Would you comment on your method of using the 10 and 18 day moving averages and using them to determine entry points?

  When a good stock is moving up in a solid rally, we have found that the 10 and 18 day moving averages often act as support on the move. Many commentators like to use the 50 day moving average, and if a stock uses that level as its support, that is not a bad idea. The leading stocks during this past rally (and other strong rallies), however, have used these two lines as support to continue their moves up.

Different stocks use different levels. Many have been using their 10 day moving average, but some fall right through that and continually use their 18 day moving average for support. We look at how a stock behaves as to which one we look at. When we have seen these leading stocks pull back to the 10 day moving average (or 18 day as the case may be), we get ready for a move up from that level. During this rally, it has worked consistently for very nice gains (e.g., VIGN, QCOM, VRTS, VRSN, CMGI) in many stocks that we have been able to enter over and over when they sell back to these points.

When the rally starts to fade, these short term averages will stop acting as support, and the stocks will move more toward their 50 day moving averages. In a correction, strong stocks tend to try hard to hold above this level. That makes them a better trading level for longer term holds. The 10 and 18 day moving averages are very good for shorter term trades. Thus, if you are making a shorter term trade and a stock breaks below these support levels, you need to be very careful with your position as the stock has broken its consistent trend. We have seen some of our stocks using the 10 day moving average fall down to the 18 day moving average, but they have quickly recovered. If they don't, they have changed their spots and we have to be careful with our positions.

I have bought stocks when they have broken resistance on good volume only to have them fall shortly thereafter. What is going on?

This is one of the most confounding parts of trading. You see a good pattern, the stock breaks out on 150% of average volume or more, but then fails. It can drive you nuts.

First, realize that even if volume, price, the moon phase, etc. are 'right,' some patterns are going to fail. This was true ten years ago, and with the advent of so many daytraders, it is even truer today. We watch the pivot point or breakout point after the breakout, and if the stock violates that point, we are out. The breakout has failed for some reason and we need to get out and let the stock prove to us it is going to go back up. It could turn right around requiring us to get in and spend more commissions, but that is better than having the stock tank further on us.

Second, we have noticed that stocks are shooting up over breakout points on news stories of one kind or another as daytraders race in the stock to capture whatever they can on the news. It could be something serious such as a company coming out and saying it will be estimates by 20% or something transient such as a company announcing they will start an internet site to sell products. For some it works, for others, they are just trying to pump up their stock price. These usually don't last.

The best defense you can have is a strict sell discipline when a breakout fails. We hate to admit we are wrong about anything-that is human nature. But that human nature will burn away profits as one or two failed breakouts wipe away solid gains in other stocks. We know some patterns will fail: we may have jumped the gun, the pattern may have some defect we didn't pick up, the market may turn south on us, or it may just fail when everything was just right. We need to be ready to just shrug, pull the trigger and keep watching to see if the stock will come back as we thought it should.

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