Greetings, fellow Pro-fundity team members -
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D. This Week's Guidepost

“BREAKOUTS - 3”

1. Last week we were left with a dilemma. The Pro-fundity Pick we chose to demonstrate the principle of “Breakouts” made some moves in late October that would have likely led to our sale of the position. We made the pick in January 1999 with some profitable rolls following. Review the price chart below.
   
   

2. Nothing looks amiss from this price pattern. The point is that with the drop near the end of October, it would be a good time to protect our profit, to sell. It is only when we look at the next, longer term, price chart that we express our woe. The price went on to a high of over $140 in the next four-plus months.
   
   

3. The question: What strategy would have kept us long to take advantage of this increase? There is a sound answer, however it requires the use of a charting service we use in our business, TC-2000. We have tried to stay away from any service in our offering that costs money, seeking to exploit the freebies on the web for subscriber benefit. Unfortunately, we were unable to remain with the Provident Investing model for this example. The message is so powerful, it needs to be delivered.

4. On the free charting service we use with Pro-fundity, Investorama, there is one indicator termed the Relative Strength Index (RSI). We mention this on page 165 of our book, not to be confused with Wilder’s Relative Strength Index. The difference between these two indicators with the same name is Wilder’s version is a measure of “internal” strength, not comparing the stock to anything external. The RSI we are dealing with in this Guidepost compares the stock in question with a market index. We use the Nasdaq as the reference index, and the RSI measures the stock performance against the Nasdaq.

5. The principle is this: Use two moving averages of the RSI comparison, generated within the TC-2000 software, and watch for the short MA to cross down through the longer MA. When this occurs, we have an effective exit strategy. It is not important to understand how this is generated, only the powerful result. Look at the same price chart with the two MA’s.
   
   

6. This shows the two MA’s, the short (Red) using 15 days, and the long (Blue) using 40 days. We see the red moving down through the blue in two places, near the first of April and again in mid-July. Those two points would designate sell signals. The quality of the signal in March is less than stellar, but it would get us out of the position with some profit. Note: The opposite case, the red moving up through the blue, is NOT a buy signal. This is only a sell strategy. Now move ahead to see how it deals with our October dilemma.
   
   

7. The Red signal does not cross down through the Blue in October. It keeps us in the stock into the low $80’s. Moving ahead, we see the signal doesn’t give us a sell trigger until the 4th of April, with the price at $68.
   
   

8. To review, we chose an exit strategy that uses two moving averages of the Relative Strength Index, comparing the strength of the ticker MCTR against the major Nasdaq index. This is termed the RSMA strategy and is popular among TC-2000 users. How did we do with it? We didn’t sell in October in the $25 to $28 range, but realized over twice that value. That’s the good news. The bad news is we missed a $130 price range that would have nearly doubled what we did get. Look at the strategy on another good roller example in the chart that follows.
   
   

9. In this example we find four exit-crosses with only the second providing a reasonable return. In the next guidepost we will show a way to recover much of what we miss in the two examples shown. This will use a trailing-stop loss to protect our profits as we move higher. In summary, the RSMA is a moving average exit strategy that will help keep us in winning positions as we let our profits run. Because it is a trailing indicator, we need companion strategies to keep us in the winning column. Stay tuned to see how we do that.
   
   

   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.