Matt Blackman: Investor Television, because you're worth it. My name is Matt Blackman, and I'm sitting here with Mr. Dan Zanger. Dan is the host of chartpattern.com, and Dan has been rated by Bloomberg in the top one percentile of hedge fund managers in the US with a 99 out of 99 score. Dan, what would you attribute your tremendous success over the last few years?
Dan Zanger: Well, you know, obviously following the leaders in the market and having a lot of money on the leaders. And I'm looking for stocks that have great, explosive earnings and explosive price movement on the explosive earnings. Stocks such as Taser or Google have been a couple of my big winners. Research In Motion I've had a number of times that have been very advantageous to have. Big-moving stocks. So, I'm looking to be selective in my selection of stocks. Very powerful earnings—earnings up 50%, 60%, 80%, if not more. Stocks like Google have earnings up 140%, 150%. Taser up 200%, 300%. These are stocks that aren't well known. And, you know, as institutions and traders and players come in to start buying the stock, this creates the buying pressure that pushes them up, and these are the stocks that I focus on. Older stocks—you know, a Time Warner, or a Cisco, Microsoft—you can't give them away. Everybody owns them. Their story is played out. There's just, you know, saturated the market with their product; there's just no need to own them anymore. So, I'm looking for basically relatively new companies that dominate their space, that are global players, niche players, that are changing the entire space at which they operate. And Taser—no one has a taser gun other than the Taser company. Google is dominating the new ad space, powerful new ad space in the market today. You know, even Yahoo has to now play catch-up to Google. So, these are the companies that I'm focusing on on a regular basis. And, you know, as they break out, I go two-to-one margin, and as the stock runs up, I start peeling back my margin and letting them run. So, you know, and I'm playing seasonalities—which are strong seasons, which are weak seasons. But basically, focusing in on the leading stocks that make the big moves all the time.
Matt Blackman: That's great. Now, maybe just outline briefly for us what your biggest winner was in 2005, what caused you to trade it the way you did, and just give us the background and the lead-up to it as well.
Dan Zanger: Well, certainly Google has been my big winner, and I've had an awful lot of my money on Google—an extraordinary amount of my money on Google. Basically, here's a company that's under-known, under-owned, but yet everybody uses Google for search. They're revolutionizing how they collect money for revenues, so much so other competitors are trying to play catch-up. So that's what you want: someone who's the dominant leader. Earnings are explosive—you know, they're up 100%, 120%, 140%. Revenues are up 90%, 95%, 110%. Here's a stock that's under-known, it's under-owned. Institutions have to come in and start buying it, and as they buy it, it fuels the stock price as the stock runs up. And again, CNBC and other stations do a great job of promoting the stock that it's overvalued. This brings in the short players. They just hear that it's overvalued, so instead of them doing their homework, they'll just pile in and be one of the short suckers that's out there. That helps fuel the stock as it races up—they do covering. So, it's an ideal climate for this stock to be a major winner, and it has been a major winner for me. I've been in the stock on three big runs, and the money that I've made has just been gargantuan, to say the least. It's really been huge.
Matt Blackman: So, most of your money's been made—you're talking about now, the money's been made in stocks going long. Now, when a stock market's getting toppy, how do you look for stocks to make money on the way down?
Dan Zanger: Well, I really don't make a whole lot of money at shorting stocks. I found shorting stocks to be very tough. Remember, a stock can only go down 100%, but it can go up 200%, 300%, 400%. A stock like Taser went up 5,000% in about 18 months. So, the real big money is made on the upside. However, I've had some very good shorts in my career. Most notably last January of 2005—this past January—where earnings were beginning to decelerate quite rapidly on eBay. eBay had broken down from a high-level channel, and then the stock created what we call a bear flag after that. I noticed that the stock was beginning to sell down the day of earnings, so I began to short the stock the day earnings were going to be posted. I wound up shorting 160,000 shares, and the stock gapped down after earnings because they missed earnings and projected weak earnings going forward. The stock gapped down some $20. For me, it was my single biggest one-day gain of $3.2 million on a single stock. I mean, I've had other days that have exceeded that, but for a one-day stock gain in one stock, it was pretty amazing. One of the very few times that I get excited in the market—that day, I got pretty excited, I'll tell you.
