Re: [CANSLIM] CSTR CVH Failed breakouts Post Analysis

From: James Bond <james_bond_3rd@yahoo.com>
Subject: Re: [CANSLIM] CSTR CVH Failed breakouts Post Analysis
Date: Tue, 3 Sep 2002 18:44:56 -0700 (PDT)
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CSTR presents an interesting example of the importance
of intraday charts. There is no clue of impending
trouble on the daily chart until the stock broke down.
The intraday chart, however, telegraphed the bad news
well in advance.

Like many other people, I too cannot follow the market
during the day and have to check charts during the
evening. When I have a position open, I check the
chart every night with no exception.

On Thursday, Aug 22, when this rally was still
advancing, I was surprised that evening to see many
bearish charts among the leading stocks. For example,
FCN had a deterioting relative strength, CCR made a
new high but its relative strength lagged, DORL gapped
to a new high but saw no progress in daily price
(distribution), and PIXR had formed an evening star
candlestick pattern. If one or two stocks were acting
poorly it probably wouldn't have bothered me so much.
When most of the leading stocks were showing signs of
weakness the market was in trouble. At that time I was
long CCR, CSTR, DORL, NUTR, and PIXR. My first
decision was to sell CCR, DORL and PIXR at the open
next morning, and but to keep CSTR and NUTR.

I changed my mind when I looked at the intraday chart
for CSTR. On the daily chart, CSTR had formed an
impeccible CwH base, with pp at 31.22. The breakout
was on very good volume, and reached a high of 34.2.
Because of a little overhead resistance (as mentioned
by others), it was expected to form a second handle
before breaking out to new highs. This was also noted
by the issue of IBD the day after its breakout. It
consolidated between 32 and 34 the next 5 days, with
nothing extraordinary shown on the daily chart. I was
several times tempted to add shares when it pulled to
low 32's but thougt better of it. My plan was to add
to my position when it broke out of the second handle.
I wasn't even thinking about selling it before I
looked at the intraday chart.

I was alarmed by the intraday chart. On the intraday
chart, the consolidation between 32 and 34 showed up
as a five day CwH formation, with the appropriate
volume actions (large volume on left and right sides,
dryups on bottom and in handle). Handle high was 33.76
which was the intraday high on Thursday. Everything
was great except for the last hour or so of Thursday.
Some heavy selling came in and broke the handle
formation (little did I know that the Off Wall Street
report was issued to its clients on that Thursday).
WON told us that heavy selling in handle was a sign of
trouble, and a good short can be entered when the
handle low was broken as the volume picked up. Of
course he was refering to daily charts. Intraday
charts work the same way except its validity is much
shorter in duration. If the market were healthy, I
probably would have expected CSTR to pullback and test
the pp and a decision could be made after the test.
But with the other leading stocks weakening, there was
no question at that point that CSTR was going to break
below its pivot point. So I decided to sell it the
next morning along with the others for a small profit.

I was kicking myself a few days later when CSTR barely
dipped below the pp and then rallied past my sell
price. But that lasted only one day. Thank goodness
the intraday chart gave me the only clue there was.

As far as CVH was concerned, I ruled it out as a buy
candidate early on. There were several issues with
CVH. First was the lack of confirming strength in the
group - although the group ranking was high, other
stocks in the group either didn't have a proper base
(SIE), or had a wide and loose base (MME). I avoid
groups like this. Second CVH was overowned by
institutions - over 90% of ownership. WON's rule was
less than 50% institutional ownership. Third was a
non-CANSLIM issue: CVH was being investigated for
overcharging government. Although it was an old issue,
as long as it remained unresolved, there could always
be surprises.

One final note. I don't think taking a 7% loss on
every losing trade is ok. If one takes a 7% loss in a
string of 5 trades (a finite probability), that's a
third of capital lost - too much for any trading
method, considering how hard it is to have a 50%
return (the amount needed to come back). My
understanding of it is that WON didn't intend 7% to be
where you place the stop order. Instead it's the
maximum allowable loss for a single trade. Usually it
should take a screwup to have a 7% loss. If one buys a
stock correctly, a 2-3% loss is achievable if the
stock fails. Sometimes one can even exit with a small
profit if the chart is read correctly.

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