Anatomy Of A Top
With the markets coming under some distribution, I decided
to do something different in
this report. Some of you that are members of TM are pros at this game,
but some of you may be starting out or still unsure of yourself. The
following commentary is for you.
ANATOMY OF A TOP
Technical analysis takes away all the news and all the
noise. That is the main point I
want to make here. Many investors have been destroyed in the stock
of Enron
(
ENE |
Quote |
Chart |
News |
PowerRating) over the last year, and specifically over the past three
months. It need not have
happened. Enron’s action gave any number of clues before the big debacle.
While analysts all had strong buys and defended it on every drop, the
stock was telling a much different story.
The first identifying mark of a top happened between
8/23/2000 (A) and 9/29/2000 (B).
The stock made what is called a triple top.
This is the point where the stock refused
to go higher on three different occasions. They were 8/23, 9/18 and
9/29 of 2000. That should have been your first
worry sign.
But you may be a long-term holder or you may be in love
with the stock because of what it
HAD done…so it is understandable to want to hang in there.
We then come to the next important
juncture…and this one is a little trickier.
Notice the action on 11/29 and 11/30 of 2000 (C).
Both those days were high-volume
drops as the stock fell from $81 to $65. That was not Aunt Mary and
Uncle Bob selling. That was the big boys. The most important key was
volume. So what happens next? The stock ramps
up on…of course…all the analysts
defending the drop. You know…” We reiterate our strong buy and
feel the drop is unwarranted. We keep our
target price of $1000.” You get the hint.
The whole month of December 2000 saw a large move back up…but what’s
missing? It is called…no conviction. Volume
remained low all the way up.
The volatile moves at the top and the large-volume drop
along with a low–volume rally should
already have your antenna up. If you
weren’t out of the stock already, 1/4/2001(D)
should have rung your alarm bell.
The stock gapped down on another monstrous volume day. This is just
another clue of institutional selling. Again
it rallies, but again without any
conviction.
So where should the party have ended for you? How about
3/12/2001 (E)? What happened?
Simply put, the stock broke 11-month support on that day. The stock
had held the mid-60 level for that amount of
time. On 3/12/2001, Enron closed at
$61.
But you may be a glutton for punishment. You may have been
listening to your broker and his
or her famous line…”Don’t worry, everything is OK. The stock
will come back. It is a great company.”
5/17/2001 (F)
had to be your next great clue to…GET OUT! Just another 12-million-share
large-drop day. What more do you want? Well, at this point you may
have been into the hope and prayer routine. Trust me, it doesn’t work.
8/15/2001 (G) had to
get you out. This was a 29-million-share day on a gap. It is not
a very good sign when the man who runs the company resigns for
“unknown” reasons.
Well, the rest is history. Your last clue had to be in the
20s when the CEO refused to
answer analysts’ questions about conflict of interest partnerships
with the CFO. This is where, finally, most
analysts jumped off the ship…after a
75% drop…but that’s been normal for them over the past 18 months.
Heavy volume…breaking of support…light-volume
rallies…CEO resigns for unknown
reasons…unanswered questions by management…undisclosed partnerships…don’t
ever let this happen to you. Oh, did I mention insiders were
selling large blocks of stock all the way down? This is the type of
stock that I cut out a picture of and keep
around to make sure it never happens
to me. Do your technical analysis.