People www.tradersonline-mag.com 08.

2014

Dan Zanger
News from a Market Wizard

Daniel Zanger first gained public attention as the subject of

a December 2000 Fortune article entitled “My Stocks Are
Up 10,000%!” The article outlined his uncanny ability to find
and trade fast moving, high momentum stocks. He set the
world stock trading record with an audited annualised return
of more than 29,000 per cent and in the process turned
$11,000 into over $18 million in less than two years. Dan was
last interviewed for TRADERS´ Magazine for the November
2006 issue. Matt Blackman talked with him by phone on
May 5, 2014 to find out how he’d been doing since then and
what he is seeing in stock markets.

» Blackman: It has been nearly eight years since your last Zanger: These high frequency traders (HFTs) are front-
interview for TRADERS´ Magazine. You mentioned then that running investors and traders which is why they park
you used chart patterns and volume to trade fast moving their servers in front of everybody at the New York Stock
high momentum stocks. Is that still true and have you added Exchange. If they weren’t front-running it wouldn’t matter
any other strategies to your approach? where they parked their servers. If they weren’t front
Zanger: Chart patterns and volume are still the best tools running, they could simply park their servers down in a
for trading high-beta momentum stocks. I don’t think place like Zimbabwe. But they need that extra 10th of a
there are any other tools that work nearly as well since second to get in front of your order. It’s not like they are
it takes volume to move stocks and they need to have a looking to buy a stock bouncing off oversold conditions.
good base from which to start. You’re not going to build They are paying brokerages for order flow to see your
a skyscraper without having a strong foundation. I like order and then front-run it. What could be clearer than
to see a base of six to ten weeks at a minimum. A six that?
month base is even better. Some of my biggest winners You might say that if you’re in it for the long haul, it
have had minimum six month bases; stocks such as doesn’t really matter but it does. I wish I could see order
Research in Motion and Google in 2004-2005. You need flows from say Fidelity or SAC Capital and know what
big volume from a strong base for stocks to move higher, they’re going to buy and when they’re going to buy it and
and that combination is hard to beat unless you are a high be in front of them. Who are these goofy people saying
frequency trader writing algorithms and looking for high HFT does not matter? But HFTs need an advantage and
turnover in an attempt to front run everybody. that advantage is getting in front of your order. You can
see it in how the bid and ask change when trading. When
Blackman: You mentioned High Frequency Trading which you put your order in things suddenly change. When you
became a hot topic after Michael Lewis’s book called Flash pull your order, the market drops. When you put in a large
Boys in which he says the practice gives these traders an buy order, they jack the bid up and after your order is
unfair advantage. Do you agree and how much of a problem filled they drop the price. They jacked it up to make you
is it for retail and professional traders? pay up and then the price goes back down to where it

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I wish I could see order flows from say Fidelity or

SAC Capital and know what they’re going to buy and when
they’re going to buy it and be in front of them.

should have been. You can clearly see these machines traders how to find the fastest and best moving stocks
and algorithms working your order. It’s the biggest scam in the market using a combination of chart patterns,
in the world. earnings growth, and volume. Some of my favourite
patterns are horizontal channels, or any type of channel,
Blackman: So you are seeing this happening and cups & handles which don’t occur as often and are
when you place your orders? more misunderstood than other patterns. We also focus
Zanger: Of course, I’ve been seeing it for years. on key reversals, topping and bottoming patterns, the
games they play on Wall Street, how they shake the tree,
Blackman: Do you know of any ways the amount of misinformation that occurs in the financial
to avoid getting caught in the HFT trap? media and how to let the charts cut through all the bull
Zanger: I think a lot of buy and sell program algorithms for you.
have whittled down large order sizes to hundred share lots
in repetition and routed them through different dealers to Blackman: Do you still like using deep-in-the-money
try to avoid the high frequency trap. Even when Apple (DITM) call options to take big positions like you did to
made its big move from $600 to $700 in 2012, the move trade stocks like Google and other expensive stocks?
happened in small lots with institutions running hundred Zanger: I have used DITM call options in the past and
share trades. Seeing trades of 5000 to 20,000 blocks is might use them once or twice a year because they are
almost non-existent nowadays. I hardly see any large highly effective on the right stock at the right time coming
blocks anymore. But I’m not an institution sitting in a New out of a strong base. Other than that, I avoid using them.
York office with 30 traders, programmers and PhDs in I never used any options until 2005 when Google made
computer science and mathematics.
Back in the 1990s shares sold in
blocks of 5,000, 10,000 or 20,000. F1) Google Deep-In-The-Money-Call Strategy
Now I’m seeing trades of 100, 200,
300 or sometimes 1000 shares made
with computer programs routing
orders to try and hide them from the
high-frequency guys. At least that’s
how I see it being someone who
trades in decent sizes of 50,000 or
100,000 shares.

