Have Rifle, Ducks Are Aligning

June 8, 2000
Greg Kuhn

The battle lines are being drawn. But
will this just be a tradable, intermediate-term advance (i.e., bear rally) or
the first leg of a new bull market?

Doesn’t matter. We got our
all-clear-to-buy signal from the Naz Friday, with a plethora of stocks with
leading characteristics setting up — some of which have already broken out to
new highs from basing patterns.

To the intermediate-term trader,
that’s all that should matter.

The rest is all noise. Learn to tune
it out. For, below the noise level, Mr. Market will whisper good things to you,
while the rest of the players get caught up in what’s “overbought” or
“oversold,” the price of eggs and “what the he– is going on,
this shouldn’t be happening?”.

Once you get to the point where you
say to yourself “I’ve seen this before,” you will approach the market
with the greatest of confidence in your system — your rules of guidance. You
will put positions on and take them off in an effortless and ego-less manner.
You won’t have to discuss what’s going on in the market with another soul. If it
doesn’t work, it doesn’t work. You just step back to the sidelines.

In my office, it’s just me. Most of
the time I don’t even answer the phone (of course, unless I recognize it’s one
of my limited partners’ phone numbers on my caller I.D.). You can hear a pin drop
in my quarters. And that’s the way it should be. Otherwise, just when you’re
about to fire on all cylinders, someone will point something out that will throw
you for a miserable loop. Stuck like a deer in headlights, wondering who to
listen to — someone in their infinite wisdom, or the market. Positive self-talk
will become your best friend.

Please forgive when I go off on my
little tangents. It’s just that I’ve been through all of this before. And, as a
normal human being, with the same desire for positive results as the next
trader, I know exactly what it can be like, day to day, if you’re
relatively new to trading.

Get focused, the easy part will be
buying these puppies setting up. Although that’s not always that easy.

I’m not sure at this point.
Personally, I wouldn’t chase them if they just kept moving higher. However, we
can use their strength, and strength-and-follow-through of other breakouts among
leading stocks, as useful information. If breakouts are working (i.e., breaking
out of solid basing patterns, on healthy volume, and following through to higher
levels, especially after successful tests of the breakout area) then it’s
telling us it’s okay to go for it. Period!

As Kevin Marder and I discussed in our

Trading Course, the action of the market and the action of leading stocks are
your best indicators as to whether to be in or out of the market. Nothing
more, nothing less. Bag everything else. Been there, done that too.

Back to the “no handle” of
Newport and SDL.

_{“Just
remember, in a real}_{bull market, leading
stocks will break out of proper basing patterns for up to three months.
Time is your friend… use it to let the market ultimately prove itself
to you, day after day.”}

It appears, for whatever reason, there
have been more stocks breaking out from cup formations without handles over the
past couple of years. More than what I’ve witnessed over the past 12 years.
Nonetheless, in my observations over this period, these situations have still
represented the exceptions. The vast majority of winning stocks over the past
two years have had the proper handle setup in a cup-with-handle pattern. Just
because a couple of them do it, doesn’t mean they’re all going to start doing
it.

Case in point: There were a number of
Internet-related names that broke out of cups without handles, or one- or
two-day handles, heading right into the Nasdaq Composite’s major peak back in
March. Names like E Piphany
(
EPNY |
Quote |
Chart |
News |
PowerRating) and RSA Security
(
RSAS |
Quote |
Chart |
News |
PowerRating) come to mind. They all failed. There
were others that just shot right into new high ground, rallying straight up off
the base lows over several days. These breakouts also soon failed. This similar
performance occurred in Silicon Storage Tech
(
SSTI |
Quote |
Chart |
News |
PowerRating) in late April, as it
drove straight to new highs off its base lows. It soon thereafter crashed back
down. The short, three-week base it broke out from was problematic as well.

So, it’s still been my experience that
the best setups, with rare exceptions, have had the proper basing
characteristics that have stood the test of time.

There are many more in various
stages of basing patterns. So things are looking pretty solid at
this point — until proven otherwise. And that’s all we need to know. No
predictions. Believe what you see and take it one day at a time.

Elantec Semiconductor
(
ELNT |
Quote |
Chart |
News |
PowerRating) was
the most recent market leader to break out of a base into new highs. Although
the handle to its 10-week cup formation looked a little on the loose side — 30%
from high to low, it appears this was more a function of the Nasdaq Composite’s
sharp break in late May. Overall, the majority of the stock’s handle action was
contained in the upper half its base.

Although it’s my general policy not to
point out what I’m actually doing in the market, until after the fact, as part
of this column’s educational podium, I did buy it for my fund on the breakout.
(It’s too extended past its breakout point, though, to safely buy it here using
a 5-8% stop-loss.) I point this out just to show you that, with more and more
experience, sometimes you have to know when to bend the rules a bit — at least
in this case. The handle did pull back (avoid handles that drift higher along
low points) and the huge volume on Tuesday’s breakout tells me I’m on the right
track. Moreover, the stock has an O’Neil RS rank of 99, is part of the leading
semiconductor manufacturing group, which has stabilized in rank at 18 (this is
high), and has had huge quarterly earnings increases over the past three
quarters of 167%, 1200% and 200%. The company’s revenue growth has also
accelerated over the past five quarters from 9% to 57%.

One of your biggest challenges from
here will be to prioritize your selections. Which ones do you stuff into your
portfolio, with a limited number of allocations?

Although many of the best ones will be
those stocks that have corrected the least, this shouldn’t be a hard-and-fast
rule. Some big-winning stocks from the prior run in the Nasdaq Composite can
swoon a good 50%, and still come back to lead the market. Names like Brocade
Communications for instance. It’s really a function of what they did prior to
their recent corrections. Your best bet will be simply this: Go with the highest
O’Neil RS rank, in the higher-ranked industry groups, with the greatest
percentage increase in quarterly earnings over the past two quarters, and
showing strong volume surges on the right side of the base-building process.

All of the names listed above have
already been screened for EPS and RS, as well as industry performance. Take the
time to study these characteristics if you ever expect to get good enough at
this on your own. A good source is O’Neil’s Daily Graphs or Daily Graphs Online.
As you can see, the current round of leadership is being drawn from the same
areas I discussed several weeks ago — specialized Electronics groups,
Semiconductor Manufacturers, Telecommunications, and now some Biotech names.

I’ve been here before and this is what
a new, bull market begins to look like — gobs of stocks setting up, following an
O’Neil follow-through signal. From here, the proof will be in pudding. If this
is for real, and you miss one launching, don’t get frustrated. And, if you’re
not on top of things, it could easily get that way. Stocks will go whizzing
higher all over the place.

Just remember, in a real, new
bull market, leading stocks will break out of proper basing patterns for up to
three months. Time is your friend. Use it to be patient and use it to let the
market ultimately prove itself to you, day after day. Just let the market bring
you in, stock by stock. It won’t be until after you’re all the way in, and your
stocks are working out great, that you’ll be able to look back and say,
“Gee, I guess this really is a new bull market.”

That’s all you have to do.

Have Rifle, Ducks Are Aligning

BUY THE FEAR, SELL THE GREED

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