Churn ‘Em And Burn ‘Em
When I speak to investors and clients about the traits of a flat base, I usually
go through the following discussion:
The flat base begins when a stock enters a period
of price consolidation where the lows and highs are not very far apart. The
stock usually trades within a range of no more than 15% for a period of at least
five weeks. This base can be shorter than the minimum requirement of other bases
(in which case, we usually like to see a seven-week minimum) because of how
boring it can become. The flat base is designed to wear investors and would-be
investors out because it gets very repetitious to simply watch a stock literally
go nowhere in a significant amount of time. Every time the base comes to the
top, people get ready for the breakout, and likewise, when the base comes to the
bottom, people are looking for it to fall apart. After the stock does this peak-and-bottom
formation several times or more, it is quickly apparent that there must be
something better to do with one’s time other than watch the stock market
equivalent of paint dry!
Guess what the market itself is experiencing
right now! The Nasdaq, since mid-April, has been trading in a range of no more
than 17%, and I am talking about our most volatile index!
As investors waiting to see what will happen
next, it is our job to simply keep track of the action and ask ourselves:
“Are we seeing accumulation and a follow-through day? Or are we seeing
distribution and a peak in the market which may lead to an actual selloff?”
The Nasdaq posted a confirmation of the rally that began on July 11 and has yet
to undercut the low or post the needed distribution days to stop looking
for stocks. Let me clarify something in response to several e-mails at this
time: The “market factor,” as backed by either follow-through or
distribution, is merely a piece of the puzzle when it comes to buying stocks.
The remainder of the puzzle will take care of itself whether the market appears
good or bad. Although I have been looking for stocks I may be able to buy, they
are not appearing. For example, in mid to late April, my potential buy list was
filled with 40-50 stocks, whereas currently, I believe I have five.
Two bright spots have appeared in Americredit
(
ACF |
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PowerRating)
and Hotel Reservation
(
ROOM |
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PowerRating). These two stocks have managed to break out
and continue with very solid follow-through.
On the flipside, many stocks which broke out
between April and the present day have fallen below their breakout levels.
Krispy Kreme Doughnuts
(
KKD |
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PowerRating) is testing its second pivot point; Columbia
Sportswear
(
COLM |
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PowerRating) fell to analysts’ comments in a weak market; Ivax
(
IVX |
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PowerRating)
moved ahead of its pivot point and fell apart showing us all why it is so
important to cut losses before they can hurt an account; and Option Care
(
OPTN |
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PowerRating)
fell back below its pivot after posting solid gains from its initial breakout.
Today we are seeing a nice pop in the market on
good volume. By looking for solid setups, we will have a good indication of the
durability of this rally. In the meantime, be careful out there and insist on
potential buys meeting each and every point, or sit out until the market starts
showing many more candidates.
Until Thursday,