Matt Blackman: I can imagine. There's not too many people that can say they've made $3.2 million in one stock in one day.
Dan Zanger: Yeah, and while I have a hedge fund, I own the majority of the fund, and most of my money is not in the fund. So, the majority of that 160 gain—that 3.2—was my personal gain, so that was even more exciting. But I'm also very happy to make my investors a lot of money as well.
Matt Blackman: So, it sounds to me like you use a combination of fundamentals and technicals. What percent would you say, when you're making a decision, what percent of your decision would be based on fundamental information, and what would be based on the market technicals that you mentioned last time, like volume and chart patterns?
Dan Zanger: Well, I mean I really don't have a defined formula that 30% may be fundamentals and 70% may be chart patterns. But typically, if the fundamentals are very good, then the chart patterns will be very good. So, you know, they kind of go hand in hand. But typically, if I find a stock that has powerful chart patterns and really explosive behavior underneath, you'll find a stock that really has tremendous fundamentals. So, they just kind of go hand in hand. But I definitely, even if a stock has a super chart pattern, I probably won't buy it if earnings are up 25% and revenue is up 25%. This stock just really has no place to go.
Matt Blackman: Now, obviously trading is a situation that you're learning all the time. What would be your biggest single lesson, you think, in 2005?
Dan Zanger: Not to be in the market all the time, and to trade far less than I do. Far less. I mean, I really have found that the market may have two big moves during the year. They may last 6, 8, 10, 12 weeks, and other than that, they just exhaust themselves after that. Really, the rest of the time, the market is just consolidating the gains. So, the big lesson for me this year has been, you know, just to trade less. Trade less, trade fewer stocks. Own just about four stocks that are really powerhouse stocks when the market bottoms out, and then the market will take off and run for maybe 10, 12, 13, 14 weeks, whatever it does. And then just trade out, and then go to golf, go to swimming, go to cash, just have fun and enjoy, and wait for everything to set up and do it again. It takes about four to five months for everything to set up again.
Matt Blackman: Great. Now, what keys do you look for in a market that may be bottoming? And you never know until after the fact, but what are some of the things that really give you a heads-up that the market's about to take off?
Dan Zanger: Well, I mean leadership stocks will be sitting near new highs—such as a Google—while the market looks like it's cascading down and almost in an inverse parabolic-like curve. And then you'll find Google sitting near new highs, like what we see it now here in October of 2005. Or it could be something like an Apple sitting near new highs and making new highs, or a SanDisk. Stocks with powerful earnings—not new earnings, but powerful earnings that'll come out, and then the stocks will explode. Meanwhile, the market is still trying to grab its legs, and the market will lag these leading stocks—hence why they're known as leaders. So, you'll look for three or four or five market leaders, you'll watch for them to break out on powerful volume, making powerful moves, gaps up, and then you'll wait. Basically, the market will have to play catch-up, and then you'll all of a sudden see the market playing catch-up.
Matt Blackman: And is that when you jump in, or do you jump in before you see the market respond, like the NASDAQ Composite for example?
Dan Zanger: Well, again, I think that the market is a lagging tool. So, if I'm going to wait for the market to take off and break a trend line or break through a resistance point or something, my leading stocks have already gone. So again, the leadership stocks are leading, and then the market will get up and follow that leader. So, I focus in on the stock first—the leading stocks first with the big earnings. And then again, right, if they're gapping up on earnings and the market's collapsing, these are stocks that I want to focus in on.
Matt Blackman: Okay, that's great. Now let's break it down onto a daily basis. I've watched you trade; it's very exciting. Can you just give us sort of a brief summary—and I know this is probably tough to do—but a brief summary of what you're looking for, how many stocks do you watch at a given time, and what you're looking for to give you a key that there might be a breakout?
