Brick By Brick
The watching and waiting game
continues as I look for 90+ relative strength stocks to build and complete sound
bases.Â
Commerce One
(
CMRC |
Quote |
Chart |
News |
PowerRating) Friday gained
6 1/8 to 70. Volume rose 37% above the norm to 14.5 million shares. After
Thursday’s close, the e-business software company reported a 3Q operating loss
of 9 cents a share vs. analyst estimates averaging 12 cents per share, according
to First Call/Thomson Financial.
As of Thursday’s session, Commerce One
shares held a 12-month relative strength score of 95 is forging the right side
of a nine-month-long correction-recovery pattern. As you can see from the above
weekly chart, the stock has a ways to go.
For momentum buys, I want stocks with
90 relative strength for the past year or higher. Commerce One meets that
criterion. I also insist that my target stocks have cleared their 50- and
200-day moving averages. Commerce One satisfied that requirement on Friday.
However, the stock still must pass a
final test. It must clear its mid level, the half way point from its last
52-week intraday high and the subsequent intraday low of the correction. To get
the mid point, add the two prices together and divide by 2. Commerce One’s mid
level is 97 1/4.
The reason for the mid level
requirement is the same as the moving average requirement. All are tests that
demonstrate a stock’s ability to overcome overhead supply. Overhead supply is
the amount of stock in the hands of shareholders with paper losses. These
so-called weak holders tend to sell into rallies, blunting further
follow-through to the upside.
All stocks, of course, are risky. In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
you’ll find extensive lessons in the Money
Management area of TradingMarkets’ Stocks Education section.