Sputtering
After seeing an expansion in the
number of high relative strength base builders last week, I’m now seeing high RS stocks pull
back to or into their bases. This market has moved ahead of itself.
If you’ve put on some test positions
after the O’Neil follow-through day, now is not the time to continue to
play games with your stops. (Of course, it never is.) As always, don’t expect
the market to prove you right. If you get stopped out, you get stopped out. Now is not the time to get aggressive with new positions. You need to see high RS bases proliferate. We’re seeing the opposite right now.
Meanwhile, continue to look for basing stocks with high earnings growth scores,
high relative strength scores for the past six to 12 months, and rising relative
strength lines.
Here are some examples of what I’m
seeing:
King Pharmaceuticals
(
KG |
Quote |
Chart |
News |
PowerRating) broke out
of a nice cup-with-saucer breakout last Friday (see Point
A in following chart). The stock followed through on Monday but since
then has failed, invalidating the prior base. It now needs at least at least
five weeks to set up a sound base.
NPS Pharmaceuticals
(
NPSP |
Quote |
Chart |
News |
PowerRating) has
balked at challenging its intermediate-term peak at 52 1/2 (Point
A in following chart) and now has undercut its 50-day moving average.
The stock can still come back from here, using this base for timing purposes,
but it is not acting healthy. The intermediate-term peak is an even stronger
test now.
Aeroflex
(
ARXX |
Quote |
Chart |
News |
PowerRating), after trying to
break out from a cup-with-handle base on Tuesday, has dropped back into the
handle. Since the stock did not forge into new high ground, the base remains
valid, but the recent trading action is sloppy. This stock now has more work to
do before it creates an entry window.
The top field of all charts in this
commentary 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, of course, 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,
check out the Money
Management area of TradingMarkets’ Stocks Education section.