Mike
01-27-2012, 09:42 AM
Some people had issues with yesterday's market sell off. CANSLIM stocks can be more volatile than the general market and they can cause traders to exit a position that perhaps they should hold. I received a question from a frustrated novice trader and below is my resposnse.
Leading stocks often pull back 17% or more after a breakout. This happens quite often.
The table below is from an older period around 1997-2000 but should serve as example of what happens to a CANSLIM stock after it breaks out. This data is a compilation of CANSLIM stocks and how they acted during the period.
12497
The initial breakout move went up 34% on average before a new consolidation formed. However the average stock pulled back 17% somewhere during the run up before it achieved the 34% gain. Some pulled back much more than that. The pullbacks were usually short term.
Having a set of sell rules is extremely important because few people can sit through a pull back like that without emotions taking over. Your sell rules needs to try to separate what is normal vs. not normal. The rules should in general make you money but will sometimes fail miserably. This is the nature of the market. As to the question: should one set their normal profit taking point lower than the 20-25% suggested in Bill’s book? Perhaps. I analyze leading stocks that breakout after a follow-through day. If no or just a few achieve 20% gains it is entirely rationale to take this into account and lower your profit taking target. Most stocks are not achieving 20% yet and there has been ample time for them to have done so.
Some sell rules for your consideration:
1. Sell a stock if it exhibits the largest down volume since the beginning of its advance.
2. Sell a stock if it starts living under the 50-day moving average.
3. Sell stocks that are making new highs on lower volume
4. Sell into a climax run
5. Sell stocks that break long-term upper trend lines
6. Sell stocks that break long-term lower trend lines
7. Sell stocks that are exhibiting a change in character such as an increase in the number of consecutive down days.
8. Sell on poor recovery from a sharp selloff.
You should be careful in the first few weeks after a breakout to not get trigger happy. You should have your own set of sell rules that work for you, I would consider the 8 points above to be an outline set of rules that need further definition. You should write your own rules down. You should periodically review them to see if they are working or need modification.
Now for the big experienced based lesson (this is from my own trading plan, you have one don’t you?)
Liquidity based rallies. In 1999 as well as 2009-2011 the market underwent large injection of reserves into the Federal Reserve banks. This amount of money tends to find its way into the market. During periods of large liquidity injections sell rules may not work as well as during other market conditions. In these periods expect to be wrong in your sell decisions. Monitor the Federal Reserve actions and possibly adjust your sell decisions in favor of holding longer.
Now back to the market. Is it topping now? I don’t know. If it is, you will see more leading stocks show problems and you will see the situation in Jerry’s leaders index deteriorate.
My portfolio is: KORS, MNST, SWI, GLD, TDG, MELI
Leading stocks often pull back 17% or more after a breakout. This happens quite often.
The table below is from an older period around 1997-2000 but should serve as example of what happens to a CANSLIM stock after it breaks out. This data is a compilation of CANSLIM stocks and how they acted during the period.
12497
The initial breakout move went up 34% on average before a new consolidation formed. However the average stock pulled back 17% somewhere during the run up before it achieved the 34% gain. Some pulled back much more than that. The pullbacks were usually short term.
Having a set of sell rules is extremely important because few people can sit through a pull back like that without emotions taking over. Your sell rules needs to try to separate what is normal vs. not normal. The rules should in general make you money but will sometimes fail miserably. This is the nature of the market. As to the question: should one set their normal profit taking point lower than the 20-25% suggested in Bill’s book? Perhaps. I analyze leading stocks that breakout after a follow-through day. If no or just a few achieve 20% gains it is entirely rationale to take this into account and lower your profit taking target. Most stocks are not achieving 20% yet and there has been ample time for them to have done so.
Some sell rules for your consideration:
1. Sell a stock if it exhibits the largest down volume since the beginning of its advance.
2. Sell a stock if it starts living under the 50-day moving average.
3. Sell stocks that are making new highs on lower volume
4. Sell into a climax run
5. Sell stocks that break long-term upper trend lines
6. Sell stocks that break long-term lower trend lines
7. Sell stocks that are exhibiting a change in character such as an increase in the number of consecutive down days.
8. Sell on poor recovery from a sharp selloff.
You should be careful in the first few weeks after a breakout to not get trigger happy. You should have your own set of sell rules that work for you, I would consider the 8 points above to be an outline set of rules that need further definition. You should write your own rules down. You should periodically review them to see if they are working or need modification.
Now for the big experienced based lesson (this is from my own trading plan, you have one don’t you?)
Liquidity based rallies. In 1999 as well as 2009-2011 the market underwent large injection of reserves into the Federal Reserve banks. This amount of money tends to find its way into the market. During periods of large liquidity injections sell rules may not work as well as during other market conditions. In these periods expect to be wrong in your sell decisions. Monitor the Federal Reserve actions and possibly adjust your sell decisions in favor of holding longer.
Now back to the market. Is it topping now? I don’t know. If it is, you will see more leading stocks show problems and you will see the situation in Jerry’s leaders index deteriorate.
My portfolio is: KORS, MNST, SWI, GLD, TDG, MELI