Stocks could pull back this month

davidino

Stocks could pull back this month

By Kevin Marder

The Nasdaq Composite broke out of its five-month, cup-with-handle base pattern last Thursday on volume 19% above its average activity. This type of pattern is one of the most bullish chart patterns around, when it comes to either a stock or an equity index like the Nasdaq.

However, the market is not so pat that a pattern will work all of the time. In fact there are a few reasons why a pullback in here would not be surprising. First, the Nasdaq COMP+0.21%  has charged ahead by some 15% in a little over three months. This qualifies as a good year in most circles. The largest retracement on this move has been just 5%. Prices are entitled to a break at some point.

Second, this is September, the weakest month of the year, historically.

Third, price on the Nasdaq often pauses near the prior price high when forming a cup-with-handle pattern as seen below.




While the pattern above is a valid basing formation, there is nothing that says price cannot form another handle right on top of the handle built during most of the past two weeks. Perhaps the "real handle" has yet to be formed. Will the real handle please stand up?

It is also quite possible, and healthier, that the averages back and fill for most of September and into October. This would not negate the bullish ramifications of the cup-with-handle pattern seen in the averages.

Drilling down to the short-term picture, the below chart shows last Thursday's breakout eclipsing the top of the two-week range signified by the two horizontal lines.




The purpose in bringing up the possibility of a market pullback is for speculators with long positions to think in advance — like, right now — about where their exits will be for each position held. It is easier to think calmly and rationally about where to get out before you actually get to that point.

Among the names, LinkedIn LNKD-0.40% was noted here on Aug. 9 (" This pullback, considered normal in the wake of a quick, sharp move, now sets the Monday high of 113.00 as a potential entry for the position trader .") In Thursday's report (written Wednesday evening) it was mentioned that " The stock could potentially be entered here with a protective sell stop beneath the 50-day moving average, currently just below 105 ."

Last Wednesday and Thursday saw the social networking specialist pass the 113 cheater entry point on volume 94% and 165% above average, respectively. Friday and Monday saw price ease as volume began to dry up. This is bullish and indicates profit-taking is minimal. Of course this could always change tomorrow, but in trading/speculating, one only plays the cards he is dealt. Trying to play cards that he has not seen yet is tantamount to trading on a prediction or whim.




A cheater entry is one that occurs before the base is actually completed. Its advantage is that it can gain entry at a lower price than entering on a standard base breakout.

But as with anything else in trading, there is a trade-off. In this case, risk is often higher with a cheater entry than with a standard entry point higher up in the base. The success of a cheater entry is largely a function of general market health. The best time to use one is early in what appears to be a new bull market or intermediate-term advance.

It is also advisable to use a junior position, or a fraction of one's normal position size, say one-half, when using a cheater entry. This compensates for the additional risk, or overhead supply of shares, that is present.

Beauty-store operator Ulta Salon Cosmetics and Fragrances ULTA-0.48% on Friday blasted out of a 12-week cup base on volume 280% above average. This is the type of conviction shown by institutional participants that serves to mitigate the risk of buying a breakout.

Because price is not materially extended above the top of its base, an aggressive speculator can enter ULTA around Monday's closing level of 100.19, using a junior position and an 8% stop (around 92.17) in case proven incorrect. The stop would be just below the recent swing low of 92.54.

Institutions like ULTA because it is an aggressive grower (36%/27% expected earnings growth in the January '13/'14 fiscal years, per most analysts) in a steady-eddy type of business (each of the last seven quarterly revenue gains have been between 20% and 23%, and the quarter before that was 19%).




Elsewhere, Sourcefire FIRE-0.35% , mentioned in the last report, is being watched closely for a sign that it may take out Thursday's high of 57.98. FIRE has been there, done that, doubling in Q1 before spending the last several month basing...been-there-done-that goes a long way around here.

In summation, in light of the beefy wins recorded by shares since early June, September's reputation for softness, and the averages knocking on the door of recent highs, it would not be a surprise to see a correction unfold this month. In the meantime, the averages and glamour titles act well, which is all that counts.

While not the perfect advance, from the standpoint of a momentum player there is little to dislike.

rightonmoney

Jennyahwu

rightonmoney 发表于 2012-9-11 10:59 AM

NOW, I hold Cash. don't know what to buy . SIGH

rightonmoney

Jennyahwu 发表于 2012-9-11 03:43 PM
NOW, I hold Cash. don't know what to buy . SIGH

yah, it is hard to get in now if you play short term ST.

silicon_beaver

go upper first.
the move down whatever.  

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