Of Bugs In Rugs, And Mud

June 15, 2000
Greg Kuhn

Stuck in the mud, like a bug snug in a
rug.

The market’s tight range over the past
week makes me wonder. Will it follow through to the upside, or pull back in
another shakeout attempt? Trying to build positions over the past few days,
pre-breakout, has felt like getting caught in one of the folding lawn-chairs.
You know, if you sit in one too close to the front edge, the back of the chair
drops down, slaps you in the back and traps you like a giant clam.

Live steamers anyone?

But don’t get too cute with this
approach at home. As a hedge fund manager with $30 mil under my wings, I have to
do some of my buying pre-breakout. Could you imagine how my trader would feel
trying to fill a 40,000-share order at the market — on a breakout?

“Helloooo,” he might say.
“Did you just start trading yesterday?” he’d probably add.

As far as the trading range’s outcome
over the short run, we’ll just have to wait and see. For now, most stocks
building bases, with leading fundamental characteristics, have yet to complete
and break out from proper pivot points. Therefore, the intermediate-term-minded
trader should be far from loaded up on stocks in here.

Yet, the action remains constructive.
The key, however, is being patient. If you’re using a 7-8% stop-loss plan as
part of a strict, money-management regimen, it’s far too easy to get
“whipped” around if you buy too soon during a stock’s base-building
process. Wait for “your” trade, and let the stock bring you in on a
breakout.

Then again, even some base breakouts
can give the word “frustration” a whole new meaning.

Take Xilinx
(
XLNX |
Quote |
Chart |
News |
PowerRating) for instance.
Formed a great-looking cup, with strong volume in all of the right
places. Yet, the stock’s handle setup showed a little too much anxiousness among
traders, wedging up along its low points over the past week. The result:
Tuesday’s breakout on below-average volume, followed by Wednesday’s downside
price reversal on increased volume — the exact opposite of what you want to see
on a breakout move. Solid breakout moves will show price follow-through almost
immediately — at least on the day following the breakout.

Perhaps too many investors eyeing up
this puppy’s pivot point tried to jump the gun too soon, creating a false
breakout. It happens. Just remember, and I can’t emphasize this enough:
BREAKOUTS DON’T COUNT IF YOU’RE THE ONE BREAKING IT OUT!” (Unless Jeff Vinik or Bob Stansky is reading this.)

Analog Devices
(
ADI |
Quote |
Chart |
News |
PowerRating) was another
leading stock failing on its breakout attempt — this one from a short, three-day
handle. Perhaps the real handle will form from here.

However, the same can’t be said for
SDL Inc.
(
SDLI |
Quote |
Chart |
News |
PowerRating). It finally punched through to new highs from its
“high handle” (high handles can form when the right side of a stock’s
cup overshoots the left side, but normally by only 10-12% max — anything higher
than this is not a high handle) — on heavy volume to boot. So far, it’s
held above the lip of the high handle, despite Wednesday’s sharp pullback on
lighter trade.

And while the majority of leaders
continue to act fine to this point, other top stocks continue along, building
basing patterns.

(NOTE: Stocks with less than
300,000 shares of average daily volume will not be mentioned in my columns.)

Rather than get into what each of the
bases is doing, I leave it to you to figure out on your own what kind of basing
pattern each is attempting to develop and where the proper pivot point is. I’ve
discussed and illustrated the three main patterns I search for in this column
and in the Kuhn/Marder Trading
Course. If you’re ever going to get it, you must
see it for yourself at some point. If you’re very new to my column, take the
time to review the column’s archives and study the course before attempting any
of this.

And for heaven’s sake, stick to a
strict stop-loss plan. Regardless of what the market or other stock’s are doing,
just remember that big losses always begin as small ones.

But while the action of most leading
stocks remains positive, the Nasdaq Composite did experience a third day of mild
distribution Wednesday over its week-long trading range. Although Wednesday’s
down day on increased volume was only marginally higher than volume on Tuesday’s
higher close — distribution is distribution. This stalling price action on
increased turnover over the past seven sessions may indicate that a downside
shakeout move is forthcoming.

As usual, the market will tell us.
However, I wouldn’t get too concerned unless the leaders currently into breakout
runs crashed back to earth, and current basing patterns among the stocks listed
above totally fell apart.

TELEVISION APPEARANCE: I will be
a guest on CNNfn Friday, June 16 at 7:15 a.m. ET.

Of Bugs In Rugs, And Mud

BUY THE FEAR, SELL THE GREED

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