Blackman: You host the annual

Chartpattern.com seminar every year
in either Miami, New York or Los
Angeles. What were some of your
favourite topics, questions and stock
trades covered at this year’s event?
Zanger: One favourite topic at my
Dan Zanger first used this option strategy in April 2005 when Google made its first big run as it was leaving
seminars is how to dissect and a solid base on earnings news (see highlighted gap up). Instead of buying a $300 stock as it was at the time
understand chart patterns of all (adjusted for splits that occurred later), he bought a $250 deep-in-the-money option out two or three months.
It can be a very effective leverage tool.
types and formations, in both short
Source: www.tradesignalonline.com
and long-term time frames. I show

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F2) Apple Running for All-Time-High its first big run as it was leaving a solid base in April of
2005 on earnings news. Instead of buying a $300 stock, I
bought a $250 deep-in-the money option out two or three
months. It can be a very effective leverage tool.

Blackman: Sounds like a great strategy. Do you have

another example to illustrate how this works?
Zanger: Another great trade for me with DITM calls was
Apple in January 2012. The company had just released
earnings that were astronomical and the stock was
coming out from a solid long base. The stock was trading
at $440, so I bought the February 380 calls for $64. This
gave me about four weeks to own the stock. Let’s do the
math to see why this is such a powerful tool. Since the
stock itself was at $440 we subtract $380 leaving $60. I
controlled a stock that could potentially move $20 in a
day for only $64! I minimised risk exposure by $380 but
could capture that same $20 move. Eventually this stock
moved from $440 to $500 in that one month time frame
giving me close to a 100 per cent return without the risk
of owning the full price stock.

Chart of Apple from the Zanger Report newsletter with Dan’s comments on Blackman: Why don’t you use
September 14, 2012 showing the big gains and powerful cup & handle chart the DITM option strategy more often?
pattern just before the stock peaked in 2012.
Zanger: I use them only a few times per year as they can
Source: www.chartpattern.com
wipe you out faster than a fully margined account if the
stock or the market breaks. You have to have the right
stock at the right time in the right market or it can knock
F3) Biotech Topping Out you out faster than a Joe Fraser left hook to the chops.
Tight spreads are best and if spreads are too wide then
you can lose five to seven points in less than an hour if
the stock has a hiccup and you need to check out. This
could mean a 15 to 20 per cent haircut in a flash shortly
after you open the trade. Tight spreads are usually seen
in strong markets in stocks that trade two to three million
shares or more per day. Even these highly liquid stocks
can see spreads widen if market conditions start to
deteriorate. At certain times spreads will widen making
deep in the money calls prohibitive for me.

Blackman: You’ve mentioned that you focus on market

leading stocks to trade. What factors do you look for in
finding the next market leaders, industries and sectors?
Zanger: I want to see very large earning increases of
40 to 150 per cent or more with similarly large revenue
Daily chart of the Powershares Ultra Nasdaq Biotech ETF (BIB) from the Zanger increases on a newer stock that is either in a hot
Report newsletter with his comments calling the biotech top at the end of commodity like fertiliser stocks in 2006-2007 or new
February 2014.
technologies like search engine stocks in the late 1990s
Source: www.chartpattern.com
or in 2005 as was the case with Google, or a new biotech

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where something has significantly

changed. Another example was
MasterCard which really started to
dominate transactions. There are
always new trends changing and
emerging. But you have to be on top
of 400 or more stocks every night
to capture the big moving, high
volume stocks that lead the rest of
the market.

