Base Builders At Work
Looking better. Friday’s broad rally,
combined with an O’Neil follow-through day, continued the repair work to our
base builders. The time may be drawing near when we’ll see the proliferation of valid bases required by intermediate-term momentum traders
for our kind of game.
However, we’re not out of the woods
yet. Stocks appeared to take their cue from trial court decisions earlier in the
session that favored the Bush presidential campaign. Then after the market
closed, the Democrat-dominated Florida Supreme Court ordered manual recounts,
dealing a serious blow to the Bush campaign as well as hopes for a breakthrough in the presidential impasse. Meanwhile, the Republican-dominated
Florida Legislature appears ready to appoint its own slate of electors. So the
outcome of presidential standoff looks more clouded than ever.
Could that dash the rally? We should
get our answer next week, if not on Monday. In the process, we’ll learn whether
the market is taking its cues from the presidential struggle or growing hopes
that the Federal Reserve will begin easing interest rates.
In the meantime, I was heartened
Friday by constructive action in a number of high relative strength stocks as
well as the resilience in Intel
(
INTC |
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PowerRating). Shares in the chip giant managed to
rally despite the overnight warning of soft Q4 sales. In bear markets, stocks
fall on positive news as well as negative news. In strong markets, stocks often
overcome negative news.
Of course, I cite Intel only as a
bellwether, not as a potential watch-list stock. Intel comes nowhere near the
profile of a buyable stock for the intermediate-term momentum trader. It’s
buried under a mountain of overhead supply, with major downtrend both in its
price action and relative strength line.
King
Pharmaceuticals
(
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PowerRating) surged 3 3/4 to 52 3/4, breaking out of a short,
five-week cup-with-handle base on volume of 3 million shares, 65% above its
average daily trade over the past 50 sessions. Given Vice President Gore’s
inclination toward drug price controls, King’s rally probably owes plenty to the
Bush-related rally in Friday’s session. We’ll see how well the stock holds up on
Monday!
 
The top field of all charts in this
commentary uses a logarithmic price scale and displays a 50-day price average in
red. In cases where the displayed security has traded long enough, the top field also
will exhibit a 200-day moving price average in black. In the second field, a
blue relative strength line represents the displayed security’s price
performance relative to the S&P 500. The third field displays vertical daily
volume bars in black with a 50-day moving average in blue for volume.
Let’s take a longer-term view at King
trading action. As you can see in the next chart, saucer-with-handle base formed
on top of a prior base. While I wouldn’t call this a classic example of an
base, you’re seeing something similar here.Â
King formed an earlier cup-with-handle
and broke out on Oct. 31. However, the breakout came on weak volume (see Points
A in the following chart). The weak volume and adverse general market
conditions may explain why began forming a new base rather than surging higher.
That’s common in ascending bases. The stock wants to move higher, but does a
sort of two-steps-forward-one-step-back routine until the general market gets
out of the way. When the market cooperated Friday, King jumped 7.7% vs. 2.0% on
the S&P 500, 6.0% on the Nasdaq Composite, 1.6% on the NYSE Composite.
After the stock began forming the
second price structure, notice the support that came in once the stock fell to
the price level of the prior base’s handle (Point B).
For another another good-looking base
builder, check out Ciena
(
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PowerRating). The stock cleared its 50-day moving
average and its mid level of 109 on heavy volume. It still has a ways to go. The
relative strength line is well south of new high ground, though improving. When
I enter a breakout, I want the RS line in new high ground.
As I said at the beginning of this
article, Friday’s session represented a valid follow-through day, and we’re
seeing constructive behavior in some of the high momentum stocks. If the action
continues next week, we may find ourselves in position to open a few trades. The
Florida Supreme Court’s ruling, announced after Friday’s close, bothers me. But
I have no elaborate predictions on how the market should sort out the
convergence of a seemingly dovish Greenspan and worsening presidential conflict.
I’ll just let the market tell me next week.Â
For more analysis of the FTD and the
potential emergence of new leaders, check out Kevin Marder’s commentary
on Friday’s session.
Remember that all stocks are risky. On any trade, reduce your risk by limiting your position size to a percentage of your total
account and setting inviolable price stops. For an intro to combining stops with
position sizing, check out my lesson, Risky Business.