Hansen Teaches Bears a Lesson

I've been getting quite a few messages about Hansen Natural (HANS - commentary - Cramer's Take) lately. The stock just keeps moving higher and higher, laughing in the face of some very smart people who wrote it off a while ago.

I've been a smart bull and a dumb bear on this stock over the past year. We'll look at weekly and daily charts of Hansen shortly, but my flip-flopping on the stock merits a brief discussion about learning from your mistakes.

In August, my chart analysis was bullish, albeit cautious. The stock was in congestion -- would the uptrend continue, or was the congestion a top? The stock subsequently ramped higher. In early February, I essentially called the top. I've written before that I'm bad at picking tops and bottoms, and my analysis of Hansen certainly proves that point. Two weeks later, I admitted defeat, noting that the strong price action made the stock tough to buy. The strongest stocks always are.

Here's the lesson, and it's an easy one: Stick with the trend, because your chances of being right are much greater than trying to fade the trend.

About a month ago, I wrote about a conversation I had with Worth Gibson, a former writer for Street Insight. His young daughter had made a simple but sterling observation about one of his charts: "Hey, Daddy. That looks like a slide!"

She was talking about a downtrend, but uptrends are just as easy to spot -- so long as you refrain from thinking you're smarter than the market. The market is always the smartest guy in the room, and it rarely pays to match wits with it. Better to stick with the trend as long as it's intact, like Hansen's.

With short interest greater than 25% of the float, I wonder how much of the current advance is due to anxious buying by bears who were licking their chops in early February. Although RSI shows a negative divergence from the bullish price pattern, it's important to step back and look at the trend.

RSI has consistently been in the top third of its range, so ignore the little wiggles and pay attention to the price action. This stock is going higher. The weekly chart above shows the next level of support is at around $75. We need more information, so let's look at the daily chart.

The daily chart shows only brief congestion around $100 over the past couple of weeks. But look closely at last Thursday's action: The stock gapped up then traded down to close near the low of the day, and volume was four times greater than average. Lots of stock changed hands, but the subsequent two days were both strong. I'd interpret this action as bullish.

Think about it: If you sold last Thursday and now see the stock higher, you'll regret letting go -- you'll buy it back! That's what I think is going on, and that's why I'd hold on to the stock -- and look to buy more on a pullback.

Broadcom (BRCM - commentary - Cramer's Take) has been in a six-week consolidation range after a very impressive run-up. The stock isn't trending any longer; it's in a $5 trading range. One rule that has served me in good stead is that the prevailing trend is valid until proven otherwise.

This small pattern of higher highs and lower lows is indicative of indecision. The bulls and bears are battling, and neither side holds the edge for very long. I'd consider staying long until the support line is broken. And I'd probably buy on a breakout above $50, but I don't see that happening for a while.

Powerwave Technologies (PWAV - commentary - Cramer's Take) keeps tagging the resistance line I've drawn above. The oscillations on the weekly chart are fairly regular and take weeks to play out. Assuming this trend continues, I'd look for a pullback to the middle Bollinger band before buying this uptrending stock. And I'd then put a stop just beneath $12.50.

I've highlighted the long price-by-volume bar to illustrate the substantial amount of churning that has occurred between $40 and $45 in Insteel (IIIN - commentary - Cramer's Take). The more churning, the greater the financial and emotional commitment investors have in that level. As such, the resolution of the current congestion is quite important.

This stock has almost tripled in value this year -- and it's only March. That kind of move just begs for the type of profit-taking we saw last week. The only way Insteel will continue to march higher is if buyers at these high levels are more aggressive than sellers. All those who bought Insteel during this congestion phase are now winners -- they'll be happy and aren't likely to consider selling for a while. On the other hand, if the stock falls to $39, all those buyers are likely to sell their losing positions.

I've highlighted the $5 range between $12.50 and $15 in the above chart of BTU (BTUI - commentary - Cramer's Take) to show the wide dispersion of commitment in the stock. It has recently made a higher high, but it hasn't yet established the next low. Unless the bears push the stock below $12.50, this uptrend is intact. And if you're long, it's really too late to be selling now -- support is just $1 lower.

And wouldn't you be unhappy to sell at $13.50 only to see the stock bounce off support and ramp up to a new high? That's the conundrum of trading. If you're long in a downtrending stock, you are always trying to differentiate between patience and prudence. And that's a tough distinction when you're so emotionally involved.

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 the 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.