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More Notes On Buying And Selling Strategy

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Question:

I want to ask you a question and advice on something.  I read your notes on
GIVN and feel the same way about HANS today.  What happened to that thing
today???  I caught it right above it’s pivot point this morning and watched
it go over 30 and thought this will be a good one!
Next thing I know I am stopped out 7% down in a flash. I have to leave to go
to my part time job at 2:15 PM EST.  When I got back home, I saw where it
really took a beating.  Thank goodness for stop loss orders.

Here’s what I learned from this one and I want your advice on how you would
have handled it.
I read somewhere that if you enter a trade, it should go up from the start
to some degree.  In other words, it should be a good trade from the start.
Now, it might wiggle a little after it moves up in a slight pullback but
should not tank before the end of the day.  I usually watch a new trade for
some time after I buy to see how it reacts.  I always immediately enter a
stop loss in case the computer or market crashes.  It is usually at some
support level around 7% to 8% below the buy price.  But today I learned to
put a shorter stop loss in on the first day especially since I can not be
here all day on the trade day.  If it survives the first day with a
reasonable gain, then the next day I will move it lower.  At least that’s
how I think it would work in this type of market.  In a bull market, maybe
the 7% stop would be best.

Finally, my question.  How do you handle a new buy the first day in this
type of market?  Where would be the best place to put a stop loss on initial
buy?  I know you can’t advise what to buy and stuff, but let me know what
you might do in these circumstances.  And another question.  Bill says to
let the winners run to about 20% from the pivot point before it bases again
and think about taking some profits while they are going up.  With this
market, many are not getting anywhere near even 15% before they fizzle. Two
stocks I am holding now have over 10% gain and I don’t want to lose it.
I’ll tell you what they are. JUPM is up 12.77 % and OS is up 11.51%.   How
close do you think Bill would put a stop loss under these?  There’s no
telling what could happen in this market we are in and I just thought I
would ask.

My Response:

Let’s tackle your HANS purchase first… did you get a chance to read the report for this stock?  In it I said "  This is a stock that is showing heavy accumulation by institutions and appears to have room to run.  However, I would be hesitant to purchase at the formal pivot of 29.18 due to the fact that it sits far above the first line of major support.  Any significant shake out in the stock will force you out of the position.  In a perfect world the stock will continue its decline to around 25 on lower selling volume, offering a better purchase point.  Does this mean you should avoid the stock completely should it surge from here above the all time high?  No.  Give yourself a chance at success, but be vigilant about keeping your losses small.  This would mean selling the position should it drop below the pivot point on increasing sell volume. "
 
This an excellent company that should continue to do well, but keep in mind that just because it’s a great company and it surpasses a pivot point does not mean it’s a great buy.  In that report I suggested taking a look at the distance from the first line of major support and the pivot point.  Clearly, this is a stock that has run up quickly in the last couple of weeks, was far extended from support and needed to consolidate gains.  This is one of those breakouts that had a high probability of coming back to the pivot or worse, dropping more than 8% below the formal pivot.  (Now it could also be argued that the pivot is 25.29 – technically it is more than 1/2 up the base.  I didn’t list this point as the pivot because I felt that after the run up it had it needed to spend more time consolidating and that a proper pivot would be higher in the base – in the future I will leave personal opinion out of it and stick to the technical rules for finding pivot points). 
 
Now, that being said, I don’t think it’s a mistake to take a chance on a breakout of a stock like this.  Stocks have certainly shot to the moon without a meaningful consolidation in the past and will happen again, but not very often.  However, this is not a stock that I would have purchased, set a 7% stop and walked away from.  It’s one that I would want to monitor (i’ve attached an intra day chart to give you some thoughts on how I would have played this during the day). 
 
OK some tips on making the purchase:
  • Purchasing in the first half hour of trading is rarely a good idea… this is the time that amateurs do most of their trading and the true direction of the stock has not been revealed.  Looking at that chart of HANS, the stock gapped up immediately at the open, consolidated and then plummeted below support of the bottom of the gap within a couple of hours on heavy volume.  It would have been best to watch a 5 or 10 min chart and waited until it cleared the consolidation on heavy buy volume… which it never did and the purchase would not have been made.
  • Make sure volume is surging: Divide the 50 day average volume by 6.5 hours (hours in a trading day) and then multiply by where you are in the trading day (this is done automatically in the Breakout Tracker, but delayed 15 minutes.)  When monitoring a breakout you will want to know if volume is surging in real time.  Of course you could see this on a 5 minute chart as well.  Helps to have one monitor for your 5 minute charts and one for executing trades.
When To Sell (may like to have look at the tutorial section on selling as well)
  • Typically, you’ll want to lock in a profit at 20-25% if the stock doesn’t increase by this amount in less than 2-3 weeks.  Stocks that jump 20% in a short time frame (JUPM has this potential and possibly OS) should be given a chance to run.   Of course if the market turns negative, these rules will be modified and positions will be closed much sooner or held longer depending on conditions.  Currently, the market is strong and positions should be given a chance to ride out.. especially positions like JUPM.  I don’t believe in hard and fast rules for selling though.  It really depends on the overall market, price, volume and where support levels

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