Dan Zanger: Well, I'm following about 60 stocks during the day in my eSignal program. You know, I'm really not doing any charting at the time; it's just on my quote monitor, and I'm just looking for surges in volume. I'm literally scanning for surges in volume on a stock and seeing how it responds. And if a stock is breaking out of a pivot area—as we would call a basing area of some sort—has powerful earnings, and, you know, for me it has to be really a big global product. Apple is global. Google is global. SanDisk, even though the name is not well-known, they're making products that go into these global products. These are powerful stocks, and this is the criteria that I need to see. And when they make their big move on volume, then I'll go ahead and make my move. I want to go with the institutions when they go.
Matt Blackman: And what are some of the cues that the institution guys are moving? You start to see volume, or what else do you see?
Dan Zanger: Well, I see massive volume, not just petty volume. You know, if a stock is trading four or five million shares a day, all of a sudden it starts trading 15 or 20 million shares a day, and the stock's leaping three and four dollars. And this is—for me—the percent change in volume is really one of the big keys to finding the big winners and following the institutions. They're just not afraid to really pile in hundreds of millions of dollars on a trade to get into that stock. And if they want it badly, I want it badly. If they don't want it, I don't want it. As simple as that.
Matt Blackman: Is there any percentage you look for? What percent above, say, the 50-day moving average of volume—what kind of percentage volume do you like to see? Is it—would you like to see 50% above that, or 150%?
Dan Zanger: Well, I don't use any 50-day moving average volumes, but I use like a 20-day average that you run in eSignal. So, if the daily average is 4 million, and the stock's trading 4 million after two hours of trading in the day, obviously the stock by the end of the day could be running 16 million shares a day, or 12 million shares a day, or whatever. That's the kind of percent change I'm looking for—a change of 300%, 400%, 600%, whatever it is. It's got to be volume, and the stock has to be breaking out. And I'm looking for the market to be oversold as a general rule to start getting into these big-moving stocks.
Matt Blackman: Okay, that's great. So, you use volume. Now, some of your chart patterns—you've talked about head and shoulders patterns, you've talked about flag patterns, you've talked about pennant patterns, and cup and handle patterns. Can you just give us a brief outline of maybe some of your favorite patterns, and maybe some examples of some patterns you've seen over the last little while, or something that you've traded? For example, eBay—maybe go through that one. What kind of patterns tipped you off that eBay was about to break down?
Dan Zanger: Well, that had, again, a high-level channel base of about three weeks—a very small base. It's a small base, it's weak. It broke south of the high-level channel, and then it created a bear flag, which is the opposite of a bull flag. It's inverted; it's upside down. The stock makes a breakdown and then moves horizontal for a while, and then that should be a continuation to the downside—should be the next thing. So, it had decelerating earnings. Earnings were up 80% three quarters ago, then they were 60% last quarter, and this quarter it was going to be even less than that. So, you have a very high-PE stock with decelerating earnings with a very bearish pattern. It just all adds up. And the market had already had a very long run of three or four months. It all added up to a stock that was just headed to make a significant break.
Matt Blackman: So, it sounds like you have a pretty exciting vocation.
Dan Zanger: Well, I love it. Boy, I wouldn't trade it in for the world. Every day it's just absolutely thrilling, you know, and every day is new, it's exciting, filled with lots of spills and chills, I'll tell you. But, you know, the rewards are absolutely phenomenal when you get it right. It takes years and years and years and years of learning and hard work, and 15-hour days. A lot of ups, a lot of downs, before you can get to put the whole package together. But you know, if you do the homework, you really study hard, long hours, you just stay focused, get rid of all the stupid indicators out there—all this MACD stuff and volume accumulation and money flow—I don't use any of it. It's totally worthless. It's price action, its volume, its chart patterns, spectacular earnings, and that's all there is.
Matt Blackman: Okay. For somebody watching out there today who may be—this may be totally new to an investor, maybe who's been frustrated by the investment returns or looking to really key up their returns, or maybe someone who's a new trader—have you got some advice, maybe some resources, some books they may want to read? I know you have some favorite books you like to talk about in your seminars.
