Take the Money and Run

After yesterday's strong advance, I got to thinking about the different theories of buying. Some folks like to buy stocks when nobody else wants them so they can sell when everybody wants them. That crowd adheres to the "buy cheap, sell dear" theory.

Other folks want to buy stocks when they are strong and sell them when they're stronger. This is the "buy high, sell higher" crowd.

Here's the secret that rarely gets above all the hubris and venom that each camp spews at the other. There is no one correct theory. Those who buy cheap like to talk smack about those who buy strength, as if the idea of following a trend is somehow less pure. That's a crock. Trading is difficult irrespective of your approach. And if you say it's not, then you're either a liar or a rookie -- or perhaps both.

Buying strength is easy ... it's the selling that's tough. The challenge is that you are intentionally running with the part of the crowd that buys late. The financial depth of that crowd is often difficult to assess, so experience, discipline and constant attention are required to ensure that you're not left holding the stock that everybody used to want, but nobody wants now. That's not an easy task.

The "buy cheap, sell dear" crowd is different. The buying is hard, and it's the selling that's easy. Here's why. Stocks go down for a number of reasons ... most of them bad. But sometimes stocks are knocked down for silly reasons, giving those who are astute enough to understand the difference between "value" and "value trap" a great opportunity. Once the stock is bought, the selling is easier. Why? Because when your once-out-of-favor stock is now taking off like a rocket ship, you sell into that strength. That low value now has a high multiple, so you take your profits and look for the next stock sale.

Get the point? Either discipline can work. It's the experience and discipline of the trader that determines whether it does work.

Let's get to some reader requests.

I tightened up this chart to provide a better frame of reference for where Lion's Gate (LGF - commentary - Cramer's Take) has been. In 2003, it was $2. Now it's at $12 -- a 52-week high. This is a textbook example of the "buy high, sell higher" approach.

The most bullish aspect of this chart is that the stock has generally been moving sideways for the past couple of years and is now going higher. That answers the question of whether the stock has been forming a top or has been consolidating. I think it goes higher. I'd like to buy it, but would also like to wait for a pullback to around $11 before I do. Keep an eye on this stock; it looks strong.

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Steel Dynamics (STLD - commentary - Cramer's Take) is another candidate for the "buy high, sell higher" camp. The stock is at an all-time high and has just broken above prior resistance. I'd use the 50-day moving average as support. This breakout looks strong, but I have to believe that at some point over the next couple of weeks we'll have a chance to buy it for less.

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Allegheny Technologies (ATI - commentary - Cramer's Take) is yet another "buy high, sell higher" stock. It's close to a 52-week high, but it hasn't made it yet. I'd be a buyer above $110, but the lowest-risk trade is a pullback to support. That way, if the trend line breaks down, you can take a small loss and move on or wait for a better entry.

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NYSE Group (NYX - commentary - Cramer's Take) is a stock that's in the "I bought high ... now what do I do?" group. After printing a double top, the stock has corrected by more than 20%. But the pattern over the past few weeks is bullish. The stock has made a higher low (particularly as it relates to the location of the early March low within the Bollinger Bands) and is now at a higher high. That's a good reversal signal. I think NYX challenges the 50-day moving average pretty soon (just 5% higher). How the stock acts at that level will be a great indication of whether this rally will be short-lived or is the start of the next multimonth leg up.

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BroadVision (BVSN - commentary - Cramer's Take) is a former superstar that has probably fallen off of most folks' radar screens. The stock only broke above $1 in January, but it's now at $4.50. I'm posting it as an illustration of how easy it is to buy strength.

Does this chart look good to you? It looks great to me. The urge is to buy. But with the price having more than quadrupled in less than three months, it's a little late in the game. This stock is running on pure adrenaline now, as well as a short squeeze at the hands of those who somehow felt compelled to be short this stock, despite its proximity to zero.

If you're long BVSN, I wouldn't sell yet. But I'd sure keep a trailing stop on it, using the prior intraday low as the reference point. On any given day, if a pullback eclipses the prior day's lows, then the uptrend is about to take a break. Take the money and run.

Be careful out there.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider BroadVision to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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At the time of publication, Fitzpatrick had no positions in the stocks mentioned, though positions may change at any time.

Dan Fitzpatrick is the publisher of StockMarketMentor.com, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback; click here to send him an email.