Gregster-re: Cup & handle...
Message 13864346
Great post, buddy! Thanks :-).
dazed alweed... er...di
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>>>Is this a bear rally or new bull market?
The answer, my friend, blows in cup formation charts
By Gregory J. Kuhn, CBS MarketWatch
Last Update: 8:16 PM ET Jun 10, 2000 Commentary section
Letters to the Editor
LOS ANGELES (CBS.MW) -- The battle lines are being drawn. But will this just be a tradable, intermediate-term advance, a bear rally, or the first leg of a new bull market?
The action of the market and the action of leading stocks are your best indicators as to whether to be in or out of the market. Nothing more, nothing less.
It doesn't matter. We got our all-clear-to-buy signal from the Nasdaq Friday, with a plethora of stocks with leading characteristics setting up -- some of which have already broken out to new highs from basing patterns.
To the intermediate-term trader, that's all that should matter.
The rest is noise. Learn to tune it out. For, below the noise level, Mr. Market will whisper good things to you, while the rest of the players get caught up in what's "overbought" or "oversold."
Once you get to the point where you say to yourself: "I've seen this before," you will approach the market with confidence in your system. You will put positions on and take them off in an effortless and ego-less manner. You won't have to discuss what's going on in the market with another soul. If it doesn't work, it doesn't work. You just step back to the sidelines.
In my office, it's just me. You can hear a pin drop in my quarters. And that's the way it should be. Otherwise, just when you're about to fire on all cylinders, someone will point something out that will throw you for a miserable loop.
Look at Newport Corp (NEWP: news, msgs) and SDL Inc. (SDLI: news, msgs), two leading stocks already out of the chute. Where do you get on board if you were waiting for a handle to form on their cup formations?
I'm not sure at this point. Personally, I wouldn't chase them if they kept moving higher. However, we can use their strength, and strength-and-follow-through of other breakouts among leading stocks, as useful information. If breakouts are working (i.e. breaking out of solid basing patterns, on healthy volume, and following through to higher levels, especially after successful tests of the breakout area) then it's telling us it's OK to go for it. Period!
As Kevin Marder and I like to say, the action of the market and the action of leading stocks are your best indicators as to whether to be in or out of the market. Nothing more, nothing less.
Back to the "no handle" of Newport and SDL. It appears that, for whatever reason, there have been more stocks breaking out from cup formations without handles over the past couple of years. More than what I've witnessed over the past 12 years.
Nonetheless, in my observations over this period, these situations have still represented the exceptions. The vast majority of winning stocks over the past two years have had the proper handle setup in a cup-with-handle pattern. Just because a couple of them lack the handle doesn't mean they're all going to start forming doing it.
Case in point: There were a number of Internet-related names that broke out of cups without handles, or one- or two-day handles, heading right into the Nasdaq Composite's major peak back in March. Names like E Piphany (EPNY: news, msgs) and RSA Security (RSAS: news, msgs) come to mind.
They all failed. There were others that just shot right into new high ground, rallying straight up off the base lows over several days. These breakouts also soon failed. This similar performance occurred in Silicon Storage Tech (SSTI: news, msgs) in late April, as it drove straight to new highs off its base lows. It soon thereafter crashed back down. The short, three-week base it broke out from was problematic as well.
So, it's still been my experience that the best setups, with rare exceptions, have had the proper basing characteristics that have stood the test of time.
Here's what I see putting the finishing touches on basing patterns: Analog Devices (ADI: news, msgs), is forming a handle to its 10-week cup; GSI Lumonics (GSLI: news, msgs), is in the midst of a four-week handle, in an overall 14-week cup-with-handle base; Koninklijke Philips Electronics (PHG: news, msgs), which is into three days of a handle; Nokia (NOK: news, msgs), is in the midst of a six-week double-bottom; Nvidia (NVDA: news, msgs), into its second day of a handle; and Xilinx (XLNX: news, msgs), which finished off its third day of a handle Wednesday.
