Go to Jeff Salisbury LWGate Home Page.From: "Katherine Malm" <kmalm@earthlink.net>
Subject: RE: Trailing stops and taking profits (was: RE: [CANSLIM] AAII letter to the editor)
Date: Wed, 16 Jul 2003 09:07:45 -0500
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Hi Hong, The first order of business is to look at the overall technical health of the stock. Here's a long term (3 year) view to put things in perspective: http://www.breakoutwatch.com/katherine/CMTL071103Wkly.JPG Now take a close-up view of the last 3 months: http://www.breakoutwatch.com/katherine/CMTL071403.JPG This is a perfectly healthy stock. The action in the last 3 days is not surprising for a couple of reasons: (1) The market itself has been tentative (2) After such a strong rise with few pullbacks, it wouldn't be out of character to see a pullback close to the upward trend line and/or the 50dMA. (3) The stock just split 3/2. That doesn't have the same sort of effect as floating additional new shares, but it does provide a boost to liquidity. That means more shares can now change hands. Sometimes after a split, you see a pause in the action while people shuffle the deck. What you're then left with is putting a profit taking plan in place. At the very least, your stop should be no lower than breakeven (assuming you entered back at the breakout of the previous consolidation in late March, approx. $8.60) Some people take some off the table after a stock has doubled, particularly if the stock is not particularly liquid. Others take some off the table after the stock has risen some percentage above both the 50 and 200dMA. Other's will leave it all on the table as long as the stock and the market is healthy. As to a trailing stop, some will let the stock rise, fall back and touch the uptrend line, then rise again. At that point, they will then move their stop up to the *previous* spot the stock touched the trend line. In this case, that would mean moving your stop to just under 16.87 (I use .13 and then make sure it's not set at an even number). Others will use the 30week MA in the same way. It's all a matter of goals and personal preference. Katherine - -----Original Message----- From: owner-canslim@lists.xmission.com [mailto:owner-canslim@lists.xmission.com]On Behalf Of Hong Hsu Sent: Tuesday, July 15, 2003 8:27 PM To: canslim@lists.xmission.com Subject: Re: Trailing stops and taking profits (was: RE: [CANSLIM] AAII letter to the editor) >look at the price/volume action itself for any signs that the stock is in *big* trouble. >These sell rules (see the investors.com site) are much more subtle and take a lot of >practice. Katherine, Thanks for sharing your professor-style comments with me. As I am newer to CANSLIM, would you elaborate little bit your experience with an example of stock: CMTL. I seem to have many reasons to support either sides. The stock failed 11.89% with heavy volume in past three days. How do I judge price/volume action is changing its trend direction or not after BO for a while. - -Hong Katherine Malm wrote: >Hi Hong, > >I think you might be confusing the use of the 7-8% rule. You have to think >of a stock in several stages for this to make sense: > >(1) The stock forms a valid intermediate term base (cup with handle, flat >base, double bottom, etc.). It sets up and breaks out above the pivot on >volume >=150% of average daily volume (ADV). Assume you enter at the optimal >buy point ($.10 above the pivot). Your purchase price is "just right" and >this is where the 7-8% rule applies. That is, a stock which is still >healthy shortly after a breakout will tend not to fall more than 8% below >the pivot before it continues to rise. If you buy at the optimal buy point, >then you can then set an inital stop which is not only 7-8% below your >purchase price but also 7-8% below the pivot itself. That's the very reason >why you don't want to chase a breakout too far past its pivot. If you >purchased, say 10% above the pivot, the stock could fall to 8% *below* the >pivot and still be healthy. If you also set your stop at 8% loss from your >*purchase* cost, you will be shaken out for no practical or technical >reason. > >(2) Once the stock starts moving up, then you need to decide where your stop >will be. There are many guidelines for this, but don't mistake a *price >drop* of 7-8% from one day or week to the next as a reason to get rid of the >stock. Instead, you want to look at the price/volume action of the stock and >determine if it remains *healthy.* For example, after a breakout, say the >stock rises very quickly to >=20% above the pivot. This is considered strong >follow-through and is often the sign of a stock that has real power. >However, it isn't uncommon for a stock which rises 20% or more very quickly >to fall back a bit on low or fairly low volume. Why? Because the short term >traders get in and quickly take their profits and ride into the sunset. >However, as a CANSLIM investor, you're looking for stocks that have the >wherewithal to withstand this sort of short term correction. What will most >often happen once the short termers influence the stock to slightly lower >prices will be the intermediate to longer term investors coming in a >scooping up more shares. That's why you want to stick with it....you're >riding the stock for bigger gains. As to your trailing stop, you may simply >raise your stop to breakeven at that point. In other words, you really don't >want to take any loss on a stock that has risen >=20%, but you also don't >want to be whipsawed out of a perfectly good intermediate term position >simply because of a temporary pullback. That's very often what sets the >stock up to launch further. > >(3) As the stock rises, you want to look at the price/volume action itself >for any signs that the stock is in *big* trouble. These sell rules (see the >investors.com site) are much more subtle and take a lot of practice. You may >wish to move your stop up a bit as the stock works its way up, but be very >careful, once again, not to set it too tightly. A stock can and does remain >perfectly healthy, rising and falling, rising and falling, while the >underlying trend itself remains *up*. You want to stick with these winning >stocks as long as the price/volume action is healthy. Whatever you do, don't >set some arbitrary trailing stop at 7-8%, because it will have absolutely no >technical meaning to the behavior of the stock itself. Look for logical >support areas such as a trend line, a previous area of support, etc. (Again, >you can find a lot of info on this at the investors.com site.) > >(4) At some point, the stock will stop its general upward trend and will put >in a fresh base. You have several options here. First, you can ride out the >consolidation and stay in the stock as it breaks out again. If it fails from >the area of consolidation, you can sell. You can add to the position as it >breaks out. You can sell as it starts the consolidation. Remember that an >intermediate term consolidation can be as little as 10-15% (flat base), to >20-60% for a cup with handle. Your decision to stay with the stock will be >determined primarily by the underlying health of the market itself, the >underlying health of the stock's industry, the underlying attractiveness of >the business itself, and you personal profit taking goals. > >All in all, you can't make a general statement about what one *should* do >with a stock. You have to decide what you are *going* to do *before* you buy >the stock. > >Katherine > > > - - - -To subscribe/unsubscribe, email "majordomo@xmission.com" - -In the email body, write "subscribe canslim" or - -"unsubscribe canslim". Do not use quotes in your email. - - - -To subscribe/unsubscribe, email "majordomo@xmission.com" - -In the email body, write "subscribe canslim" or - -"unsubscribe canslim". Do not use quotes in your email.
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