More Eyeball Work
Take upward wedging action from a
recent correction, add a lagging relative strength line, then toss in a negative
market response to positive news, and you’ve got a nice short signal.Â
Trigon Healthcare
(
TGH |
Quote |
Chart |
News |
PowerRating) fit the
bill on Wednesday. During trading, Virginia’s largest managed care company said
Q4 operating net rose earnings 76%, topping Wall Street estimates. The company
reported strengthening revenue and membership growth. Shares in Trigon fell 6%
on three times normal trade. Note the close in the bottom half of the day’s
range.
While the financials have discounted
falling interest rates for some time now, we’re still in the midst, not at the
end, of an easing cycle at the Federal Reserve. Consequently, I’m still seeing
healthy action in a number of these issues. Check out the market behavior of Doral Financial
(
DORL |
Quote |
Chart |
News |
PowerRating), a mortgage banking institution
operating in Puerto Rico.
The stock shot up 3 5/8, or 11%,Â
to 26 1/2 on triple average volume. The stock has followed through handsomely
since breaking out of nice, flat consolidation zone on Nov. 30, 2000 (see Point
a in the following chart).Â
A good way to hunt for leadership
within a sector or group is to compare the charts of component stocks. This is
one reason why I prefer logarithmic price charts to arithmetic price charts: It
measures everyone on the same scale. For instance, look at the Doral above, then
look at the following chart of Investors Financial Services
(
IFIN |
Quote |
Chart |
News |
PowerRating), a
Boston-based bank holding company. Shares in the latter popped into new high
ground on Dec. 7, 2000 on mediocre volume (see Point a
in the chart). The stock ran to an all-time high of 96 on Dec. 26 (Point
b), then gave it all back and then some. Shares bottomed on Jan. 22 (Point
c) and now appear to be consolidating in a handle-like price
structure after sharp, partial recovery.
Compare the relative strength lines of
the two stocks. Notice the “wide and loose” action in Investors
Financial Services vs. the much more contained downside in Doral Financial.
Investors Financial fell 38% from Dec. 26 peak to Jan. 22 trough. Go back
to the Doral chart. That stock peaked on Dec. 28 (Point
b), then fell only 20% to its trough (Point
c) Jan. 3. Also, notice the immediate reversal off the Jan. 3 low on
heavy volume.
Trading is a game of probabilities.
Investors Financial Services could take off from here, and Doral could lag or
fail. But at this point in time, the chart pictures suggest Doral is the higher
probability long.
The top field of the above chart 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 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.
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