Upon further review, I’ve been focusing way too much on short-term explosive chart formations, and not enough on the longer-term trending nature of the stocks I’ve been buying and, more importantly, selling.
Sure, for the short-term momentum trading I’ve done in the past, trading these explosive breakout patterns works great. And, they work well as an entry point for trending stocks, so long as they happen close to the bottom trend line. I have not, however, been paying attention to proximity to the trend line when I pull the buy lever. Often times, especially toward the top of a trend channel, these breakouts fail because the longer-term and stronger trend channel top overrides the move. Normal, stable stocks just will not stay “out of whack” for too long without correcting.
For my purposes, all that should matter is the entry point and where the stock trades in relation to the bottom trend line. Once the stock breaks below the trend line, it is a sell. Not before, no matter where the previous bottom is. So long as the trend line is steep enough to yield a generous return, there is no reason to sell above the line
The entry point is important. If a stock is trending along a line, and I buy too far above the line, it can take several weeks or even months before the trend line reaches my entry point. That means, until the line meets my entry point, I’ve got good capital sitting there doing nothing, regardless of the price action of the stock. Until the trend line gets above my entry price, I’ve made nothing. The sooner I can get the trend line above my entry price, the sooner I start making “real” gains versus fake paper gains.
So, what are these “real” gains? Well, a “real” gain is the difference between the trend line price and my entry price. Actually, it is the difference between my stop price and entry price, but the stop will always be set just below the trend line. What that means is if I have a trend that moves up at a 2% per month rate, my return is really 2% per month, regardless of the stock’s actual move during the month. If I buy on the trend line at 10 and the trend line moves to 12 while the stock moves to 20, I’ve really “made” 2, not 10. I will let the stock trade below 20, but not below 12. Of course, “real” is in quotes because it isn’t a real gain. I haven’t sold the stock, and it could certainly gap down below the trend line. In reality, it is a “trend gain”.
Now that I’ve woken up, this week’s stock report will focus on whether a stock is in a trend or not, the strength of the trend and future plans for the stock.
RAI: In a very strong trend channel about 15% wide. The trend is about 4.5%/month and is more than a year old. The price is right about in the middle of the trend now. The bottom of the trend is 60.
CXW: In a very strong trend channel almost 20% wide. The trend is about 6.25%/month and is more than a year old.. Price is in the middle of the trend. The bottom line is just under 40.
HCR: In a very strong trend channel close to 12% wide. The trend is about 3.7%/month and is about eight months old. Price is in the middle of the channel and the bottom line is 50.
LNT: In a strong trend channel about 10% wide. The trend is about 3.9%/month and is about ten months old. Price is towards the bottom of the channel and the bottom line is 36.
SBIB: In a short aggressive trend four months old. The channel is about 10% wide. The trend is 5%/month. The price is near the bottom of the channel and the bottom line is just over 20. There is a longer-term trend, but it is too shallow. I’ll sell out of this trend.
LTR: Short, aggressive trend channel closing in on four months old and about 8% wide. The trend is about 4.2% per month. The price is in the middle and the bottom line is under 38.
ORCL: I’ve badmouthed this one before for being too slow, too big, blah blah blah. However, in trend land, it is shaping up to be a very nice pick.. The three month old trend is quick and aggressive at 6.25%/month. The channel, such as it is after only three months, is around 15% wide. Price is in the mid-bottom of the channel and the lower support line is under 16.
DGX: Strong five month old trend gaining 2.4%/month. Channel is about 7% wide, so a tight one. Price is towards the middle and holding, the support line is just above 60.
SEIC: Nice looking trend at least six months old gaining 3.3%/month. The channel is about 13% wide. Price is way at the top of the channel. Support is around 49. This is a case where I wasn’t paying attention to the trend line when I bought. I have a solid month to go before the trend line will match my entry price. Only then will I be making any profits.
PWEI: My favorite stock at this time just because I’m very curious what will happen with all the short interest in this one. There is a mildly violated trend channel that started with a huge gap up ten months ago. It is a quick mover at 5.5%/month. The channel is a monster at about 35% - 40% wide. Indeed, this one moves in chunks. The price is towards the middle and support is just under 30.
TRMB: Horrible. No trend here. This was a breakout play where I elected to set the stop below the previous low instead of below support, which held about as well as the straw pig’s house. I’ve got a stop set below the previous low. I don’t know what the hell I’m still doing in this thing, but maybe I’ll get lucky and something will develop.
UDR: This guy had a short trend within a breakout pattern, but when it broke out of its pattern, it shot up through its trend. Now it looks like a continuation of the breakout is taking shape. This is a breakout play, hoping for trend development. Stop is set below 30.
ORB: Breakout play, pure and simple. Hoping for a trend to take shape. Stop is set at about 18.50. When explosiveness happens, I’m content to keep bumping up my stops until some sort of longer-term trend takes shape. When and if it does, I’ll adjust the strategy to follow the new trend.
HPOL: Little guy in a young 4+ month trend, making around 5%/month. I bought a breakout pattern within the trend. The break took it to the top of the trend (which I wasn’t focused on at the time) and it has since retraced back towards the upper middle of the pattern. I won’t make any trend profits for a very long time. In the meantime, I’ve set a more aggressive stop under the top of the consolidation pattern it broke out of.
HET: New trend exiting from a steep drop in price from May through the end of July. This young trend is making 4.5%/month and the channel is about 8% wide. Price is in the upper middle of the channel.
CVD: A wide year-old trend earning 2.7%/month. The channel is about 18% wide, price is in the middle, and support is just over 60.
MAR: The trend is very long – about three years at 2.1%/month. The channel is very wide at over 30%, but that is probably inflated by a period when the stock seems to have gotten a bit ahead of itself. Price is in the middle and support is at 35. My stop is below support of a breakout from earlier in the week. The trend won’t catch me for a very long time.
MGRM: Pure rolling play. No trend at all. Getting involved with these little guys is playing with fire, and I think I’m getting torched on Monday. The company announced after Friday’s close they are going to sell a bunch of shares to raise cash. Poop.
MS: A breakout play with no real reliable trend. That said, the way this stock behaves, I think a good trend could develop.
IGT: I bought in anticipation of a breakout, and got one the very next day. The trend is young and 3.7%/month. It should catch me in about a month. Until then, my stop is below support of the breakout.
ISIG: Tiny little guy, but it has somewhat of a trend. The breakout is what I’m playing here unless the trend proves itself reliable.
That’s it! I feel so much better about things now. I feel like I’m starting to formulate a workable, winning longer-term strategy. It will take some time for the trends to catch up to me so I can see it at work, but at least I feel less like I’m wondering around in the fog. I now know why I've been getting my ass handed to me by the market lately, and why it will happen for periods in the future. Nothing matters but the end result, and if I stick to stocks that trend faster than the market can, I'm looking good at the end of the day. And no more plans to abandon things for my old tried and true momentum trading. Not yet anyway!
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