Question:

When you buy a breakout such as you did with EASI, what are your concerns about overhead supply? I noticed this stock will be hitting the December high of 61.93 fairly soon. How will you handle this?

My Response:

Overhead supply is of some concern, but not much in this case.  The December high is the all time high, which may offer some resistance in the form of another handle like formation (pull back on lighter volume).  Much more important of a resistance level is 60.  Multiples of 5 and 10 are often sources of resistance for higher priced stocks.  For example, investors rarely say sell my position when it hits 61.93.  They will set a sell or tell the broker to sell at 60.  This is exactly what we are seeing now.  Notice I chose a breakout point for this stock quite low in the right side?  Sometimes it’s a good idea to purchase lower in the right side, because your purchase point is much closer to major support which allows you to stay in the stock longer w/out getting stopped out of the position.  How do you know which stocks to purchase lower in the in the right side?  Depends on volume, price action and instinct (based on viewing many charts)… this is where experience comes into play

Question:

I notice that all your recent buys have been taken with a half position. Is this standard procedure for you is are you doing it because of the uncertain and volatile market? For adding on to a rising buy, some people advocate adding on 50% of the original buy with the next buy at 25% of the original and so on. Does this make sense to you?

My Response:

Not standard procedure, but procedure in an uncertain market.  Much of that uncertainty was removed with the breakout of yesterday.  Any positions opened at this point will be full positions.  Please keep in mind that there are great stocks that won’t be purchased for the SelfInvestors.com.. i simply just don’t have the time to cover them all.  I try to pick a couple here and there to give members an idea of real world, real time implementation of how a portfolio is run.

Question:

My job prohibits me from any other role than being an end-of-the-day trader. Consequently, I often miss buy points when a stock explodes past the appropriate buy range (pivot + 5%). In a strong bull market I can stretch my buy window to +10%. In this sideways market, however, I am wondering if I should put a buy stop near promising prospects even though I understand that I cannot possibly predict which ones will blow and which ones will continue to consolidate. A buy stop with a Good-Till-Cancel might ameliorate this dilemma somewhat. Of course, I could also wait for a pullback but with this market many good breakouts are falling back below the pivot. Do you have any thoughts on this? This question becomes more interesting as I am watching EASI being absent from my portfolio.

My Response:

Question (from Vernon K):

I am a preimum member and since I usually work during the day I come home to find your email about purchases in the SelfInvestor.com Featured Portfolio. I would like to follow along with some of these picks, but find that many of these stocks have risen from the optimal breakout point. I could place stop buy orders with my broker for the breakout stocks that haven’t been purchased yet, but that seems like over kill and I don’t have enough captial to buy them all. Are there any recommendations that you can give so I make the purchase closer to the breakout price since I would have 1 market day delay in the purchase? How far past the breakout price is safe for purchasing? Thanks.

My Answer:

It’s a great question. There are a few things that you can do.. 1. Placing a buy stop around the pivot point is not such a bad idea. .. the only problem with this is that you don’t have the luxury of avoiding a purchase if the buying volume is not there. Being able to watch the stock move in real time is a major advantage and often times you anticipate a large move in stock by looking at the volatility around the pivot point. Unfortunately, not many have the luxury of watching these breakouts in real time. If you use the buy stop and find that the stock is not breaking out successfully, you can always sell the next day. 2. If you have a cell phone that allows you to receive emails, you can receive these alerts as they happen and put in a call to your broker or make an online trade at a break in work or on your lunch break provided the stock is still within the 5% range. 3. Another strategy is avoiding the initial breakout altogether and waiting for a pullback to the buy point range (half of all stocks will come back the buy point before resuming their advance). If you take a look at the Breakouts area , all of the previous breakouts are listed. There are some good buys there (i have not had time to rank those yet, but plan to do so soon). Companies like Robert Half (RHI), Kensey (KNSY) I believe are still in a "buyable range" which is 5% from the breakpoint. Also, if you take a look at the recent additions to the portfolio, all are still in a buyable range. However, it’s important to buy as close to the pivot as possible. The reason for implementing the ranking system is to keep investors focused on the very best breakouts with just seconds a day… there are a ton of stocks out there and it only makes since to hold 5-10 at a time, so why not own the best. Since your capital is limited I would focus on only the best, which are generally stocks purchased for this portfolio. I am also considering adding a risk rank for each breakout stock to give investors another tool for buying what’s best for their circumstances. If there is anything else you’d like to see in this area, please let me know.  

Question:

I just read your reports for the 3 stocks you sent me.  You really have
a gift for analyzing stocks. I can’t believe how easily you analyze
them.  I am so jealous.  How long have you been doing this?  I keep
learning and learning.  Going back to my books and looking up patterns,
etc.. I am so happy owning SAFM especially after seeing what you have to
say.  The insider selling was a concern to me and that is why I held out
buying for so long.  I know everyone has different reasons for selling.
I read on the yahoo message board for SAFM that the company plans on
opening a new processing facility in GA.  It should be announced in the
short term.  It is supposed to increase production by 20%.  So once that
is announce publicly it should help the stock even more. 

I hope you are doing well with the site and that you are making money in
the market.  I wish only good things for you.  You deserve them!

