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us stock market, stock watch
Begin Part 2 of 3
SUBSCRIBER QUESTIONS
Q: Once a stock has broken out (e.g., through a critical level of resistance) and you have made some profit on the move, what guidelines do you use to sell and take your profit? It would be nice to be able to follow your advice on exit as well as entrance criteria. Thanks.
A: Many times we let the manner in which we played the stock, options or stock, tell us when we will take profits. In the simplest sense, we tend to take profits on options trades when a stock's breakout move starts to slow and roll over. We move up trailing stops behind the play in case of unexpected weakness, and then when we see it starting to roll over, we will go ahead and sell. We may be wrong and miss a brief pullback and run back up, but in the type of market we are seeing, we would rather take the profit in hand than see if the stock is going to recover after the almost inevitable pullback to test the move. We say 'why not take the profit and play the test if it successful?' As options are wasting assets, we will take profit first and play it again rather than ride it down in this market.
On very strong breakouts, i.e., powerful volume such as SDS' breakout over several days, that shows institutions are still buying after the breakout. There will be some profit taking before too long, but the volume on the buying shows massive support. Thus, we are willing to ride it back on a test as long as the volume remains low. We may even sell half the position to lock in some profits if we are uncomfortable, but on this move we will most likely hang on as SDS could be a real leader. We will watch if it can make a quick 20% move; that is an indication a stock could be a long term winner. If volume is not that strong on the breakout, we would tend to lock in profits after the breakout tends to top. There are not fixed percentages, though some around here use 20% gain as a rule of thumb. In a weaker market, not a bad idea. The key on stocks such as SDS is to watch volume; if it starts notching higher on selling, we get out. If support holds and it moves back up on stronger volume once again in a successful test of the breakout, we can get back in.
In short, where and when we decide to take profits depends on the type of position we took, the strength of the breakout, and the condition of the market. Some big gainers from the summer (SDLI) broke out and powered ahead, but when the overall market started to fold, SDLI started to sell down as well on higher volume. That combined with a weakening market showed the move was over.
Q: When I follow your suggestions and make a purchase (as in PLC & IFMX), & no follow-up mention is made from you, should I just sit & wait or what?
A: As there are many times to take positions on a stock that is moving up, so setting stating sell points is not as easy. First and foremost, we don't enter a positions unless it hits our buy point on the volume we want. If we take an aggressive position, i.e., before the breakout move, we need to be ready to cut and run if it turns against us or sells down 7% or 8%; that is the price of playing an aggressive position. If a stock hits a buy point but then stalls, as long as it holds above the buy point that is fine. We are on alert, however, that it has stopped moving and thus are ready to get out if it starts to fall below the buy point. If it makes a move but then returns to the pattern, while that is not the best sign for a move back up, if the pattern holds on and it continues to show decent price/volume action, we will give the pattern a benefit of the doubt to continue to work toward a solid break to the upside. If the pattern breaks down, we get out immediately as the reason for following the stock is no longer there. Patterns give you an edge over just picking a stock, and if it stops working, it is time to move on.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
THE PLAYS: We are continuing to watch the financial sector for stocks that look like they can make good moves when the market moves back into the rally mode. Many are showing strong patterns, while others are pulling back and consolidating for moves up in the next rally.
All prices reflect prices at the close on Monday.
Best Plays, Part 2:
1) SDS: Still breaking out, but we're waiting for a pullback.
2) THQI: Getting ready to move back up from support.
3) HI: Making a breakout move from the ascending wedge.
4) FAF: Making its move.
5) NEU: Still looks good in the pennant.
6) PNC: Moving up in the pennant.
READY TO BREAK TO A NEW HIGH:
New Play (from the weekend):
PHCC (Priority Healthcare--$39.06; +1.18; optionable (UHP)): Drugs Wholesale
http://biz.yahoo.com/p/p/phcc.html
STATUS: Continued Friday's move up but volume dropped back below average (to 410.800; avg. 493,363). The stock is in a pennant consolidation prior to breaking to a new high, but can pull back from here if it doesn't continue with stronger volume Tuesday; indeed, price closed below 39.13, resistance noted in the weekend report. 10 day MVA is at 36.84. Relative strength has broken out ahead of price, a bullish sign.
BUY POINT: Over 41, on volume of 555,000 or better.
POSITION: Aggressive: Stock and/or April $40 calls to buy (UHP DH, which have only 28 open interests).
BREAKOUTS:
New Play (from the weekend):
SDS (Sungard Data Systems Inc--$57.95; +2.96; optionable (SDS)): Business software
http://biz.yahoo.com/p/s/sds.html
STATUS: Moved even higher on great volume (2.17 million; avg. 807,000), surpassing our stated limit on the breakout (55.52). Looks like a definite buy after a pullback to test the breakout (buy) point of 52.88. Great money flow and relative strength broke out further. Good buying. Business software is performing well.
BUY POINT: On a move back up after a test of the 53 range.
