7-29-2013 Comments

[Mike]

I took the weekend off from my usual stock preparation routine. I currently hold TSLA, FB, ACT, HTZ and ILMN. I was able to add to my TSLA position on Friday and so far it is acting like past high-tight flag patterns. My current watchlist is below. I am not seriously considering shorting anything in this FED injected market but I always like to be ready for unexpected events.

The Market School Exposure Model (MEM) sits at +4 or 90% invested. NASDAQ distribution count is 4 and the oldest distribution day was 9 days ago so they will likely hang in the 25-day count for a while giving any future distribution event the likelihood of bringing us to 5 or more days which would produce MEM sell signals suggesting the possibility of exposure reduction on the horizon. NASDAQ volume is so far running light today with consolidated NYSE volume running 3% above the volume run rate last Friday. So we might see S&P distribution today.

Long

ACT
AMBA
EVR
FLT
HTZ
LGF
LNKD
OAS

Short

AGN
ARIA
COH
LPX
NTI
ULTA
WNR

[Chern]

Hi Mike;
A while ago you posted a link to a risk tolerance/ability test. I was going to take it, then forgot, and now can't find the link. Any chance you can repost it? Thank you.

[Mike]

Hi Mike;
A while ago you posted a link to a risk tolerance/ability test. I was going to take it, then forgot, and now can't find the link. Any chance you can repost it? Thank you.

I vaguely remember that I used to track a Risk Tolerance index which simply counted the number of stocks with PE > 20 and price within 15% of a 52-week high. I am not sure why I quit doing this. This doesn't seem to be what you are looking for...

[Chern]

No this was not yours. It was a link to a website that had a test on how a person perceives risk, I guess to determine whether they view risk correctly. It was sometime this month I think.

[MTman]

Mike,
TSLA is a good example of O'Neil's rule that if you get shaken out of a stock that shows resilience after the shakeout then you must buy back. I was shaken out of this stock on the big drop day but unfortunately never bought back. Using this recent example, at what point do you think the proper buy back price should have been the day after the shake out? What signs would you be looking for in price and volume intraday? If you would have waitied until the end of the day in order to know how it was going to close it seemed to extended to have a safe re-entry.

Thanks,
Mark

[Mike]

Mike,
TSLA is a good example of O'Neil's rule that if you get shaken out of a stock that shows resilience after the shakeout then you must buy back. I was shaken out of this stock on the big drop day but unfortunately never bought back. Using this recent example, at what point do you think the proper buy back price should have been the day after the shake out? What signs would you be looking for in price and volume intraday? If you would have waitied until the end of the day in order to know how it was going to close it seemed to extended to have a safe re-entry.

Thanks,
Mark

Mark,

The first step towards not getting shaken out of TSLA on July 16 was possibly to note that you probably had 20% gains in TSLA in less than 3 weeks triggering a 8-week hold period. Stocks that move this quickly often have shakeouts and the 8-week hold rule is there for this purpose: to get you to the other side. Big leading stocks often have shakeouts and average 17% drops on the way up. TSLA drop was a bit more at 21.6% but still within the normal bounds.

In practice I sold my shares of TSLA on 7/16 just above the 10-day moving average at 123.27. The prior day reversal in high volume followed by a gap down and very heavy volume told me that a shakeout was very likely and I decided to stand aside and watch instead of go for the ride. So I watched it cut the 10-day and then the 21-day and also touch the 10-week moving average. I then developed a plan to buy it back if it looked like it would recover in substantial volume. I bought it back the next day at 117.17 after it demonstrated a recovery above the 21-day with substantial buying volume. I did not wait until end of day. I watched volume in the morning and it was heavy and when it recovered the 21-day that was enough. It would have been just as easy to buy it back the next two days also. I like buying close to a cardinal moving average as this gives me a bailout place incase the buyback fails. So if TSLA after regaining the 21-day then proceeded to fail it again I would have bailed.

