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Often people question why we put our "consider buys" at just above
resistance levels and now is a good time to look at it.
We have built the basis of our business by quietly playing breakouts
and news related stocks. Over the years we have done extremely well
by buying into stocks that were making good patterns and then "bust
out" above them.
One "complaint" that we hear is that we don't make money "now" and
that needs to be talked about. First what do we mean by that? Let's
set one up. Suppose that ABC has run up to $40 and pulled back twice
now. It's currently sitting at $38 and "appears" to be ready to move
up and challenge 40 again. Why not jump in now and capture the move
from 38 "to" 40? Good question.
There is "no" reason that a well heeled trader shouldn't be jumping
in now for the run up to the $40 level. The reason we don't put that
type of play in the letter has several explanations though. First, in
today's market, a stock can go from 38 to 40 in literally minutes. We
have found that the bulk of our subscribers aren't hard core
daytraders, they are more casual "swing traders". So, many times a
stock will indeed try and challenge a resistance level and fail that
level in a matter of moments. Often though, the failure brings a
punishment. That is the problem. If you look at enough chart patterns
over the years, you often see that the days approaching a resistance
test are pretty volatile.
Is it possible for a stock to open at 38, test 40, fail to bust out
and be trading at 36 in less than an hour? Absolutely! Therein lies
the problem, we don't like to put you in danger and that is a
dangerous "period". On the other hand, the statistics are pretty
well documented that if a stock can cross a resistance line AND close
the day above it, there is a pretty good chance the breakout will
hold and the trader will be rewarded instead of being punished by a
downdraft. Does it work always? Nope.
But it does enough to keep putting money in our pockets with
the "minimum" of risk. So, until that pattern changes, we have to
avoid putting out the plays that appear like they will challenge
resistance, and stay with the ones that have set up to bust out and
actually do. At least that keeps you as "safe" as humanly possible.
(and it still fails at times)
So, we continue to put the plays out based on a move over resistance
levels. Now the only question that remains is can you buy the
breakouts on the intra day cross or do you have to wait for the close
before getting in. This is not an easy question to answer. In a
perfect world, when a stock breaks above a resistance on good volume,
it shows the buyers have outweighed the sellers and it is a
successful breakout. In a less than perfect world, like the one we
are in, there are a multiple of variables that play out.
The most important of these variables is the overall market
condition. We cannot stress hard enough to you, that if the overall
market is falling the likelihood of your stock moving higher or
breaking out is dramatically lessened. Likewise if a stock crosses
resistance in the morning as the market is moving up, it doesn't
guarantee that later in the day if the market falters, the stock will
have enough strength to remain in breakout territory. Remember this
number, about 40% of a stock's move either up or down is directly
related to the strength or weakness of the overall market.
So one thing that you have to watch closely are the overall averages.
If you buy a breakout stock and the averages are ticking higher, you
have just increased your chances of success. If the stock had
no "news" to help it along, it's moving purely on speculation and
technical buying and that can sure change quickly! This is why you
often see us buy the breakout and then sell half of it for a dollar
or two in profit. If we sense the overall market is weakening, we
know out stock probably will too and we want to lock in "something"
right away.
One last note here friends. We obviously don't get them right all the
time, in fact, far from it. Many times we buy a breakout as it
crosses the line and have to eat it again as it weakens and plunges
under the line, only to get "mad" that it reverses again and pops up
again. There is no shame in buying something, dumping it and buying
it again, it happens to be part of what trading is. But, if you time
the breakout with a decent market tone, you should get more winners
than losers and in trading that is all you can shoot for.
http://clix.to/wallmann
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