Re: [CANSLIM] Breakout Blues

From: RWElmer@aol.com
Subject: Re: [CANSLIM] Breakout Blues
Date: Thu, 22 Aug 2002 03:08:38 EDT

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Greetings All,

The discussion of Breakouts deals with the one issue I have always had with
CANSLIM (and that *does* mean that I enthusiastically embrace the rest of
it), and that's buying only on this specific pattern and its variants. In my
humble opinion there is a proper time to use this technique, and that's when
the smart money is pouring into these stocks and there is enough of this
going on that it overwhelms any short term trading interests. (This is the
stage mentioned earlier when the swing trader transitions to momentum.) That
is why volume is so important on Breakouts. You're intelligently riding the
stampede at those times. Times like the current environment retain the memory
of all the failed breakouts from earlier in the year and create alot of
uncertainty. In retrospect, those earlier failures were influenced by the
fact that the Market was in the process of topping off the September -
January rally. Breakouts are bound to fail when M is doing this. In fact
that's a confirming indicator of a downturn, in my book, just luck IBD's
search for succeeding Breakouts is validation for a new uptrend. The question
right now is which environment are we in? We see lots of "proper" signals to
identify at least an intermediate uptrend; be they higher highs/higher lows,
breadth, volume being heavier on up days, good stocks forming bases or
breaking out and holding, etc. But the overall volume seems to lack
conviction. The fact that there is enough hesitation both ways, while stocks
continue to climb, makes me believe we are going up for at least another
couple of weeks. I remember having this same feeling in late September '01
thinking that the Market seemed to be saying to get in but my emotions were
listening to all the arguments against it, backed mostly by opinion. (And yes
I'm aware of the irony as I'm giving my opinion.)

Back to the mechanics of the failed breakouts. I think there are swing
traders who play those breakouts exactly contrary to CANSLIMmers during times
of weakness in the Market. They buy the bottom of the handles as the trading
dries up in anticipation of the eventual move. If they're dead wrong their
stops are just underneath the lows of the handle, so losses are minor. If
they're partly wrong they sell as soon as evidence shows the pivot point
resistance is going to hold. If they're right, they sell to the CANSLIMmers'
buying of the Breakout as the candle prints start expanding. What they've
gained is the move from bottom of the handle to above the pivot point in
probably a day to three's time; plus they've sold into excellent liquidity,
namely CANSLIMmers jumping on the Breakout. At this point all that's happened
is that the trader bought up shares in anticipation of the move, the move
happens and CANSLIM buys what the traders held, then there's nobody left to
buy so the move breaks down.

Other swing traders don't anticipate, they wait to see the moved confirmed
and buy after the stock's first retest of the pivot point, or even the lows
of the base. The bounce back from *that* is where maybe the swingers become
mo-mos and help the move ultimately succeed. Of course if the Market's
falling apart, you'd only have the swingers taking advantage of inexperienced
buyers chasing breakouts in a sick Market. Something none of us do here :))
In a newly healthy Market, when the true leaders of tomorrow start to exert
their dominance, then I have no doubt CANSLIM Breakouts work exactly as WON
describes.

That brings about another point. I wonder if it's possible to exercise a true
CANSLIM discipline right now anyway, as the types of Leaders WON describes
typically would not have surfaced in such close proximity to a major Bear
like this one; although that's speculation on my part that others may refute.
Instead I think what we are mostly doing is using CANSLIM to find the best
stocks this Market has to give, but not the classic early Bull Leaders yet.

What I find encouraging with this group is that there are several people
adapting to these Market conditions and buying before the Breakouts. I may be
way off base, but I think that's recognizing and adapting to the competition.
There is a certain, well-respected small cap guru here who I believe has done
this for a long while and who seems to do this especially well, by what I've
seen. In this Market, I think it just may require these kinds of adjustments.
But I also do believe the eventual Bull will make a genius out of WON and C&H
Breakouts once again.

Anyway, that's my take on things. FWIW.

