a short sale is hamperedby your broker’s inability to find shares to borrow.)
Here are the rules for our short selling strategy:1, Identify a stock whose weekly ADX reading is above 60.
2. The stocks price should be above 20, as I have found this setup towork even better on higher priced stocks.
3. After the weekly ADX reading reaches 60, wait for the first lowerADX weekly reading to occur.
4. | When the above 3 rules are met, short the stock and risk no morethan 15 percent.
5. Cover one-half the position upon a 20 percent profit and use trail-ing stops on the other half.
Here are some examples: 
The Crash, Burn, and Profit Trading Strategy (CBP) 91
FIGURE 11.1 Centennial Technologies
 
 
COMPOSI TE/CLOSE/ TRADELast 2% on 4 719/97
High SQta on 1 9-97fve 16,561 «Close?
 
ISDECIS 1990NDE 29FEB 29MAR NAY «7 IZ IGAUS205EP 250CT 29MOU SURO7 FER 14HAR  108PR
 
 
Centennial Technologies is a good CBP example. The PC solution com-pany entered 1997 trading at more than 150 times stated earnings andpromising investors the road to riches. On the week of January 10, 1997,the weekly ADX downticks for the first time since closing above 60, Ashort signal is triggered at 49 1/8 and the profit (as many times occurswhen the bubble bursts) is immediate with the stock closing the week at39 3/8. Six weeks later, the game is over as fraud has been uncoveredand the company’s chairman is indicted. The stock currently trades in the21/2 range. 
92 Chapter 11
FIGURE 11.2 Diana Corp.
 
(COMPOSITE /CLOSE/TRADELast 5% on 4 stie37High 120 on 5 724096fe 24.085 Close?
Low 4t4 om 6 1695
 
14395 25AUG OCT 17HOU 290EC SFEBSG Z2MAR SHAY 14JUN 26JUL GSEP OCCT 29MOY 10UMHO7 ZIFER 4aPR
 
 
Diana Corp. (the symbol was DNA before the NYSE delisted them) is atelephone networking company. The stock had two CBP setups. The firstcecurred January 6, when the ADX downticked from its above-60 level.The next week, the stock lost 35 percent of its value. As you can seethough, it’s tough to keep a good story down and the stock rose another100 points (!) triggering another CBP signal on June 7 at 67 3/8 (the stockhad almost halved in the previous two weeks). Three weeks later, DNAwas trading more than 30 points lower and as of April 22, 1997, it waschanging hands at 4 3/8. 
The Crash, Burn, and Profit Trading Strategy(CBP) 93
FIGURE 11.3 Wackenhut Corrections Corp.
 
J4L95 Z50UG GOCT 17NOU 250EC SFEBIS ZemAR SHAY 14JUN 26JU 6SEP :80CT 29NOU LOJAHO7 ZIFER 4nPR
 
In the summer of 1996, momentum investors and money managers weretripping over themselves to buy Wackenhut Corrections Corp. On June21, 1996, a CBP signal gets triggered at 32 1/8 and within one month thestock was nearly 40 percent lower. 
94 Chapter 11
FIGURE 11.4 Delta and Pine
COMPOSITE -TLOSE/ TRADE |:Lest 22% © on 4 719/97 |:High te on 33-796 [> -fe 18.901 Close» |!how 6 B16 on 1223-0
2ONMSS 17H aR —7IUL ISEP  270CT 220EC LEFEBSG 120PR 7JUH 2A 278EP ZHOU L7J0K97 L4HOR
 
Delta and Pine breeds cotton seed. Here we have one unsuccessful setupin August 1995 and one very quick successful setup (eight weeks) lastJune leading to a 40 percent gain. 
The Crash, Burn, and Profit Trading Strategy (CBP) 95
FIGURE 11.5 Micron Technologies
 
 
Micron Technologies was the darling of growth investors in 1995. Unfor-tunately for those investors who got caught owning the stock during itsdowntum, the sell-off that was triggered after the CBP signal was quitepainful.96 Chapter 11
FIGURE 11.6 Fine Host Corporation
ve 31-199on 12/12/97
a a a
 
