FOOD FOR THOUGHT ... Buying Laggards .....................
For some reason, people love to buy laggards. There's something about trying to buy a stock at rock bottom prices. It's purely an emotional play.
If we don't know how to sell at the exact top, there's no logical reason to expect us to catch the rock bottom. Therefore, the attraction is emotional. I call these people the dream chasers.
Professional traders buy strength for a number of reasons. A trader on the desk, investing money for Goldman Sachs, or trading money for Wachovia Bank for example, must show a profit. They are using institutional money to earn a profit and the professional trader is expected to show a profit every month, regardless of market conditions.
The professional or institutional trader may have a bad month from time to time, but have 2 months in a row of losses, and you are temporarily off the trading desk. Someone else is assigned to your trades and they immediately dump all of the losers, regardless of potential.
The professional trader's job and livelihood depend on earning profits every month. The professional trader must trade in the here and now, and there's something to be said for that.
Baseball season starts today. If you were managing a baseball team, would you put your best 9 players on the field, or would you start some players who weren't ready to play but had potential?
The professional manager goes with his best 9 ideas, his best 9 players. His laggards stay on a watch list, referred to as the Minor Leagues, where they have a chance to develop.
It's the bottom of the ninth inning. The situation is; you are down by a run, men on first and third with two out. Your number nine batter is due up and he's hitting .193. Do you let him bat, or do you send your best available hitter on the bench in, to pinch hit for him?
The professional manager goes with his best available idea. He sends up his strength, not his laggard.
Professional managers keep their future prospects, their laggards, on a watch list (in the minors) until they start to show some strength. The idea is to let them develop for a period of time. The manager of the team doesn't have to catch some young star on his first day in professional ball (catch the bottom). He just needs to utilize that player when he has the potential to be productive, to catch him just before he's ready to blossom, and before he peaks as a player.
Today's FOOD FOR THOUGHT has to deal with knowing when to bring that young prospect up from the minors (bringing that beaten down laggard up off the watch list.)
To me, a Hall of Fame stock is one that eventually earns a 100% profit or more. I have presented two stocks on this thread that I brought up from the minors and timed their career where they performed well enough to earn a spot in the Hall of Fame when I decide to retire them. Those two stocks are BRCD and GT.
Today I am going to show two chart set ups that I determined were good enough to bring these two stocks up to the majors.
On 11/13/05, BRCD (BRCDE at the time) was in a Stage 4 downtrend. Price was down at $3.50 on that day. We had a declining 20 day moving average below a declining 50 day moving average with a comfortable distance between the two. This was a BEARISH ALIGNMENT, and when you have a Bearish Alignment, you look for opportunities to short, or wait until something changes in the character of the trend before going long.
On 11/14/05, something changed in the character of the trend. Price gapped up at the open with price rising above both moving averages. The gap was accompanied by huge volume. This was your buy signal!
I posted a message on that very day, early in the session, to illustrate that buy signal.
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For those of you who like to hold longer term, BRCDE had the type of chart pattern today that I like to try and take advantage of.
It's a stock that has been beaten down. It gapped up at the open in the double digit range and traded as much volume in the first hour than it does on an average day.
This type of volume and price pattern, coming off a beaten down stock, often times is the first step on the long road to recovery.
Message 21882917
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Most people looked at that chart and thought price had run up too much that day to get a decent entry. The stock wasn't laggard enough for them to take a position.
I didn't catch the bottom. I bought that gap. BRCD showed me it was ready to play in the majors. I brought it up from the minors and I let it play in the majors.
I am currently overweighted on this position as I have added to it. My original position is now up 135%. Does it matter now that I didn't catch the bottom? Not to me. I'll give up that original 17% I missed and take my Hall of Fame player as he is.
The point is, from a timing standpoint, I waited until something changed in the character of the trend and I jumped on it. It was a good trade from a timing and accuracy standpoint, not to mention the profit.
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GT was another player I was keeping an eye on down in the minors. It too was in a steep Stage 4 down trend. The weekly chart was showing a declining 20 week moving average below a declining 40 week moving average with a comfortable distance between the two. This was a BEARISH ALIGNMENT. Additionally, price was well below those moving averages, that's how steep the price drop was. Then it happened! GT provided a reversal signal. Only those who can read candlestick charts though, were able to decode the message.
The week of 7/24/06 saw GT form was is known as a "Morning Doji Star."
Pattern: reversal
Reliability: high
Identification:
A long black day is followed by a Doji that gaps in the direction of the trend. The third day is a white day which closes in the top half of the black day.
The Psychology:
In a downtrend or during a pullback within an uptrend, the market gaps down but does not continue its downward movement. Instead enough bulls step up to bring supply and demand back into equilibrium and the stock churns in place. This is the bullish Doji Star formation. A subsequent follow through gap up that closes above the midpoint of the black day completes the Morning Doji Star and confirms the reversal.
Examples provided here:
leavittbrothers.com
The Morning Doji Star that formed on GT was even more bullish than the pattern allows for technically. The third candle, the up week, gained nearly all of the losses back that had developed over the previous two weeks. This pattern that normally has a high reliability rating, was even stronger than it needed to be. In addition to that, it was a weekly pattern which is stronger than a daily pattern. GT was good to go!
Here is the chart at that time showing that reversal signal.
Price never came back down. Those concerned with buying a bottom, even though they look to do that, missed out as price took off and moved up over 180% over the following 8 months.
I have a very large position, as I have continued to add this stock to my portfolio. My original position is now up 187%.
I didn't catch the bottom. I did time the entry though. I waited for something to change in the character of the trend. I brought GT up from the minors when it showed me it had the potential to play on the big league level.
GT was still a laggard at the time I bought it. However, I didn't have to hold it for a long period of time before it did something. I was able to pick this laggard up when something changed in the character of the trend.
There's nothing wrong with buying beaten down stocks as long as you go with your best available ideas until the laggards show they are ready to play in the majors. You can still catch the larger portion of the up move and do it when the timing is right.
Let the novice hold a dead stock and tie up funds. The professional trader operates from a business point of view. Go with your best idea today and let's make some money. Trade like a professional! |