POSITION: Aggressive: Stock and/or April $50 (SDS DJ).
Continued Plays:
ASD (American Standard--$55.40; +0.44; optionable (ASD)): Materials and construction
http://biz.yahoo.com/p/a/asd.html
STATUS: Tacked onto Friday's breakout move as volume dropped back just below average to 397,400. Look for a pullback unless volume surges back; the stock remains a buy, technically, on the breakout up to 56.51.
BUY POINT: Aggressive: Up to 56.51, but on volume in the range of 450,000. Safer: On a move back up after a pullback to the buy point of 53.82.
POSITION: Aggressive: Stock and/or April $55 calls to buy (ASD DK). Safer: Stock and/or April $50 calls to buy (ASD DJ).
NATI has been moved to the next section.
TESTS OF THE BREAKOUT: Some of these stocks are moving back on low volume to test the breakout. We often take profits on option plays when they start to pullback on the breakout move and then get back in when the stock bounces up off of the breakout point. This second move is where some of the biggest gains are made.
Continued Plays:
THQI (Thq Inc--$30.50; -0.31; optionable (QHI)): Software
http://biz.yahoo.com/p/t/thqi.html
STATUS: Continued to pull back from the breakout high of 31.69 (from the lateral consolidation breakout last Thursday). Volume dropped below average to 328,400, and most likely will pull back further right along with the stock. It can find support at the 30 level (the lateral consolidation); 10 day MVA is just lower at 29.59. Looking for a move back up over the high after the pullback. Relative strength continues to break higher.
BUY POINT: Back over the Thursday high of 31.69 on stronger volume.
POSITION: Stock and/or June $30 calls to buy (QHI FF).
ACS (Affiliated Computer Svc--$65.45; -0.75; optionable (ACS)): Software
http://biz.yahoo.com/p/a/acs.html
STATUS: Pulled back just a bit lower from the Friday doji as volume dropped again (224,800; avg. 323,636). The stock can pull back to the 65 level (10 day MVA is at 64.86) before heading back up from there or the moving average. Huge money flow and high relative strength.
BUY POINT: Back over Thursday's high of 67.75 on volume of 304,000 or better.
POSITION: Stock and/or April $60 calls to buy (ACS DL). April $65 options have 55 open interests (ACS DM).
SUB (Summit Bancorp--$43.18; +0.06; optionable (SUB)): Regional banks
http://biz.yahoo.com/p/s/sub.html
STATUS: Holding just above Friday's close, showing a tight doji on lower volume (388,200; avg. 747,000). It was reported after the market close that the company is being acquired by FleetBoston; volume was higher after hours, so look for a move up from here on the news. The stock hit a high of 44.61 at the end of January. Great money flow.
BUY POINT: Over 44.61 on volume of 524,000 or better.
POSITION: Stock and/or April $40 calls to buy (SUB DH).
NATI (National Instruments Cp--$53.69; -2.44; optionable (SJQ)): Computer peripherals
http://biz.yahoo.com/p/n/nati.html
STATUS: Testing the breakout point of 53.26 as predicted, the stock pulling off the breakout high reached Friday (57.56) as volume pulled back (316,900; avg. 248,090). Support looks good at the 10 day MVA (52.95), a level reinforced by several January highs. Intraday high tapped near the breakout high. Outstanding money flow.
BUY POINT: On a move back up after a pullback to 53.26 (or better).
POSITION: Stock. June $50 options (SJQ FJ) have insufficient open interests (57).
WEDGES, PENNANTS, and FLYING PLATEAUS (AND FLAGS): These are some of our favorite patterns as the moves can be explosive. In this market, however, we need to see the move on the breakout on strong volume.
Wedges:
New Play (from the weekend):
HI (Household International--$60.33; +1.13; optionable (HI)): Credit services
http://biz.yahoo.com/p/h/hi.html
STATUS: Making a move up on stronger volume (1.76 million; avg. 1.6 million) as the stock hit the buy point on a move up from the ascending wedge. Looking for a breakout on stronger volume. Great money flow and high relative strength.
BUY POINT: Up from here on volume of 2 million or better. Remains a buy on the breakout up to 63.35.
POSITION: Stock and/or April $60 calls to buy (HI DL).
Continued Plays:
TD (Toronto Dominion Bank--$29.00; +0.04; optionable (TD)): Banking
http://biz.yahoo.com/p/t/td.html
STATUS: Dropped to a low (from the Friday doji) of 28.70 but on stronger volume headed back up to close just under the 18 day MVA (29.15). The stock looks ready to mount another move back up in the ascending wedge (pattern high is 31.13). Looking for continued rising volume to boost the stock over the short term moving averages (10 day MVA, 29.25). Volume almost hit average (95,600; avg. 104,000).
BUY POINT: Breakout: 31.13, on volume of 140,000 or better.
POSITION: Stock and/or April $30 calls to buy (TD DF).
PNC has been moved to the next section.
End Part 2 of 3
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us stock market
stock watch
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