My Response:

thanks for the kind words!  I’m relatively young.. haven’t quite reached my
30th birthday!  Since I don’t have a family yet, I’m able to spend more time
learning about the market.  It was during my first job out of college that I
realized I didn’t ever want to work for anyone but myself.  I worked for a
fairly large corporation and wasn’t compensated for the work I put it in.. I
was just a number and wasn’t compensated by performance, but by job title.
So I left.  Went back to school to get certified as a Microsoft engineer
only to have the industry collapse.. definitely a low point in my life.
While all this was going on I was studying the markets whenever I could..
and realized it was the only way I wanted to earn a living.  To be able to
work anywhere in the world is very, very appealing to me!  For the last five
years, I’ve spent several hours a day seven days a week studying charts,
reading books, books and magazines.  I guess you could say I was fascinated
with the way the market works!     I was a math and chemistry major in
college, so have always been into numbers.  I studied psychology a bit too,
so the manipulation of prices based on human emotions seemed right up my
alley.  I haven’t looked back.  Every day I learn something new.. it never
gets old and I enjoy sharing my research with others.  The website is my
outlet.  None of my friends are investors or enjoy this kind of stuff, so I
need a place to get my thoughts out!!!  CANSLIM.net gave me a taste of that,
but I need more of a creative outlet… hence the site.  It’s been an
exciting journey and am looking forward to seeing where it leads.

My advice to you is study as many charts as you can.. you begin to see
certain volume and price patterns.  You probably have an idea now of the
kind of charts I look for.  Low volatility, quiet charts with decreasing
selling volume near major support areas.  If it’s a flat base, all the
better.  To be honest I place more emphasis on the technical side than I do
the fundamentals..probably 60/40 technical or so.  Anyway, I’m done
rambling.  Have a good day. 

Question:

Do you have a target price technique that you use as a rule of thumb?

My Response:

I don’t believe in price targets..at least those based on the fundamentals which is what analysts use to come up with price targets.  The only time I’m able to guesstimate a price target are at areas of technical resistance.    For example, if I purchase a stock at $10/share, but the 52 week high is at $12/share I can reasonably assume that there will some resistance in the stock there and I’d call that a short term price target.    That might be an area where I take some profit.  I reevaluate my position in a stock every day or two.  I’ll continue to hold as long as it continues to look good.. whether that is one week or one year, it depends on the day to day action of the stock as well as the health of the overall market.   I wish analysts would quit trying to give price targets.. they’re worthless!

Question:

I have a question for you.  I know this isn’t an investment style that you
will support.  However, I am desperate here to make my money back quickly so
that I have a cushion for investing again.  I wanted to research the success
of the strategy of buying New America stocks the day or eve of their debut
and selling after a small run-up.  I’ll only invest in the ones that seems
good and have a great write up.  I’ll buy 1000 shares and just let it go a
little and sell.  I am going to look at the New America Archives and see
what the activity for the day is and what kind of success rate I would have.
What do you think.  I hope you don’t think it is ridiculous.  It’s just when
I get the CANSLIM breakout reports I am always nervous that they have run up
too much and that I am late getting in.

My Response:

I wouldn’t recommend buying stocks just because they appear in New America,
although some research to see how that strategy would have done would be
interesting.  Buying at the right time is critical.  You need to be careful
about trying to make a ton of money right away.. it leads to mistakes.
Being patient and waiting for the best companies to flash a buy signal is
always the best policy.  When I make a trade that doesn’t work out, it
almost always because I didn’t stick to my buy rules. If you have a margin
account, that provides you considerable leverage in a bull market … it can
really hurt you buying on margin when the market is rough, but if you use it
sparingly and only at times when the market is beginning a new run up it can
be very powerful.

Question:

What does "fill the gap" mean?  Does it mean it has no support there?

My Response:

It’s a good question.  Filling a gap  occurs as the gap fails to ignite further excitement to push the stock even further.  Traders
see the lack of conviction in the gap and take profits and/or sell short.  Another important thing to consider is that specialists on the NYSE  and MM’s on the the Nasdaq are trying to make money too.  They see a surge in overnight buy orders (leading
to the gap up) and try to pump the stock up further by buying shares themselves.  Some investors see the gap up with a surge in volume and jump in due to greed.  But the specialists know better and begin dumping their shares for a nice profit.   It’s fairly common to see a stock fade a bit after a gap up and find support at the price where the gap started (this is filling the gap). Stocks that continue higher throughout the day and into the next couple days are showing tremendous strength.  Two things to note on AUO in this situation.  Notice that on the day the stock gapped up, that volume was below average.
That was a clue that the rally probably wasn’t sustainable.  The volume in the morning was nearly double the average (by checking the hourly volume)… but it clearly fades  into the close (even though the price surged).  The next day it fills the
gap and finds support at the price where the gap started on lower volume, which was a good sign.  However, it didn’t hold support there after filling the gap and tanked today on very large volume.   The action in AUO in the last few days has definitely been the result of the election.. it was widely believed that the opposing candidate was going to win the election, which
many thought would be best for the Taiwan market.  This resulted in the gap up.  This didn’t happen and the stock as well as the Tawain market took a hit.  The bounce off of the 35DMA was encouraging, but it’s best to wait for the dust to settle.  Sorry for the long rambling explanation.. short on time.  Let me know if i’ve completely confused you!  i’m good at doing that.