Wait for these 2 things before buying

  • May 30, 2006
  • Tim Truebenbach


Timothy J. Truebenbach is the
President of True Capital Management and general partner of True Capital
Partners LP, a hedge fund. He uses a disciplined model that trades on the
intermediate-term time frame. For a free trial to Tim’s Nightly Stock Analysis
Report

click here or call
888-484-8220 ext. 1.

The market is currently in a correction and attempting a
rally. Tuesday’s trading did little to inspire confidence as the major indices
closed significantly lower on increased volume over Friday’s levels.


Over the past several weeks, many stocks that led the run-up have fallen to
heavy institutional selling. Names like Hansen Natural
(
HANS |
Quote |
Chart |
News |
PowerRating), that are
trading only 11% off highs are rare.

Drew Industries
(
DW |
Quote |
Chart |
News |
PowerRating) is a more typical example of a prior leader that has
pierced its 50-day
moving average
and found support, for the time being at its 200-day MA.

Many stocks are taking high-volume hits to break below key areas of support.
Subsequent rallies, or bounces are coming on diminishing volume. We know that
prices move up and down all of the time. Stocks do not go straight up or
straight down, but the important factor to always consider among price movement
is volume. When volume is heavy and above-average it is probably an indication
that institutions are selling shares. Another important point to consider is
that institutions do not trade like individual investors. Individuals sell 1,000
shares or so and are done immediately. Institutions may sell a thousand,
five-thousand or more shares a day for months. So, when we start to see them
selling it is a good idea not to bother with the stock until we start to see
them buying.

For now, the best thing to do is make sure money is allocated to an asset that
your risk tolerance can handle. If you are investing in individual stocks, it is
best to place money in cash until a new rally unfolds. As I mentioned in the
beginning of this article, the market is attempting a rally. If we see a 1-2%
rally in the major indexes on above-average volume in the course of this week,
that is an indication to pursue the strongest stocks for our portfolio.