My strategy in trading since 1997 was to buy LEAPS on stock in a strong uptrend and hold them until the stock closes below its 18 day moving average. I had great success doing this simple strategy. It was a strategy that was unemotional that told me when to get out. Since April of 2000 I have not found any stock that has been moving up in a strong uptrend. Those that seem to be breaking out and moving up seem to just fizzle out causing me to stop out. Since receiving your newsletter I have found a few potential candidates (EBAY, LOW, etc.). When you are buying the stock in your newsletter are you playing the stock on the breakout and selling as it peaks, then buying again at support etc.? Or are you holding these stocks longer term? Does the strategy I used from 1997-2000 still work and I just need to find the right stocks? Or do I need to become a shorter term play in these markets? (June 25, 2001)
A great question for these markets. We are seeing many stocks that are in great patterns with great fundamentals that are breaking out and moving higher. When the market is improving and moving into a new bull phase, leading stocks in great patterns are the best place to be. We have a pretty good idea when we are in such a time when we see the market reverse off of selling and give us a follow through day that confirms the reversal. We had that on the Nasdaq back in April and we had double bottom breakouts on the Dow and the S&P 500 in early April as well. Since then the indexes ran up and are now correcting back down. For us a major key is whether they hold at the gap up points from April. If not the rally is not over as discussed in the weekend issue, but it just weakens the move overall.
When we see breakouts of good patterns by leading stocks, that is the last piece of the puzzle, but the majority of the breakouts have to hold up. We are seeing more fail right now, but others are doing well still. There are still many, many stocks in good patterns that are ready to breakout if this current correction ends at the gap up levels on the indexes. With the rate cuts and the patterns in the indexes, we remain positive on the future if not the immediate future.
What does that mean to you? Well, that is one reason we keep tracking the leading stocks on the reports. When we see breakouts ready to happen we are ready to invest in those because history tells us that if the market is going to run higher, these will be the early leaders that will provide strong returns. At the same time we have to recognize that the market is choppier right now than it was in May, and that breakouts can still fail. We have not gone totally defensive at this point on breakouts, i.e., setting targets at 10% to 15% and then selling when those are hit or the stock shows topping signs (finishing off the intraday high after the breakout run, declining volume on the move up and a close off the intraday high, smaller and smaller daily moves up, doji's after the move higher). That is for our stock purchases that we want to hold long term, and we do like to hold stocks if we can for years. For our shorter term plays with options and those plays that are bounces up off of support, we are taking profits when they appear to be peaking as just described.
We may have to go back to what we were doing in January to March, tightening our stop losses to just below the breakout point and selling when our breakouts hit a 10% or 15% gain and showed the first sign of topping. Right now we are going to let them run and see if support levels hold and they bounce back up strong for the really big moves up. What they do depends primarily on the overall market as 3 out of 4 stocks follow the market. If you are not comfortable with that and want to take profits after the initial surge, that is never a bad strategy when the market is not making those higher lows and higher highs. It is correcting right now, so if you adopt this strategy until things turn back up, that is not a bad call.
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