Don’t Look Back
Not all cups and double-bottoms put in
a handle before breaking out. On Friday, PeopleSoft, the giant business software
company, surged straight out of a correction-recovery pattern without looking
back.
PeopleSoft
(
PSFT |
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PowerRating), which flashed
on our radar screen on Jan.
8, rose 1 5/8 to a new high of 51 1/16 on trade of 13 million shares,
more than double normal volume.
While PeopleSoft did not put in a
the stock did offer two possible pivot points: 1/8 point above the intermediate
peak within the base (see Point a in the
chart above) and 1/8 above the pre-correction high (Point
b).
Notice the four straight accumulation
days going into the breakout. Positive news surrounding the PeopleSoft8 product
is helping the company’s fundamental outlook. Earlier this week CEO
Craig Conway said that the suite of accounting, human
resources and supply-chain applications, released four months ago, has already generated more than 1,000
orders.
Breakouts without handles in cup and
double-bottom type bases tend to be more failure prone, but they can work out.
(As always, watch your stops!) When they work out, breakouts without
handles tend to
occur in concert with a rallying market. On Thursday, the Nasdaq Composite
(
$OTC.X |
Quote |
Chart |
News |
PowerRating)
rallied 4.6%, its third consecutive up day, on a vigorous rise in volume.
This brings me to a few general market
observations. Notice the increasing volume over the past several days
accompanying the progress in the Nasdaq. That’s institutional money returning to
market, a bullish sign.
Another point: For weeks now, hedge
fund manager and institutional advisor Mark Minervini noted
the Nasdaq’s continuing inability to stage more than two up days before running
into selling, a pattern that has held in place since Sept. 1 (see Point
a in the chart above). Starting this week, he began
advising his clients to look for a possible break with the precedent. Mark is
the winner of the 1997 U.S. Investing Championship and one of few chosen to make Stock
Market Wizards, the third in Jack Schwager’s Wizards series of
books of interviews with renowned traders. So how does Mark interpret the
Nasdaq’s finally putting in the third up day?
“There’s nothing magical about
the three days except that we’re breaking a previous negative behavior. So that’s
a mild positive,” Minervini told me. “You’re getting oversold bounces
in the big-cap techs. Some of those areas still have to bottom. Money has
rotated out the defensive areas because of the Fed’s changing course, and we’re
seeing the first signs of money going back into tech.”
He cautions against premature
enthusiasm. “It’s still very hard to get grip on any leadership. The group
rotation has been very fierce. The Fed shift is positive for the intermediate
term. But I think the economy is going to be worse than people expect. You’re
going to see more downward revisions, and that can have a negative impact on the
market near term. Ultimately, the Fed will act as aggressively as necessary to
turn this thing around. So in the long run, this will be positive for the
market.”
For another healthy news mover, check
out Rational Software
(
RATL |
Quote |
Chart |
News |
PowerRating). Overnight, the company reported earning 20
cents a share pro forma in the Dec. 31 third quarter, beating estimates
averaging 18 cents, according to First Call/Thomson Financial. The company’s pro
forma results exclude unusual items related to acquisitions. Rational Software
also raised earnings guidance for the fourth quarter of 2001 and fiscal 2002.
The stock surged 6 1/16 to 45 3/4,
clearing its 50-day moving average on volume 12.7 million shares, nearly triple
its usual trade. As an intermediate-term momentum trader, I would not find the
stock buyable near this level, but the powerful accumulation and 50-day
clearance are good signs. The relative strength line needs more work. I want the
RS
line to be very close to new high ground if not already in new high ground at
the time of a breakout.
Crosses above the 50-day on heavy
volume are a good way to spot future winners before they set up. TradingMarkets
provides an indicator, updated every day after the close, which screens for
stocks crossing above their 50-day on at least double average volume. To check
out the screen’s latest results, click
here. You also can find it on our indicators
page.
The stock also needs to overcome its
mid-level. I generally avoid
stocks until they have retraced at least half of the loss of their corrections.
Buy earlier, and you risk of running into a pullback as
overhead supply comes to market. Overhead supply represents shares in
the hands of shareholders who bought at higher prices. These 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 before 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.
The top field of all charts in this
commentary uses a logarithmic price scale and displays a 50-day price average in
red. 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.
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,
check out the Money
Management area of TradingMarkets’ Stocks Education section.