Hi Sandi,
Yes, I think KKD is forming a short-term bottom here.
But personally, I would not consider a long position in KKD.
The reason is that the stock is in a long-term downtrend. You can see from this chart that there was a bear cross (50sma/200sma crossover) in January 2004.
stockcharts.com[w,a]daclyyay[de][pb50!b200][vc60][iLg!Lp14,3,3]&pref=G
I successfully shorted KKD a few times last year (I think the last time was around early summer or so). In general, it is better to take long positions in stocks that are in an uptrend, and consider short positions in stocks that are in a downtrend. That way, you are aligned with the trend. If the general market is currently trending the same way, that's much better. If the sector, stock, and general market are all trending the same way, that is perfect.
This chart illustrates pretty dramatically why taking long positions in a downtrending stock is a sucker's game. The technical reason is that the volatilities make the risk/reward profile prohibitively expensive. The pictorial explanation is that the uptrends are short-term relief rallies, and are much briefer than the downtrending phases.
Just look on the chart below at the stochastic crossovers, and imagine what might have happened had you gone long at those points.
139.142.147.218
I think you will see that if you only looked at the stochastics, you would have to conclude that the stock is showing strong buy signals, and was going to make a pretty dramatic rise. But repeatedly, that did not happen----the stock made a rather aborted rise, then suddenly went into free-fall mode.
The upward moves in general were much weaker than the downward moves, and tend to end very suddenly in other words. Or stated a little differently, the upside volatility was considerably less than the downside volatility.
The reason? Each time the stock rallies, you get another crowd of traders who saw the apparent long opportunity (similar to now), and got burned somewhere along the long slide, and when the stock rallies a bit, they bail, figuring it is a rare opportunity to get out and crawl to the sidelines and lick their wounds. So selling pressure continually overwhelms buying pressure.
There's another lesson to be learned from the first long-term chart above. When a stock fails convicingly at the 200 sma, with professional gaps down, and this is confirmed with a lower low below the 200, then further confirmed by a bear cross, you have all the characteristics of a stock that is virtually certain to be dead money for a year or longer. That makes it imminently shortable when it rallies into short-term resistance because your risk is decreased in your favor, and your reward is increased by a greater amount in your favor because the downside volatility can be expected to be greater than the upside volatility for a long time. THAT is the kind of risk/reward characteristics to look for in trades! Even if the stock temporarily moves against you, then so long as you are shorting within the first 6 - 9 months of the downtrend, you can patiently wait, because the probabilities that the long-term downtrend is ending are remote that early in the cyle.
An exception is when there is an intial monster gap down, such as we saw in BIIB yesterday.
stockcharts.com[w,a]daclyyay[de][pb50!b200!f][vc60][iLg!Lp14,3,3]&pref=G
That magnitude of gap down demands a much closer look at the reasons why, and often what the stock will do is go through a phase lasting several months where it is trying to figure out just what it is going to do for the next year or two. During this time there may be considerable upside moves as the stock "finds its way back home", then begins a more orderly trend (usually down). For this reason and some fundamental reasons also, I am not short BIIB, but instead went long at the open. However, I will not get too greedy, because the stock is most likely dead money for a year or more. I cannot be sure when the stock will "find its niche" so to speak, and proceed with a much more orderly downtrend. When it does, I will be looking to short the stock as it rallies into resistance. And almost certainly, this is the last time I will try to take a long position in this stock until the long-term trend is clearly up. That might take years.
BOTTOM LINE: Yes, KKD appears to be forming a short-term bottom, and will probably rally from here for a bit. But I think a long position is too risky because there is every indication that the up move will be much less than the subsequent down move. That will be true as long as KKD is in a downtrend. I know you are wondering if we are seeing the reversal of the long-term downtrend, but I cannot tell if this is THE bottom or not. I see the increased volumes, but regardless, KKD could easily move lower from here, or just begin an extended sideways move.
Hope this helps,
T |