Blackman: What were you seeing in

stock markets heading into 2014?
Zanger: Leaders collapsed and big
cap stocks paying dividends around
what the 10-year note was yielding
were attracting all the money. The
high priced, high momentum stocks
priced themselves out of the market and there was your portfolio? A couple of years ago you liked some of the
tremendous froth. In February and March many of these REITs (Real Estate Investment Trusts) and dividend stocks
stocks collapsed. Examples of stocks that were hard hit when momentum stocks rolled over. Are they still a good
included cloud stocks like Workday Inc (WDAY), the First place to find safety?
Trust ISE Cloud Computing Index ETF (SKYY), and Tableau Zanger: My best strategy in a weak market is to go to cash.
Software (DATA). A lot of speculative buyer names were There is nothing worse than being short a stock that has
cut in half or dropped by 30 per cent. Certainly many of come down but then a positive news story comes out
the Chinese names were down 30 per cent and some gave
all their gains back. Any stock that had doubled in a short
period of time got killed. Many of the 3D companies, like F4) A Leader Breaking Down
3D Systems (DDD) and StrataSys (SSYS) got crushed
as did the biotechs such as the ProShares Ultra Nasdaq
Biotech ETF (BIB).
After a big correction you have to wait for stocks to
consolidate and form low-level bases. At some point they
will come back. There are some big political unknowns in
2014 like what’s been happening in the Ukraine. It seems
like a foregone conclusion that Russia will take it over
but what is more important is how we respond to it that
will impact markets. Sometimes there’s a big reaction to
this type of news in stocks but at other times, the street
doesn’t seem to care.
It’s interesting that what we were seeing in early to
mid-2014 was somewhat similar to what happened in
1987 when stocks went horizontal. Then in March through
May 1987 the market took off and ran into August but
then buckled in October. We had a similar type economy
in 2014 but there were also some key differences. Chart from the Zanger Report newsletter with Dan’s notes showing prior market
leader Stratasys Inc. (SSYS) peaking in January 2014 and then vulnerable to a
big selloff.
Blackman: When markets get jittery like they were in the
Source: www.chartpattern.com
early part of 2014, what strategies do you use to protect

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 PeoPle www.tradersonline-mag.com 08.2014

Trade less, be more patient

and wait for the best setups.

and it gaps and runs. With my strategies, knowledge, and base and I’m waiting for the next time that stocks are set up
experience, I’ve always found that going to cash is best. to possibly double or more. I’ve been doing this for more
I’ve made money being short – I was short EBAY prior to than 25 years and have found that cash is best when the
its two for one split when the stock gapped down $20. I market tops out or when it gets choppy. You’re not going to
had 160,000 shares and made $3 million in 20 minutes. But buy at the exact low or get out at the top. When things get
in this kind of market, stocks chop their way lower but the choppy it’s best to simply move to the sidelines.
S&P 500 and Dow Jones Industrials have been sitting just As for dividend stocks and REITs, I haven’t been in
below new highs so it’s a tough call. Eventually stocks will them lately. I did buy some in 2010-2011 and quite a few of
them made 40-50 per cent gains plus dividends but then
interest rates started to rise. I got out near the top and
F5) Avoid after the Run Up many gave back 40 per cent or more. Lately, I’ve found it
better to be in cash when markets get choppy.

Blackman: Are you seeing any of the same patterns that you
saw in 2007-2008 and what likelihood do you see of another
similar correction of 30 per cent or more?
Zanger: The Russell 2000 experienced a ten per cent
correction in April and May but has started to come
back. It was showing a quasi looking Head & Shoulders
(H&S) pattern but none of other major indexes including
the Nasdaq, the S&P 500, the Dow or the transports are
showing the pattern so I’ve ruled out that possibility. The
yield on the 10-year bond is right in line with the yield on
the S&P 500. So to answer your question, I’m not seeing
any of the same patterns right now that we saw in 2007-8.

Blackman: If you had your trading life to do over,

what might you do differently?
Zanger: I love that question (laughs). I’d have to say
Chart of powerful market leader Tesla Motors at its peak in early March 2014 learning to move to cash sooner and having the
from the Zanger Report newsletter with Dan’s warning to Chartpattern.com wherewithal and knowledge to appreciate just how
members to avoid the stock.
deadly extreme whipsaws can be. During these
Source: www.chartpattern.com
whipsaws there is no clear definition of trend. It’s
important to learn extreme patience and that sitting on
your hands for months or even years at a time can be
your best friend. You don’t have to make trades all the
Matt Blackman time. The big winners will come and when they do you
Matt Blackman, CMT is a full-time technical need to have all your cash available. I think that’s what
and financial writer and trader. He helps clients
produce corporate and financial newsletters, I would do differently – trade less and be more patient
and assists them in getting articles published in
the mainstream media. Matt has earned a BSc
and wait for the best setups.
Honours degree from Simon Fraser University in
British Columbia, Canada. You can follow Matt
on Twitter at www.twitter.com/RatioTrade Blackman: It’s been great speaking with you again.
Thanks Dan! «

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