Whether to sit or take action depends on your style. If you have trouble buying back shakeouts it may be better to sit through them. A friend of mine and a very experienced CANSLIMer did just that. I don't have any issue with buying stocks back and I often find that I can improve my average cost by buying on a lower moving average bounce such as I did here. My friend is comfortable with sitting.

[barbados11]

Mike,

Thank you very much for this explanation. I too got shaken out the day of the downgrade. I looked at the models in the chart school model book and found no example of a HTF that crashed through the proper pivot and worked. The next day I was conflicted. I saw the power of it but got it stuck in my head that it could not be a HTF and made a huge mistake thinking it would give me another opportunity. I missed it and regret it since I had built a large position. Last Friday I began to think differently. Would you mind sharing how you were confident that it was a HTF or did you mostly rely on the up 20% in 3 weeks or less and forgot about labels? I'm trying to avoid making a similar mistake in the future.

Pablo

[Mike]

Mike,

Thank you very much for this explanation. I too got shaken out the day of the downgrade. I looked at the models in the chart school model book and found no example of a HTF that crashed through the proper pivot and worked. The next day I was conflicted. I saw the power of it but got it stuck in my head that it could not be a HTF and made a huge mistake thinking it would give me another opportunity. I missed it and regret it since I had built a large position. Last Friday I began to think differently. Would you mind sharing how you were confident that it was a HTF or did you mostly rely on the up 20% in 3 weeks or less and forgot about labels? I'm trying to avoid making a similar mistake in the future.

Pablo

Pablo,

I am using TASR as my high-tight flag model for TSLA. Please see the attached powerpoint file that shows each stock on daily charts. Both meet the flagpole requirement of up 100% or more in 8 weeks or less. Both push the flag pullback a bit by exceeding the 20% pull back requirement. I have seen many work with up to 29% pullbacks. Both established a lower entry point than making a new high by establishing a lower resistance point. Both pulled back below the buy point and then went on to make new highs. So I believe that TSLA is falling within the parameters of prior successful high-tight flags. JDSU in December 1999 was a HTF that also shows the concept of establishing a lower entry point than the highest high.

19355

[Mike]

Pablo,

I am using TASR as my high-tight flag model for TSLA. Please see the attached powerpoint file that shows each stock on daily charts. Both meet the flagpole requirement of up 100% or more in 8 weeks or less. Both push the flag pullback a bit by exceeding the 20% pull back requirement. I have seen many work with up to 29% pullbacks. Both established a lower entry point than making a new high by establishing a lower resistance point. Both pulled back below the buy point and then went on to make new highs. So I believe that TSLA is falling within the parameters of prior successful high-tight flags. JDSU in December 1999 was a HTF that also shows the concept of establishing a lower entry point than the highest high.

19355

I have also found a pamphlet that may be of use to you Pablo. The attached pamphlet describes high tight flags and ascending bases. If shows the requirements of each pattern as well as has many examples of each.

19356

[barbados11]

Mike,

Thank you very much for this additional explanation. I was away yesterday afternoon through late last night. i will study the attached.

Best regards,

Pablo

[barbados11]

Mike,

Somehow I looked at all the examples including TASR in July and December 2003 and overlooked September. I'm not feeling too smart but better late than never. Thanks again for your kind help.

[MTman]

Mike,
I apologize for coming back to TSLA but it has been a great stock to learn from. One more question. . . in order to have bought correctly into this stock you would have bought when the market was in a correction. What are some parameters you have when buying a stock while the market is in a correction?

Thank you!
Mark

[Mike]

Mike,
I apologize for coming back to TSLA but it has been a great stock to learn from. One more question. . . in order to have bought correctly into this stock you would have bought when the market was in a correction. What are some parameters you have when buying a stock while the market is in a correction?

Thank you!
Mark

Oh Man! Do I get some tough questions here at times. Yes I do buy when the market is in correction but only when leading stocks are setting up an breaking out and a stock that I want to own breaks out. I wanted to own TSLA and it broke out before the market broke out. I decided now or never! These decisions seem tough but not really. Either it takes off or it doesn't. If it doesn't I exit, if it does I add to my position.