Jack Hershey method - “Tomorrow’s paper today”

Jack Hershey is a trader who posts on discussion groups such as misc.invest.technical, misc.invest.stocks,
and misc.invest.futures. He has traded since 1957, primarily commodities futures but also stocks. His method
is not published but he freely offers advice and guidance to anyone wishing to use his strategy. He is a great
advocate of William O’Neil’s CANSLIM methodology. He strongly dismisses the “buy and hold” mentality
– stressing that it only makes sense to own a stock while it is going up in price, at its fastest rate. Trade the
trend – if there is no trend – get out. If you are holding a stock that is falling in price, sell it. His method
focuses on the natural cycles of quality stocks. He repeatedly stresses that prediction is futile – learn to
anticipate. Searching the newsgroups for “Jack Hershey” results in over 2000 posts, many of which are
several sides of A4. The only minor drawback is that his writing style frequently borders on the
incomprehensible. Summarising his method will inevitably lose some of the nuances.

Trading principles
1. Optimization of capital appreciation – compound interest formula
2. Risk minimization - achieved through quality stocks
3. Comprehensive set of tools that integrate into an operational system.

1. Power of compound interest formula:

P = A*(1+%)^n where P= final capital, A=initial sum, % is % increase per trade, n = no of cycles
Important to realise that rate of growth is dominated by no. of cycles, NOT profit %
Ex: 10% per cycle (trade), 50 cycles in three years, gain is 117 * starting capital
Focus on strongest portion of trend i.e enter late and leave early and move to next candidate with stronger
trend (= higher ROI). This decreases % profit per trade but increases number of trades. This is what drives
the compound interest formula to get the maximum Return On Investment.

2. Quality stocks only:

Earnings Per Share and Relative Strength ranking >90 (in top 10%)
Min price $10, max price $50, min 65 day average volume of 300,000.
Float (no. of outstanding shares) 5 to 30 million.
Focus on stocks that regularly exhibit 6 to 8 day cycles of 20% price movement
Look for stocks where volume has dried up. The cue to trade is then an increase in volume.
Trade 6 to 8 stocks, one per day, taking the middle 10% of each swing to give 10% every 6 to 8 days, per
stock.

3. Volume leads Price

Volume is the leading indicator for both buying and selling. Hershey focuses on the Price, Volume
relationship i.e. the use of volume as a leading indicator to price change.

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Volume change precedes price change. If the Volume trend is increasing, then the Price trend will continue. If
the Volume is decreasing then the Price trend will change. Also, if the volume is relatively unchanging, then
the Price will drift slowly downward (Hershey call this 4 o'clock drift.).

In essence it is saying that if volume is increasing the existing price trend will continue. When volume
decreases expect the price trend to change. The vertical arrows in the boxes represent these conditions. The
hourglass shape in the middle represents the sequence of events for a stock one is trading. Starting at lower
right, when when price is trending down and volume is decreasing, be prepared to buy. The advance warning
to buy comes when volume increases again, with the buying being done as the transition is made from lower
right to upper left. This is very important, you don't actually buy just because volume and price are trending
down as the diagram appears to suggest.

As long as volume is increasing and price is increasing the trend should continue and you hold. As volume
deceases with price increasing you make the transition from upper left upper right. The smart seller sells
when the price then shows signs of faltering. When volume picks up again and price falls you make the
transition from upper right to lower left for the sell off phase. Then when volume decreases (drys up) you
make the transition to lower right and get ready to buy the next up-cycle. If volume is way below average
and price falling we are in stage 1

The price curve is an elegant mathematical description of the relationship between price, volume and
accumulation/distribution. Using Boolean notation:

Price Volume Acc/Dist Score

Down (0) Down (0) Distribution (0) 000 = 0 (Dry up)
Down (0) Down (0) Accumulation (1) 001 = 1 (Dry up)
Down (0) Up (1) Distribution (0) 010 = 2
Down (0) Up (1) Accumulation (1) 011 = 3
Up (1) Down (0) Distribution (0) 100 = 4
Up (1) Down (0) Accumulation (1) 101 = 5
Up (1) Up (1) Distribution (0) 110 = 6
Up (1) Up (1) Accumulation (1) 111 = 7 (FRV)

All we are really interested in are stages 1, 0 and 7 (to go long).

Shorting would use the sequence 5, 4, 3.

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Selection of stock universe
a. Using www.stocktables.com
b. TC2000 scans (he no longer uses TC2000 since v3)

(a) Stocktables selection

Set search to EPS and RS>90. Min price $10, max $50. Sort the list by % volume change.
We are looking to create 3 lists: 7's, 0's and 1's.

List the top 10 stocks with price increase and vol increase = 7’s list
From bottom of list, select 1st 10 stocks with vol>20000 = 0’s list (Dry Up 1)
Continue up list, select next 10 stocks with vol>20000 = 1’s list (Dry Up 2)
We now have 30 stocks, in 3 lists of 10
The 7's are "taking off", the 1's are "landing", and the 0's are preparing for take off.