 
1. Here is an example that occurred as the book was ready to go tothe printers. Fine Host Corporation, a contract food service com-pany, was reporting record earnings since going public. The stockrose five-fold in 14 months, bringing the weekly ADX above 60.
2. A downtick in ADX and we are short.
3. | Two months later the company announces it would restate earningsdue to “accounting irregularities” and it fired its CEO and treas-urer. As I am writing this, the stock has been halted and may notresume trading for as long as a month. 
The Crash, Burn, and Profit Trading Strategy (CBP)
SUMMARY
As the funds which short equities on fundamental analysis alone havelearned, one needs to properly time when to short these highest-flyingstocks. The ADX above 60 reversal method does a good job of doing this.
You need to be somewhat patient as this method is fairly rare, but withthe proliferation of momentum-based money managers and investors,ample opportunities do occur over the course of a year. The best way toidentify these opportunities is to do a weekly scan if you have the soft-ware, or to use Investor’s Business Daily and identify those stocks whoseRelative Strength is 98 or 99. This will keep you focused on the correctnames to follow and allow you to participate when these crazy stockscollapse.
One final point should be made. Some of the examples showed compa-nies whose stock completely collapsed. In reality, these are more the ex-ception than the rule. Ideally, you should expect smaller moves, andwhen the home runs occur, view them as a gift.
97 
CHAPTER 12
WHEN THEY’RE LATE,THEY’RE PROBABLYDEAD
This strategy looks at a method to identify when companies will prob-ably disappoint with their earnings. As you know, when a growth com-pany has an earnings downfall, prices implode and those tradersfortunate enough to be short are amply rewarded.
This is a method I have used over the years to exploit negative earningssurprises. Unfortunately, this strategy doesn’t happen often but when itdoes the results are powerful.
The “When They're Late, They‘re Probably Dead” trading strategy targetscompanies:
1. That are late reporting their earnings.2. Whose price trends lower before the earnings are due.
Let's look at an example. 
100 Chapter 12
FIGURE 12.1 Baby Superstores
 
Baby Superstores,’ a rapidly growing infant products company is ex-pected to report earnings during the week of May 15, 1996. When theweek comes to a close, the company still hasn’t released their numbersand a red flag is triggered. We then look at the recent trend of the stock.As you can see, the stock is not only declining while the stock market isrising, but it is hovering around the year’s lows.
We put these two pieces together and come to the conclusion that there isa potential problem. The safest strategy is to buy puts. If by chance weare wrong, this will limit our losses.
In this example, I paid 2 1/4 for the June 35 puts.
The company goes the entire next week again without reporting earn-ings! On Tuesday morning of the following week, Baby Superstores fi-
* When this trade occurred, I was in Washington, D.C., to listen to a friend speak at the ManagedFutures Association annual meeting. The options desk I trade through called my office with thegood news and I closed my position very near the high of the day from a pay phone in thehotel lobby. Sometimes you’re better Jucky than smart.
  
When They're Late, They’re Probably Dead
nally releases their numbers and they are terrible. The stock immediatelycollapses and the puts climb to above $10 intraday.
Why is the company late reporting earnings? My guess is that seniormanagement is taken by surprise by the shortfall and it takes them aweek or two to digest the problem and create a new “strategic plan” toannounce to Wall Street.
A late earnings report alone though is only one piece of the puzzle. Theother piece is the price action preceding the announcement. It is obviousby the trend that the so-called “smart money” was unloading its posi-tions ahead of the report. There is no other way to explain a momentumstock like Baby Superstores trending downward in a climbing market.
Again, this situation does not happen everyday, but when it does, it paysto take a good close look at it.
101 
CHAPTER 13
DOUBLE VOLUMEMARKET TOP METHOD
Tn the 1980s, there was a wonderful bookstore in West Los Angeles thatsold nothing but investment books. In a one-room loft, it had copies(mostly photocopies) of nearly every book and course written over theprevious 50 years on the markets. The owner unfortunately passed awaysix or seven years ago and the store was closed. On one of my last visits I
was lucky enough to purchase a copy of Tubb’s Stock Market Correspon-dence Lessons, written in the 1930s.
This book is one of the worst written treatises I have ever come across,but it is also one of the single best books published on how to trade themarkets. Tubb’s was decades ahead of everyone else in formulating“rules” and “laws” that dictate market behavior. One of his areas of ex-pertise was how volume preceded and affected price. One of his conceptswas that when the volume of a stock had a large spike relative to theprevious 15 days, and the stock was near its highs, a reversal was likely.
For me this made sense but the rules were too vague and needed to betightened and made more specific. Building on Tubb’s observation, I cre-ated the “Double Volume Market Top Method” (DVMTM) which com-bines exact volume rules with an exact pattern to better pinpoint markettops.
 
