Progress Report

August 31, 2000
Greg Kuhn

When I was young stockbroker
back in
the 80s, my weekly ritual included reporting my sales numbers to the branch
manager. I always used to get a kick out of telling him I was “making
progress.”

So what if he couldn’t take a joke?

As the Nasdaq Composite claws its way
back, slowly chomping its way through upside resistance, the intermediate-term
trader is still left with slim pickings. Progress, nonetheless.

However slim, though, there are
pickings.

Then there’s BEA Systems
(
BEAS |
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PowerRating),
also mentioned previously, and now the likes of Mercury Interactive
(
MERQ |
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PowerRating)
and Network Appliance
(
NTAP |
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Chart |
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PowerRating). All three continue to work on multi-week
basing formations. Moreover, all of these stocks represent the sort of
institutional-quality leaders the intermediate-term trader should be after in
his/her search — the right trading liquidity, strong quarterly earnings growth,
high relative price strength and leaders in their field. Obviously, valuation
will eventually matter. But the stocks will tell you when.

Interestingly, each of the names above
are part of very weak or weakening industry groups in the market. Bear in mind,
however, that O’Neil’s studies of history’s biggest winning stocks were part of
group moves roughly two-thirds of the time. Obviously, this means that one-third
were not. If the trader can recognize the true leading stock in its field, then
strong group participation isn’t always necessary.

That’s not to suggest that any of the
stocks discussed above will double in price from current levels either, or that
the market — namely the Naz — can stage a meaningful advance from current
levels. In fact, every day the Naz inches its way higher, I get this feeling
it’ll all just fall apart any day now — at least from an intermediate-term
perspective.

But this is why I’m able to do what I
do for a living. I don’t make decisions on how I feel, but on what I see. This
means being ready to change my stance in the market with each new data
point.

With that said, the Naz, although
inching its way higher over the past week, has been doing so on increasing
volume. Fairly constructive through Wednesday. The improved tone in the Naz’s
price-and-volume action comes on the heels of an O’Neil FTD recorded Aug. 17 —
11 days from the closing low on Aug. 2. As I stated at the time, FTDs occurring
outside of the four-to-10-day window typically lack the kind of power that an FTD
occurring within four to seven days off a closing low has. Moreover such FTDs outside of this window are more failure-prone. However, as I’ve discussed before, failed
signals typically occur within a few days of the signal. As of Wednesday, the
Naz was nine days past its Aug. 17 FTD.

Finding the best-looking stocks is,
and has been, a very difficult undertaking for the intermediate-term trader over
the past few months. And, unlike most other times over the past five years,
demanding only the best characteristics among one’s selections has never been
more important. The market’s done a very good job of exploiting mistakes — and
rather quickly. I can attest to that.

Speaking of demanding the best
characteristics: If a stock breaks out from what appears to be a sound basing
pattern, but on below-average, or even unconfirmed volume, what should the
trader do? Anyone…anyone?

Don’t buy it!

Broadcom
(
BRCM |
Quote |
Chart |
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PowerRating) spent months
setting up a wonderful cup-with-handle base. But when it came down to crunch
time, it failed the test miserably.

The stock broke out on below-average
volume last week, then got slammed Tuesday and Wednesday. The stock was a
sitting duck for some bad news, which it got Wednesday when Intel announced it
was filing a lawsuit against the company.

Interestingly, of the four bases it
tried to emerge from over the past two years, last week’s breakout was the only
one lacking volume. It was a fourth-stage base, which should normally be
avoided. Typically, though, the fourth basing pattern in a long upward trend
ends up looking obviously sloppy. I got sucked into to seriously looking at it
because it looked just as sound as every other base the stock’s formed.
Nonetheless, the lack of volume at the stock’s inflection point should have kept
the trader away from it.

You have to watch this stuff right up
to the breakout point. It’s doing all of the little things, picking up on the
little nuances, that ultimately make the difference in the trader’s performance.
It takes a lot of time to get down. However, careful study of each situation
you’re involved with should bring you that much closer to being a better trader.

Another champ lacking important volume
in its base-building efforts is Checkpoint Software
(
CHKP |
Quote |
Chart |
News |
PowerRating).

In addition to the stock’s overall
pattern looking a bit too “wedging” over the past two months, volume
on Tuesday’s breakout move above its six-week trading zone occurred on
below-average volume. Not what you want. Maybe the stock just needs some more
work — like a nice pullback from here — to set up more cleanly. Only time will
tell.

Patterson Energy
(
PTEN |
Quote |
Chart |
News |
PowerRating) is a
stock worth considering in the Oil Drilling group. It’s one of only a handful in
the Energy sector with strong quarterly earnings growth. In fact, year-over-year
quarterly earnings growth has accelerated over the past three quarters — 105%,
125% and 200%, while quarterly revenue growth over the same stretch has also
accelerated — 68%, 119% and 120%.

The stock appears to be forming a
handle to go with its 21-week cup formation, with solid volume characteristics
throughout. It’s tended to pull back on lighter volume and risen on higher volume
throughout the basing structure. You can really notice this on a weekly graph.

Progress Report

BUY THE FEAR, SELL THE GREED

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