Lights Out

July 31, 2000
Greg Kuhn

What party?

I showed up with my light-flickering
dancing shoes, but nobody wanted to dance with me. Gee, I wonder why?

What a bust. Last one out the door,
please turn off the lights.

From low-volume breakouts, to poor
setups, to failed breakouts, to negative price reactions following otherwise
strong earnings news from many stocks, all of the warning signs were there. It
just took the general market a little while to react in unison.

An intermediate-term trader following
the rules I laid in the Kuhn/Marder
Trading Course should have been forced to
the sidelines last week. In some cases, the intermediate-term trader could have
even been forced to the sidelines days before last week’s big hit in the market.
If your stocks weren’t working, if you
stuck to your stop-loss discipline, you should be pretty well tucked away in
your foxhole by now. And don’t hold out to see if your losers will bounce. Large
losses always begin as small ones. This should always be your attitude.

As I pointed out a
week ago, despite
the Nasdaq Composite’s lower volume during the initial stage of its decline,
breakout failures among some key issues indicated something was amiss in the
market. When a string of your stocks, say your last four or five purchases, fail
on breakout maneuvers, it should serve as a loud warning to stop buying. Yes,
some of the breakouts like Flextronics
(
FLEX |
Quote |
Chart |
News |
PowerRating) looked fine from setup to
breakout. If you bought this one, for instance, you didn’t do anything wrong.
It’s just that you will have a difficult time holding onto them if the market’s trend
turns sour.

Interestingly, the decline in the Naz
over the past two weeks began out of character. Other than the continued drive
lower over the past two weeks, signs of distribution (when an index drops on
higher volume than the day before) were absent all of the way up to Wednesday
and Thursday — back-to-back days of distributive action. Normally, it takes four
or five distribution days over a two-to-three-week period to kill an upward
trend. So, there was little warning from the market itself. However, in this
case, your own positions provided the warning.

Nonetheless, if you were waiting for
complete confirmation from the market, you got it last week.

For example, a potentially leading
stock like Flextronics completely failed from its 15-week cup-with-handle
breakout, Thursday and Friday.

Following its strong-volume breakout
on July 17, FLEX milled around for a week, as the market waited on its earnings
report. There was nothing unusual about its price-and-volume action heading into
the report last week — the stock pulled back to its breakout point on very low
volume, then snapped back July 20 on increased volume. The action was good. What
wasn’t good, and a sure sign to part company with the position, was Thursday’s
swoon on the heaviest volume in eight weeks. In fact, Thursday’s downside volume
was far heavier than the stock’s breakout volume.

Earnings came through just fine, a
year-over-year quarterly increase of 95%. Moreover, year-over-year quarterly
revenues accelerated for the fourth consecutive quarter to 139%. However, like
many of its semi-related brothers and sisters, the stock sold off on the news —
not what you want to see. The one caveat with a strong earnings trend in the
cyclical growth semiconductor groups is that one never knows when the
marketplace will sniff out an eventual slowdown, quarters ahead.

But stocks selling off on strong
quarterly earnings numbers didn’t stop with the semi’s.

Stocks in many other groups succumbed
as well — probably due to their extremely high P/E ratios. And if the market smelled a
slowdown ahead for these companies, the picture was just as poor. It’s always best, though, to let the market tell you when a stock’s valuation has been stretched to the max.

Although MERQ never broke out of its
basing pattern into new highs, it was slinking up the right side of its
base heading into its report. In fact, I scaled into a position with this stock,
as it emerged up the right side of its base from a tight, two-week consolidation
on July 7 and 8. Volume was ample as the stock emerged on this “cheat”
play — more than 40% above normal on both days. However, volume did tail off a
bit on the second day, then again on July 11 — the third day of the rally
attempt. I stayed with my one-half position at this point, however, with the
anticipation the stock would move up closer to its old high and form a handle —
a breakout from a handle would be the spot to finish off my full position.

Then the earnings report came through.
The stock gapped down at the open on July 14 and continued lower throughout the
session. It closed down 13 3/4 points on volume twice that of the breakout move
I bought off of. Not what you want to see if the market was in agreement with
the earnings number.

This was just another example of the
difficulty in latching onto a winner over the past six weeks.

And even if you had some winners in
your portfolio, like Corning
(
GLW |
Quote |
Chart |
News |
PowerRating), signs of wear-and-tear among this
handful of leading issues should be completely obvious by now to the observant
intermediate trader.

And where the market’s lost its
leaders, the final nail in the coffin of its intermediate-term advance has been
inserted. The technical breakdown in most stocks is not irreparable, but due to
the sharpness of the downside price breaks, will take weeks, at the least, to
get the intermediate-term-minded trader hunting again.

From this point, there are no excuses for the
intermediate-term trader who gives back more gain or loses more money!

Lights Out

BUY THE FEAR, SELL THE GREED

Quick Links

Company Info

Contact

Company Resources