Greetings, fellow Pro-fundity team members -
4-14-00 Page Background music:

D. This Week's Guidepost

“BREAKOUTS - 2”

1. Last week we introduced the topic of “Breakouts,” offering hope of increased returns when a rolling stock ends its rolling pattern on the up-side. We know that rollers must come to an end, most frequently after three to five rolls. When the pattern ends, it can go one of two ways, up or down. While rolling side-ways, in its trend-LESS trading pattern, we try to buy near the lows and sell near the highs, ever vigilant to not wait too long at each trigger point. However, we will find many times the best action to take is no action. Look at the following price pattern on one of our picks, MCTR.
   
   

2. This pattern had some profitable rolls through most of 1999 and we would likely be ready to sell toward the end of October. And, why wouldn’t we sell then? With only the price pattern as a guide we probably would have sold. Suppose, for arguments sake, we were out of action 10 days beginning October 22nd and returned to see the price still moving up on November 2nd. Jump now to the next price chart showing where MCTR went for the next 4 ½ months.

   
   

3. We have another ten-bagger. In this second chart, with volume shown in the lower window, notice what we term a “share explosion!” as we move into November. This volume activity kicked the stock in the pants, giving it a momentum that carried it beyond the point of impact. It required less volume to sustain its momentum as it rose steadily into the 21st century. We will repeat the “Profound-ditty” from last week:
   Trends are created (started) by explosive volume activity. A trend is an example of market momentum, once started it will continue until some opposing force counters it. That is the definition of momentum; once in motion a body tends to remain in motion. In the market, it means that once a price starts to move, it will probably continue to move in the same direction. It is the explosion of trading volume that gets it all started.

4. The next chart of a Pro-fundity Pick reinforces this notion. ELNT had moved up nicely through the first part of June in 1999. This had been a roller for a short time in January and February, then broke to the up-side in March with a kick in volume. It ended June in another rolling pattern which prompted our selection at that time.
   
   

5. Moving ahead in time, the next chart shows the dramatic price performance as volume spikes kept the momentum going for a nice 2X+ return from our entry in early July.
   
   

6. We repeat two paragraphs from last week’s guidepost:
   As short-term traders, trying to catch peaks and dips with some consistency, we are in for a rough ride. We are going to have losses! We can take that idea to the bank. That said, how can we pay for these losses? Simple: Our wins must pay for the losses. There are only two ways to do this. First, we need fewer losses than wins, and secondly, each respective loss must be much less than each respective win. A little of each would be good.

   This demonstrates the market maxim, “Cut your losses short, let your profits run.” We cannot let our profits run if we try to catch every positive blip on the radar screen by selling and then hoping to buy into something as good or better than the last trade. We pay a severe “lost opportunity” penalty by taking money out of a winning trade.

7. A question posed last week: “How can we take advantage of breakouts?” First, when trading a rolling stock, we understand it will stop rolling and we should be ready to take advantage of breaks to the up-side. Secondly, protect ourselves from breakouts on the down-side by moving sell-stops steadily up to protect profits already gained. Third, we can look for price patterns that suggest an imminent breakout and enter without insisting on playing it as a roller first.

8. Does this work? If we are playing in a totally random marketplace, where the price reflects everything that is known about a stock, and price fluctuations are random events, probably not. If, on the other hand, price reflects the human emotions that accompany all market trades, if some stocks are overvalued while others are undervalued, if great companies are allowed to prosper in a free-market environment and allowed to lose market share to budding competitors, etc., etc., then yes, it works. What can we do to take advantage of the breakout phenomena? Let me count the ways:
   • Select only stocks with great fundamentals. This will allow you to err on the side of optimism as a stock price hovers.
   • Watch the daily volume figures to help identify potential momentum kicks.
   • As mentioned, protect profits by moving stop-losses up comfortably beneath the increasing stock price.
   • Study technical indicators to flag breakout possibilities. We will spend time on this topic next week.
   • Carefully watch news sources to keep from being blindsided. Learn all you can about the companies you invest in.
   • Remain flexible. Disciplined often means “hard-headed!”
   • Keep learning.
   
   

9. Next week we will study how to anticipate the direction a breakout will take as well as some negative examples. That is, does it always work? You know the answer to that. But it doesn’t have to always work. You just have to be right more times than wrong, and always limit your losses on the negative side.

Recently (12/28/99), eminent stock market chartist and guru Don Worden (founder of TC2000) made the following comment: “Every stock has a personality. You should study a stock's personality before you attempt to come to conclusions about its technical strength or weakness... “

To Worden’s observation we add a hearty hurrah! That is the purpose of the Rolling Analysis section. It is not to fix buy and sell triggers. It is to help us understand the personality of tickers we are considering to be rollers. This is but one unique and proprietary feature of Pro-fundity that sets it apart from other rolling stock web sites. Properly utilized, this will provide a market sense and understanding of the nature of what we call “rolling stocks,” increasing their successful use to fatten our wallets.

It is our intent to help our subscribers understand market strategies well enough to make informed decisions and understand the risks.

TC-2000 tutorials are available on the home page.