Strength in Numbers
My best advice for the
intermediate-term trader remains to stick it out largely in cash. Still, it’s by
screening for the high RS stocks and eyeballing the patterns that you’ll catch
the bull rally when it comes. Whatever the Nasdaq does, you have nothing to do
unless your stocks are setting up and breaking out.
We’re a long way from seeing the kind
of proliferation among bullish chart patterns that is the hallmark of the advent
of a strong rally in growth stock. Think about how the bearish inverted
cup-with-handles multiplied over January-March. We want to see the same
multiplication among normal cup-with-handles if a market bottom is to be
believed.
If we get follow through in terms of
strong Nasdaq gains on strong volume, you can venture small positions here and
there, what Jesse Livermore
called probes, if we get healthy gains on the Nasdaq Comp on robust volume.
Otherwise, I’d wait it out.
For your eyeball training, there are isolated stocks forming bases. (The operative word “isolated” should tell you to be doubly on your guard about the state of the market for high RS stocks.) Hot Topic
(
HOTT |
Quote |
Chart |
News |
PowerRating)
formed a bullish engulfing pattern as volume rose 25% above normal trade to
727,200 shares. Rare Hospitality
(
RARE |
Quote |
Chart |
News |
PowerRating) moved ahead on volume of 513,800
shares, a 63% over average trade. First Tennessee National
(
FTN |
Quote |
Chart |
News |
PowerRating) is
consolidating constructively above its 50-day moving average atop a strong
uptrend. Note the confirming relative strength lines in these issues.
A good test for market health is to
watch stocks that appear to be setting up and watch for failures after
breakouts. Don’t feel that you have to jump into the very first breakouts of an
ensuing rally. Remain very skeptical. If an authentic rally comes, the first
breakouts will move high on healthy volume and hold above their old bases,
giving you another piece of confirmation. Then if more breakouts come en masse,
you’ll have reason to venture out, buying the high earnings growth,
high relative strength names in order of breakout.
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.