103 
104
Chapter 13
Here are the rules:
1.
A stock must be trading near or at a three-month calendar-dayhigh.
Today’s volume must be double its 15-day average volume. Thismeans if the volume has averaged 1 million shares daily for thepast 15 trading days, it must trade at least 2 million shares today.Either today, tomorrow, or the next day, the stock must close belowits open.
When Rule 3 is met, over the next two days sell 1/8 under the Rule3 day low.
Your initial protective stop should be the top of the Rule 3 day barand trailing stops should be used to lock-in profits.
Let’s look at a handful of examples to further understand this strategy. 
Double Volume Market Top Method 105
FIGURE 13.1 Microsoft
(COMPOSITE/TRADE
Last 185 15/16 on 07721797
High 180% on 07717797
fve 136.355 «Close?
Low 128 7716 on OPr1197 |...
 
 
1, On July 16, 1997, Microsoft makes a new high on more than doubleits normal daily average volume.
2. Another new high and a close below its open.3. Sell short at 145.4. The stock closes 9 points below yesterday's fill. 
106 Chapter 13
FIGURE 13.2 Yahoo
 
 
1. Anew high on double its average daily volume.2. Yahoo closes below its open.3. Sell short at 53 and it closes at 48 13/16. 
Double Volume Market Top Method 107
FIGURE 13.3 Western Digital
 
1, OnJuly 16, WDC makes a new high, has volume of double its dailyaverage, and the close is below its open.
2. We sell short on the opening at 40 3/4 and the stock closes 3 1/2points lower two days later. 
108 Chapter 13
FIGURE 13.4 Fila
 
 
Here is an example of the DVMT catching the all-time high on Fila.1. Anew high on double the average daily volume.2. A close below the open.
3. Sell short at 103 3/8 and we catch the absolute top. In fact, a yearlater Fila traded under 30.
SUMMARY
If you have historical data going back into the 40s, 50s, 60s, and 70s, youwill see this setup identify short-term tops over and over again. Tubb’sobservations of 60 years ago, when tightened with our rules, make thisan excellent pattern with which to short stocks. 
CHAPTER 14
TRADING EQUITIESWITH THE CONNORSVIX REVERSAL
With a methodology that does as good a job of identifying short-termhighs and lows in the stock market as the three Connors VIX Reversalstrategies do, it only makes sense to identify those stocks in the Dowand/or S&P 500 that are likely to lead the markets up or down.
In an upcoming chapter, “Maximizing Profits in Short-Term Market De-clines,” I highlight strategies to exploit declining markets. As you willsee, the interest-sensitive stocks, brokerage stocks, and to a lesser extenttechnology stocks tend to lead the market both higher and lower.
In order to fully maximize our profits in equities when a CVR signaloccurs, we want to be in these market leaders, In my opinion, the twobest stocks to trade for this are Merrill Lynch and Intel. Both provideexcellent, consistent market leadership at extreme market levels and bothare weighted heavily in many of the indices.
Now, the answer to the question of how to best trade these stocks: exactlyas you would trade the futures—buy (sell) on the close and hold for threedays with some sort of protective stop in place. Because the VIX closes at
 
109110 Chapter 14
4:00 pa., you will need to front-run the signal by a few minutes to assuregetting filled.
Let’s look at the results over a 15-month period using the CVR I for bothMerrill Lynch and Intel. Please note that in the following results slippageand commission were not included, but the results should give you a
 
 
rough guide to performance.MERRILL LYNCHPLDate Signal Entry Price Exit Price P L01/05/96 B 511/2 49 3/8 21/802/07/96 B 601/4 617/8 15/802/14/96 B 607/8 573/4 31/802/29/96 B 575/8 601/4 25/804/04/96 $s (1 DAY) 615/8 58 1/2 31/804/08/96 B 58 1/2 56 1/4 21/404/22/96 ss 05/8 0 5/806/07/96 B 647/8 63 17/807/16/96 B 58 3/8 591/2 11/807/24/96 B 58 3/4 587/8 1/809/03/96 B 62 613/8 - 5/809/27/96 B 651/4 69 33/410/07/96 ss 715/8 683/8 31/410/17/96 ss 69:1/4 675/8 15/810/23/96 B 685/8 675/8 110/31/96 B 701/4 741/2 41/411/15/96 ss 78 3/4 781/4 1/212/04/96 B 79 793/4 3/412/13/96 B 785/8 801/8 11/201/02/97 B 793/4 803/8 5/801/23/97 ss 841/8 801/8 402/26/97 B 98 3/8 977/8 1/202/28/97 B 9 98 1/2 21/203/20/97 B 913/4 917/8 1/803/27/97 ss 871/2 857/8 15/8
Total Results: 18 profitable7 unprofitable+ 22 1/4 points
 
