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Strategies & Market Trends : The Rational Analyst -- Ignore unavailable to you. Want to Upgrade?

To: The Perfect Hedge who wrote (407)	3/2/1998 8:21:00 PM
From: ftth	Read Replies (2) \| Respond to of 1720

Hi Glen, this is kind of long winded, but a scant few words just didn't do the job. Yes, some of these are quite extended from their last consolidation region, and yes, the conventional wisdom is not to chase stocks once they're extended. Although I don't believe that arbitrarily buying into an extended stock is wise, strategic buying into "special" extended stocks carries no more absolute risk that buying at any other point because of our friend, the "sell stop." It has slightly more relative risk in that the stop in the extended case is best based on, for example, 2-2.5 standard deviations of downside volatility, (but only enter if this prevents a loss greater than 10%), whereas the stop when breaking out from a consolidation region is set just below chart support, which has a slight edge in its likelihood (less) of being penetrated. Either way, 10% is the limit, so the absolute loss is the same. Also note that neither stop is based on an ARBITRARY percent--they are both based on a statistical measure from the chart. Arbitrary stops are silly in my opinion because you have no real reason to believe they won't be hit. Using the "I only wanna lose x dollars" rule is crazy--the market doesn't know or care about those levels. Hitting a stop should in some way signal that something is breaking down technically. Always wait AT LEAST 10 trading days before clubbing yourself over the head for thinking you should have set the stop lower. If you follow the guidelines, the technical deterioration materializes more times than not within that time frame, or shortly thereafter. On to the "special" extended stocks. Rules: never buy an extended stock (at its current levels) that is within 2 weeks of an earnings announcement or other significant pending announcement, e.g. FDA approval in 2 weeks. Best time seems to be 2-4 weeks after earnings. Never buy an extended stock with deteriorating fundamentals(i.e. it also has to have a good fundamental reason to continue up). Never buy an extended stock that is being hyped heavily, or is in an industry group that is being hyped heavily (e.g. oils/ oil service stocks starting in late September) Never buy an extended stock that is looking toppy (CBSL is looking toppy to me, which is why I'm waiting for a pullback). Never buy an extended stock that has shown a recent clear acceleration in it's distance from its 20 day MA; it should also have ridden this 20 day line during its rise, and touched it on at least a couple occasions. This kind of falls into the "looking toppy" category. (NOTE: "never" is a long time, so there will probably be exceptions) A couple of preferred chart characteristics for extended stocks: Type 1) A smooth, methodical rise, with no notable changes in volatility, no large 1 day moves that stand out, no large multi-day swings, no clear pivot points (in other words, it's the picture of consistency). ABF would be a good example. Even when this was extended 50% from its consolidation in mid June, it still had these characteristics and was good for a 50% gain from there, before it's character started to change toward the end of September. Type 2) A triangular mover (in other words, it's always trending up or down). It just doesn't sit still and go sideways more that 3 or 4 consecutive days. It moves from pivot point to pivot point. The spacing and extent between pivots is fairly regular (the spacing is allowed to change to a new spacing (and generally does once the momentum crowd piles in); there's nothing wrong with this change--it just means that trading sentiment and timeframe is now being dominated by a "new" group, so you adjust accordingly. Always use the most recent spacing as the likely future spacing). SAVLY is a fairly good example (if I find a better one I'll post it). It's daily trading ranges increased noticeably after the October market regurgitation, and the shape/spacing changed somewhat (now there's a mid-trend downward blip between low pivot points). The nice thing about extended stocks of this type is that you can EXPECT a buying opportunity at the next pivot, and as long as it doesn't break a lower trendline based on these pivots, you can expect/anticipate where the upper pivot will be. If the expectation doesn't pan out, it didn't cost you a cent. Another handy characteristic of these types is that they tend to telegraph an impending top by--of all things--actually going sideways for an inordinate amount of time. Normally, this isn't a weakness trait, but for stocks which have a strong triangular history, it generally signifies the top is near. Probably one more run to the top. Generally this run will look abnormal--gaps when that hasn't been the case recently, wider-than-normal daily ranges intermixed with "no movement days" that close at the open. A general look of exhaustion. CDG (Cliff's Drilling) is a good example also, and since I did own this I don't have to guess what I MIGHT have done; I know exactly what I did and why. I use this since you mentioned <<I know too often that the high fliers can fall of a cliff (no pun intended) like the drillers did>>. I picked this up when it was a little more than 20% extended (too much in most peoples mind). It showed nice triangle characteristics so I bought on a low pivot day. From 9/15 to 9/25 it showed a clear violation of its triangular character, followed by a weak looking rise to 75, and more stalled days. I was stopped out on 10/13. Six trading days later, I wondered if I had made a mistake. Same thoughts crossed my mind in early November. So I didn't hit the top (in fact not even close), but in retrospect, the character of the stock changed (in fact, on the day I was stopped out) from 10/13 forward, so I don't consider this a mistake. Hope this helped. dh