Trading Highlights: Monday’s poor Dow (down 120.68) and Nasdaq’s showings (down 38.15) didn’t dampen the housing stocks. Featured stock WLS, was the day’s biggest winner up $2.25 or $2.10 above its pivot. Featured stocks RYL (up $4.14 on the day!!), MHO, KBH, and HOV also did respectably, and were all above their pivots. Meanwhile, auto retailer Group 1 Automotive was also up and out of its base at 43.79 up to 44.84, on twice its average volume. Tuesday saw the housing stocks continue to power forward, with RYL up another $4.20! KBH was up another $1.45, as were the other housing stocks mentioned on Monday. TOL, taking its cue from the others, broke above its pivot at $28.26 and ended the day at $29.05, after being up as high as $29.80. Wednesday started out in rally mode, but accelerated down by day’s end-- a bear market pattern. Just a few featured stocks hit their pivots. This included wholesale pharmaceutical and healthcare distributor DKWD, which ended the day $1.05 above its pivot on a strong earnings announcement. RACN, maker of collectible cars and trucks beat earnings estimates yesterday broke out today, only to retire back into its base towards the market’s close. Meanwhile the housing area withered a bit. The market has been honoring breakouts of stocks in strong industry groups, like the housing group, but you might consider either taking some money off the table or moving up your stops to protect your capital.

Here are the strong breakouts of Ryland and DK Healthcare. Notice the strong volume on the breakout and how it continues to accelerate on Ryland even after the initial breakout.

Market Commentary:For the third time, the NASDAQ has sputtered into the 1700 level. Yesterday, it undercut its April 11^th low of 1725–on higher volume, no less. Today, it continued to slide. You can see from the chart below the latest of three downside gaps the index has created, which now poses as upward resistance. The uppermost line is the 200-day moving average, long since passed. The Dow, meanwhile, is on a little firmer footing, but in a distinct downtrend. At least its 50-day moving average (the uppermost line) is up. With earnings season starting to wind down, I’d look for the NASDAQ, or one of the indexes, to show some strength before putting a lot of money on the line. This would entail a strong rally of at least 2% on higher volume than the previous day, and ideally a strong follow-through day a week or two later.

Potential Breakout Stocks

Today’s Tip: Just as happened earlier this week when many of the housing stocks broke out, stocks within a certain group tend to act in tandem. When you see one leader in a group breaking out, often others in the group will not be far behind. Beware of the latecomers, though. Sometimes those are the first to fail.

1. Stock investing involves risk and is not suitable for all investors. Use discretionary capital only.
2. Never trade on margin unless you are an extremely experienced investor and have control over your emotions.
3. Breakout stocks should have a volume at least 50% above their average daily volume on the day of their breakout. Though stocks can break out at lower volume levels and move higher, keep close tabs on them as they can be more prone to failure. If a breakout stock comes back down to its opening price after breaking out, sell it.
4. Always put in a stop-loss (sell) order with every stock you buy to protect your capital. A rule-of-thumb for long-term investors is to place it 7-8% below your breakout buy price. For swing and day traders, stop losses can be placed .10 under the breakout day’s low or at the stock’s opening price. Once the stock has advanced $1 above your buy price, you may want to move your stop loss to your buy price. Always maintain a daily or intraday "trailing stop" as your stock advances to protect your profits.
5. Never chase a stock more than 5% beyond its pivot.
6. News Rules! Before each market day, scan breaking news stories of financial and national/international significance to guage whether they might influence the market. Also watch DJIA, NASDAQ and S&P pre-market futures readings for hints as to how day might unfold.
7. Using a real time stock quote service with charting software is the only sure way to determine if a stock is breaking out in strong volume, and the only way to judge the character of the market throughout the market day.
8. Reversal stocks such as those indicated above tend to follow the market’s strength and direction, so early indications of the market’s strength (see #6 above) are important. In down or sideways-trending markets, exercise caution as these trades are much less predictable, and stocks can move down further or take more time to reverse than expected. Beginners or intermediate investors are encouraged to wait for a confirmed "up" market before trading these, and access to a real time quote service is strongly advised.
9. The information featured in Stock Confidential is based upon a subjective analysis of chart patterns and a variety of other criteria. It is not intended as a substitute for your own independent research, or consultation with your stockbroker or investment professional. All trading decisions are ultimately your own.

© 2002, Paul Johnson Financial All Rights Reserved

Careful with your stops. I see a lot of stocks flashing short-term overbought patterns right now. It may be nothing to worry about, but better to play it safe. Also, while the oversold NASDAQ followed through on strong volume on Monday, 7/29, the Dow is exhibiting decreasing volume as it goes up–including Monday when it was up 447.49!

(Note: All charts provided courtesy of AIQ.)

The Dow is also showing a bearish harami cross pattern, and today, the volume actually increased on a down day. That is a troubling sign indicating some institutional selling.

© 2002, Paul Johnson Financial All Rights Reserved

Home :: Sample :: About :: Mission :: Recently Featured :: Appearances & Workshops :: Candle Reversal Patterns :: Subscribe :: Contact :: Terms of Use