  
Trading Equities with the Connors VIX Reversal 111
INTEL
 
 
PADate Signal Entry Price Exit Price P L01/05/96 B 571/2 541/8 33/802/07/96 B 58 1/4 58 1/4 _ _02/14/96 B 58 57 7/8 1/802/29/96 B 58 7/8 55 3/8 31/204/04/96 $$ @ DAY) 5911/4 605/8 13/804/08/96 B 605/8 601/2 1/804/22/96 ss 67 3/4 695/8 17/806/07/96 B 7851/4 763/4 11/207/16/96 B 70 723/4 23/407/24/96 B 6 7271/8 27/809/03/96 B 815/8 811/4 3/809/27/96 B 967/8 99 21/810/07/96 Ss 1043/4 997/8 47/810/17/96 ss 1103/4 105 1/2 51/410/23/96 B 109 3/8 106 33/810/31/96 B 1097/8 114 41/811/15/96 ss 115 7/8 1207/8 512/04/96 B 1291/2 130 1/8 5/812/13/96 B 1323/8 1353/4 33/801/02/97 B 1303/8 143 3/8 1301/23/97 ss 1513/4 151 3/402/20/97 B 1497/8 1487/8 102/28/97 B 1417/8 1491/2 75/803/20/97 B 1331/4 1331/4 _ _03/27/97 ss 139 1/8 137 21/8Totai Results: 13 profitable
10 unprofitable
2 breakeven
+30 7/8 points
 
 
SUMMARY
You can select your own leaders to trade this strategy with but I believethat these two stocks move most consistently with the overall market.Also, as a reminder, always place protective stops to protect yourself! 
CHAPTER 15
TORPEDOES
“Torpedoes” is an intraday strategy created by Jeff Cooper. Torpedoesare volatile, market-leading stocks which rise in spite of a sharply declin-ing market. These stocks are on a mission of their own and tend to leadthe rise most dramatically when the market bounces back.
Let’s look at how to identify Torpedoes and how best to trade them.
FOR BUYS (THERE ARE NO SHORT-SALE TORPEDOES)
1. Identify the recent market leaders. These are usually higher priced,big cap names such as Microsoft, IBM, 3COM, Intel, Dell, etc. An-other group of names to identify is the higher-priced, highly vola-tile mames that can be screened using the “Trading Where TheAction Is” chapter.
2. Wait for the stock market to be down at least 1 percent in the firsthour of trading. At that time, look for any market leader or highlyvolatile stock that is defying the trend. This means stocks which areup for the day or down only a small amount.
3. Here is where it gets a bit subjective. If the overali market begins tobounce back, buy the strongest stock(s) from Rule 2. The key to thisstrategy is the initial protective stop you are using. Your risk should
 
113 
114 Chapter 15be only one point from your entry. If you are stopped out, it is OK tore-enter if the stock begins rising again.4. When this strategy works, it often works big. On numerous occa-sions, I have seen Jeff make between 2 and 5 points within a fewhours.
Here are three examples.
FIGURE 15.1 Vitesse Semiconductor
 
 
 
10°00 11:00 12900-13500 14:00 15:00 16:00
10100-11600 1250013500 14:00 15:00 16:00
_ a8 Je 10.
 
 
In January 1997, Vitesse Semiconductor, a highly volatile NASDAQ stock,opened down only 3/8 point in spite of the S&P’s trading more than tenpoints lower near the opening. The stock immediately reversed and pro-ceeded to trade 3 points higher with 30 minutes and 4 11/16 pointshigher for the day. This action is the epitome of the Perfect Torpedo.
 Torpedoes 115
FIGURE 15.2 Paccar
 
 
   
10:0