A Slow Suffocation
Push ’em back, push ’em
back… way
back, way back…
As I traded over the past several
weeks from my perch just south of the Pocono Mountains, that’s all I kept
hearing in my head. I’d make some progress, then there it was again, “Push
’em back….” — the collective cry of the other football team’s
cheerleaders.
I don’t know if little-league football
teams still use that silly cheer, but I remember thinking then, as I did over
the past month, “Off with their heads!” Couldn’t do it though. Where’s
that axe when you need it? Oh well. No matter how deafening the other team’s
battle cry, there’s only one thing to do when you have a fourth-and-long
situation — PUNT!
The breathing room the market gave us
intermediate-term traders two weeks ago turned into a slow suffocation. Sure, the
Nasdaq Composite declined on lighter volume — just what you want to see — but
there was no bartering with the stock gods. Price is price. If you bought a
stock breaking out from its basing pattern, with all of the right fundamental
and technical characteristics, but it failed and hit your stop-loss, you should
have sold it.
Varian
(
VARI |
Quote |
Chart |
News |
PowerRating) was one such recent
example.
Following its breakout July 7 from a
perfect cup-with-handle pattern, Varian quickly rallied 30% in four days. As I
laid out in the Trading
Course I did with Kevin Marder, whenever I have a
position that advances more than 25%, I raise my stop-loss to my cost. In the
case of Varian, I bought the stock at an average cost of 50 3/4. (I scaled into
my position just before it broke out above its 50 3/8 pivot point, then quickly
added to finish off the position on the breakout to new highs.) On July 19, the
stock cascaded lower from the opening bell and moved right down to my cost of 50
3/4 — now my stop price. Interestingly, though, before I could even pick the
phone up to call in a sell order, the stock rocketed back up, then followed
through to higher into the close. I can’t remember the last time that happened,
but I stayed with the position at that point.
That’s until the next morning.
The following day, Varian opened
higher, tagged fresh new all-time highs, then proceeded to cave in. As I watched
each intraday low hold, then fold, it became very clear volume would exceed the
prior day’s upside volume. It did, and, in fact, was the heaviest-volume day
since October. This poor action is exactly the opposite of what should have
happened. The stock should have followed through to new highs and stuck,
following the prior day’s strong price-and-volume reversal. I sold fairly close
to the low on the day around 52 — down about 9 points from the previous day’s
close.
Do you ever find yourself in that
situation? “It’s already down 9 points, how could I sell it now?”
says that little voice in your head. The stock tagged an intraday low of 35 5/8
Wednesday. Though the situation was a bust, I was more than happy to say
“Thank you very much,” 30% higher.
Honestly, though, I really couldn’t
believe my eyes. Considering the way the stock reversed so strongly on heavy volume the day before, I was fully expecting to see this stock rocket higher — which it
did at the open, following the prior day’s close. In fact, my trader recalls
hearing me say, “What the —-!” as I was giving him my order to
unload the position. He said it was the first time in two years he’s ever heard
me a bit rattled as I was giving him an order.
Unfortunately, these failed breakouts
have been all too common over the past several weeks, making it extremely
difficult to get a handle on anything. Do I hear something? Is the market
telling me it’s not ready to follow through on the upside? You have to listen
up.
So when it was time for Applied Micro
Circuits
(
AMCC |
Quote |
Chart |
News |
PowerRating) to take a stab at a breakout I passed.
For one, the short handle to its
16-week cup formation “wedged” higher in the two days preceding
Tuesday’s breakout attempt. Moreover, as the stock rallied toward its breakout
point during the day, extrapolated intraday volume never indicated the stock
would meet its minimum breakout volume requirement of 40% above normal. The
stock closed into new high ground and volume came in below average. The stock
fell back into its faulty handle Wednesday on increased volume.
Maybe it can pull back a bit in price
and form a better handle around current levels, or maybe it just succumbs to
market pressure and attempts to build a whole new base. I never take my eyes off
these situations because it could still form a better setup. However, until it
does. I pass on the long side.
You see how everything seemed to be in
place for Applied Micro — solid base, accelerating quarterly earnings growth,
great upside earnings surprise, which the stock responded to, but yet, when
it came right down to the days heading into its breakout, the setup just wasn’t
right?
In order to be involved in the best
stocks, it’s your prerogative to demand only the best characteristics. Finding
the best performers goes well beyond just a stock’s chart pattern. If there are
five stocks in basing patterns with RS rankings in the high 90s, for instance,
why would you even look at one with an RS rank of 81? And when you see a high RS
stock like Varian totally fail from a very good launching pad, especially on the
heels of other base breakout failures, it indicates something’s amiss in the
market. I don’t know what, but I don’t want to stick around to find out, either.
I’m more than fully aware of all of
the external influences affecting the market, i.e., the Fed, concerns about
the economy slowing too much, thus affecting future corporate profits. I don’t
live in a bubble, but my trading system does. My method focuses on the
intermediate term. Perceptions and expectations have more to do with this time
frame than anything else. This information can only be gleaned from following
the action of the market and its leading stocks. This information is what forced my
fund back into a substantial cash position last Friday.
No arguments here.