Weekly Wonders

Jul 24, 2007: 7:25 PM CST

I promised more weekly uptrends to study in the last post and here are a few examples:

Warnaco Group – WRNC – is exhibiting a “two-step” move and is currently beginning a potential sell swing lower (aka – not time to buy now… study the chart only):

wnhr-w.png

Blue Coat Systems – BCSI -  Notice the absolute strength of the price move from $12.50 all the way to $55 with only two pullbacks for entry.  In runaway trend environments, you really don’t get the normal or nice pullback to a moving average that calls for proper entry points.  It is thus best to think of entry targets as ‘zones’ and confirmation points rather than exact perfect pullbacks.  Alternatively, you could use a shorter term moving average for entry (I use the 20 period MA).  We are also coming up on a potential pullback/sell wave for BCSI:

bcsi-w.png

 Dresser-Rand Inc – DRC – We had a long consolidation period following this IPO and have had a runaway move since price made a low at $19.  Price reached $42 less than a year later, doubling in value.  Following March, there was absolutely no moving average entry pullback on the weekly chart.

drc-w.png

What is the point of posting ‘picture perfect’ charts?  If you study what’s happened, you can identify similarities that may lead to knowledge to capture some of these moves as they are unfolding right now.  Hint – technical analysis alone is NOT sufficient to allow you to capture moves like this consistently.  You need to look behind the charts to the sector (and relative strength of the stock) and fundamentals (best done on the fly with stock scanners you have found produce good results).

Technical analysis does not work in a vacuum – price does not move magically because a chart pattern or price movement ‘looks’ good.  People don’t pour money into a stock with a ‘great’ pattern.  The major funds do not risk billions of dollars exclusively because of something they see on a chart – they look much deeper at a company before putting capital to work.

Price and volume action alone cannot tell you how far a stock is likely to move – few things can.  It still all comes down to odds and probability and perception.  Fundamental or sector analysis is like a wind that drives the odds in your favor when you see certain chart patterns.  In fact, it may be best to start with a fundamentally sound watchlist and then act when you see a compelling pattern.

Do not trade in a vacuum – there are so many factors that move price.  Put the odds solidly in your favor.  This means more than “there seems to be support at a moving average and the RSI is below 30 and the ADX indicates a high value, indicating a trend is present … etc”.  Begin with a “Top-Down” approach to put the odds in your favor and once you find good candidates, hold on to them to let them run for as long as possible!

It may take only two to three major winning trades to make your whole year – thus, keep a few slots in your portfolio open for long-term position trades.  Remember, trades held longer than a year receive more favorable tax treatment, adding to your bottom line.

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