Good investing All,

What I find encouraging with this group is that there's the rumblings of
those looking

Robert W. Elmer
Coldwell Banker First Shasta
2837 Bechelli Ln.
Redding, CA 96002
RWElmer@aol.com
221-9556 or 1-800-348-7939 ext.156
www.robertelmer.com

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<HTML>Greetings All,
 
 The discussion of Breakouts deals with the one issue I have always had with CANSLIM (and that *does* mean that I enthusiastically embrace the rest of it), and that's buying only on this specific pattern and its variants. In my humble opinion there is a proper time to use this technique, and that's when the smart money is pouring into these stocks and there is enough of this going on that it overwhelms any short term trading interests. (This is the stage mentioned earlier when the swing trader transitions to momentum.) That is why volume is so important on Breakouts. You're intelligently riding the stampede at those times. Times like the current environment retain the memory of all the failed breakouts from earlier in the year and create alot of uncertainty. In retrospect, those earlier failures were influenced by the fact that the Market was in the process of topping off the September - January rally. Breakouts are bound to fail when M is doing this. In fact that's a confirming indicator of a downturn, in my book, just luck IBD's search for succeeding Breakouts is validation for a new uptrend. The question right now is which environment are we in? We see lots of "proper" signals to identify at least an intermediate uptrend; be they higher highs/higher lows, breadth, volume being heavier on up days, good stocks forming bases or breaking out and holding, etc. But the overall volume seems to lack conviction. The fact that there is enough hesitation both ways, while stocks continue to climb, makes me believe we are going up for at least another couple of weeks. I remember having this same feeling in late September '01 thinking that the Market seemed to be saying to get in but my emotions were listening to all the arguments against it, backed mostly by opinion. (And yes I'm aware of the irony as I'm giving my opinion.)
 
 Back to the mechanics of the failed breakouts. I think there are swing traders who play those breakouts exactly contrary to CANSLIMmers during times of weakness in the Market. They buy the bottom of the handles as the trading dries up in anticipation of the eventual move. If they're dead wrong their stops are just underneath the lows of the handle, so losses are minor. If they're partly wrong they sell as soon as evidence shows the pivot point resistance is going to hold. If they're right, they sell to the CANSLIMmers' buying of the Breakout as the candle prints start expanding. What they've gained is the move from bottom of the handle to above the pivot point in probably a day to three's time; plus they've sold into excellent liquidity, namely CANSLIMmers jumping on the Breakout. At this point all that's happened is that the trader bought up shares in anticipation of the move, the move happens and CANSLIM buys what the traders held, then there's nobody left to buy so the move breaks down.
 
 Other swing traders don't anticipate, they wait to see the moved confirmed and buy after the stock's first retest of the pivot point, or even the lows of the base. The bounce back from *that* is where maybe the swingers become mo-mos and help the move ultimately succeed. Of course if the Market's falling apart, you'd only have the swingers taking advantage of inexperienced buyers chasing breakouts in a sick Market. Something none of us do here :)) In a newly healthy Market, when the true leaders of tomorrow start to exert their dominance, then I have no doubt CANSLIM Breakouts work exactly as WON describes.
 
 That brings about another point. I wonder if it's possible to exercise a true CANSLIM discipline right now anyway, as the types of Leaders WON describes typically would not have surfaced in such close proximity to a major Bear like this one; although that's speculation on my part that others may refute. Instead I think what we are mostly doing is using CANSLIM to find the best stocks this Market has to give, but not the classic early Bull Leaders yet.
 
 What I find encouraging with this group is that there are several people adapting to these Market conditions and buying before the Breakouts. I may be way off base, but I think that's recognizing and adapting to the competition. There is a certain, well-respected small cap guru here who I believe has done this for a long while and who seems to do this especially well, by what I've seen. In this Market, I think it just may require these kinds of adjustments. But I also do believe the eventual Bull will make a genius out of WON and C&amp;H Breakouts once again.
 
 Anyway, that's my take on things. FWIW.
 
 Good investing All,
 
 What I find encouraging with this group is that there's the rumblings of those looking
 
 Robert W. Elmer
 Coldwell Banker First Shasta
 2837 Bechelli Ln.
 Redding, CA 96002
 RWElmer@aol.com
 221-9556 or 1-800-348-7939 ext.156
 www.robertelmer.com</HTML>

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