Eyeball Workout
Base builders continue to be rare in
the high relative strength crowd, but as I said before, that’s to be expected
after a 50% market down on the Naz in only eight months. If this bottom holds,
and that’s a big if, I would expect the momentum stocks to act much as they did
in 1991. They will take months to complete bases after the end of the last bear.
In the meantime, I’ll continue to
point out from time to time the rare base builder. But as an intermediate-term
momentum trader, my hunt for base builders is more a quest to gauge the health
of the market and build a long-term watch list than an active search for
imminent buy candidates.Â
When high RS base builders are scarce,
the market is a high risk, low return proposition for medium-term momentum
traders. Better to use the hunt for bases to evaluate market conditions, so
you’ll spot the rapid proliferation of healthy bases when it occurs, and your
eyes will be adept at spotting these bases. Believe me, when the shift occurs,
it’s quite remarkable. It’s like angling for days without a nibble. Then all of
a sudden, a big school of fish cruises right under your boat and
starts hitting! High RS bases just crop up everywhere.
FileNet
(
FILE |
Quote |
Chart |
News |
PowerRating) is acting okay.
The stock has been backing and filling underneath 35 level. Since that’s the
resistance level, that’s the bogey to beat before looking for entries (assuming
a health market characterized by volume on an uptrending tape and more base
formation among other stocks). The stock’s relative strength line, which plots
its performance vs. the S&P 500, also needs to overcome its prior high
recorded on Feb. 29 (see Point A in the
following chart). I want the RS line to lead or coincide with any breakout.
Good quarterly earnings growth and
relative strength scores as of the prior session’s close on the StockScanner.
EPR 76, RS12 88, RS6 88, RS3 92.Â
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.
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.