The Ins and Outs of Buy Low, Sell High

Buying opportunities come in all shapes and sizes, although there's no arguing with the old saying, "Buy low, sell high."

That's the idea behind every trade, isn't it? But despite the simplicity of the concept, there are varying themes on this idea.

Momentum-oriented traders will try to buy high and sell even higher, but it's still the same idea -- take the stock at a level that's lower than your target. Other traders will look for uptrending stocks, but then wait for a pullback before buying.

They are not bottom-fishing, they are just patient about finding an uptrending stock at a cheaper price relative to what the momentum traders are paying. In fact, they are planning to sell that stock to the last of the momentum traders.

Finally, value-oriented investors will look at fundamentals, with only a secondary eye on actual stock price. They'll buy the stock when it's really cheap relative to the fundamentals and count on the good judgment of the broader market to discover the value. The resulting buying pressure pushes the stock higher. The value investor buys cheap companies and sells them when they get too overpriced, or when the stock "is ahead of itself."

Whether any of these strategies work for you depends on your discipline. Be patient and wait for the proper time to act. If you are short discipline, you'll be long pain. That's a fact.

One advantage of chart analysis is that it enables us to use multiple strategies for buying low and selling high. I've found five stocks that illustrate various buying strategies, so let's check out Hewlett-Packard (HPQ - commentary - Cramer's Take), Marvell (MRVL - commentary - Cramer's Take), Silver Standard Resources (SSRI - commentary - Cramer's Take), Coach (COH - commentary - Cramer's Take) and State Street (STT - commentary - Cramer's Take).

Hewlett-Packard

Hewlett-Packard is trending higher. The price actually peaked a week ago after consolidating for a few days, but after the push above $32, the stock once again is resting in a consolidation pattern. The catalyst for buying is the breakout above $32. If that occurs, expect the stock to keep running.

So where do we put our stop? Right back in the congestion, around $31.50. Knowing the reason for buying (the catalyst) makes for a low-risk trade, so there's no need to set the stop lower than that. Why? Because if the stock falls back just a little bit, you know the breakout is a failure. The stock may move higher at some point, but your immediate reason for putting on the trade is gone. Exit with pride. You're a winner because you only took a small loss.

Marvell

Marvell's chart exemplifies the same idea. The stock has been consolidating the dramatic breakout above $60, and is close to breaking out of congestion at any time. If the bulls take the stock to a new high, buy. The stop goes clear down beneath $60, right in the middle of congestion. If Marvell falls back into congestion after breaking out, the reason for buying is gone. Another setup may arise, but the most immediate setup failed, so get out.

Silver Standard Resources

Silver Standard hasn't really been consolidating as much as it has simply been stair-stepping higher. But this week's action is finally pushing the stock to a new high. So my catalyst for entry would be the overall uptrend and not the breakout.

Do we really think the market has a memory almost two years in duration? Not hardly. The last time this stock was this high was in early 2004. No, I like the steady uptrend. So I wouldn't be a buyer now. Instead, I'd wait for a tag of the middle Bollinger Band. It might take another couple of weeks, but that's the better entry. We want to buy low (at the uptrending support line), not high, and if the stock falls beneath the middle Band for more than a day or so, we exit. That's a low-risk way of trading this type of uptrend.

Coach

We see the same type of cycling here in Coach. Although this stock is a bit more volatile, the idea is the same. We have two potential catalysts.

First, the stock could push to a new high -- a breakout! The buy point is on a close above $36, with a stop back in congestion.

The alternative and lower-risk buy point is a pullback to support. That enables us to anticipate the eventual breakout while minimizing risk with a stop just beneath the support line. The only way the stop will be hit is if Coach makes a lower low. In that event, the catalyst for buying has disappeared.

State Street

State Street looks a bit like a cup-and-handle formation, but more bullish. A cup-and-handle is formed when a stock consolidates at around the same level as the previous price peak, which in this case is back at around $55 in early 2004. But State Street has instead broken to a new high and is consolidating at this higher level. But the resolution is the same. The stock consolidates on declining volume, and then breaks out on high volume.

So the buying catalyst is the breakout from congestion. The stop is back in the middle of congestion, and not beneath $55. Again, breakouts are only breakouts if they stay away from prior congestion. So if you're still long when State Street is trading at $57, you are no longer trading a breakout pattern.

If you've got a chart that interests you, email me and I'll have a look.

Be careful out there.

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Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick has lectured throughout the U.S. on the proper use of technical analysis and options trading. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.