Creeping up the right side of bases: Brocade Communications (BRCD: news, msgs), Cephalon (CEPH: news, msgs), Checkpoint Software (CHKP: news, msgs), Copper Mountain Networks (CMTN: news, msgs), Cor Therapeutics (CORR: news, msgs), Corning (GLW: news, msgs), L.M. Ericcson (ERICY: news, msgs), Kopin Corp (KOPN: news, msgs), M Systems Flash (FLSH: news, msgs), Medimmune (MEDI: news, msgs), Scientific Atlanta (SFA: news, msgs), STMicroelectronics (STM: news, msgs), Siebel Systems (SEBL: news, msgs), Telcom Semiconductor (TLCM: news, msgs) and Triquint Semi (TQNT: news, msgs).
There are many more in various stages of basing patterns. So things are looking pretty solid at this point -- until proven otherwise. And that's all we need to know. No predictions. Believe what you see and take it one day at a time.
Elantec Semiconductor (ELNT: news, msgs) was the most recent market leader to break out of a base into new highs. Although the handle to its 10-week cup formation looked a little on the loose side -- 30 percent from high to low, it appears this was more a function of the Nasdaq Composite's sharp break in late May. Overall, the majority of the stock's handle action was contained in the upper half of its base.
It's my general policy not to point out what I'm actually doing in the market until after the fact. As part of this column's educational podium, however, I will say that I did buy Elantec for my fund on the breakout. It's too extended past its breakout point, though, to safely buy it here using a 5 percent-to-8 percent stop-loss. I point this out just to show you that, with more and more experience, sometimes you have to know when to bend the rules a bit -- at least in this case.
The handle did pull back (avoid handles that drift higher along low points) and the huge volume on Tuesday's breakout tells me I'm on the right track. Moreover, the stock has high relative strength, is part of the leading semiconductor manufacturing group, which has stabilized in rank at 18 (this is high), and has had huge quarterly earnings increases over the past three quarters of 167 percent, 1200 percent, and 200 percent. The company's revenue growth has also accelerated over the past five quarters from 9 percent to 57 percent.
Prioritize your selections
One of your biggest challenges from here will be to prioritize your selections. Which ones do you stuff into your portfolio, with a limited number of allocations?
Although many of the best ones will be those stocks that have corrected the least, this shouldn't be a hard-and-fast rule. Some big-winning stocks from the prior run in the Nasdaq Composite can swoon a good 50 percent, and still come back to lead the market. Names like Brocade Communications for instance. It's really a function of what they did prior to their recent corrections.
Your best bet would be to go with the highest relative strength rank as listed in Investor's Business Daily, in the higher-ranked industry groups, with the greatest percentage increase in quarterly earnings over the past two quarters, and showing strong volume surges on the right side of the base-building process.
All of the names listed above have already been screened for EPS rank and RS rank, as well as industry performance. Take the time to study these characteristics if you ever expect to get good enough at this on your own. A good source is Bill O'Neil's Daily Graphs or Daily Graphs Online. As you can see, the current round of leadership is being drawn from the same areas I discussed several weeks ago -- specialized Electronics groups, Semiconductor Manufacturers, Telecommunications, and now some Biotech names.
I've been here before and this is what a new, bull market begins to look like -- gobs of stocks setting up, following an O'Neil follow-through signal such as we saw earlier this month. From here, the proof will be in pudding. If this is for real, and you miss one launching, don't get frustrated. And, if you're not on top of things, it could easily get that way. Stocks will go whizzing higher all over the place.
Just remember, in a real, new bull market, leading stocks will break out of proper basing patterns for up to three months. Time is your friend. Use it to be patient and use it to let the market ultimately prove itself to you, day after day. Just let the market bring you in, stock by stock. It won't be until after you're all the way in, and your stocks are working out great, that you'll be able to look back and say, "Gee, I guess this really is a new bull market."
That's all you have to do.<<<
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