Mike
02-21-2016, 02:01 PM
I had more difficulty producing a watch list this week than any other week in recent memory. With the day-4 FTD, IBD placed the market in a confirmed uptrend last Wednesday, however, the dearth of quality stocks setting up in sound bases was concerning. Last week my long side watch list contained the single stock EW; it has been performing okay. It is extended today. This week some oddly shaped double bottoms have appeared, such as EBIX, MTSI and MXL.
I modified my search for suitable candidates in the current environment from regular CANSLIM methods. Essentially, when many breakouts falter or go nowhere, I don't buy them. Instead, I look for alternate entry locations closer to the 50-day. Double bottom bases can offer "Shakeout Plus $3" entries for stocks trading between $30 and $60. Substitute relative values for different price points, such as MXL, where I would use Shakeout + $1.5 at its $15 price point. A Shakeout in this context means that a prior base low price gets undercut as is prevalent in a double bottom pattern. After the undercut, the $3 is added to the first low price to obtain a buy point; a common error is to add the value to the second low. If the buy point shows up under the 50-day, I usually pass or wait until the stock recovers the 50-day. The first low of MXL is $13.42, adding $1.5 I get a buy point of $14.92, just about the current price right at the 50-day. This shakeout pattern was first identified by Jessie Livermore early last century. Bill O'Neil has used and written about this pattern since.
I select other alternative buy points by drawing sloping pivot lines along the tops of the base pattern. 50-day moving average bounces and 50-day moving average recoveries are also common buy points. Essentially, when I consider buying a stock I ask myself the question: can I withstand a pullback to the 50-day without getting stopped out? If I don't think I can, I pass. OLLI is an example of a stock that fails this test, but I might otherwise select it in a healthy CANSLIM environment. OLLI trades a bit thin. FB is looking a little late stage to me; in 2013, I computed a 130% P/E expansion price target for FB of $102, a price FB has bested. When a stock reaches an expansion price target, it often needs a year to rest as occurred with PCLN. PCLN nearly achieved its $782 expansion price target in April 2012 and then went to sleep in a long base until May 2013 where it could continue its advance.
Last week in my IBD Meetup presentation I was sure I came across very negative on the current market outlook. I was truthful in my views, however. Partially this bearish feeling originates from the length of the bull market since the 2009 market low. However, if we follow Richard Arms' observation that the volume in a topping pattern is usually followed by an equal amount of volume in the subsequent decline, we have a way to go before we are ready for a rocket launch. This volume begets volume relationship was approximately followed after the head and shoulders top of 2007. In the case of the 2000 top, it's hard to decide where the topping pattern started, thus difficult to add up the volume. I see a head and shoulders pattern for the current NASDAQ with left shoulder in November 2014 and right shoulder in December 2015. This topping pattern contains more than one-year of trading volume. Thus my expectation, that the decline off of the current H&S pattern will take until approximately November to complete. It may be coincidental but November is the presidential election month, an election with little visibility in outcome from polar-opposite candidate pools.
The above statements contain some fact and some opinion. The market does not care what my opinion is. I need to always be prepared for the market to move in any direction. Preparation means having a written trading plan (rules where and when you buy or sell stocks) and up-to-date watchlists.
I modified my search for suitable candidates in the current environment from regular CANSLIM methods. Essentially, when many breakouts falter or go nowhere, I don't buy them. Instead, I look for alternate entry locations closer to the 50-day. Double bottom bases can offer "Shakeout Plus $3" entries for stocks trading between $30 and $60. Substitute relative values for different price points, such as MXL, where I would use Shakeout + $1.5 at its $15 price point. A Shakeout in this context means that a prior base low price gets undercut as is prevalent in a double bottom pattern. After the undercut, the $3 is added to the first low price to obtain a buy point; a common error is to add the value to the second low. If the buy point shows up under the 50-day, I usually pass or wait until the stock recovers the 50-day. The first low of MXL is $13.42, adding $1.5 I get a buy point of $14.92, just about the current price right at the 50-day. This shakeout pattern was first identified by Jessie Livermore early last century. Bill O'Neil has used and written about this pattern since.
I select other alternative buy points by drawing sloping pivot lines along the tops of the base pattern. 50-day moving average bounces and 50-day moving average recoveries are also common buy points. Essentially, when I consider buying a stock I ask myself the question: can I withstand a pullback to the 50-day without getting stopped out? If I don't think I can, I pass. OLLI is an example of a stock that fails this test, but I might otherwise select it in a healthy CANSLIM environment. OLLI trades a bit thin. FB is looking a little late stage to me; in 2013, I computed a 130% P/E expansion price target for FB of $102, a price FB has bested. When a stock reaches an expansion price target, it often needs a year to rest as occurred with PCLN. PCLN nearly achieved its $782 expansion price target in April 2012 and then went to sleep in a long base until May 2013 where it could continue its advance.
Last week in my IBD Meetup presentation I was sure I came across very negative on the current market outlook. I was truthful in my views, however. Partially this bearish feeling originates from the length of the bull market since the 2009 market low. However, if we follow Richard Arms' observation that the volume in a topping pattern is usually followed by an equal amount of volume in the subsequent decline, we have a way to go before we are ready for a rocket launch. This volume begets volume relationship was approximately followed after the head and shoulders top of 2007. In the case of the 2000 top, it's hard to decide where the topping pattern started, thus difficult to add up the volume. I see a head and shoulders pattern for the current NASDAQ with left shoulder in November 2014 and right shoulder in December 2015. This topping pattern contains more than one-year of trading volume. Thus my expectation, that the decline off of the current H&S pattern will take until approximately November to complete. It may be coincidental but November is the presidential election month, an election with little visibility in outcome from polar-opposite candidate pools.
The above statements contain some fact and some opinion. The market does not care what my opinion is. I need to always be prepared for the market to move in any direction. Preparation means having a written trading plan (rules where and when you buy or sell stocks) and up-to-date watchlists.