Dan Zanger: Well, my favorite book is How to Make Money in Stocks by William O'Neil. For me, it's the stock Bible. Many chapters in the book... I mean, I probably read the book from cover to cover maybe six, seven times for the first five or six months of my trading. And then I read selective chapters probably 30 times after that over the next six years, constantly hammering into my mind how to trade, what to trade, what your mistakes are—you know, you just can't do this, this is going to be wrong. And over and over and over and over again for six years, it just constantly changed my mind, my thought patterns, what I'm looking for. And after a while, it was just, you know, like the light really came on. I started making incredible amounts of money, and then the bubble hit. And that's, uh, the internet bubble in 1998, and that's really when things took off for me. Up until then, it was a brutal, brutal learning curve—a lot of ups and downs, making money, losing it, making money, losing it, and then finally putting it all together. And then the bubble hit, and it was just the right trader with the right mentality, the right trading tools, in the right market environment. And, you know, we already know what took place. The tax returns have been audited. I've been in Fortune magazine, Forbes, I've been on Extra TV as a result. You know, it's just really been phenomenal. But again, I mean, you can't imagine the amount of hours that I put in, you know, weekends—8, 10, 12 hours on weekends—three, four hours after my regular job. And, you know, it takes a long, long time to put the whole package together.
Matt Blackman: Okay. So, besides William O'Neill's How to Make Money in Stocks, what are some other books that really have to be read by people who want to understand how to trade chart patterns?
Dan Zanger: Well, I obviously think that the Jesse Livermore book is critical, really teaching you how to identify when to get in and when to get out of stocks. You know, trading fast-moving stocks in particular. Don't worry about expensive stocks; they're probably the biggest money makers in the market percentage-wise. You know, those are really the only books that I've really ever read that have had an impact on me. I think everything else is just a lot of fluff.
Matt Blackman: So, is that the—I believe it's called Reminiscences of a Stock Operator?
Dan Zanger: That's correct. That is correct, yeah. In fact, fabulous book, quick, easy read. O'Neill's book is quick and easy. You know, they're just... You know, if you read it once or twice, you don't go back to it... Don't lose your day job, because you're going to need it, you know? You really need to read these over and over and over and over again until, you know, you just know it inside and out so when you see the situation in real time, you just know how to react.
Matt Blackman: Now, the chart patterns, though, they sound fairly complicated. Is there somewhere or some place you can go to learn about chart patterns or read about them? Is there a course you can take, or how do people learn all about chart patterns and how chart patterns react with volume?
Dan Zanger: Well, obviously I think the best place is my website at chartpattern.com—that's singular, no 's' at the end of it. And I put a newsletter out four nights a week highlighting the big movers, like your Google, or your Taser, your Research In Motion, your Apple, or your SanDisk. I put the newsletter out four nights a week highlighting and giving you the big ones, so I'm leading you right to the water. I can't make you drink, but... So, I'm showing all the different patterns out there that the stock market has, of which you can buy from stocks—descending channels, ascending channels, flags, wedges, pennants, cup and handles, head and shoulders, all kinds of crazy stuff. And we utilize these for buy points. And obviously, the stocks that I'm showing have the big revenue numbers and the big earnings numbers that go hand in hand with it, so it's an explosive situation. And that's what we're looking to exploit: explosive moving stocks.
Matt Blackman: Yeah, I'm familiar with your newsletter. It really is good because, as I see it, it's training in the trenches. You're actually seeing stocks break out, you talk about them before they break out, and it's exciting to actually watch them break out, especially if you've got money in them.
Dan Zanger: Correct. Oh yeah, nothing more exciting than when you have the money in them. That's when you really begin to follow them, and you really don't really learn anything until you have a few bucks on them. And again, if you're new to this, I would not have a whole lot of money until you go through a few cycles—maybe you tried this for a few years because there's a lot of ups and downs, a lot of traps. The market's not here to give you money; the market's here to take your money. So, you have to learn to play with the pros. They'll rally the stocks to sucker you in, your emotions will get you in, and the next thing you know, they pull the rug out from under your feet. So, and then you're selling way too late or you're holding too long and it continues to go down. There's so many pitfalls in the market. The market is designed to shake you out of your cash. Once you get the routine down and how they're trying to shake you out, then you can be in front of them, and that's what the game is all about: being in front of the institutions.
