A Trio of Bases

They’re not pretty, but I
still can find a few high relative strength, high earnings growth stocks that are
completing bases. If you trade the medium term, now is not a time to go full
bore on the long side. If you’re going to trade, keep your exposure limited.
Otherwise, sit in cash and be ready to do so for weeks, if not months.

MGIC Investment
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is consolidating 6% below its Oct. 30 high. The company owns Mortgage Guaranty
Insurance, a provider of private mortgage insurance coverage. Ideally, we’d see
volume dry up here while volatility continues to contract, a sign that
shareholders may be content to sit tight rather than sell into demand. 

Atlantic Coast Airlines
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got a pop from strong traffic numbers. The carrier
generated 136.9 million revenue passenger miles in March, a 35.5% increase over
the same month last year. The stock is 5% off its Feb. 6 high.

With so few stocks
setting up, now’s a good time to check your long-range radar for stocks that are
at least bottoming and beginning to work on the right side of potential bases.
One possibility is BE Aerospace
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The stock needs to
overcome its 50-day moving average as well as its mid level before I’d look for
possible entries. One of my guidelines is not to buy
stocks until they have retraced at least half of the loss of their corrections.
Buy earlier, and you run the risk of seeing your stock’s share price fall as
overhead supply comes to market. Overhead supply represents shares in
the hands of shareholders who bought at higher prices. These share
holders — so-called weak holders — tend to sell into rallies to end their
unhappy experience in the stock. For that reason, I generally insist that my
watch list stocks are trading above their mid levels for looking for entries. To find a stock’s mid level,
sum the pre-correction high and the post-correction low, then divide the
result by 2. 

Remember to limit your risk by using
stops and limiting your allocation in individual stocks. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business
. For further treatment of these and related topics,
check out the Money
area of TradingMarkets’ Stocks Education section.