Candidates only qualify to be listed if:

1. 65 day moving average exceeds 300,000
2. Float (no. of outstanding shares) is 5 to 30 million.
3. Stocks should exhibit cyclic behaviour , 6 to 8 day cycles, 20% price range, over the last 5 or 6 months.
4. EPS is positive.
5. Institutional ownership >25%

Recently I have found that most stocks are just too thin to trade. I have however arrived at the following
preliminary watch list:
ACDO, ALLY, CACI, CHBS, COTT,CVG, DFXI, FHRX, HOTT, HPLA, IPIC, MENT, MIMS, MOSY,
MOVI, NTBK, PECS, RMCI, TTIL, WBSN

Some of these have drifted slightly under the EPS & RS>90 criteria but I gather that Jack doesn't rush to
remove them from the list. For each stock, look back a few days and note 3 levels of volume: the lowest (Dry
Up), the highest (Peak) and the volume that indicates a breakout (First Rising Volume). You may also see
some heavy volume increases that don’t have the desired effect. This is the “failure to breakout” level. FRV
should be 3 to 4 times DU. When volume in 1st 2 hours exceeds DU then bracket orders for entry. Hold until
pro-rata volume < 65day ma vol.

(b) TC2000 scans

3 progressive stages of dry up:
1. ((AVGV30 - 3 * AVGV5) > 0) AND (AVGV5 > 0) Dry Up 1
2. (AVGV30 > 2 * AVGV3.6 AND AVGV30 > 2 * AVGV3) AND (AVGV3.3 - AVGV3) > 0 Dry Up 2
3. (AVGV30 > 2 * AVGV6.3 AND AVGV30 > 2 * AVGV3) AND (AVGV6.3 - AVGV3) > 0 Dry Up 3

FRV
4. (AVGV5 - AVGV30) > 1000 AND (MAXC126 - MINC126) > 0.5 * MINC126
5. (AVGV5 - AVGV30) > 1000

Exit conditions:
Gainers Over Yesterday Between 5% and 10% Inc.
6. ((C - C2) / C2) * 100 > 5 AND ((C - C2) / C2) * 100 < 10
Gainers Over Yesterday Greater than 10%
7. ((C - C2) / C2) * 100 > 10

Stage 1 or Stage 3
(H30 < 1.1 * L5) AND (H5 < 1.1 * L30)

Stage 2 or Stage 4
((MAXC126 - MINC126) / MINC126) * 100

Gappers
L > H1 OR H < L1 AND V > 1000 OR (C * V) > 2500

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Trading technique
Use 3 timescales (Hershey calls these fractals). Use the slowest to determine market direction, the middle
one to trade, and the fastest to anticipate entry/exit. It is important that the 3 timescales are in phase. Hershey
refers to the phasing as harmonics.

1. Fractals (timescales)
a. Weekly, daily, 30min (trading the daily)
b. Daily, 30min, 5 min (trading on 30 min)
c. 30,5,1 min (trading on 5 min)
d. harmonics – enter when synchronised

2. Indicators
a. Volume
i. look for volume to exceed Dry Up (DU) within first 2 hours of the day. Enter when
volume exceeds 3 to 4 times DU (= First Rising Volume, FRV) then enter.
b. macd (5,13,6)
i. “away” macd – significantly away from zero and turning
ii. slope of macd = strength of trend
iii. divergence/convergence of macd and ma of macd
iv. rate of change of slope of macd
c. stochastics (5,3,3)

3. Patterns
a. Rocket – stochastic goes up, stays perched and entwined
b. Pennants / flags

Comments from Jack Hershey:

Monitor the Dry Up volume of the stock using EOD data. Look at the daily chart for a period of six months.
Look at the volume of the stock prior to the last five times it has gone up 10 to 20 % over a few days time.
Record that daily volume to two significant figures (roughly determine it). Watch the stock approach that
volume as the days pass. Notice that every day it continues in DU it is getting closer to breaking out in
volume and then, later, breaking out in price.

When the day comes that the stock volume begins to rise in the morning, note if it reaches the dry up (DU)
volume within two hours of the opening price. If it does place the stop order or watch the price rise to that
point and go in with a Market order. Don't try to get it cheaper...get it when it has started the trend to best
eliminate risk.

Sell the stock. Once you own the stock keep track of the volume at hourly intervals each day. As long as the
stock has sold more shares per hour than the day before, keep the stock. Look at the last five times the stock
has done this in the last six months. Make a note of how many days it takes to go up in price and how many
days it takes for the volume to not again exceed the previous days volume. The two numbers you get will be
consecutive numbers. The price number of days will be one day greater than the volume number of days. If
you sell the stock on the smaller day you will make twice as much money per year than if you sell on the
longer number assuming you are in the market much of the time this way. The numbers you will be using
are around 6 to 8 usually. Raise stops daily. It works like getting a pay check periodically.

DKM 3/2/02

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