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Sunday, July 10, 2005
Market Recap
Fridays rally was nothing less than absolutely amazing. A major reversal on Thursday, after the London terrorist attacks, and a big follow through day on Friday on super volume took the DOW up 148 points and up 280 points from Thursday's low. The NASDAQ gained an incredible 37 points and the S&P was up 14 points. This rally came out of nowhere, just when the all of these indices had bear flags on their daily charts. However, the bullish candles at the end of the day on Thursday's charts, as mentioned in Thursday's commentary, signaled that the market could be ready for a strong reversal to the upside. Sure enough, we got that powerful reversal on Friday after some very good economic news before the open. Things looked great on the charts after Friday's big move and we have updated charts of the big three indexes tonight so that you can see just how good this move was. All it takes is a couple of powerful moves to the upside on good volume to repair a damaged chart. Now this market looks more bullish than bearish. Let's ride it up as far as it will take us. Since the market looks like it may run, it is a good time to remind everyone not to chase stocks higher.
The Chase is On
Stocks go up usually because large numbers of traders and/or institutions are buying the stock. The Russell small cap index is currently breaking out to all time highs; the NASDAQ looks like it may break out as well, given that it closed at the high and above resistance on Friday. This means that many stocks may be getting ready to make some big runs and some have already started. For this reason we want to be cautious about buying stocks that are rapidly moving away from us. In a bull market we can afford to take a little more risk and buy breakouts but until we are sure that the Bull has returned, buying the pullbacks instead of the breakouts is by far the better risk/reward level. Money can be made in stocks by buying stocks prior to a sudden move, you do not have to chase a sudden move up. The time to buy is when the stock is just breaking out or when a leading stock pulls back to a support area.
The one possible exception to this may be if there is some very positive news that has caught the markets off guard and/or if the news is so outstanding that there is a high probability that the stock may benefit from a multiple day run. Keep in mind, however, that a sudden move in a stock is often quite different than a change in the overall trend. Sudden moves tend to reverse and if you get into the habit of chasing stocks that are moving up and have yet to break their down trends, you will often end up over paying and/or getting caught in a downward move shortly thereafter.
Generally, people that buy late are buying on pure emotion; greed and fear. Greed that they may make a lot of money very quickly and fear that they may miss out, should they not "get on board". Those are the two worst reasons to buy anything. True, you may miss out on the stock, however, in most cases, it is better to wait and find another stock than to pay up too much. Patience in the stock market is very important; usually you will do better by avoiding the temptation to jump in with the crowd or buying on impulse as result of a sudden move up.
Average Up, Not Down
Often time's stocks will give you many chances to get into them at current or sometimes even lower prices. Generally, there are few cases that require sudden action, if you are really careful in how you trade. Sometimes the best trades are ones in which you wait patiently for the stock to come to you. If you feel the need to rush in to buy a stock, it is sometimes a warning sign that you are acting on impulse and not on a well laid out plan for the trade. Keep in mind as well; it is often not a bad idea to take up positions in a trade little by little. For example, if you plan to own 1000 shares, consider buying 500 shares and seeing how the stock acts. If you are right and the stock moves up 5%, you can buy more, maybe 300 more shares and then if the stock continues to move up, you can buy the last 200 shares. This way, you have purchased your 1000 shares and most of them are at lower prices. This is called pyramiding up and it prevents you from jumping in all at once.
The Great Pyramid
By averaging up with fewer shares each time, you are building a sound base in the trade. Think of it like the Great Pyramids of Egypt. The trade will be wider at the bottom than it is at the top and a lot more solid. Be careful to only buy an equal number or less than your first purchase. If you buy more shares than your first purchase, your average cost will be much higher and the trade is considered top heavy and you want it to be bottom heavy. If you are top heavy, having more shares at higher prices than your original purchase, you will lose at a much faster rate, should the trade go against you. You want to keep your average cost down as low as possible while the trade is working in your favor. The higher your cost basis, the quicker you will be under water if the trade goes against you. It is always better to average up (not down) but you need to average up the right way by keeping your cost basis as low as possible. By averaging up; you are on the right side of the trade. You have given the stock a chance to prove itself and it has done so by moving in the direction you had planned, it is only at that point that you should consider purchasing more.
Stocks Are Like Employees
At no time should you average down if the trade goes against you. If you buy 500 shares and your plan was to buy 1000 but the stock drops 2 or 3%, then you are better off cutting the losses instead of buying more shares. Remember, if the trade is not working like you had planned, there is no reason to put more cash into the trade. Especially in a bull market when so many stocks are going up. You are better off using that cash in another trade. There is almost always another working trade that you can put the cash into. If this is truly a bull market ready to start, there is no reason to hold any trade that is not working. Think of it as a business. If you were in business and an employee of yours did not perform, you would fire them and replace them with one that will perform to your expectations. Think of stocks as employees of your portfolio, if they are not working, fire them and find some that are going to work hard to make you some money.
STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts that we have annotated for each stock listed in the past.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings, you can either use the link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
Stockcharts Listing
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http://stockcharts.com/def/servlet/Favorites.CServ...
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