Scientific-Atlanta’s Slippery Handle
Avoiding the failure-prone,
upward-drifting handle would have you out of Scientific-Atlanta’s doomed
breakout. The maker of cable set-stop boxes cleared a five-week base on Friday,
then tanked on Monday.
The sell-off came after Gerard Klauer
Mattison analyst Michael Cristinziano downgraded Scientific-Atlanta
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SFA |
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PowerRating) to
neutral from buy. The stock fell 11 3/8 to 82 on more than double average
volume.
Notice how the stock drifted higher on
above-average volume just before Friday’s move into new high ground (see the
thick black line in the above chart). Intermediate-term momentum traders wait
for stocks to settle into a tightening, low-volume, downward drifting price
range, called a handle, then buy on a high-volume breakout above the high of the
handle.Â
The price decline, as measured by the
lows of the handle, suggests that the last weak holders are leaving the stock.
But the tight trading range and absence of real trading activity indicate that
most shareholders are holding tight at the market, obliging would-be buyers to
bid up the stock the next time heavy demand hits the stock.
Mastering the intricacies of the
handle is one of the trickiest parts of learning the cup-with-handle pattern.
For more on this topic, check out Greg Kuhn’s lesson, Getting
A Handle On The Handle.
Home-improvement retailer Lowe’s Cos.
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PowerRating) reported Q2 net income rose to 73 cents a share vs. 60 cents a year
ago and matching Wall Street expectations. The stock has shown signs of turnover
near the lows and putting in a bottom. But the stock has a long way to go before
it overcomes its mid level, one of the
minimum requirements for the intermediate-term momentum trader.
For long trades, I shun stocks that
are priced below their mid levels on the assumption that they are weighed down
by too much overhead supply. Overhead supply is the amount of shares in
the hands of shareholders with paper losses. Wall Street calls these buyers weak
holders because they tend to look for exits and sell into rallies, blunting
further share-price progress. You can find a stock’s mid level by
summing the pre-correction high and the post-correction low, then dividing the
result by 2. Lowe’s mid level is 53 13/16.