Matt Blackman: So, for somebody starting out who maybe is frustrated either investing or trading, do you buy the less expensive stocks because there are—you know, you don't have as much money, or what's your advice on buying cheap or expensive stocks?
Dan Zanger: Well, I never made money in the stock market till I quit buying cheap stocks and always focused on buying the most expensive stock in the market. You know, right now I always focus on $60, $80, or $100 stocks. And if I can find a $150 or $300 stock—like the Chicago Mercantile Exchange trading, I started playing with that stock at 200, a couple of months later now it's like 370. Had some ups and downs on the stock, but you know, that stock has made a spectacular move. Google started out at 100, basically plus or minus a few bucks, and now here it is at $391 a year later, and has had some spectacular moves in between and some long horizontal consolidations. But boy, when these things get up and run, you can just plow your money into it. Now remember, you're going to buy fewer shares, but you're looking at your percent. So, if Google makes a 50% run like it did from 200 to 300, that's a 50% run. You're on margin, you made 100% on your money. Now, if the stock turns and starts to break down, you may lose three or four percent of your money. So, your risk-reward ratio is enormous on the expensive stocks, and these are the real quality stocks, and they make huge runs for long periods of time.
Matt Blackman: So, if I read what you're saying: don't make the mistake of buying a stock because it's inexpensive. Buy a stock because it's the one that's actually got the greatest potential for making a big move.
Dan Zanger: That's exactly right. The old saying is, "Buy the best merchandise you can find." So, you want to find the market leaders, dominant in their space, with quarter-over-quarter earnings increases, and stocks that basically own the space—leaders producing new products, new services, new management. Is that correct?
Matt Blackman: That is correct, and it's basically known as the CAN SLIM formula by O'Neil, and it's absolutely brilliant. And I just have to hand it to O'Neil—the guy did all this research work in the '60s and wound up wanting to know why a stock made a spectacular run of 500% or 1,000%. So, he would go back and find out why that stock made the big move, and now he's classified this as the CAN SLIM formula that he's come up with, and, you know, I'll be damned, it works really well. Really good. So, I focus on those stocks, and then I use my own trading style using my chart patterns and my key reversal bars and stuff like that to really enter and exit the stocks.
Matt Blackman: Dan, you've got a great story, and, you know, it's really interesting sitting here listening to you. Now, how do people learn more about your story? I know you've got some links on your website to some of the many articles that have been written about you. Can you just give us a brief idea of how people go and can—and maybe download—some more information about you?
Dan Zanger: Well, again, I started out as a pool contractor many years ago, and made a vast fortune in the stock market really working hard at it. But a lot of the story—the nuts and bolts of sweat and the tears, so to speak—are in numerous articles: Stocks & Commodities magazine, Active Trader, Monthly Trader, etc. And they're all on my website. They can go to my homepage, and at the top of my homepage, there's a circulating banner up there with all the different links to the articles that we have archived on my website. They have archived on my website. They can go there and read all about me and how I did it. I also give a seminar once a year, if anybody would like to learn how to do it. A very in-depth seminar—eight hours. I'll have a banner on my website in February and March of 2006 highlighting the seminar. Should be in either Miami or Chicago, we're not sure yet. It's an all-day show. It's about $995, and it's information overload for most people. So, you may think it's only a one-day show, but I guarantee you're going to walk out of there going, "What did he say?" So, you know, we don't want to fool around and waste your time or my time. We want to get right down to it—how it's done. All the daily bars, and fundamental work, and psychological stuff, and cycles, and seasonal work, and stuff like that. We get into everything; it's incredible. So, that's what I would highly recommend. Also, signing up for my newsletter—it's free for three weeks, no credit card required, at chartpattern.com—one word, chartpattern.com. And, really, it's a fantastic opportunity to get right into how to do it and follow the leaders at the same time.
Matt Blackman: Well, Dan, it's been great talking to you. This is Matt Blackman from ITV with Dan Zanger saying goodbye for now. Thank you.
Dan Zanger: Thank you.